- --------------------------------------------------------------------------- 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, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 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 of (I.R.S. Employer Incorporation or Organization) Identification Number) 6922 Hollywood Boulevard Suite 800 Hollywood, 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 [ ] As of October 31, 2001, there were 11,121,379 shares of the Registrant's common stock, $0.01 per share, outstanding. - -------------------------------------------------------------------------------- -1-
j2 Global Communications, Inc. For the Quarter Ended September 30, 2001 INDEX <TABLE> <CAPTION> Page ---- <S> <C> PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements (Unaudited) Condensed Consolidated Statements of Operations................. 3 Condensed Consolidated Balance Sheets........................... 4 Condensed Consolidated Statements of Cash Flows................. 5 Notes to Condensed Consolidated Financial Statements............ 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................. 10 Item 3. Quantitative and Qualitative Disclosures about Market Risk ..... 15 PART II. OTHER INFORMATION Item 1. Legal Proceedings .............................................. 16 Item 2. Changes in Securities and Use of Proceeds ...................... 16 Item 3. Defaults Upon Senior Securities ................................ 17 Item 4. Submission of Matters to a Vote of Security Holders ............ 17 Item 5. Other Information .............................................. 17 Item 6. Exhibits and Reports on Form 8-K ............................... 17 </TABLE> -2-
PART I FINANCIAL INFORMATION ITEM 1. Financial Statements j2 Global Communications, Inc. Condensed Consolidated Statement of Operations (Unaudited) (in thousands, except per share amounts) <TABLE> <CAPTION> Three months ended Nine months ended September 30, September 30, ------------------------- ------------------------- 2001 2000 2001 2000 ----------- ---------- ----------- ---------- <S> <C> <C> <C> <C> Revenues: Subscriber $ 8,329 $ 3,266 $ 22,034 $ 9,139 Hardware -- -- 742 -- Other 268 -- 896 -- ----------- ---------- ----------- ---------- Total 8,597 3,266 23,672 9,139 Cost of revenue Subscriber 3,387 1,709 9,504 4,747 Other -- -- 450 -- ----------- ---------- ----------- ---------- Total cost of revenue 3,387 1,709 9,954 4,747 Gross profit 5,210 1,557 13,718 4,392 Operating expenses: Sales and marketing 1,125 2,549 3,313 7,167 Research and development 709 767 1,890 2,120 General and administrative 3,381 3,711 10,600 11,483 Amortization of goodwill and other intangibles 1,727 1,141 5,197 2,942 ----------- ---------- ----------- ---------- Total operating expenses 6,942 8,168 21,000 23,712 Operating Loss (1,732) (6,611) (7,282) (19,320) Other income, net 275 703 1,076 2,178 ----------- ---------- ----------- ---------- Net Loss (1,457) (5,908) (6,206) (17,142) =========== ========== =========== ========== Basic and diluted net loss per common share $ (0.13) $ (0.66) $ (0.54) $ (1.92) =========== ========== =========== ========== Weighted average shares outstanding 11,239,198 9,005,895 11,412,078 8,897,921 ----------- ---------- ----------- ---------- </TABLE> -3-
j2 Global Communications, Inc. Condensed Consolidated Balance Sheets (Unaudited) (in thousands) <TABLE> <CAPTION> ASSETS September 30, 2001 December 31, 2000 ------------------ ----------------- <S> <C> <C> Cash and cash equivalents $ 22,816 $ 23,824 Short-term investments 0 1,983 Accounts receivable, net 2,865 2,443 Prepaid expenses and other 2,273 2,047 ------------------ ----------------- Total current assets 27,954 30,277 Furniture, fixtures and equipment, net 5,629 6,214 Goodwill, net 16,857 20,759 Other purchased intangibles, net 1,771 2,945 Long-term investments 0 2,320 Other assets 1,835 2,790 ------------------ ----------------- Total assets $ 54,046 $ 65,305 ================== ================= LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable and accrued expenses $ 3,440 $ 5,298 Accrued exit costs 1,098 2,106 Deferred revenue 1,117 1,485 Current portion of capital lease payable 390 295 Current portion of long-term debt 674 1,285 Other 282 132 ------------------ ----------------- Total current liabilities 7,001 10,601 Capital lease obligations 0 168 Long-term debt 87 416 ------------------ ----------------- Total liabilities 7,088 11,185 Redeemable common stock 0 7,065 Common stock subject to put option 998 998 Total stockholders' equity 45,960 46,057 ------------------ ----------------- Total liabilities and stockholders' equity $ 54,046 $ 65,305 ================== ================= </TABLE> -4-
j2 Global Communications, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited) (in thousands) <TABLE> <CAPTION> Nine months ended September 30, ---------------------- 2001 2000 --------- --------- <S> <C> <C> Net cash used in operating activities $ (1,028) (9,887) --------- --------- Cash flows from investing activities: Redemption of investments, net 4,344 20,926 Advances under note receivable (500) (4,000) Purchases of furniture, fixtures and equipment (1,179) (3,688) --------- --------- Net cash provided by investing activities 2,665 13,238 --------- --------- Cash flows from financing activities: Exercise of stock options - 90 Repayments of loans payable and capital lease obligations, net (1,341) (640) Repurchase of common stock (1,304) - --------- --------- Net cash used in financing activities (2,645) (550) --------- --------- Net increase (decrease) in cash and cash equivalents (1,008) 2,801 Cash and cash equivalents, beginning of year 23,824 12,256 --------- --------- Cash and cash equivalents, end of period $ 22,816 15,057 --------- --------- </TABLE>
