-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IF7jDq+huhNdZ1N6lOWnsK1v4ZlKXPsXoh9DwWM3o7cip+PqBWEubLLnnYbo82fo JrTys10Ky8B5ieHaNfiVdQ== 0001072613-03-001826.txt : 20031114 0001072613-03-001826.hdr.sgml : 20031114 20031114130416 ACCESSION NUMBER: 0001072613-03-001826 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: J2 GLOBAL COMMUNICATIONS INC CENTRAL INDEX KEY: 0001084048 STANDARD INDUSTRIAL CLASSIFICATION: TELEGRAPH & OTHER MESSAGE COMMUNICATIONS [4822] IRS NUMBER: 510371142 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-25965 FILM NUMBER: 031002398 BUSINESS ADDRESS: STREET 1: 6922 HOLLYWOOD BLVD STREET 2: SUITE 900 5TH FLOOR CITY: LOS ANGELES STATE: CA ZIP: 90028 BUSINESS PHONE: 3238609200 MAIL ADDRESS: STREET 1: 6922 HOLLYWOOD BLVD STREET 2: SUITE 900 CITY: LOS ANGELES STATE: CA ZIP: 90028 FORMER COMPANY: FORMER CONFORMED NAME: JFAX COM INC DATE OF NAME CHANGE: 19990413 10-Q 1 form10-q_12299.txt FORM 10-Q FOR PERIOD ENDED SEPTEMBER 30, 2003 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 _____________ FORM 10-Q _____________ [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2003 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ____________ Commission File Number: 0-25965 ______________ j2 GLOBAL COMMUNICATIONS, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 51-0371142 ---------------------------- ---------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 6922 Hollywood Boulevard Suite 500 Los Angeles, California 90028 ---------------------------------------- (Address of principal executive offices) (323) 860-9200 ---------------------------------------------------- (Registrant's telephone number, including area code) ______________ Indicate by check mark whether the registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [X] No [_] As of October 31, 2003, the registrant had outstanding 23,064,840 shares of Common Stock, $0.01 par value, which is the only class of common or voting stock of the registrant issued. ================================================================================ j2 GLOBAL COMMUNICATIONS, INC. FOR THE QUARTER ENDED SEPTEMBER 30, 2003 INDEX PAGE ----- ---- PART I. FINANCIAL INFORMATION - ----------------------------- Item 1. Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheets (unaudited) 3 Condensed Consolidated Statements of Operations (unaudited) 4 Condensed Consolidated Statements of Cash Flows (unaudited) 5 Notes to Condensed Consolidated Financial Statements (unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 Item 3. Quantitative and Qualitative Disclosures About Market Risk 20 Item 4. Controls and Procedures 20 PART II. OTHER INFORMATION - -------------------------- Item 1. Legal Proceedings 22 Item 6. Exhibits and Reports on Form 8-K 22 Signatures 23 Index to Exhibits 24 2 PART I FINANCIAL INFORMATION - ---------------------------- Item 1. Financial Statements - ----------------------------
j2 GLOBAL COMMUNICATIONS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited, in thousands) September 30, December 31, 2003 2002 ------------ ------------ ASSETS Cash and cash equivalents $ 46,313 $ 32,777 Short-term investments 8,213 -- Accounts receivable, net of allowances of $336,000 and $233,000, respectively 5,858 5,082 Prepaid expenses and other current assets 2,279 1,408 ------------ ------------ Total current assets 62,663 39,267 Furniture, fixtures and equipment, net 6,641 6,500 Goodwill and other purchased intangibles, net 17,961 17,324 Other assets 372 1,002 ------------ ------------ Total assets $ 87,637 $ 64,093 ============ ============ LIABILITIES & STOCKHOLDERS' EQUITY Accounts payable and accrued expenses $ 3,590 $ 3,948 Deferred revenue 3,691 2,615 Current portion of long-term debt 1,256 595 ------------ ------------ Total current liabilities 8,537 7,158 Long-term debt 334 252 ------------ ------------ Total liabilities 8,871 7,410 ------------ ------------ Total stockholders' equity 78,766 56,683 ------------ ------------ Total liabilities and stockholders' equity $ 87,637 $ 64,093 ============ ============
See accompanying notes to condensed consolidated financial statements 3
j2 GLOBAL COMMUNICATIONS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited, in thousands except share and per share amounts) Three Months Ended Nine Months Ended September 30, September 30, --------------------------- --------------------------- 2003 2002 2003 2002 ------------ ------------ ------------ ------------ Revenues: Subscriber $ 17,806 $ 11,551 $ 48,567 $ 31,349 Advertising 681 783 1,902 2,314 Licensed services 416 169 679 526 ------------ ------------ ------------ ------------ 18,903 12,503 51,148 34,189 Cost of revenues 3,494 2,550 9,751 8,692 ------------ ------------ ------------ ------------ Gross profit 15,409 9,953 41,397 25,497 ------------ ------------ ------------ ------------ Operating expenses: Sales and marketing 2,897 1,982 8,273 4,713 Research and development 1,006 747 3,055 2,279 General and administrative 4,085 3,372 11,296 10,144 ------------ ------------ ------------ ------------ Total operating expenses 7,988 6,101 22,624 17,136 ------------ ------------ ------------ ------------ Operating earnings 7,421 3,852 18,773 8,361 Interest and other income, net 126 62 269 387 ------------ ------------ ------------ ------------ Earnings before income taxes and cumulative effect of change in accounting principle 7,547 3,914 19,042 8,748 Income tax expense 347 -- 862 -- ------------ ------------ ------------ ------------ Earnings before cumulative effect of change in accounting principle 7,200 3,914 18,180 8,748 Cumulative effect of change in accounting principle -- -- -- 225 ------------ ------------ ------------ ------------ Net earnings $ 7,200 $ 3,914 $ 18,180 $ 8,973 ============ ============ ============ ============ Net earnings per common share: Basic $ 0.32 $ 0.18 $ 0.81 $ 0.42 Diluted $ 0.28 $ 0.16 $ 0.73 $ 0.38 Weighted average shares outstanding: Basic 22,857,057 21,656,946 22,578,729 21,544,116 Diluted 25,493,305 24,479,474 24,990,025 23,679,576
See accompanying notes to condensed consolidated financial statements 4
j2 GLOBAL COMMUNICATIONS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited, in thousands) Nine Months Ended September 30, ------------------------------- 2003 2002 ------------ ------------ Cash flows from operating activities: Net earnings $ 18,180 $ 8,973 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 2,986 2,615 Non-cash income tax expense 726 -- Compensation in exchange for note reduction 130 130 Compensation in exchange for common stock -- 93 Gain on sale of investment -- (162) Gain on repurchase of treasury stock -- (80) Cumulative effect of change in accounting principle -- (225) Decrease (increase) in: Accounts receivable (557) (1,119) Interest receivable (27) (28) Prepaid expenses 542 374 Other assets (139) (299) (Decrease) increase in: Accounts payable (395) (792) Deferred revenue 1,026 549 ------------ ------------ Net cash provided by operating activities 22,472 10,029 ------------ ------------ Cash flows from investing activities: Purchases of short-term investments, net (8,213) -- Purchase of furniture, fixtures and equipment (2,660) (1,780) Purchase of intangible asset (200) -- Acquisition of a business, net of cash received (975) -- Payment of accrued exit costs -- (100) Repayments of notes receivable, net 539 190 Proceeds from sale of equipment 73 -- Proceeds from sale of an investment -- 170 ------------ ------------ Net cash used in investing activities (11,436) (1,520) ------------ ------------ Cash flows from financing activities: Issuance of common stock under employee stock purchase plan 270 -- Exercise of stock options 2,906 798 Repayment of long-term debt and capital leases, net (676) (954) ------------ ------------ Net cash provided by (used in) financing activities 2,500 (156) ------------ ------------ Net increase in cash and cash equivalents 13,536 8,353 Cash and cash equivalents at beginning of year 32,777 19,087 ------------ ------------ Cash and cash equivalents at end of period $ 46,313 $ 27,440 ============ ============
