UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
|
x
|
ANNUAL
REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE
ACT OF
1934
|
For
the fiscal year ended December 31, 2007
OR
|
¨
|
TRANSITION
REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE
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 of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
6922
Hollywood Boulevard, Suite 500, Los Angeles, California 90028, (323)
860-9200
(Address
and telephone number of principal executive offices)
Securities
registered pursuant to
Section 12(b) of the Act:
None
Securities
registered pursuant to Section 12(g) of the Act:
Common
Stock, $0.01 par value
(Title
of
class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act.
Yes
¨ No
x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes
¨ No
x
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed 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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
See
the definitions of “large accelerated filer”, “accelerated filer” and “small
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer x
Accelerated filer
¨
Non-accelerated filer ¨
Smaller reporting
company ¨
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes ¨ No x
As
of the
last business day of the registrant’s most recently completed second fiscal
quarter, the approximate aggregate market value of the common stock held
by
non-affiliates, based upon the closing price of the common stock as quoted
by
the NASDAQ Global Select Market was $1,028,905,537. Shares of common stock
held
by executive officers, directors and holders of more than 5% of the outstanding
common stock have been excluded. This determination of affiliate status is
not
necessarily a conclusive determination for other purposes.
As
of
February 13, 2008, the registrant had 48,668,458 shares of common stock
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE:
Portions
of the definitive Proxy Statement to be delivered to shareholders in connection
with the Annual Meeting of Shareholders to be held May 1, 2008 are incorporated
by reference into Part III of this Form 10-K.
This
Annual Report on Form 10-K includes 72 pages with the Index to Exhibits
located on page 63.
TABLE
OF CONTENTS
|
PART
I.
|
Page
|
|
|
Item
1.
|
Business
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3
|
|
Item
1A.
|
Risk
Factors
|
8
|
|
Item
1B.
|
Unresolved
Staff Comments
|
18
|
|
Item
2.
|
Properties
|
19
|
|
Item
3.
|
Legal
Proceedings
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19
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
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20
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PART
II.
|
|
|
|
Item
5.
|
Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
|
21
|
|
Item
6.
|
Selected
Financial Data
|
24
|
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
24
|
|
Item
7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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34
|
|
Item
8.
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Financial
Statements and Supplementary Data
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35
|
|
Item
9.
|
Changes
In and Disagreements with Accountants on Accounting and Financial
Disclosure
|
60
|
|
Item
9A.
|
Controls
and Procedures
|
60
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|
Item
9B.
|
Other
Information
|
61
|
|
PART
III.
|
||
|
Item
10.
|
Directors,
Executive Officers and Corporate Governance
|
62
|
|
Item
11.
|
Executive
Compensation
|
62
|
|
Item
12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
62
|
|
Item
13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
62
|
|
Item
14.
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Principal
Accounting Fees and Services
|
62
|
|
PART
IV.
|
||
|
Item
15.
|
Exhibits
and Financial Statement Schedules
|
63
|
2
PART
I
Item
1. Business
Company
Overview
j2
Global
Communications, Inc. (“j2 Global”, “our”, “us” or “we”) is a Delaware
corporation founded in 1995. By leveraging the power of the Internet, we provide
outsourced, value-added messaging and communications services to individuals
and
businesses throughout the world. We offer fax, voicemail, email and call
handling services and bundled suites of certain of these services. We market
our
services principally under the brand names eFax®,
eFax
Corporate®,
eFaxDeveloperTM,
Fax.comTM,
Send2Fax®,
eFax
BroadcastTM,
jBlast®,
jConnect®,
Onebox®,
Onebox
ReceptionistTM,
RapidFAXTM,
eVoice®,
eVoice
ReceptionistTM,
YAC®
and
Electric
Mail®.
We
deliver many of our services through our global telephony/Internet Protocol
(“IP”) network, which spans more than 3,000 cities in 42 countries across five
continents. We have created this network, and continuously seek to expand it,
through negotiating with U.S. and foreign telecommunications and co-location
providers for telephone numbers (also referred to as Direct Inward Dial numbers
or “DIDs”), Internet bandwidth and co-location space for our equipment. We
maintain and seek to grow an inventory of telephone numbers to be assigned
to
new customers. Most of these numbers are “local” (as opposed to toll-free),
which enables us to provide our paying subscribers telephone numbers with a
geographic identity. In addition to growing our business internally, we have
used small acquisitions to grow our customer base, enhance our technology and
acquire skilled personnel.
Our
core
services include fax, voicemail, email and call handling, as well as bundled
suites of certain of these services. These are business services that make
our
customers more efficient, more mobile, more cost-effective and more secure
than
traditional alternatives. We generate substantially all of our revenues from
subscribers that pay activation, subscription and usage fees. Activation and
subscription fees are referred to as “fixed” revenues, while usage fees are
referred to as “variable” revenues. We also generate revenues
from patent licensing fees, advertising and revenue share from our customers’
use of premium rate telephone numbers. Of the nearly 12.0 million telephone
numbers deployed as of December 31, 2007, more than one million were serving
paying subscribers, with the balance deployed to free subscribers, including
those with premium rate telephone numbers. We operate in one reportable segment:
value-added messaging and communications services, which provides for the
delivery of fax, voicemail and email messages and communications via the
telephone and/or Internet networks.
During
the past three years, we have derived a substantial portion of our revenues
from
our DID-based services, including eFax, Onebox,
Onebox
Receptionist,eVoice and eVoice
Receptionist. As a result, we believe that paying DIDs and the revenues
associated therewith are an important metric for understanding our business.
It
has been and continues to be our objective to increase the number of paying
DIDs
through a variety of distribution channels and marketing arrangements and
by
enhancing our brand awareness. In addition, we seek to increase revenues
through
a combination of stimulating use by our customers of usage-based services,
introducing new services and instituting appropriate price increases to our
fixed monthly subscription and other fees.
We
market
our services to a broad spectrum of prospective customers including individuals,
small to medium-sized businesses and large enterprises and government
organizations. Our marketing efforts include enhancing brand awareness;
utilizing online advertising through Internet portals, Internet service
providers (“ISPs”), search engines and affiliate programs; and selling through
both a telesales and direct sales force. Currently, we have seven primary
methods by which we acquire paying subscribers: (i) selling direct through
our
Websites such as www.efax.com, www.j2.com, www.onebox.com, www.evoice.com and
www.evoicereceptionist.com; (ii) attracting direct paying individual subscribers
through various Internet portals, ISPs, search engines and affiliate programs;
(iii) promoting our solutions to small to mid-sized businesses through our
www.efaxcorporate.com, www.oneboxreceptionist.com and www.evoicereceptionist.com
Websites assisted by in-house sales representatives; (iv) converting a portion
of our free base of customers to a paid solution; (v) selling our solutions
to
large enterprises and governmental organizations through our direct sales force;
(vi) attracting international individual and business customers through our
international Websites and direct sales force; and (vii) offering additional
services to our existing customers. We continuously seek to extend the number
of
distribution channels through which we acquire paying customers and improve
the
cost and volume of customers obtained through our current channels.