j2 Global Communications, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2001 (Unaudited) NOTE 1 - BASIS OF PRESENTATION The accompanying financial information is unaudited but reflects all adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the consolidated financial position and results of operations for the interim periods. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto, together with management's discussion and analysis of financial condition and results of operations, for the fiscal year ended December 31, 2000 as presented in the Company's Form 10-K, as amended on April 30, 2001. The results of operations for the three and nine months ended September 30, 2001 are not necessarily indicative of the results to be expected for the entire fiscal year. NOTE 2 - USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles 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. Actual results could differ from those estimates. NOTE 3 - COMPREHENSIVE LOSS Comprehensive loss is comprised of net loss and unrealized losses on a short- term investment classified as available for sale for fiscal 2000, and net loss only for fiscal 2001. Comprehensive loss was $1.5 and $6.1 million for the quarters ended September 30, 2001 and 2000, respectively, and $6.2 and $17.5 million for the nine months ended September 30, 2001 and 2000, respectively. NOTE 4 - BUSINESS COMBINATIONS SureTalk.com, Inc. - ----------------- On January 26, 2000, the Company acquired all of the outstanding stock of SureTalk.com, Inc. for $12 million in common stock, valued at the average closing price at the acquisition date. SureTalk.com, Inc. was a closely held Internet-based faxing, messaging and communications company based in Carlsbad, California. The acquisition was accounted for as a purchase transaction with substantially all of the purchase price allocated to goodwill and other purchased intangibles which are being amortized over 2 to 3 years. TimeShift, Inc. - -------------- On March 6, 2000 the Company acquired substantially all of the assets of TimeShift, Inc. for $1.1 million in common stock, valued at the average closing price at the acquisition date. TimeShift was a closely held Internet technology company based in San Francisco, California. -6-
eFax.com - -------- On November 29, 2000, the Company acquired all of the outstanding stock of eFax.com, Inc. for $8.2 million, including $5.8 million in common stock, valued at the average closing price at the acquisition date, $0.8 million in acquisition costs, and $1.6 million in common stock warrants, valued at their fair value at the acquisition date. eFax.com was a leading provider of unified messaging and communications services. The acquisition was accounted for under the purchase method of accounting and, accordingly, eFax.com's assets and liabilities were recorded based upon their fair values on the date of acquisition. In connection with this acquisition, the Company recorded approximately $16.1 million in goodwill and other intangible assets that are being amortized on a straight-line basis over seven years from the date of acquisition. The operations of the above-acquired companies are included in the results of operations and cash flows of the Company from the date of acquisition forward. The pro forma consolidated financial information for the Company for the three and nine months ended September 30, 2000 determined as if the SureTalk and eFax acquisitions had occurred on January 1, 2000 would have resulted in net sales of $6.0 million and $16.8 million, net loss of $5.6 million and $16.8 million, loss from operations of $6.3 million and $19.0 million, and basic and diluted loss per share of $0.48 and $1.47 respectively. The pro forma financial information is not necessarily indicative of the combined results that would have occurred had the acquisitions taken place at the beginning of the period, nor is it necessarily indicative of results that may occur in the future. The pro forma effect of the TimeShift transaction is immaterial for all periods presented and therefore is not included in the pro forma information presented. NOTE 5 - INTEGRATION COSTS In connection with the acquisition of eFax.com, the Company incurred acquisition integration expenses for the incremental cost to exit and consolidate activities at eFax locations, to involuntary terminate eFax employees, and for other activities of eFax with j2 Global. Generally accepted accounting principles require that these integration expenses, which are not associated with the generation of future revenues and have no future economic benefit to the Company, be reflected as assumed liabilities in the allocation of the purchase price to the net assets acquired. The components of the acquisition integration liabilities included in the purchase price allocation are as follows: -7-