See accompanying notes to condensed consolidated financial statements 5 j2 GLOBAL COMMUNICATIONS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2003 (unaudited) NOTE 1 - BASIS OF PRESENTATION j2 Global Communications, Inc. (the "Company") is a leading provider of outsourced, value-added messaging and communications services to individuals and businesses throughout the world. The Company is a Delaware corporation and was founded in 1995. The consolidated financial statements include the accounts of the Company and its direct and indirect wholly-owned subsidiaries; eFax.com, Inc., SureTalk.com, Inc., Documagix, Inc., ProtoDyne, Inc., j2 Latin America, Inc., dotCOM, Ltd. and Driverworks.com Development Corporation. All inter-company accounts and transactions have been eliminated in consolidation. The accompanying interim condensed consolidated financial statements and related financial schedules are unaudited. The Company's interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") including those for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X issued by the Securities and Exchange Commission ("SEC"). Accordingly, they do not include all of the information and note disclosures required by GAAP for complete financial statements. These statements are unaudited and, in the opinion of management, all adjustments (which include only normal recurring adjustments) considered necessary for a fair presentation have been included. Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation. These consolidated financial statements should be read in conjunction with the audited financial statements and related notes for the year ended December 31, 2002 included in the Company's Annual Report on Form 10-K filed with the SEC on March 31, 2003 and the Company's Quarterly Reports on Form 10-Q filed with the SEC on May 9, 2003 and August 13, 2003. The results of operations for these interim periods are not necessarily indicative of the operating results for the full year or for any future period. NOTE 2 - USE OF ESTIMATES The preparation of financial statements, in conformity with GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates, including those related to revenue recognition, allowances for doubtful accounts and the valuation of deferred income taxes, long-lived and intangible assets and goodwill. These estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the current circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates. NOTE 3 - STOCK SPLIT On August 5, 2003, the Company's Board of Directors declared a two-for-one stock split effected in the form of a stock dividend, payable August 29, 2003 to shareholders of record on August 18, 2003. Per share and weighted average share amounts have been adjusted in the accompanying financial statements and related notes to reflect this split for all periods presented. NOTE 4 - RECENT ACCOUNTING PRONOUNCEMENTS In June 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 146, "Accounting for Exit or Disposal Activities". SFAS No. 146 addresses significant 6 issues regarding the recognition, measurement and reporting of costs that are associated with exit and disposal activities, including restructuring activities that are currently accounted for under Emerging Issues Task Force ("EITF") No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit and Activity (including Certain Costs Incurred in a Restructuring)". The scope of SFAS No. 146 also includes costs related to terminating a contract that is not a capital lease and termination benefits that employees who are involuntarily terminated receive under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred-compensation contract. SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002. The adoption of SFAS No. 146 in the first quarter of fiscal 2003 did not have a material effect on the Company's financial condition, results of operations or liquidity. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure". This statement amends SFAS No. 123, "Accounting for Stock-Based Compensation", to provide alternative methods of transition for a voluntary change to the fair value-based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosure in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. This Statement also amends Accounting Principles Board Opinion ("APBO") No. 28, "Interim Financial Reporting", to require disclosure about those effects in interim financial information. The amendments to SFAS No. 123 are effective for financial statements for fiscal years ending after December 15, 2003. The required disclosures for interim financial statements are effective for financial reports containing condensed financial statements for interim periods beginning after December 15, 2002. As the Company has elected not to change to the fair value-based method of accounting for stock-based employee compensation, SFAS No. 148 will have no impact on the Company's financial condition, results of operations or liquidity. Please refer to Note 10 to the condensed consolidated financial statements included herein for interim disclosures regarding stock-based employee compensation. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities". This statement amends SFAS 133 to clarify the financial accounting and reporting of derivative instruments and hedging activities and requires contracts with similar characteristics to be accounted for on a comparable basis. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003. The adoption of SFAS No. 149 in the third quarter of fiscal 2003 did not have a material effect on the Company's financial condition, results of operations or liquidity. NOTE 5 - CRITICAL ACCOUNTING POLICIES REVENUE RECOGNITION The Company's subscriber revenues consist substantially of monthly recurring and usage based subscription fees. In accordance with GAAP and with SEC issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements", which clarifies certain existing accounting principles for the timing of revenue recognition and classification of revenues in the financial statements, the Company defers the portions of monthly recurring and usage based fees collected in advance and recognizes them in the period earned. Additionally, the Company defers and recognizes subscriber activation fees and related direct incremental costs over a subscriber's estimated life. The Company's advertising revenues consist primarily of revenues derived by delivering email messages and presenting banners on behalf of advertisers to its customers who elect to receive such messages. Revenues are recognized in the period in which the advertising services are performed, provided that no significant Company obligations remain and the collection of the resulting receivable is reasonably assured. VALUATION OF LONG-LIVED ASSETS The Company assesses the impairment of long-lived assets, which include furniture, fixtures and equipment and identifiable intangible assets with finite useful lives (subject to amortization), in accordance with the provisions of SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". This Statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets and requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of 7 an asset may not be recoverable. SFAS No. 144 also requires companies to separately report discontinued operations and extends that reporting to a component of an entity that either has been disposed of (by sale, abandonment or in a distribution to owners) or is classified as held for sale. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. In accordance with SFAS No. 144, the Company assesses the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Impairment indicators the Company considers important, which could individually or in combination trigger an impairment review, include the following: o significant underperformance relative to expected historical or projected future operating results; o significant changes in the manner of the Company's use of the acquired assets or the strategy for its overall business; o significant negative industry or economic trends; o significant decline in the Company's stock price for a sustained period; and o the Company's market capitalization relative to net book value. If events and circumstances indicate that the carrying amount of a long-lived asset may not be recoverable and the expected undiscounted future cash flows attributable to the asset are less than the carrying amount of that asset, an impairment loss equal to the excess of the asset's carrying value over its fair value is recorded. Fair value is determined based on the present value of estimated expected future cash flows using a discount rate commensurate with the risk involved, quoted market prices or appraised values, depending on the nature of the assets. In accordance with SFAS No. 144, during the first, second and third quarters of 2003 the Company assessed whether events or changes in circumstances occurred that potentially indicate the carrying amount of long-lived assets may not be recoverable. Having done so, the Company concluded that there were no such events or changes in circumstances during the three and nine months ended September 30, 2003. Net long-lived assets amounted to approximately $7.5 million as of September 30, 2003. VALUATION OF GOODWILL AND OTHER INTANGIBLE ASSETS The Company assesses the impairment of goodwill and a trade name with an indefinite useful life (not subject to amortization) in accordance with the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets". Under SFAS No. 142, goodwill and intangible assets with indefinite useful lives are no longer amortized, but are tested for impairment at a reporting unit level on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value amount. Impairment indicators the Company considers important, which could individually or in combination trigger an impairment review, include the following: o significant adverse change in legal factors or in the business climate; o adverse action or assessment by a regulator; o unanticipated competition; o significant changes in the manner of the Company's use of the acquired assets or the strategy for its overall business; o loss of key personnel; o significant negative industry or economic trends; and o significant decline in the Company's stock price for a sustained period. 8 For purposes of financial reporting and impairment testing in accordance with SFAS No. 142, the Company operates in one principal reporting unit, a provider of outsourced, value-added unified messaging and communications services. In testing for a potential impairment of goodwill and a trade name with an indefinite useful life, the Company first compares its estimated fair value with its book value, including goodwill and a trade name with an indefinite useful life. If the Company's estimated fair value exceeds its book value, the assets are considered not to be impaired and no additional steps are necessary. If, however, the fair value of the Company is less than its book value, then the Company is required to compare the carrying amount of its goodwill and trade name with their respective implied fair values. The estimate of implied fair value of these assets may require independent valuations of certain internally generated and unrecognized intangible assets such as our subscriber base, software and technology and patents and trademarks. If the carrying amounts of goodwill and the trade name exceed their respective implied fair values, an impairment loss would be recognized in an amount equal to the excess. In accordance with SFAS No. 142, the Company performed annual impairment tests of goodwill and this trade name as of December 31, 2002 and concluded that, as of that date, there was no impairment. Furthermore, during the first, second and third quarters of 2003 the Company assessed whether events or changes in circumstances occurred that potentially indicate that the carrying amount of these assets may not be recoverable. Having done so, the Company concluded that there were no such events or changes in circumstance during the three and nine months ended September 30, 2003. Net goodwill and a trade name with an indefinite useful life amounted to approximately $16.5 million as of September 30, 2003. VALUATION OF DEFERRED TAX ASSETS Income taxes are accounted for under the asset and liability method as described in SFAS No. 109 "Accounting For Income Taxes". Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company's ability to realize the deferred tax asset is assessed throughout the year and a valuation allowance is established accordingly. See Note 9 to the accompanying condensed consolidated financial statements, as well as Item 2 of this Form 10-Q (Management's Discussion and Analysis of Financial Condition and Results of Operations), for a further discussion of income taxes and the valuation of deferred tax assets. NOTE 6 - NET EARNINGS PER SHARE Basic net earnings per share are computed on the basis of the weighted average number of common shares outstanding. Diluted net earnings per share are computed on the basis of the weighted average number of common shares outstanding plus the effect of outstanding stock options and warrants using the "treasury stock" method. For the three and nine months ended September 30, 2003 and 2002, the components of basic and diluted net earnings per share were as follows (in thousands except share and per share amounts): 9
Three Months Ended Nine Months Ended September 30, September 30, ------------------------- ------------------------- 2003 2002 2003 2002 ----------- ----------- ----------- ----------- Numerator for basic and diluted net earnings per common share: Net earnings $ 7,200 $ 3,914 $ 18,180 $ 8,973 ----------- ----------- ----------- ----------- Denominator: Weighted average outstanding shares of common stock 22,857,057 21,656,946 22,578,729 21,544,116 Dilutive effect of: Employee stock options 2,312,510 2,595,584 2,120,686 2,087,638 Warrants 323,738 226,944 290,610 47,822 ----------- ----------- ----------- ----------- Common stock and common stock equivalents 25,493,305 24,479,474 24,990,025 23,679,576 ----------- ----------- ----------- ----------- Net earnings per share: Basic $ 0.32 $ 0.18 $ 0.81 $ 0.42 =========== =========== =========== =========== Diluted $ 0.28 $ 0.16 $ 0.73 $ 0.38 =========== =========== =========== ===========
NOTE 7 - ACQUISITIONS On January 30, 2003, the Company acquired dotCOM, Ltd., d/b/a Cyberbox, a Hong Kong-based company, for approximately $175,000, net of cash received, subject to adjustment based upon certain customer retention targets. The transaction has been accounted for under the purchase method and, accordingly, the results of operations of dotCOM, Ltd. have been included in the consolidated results of the Company since the date of acquisition. The excess of the purchase price over the fair value of net assets acquired amounted to approximately $149,000. The excess purchase price was comprised of approximately $122,000 of goodwill and $27,000 of identifiable intangible assets. On September 15, 2003, the Company acquired Driverworks.com Development Corporation ("Driverworks"), d/b/a M4Internet, a California-based company that provides technology and services for personalized, permission-based email messaging, for approximately $800,000, net of cash received, subject to adjustment based upon certain earn-out provisions. The transaction has been accounted for under the purchase method and, accordingly, the results of operations of Driverworks have been included in the consolidated results of the Company since the date of acquisition. The excess of the purchase price over the fair value of the net assets acquired amounted to approximately $600,000, without giving effect to potential purchase price adjustments. As of the date of this report, the Company has not determined the allocation of excess purchase price between goodwill and identifiable intangible assets. NOTE 8 - GOODWILL AND INTANGIBLE ASSETS Upon the adoption of SFAS No. 142, "Goodwill and Other Intangible Assets", in the first quarter of 2002, the Company discontinued amortizing the remaining balances of goodwill and a trade name with an indefinite useful life. In accordance with this Statement, no goodwill or trade name amortization was recorded during the three and nine-month periods ended September 30, 2003 and 2002. SFAS No. 142 also required that the amount of any unamortized deferred credit from a business combination effected prior to July 1, 2001 be recognized into earnings as the effect of a cumulative change of accounting 10 principle. In the first quarter of 2002, the Company recognized such a deferred credit amounting to $225,000 in the accompanying condensed consolidated statement of operations. The following table reconciles per share data for net earnings before the cumulative effect of a change in accounting principle to net earnings after such change for the three and nine-month periods ending September 30, 2003 and 2002:
Three Months Ended September 30, Nine Months Ended September 30, 2003 2002 2003 2002 -------------- -------------- -------------- -------------- Basic net earnings before cumulative effect of a change in accounting principle $ 0.32 $ 0.18 $ 0.81 $ 0.41 Cumulative effect of a change in accounting principle -- -- -- 0.01 -------------- -------------- -------------- -------------- Basic net earnings per common share $ 0.32 $ 0.18 $ 0.81 $ 0.42 ============== ============== ============== ============== Diluted net earnings before cumulative effect of a change in accounting principle $ 0.28 $ 0.16 $ 0.73 $ 0.37 Cumulative effect of a change in accounting principle -- -- -- 0.01 -------------- -------------- -------------- -------------- Diluted net earnings per common share $ 0.28 $ 0.16 $ 0.73 $ 0.38 ============== ============== ============== ============== Weighted average shares outstanding: Basic 22,857,057 21,656,946 22,578,729 21,544,116 ============== ============== ============== ============== Diluted 25,493,305 24,479,474 24,990,025 23,679,576 ============== ============== ============== ==============
Intangible assets, which are included in other purchased intangibles, are recorded at cost, less accumulated amortization. Amortization of intangible assets with finite lives is provided over their estimated useful lives currently ranging from 3 years to 8 years on a straight-line basis. Amortization expense, included in general and administrative expense, during the three and nine-month periods ended September 30, 2003 approximated $46,000 and $102,000, respectively. Amortization expense for the fiscal years 2003 through 2007 is estimated to approximate $150,000 per year and for fiscal year 2008 is estimated to approximate $120,000. Goodwill and a trade name with an indefinite useful life are recorded net of accumulated amortization through December 31, 2001. During the nine months ended September 30, 2003, the Company decreased the carrying amount of goodwill by approximately $88,000 primarily as a result of certain purchase price adjustments that effected existing goodwill, offset by the acquisition of dotCOM, Ltd. As of September 30, 2003, intangible assets with finite lives, goodwill and trade name balances, net of accumulated amortization were as follows (in thousands): 11
Amortization Historical Accumulated period cost amortization Net ------------ ---------- ------------ --------- INTANGIBLE ASSETS SUBJECT TO AMORTIZATION Acquired product technology rights: Patent 8 years $ 1,005 $ 169 $ 836 Other 3 years 59 51 8 INTANGIBLE ASSETS NOT SUBJECT TO AMORTIZATION Goodwill $ 23,430 $ 8,181 $ 15,249 Indefinite-lived trade name 1,500 $ 232 1,268 OTHER Unallocated - refer to Note 7 $ 600 -- 600 -------- Goodwill and other purchased intangibles, net $ 17,961 ========
NOTE 9 - INCOME TAXES FEDERAL INCOME TAXES As of September 30, 2003, the Company had federal net operating loss carry-forwards ("NOLs") and federal tax credits of approximately $103 million and $1 million, respectively. As a result of these NOLs and tax credits, the Company has neither accrued nor paid federal income taxes since its inception. The Tax Reform Act of 1986 imposes substantial restrictions on the utilization of NOLs in the event of an "ownership change" (as defined in the Internal Revenue Code) of a corporation. The Company's ability to utilize its NOLs is limited as a result of such "ownership changes". The NOLs attributable to the eFax.com and SureTalk.com subsidiaries before their acquisitions by the Company are also limited according to these provisions. After giving effect to these limitations, as of September 30, 2003 the Company estimated that approximately $41 million of the federal NOL and $1 million of federal tax credits would be available for use before their expiration in the year 2021. State Income Taxes As of September 30, 2003, the Company had State of California NOLs of approximately $43 million, net of "ownership change" restrictions imposed by the Tax Reform Act of 1986 referred to above. In September 2002, the State of California enacted legislation deferring the use of NOL carry-forwards until the 2004 tax year. The Company anticipates utilizing these state NOLs before they expire in the year 2013. As a result, state income tax expense for the three and nine-month periods ending September 30, 2003 approximated $347,000 and $862,000, respectively, which amounts consist of apportioned California taxes offset by certain state research and development tax credits. Deferred Tax Assets The Company's federal and state NOLs and other deferred tax assets as of September 30, 2003 were fully reserved by a valuation allowance. Based upon its expected continued profitability in the fourth quarter of 2003 and, based on current information, for the foreseeable future, the Company anticipates that it will meet the "more likely-than-not" criteria for recognition of deferred tax assets as described in SFAS No. 109 "Accounting For Income Taxes". As a result, the Company anticipates reducing its valuation allowance and recognizing a substantial portion of its remaining federal and state NOLs and other tax credits as a tax asset in the fourth quarter of 2003. 12 NOTE 10 - ACCOUNTING FOR STOCK OPTIONS The Company applies the intrinsic value-based method of accounting prescribed by APBO No. 25, "Accounting for Stock Issued to Employees", and related interpretations to account for its fixed plan stock options. Under this method, compensation expense is generally recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. The Company has adopted the disclosure only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation", and SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure", which was released in December of 2002 as an amendment to SFAS No. 123. These statements establish accounting and disclosure requirements using a fair value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123 and SFAS No. 148, the Company has elected to continue to apply the intrinsic value-based method of accounting described above. The Company accounts for option grants to non-employees using the guidance of SFAS No. 123, as amended by SFAS No. 148, and EITF No. 96-18, whereby the fair value of such options is determined using the Black-Scholes option pricing model at the earlier of the date at which the non-employee's performance is complete or a performance commitment is reached. In accordance with the intrinsic value method, no compensation cost has been recognized for the Company's fixed plan stock option grants in the accompanying financial statements. If the fair value-based method had been applied in measuring stock compensation expense under SFAS No. 123, as amended by SFAS No. 148, the pro forma effect on net earnings and net earnings per share would have been as follows (in thousands, except share and per share amounts):
Three Months Ended Nine Months Ended September 30, September 30, 2003 2002 2003 2002 ---------- ---------- ---------- ---------- Net earnings, as reported $ 7,200 $ 3,914 $ 18,180 $ 8,973 Add: Stock based employee compensation expense included in reported net earnings, net of related tax benefits -- -- -- -- Deduct: Stock based employee compensation expense determined under the fair value-based method for all awards, net of related tax effects (531) (504) (1,420) (1,143) ---------- ---------- ---------- ---------- Pro forma net earnings $ 6,669 $ 3,410 $ 16,760 $ 7,830 ========== ========== ========== ========== Basic net earnings per common share: As reported $ 0.32 $ 0.18 $ 0.81 $ 0.42 ========== ========== ========== ========== Pro forma $ 0.29 $ 0.16 $ 0.74 $ 0.36 ========== ========== ========== ========== Diluted net earnings per common share: As reported $ 0.28 $ 0.16 $ 0.73 $ 0.38 ========== ========== ========== ========== Pro forma $ 0.26 $ 0.14 $ 0.67 $ 0.33 ========== ========== ========== ==========