In
addition to growing our business organically, we have used small acquisitions
to
grow our customer base, enhance our technology and acquire skilled personnel.
During 2007 we completed two acquisitions: we purchased YAC Limited, an
Ireland-based provider of messaging services primarily providing services
in the
United Kingdom, and we purchased the RapidFAX business of Easylink Services
International Corporation, including its customer contracts, the RapidFAX trademark and
other
related assets. During 2006, we purchased substantially all of the assets
and
operations of Send2Fax, LLC, a South Carolina provider of Internet fax
services.
Through
a
combination of internal technology development and acquisitions, we have built
a
patent portfolio consisting of 56
3
issued
U.S. and foreign patents and numerous pending U.S. and foreign patent
applications. We generate licensing revenues from some of these patents. We
intend to continue to invest in patents, to aggressively protect our patent
assets from unauthorized use and to continue to generate patent licensing
revenues from authorized users. For more information on our patents and other
intellectual property, please refer to the section entitled “Patents and
Proprietary Rights” contained in Item 1 of this Annual Report on Form
10-K.
Our
Solutions
We
believe businesses and individuals are increasingly outsourcing their
communication and messaging needs. Their goal is to reduce or eliminate costs
while also enhancing the security of transmissions and user efficiency. Our
core
eFax solution enables
users to receive faxes into their email inboxes. Our core eVoice Receptionist and Onebox
Receptionist solutions
provide customers a virtual receptionist with various available enhancements.
These services represent more efficient and less expensive solutions than many
existing alternatives, and provide for increased security, privacy and message
handling flexibility (e.g., the ability to store messages electronically and
forward them by simply forwarding an email).
We
currently offer integrated solutions designed to replace or augment individual
and corporate messaging and communication services. We tailor our solutions
to
satisfy the differing needs of our customers. Our paid services allow a
subscriber to select a local telephone number from among approximately 3,000
cities around the world. Toll-free U.S. and Canadian telephone numbers are
also
available, as are premium rate numbers in various countries in Western Europe.
Our services also enable our customers to scale up or down, on a variable cost
basis, the amount of messaging they may require to accommodate their changing
business needs. In addition, our services enhance the ability of businesses
to
provide messaging services to their remote workforces, increase their level
of
information security and control and allocate costs more
effectively.
We
offer
the following services and solutions:
Fax
Mail
eFax
offers
desktop faxing
services. Various tiers of service provide increasing levels of features and
functionality. Our eFax
Free®
service
is our limited use, advertising-supported “introductory offering,” which assigns
the subscriber a unique randomly selected telephone number that enables the
user
to receive a limited number of faxes into his or her personal email inbox and
to
access these messages via a Web-based email interface. In exchange, the
subscriber agrees to receive and open email advertising, which we distribute
on
a consistent basis. In various countries in Western Europe, we also offer
premium rate telephone numbers at no charge to our subscribers. Our eFaxPlus®
and
eFax ProTM
services allow a subscriber to choose either a toll-free telephone number that
covers both the U.S. and Canada or a local telephone number in one of
approximately 3,000 cities worldwide. This service level enables subscribers
to
receive inbound fax messages in their email inboxes, access these messages
via a
full-featured Web-based email interface and send digital documents to any fax
number in the world directly from their desktops. This service offering is
also
localized in many international currencies and languages, including Dutch,
French, German, Italian, Polish, Portuguese and Spanish.
eFax
Corporate offers
capabilities similar to those offered by eFax Plus and eFax
Pro, but with added
features and tools geared towards enterprises and their users. For example,
we
provide our corporate customers a Web browser-based account administration
interface, which enables them to provision telephone numbers to employees,
as
needed, without contacting our account representatives. eFax Corporate also offers
the option of enhanced security features, which are particularly attractive
to
law firms and companies in regulated industries such as banking, brokerage
and
healthcare.
eFaxDeveloper
offers
high-volume, production fax solutions. Designed for quick and simple integration
with application environments, eFaxDeveloper provides
inbound and outbound fax services through a secure XML interface. Enhanced
features such as bar-code recognition, dynamic retries, and high speed
transmission are included and accessible 24/7/365. Robust fax capabilities
can
easily be implemented through simple Java and .NET SDKs, or through a Universal
web post solution. It provides the scaling power of an outside fax service
with
the flexibility of an internal server without requiring additional equipment,
supplies or expertise.
Fax.com,
RapidFAX and
Send2Fax are alternative desktop faxing solutions that are offered under
a variety of pricing plans geared primarily toward the individual or small
business user.
eFax
Broadcast and jBlast offer cost-effective
solutions for high-volume outbound faxing. These services enable users to send
important documents simultaneously to hundreds or thousands of recipients
anywhere in the world. Customers do not need special computer equipment,
expensive fax boards or multiple phone lines. These services also enable
customers to accurately monitor the status of their faxes and update their
database of “Do Not Fax” names and undeliverable fax numbers.
Unified
Communications
jConnect® offers
two levels of
service. jConnect
Free®
is j2
Global’s limited use, advertising-supported “introductory offering,”
which
assigns each subscriber a unique randomly selected telephone number that
enables
the user to receive a limited number of faxes and voicemails into his or
her
personal email inbox and to access these messages via a Web-based email
interface. In exchange, the customer agrees to receive and open email
advertising,
4
which
we
distribute on a consistent basis. jConnectPremier®
allows
the subscriber to choose either a toll-free U.S. and Canadian telephone
number
or a local telephone number in one of approximately 3,000 cities worldwide.
This
service level enables subscribers to receive inbound fax and voicemail
messages
in their email inboxes, access these messages via a full-featured Web-based
email interface and send digital documents to any fax number in the world
directly from their desktops. jConnect Premier subscribers
also have the ability to access all messages, including email, from any
touch-tone telephone and have access to the jConnect telephone or Web-initiated
sixteen-party conference calling solution.
Onebox®is
a
full-featured suite of unified communications services, including email,
voicemail, fax and “find me/follow me.” Onebox offers three levels
of
service, all paid, ranging from the basic Onebox Unified Messaging
suite of services – which provides the subscriber a unique toll-free number and
enables him or her to receive voicemail messages or faxes via email or access
them by telephone; to send, receive or reply to faxes or voicemail messages
online or by telephone; and to store faxes and email messages online – to the
Onebox Receptionist
suite of services,
which provides the subscriber a virtual PBX in
addition to the features available under the other service
tiers.