<TABLE> <CAPTION> e-fax duplicate e-fax duplicate Workforce Occupancy phone operations information systems reductions Costs Total ---------------- ------------------- ----------- --------- ----- <S> <C> <C> <C> <C> <C> (thousands) Balance November 29, 2000 (efax.com acquisition date) $ 1,204 675 380 386 2,645 Utilized--fiscal 2000 (134) (75) (300) (30) (539) ----------- ------ ------ ------ ------ Balance December 31, 2000 1,070 600 60 358 2,106 Adjustments--three months ended March 31, 2001 -- (300) 300 -- -- Utilized--three months ended March 31, 2001 (276) -- (309) (126) (713) ----------- ------ ------ ------ ------ Balance March 31, 2001 794 300 71 228 1,393 Utilized--three months ended June 30, 2001 (198) (30) (23) 0 (251) ----------- ------ ------ ------ ------ Balance June 30, 2001 596 270 46 228 1,142 Adjustments--three months ended September 30, 2001 (270) (48) 318 -- Utilized--three months ended September 30, 2001 (44) -- -- -- (44) ----------- ------ ------ ------ ------ Balance September 30, 2001 552 0 0 546 1,098 </TABLE> Certain aspects of the integration plan will be refined as actual costs are incurred. Adjustments to the estimated acquisition integration liabilities based on these refinements will be included in the allocation of the purchase price of eFax.com if the adjustment is determined within the purchase price allocation period. Adjustments that are determined after the end of the purchase price allocation period will be (1) incurred as a reduction of net income if the ultimate amount of the liability exceeds the estimate or (2) recorded as a reduction of goodwill if the ultimate amount of the liability is below the estimate. Based on our most current information available, except for certain unsettled amounts related to terminations of certain phone operations contracts and a lease, all duplicate costs payments ceased at the end of the third quarter of fiscal 2001. NOTE 6 - LOSS PER SHARE Basic net loss per share is computed using the weighted average number of common shares outstanding during the period. For the three and nine month periods ended September 30, 2001, diluted net loss per share excludes the effect of options and warrants to purchase approximately 890,000 and 812,000 shares, respectively, because their effect would be antidilutive. Additionally, for the three and nine month periods ended September 30, 2000, diluted net loss per share excludes the effect of options and warrants to purchase approximately 380,000 and 491,000 shares, respectively, because their effect would also be antidilutive. NOTE 7 - STOCK REPURCHASE TRANSACTIONS In June 2001, the Company announced that is Board of Directors had approved a stock repurchase program pursuant to which, through December 31, 2001, the Company is authorized to repurchase up to $2 million of the Company's common stock through one or more open market or off market purchases. During the third quarter of fiscal 2001 we purchased $393,000 of common stock through a series of open market purchases under the program. As of October 31, 2001, the Company has purchased an aggregate of $1.3 million in common stock under the program, leaving $700,000 available for additional repurchases through December 31, 2001. The Company is not required to effect additional repurchases under the program, but may do so as it deems appropriate and in the best interests of the Company and its shareholders. -8-
On June 20, 2001, also pursuant to the stock repurchase plan, we repurchased, 251,922 shares (of 551,925 shares outstanding) of our redeemable common stock and 117,188 outstanding warrants, for an aggregate value of $911,024. Prior to repurchase, these common shares were classified at their redeemable security value of $3,224,598 in our balance sheet due to certain put features available to the holders. The fair value paid for the shares and the difference between such fair value and the carrying value of the shares was recorded as treasury stock and additional paid in capital, respectively, in our stockholders equity section in the accompanying balance sheet. The fair value paid for the warrants when issued was an immaterial amount and was recorded as additional paid in capital in our stockholders equity section in the accompanying balance sheet. On June 28, 2001 the remaining 300,003 redeemable common shares were privately sold by the holder. In connection with the sale, the put feature associated with the securities was eliminated, and as such, we have reclassified the carrying value of these shares of $3,840,035 to stockholders equity in the accompanying balance sheet. NOTE 8 - LITIGATION On October 28, 1999, AudioFAX IP LLC filed a lawsuit against us in the United States District Court for the Northern District of Georgia asserting the ownership of certain United States and Canadian patents and claiming that we are infringing these patents as a result of our sale of enhanced facsimile services. The suit requests unspecified damages, treble damages due to willful infringement, and preliminary and permanent injunctive relief. We filed an answer to the complaint on December 2, 1999. Discovery began in early 2000 and no trial date has been set. The case was stayed pursuant to a consent order submitted by both parties in September 2000 pending the re-examination by the U.S. Patent and Trademark Office. The re-examination concluded in September 2001 and the stay was lifted and discovery resumed. We have reviewed the AudioFAX patents with our business and technical personnel and outside patent counsel and have concluded that we do not infringe these patents. As a result, we are confident of our position in this matter and are vigorously defending the suit. However, the outcome of complex litigation is uncertain and cannot be predicted with certainty at this time. Any unanticipated adverse result could have a material adverse effect on our financial condition and results of operations NOTE 9 - REVERSE STOCK SPLIT On February 8, 2001 we carried out a 1 for 4 reverse stock split. All historical share and per data are presented on a post split basis. -9-