13 NOTE 11 - LEASING LINE OF CREDIT In the third quarter of 2003, the Company entered into an equipment leasing line of credit which permits borrowings up to $2.5 million. As of September 30, 2003, amounts drawn down under this credit line were $236,000, which are included in long-term debt in the accompanying financial statements. The credit line bears interest at 5.8% subject to adjustment based on the 36-month Treasury rate and is secured by the equipment being financed. Borrowings under this credit line are subject to repayment terms of 36 months commencing from the date of each draw-down. NOTE 12 - SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for interest during the nine-month periods ended September 30, 2003 and 2002 approximated $40,000 and $71,000, respectively, substantially all of which related to long-term debt and capital leases. Cash paid for income taxes during the nine-month periods ended September 30, 2003 and 2002 approximated $300,000 and zero, respectively. During the nine-month periods ended September 30, 2003 and 2002, the Company entered into loan arrangements approximating $1.2 million and $695,000, respectively, to finance certain corporate insurance policies. During the nine months ended September 30, 2003 and 2002, the Company entered into capital lease arrangements for certain computer equipment and software approximating $236,000 and $543,000, respectively. Through the nine months ended September 30, 2003, the Company recorded the tax benefit from the exercise of non-qualified stock options as a reduction of its income tax liability and an increase in equity in the amount of approximately $726,000. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS - ------------------------------------------------------------------------------- OF OPERATIONS - ------------- ORGANIZATION AND DESCRIPTION OF BUSINESS j2 Global Communications, Inc. ("we," "us" and "our") is a leading provider of outsourced, value-added messaging and communications services to individuals and businesses throughout the world. We are a Delaware corporation and were founded in 1995. We offer faxing and voicemail solutions, document management solutions, Web-initiated conference calling and unified messaging services. We market our services principally under the brand names eFax(R), jConnect(R), JFAX(R), eFax Corporate(R), jBlast(R), eFax BroadcastTM, Consensus(R), PaperMaster(R) ProTM, Documagix(R), Hotsend(R) and recently-acquired M4InternetTM. We deliver our services through our global telephony/Internet Protocol ("IP") network, which covers more than 1,100 cities in 20 countries across 5 continents. We have created this network, and continuously seek to expand it, through negotiating with U.S. and foreign telecommunications providers for telephone numbers (also referred to as Direct Inward Dial numbers or "DIDs"), Internet bandwidth and co-location space for our equipment. In addition, we have expanded our network through small acquisitions of local players in international territories, such as Hong Kong, and we intend to continue to pursue similar acquisitions in the future. As of September 30, 2003, we had more than 5.5 million telephone numbers deployed to our customers. In addition, we maintain an inventory of additional telephone numbers to be assigned to new customers. We organize our marketing and sales efforts into three distinct channels: Web, Corporate and Licensed Services. WEB CHANNEL We currently generate 70% of our total revenues through our Web channel, from a combination of Web subscriber and advertising revenues. This channel markets our eFax(R), jConnect(R) and Consensus(R) branded services through the Web sites eFax.com and j2.com, and also advertises to our non-paid subscribers (sometimes referred to as "Free" or "advertising-supported" subscribers). Our "advertising-supported" subscribers also serve as a source of new paid subscribers, for both our Web and Corporate channels. This process of migrating advertising-supported customers to paid services is part of our "life cycle management" program. This program includes monitoring the usage level of advertising-supported customers, sending them promotional up-sell messages and culling out subscribers that do not adhere to the limitations on free services set forth in our customer agreements. In addition, our life cycle management program is designed to encourage more frequent use of our services by both paid and non-paid subscribers. Subscriber Revenues. We generate subscriber revenues through marketing our Web channel services primarily to individuals and small businesses through a combination of Internet-based marketing and advertising, an in-house 14 telesales group and word-of-mouth. More than three-quarters of our Web channel subscriber revenues are comprised of recurring subscription fees, with the balance resulting from usage and activation fees. As of September 30, 2003, we had approximately 317,000 telephone numbers deployed to paid Web channel subscribers. Advertising Revenues. Web channel advertising revenues are generated from advertising primarily to non-paid subscribers. As of September 30, 2003, we had approximately 5.1 million telephone numbers deployed to these advertising-supported Web channel subscribers. CORPORATE CHANNEL We currently generate 29% of our total revenues through our Corporate channel. This channel markets our eFax Corporate(R) branded services to midsize and large businesses, as well as government agencies, through an in-house direct sales force. In September 2003, we acquired M4InternetTM, which provides technology and services for personalized, permission-based email messaging to midsize and large businesses through an in-house direct sales force. The Corporate channel also markets our eFax BroadcastTM and jBlast(R) services through an outsourced telesales organization. More than two-thirds of our Corporate channel revenues are generated by usage fees with the balance resulting from recurring subscription and activation fees. Usage makes up a significant portion of revenues generated by our Corporate channel; as a result, this channel's revenues are subject to fluctuations based on the market conditions faced by our corporate customers. For example, we have experienced fluctuations in usage levels from customers in the real estate industry, particularly those in the mortgage refinancing sector, due to fluctuations in mortgage rates. As of September 30, 2003, we had approximately 63,000 telephone numbers deployed to paying Corporate channel subscribers. LICENSED SERVICES CHANNEL We currently generate 1% of our total revenues through our Licensed Services channel. This channel seeks to integrate our services and network capabilities on an opportunistic basis into third-party product offerings, to sell our software products and to license our intellectual property. The majority of our Licensed Services channel revenues currently result from the sale of our recently released PaperMaster(R) ProTM desktop-based document management software. RESULTS OF OPERATIONS FOR THE THREE AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2003 AND 2002 REVENUE ITEMS Subscriber Revenues. Subscriber revenues, which accounted for more than 94% of our total revenues for each of the three and nine-month periods ended September 30, 2003, are comprised primarily of monthly recurring subscription fees and usage based fees. Subscriber revenues were $17.8 million and $11.6 million for the three months ended September 30, 2003 and 2002, respectively. For the nine months ended September 30, 2003 and 2002, subscriber revenues were $48.6 million and $31.3 million, respectively. The increases in subscriber revenues during these periods were due primarily to an increase in our paying subscribers in both our Web and Corporate channels, an increase in usage levels in our Corporate channel and a price increase effective mid-June 2003 for new Web channel customers. The increases in paid subscribers in our Web channel were the result of new Web sign-ups derived from word-of-mouth, conversions of existing advertising-supported customers to paid services as a result of our "lifecycle management" program, a decrease in cancellations and increased Internet advertising . The increases in paid subscribers in our Corporate channel were the result of new customer accounts generated by our direct sales force and DID additions to the existing Corporate channel customer base. Our number of subscribers (both paid and advertising-supported) was greater than 5.5 million and 4.6 million as of September 30, 2003 and 2002, respectively, and the percentage of paid subscribers has increased year-over-year. Effective mid-June 2003, we implemented a price increase to new subscribers of our Web channel services. In