Voice
eVoice® is
an Internet voicemail answering service that delivers a subscriber’s voicemail
messages to their email inbox. Like eFax Free and jConnect
Free, eVoice FreeTM is
j2 Global’s
advertising-supported “introductory offering.” Each subscriber is given a unique
randomly assigned telephone number, which enables them to receive a limited
number of voicemail messages via email and to access these messages via a
Web-based email interface. With eVoice PlusTM,
the
subscriber may choose either a toll-free U.S. and Canadian telephone number
or a local telephone number in one of approximately 3,000 cities worldwide,
from
which the subscriber can access his or her voicemail messages via a
full-featured Web-based email interface or via telephone and receive text
message notifications upon receipt of new messages.
eVoice
ReceptionistTM
and
OneboxTM
Receptionist are virtual PBX
solutions that provide small and medium-sized businesses on-demand voice
communications services, featuring a toll-free company telephone number,
a
professionally-produced auto-attendant and menu tree. With these services,
a
subscriber can also assign departmental and individual extensions that can
connect to any U.S. or Canadian telephone number, including traditional
land-line telephones as well as mobile and IP networks. These services also
include advanced integrated voicemail for each extension, effectively unifying
mobile, office and other separate voicemail services.
YAC®
offers
on demand, communication solution services to individuals, small and
medium-sized businesses, and large enterprises. These services include a
range
of call management solutions that provide re-direction, customer greeting,
call
queuing/call waiting and routing functionality.
Email
Electric
Mail®
is an
outsourced hosted email service we offer to businesses. From its Electric WebMailTM,
E-mmunityTM
virus
scanning and SpamSMARTTM
SPAM
filtering to professional consulting and needs analysis, Electric Mail develops and
delivers customized email and perimeter protection solutions that can be
hosted
offsite or installed at a customer site with seamless integration into a
customer's existing email systems. In November 2006, we launched VaultSMARTTM
and
PolicySMARTTM,
unique
new email archiving service, as part of our Electric Mail service
offering. VaultSmart
delivers the enterprise-class advantages of a secure, scalable email archive
and
customizable compliance tools to correspond to a company’s records retention
policy.
Global
Network and Operations
We
have
multiple physical Points of Presence (“POPS”) worldwide, a central data center
in Los Angeles and a remote disaster recovery facility. We connect our POPS
to
our central data centers via redundant, and often times diverse, Virtual Private
Networks (“VPNs”) using the Internet. Our network is designed to deliver
value-added user applications, customer support, billing and a local presence
in
over 3,000 cities in 42 countries on five continents. Our network covers all
major metropolitan areas in the U.S., U.K., Canada and Germany and such other
major cities as Hong Kong, London, Madrid, Manila, Mexico City, Milan, Paris,
Rome, Singapore, Sydney, Taipei, Tokyo and Zurich. For financial information
about geographic areas, see Note 14 of the Notes to Consolidated Financial
Statements included elsewhere in this Annual Report on Form 10-K.
We
obtain
telephone numbers from various local carriers throughout the U.S. and
internationally. Our ability to continue to acquire additional quantities of
telephone numbers in desired locations in the future will depend on our
relationships with our local carriers, our ability to pay market prices for
such
telephone numbers, a continuing growth in alternate providers and the regulatory
environment. Please refer to the sections entitled “Government Regulation” and
“Risk Factors” contained in Item 1 and 1A, respectively, of this Annual Report
on Form 10-K.
5
Customer
Support Services
Our
Customer Service organization provides support to our customers through a
combination of online self-help, email messages, interactive chat sessions
and
telephone calls. Our Internet-based online self-help tools enable customers
to
resolve simple issues on their own, eliminating the need to speak or write
to
our customer service representatives. We provide email support seven days per
week, 24 hours per day to all subscribers. We use internal personnel and
contracted third parties (on a dedicated personnel basis) to answer our customer
emails and telephone calls and to participate in interactive chat sessions.
Paying subscribers have access to live-operator telephone support 15 hours
per
day on business days. Dedicated telephone support is provided for Corporate
customers 24 hours per day, seven days per week.
Competition
Competition
in the outsourced, value-added messaging and communications space is fierce
and
continues to intensify. We face competition from, among others, fax-to-email
providers, broadcast fax companies, traditional fax machine or multi-function
printer companies, unified messaging/communications providers, telephone
companies, voicemail providers, companies offering PBX systems and outsourced
PBX solutions and email providers. We believe that the primary competitive
factors determining success in the market for value-added messaging and
communications services include pricing, reputation for reliability and security
of service, intellectual property ownership, effectiveness of customer support,
service and software ease-of-use, service scalability, customer messaging and
branding, geographic coverage, scope of services and local language sales,
messaging and support.
Our
most
popular solutions relate to faxing, including the ability to deliver faxes
to
our customers via email and our outbound desktop faxing capabilities. These
solutions compete primarily against traditional fax machine manufacturers,
which
are generally large and well established companies, providers of fax servers
and
related software, such as Captaris, Inc., as well as publicly traded and
privately-held application service providers, such as Premiere Global Services,
Inc. (formerly PTEK Holdings Inc.) and Easylink Services International
Corporation (formerly Easylink Services Corporation). Some of these companies
may have greater financial and other resources than we do. For more information
regarding the competition that we face, please refer to the section entitled
“Risk Factors” contained in Item 1A of this Annual Report on Form
10-K.
Patents
and Proprietary Rights
We
regard
the protection of our intellectual property rights as important to our success.
We aggressively protect these rights by relying on a combination of patents,
trademarks, copyrights, trade dress and trade secret laws and by using the
domain name dispute resolution system. We also enter into confidentiality and
invention assignment agreements with employees and contractors, and
nondisclosure agreements with parties with whom we conduct business in order
to
limit access to and disclosure of our proprietary information.
We
have a
portfolio of 56 issued U.S. and foreign patents and have numerous pending U.S.
and foreign patent applications, all covering components of our technology
and
in some cases technologies beyond those that we currently offer. We seek patents
for inventions that contribute to our business and technology strategy. We
have
obtained patent licenses for certain technologies where such licenses are
necessary or advantageous. Unless and until patents are issued on the pending
applications, no patent rights on those applications can be
enforced.
Over
the
past three years we have generated royalties from licensing certain of our
patents and have enforced these patents against companies using our patented
technology without our permission. We have pending patent infringement lawsuits
against several companies. In each case, we are seeking at least a reasonable
royalty for the infringement of the patent(s) in suit, a permanent injunction
against continued infringement and attorneys’ fees, interest and costs. Some of
these cases have been stayed due to pending re-examination proceedings on
certain of our U.S. patents with the U.S. Patent and Trademark Office, and
others continue to proceed forward.
We
own
and use a number of trademarks in connection with our products and services,
including eFax and the eFax logo, jConnect, j2 and the j2 logo, eFax Corporate,
Onebox and the Onebox logo, Onebox Receptionist, Electric Mail and the Electric
Mail logo, eVoice and the eVoice logo, eVoice Receptionist, Send2Fax, YAC,
PumaOne, RapidFAX, jBlast, PaperMaster and Email-By-Phone, among others.
Many of
these trademarks are registered in the U.S. and other countries, and numerous
trademark applications are pending in the U.S. and several non-U.S.
jurisdictions. We hold numerous Internet domain names, including “efax.com”,
“jconnect.com”, “fax.com”, “j2.com”, “j2global.com”, “onebox.com”,
“electricmail.com”, “efaxcorporate.com” and “evoice.com”, among others. We have
in place an active program to continue securing “eFax” and other domain names in
non-U.S. jurisdictions. We have filed to protect our rights to the “eFax”
and other names in certain new top-level domains such as “.biz”, “.info” and
“.us” that have become operational more recently.