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations for the Three Months Ended September 30, 2001 and 2000 Revenue. Subscriber revenue was $8.6 million and $3.3 million for the three months ended September 30, 2001 and 2000, respectively. The increase in revenue was primarily due to an increased number of subscriptions principally through our acquisition of eFax.com in November 2000 and a price increase to eFax subscribers effective February 2001. Total subscribers at September 30, 2001 were 4.5 million. This compares to pro forma total subscribers, inclusive of eFax.com, of 3.5 million at September 30, 2000. For the three months ended September 30, 2001 other revenues consist primarily of royalties from certain licensing arrangements related to sales of consumable products to users of existing eFax.com licensed fax machines. Due to the eFax.com acquisition date of November 2000, there were no comparable revenues for the three months ended September 30, 2000. Cost of Revenue. Subscriber cost of revenue is comprised primarily of data and voice network costs, customer service expenses, online processing fees, and equipment depreciation. Subscriber cost of revenue was $3.4 million, or 41% of subscriber revenue, and $1.7 million, or 52% subscriber of revenue, for the three months ended September 30, 2001 and 2000, respectively. The increase in cost of revenue in absolute dollars reflects the cost of building and expanding our server and networking infrastructure and customer service capabilities to accommodate growth of our subscriber base. The decrease in cost of revenues as a percentage of sales is primarily due to our higher absorption of fixed capacity costs in fiscal 2001 versus 2000. Operating Expenses Sales and Marketing. Our sales and marketing costs for the three months ended September 30, 2001 consisted primarily of personnel related expenses, advertising costs, and consulting fees. For the three months ended September 30, 2000 our sales and marketing costs consisted primarily of payments with respect to strategic alliances, personnel related expenses, consulting, advertising, and public relations. Sales and marketing expenses were $1.1 million, or 14% of subscriber revenue, and $2.5 million, or 78% of subscriber revenue, for the three months ended September 30, 2001 and 2000, respectively. Sales and marketing costs decreased for the three months ended September 30, 2001 as compared to the same period in 2000 primarily due to the reduction of fixed payments for advertising in favor of transactions requiring payment only upon acquisition of paid subscribers. Prior to mid fiscal year 2000, we allocated limited resources to marketing our services, relying on our web sites to generate subscriptions and strategic alliances to market and sell our services to their customer bases. For the second half of fiscal 2000, and on a go forward basis, we expect our sales and marketing customer acquisition expenses to primarily occur only upon the acquisition of a paid subscriber. As a result, our marketing relationships with third parties are expected to primarily consist of revenue share arrangements. Research and Development Research and development costs were $709,000, or 8% of total revenue, and $767,000, or 23% of total revenue, for the three months ended September 30, 2001 and 2000, respectively. Research and development costs for the three months ended September 30, 2001 and 2000 primarily consisted of personnel related expenses. The decline as a percentage of revenue from fiscal 2000 to 2001 was primarily due to increases in revenues over these comparable periods. -10-
General and Administrative. Our general and administrative costs consist primarily of personnel related expenses, professional fees, and occupancy costs. General and administrative costs were $3.4 million, or 39% of total revenue, and $3.7 million, or 114% or total revenue, for the quarters ended September 30, 2001 and 2000, respectively. The percentage of revenue decline in the second quarter of 2001 versus 2000 was principally due to increases in revenues over these comparable periods. Amortization of Goodwill and Other Intangibles. For the three months ended September 30, 2001 and 2000, amortization of goodwill and other intangibles aggregated $1.7 million and $1.1 million, respectively. The increase in fiscal 2001 was due to the acquisition of eFax.com in November 2000. Other Income, net. Other income, net, was $275,000 and $703,000 for the three months ended September 30, 2001 and 2000, respectively. Other income, net, primarily resulted from interest income earned on our cash and cash equivalents and short and long-term investments offset by interest expense on capital lease obligations and long-term debt. Amounts for the third quarter of 2000 were higher than 2001 primarily due to the carrying of higher cash and investment balances and higher interest rates. Results of Operations for the Nine Months Ended September 30, 2001 and September 30, 2000 Revenue. Subscriber revenue was $23.7 million and $9.1 million for the nine months ended September 30, 2001 and 2000, respectively. The increase in revenue was primarily due to an increased number of subscriptions principally through our acquisition of eFax.com in November 2000 and a price increase to eFax subscribers effective February 2001. Total subscribers at September 30, 2001 were 4.5 million. This compares to pro forma total subscribers, inclusive of eFax.com, of 3.5 million at September 30, 2000. Hardware and other revenues aggregated $1.4 million for the nine months ended September 30, 2001. We had no comparable revenues for the nine months ended September 30, 2000. Hardware revenues result from sales of consumable products to users of existing eFax.com licensed fax machines. Other revenues consist primarily of royalties from certain licensing arrangements related to eFax hardware products. On February 15, 2001 we sold, at book value, our remaining consumables inventory to a third party and simultaneously entered into a royalty based agreement with such party for future consumable sales. As a result, hardware sales and cost of sales are not