mid-September 2003, we began applying the price increase to our existing base of Web channel customers. The monthly subscription fee for the eFax Plus service was raised from $9.95 to $12.95, and the activation fee increased from $10.00 to $12.95. For the jConnect Premier service, the monthly subscription fee was increased from $12.50 to $15.00, and the activation fee remained unchanged at $15.00. Implementation of this price increase to our 15 existing Web channel customers is anticipated to extend over a period of twelve months, with the majority of the increases occurring within the first six months. As of September 30, 2003, we estimate that approximately 10% of our Web channel customers were subject to this increased pricing and, as such, the price increase had an insignificant impact on total third quarter Web channel revenues. Advertising. We generate advertising revenues by delivering email messages and presenting banners on behalf of advertisers to our customers primarily those in our advertising-supported Web channel base. Advertising revenues, a component of our Web channel, accounted for approximately 5% of our total revenues for each of the three and nine-month periods ended September 30, 2003. For the three months ended September 30, 2003 and 2002, advertising revenues were $681,000 and $783,000, respectively. For the nine months ended September 30, 2003 and 2002, advertising revenues were $1.9 million and $2.3 million, respectively. The decreases in advertising revenues were due, among other reasons, to a weaker email advertising market demand inherent in the first nine months of 2003 compared to the first nine months of 2002, which resulted in less advertising spend by our advertisers and a slight decrease in advertising rates. We expect Internet email advertising market demand for the remainder of 2003 to remain comparable to that of the third quarter of 2003. Licensed Services. Licensed Services channel revenues, which accounted for approximately 1% of our total revenues for each of the three and nine-month periods ended September 30, 2003, consisted primarily of revenues from licensing our PaperMaster(R) ProTM document management software. For the three and nine months ended September 30, 2002, our Licensed Services channel consisted primarily of hardware and software royalties and revenues from licensing our PaperMaster(R) document management software products. Revenues by Channel. For each of the three and nine-month periods ended September 30, 2003, our Web, Corporate and Licensed Services channel revenues represented approximately 70%, 29% and 1% of our total revenues, respectively. For the three and nine-month periods ended September 30, 2002, our Web, Corporate and Licensed Services channel revenues represented approximately 73%, 26% and 1% of our total revenues, respectively. The primary reason for the change in these revenue percentages across the sales channels was the faster rate of growth of our Corporate channel during 2003. Cost of Revenues. Cost of revenues is comprised primarily of costs associated with data and voice transmission, telephone numbers, customer service, online processing fees and equipment depreciation. Cost of revenues were $3.5 million, or 18% of total revenues, and $2.6 million, or 20% of total revenues, for the three months ended September 30, 2003 and 2002, respectively. For the nine months ended September 30, 2003 and 2002, cost of revenues were $9.8 million, or 19% of total revenues, and $8.7 million, or 25% of total revenues, respectively. The absolute dollar increases in cost of revenues corresponded to an increase in subscription and usage revenues across both the Web and Corporate channels. The decreases in cost of revenues as a percentage of total revenues were a result of increased economies of scale in our infrastructure and our ability to negotiate reduced costs with several of our vendors and the consolidation of various components of our infrastructure during the first six months of 2002 with a continuing effect into this past quarter's results. OPERATING EXPENSES Sales and Marketing. Sales and marketing expenses are comprised primarily of payments to sales and marketing personnel, customer acquisition payments, advertising expenses, consulting services, promotional and public relations activities, trade show appearances and other business development activities. Our marketing and advertising relationships consist primarily of fixed Web site advertising placements at a fixed monthly cost, paid search engine placements priced on a cost-per-click basis, and cost-per-click and impression-based advertising arrangements, all with an array of online service providers. On an ongoing basis, we assess the effectiveness of these relationships in acquiring new customers at acceptable costs. Sales and marketing expenses were $2.9 million, or 15% of total revenues, and $2.0 million, or 16% of total revenues, for the three months ended September 30, 2003 and 2002, respectively. For the nine months ended September 30, 2003 and 2002, sales and marketing expenses were $8.3 million, or 16% of total revenues, and $4.7 million, or 14% of total revenues, respectively. The increases in sales and marketing expenses were due primarily to a more aggressive Web channel customer acquisition campaign and additional selling personnel added to the Corporate channel. 16 Amounts expensed under agreements with online service providers are included in sales and marketing expenses. For the three months ended September 30, 2003 and 2002, total amounts expensed under these agreements were $375,000 and $225,000, respectively. For the nine months ended September 30, 2003 and 2002, total amounts expensed under these agreements were $1,125,000 and $300,000, respectively. Research and Development. Our research and development costs consist primarily of personnel related costs. Research and development costs were $1.0 million, or 5% of total revenues, and $747,000, or 6% of total revenues, for the three months ended September 30, 2003 and 2002, respectively. For the nine months ended September 30, 2003 and 2002, research and development costs were $3.1 million, or 6% of total revenues, and $2.3 million or 7% of total revenues, respectively. The increases in research and development costs were primarily due to an increase in personnel costs to develop and implement additional service features and functionality and continue to bolster the capacity, reliability and security of our infrastructure to accommodate our growing Web and Corporate channel customer bases and to serve our increasingly sophisticated Corporate channel customer base. Research and development costs as a percentage of total revenues decreased as a result of proportionately greater increases in revenues over the same periods. Amortization of Goodwill and Other Intangibles. Upon the adoption of SFAS No. 142, "Goodwill and Other Intangible Assets", in the first quarter of 2002, we discontinued amortizing the remaining balances of goodwill and a trade name with an indefinite useful life. In accordance with this statement, no goodwill or trade name amortization was recorded during the three and nine-month periods ended September 30, 2003 and 2002. SFAS No. 142 also required that the amount of any unamortized deferred credit from a business combination effected prior to July 1, 2001 be recognized into earnings as the effect of a cumulative change of accounting principle. In the first quarter of 2002, we recognized such a deferred credit amounting to $225,000 in the accompanying condensed consolidated statement of operations. Amortization of other intangibles, included in general and administrative expenses, aggregated $46,000 and $19,000 for the three months ended September 30, 2003 and 2002, respectively, and $102,000 and $150,000 for the nine months ended September 30, 2003 and 2002, respectively. The $150,000 as of September 30, 2002 primarily represented amortization for an intangible asset with a finite useful life under SFAS No. 142. This intangible asset was fully amortized as of January 2002. See Note 8 to the accompanying condensed consolidated financial statements for a further discussion of goodwill and intangible assets. Interest and Other Income. For the three and nine-month periods ended September 30, 2003, interest and other income consisted primarily of