6
Like
other technology-based businesses, we face the risk that we will be unable
to
protect our intellectual property and other proprietary rights, and the
risk that we will be found to have infringed the proprietary rights of others.
For more information regarding these risks, please refer to the section entitled
“Risk Factors” contained in Item 1A of this Annual Report on Form
10-K.
Government
Regulation
As
our
services relate principally to the Internet and telecommunications, we are
subject to a number of international, federal, state and local laws and
regulations addressing issues such as privacy, data protection, freedom of
expression, indecency, obscenity, defamation, libel, pricing, online products
and services, taxation, content, advertising, copyrights and other intellectual
property, information security and technological convergence. The nature of
any
related new laws and regulations and the manner in which existing and new laws
and regulations may be interpreted and enforced cannot be predicted with
certainty.
We
provide our services through data transmissions over public telephone lines
and
other facilities provided by telecommunications companies (“carriers”). These
transmissions and carriers are subject to regulation by the U.S. Federal
Communications Commission (“FCC”), state public utility commissions and foreign
governmental authorities. However, as an Internet messaging services provider,
we are generally not subject to direct regulation by any governmental agency
in
the U.S., other than regulations applicable to businesses generally. This is
not
the case in some international locations. Nevertheless, as Internet services
and
telecommunications services converge or the services we offer expand, we may
face increased regulation of our business. For example, the FCC has initiated
several proceedings to examine regulations regarding the delivery of broadband
services in the U.S., the outcomes of which may affect the regulatory
requirements for the transmission of services such as those we provide. The
FCC
is also reviewing the system for inter-carrier compensation that may affect
the
prices we pay for telephone number acquisition, transmission and switching
services, while continued regulation of competition in the telecommunications
industry may have an indirect effect on our services.
Continued
regulation arising from telephone number administration may also make it more
difficult for us to obtain necessary numbering resources. For example, in the
U.S., the FCC allows states to petition for authority to adopt specialized
area
codes, including area codes that would include specific technologies like those
we offer. We have sought reconsideration from the FCC of this decision, and
the
outcome of this proceeding could affect our ability to offer services in
competition with incumbents. While our petition has been pending, California
and
Connecticut have requested authority to adopt special area codes that would
include unified messaging. The FCC conditionally granted Connecticut’s petition
in 2003, but the state has not yet adopted a specialized code. The FCC granted
California’s petition with fewer conditions. We opposed California’s request for
this authority and are now participating in the reconsideration stage of the
FCC
proceeding. Whether other states apply for and implement specialized area codes
could affect our ability to compete in those states. Similar regulation has
occurred internationally and may continue to be enacted in additional locations
in the future.
The
FCC
is also examining inter-carrier compensation for calls to ISPs, which could
affect ISPs’ costs and consequently substantially increase the costs of
communicating via the Internet. This increase in costs could slow the growth
of
Internet use, decrease the demand for our services and increase our costs.
However, Internet users are rapidly migrating to other methods of Internet
access, such as cable broadband, thereby mitigating the concern that additional
costs applied to ISPs will have a significant impact on our
services.
In
addition, Congress and the FCC have initiated a review of legislation and
regulations related to the “Universal Service Fund” (“USF”), which subsidizes
the U.S. telecommunications system. Congress and the FCC are considering
altering the formula by which entities contribute to the USF and could impose
a
flat fee per telephone line to support the USF. If adopted without an exemption
for our services, this change would alter or eliminate the provision of our
non-paid (free advertising-supported) services, and would cause us to raise
the
price of our paid service. Other changes to the USF may also increase our costs
and impact our operations.
The
FCC
is authorized to take enforcement action against companies that send so-called
“junk faxes” and has held numerous fax broadcasters liable for violating the
Telephone Consumer Protection Act of 1991 (“TCPA”), the Junk Fax Prevention Act
of 2005 (“Junk Fax Act”) and related FCC rules. Individuals may also, under
certain circumstances, have a private cause of action for violations and recover
monetary damages for such violations. Entities that merely transmit facsimile
messages on behalf of others may be found liable if they have a high degree
of
involvement in transmitting junk faxes or have actual notice of illegal junk
fax
transmissions and failed to take steps to prevent such transmissions. We take
significant steps to ensure that our services are not used to transmit
unsolicited faxes on a large scale and we do not believe that we have a high
degree of involvement or notice of the use of our service to broadcast junk
faxes. However, because fax transmitters do not enjoy an absolute exemption
from
liability under the rules, we could face FCC inquiry and enforcement, civil
litigation, or private causes of action, which could result in financial
penalties that could cause material adverse effects to our operations. We are
currently involved in litigation involving alleged violations of the TCPA with
Protus IP Solutions, Inc. For more information about this lawsuit, see
Item 3 of this Annual Report on Form 10-K entitled “Legal
Proceedings.”
7
E.U.
Member States have adopted strong protections governing the use of personal
data
about individuals. For example, the E.U. Privacy Directive requires
Member States to adopt legislation that prohibits the transfer of personal
data
from an E.U. country to a non-E.U. country that lacks “adequate” data protection
laws. Because the E.U. has determined that the U.S. lacks adequate data
protection laws, persons failing to follow certain alternative procedures
risk
the interruption of data flows between E.U. countries and the U.S. E.U. Member
States have also adopted legislation restricting sending unsolicited
communications to individuals via automatic calling machines, fax and email.
Generally, companies must obtain “prior explicit” (i.e., opt-in) consent before
they can contact users via this type of marketing. E.U. Member States have
also
adopted consumer protection legislation with respect to electronic commerce.
Other non-U.S. legislation dealing with privacy, data protection, marketing
and
consumer protection could also have a direct impact on business conducted
over
the Internet.
Future
developments in laws that govern online activities might inhibit the growth
of
the Internet, impose taxes, mandate costly technical requirements, create
uncertainty in the market or otherwise have an adverse effect on the Internet.
There is also substantial uncertainty as to the applicability to the Internet
of
laws governing issues such as property ownership, fraud, tort, copyrights and
other intellectual property issues, taxation, defamation, obscenity and privacy,
which did not contemplate the existence of the Internet. These developments
could, in turn, have a material adverse effect on our business, prospects,
financial condition and results of operations. Also uncertain is the impact
of
foreign legal developments regarding jurisdiction and choice of law for cases
involving Internet-based activities.
Seasonality
and Backlog
Our
subscriber revenues are impacted by the number of effective business days in
a
given period. For example, we believe that we experience fewer subscriber
sign-ups and less usage-based revenues during the fourth-quarter holiday
season.
We
experience no material backlog in sales orders or the provisioning of customer
orders.
Research
and Development
The
markets for our services are evolving rapidly, requiring ongoing expenditures
for research and development and timely introduction of new services and service
enhancements. Our future success will depend, in part, on our ability to enhance
our current services, to respond effectively to technological changes, to sell
additional services to our existing customer base and to introduce new services
and technologies that address the increasingly sophisticated needs of our
customers.