expected to recur subsequent to the first quarter of fiscal 2001. Instead, we expect to receive royalty payments which are anticipated to result in immaterial revenues for fiscal 2001. Cost of Revenue. Subscriber cost of revenue is comprised primarily of data and voice network costs, customer service expenses, online processing fees, and equipment depreciation. Subscriber cost of revenue was $10.0 million, or 42% of subscriber revenue, and $4.7 million, or 52% of subscriber revenue, for the nine months ended September 30, 2001 and 2000, respectively. The increase in cost of revenue in absolute dollars reflects the cost of building and expanding our server and networking infrastructure and customer service capabilities to accommodate growth of our subscriber base. The decrease in cost of revenues as a percentage of sales is primarily due to our higher absorption of fixed capacity costs in fiscal 2001 versus 2000. Cost of revenue from hardware sales, which, as discussed in the "Revenue" section of MD&A above, are not expected following the first quarter of fiscal 2001, was $450,000 or 61% of hardware sales for the nine months ended September 30, 2001. There were no comparable sales for the nine months ended September 30, 2000. Operating Expenses Sales and Marketing. Our sales and marketing costs for the nine months ended September 30, 2001 consisted primarily of personnel related expenses, advertising costs, and consulting fees. For the nine months ended September 30, 2000 our sales and marketing costs consisted primarily of payments with respect to -11-
strategic alliances, personnel related expenses, consulting, advertising, and public relations. Sales and marketing expenses were $3.3 million, or 14% of subscriber revenue, and $7.2 million, or 78% of subscriber revenue, for the nine months ended September 30, 2001 and 2000, respectively. Sales and marketing costs decreased for the nine months ended September 30, 2001 as compared to the same period in 2000 primarily due to the reduction of fixed payments for advertising in favor of transactions requiring payment only upon acquisition of paid subscribers. Prior to mid fiscal year 2000, we allocated limited resources to marketing our services, relying on our web sites to generate subscriptions and strategic alliances to market and sell our services to their customer bases. For the second half of fiscal 2000, and on a go forward basis, we expect our sales and marketing customer acquisition expenses to occur only upon the acquisition of a paid subscriber. As a result of this, we expect our marketing relationships with third parties to principally consist of revenue share arrangements. Research and Development. Research and development costs were $1.9 million, or 8% of total revenue, and $2.1 million, or 23% of total revenue, for the nine months ended September 30, 2001 and 2000, respectively. Research and development costs for the nine months ended September 30, 2001 and 2000 primarily consisted of personnel related expenses. The decline as a percentage of revenue from fiscal 2000 to 2001 was primarily due to increases in revenues over these comparable periods. General and Administrative. Our general and administrative costs consist primarily of personnel related expenses, professional fees, and occupancy costs. General and administrative costs were $10.6 million, or 45% of total revenue, and $11.5 million, or 126% of total revenue, for the nine months ended September 30, 2001 and 2000, respectively. The decline as a percentage of revenue for the nine months ended September 30, 2001 versus 2000 was principally due to increases in revenues over these comparable periods. Amortization of Goodwill and Other Intangibles. For the nine months ended September 30, 2001 and 2000, amortization of goodwill and other intangibles aggregated $5.2 million and $2.9 million, respectively. This increase was due to the acquisition of eFax.com in November 2000. Other Income, Net. Other income, net, was $1.1 million and $2.2 million for the nine months ended September 30, 2001 and 2000, respectively. Other income, net, primarily resulted from interest income earned on our cash and cash equivalents and short and long-term investments offset by interest expense on capital lease obligations and long-term debt. Amounts for the nine months ended September 30, 2000 were higher than the comparable period for fiscal 2001 primarily due to the carrying of higher cash and investment balances and higher interest rates. Liquidity and Capital Resources As of September 30, 2001 we had $22.8 million in cash and cash equivalents. Net cash used in operating activities decreased to $1.0 million for the nine months ended September 30, 2001 from $9.9 million for the same period in 2000. The decrease in net cash used in operating activities was due primarily to a decrease in net loss and an increase in depreciation and amortization offset by a decrease in accounts payable and accrued expenses. Net cash provided by investing activities was $2.7 million and $13.2 million for the nine months ended September 30, 2001 and 2000, respectively. The decrease in net cash provided by investing activities from fiscal 2000 to 2001 was primarily due to decreases in the redemption of short and long-term investments, purchases of property, plant and equipment, and advances under notes receivable. -12-