interest earned on cash, cash equivalents and short-term investments. For the three and nine-month periods ended September 30, 2002, interest and other income consisted primarily of a gain on the sale of an investment and interest earned on cash and cash equivalents. Interest and other income amounted to $126,000 and $62,000 for the three months ended September 30, 2003 and 2002, respectively, and $269,000 and $387,000 for the nine months ended September 30, 2003 and 2002, respectively. The increase in interest and other income for the three months ended September 30, 2003 compared to the three months ended September 30, 2002 was a result of higher overall cash balances and the composition of slightly higher yielding investments during third quarter of 2003. The decrease in interest and other income for the nine months ended September 30, 2003 compared to the nine months ended September 30, 2002 was primarily due to a gain on the sale of an investment approximating $162,000 occurring in the first half of 2002. Income Taxes. Income tax expense amounted to approximately $347,000 and zero for the three months ended September 30, 2003 and 2002, respectively. For the nine months ended September 30, 2003 and 2002, income tax expense was $862,000 and zero, respectively. In September 2002, the State of California enacted legislation deferring the use of NOL carry-forwards until the 2004 tax year. As a result, 2003 state income tax expense of $347,000 and $862,000 for the three and nine-month periods ended September 30, 2003 and 2002, respectively, consisted of apportioned California taxes offset by certain state research and development tax credits. For the remainder of 2003, we expect to incur California income tax expense of approximately 5% of income before taxes. 17 As of September 30, 2003, we had federal and state (California) net operating loss carry-forwards ("NOLs") of approximately $103 million and $43 million, respectively. In addition, we had federal tax credits approximating $1 million. The Tax Reform Act of 1986 imposed substantial restrictions on the utilization of NOLs in the event of an "ownership change" (as defined in the Internal Revenue Code) of a corporation. Our ability to utilize NOLs is limited as a result of such "ownership changes". The NOLs attributable to the eFax.com and SureTalk.com subsidiaries before their acquisitions by the Company are also limited according to these provisions. After giving effect to these limitations, as of September 30, 2003, we estimated that approximately $41 million of the federal NOL and $1 million of the federal tax credits would be available for use before their expiration in the year 2021 and $43 million of the state NOL would be available for use before its expiration in the year 2013. Based upon our expected continued profitability in the fourth quarter of 2003 and, based on current information, for the foreseeable future, we anticipate that we will meet the "more likely-than-not" criteria for recognition of deferred tax assets as described in SFAS No. 109 "Accounting For Income Taxes". As a result, we anticipate reducing the valuation allowance and recognizing a substantial portion of its remaining federal and state NOLs and other tax credits as a tax asset in the fourth quarter of 2003. We believe that a reduction in the valuation allowance at that time will result in a one-time income tax benefit recorded in the fourth quarter of 2003 ranging from $9 million to $13 million, or $0.35 to $0.50 per fully diluted share. Assuming this takes place, beginning in the first quarter of 2004 and continuing into the future, we expect to reflect both federal and state income tax expense at a rate no greater than 40%; however, the actual tax rate accrual for 2004 and beyond will depend on several factors, including, but not limited to, tax rates and the relative composition of our domestic and international business. LIQUIDITY AND CAPITAL RESOURCES At September 30, 2003, our primary sources of liquidity consisted of $46.3 million in cash and cash equivalents and $8.2 million in short-term investments. Net cash provided by operating activities was $22.5 million and $10.0 million for the nine months ended September 30, 2003 and 2002, respectively. For the first three quarters of 2003 and 2002, net cash provided by operating activities resulted primarily from our operating earnings and depreciation and amortization, offset by changes in assets and liabilities. Net cash used in investing activities was $11.4 million and $1.5 million for the nine months ended September 30, 2003 and 2002, respectively. For the first three quarters of 2003, net cash used in investing activities was comprised primarily of purchases of short-term investments and furniture, fixtures and equipment. For the first three quarters of 2002, net cash used in investing activities consisted primarily of purchases of furniture, fixtures and equipment. Net cash provided by (used in) financing activities was $2.5 million and ($156,000) for the nine months ended September 30, 2003 and 2002, respectively. For the first three quarters of 2003 and 2002, net cash provided by financing activities was comprised primarily of proceeds from the exercise of stock options, offset by net repayments of long-term debt and capital lease obligations. Based on our past performance and current expectations, we believe that our cash and cash equivalents will be sufficient to meet our anticipated needs for working capital and capital expenditures for at least the next 12 months. FINANCIAL COMMITMENTS CAPITAL LEASING AND LOAN ARRANGEMENTS We finance a portion of our operating technology software and hardware, office equipment and certain insurance costs through capital leasing and loan arrangements. Our software, hardware and office equipment financing is typically secured by the related assets. Our financing for insurance costs is unsecured. Amounts due under these arrangements approximated $1.6 million and $847,000 as of September 30, 2003 and December 31, 2002, respectively, with installments due through 2006 at fixed rates ranging from 3.4% to 8.8% per annum. 18 In the third quarter of 2003, we entered into an equipment leasing line of credit which permits borrowings up to $2.5 million. As of September 30, 2003, amounts drawn down under this credit line were $236,000, which is included in long-term debt in the accompanying financial statements. The credit line bears interest at 5.8% subject to adjustment based on the 36-month Treasury rate and is secured by the equipment being financed. Borrowings under this credit line are subject to repayment terms of 36 months commencing from the date of each draw-down. Operating Leases We lease certain facilities and equipment under non-cancelable operating leases which expire at various dates through 2010. For the remainder of fiscal year 2003, minimum lease payments under operating leases as of approximate $195,000. Future minimum lease payments under non-cancelable operating leases (with initial or remaining lease terms in excess of one year) are as follows (in thousands): Year Ending December 31, ----------- 2004 $ 695 2005 695 2006 708 2007 708 2008 708 Thereafter 708 ----------- Total $ 4,222 =========== FORWARD-LOOKING INFORMATION In addition to historical information, the foregoing Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements. These forward-looking statements involve risks, uncertainties and assumptions. The actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including but not limited to those discussed below, the results of any acquisition we may complete and the factors discussed in the section in this Quarterly Report on Form 10-Q entitled "Quantitative and Qualitative Disclosures About Market Risk". Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's opinions only as of the date hereof. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements. Readers should carefully review the risk factors described below, those identified in the "Risk Factors" section of our Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC") on March 31, 2003 and the risk factors set forth in other documents we file from time to time with the SEC. Some factors that could cause actual results to differ materially from those anticipated in these forward-looking statements include, but are not limited to, our ability to: o Sustain growth or profitability; o Continue to maintain, expand and retain our customer base; o Compete with existing or new providers of similar services with regard to price, quality and functionality; o Cost-effectively procure large quantities of telephone numbers in desired locations in the United States and abroad; o Adequately manage and plan for potentially burdensome regulation of the telecommunications and/or the Internet industries, which could adversely affect our business; o Obtain large quantities of non-paying users on a cost effective basis, and effectively derive revenues from those users through advertising to them and selling them paid services; 19 o Successfully manage our cost structure, including but not limited to our telecommunication and personnel related expenses; o Utilize our federal and state net operating loss tax carry-forwards which may be subject to limitations o Successfully adapt to technological changes in the messaging, communications and document management industries; o Successfully protect our intellectual property and avoid infringing upon the proprietary rights of others; o Maintain and manage relationships with marketing companies, telecommunications carriers and network services providers (e.g., collocation and Internet broadband suppliers); o Adequately manage growth in terms of managerial and operational resources; o Maintain and upgrade our systems and infrastructure to deliver acceptable levels of service quality, accommodate increased traffic, bill our customers and provide adequate security of customer data and messages; o Introduce new services and achieve acceptable levels of returns-on-investment for those new services; and o Recruit and retain key personnel. In addition, a material amount of the Company's Corporate channel revenues are generated from customers in the real estate industry, particularly those in the mortgage refinancing sector. As a result, the Company's Corporate channel usage revenues can fluctuate based on changes in mortgage interest rates. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - ------------------------------------------------------------------ The following discussion of the market risks we face contains forward-looking statements. Forward-looking statements are subject to risks and uncertainties. Actual results could differ materially from those discussed in the forward-looking statements. We believe that our exposure to market risk related to changes in interest rates and foreign currency exchange rates is not significant, primarily because our indebtedness under financing arrangements has fixed interest rates and our transactions are substantially denominated in US Dollars. However, we invest our cash primarily in high grade, short-term, interest-bearing instruments. Our return on these instruments is subject to interest rate fluctuations. We do not have derivative financial instruments for hedging, speculative or trading purposes. ITEM 4. CONTROLS AND PROCEDURES - ------------------------------- Disclosure Controls and Procedures. The Company's management, with the participation of the Company's President (principal executive officer) and Chief Financial Officer (principal financial officer), has evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this report. Based on such evaluation, the Company's President (principal executive officer) and Chief Financial Officer (principal financial officer) have concluded that, as of the end of such period, the Company's disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act. 20 Internal Control Over Financial Reporting. There have not been any changes in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. 21 PART II. OTHER INFORMATION - -------------------------- ITEM 1. LEGAL PROCEEDINGS - ------------------------- We are not currently aware of any legal proceedings or claims that we believe are likely to have a material adverse effect on our business, prospects, financial position, results of operations or cash flows. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K - ---------------------------------------- a. Exhibits: Exhibit Number Description ------ ----------- 31 Certificates of Chief Executive Officer and Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-15(e) and 15d-15(e) as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 dated November 11, 2003. 32 Certificate of Chief Executive Officer and Chief Financial Officer pursuant to section 18 U.S.C. section 1350 dated November 11, 2003. b. Reports on Form 8-K: Item Description Filing Date ---- ----------- ----------- 7,9 Regulation FD disclosure regarding second July 22, 2003 quarter 2003 financial results, revised financial estimates for third quarter and fiscal year 2003, and July 2003 Investor Presentation. 7,9 Regulation FD disclosure regarding July 22, 2003 clarification of certain comments made during the second quarter earnings conference call. 7,9 Regulation FD disclosure announcing that August 8, 2003 j2's Board of Directors approved a two-for-one stock split, to be effected in the form of a stock dividend. 7,9 Regulation FD disclosure announcing September 9, 2003 that j2 was awarded a patent for its messaging network architecture. 7,9 Regulation FD disclosure regarding the September 11, 2003 Company's intentions to apply a price increase to its existing Web channel customer base over a twelve month period. Items 2, 3, 4 and 5 are not applicable and have been omitted. 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. j2 Global Communications, Inc. Date: November 11, 2003 By: /s/ R. SCOTT TURICCHI ----------------------------- R. Scott Turicchi Chief Financial Officer (Principal Financial Officer) Date: November 11, 2003 By: /s/ GREGGORY KALVIN ----------------------------- Greggory Kalvin Chief Accounting Officer (Principal Accounting Officer) 23 INDEX TO EXHIBITS ----------------- Exhibit Number Description ------ ----------- 31 Certificates of Chief Executive Officer and Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-15(e) and 15d-15(e) as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 dated November 11, 2003. 32 Certificate of Chief Executive Officer and Chief Financial Officer pursuant to section 18 U.S.C. section 1350 dated November 11, 2003. 24 EX-31 3 exhibit31_12299.txt 302 CERTIFICATION OF PRESIDENT AND C.F.O. EXHIBIT 31 ---------- Certification of CEO Pursuant to Securities Exchange Act Rules 13a-15(e) and 15d-15(e) as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Scott M. Jarus, certify that: 1. I have reviewed this quarterly report on Form 10-Q of j2 Global Communications, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 11, 2003 /s/ SCOTT M. JARUS ---------------------------- Scott M. Jarus President (Principal Executive Officer) Certification of CFO Pursuant to Securities Exchange Act Rules 13a-15(e) and 15d-15(e) as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, R. Scott Turicchi, certify that: 1. I have reviewed this quarterly report on Form 10-Q of j2 Global Communications, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 11, 2003 /s/ R. SCOTT TURICCHI ------------------------------- R. Scott Turicchi Chief Financial Officer (Principal Financial Officer) EX-32 4 exhibit32_12299.txt 906 CERTIFICATION OF PRESIDENT AND C.F.O. EXHIBIT 32 ---------- Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the quarterly report on Form 10-Q of j2 Global Communications, Inc. (the "Company") for the quarter ended September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Scott M. Jarus, as President (principal executive officer) of the Company, and R. Scott Turicchi, as Chief Financial Officer (principal financial officer) of the Company, each hereby certifies, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, to the best of his knowledge, respectively, that: (1) The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. By: /s/ SCOTT M. JARUS ---------------------------- Dated: November 11, 2003 Scott M. Jarus President (Principal Executive Officer) By: /s/ R. SCOTT TURICCHI ---------------------------- Dated: November 11, 2003 R. Scott Turicchi Chief Financial Officer (Principal Financial Officer) A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to j2 Global Communications, Inc. and will be retained by j2 Global Communications, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----