We
devote
significant resources to the development of enhancements to our existing
services and to introduce new services. Our research, development and
engineering expenditures were approximately $11.8 million, $8.8 million and
$7.1
million for the fiscal years ended December 31, 2007, 2006 and 2005,
respectively. For more information regarding the technological risks that we
face, please refer to the section entitled “Risk Factors” contained in Item 1A
of this Annual Report on Form 10-K.
Employees
As
of
December 31, 2007, we employed a total of 410 employees, the majority of whom
are in the U.S.
Our
future success will depend, in part, on our ability to continue to attract,
retain and motivate highly qualified technical, marketing and management
personnel. Our employees are not represented by any collective bargaining unit
or agreement. We have never experienced a work stoppage. We believe our
relationship with our employees is good.
Web
Availability of Reports
Our
corporate information Website is www.j2global.com. The information on our
Website is not part of this Annual Report on Form 10-K. However, on the Investor
Relations portion of this Website the public can access free of charge our
annual, quarterly and current reports, changes in the stock ownership of
our
directors and executive officers and other documents filed with the Securities
and Exchange Commission (“SEC”) as soon as reasonably practicable after the
filing dates. Further, the SEC maintains an Internet site that contains reports,
proxy and information statements and other information regarding our filings
at
www.sec.gov.
Item
1A. Risk Factors
Before
deciding to invest in j2 Global or to maintain or increase your investment,
you
should carefully consider the risks described below in addition to the other
cautionary statements and risks described elsewhere, and the other information
contained in this Annual Report on Form 10-K and in our other filings with
the
SEC, including our subsequent reports on Forms 10-Q and 8-K. The risks and
uncertainties described below are not the only ones we face. Additional risks
and uncertainties not presently known to us or that we currently deem immaterial
also may affect our business. If any of these known or unknown risks or
uncertainties actually occurs, our business, prospects, financial condition,
operating results and cash flows could be materially adversely affected. In
that
event, the market price of our common stock will likely decline and you may
lose
part or all of your investment.
8
Risks
Related To Our Business
In
order to sustain our growth, we must continue to attract new paid subscribers
at
a greater rate and with at least an equal amount of revenues per subscriber
than
we lose existing paid subscribers.
We
may
not be able to continue to grow or even sustain our current base of paid
customers on a quarterly or annual basis. Our future success depends heavily
on
the continued growth of our paid user base. In order to sustain our growth
we
must continuously obtain an increasing number of paid users to replace the
users
who cancel their service. In addition, these new users must provide revenue
levels per subscriber that are greater than or equal to the levels of our
current customers or the customers they are replacing. We must also retain
our
existing customers while continuing to attract new ones at desirable costs.
We
cannot be certain that our continuous efforts to offer high quality services
at
attractive prices will be sufficient to retain our customer base or attract
new
customers at rates sufficient to offset customers who cancel their service.
In
addition, we believe that competition from companies providing similar or
alternative services has caused, and may continue to cause, some of our
customers or prospective customers to sign up with or to switch to our
competitors’ services. These factors may adversely affect our customer retention
rates, the number of our new customer acquisitions and/or their usage levels.
Any combination of a decline in our rate of new customer sign-ups, decline
in
usage rates of our customers, decline in customer retention rates or decline
in
the size of our overall customer base may result in a decrease in our revenues,
which could have a material adverse effect on our business, prospects, financial
condition, operating results and cash flows.
Weakness
in the financial markets and in the economy as a whole has adversely affected
and may continue to adversely affect segments of our customers, which has
resulted and may continue to result in decreased usage levels, customer
acquisitions and customer retention rates and, in turn, could lead to a decrease
in our revenues or rate of revenue growth.
Certain
segments of our customers - those whose business activity is tied to the health
of the credit markets and the broader economy, such as banks, brokerage firms
and those in the real estate industry - have been and may continue to be
adversely affected by the current turmoil in the credit markets and weakness
in
the broader mortgage market and the general economy. To the extent our
customers’ businesses have been adversely affected by these economic factors and
their usage levels of our services decline, we have and may continue to
experience a decrease in our average usage per subscriber and, therefore, a
decrease in our average variable revenue per subscriber. In addition,
continued weakness in the economy has adversely affected and may continue to
adversely affect our customer retention rates and the number of our new customer
acquisitions. These factors have adversely impacted, and may continue to
adversely impact, our revenues and rate of revenue growth.
Our
financial results may be adversely impacted by higher-than-expected tax rates
or
exposure to additional income tax liabilities.
We
are a
U.S.-based multinational company subject to tax in multiple U.S. and foreign
tax
jurisdictions. Our provision for income taxes is based on jurisdictional
mix of
earnings, statutory rates and enacted tax rules, including transfer pricing.
Significant judgment is required in determining our provision for income
taxes
and in evaluating our tax positions on a worldwide basis. It is possible
that
these positions may be challenged or we may find tax-beneficial intercompany
transactions to be uneconomical, either of which may have a significant impact
on our effective tax rate.
A
number
of factors affect our income tax rate and the combined effect of these factors
could result in an increase in our effective income tax rate. An increase
in
future effective income tax rates would adversely affect net income in future
periods. We operate in different countries that have different income tax
rates.
Effective tax rates could be adversely affected by earnings being lower than
anticipated in countries having lower statutory rates and higher than
anticipated in countries having higher statutory rates, by changes in the
valuation of deferred tax assets or liabilities or by changes in tax laws
or
interpretations thereof.
Effective
January 1, 2007, we adopted the provisions of FASB Interpretation
No. 48, Accounting
for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109
(“FIN 48”). FIN
48 clarifies the accounting for uncertainty in income taxes by creating
a
framework for how companies should recognize, measure, present and disclose
in
their financial statements uncertain tax positions that they have taken
or
expect to take in a tax return. We consider many factors when evaluating
and estimating our tax positions and tax benefits, which may require
periodic
adjustments and which may not accurately anticipate actual outcomes (see
Note 8
of the Notes to Consolidated Financial Statements included elsewhere
in this
Annual Report on Form 10-K).
We
are also exposed to risks related to the
effects of changes in foreign currency exchange rates and interest rates,
and we
may be subject to incremental taxes upon repatriation of funds. While we
carefully watch and attempt to manage these exposures, these types of changes
can have a material adverse effect on our business.
9
In
addition, we are subject to examination of our income tax returns by
the U.S.
Internal Revenue Service and other tax authorities. We are currently
under audit
by the Internal Revenue Service for the 2005 tax year (see Note 8 of
the Notes
to Consolidated Financial Statements included elsewhere in this Annual
Report on
Form 10-K). We regularly assess the likelihood of adverse outcomes resulting
from these examinations to determine the adequacy of our income tax reserves
and
expense. If our reserves are not sufficient to cover these contingencies,
such
inadequacy could materially adversely affect our business, prospects,
financial
condition, operating results and cash flows.
A
system failure or breach of system or network security could delay or interrupt
service to our customers, harm our reputation or subject us to significant
liability.