Net cash used in financing activities of $2.6 million for the nine months ended September 30, 2001 consisted of repayments of long-term debt and capital lease obligations, and the purchases of redeemable and open market common stock. Net cash used in financing activities of $550,000 for the nine months ended September 30, 2000 consisted of repayments of long-term debt and capital lease obligations offset by the exercise of employee stock options. Stock Repurchase Program Transactions In June 2001, the Company announced that is Board of Directors had approved stock repurchase program pursuant to which, through December 31, 2001, the Company is authorized to repurchase up to $2 million of the Company's common stock through one or more open market or off market purchases. During the third quarter of fiscal 2001 we purchased $393,000 of common stock through a series of open market purchases under the program. As of October 31, 2001, the Company has purchased an aggregate of $1.3 million in common stock under the program, leaving $700,000 available for additional repurchases through December 31, 2001. The Company is not required to effect additional repurchases under the program, but may do so as it deems appropriate and in the best interests of the Company and its shareholders. On June 20, 2001, also pursuant to the stock repurchase plan, we repurchased, 251,922 shares (of 551,925 shares outstanding) of our redeemable common stock and 117,188 outstanding warrants, for an aggregate value of $911,024. Prior to repurchase, these common shares were classified at their redeemable security value of $3,224,598 in our balance sheet due to certain put features available to the holders. The fair value paid for the shares and the difference between such fair value and the carrying value of the shares was recorded as treasury stock and additional paid in capital, respectively, in our stockholders equity section in the accompanying balance sheet. The fair value paid for the warrants when issued was an immaterial amount and was recorded as additional paid in capital in our stockholders equity section in the accompanying balance sheet. On June 28, 2001 the remaining 300,003 redeemable common shares were privately sold by the holder. In connection with the sale, the put feature associated with the securities was eliminated, and as such, we have reclassified the carrying value of these shares of $3,840,035 to stockholders equity in the accompanying balance sheet. Capital Requirements Our capital requirements depend on numerous factors, including market acceptance of our services, the amount of resources we devote to investments in our network and services development, the resources we devote to the sales and marketing of our services and our brand promotions, and other factors. We have experienced a substantial increase in our capital expenditures and operating lease arrangements since our inception consistent with the growth in our operations and staffing, and anticipate that this will continue for the foreseeable future. Additionally, we expect to make additional investments in technologies and our network, and plan to expand our sales and marketing programs and conduct more aggressive brand promotions. We currently anticipate 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. Although operating activities may provide cash in certain periods, to the extent we experience growth in the future we anticipate that our operating and investing activities may use cash. Consequently, any such future growth may require us to obtain additional equity or debt financing, which may not be available on attractive terms, or at all, or may be dilutive. -13-
Recently Issued Accounting Pronouncements In July 2001, the FASB issued Statement No. 141, Business Combinations, and Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001. Statement 141 also specifies criteria intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill, noting that any purchase price allocable to an assembled workforce may not be accounted for separately. Statement 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of Statement 142. Statement 142 will also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. We are required to adopt the provisions of Statement 141 immediately, except with regard to business combinations initiated prior to July 1, 2001, and Statement 142 effective January 1, 2002. Furthermore, any goodwill and any intangible asset determined to have an indefinite useful life that are acquired in a purchase business combination completed after June 30, 2001 will not be amortized, but will continue to be evaluated for impairment in accordance with the appropriate pre-Statement 142 accounting literature. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 will continue to be amortized prior to the adoption of Statement 142. Statement 141 will require, upon adoption of Statement 142, that we evaluate our existing intangible assets and goodwill that were acquired in prior purchase business combinations, and to make any necessary reclassifications in order to conform with the new criteria in Statement 141 for recognition apart from goodwill. Upon adoption of Statement 142, we will be required to reassess the useful lives and residual values of all intangible assets acquired in purchase business combinations, and make any necessary amortization period adjustments by the end of the first interim period after adoption. In addition, to the extent an intangible asset is identified as having an indefinite useful life, we will be required to test the intangible asset for impairment in accordance with the provisions of Statement 142 within the first interim period. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in the first interim period. In connection with the transitional goodwill impairment evaluation, Statement 142 will require that we perform an assessment of whether there is an indication that goodwill (and equity-method goodwill) is impaired as of the date of adoption. To accomplish this we must identify our reporting units and determine the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of the date of adoption. We will then have up to six months from the date of adoption to determine the fair value of each reporting unit and compare it to the reporting unit's carrying amount. To the extent a reporting unit's carrying amount exceeds its fair value, an indication exists that the reporting unit's goodwill may be impaired and we must perform the second step of the transitional impairment test. In the second step, we must compare the implied fair value of the reporting unit's goodwill, determined by allocating the reporting unit's fair value to all of it assets (recognized and unrecognized) and liabilities in a manner similar to a purchase price allocation in accordance with Statement 141, to its carrying amount, both of which would be measured as of the date of adoption. This second step is required to be completed as soon as possible, but no later than the end of the year of adoption. Any transitional impairment loss will be recognized as the cumulative effect of a change in accounting principle in our statement of earnings. Finally, any unamortized negative goodwill (and negative equity-method goodwill) existing at the date Statement 142 is adopted must be written off as the cumulative effect of a change in accounting principle. -14-
As of the date of adoption, we expect to have unamortized goodwill in the amount of $15.4 million, unamortized identifiable intangible assets in the amount of $1.4 million, and no unamortized negative goodwill, all of which will be subject to the transition provisions of Statements 141 and 142. Amortization expense related to goodwill was $3.2 million and $4.1 million for the year ended December 31, 2000 and the nine months ended September 30, 2001, respectively. Because of the extensive effort needed to comply with adopting Statements 141 and 142, it is not practicable to reasonably estimate the impact of adopting these Statements on the Company's financial statements at the date of this report, including whether any transitional impairment losses will be required to be recognized as the cumulative effect of a change in accounting principle. For fiscal 2001 our policy for business combinations completed prior to July 1, 2001 is to periodically evaluate whether changes have occurred that would require revision of the remaining estimated useful life of the assigned goodwill or render the goodwill not recoverable. If such circumstances arise, we would use an estimate of the undiscounted value of expected future operating cash flows to determine whether the goodwill is recoverable. For the portion of goodwill deemed not recoverable, we would record a charge, in the period identified, between the difference of the carrying amount and the estimated undiscounted value of future operating cash flows. In August 2001, the Financial Accounting Standards Board issued FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (Statement 144), which supersedes both FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of (Statement 121) and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations--Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions (Opinion 30), for the disposal of a segment of a business (as previously defined in that Opinion). Statement 144 retains the fundamental provisions in Statement 121 for recognizing and measuring impairment losses on long-lived assets held for use and long-lived assets to be disposed of by sale, while also resolving significant implementation issues associated with Statement 121. For example, Statement 144 provides guidance on how a long-lived asset that is used as part of a group should be evaluated for impairment, establishes criteria for when a long-lived asset is held for sale, and prescribes the accounting for a long-lived asset that will be disposed of other than by sale. Statement 144 retains the basic provisions of Opinion 30 on how to present discontinued operations in the income statement but broadens that presentation to include a component of an entity (rather than a segment of a business). Unlike Statement 121, an impairment assessment under Statement 144 will never result in a write-down of goodwill. Rather, goodwill is evaluated for impairment under Statement No. 142, Goodwill and Other Intangible Assets. The Company is required to adopt Statement 144 no later than the year beginning after December 15, 2001, and plans to adopt its provisions for the quarter ending March 31, 2002. Management does not expect the adoption of Statement 144 for long-lived assets held for use to have a material impact on the Company's financial statements because the impairment assessment under Statement 144 is largely unchanged from Statement 121. The provisions of the Statement for assets held for sale or other disposal generally are required to be applied prospectively after the adoption date to newly initiated disposal activities. Therefore, management cannot determine the potential effects that adoption of Statement 144 will have on the Company's financial statements. Caution Concerning Forward-Looking Statements The SEC encourages companies to disclose forward-looking information so that investors can better understand a company's future prospects and make informed investment decisions. This document contains such "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, particularly statements anticipating future growth in revenues and cash flow. Words such as "anticipates," "estimates," "expects," "projects,"intends," "plans," "believes" and words and terms of similar substance used in connection with any discussion of future operating or financial performance identify such forward-looking statements. Those forward-looking