Our
operations are dependent on our ability to protect our network from interruption
by damage from fire, earthquake, power loss, telecommunications failure,
unauthorized entry, computer viruses or other events beyond our control. There
can be no assurance that our existing and planned precautions of backup systems,
regular data backups, security protocols and other procedures will be adequate
to prevent significant damage, system failure or data loss. Also, despite the
implementation of security measures, our infrastructure may be vulnerable to
computer viruses, hackers or similar disruptive problems caused by our
subscribers, employees or other Internet users who attempt to invade public
and
private data networks. Any damage, system failure or security breach that causes
interruptions or data loss in our operations or in the computer systems of
our
customers or leads to the misappropriation of our customers’ confidential
information could result in significant liability to us, cause considerable
harm
to our reputation and deter current and potential customers from using our
services. Any of these events could have a material adverse effect on our
business, prospects, financial condition, operating results and cash
flows.
Our
security measures may not prevent security breaches that could harm our
business. Currently, a significant number of our users authorize us to
bill
their credit card accounts directly for all transaction fees charged
by us. We
rely on encryption and authentication technology to effect secure transmission
of confidential information, including customer credit card numbers.
Advances in
computer capabilities, new discoveries in the field of cryptography or
other
developments may result in a compromise or breach of the technology used
by us
to protect transaction data. Any compromise of our security could harm
our
reputation and, therefore, our business, and also subject us to significant
liability. In addition, a party who is able to circumvent our security
measures
could misappropriate proprietary information, cause interruptions in
our
operations, damage our computers or those of our users or otherwise damage
our
reputation and business.
Our
business is dependent on a small number of telecommunications carriers in each
region and our inability to maintain agreements at attractive rates with such
carriers may negatively impact our business.
Our
business substantially depends on the capacity, affordability, reliability
and
security of our telecommunications networks. Only a small number of carriers
in
each region, and in some cases only one carrier, offer the telephone number
and
network services we require. Certain of our telecommunications services are
provided pursuant to short-term agreements that the providers can terminate
or
elect not to renew. As a result, any or all of our current carriers could
discontinue providing us with service at rates acceptable to us, or at all,
and
we may not be able to obtain adequate replacements, which could materially
and
adversely affect our business, prospects, financial condition, operating results
and cash flows.
General
market forces, the failure of providers, regulatory issues and other factors
could result in increased telecommunications costs, which would in turn increase
the cost of providing our services. If significant, these increases could
materially adversely affect our business, prospects, financial condition,
operating results and cash flows.
Increased
cost of email transmissions could have a material adverse effect on our
business.
We
rely
on email for the delivery of our fax and voicemail messages. In addition,
we
derive some advertising revenues through the delivery of email messages to
our
free subscribers and we regularly communicate with our subscribers via email.
If
regulations or other changes in the industry lead to a charge associated
with
the sending or receiving of email or voicemail messages, the cost of providing
our services would increase and, if significant, could materially adversely
affect our business, prospects, financial condition, operating results and
cash
flows.
If
we experience excessive fraudulent credit card charges or cannot meet evolving
credit card company merchant standards, we could lose the right to accept
credit
cards for payment and our subscriber base could decrease
significantly.
A
significant number of our paid subscribers authorize us to bill their credit
card accounts directly for all service fees charged by us. We incur losses
from
claims that the customer did not authorize the credit card transaction to
purchase our service. If the numbers of unauthorized credit card transactions
become excessive, we could be assessed substantial fines for excess chargebacks
and we could lose the right to accept credit cards for payment. In addition,
credit card companies may change the merchant standards
10
required
to utilize their services from time to time. If we are unable to meet these
new
standards, we could be unable to accept credit cards. Our inability to accept
credit card payments could cause our paid subscriber base to significantly
decrease, which could have a material adverse effect on our business, prospects,
financial condition, operating results and cash flows.
Our
business could suffer if we cannot obtain or retain telephone numbers, are
prohibited from obtaining local numbers or are limited to distributing local
numbers to only certain customers.
Our
future success depends on our ability to procure large quantities of local
telephone numbers in the U.S. and foreign countries
in desirable locations at a reasonable cost and offer our services to our
prospective customers without restrictions. Our ability to procure and
distribute telephone numbers depends on factors such as applicable regulations,
the practices of telecommunications carriers that provide telephone numbers,
the
cost of these telephone numbers and the level of demand for new telephone
numbers. In addition, although we are the customer of record for all of our
U.S.
telephone numbers, from time to time, certain U.S. telephone carriers illegally
port our telephone numbers away from us to other carriers. Also, in some foreign
jurisdictions, under certain circumstances, our customers are permitted to
port
their telephone numbers to another carrier. These factors could lead to
increased cancellations by our customers and loss of our telephone number
inventory. Failure to obtain telephone numbers in a timely and cost-effective
manner, increased porting away of our telephone numbers or regulatory
restrictions on our ability to market our services without restriction may
have
a material adverse effect on our business, prospects, financial condition,
operating results, cash flows and growth in or entry into foreign or domestic
markets.
For
example, in the U.S., the FCC has adopted an order that permits states to apply
to the FCC for delegated authority to implement specialized area codes that
would segregate services, which may include “unified messaging” and other
services that the FCC perceives as being “geographically insensitive,” into
unique area codes. We have petitioned the FCC for reconsideration of this
decision, which remains pending. The outcome of this petition may reduce demand
by our customers or prospective customers for new DIDs in the affected areas,
if
it restricts us from obtaining telephone numbers in area codes that are
generally perceived as local by consumers. Two states, Connecticut and
California, have petitioned the FCC for such authority. The FCC conditionally
granted Connecticut’s petition in 2003, but the state has not adopted a
specialized code. We participated in Connecticut’s proceedings to attempt to
obtain a nondiscriminatory outcome. If the state goes forward at some future
date and adopts a specialized area code, the outcome of this proceeding could
affect our ability to compete in the state. The FCC granted California’s
petition with fewer conditions. We are now participating in the reconsideration
stage of that FCC decision, asking for clarification that the decision will
not
apply to our services. The outcome of the FCC decision and California’s eventual
implementation of it may affect our ability to obtain telephone numbers that
are
perceived by consumers as being local. Similar regulation has occurred in some
international locations and may continue to be enacted in additional locations
in the future. For instance, Germany prohibits issuing a local telephone number
to anyone without a physical presence in the area associated with a local area
code. If this continues, it may materially affect our ability to acquire the
telephone numbers for our operations.
In
addition, future growth in our subscriber base, together with growth in the
subscriber bases of providers of other fax and/or voicemail to email and unified
messaging services, may increase the demand for large quantities of telephone
numbers, which could lead to insufficient capacity and our inability to acquire
sufficient telephone numbers to accommodate our future growth.
Inadequate
intellectual property protections could prevent us from enforcing or defending
our proprietary technology.
Our
success depends in part upon our proprietary technology. We rely on a
combination of patents, trademarks, trade secrets, copyrights and contractual
restrictions to protect our proprietary technology. However, these measures
provide only limited protection, and we may not be able to detect unauthorized
use or take appropriate steps to enforce our intellectual property rights,
particularly in foreign countries where the laws may not protect our proprietary
rights as fully as in the U.S. While we have been issued a number of patents
and
other patent applications are currently pending, there can be no assurance
that
any of these patents will not be challenged, invalidated or circumvented, or
that any rights granted under these patents will in fact provide competitive
advantages to us.
Currently,
three of our patents are subject to re-examination proceedings with the U.S.
Patent and Trademark Office. The result of these proceedings could limit or
invalidate some or all of the claims under these patents, which could require
us
to record an impairment of our patent asset in our consolidated financial
statements. In that case, we would be required to record a charge to earnings
in
our consolidated financial statements during the period in which the impairment
of our patent is determined. This may adversely impact our results of
operations.
In
addition, effective protection of patents, copyrights, trademarks, trade secrets
and other intellectual property may be unavailable or limited in some foreign
countries. As a result, we may not be able to effectively prevent competitors
in
these regions from infringing our intellectual property rights, which could
reduce our competitive advantage and ability to compete in those regions and
negatively impact our business.
Companies
in the messaging industry have experienced substantial litigation regarding
intellectual property. Currently, we have
11
pending
patent infringement lawsuits, both offensive and defensive, against several
companies in this industry. This or any other litigation to enforce our
intellectual property rights may be expensive and time-consuming, could divert
management resources and may not be adequate to protect our business.
If
our trademarks are not adequately protected or we are unable to protect our
domain names, our reputation and brand could be adversely affected.
Our
success depends, in part, on our ability to protect our trademarks. We rely
on
some brands that use the letter “e” before a word,
such as “eFax” and “eVoice”. Some regulators and competitors have taken the view
that the “e” is descriptive. Others have claimed that these brands are generic
when applied to the products and services we offer. If we are unable to secure
and protect trademark rights to these or other brands, the value of these
brands
may be diminished, competitors may be able to more effectively mimic our
service
and methods of operations, the perception of our business and service to
subscribers and potential subscribers may become confused in the marketplace
and
our ability to attract subscribers may be adversely affected.
We
currently hold various domain names relating to our brands, both in the U.S.
and
internationally, including efax.com and various other international extensions,
evoice.com, fax.com, onebox.com and others. The acquisition and maintenance
of
domain names generally are regulated by governmental agencies and their
designees. The regulation of domain names in the U.S. may change. Governing
bodies may establish additional top-level domains, appoint additional domain
name registrars or modify the requirements for holding domain names. As a
result, we may be unable to acquire or maintain relevant domain names in
the
U.S. Furthermore, the relationship between regulations governing domain names
and laws protecting trademarks and similar proprietary rights in the U.S.
is
unclear. Similarly, international rules governing the acquisition and
maintenance of domain names in foreign jurisdictions are sometimes different
from U.S. rules, and we may not be able to obtain all of our domains
internationally. As a result of these factors, we may be unable to prevent
third
parties from acquiring domain names that are similar to, infringe upon or
otherwise decrease the value of our trademarks and other proprietary rights.
In
addition, failure to protect our domain names domestically or internationally
could adversely affect our reputation and brands, and make it more difficult
for
users to find our Websites and our services.
Our
growth will depend on our ability to develop our brands and market new brands,
and these efforts may be costly.
We
believe that continuing to strengthen our current brands and effectively
launch
new brands will be critical to achieving widespread acceptance of our services,
and will require continued focus on active marketing efforts. The demand
for and
cost of online and traditional advertising have been increasing and may continue
to increase. Accordingly, we may need to spend increasing amounts of money
on,
and devote greater resources to, advertising, marketing and other efforts
to
create and maintain brand loyalty among users. In addition, we are supporting
an
increasing number of brands, each of which requires its own resources. Brand
promotion activities may not yield increased revenues, and even if they do,
any
increased revenues may not offset the expenses incurred in building our brands.
If we fail to promote and maintain our brands, or if we incur substantial
expense in an unsuccessful attempt to promote and maintain our brands, our
business could be harmed.
We
may be found to have infringed the intellectual property rights of others,
which
could expose us to substantial damages or restrict our operations.
We
have
been and expect to continue to be subject to claims and legal proceedings that
we have infringed the intellectual property rights of others. The ready
availability of damages, royalties and the potential for injunctive relief
has
increased the costs associated with the litigation and settlement of patent
infringement claims. In addition, we may be required to indemnify our resellers
and users for similar claims made against them. Any claims against us, whether
or not meritorious, could require us to spend significant time and money in
litigation, pay damages, develop new intellectual property or acquire licenses
to intellectual property that is the subject of the infringement claims. These
licenses, if required, may not be available at all or have acceptable terms.
As
a result, intellectual property claims against us could have a material adverse
effect on our business, prospects, financial condition, operating results and
cash flows.
The
successful operation of our business depends upon the supply of critical
elements and marketing relationships from other companies.
We
depend
upon third parties for several critical elements of our business, including
various technology, infrastructure, customer service and marketing components.
We rely on private third-party providers for our Internet and telephony
connections and for co-location of a significant portion of our communications
servers. Any disruption in the services provided by any of these suppliers,
or
any failure by them to handle current or higher volumes of activity, could
have
a material adverse effect on our business, prospects, financial condition,
operating results and cash flows.
To
obtain
new customers, we have marketing agreements with operators of leading search
engines and Websites. These
12
arrangements typically are not exclusive and do not extend over a
significant period of time. Failure to continue these relationships on terms
that are acceptable to us or to continue to create additional relationships
could have a material adverse effect on our business, prospects, financial
condition, operating results and cash flows.
Our
business is highly dependent on our billing systems.
A
significant part of our revenues depends on prompt and accurate billing
processes. Customer billing is a highly complex process, and our billing
systems
must efficiently interface with third-party systems, such as those of credit
card processing companies. Our
ability to accurately and efficiently bill our subscribers is dependent
on the
successful operation of our billing systems and the third-party systems
upon
which we rely, such as our credit card processor, and our ability to provide
these third parties the information required to process transactions. In
addition, our ability to offer new paid services or alternative-billing
plans is
dependent on our ability to customize our billing systems. We are in the
process
of upgrading our current billing systems to meet the needs of our growing
subscriber base. Any failure to properly implement the upgraded systems
or to
manage the new systems and procedural transitions could impair our ability
to
properly bill our current customers or attract and service new customers.
In
addition, any failures or errors in our current billing systems or procedures
or
resulting from any upgrades to our billing systems or procedures could
materially and adversely affect our business and financial
results.
Our
failure to properly manage growth could harm our business.