statements are based on management's present expectations about future events. As with any projection or forecast, they are inherently susceptible to uncertainty and changes in circumstances, and we are under no obligation to (and expressly disclaims any such obligation to) update or alter our forward-looking statements whether as a result of such changes, new information, future events of otherwise. Our risk factors included in our annual report on Form 10-K, as amended April 30, 2001 and those identified in our other filings with the SEC could also cause actual results to differ from those contained in the forward looking statements. ITEM 3. Quantitative and Qualitative Disclosures About Market Risk At September 30, 2001, all of our investments were classified as cash equivalents and as such we believe we have immaterial market rate risk. We believe that our exposure to currency exchange fluctuation risk is insignificant because our transactions with international vendors and customers are generally denominated in US dollars, and those not denominated in US dollars are immaterial in amount. -15-
PART II. OTHER INFORMATION ITEM 1. Legal Proceedings On October 28, 1999, AudioFAX IP LLC filed a lawsuit against us in the United States District Court for the Northern District of Georgia asserting the ownership of certain United States and Canadian patents and claiming that we are infringing these patents as a result of our sale of enhanced facsimile services. The suit requests unspecified damages, treble damages due to willful infringement, and preliminary and permanent injunctive relief. We filed an answer to the complaint on December 2, 1999. Discovery began in early 2000 and no trial date has been set. The case was stayed pursuant to a consent order submitted by both parties in September 2000 pending the re-examination by the U.S. Patent and Trademark Office. The re-examination concluded in September 2001 and the stay was lifted and discovery resumed. We have reviewed the AudioFAX patents with our business and technical personnel and outside patent counsel and have concluded that we do not infringe these patents. As a result, we are confident of our position in this matter and are vigorously defending the suit. However, the outcome of complex litigation is uncertain and cannot be predicted with certainty at this time. Any unanticipated adverse result could have a material adverse effect on our financial condition and results of operations. ITEM 2. Changes in Securities and Use of Proceeds A. Not applicable B. Not applicable C. Not applicable D. Sales of Registered Securities and Use of Proceeds During July 1999, the Company completed its initial public offering (the "Offering") of 8,500,000 shares of its common stock. The offering date was July 23, 1999. The Company'scommon stock is publicly traded on the NASDAQ National Market under the symbol "JCOM." The lead underwriters in the offering were Donaldson, Lukfin & Jenrette; BancBoston Robertson Stephens; CIBC World Markets; and DLJdirect Inc. The shares of common stock sold in the Offering were registered under the Securities Act of 1933, as amended, on a Registration Statement on Form S-1 (the "Registration Statement") (File No. 333-76477), which the Securities and Exchange Commission declared effective on July 22, 1999. The Company registered a total of 8,500,000 shares of common stock for sale under the Registration Statement for an aggregate amount of $80,750,000 (based upon the offering price of $9.50 per share). The Company sold all 8,500,000 shares for an aggregate amount of $80,750,000 (before deduction of underwriting discounts, commissions and other expenses). Additionally, the underwriters had an option to purchase an additional 473,000 shares from the Company and 802,000 shares from certain selling stockholders to cover overallotments. None of those shares were sold in the Offering. If they had been sold, the aggregate amount received for the optional shares on the same basis as above would have been $4.5 million for the Company and $7.6 million for the selling stockholders. After deducting underwriting discounts and commissions of $5,652,500 and expenses of $1,274,000 in -16-
connection with the Offering, the Company received net proceeds from the Offering of $73.8 million. Through September 30, 2001, we have used $57.0 million of proceeds from the Offering for the following purposes: (i) $17.4 million for repayment of long- term debt in the amount of $10.5 million and redemption of preferred stock in the amount of $6.8 million, (ii) $8.7 million for expansion of our worldwide network, (iii) $15.1 million for funding advertising and marketing activities, (iv) $10.9 million for funding general corporate expenses, and (v) $4.9 million for note receivable advances to eFax.com. ITEM 3. Defaults Upon Senior Securities Not applicable ITEM 4. Submission of Matters to a Vote of Security Holders Not applicable ITEM 5. Other Information Not applicable ITEM 6. Exhibits and Reports on Form 8-K A. Exhibits. Not applicable B. Reports on Form 8-K Form Item Description Filing Date ---- -------- ----------- ----------- 8-K 5, 7 Announcement of stock repurchase July 2, 2001 program and closing of off-market transaction 8-K 5, 7 Regulation FD Disclosure regarding July 24, 2001 second quarter fiscal 2001 financial results -17-
SIGNATURE Pursuant to the requirements of the Securities and 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. (Registrant) By: /s/ Nehemia Zucker ---------------------- Its: Chief Financial Officer and Duly Authorized Officer of the Registrant By: /s/ Greggory Kalvin ---------------------- Its: Vice President, Finance (Principal Accounting Officer) November 13, 2001 -18-