We
have
expanded our operations rapidly and anticipate that we will continue to grow
and
diversify both in the U.S. and internationally, including increasing our
customer base, the volume of messages and communications that pass through
our
network, the types of services we offer and our methods of sale. This expansion
has placed, and we expect it will continue to place, a significant strain
on our
management, operational and financial resources. As a result, we must expand
and
adapt our operational infrastructure and increase the number of our personnel
in
certain areas. Our business relies on our data systems, billing systems for
our
fee-based and other services and other operational and financial reporting
and
control systems. All of these systems have become increasingly complex due
to
the growth of our business and to acquisitions of new businesses with different
systems. To manage further growth we will need to continue to automate, improve
or replace our data, billing and other existing operational, customer service
and financial systems, procedures and controls. These upgrades and improvements
will require a dedication of resources that, in some cases, are likely to
be
complex. Any failure to properly implement and manage these systems and
procedural transitions could impair our ability to attract and service
customers, and could cause us to incur higher operating costs and delays
in the
execution of our business plan. If we cannot manage growth effectively, our
business and operating results could suffer.
Future
acquisitions could result in dilution, operating difficulties and other harmful
consequences.
We
may
acquire or invest in additional businesses, products, services and technologies
that complement or augment our service offerings and customer base. We cannot
assure you that we will successfully identify suitable acquisition candidates,
integrate disparate technologies and corporate cultures and manage a
geographically dispersed company. Acquisitions could divert attention from
other
business concerns and could expose us to unforeseen liabilities. In addition,
we
may lose key employees while integrating any new companies. We may pay for
some
acquisitions by issuing additional common stock, which would dilute current
stockholders. We may also use cash to make acquisitions. We will be required
to
review goodwill and other intangible assets for impairment in connection with
past and future acquisitions, which may materially increase operating expenses
if an impairment issue is identified.
Our
success depends on our retention of our executive officers, senior management
and our ability to hire and retain additional key personnel.
Our
success depends on the skills, experience and performance of executive officers,
senior management and other key personnel. The loss of the services of one
or
more of our executive officers, senior management or other key employees could
have a material adverse effect on our business, prospects, financial condition,
operating results and cash flows. Our future success also depends on our
continuing ability to attract, integrate and retain highly qualified technical,
sales and managerial personnel. Competition for these people is intense, and
there can be no assurance that we can retain our key employees or that we can
attract, assimilate or retain other highly qualified technical, sales and
managerial personnel in the future.
We
may be subject to risks from international operations.
As
we
continue to expand our business operations in countries outside the U.S., our
future results could be materially adversely affected by a variety of
uncontrollable and changing factors including, among others, foreign currency
exchange rates; political or social unrest or economic instability in a specific
country or region; trade protection measures and other regulatory requirements
which may affect our ability to provide our services; difficulties in staffing
and managing international operations; and adverse tax consequences, including
imposition of withholding or other taxes on payments by subsidiaries and
affiliates. Any or all of these factors could have a material adverse impact
on
our future business, prospects, financial condition, operating results and
cash
flows.
13
In
addition, we have only limited experience in marketing and operating our
services in certain international markets. Moreover, we have in some cases
experienced and expect to continue to experience in some cases higher costs
as a
percentage of revenues in connection with establishing and providing services
in
international markets versus the U.S. In addition, certain international
markets
may be slower than the U.S. in adopting the Internet and/or outsourced
messaging
and communications solutions and so our operations in international markets
may
not develop at a rate that supports our level of investments.
As
we continue to grow our international operations, adverse currency fluctuations
and foreign exchange controls could have a material adverse effect on our
balance sheet and results of operations.
As
we
expand our international operations, we could be exposed to significant risks
of
currency fluctuations. In some countries outside the U.S., we already offer
our
services in the applicable local currency, including but not limited to the
Canadian Dollar, the Euro and the British Pound Sterling. As a result,
fluctuations in foreign currency exchange rates affect the results of our
operations, which in turn may adversely affect reported earnings and the
comparability of period-to-period results of operations. As our international
operations grow, these effects could become material. Changes in currency
exchange rates may also affect the relative prices at which we and foreign
competitors sell our services in the same market. In addition, changes in the
value of the relevant currencies may affect the cost of certain items required
in our operations. Furthermore, we may become subject to exchange control
regulations, which might restrict or prohibit our conversion of other currencies
into U.S. Dollars. We cannot assure you that future exchange rate movements
will
not have a material adverse effect on our future business, prospects, financial
condition, operating results and cash flows. To date, we have not entered into
foreign currency hedging transactions to control or minimize these
risks.
Our
business and users may be subject to sales tax and other
taxes.
The
application of indirect taxes (such as sales and use tax, value added tax
(“VAT”), goods and services tax, business tax and gross receipt tax) to
e-commerce businesses such as j2 Global and our users is a complex and evolving
issue. Many of the fundamental statutes and regulations that impose these taxes
were established before the growth of the Internet and e-commerce. In many
cases, it is not clear how existing statutes apply to the Internet or
e-commerce. In addition, some jurisdictions have implemented laws specifically
addressing the Internet or some aspect of e-commerce and several other proposals
have been made at the U.S. federal, state and local level that would impose
additional taxes on the sale of goods and services through the Internet. These
proposals, if adopted, could substantially impair the growth of e-commerce,
hamper our ability to retain and attract new customers and diminish our ability
to derive financial benefit from our activities. In November 2007, the
U.S. federal government enacted legislation extending the moratorium on
states and other local authorities imposing access or discriminatory taxes
on
the Internet through November 2014. This moratorium does not prohibit federal,
state or local authorities from collecting taxes on our income or from
collecting taxes that are due under existing tax rules. The application of
existing, new or future laws could have adverse effects on our business,
prospects and operating results. There have been, and will continue to be,
substantial ongoing costs associated with complying with the various indirect
tax requirements in the numerous markets in which we conduct or will conduct
business.
We
may be engaged in legal proceedings that could cause us to incur unforeseen
expenses and could occupy a significant amount of our management’s time and
attention.
From
time
to time we are subject to litigation or claims, including in the areas of
patent
infringement and anti-trust, that could negatively affect our business
operations and financial condition. Such disputes could cause us to incur
unforeseen expenses, occupy a significant amount of our management’s time and
attention and negatively affect our business operations and financial condition.
We are unable to predict the outcome of our currently pending cases. Some
or all
of the amount we may be required to pay to defend or to satisfy a judgment
or
settlement of any or all of these proceedings may not be covered by insurance.
Under indemnification agreements we have entered into with our current and
former officers and directors, we are required to indemnify them, and advance
expenses to them, in connection with their participation in proceedings arising
out of their service to us. These payments may be material. For a more detailed
description of the lawsuits in which we are involved, see “Item 3. Legal
Proceedings.”
The
markets in which we operate are highly competitive and our competitors may
have
greater resources to commit to growth, superior technologies, cheaper pricing
or
more effective marketing strategies.
For
information regarding our competition, and the risks arising out of the
competitive environment in which we operate, see the section entitled
“Competition” contained in Item 1 of this Annual Report on Form 10-K. In
addition, some of our competitors include major companies with much greater
resources and significantly larger subscriber bases than we have. Some of these
competitors offer their services at lower prices than we do. These companies
may
be able to develop and expand their communications and network infrastructures
more quickly, adapt more swiftly to new or emerging technologies and changes
in
customer requirements, take advantage of acquisition and other opportunities
more readily and devote greater resources to the marketing and sale of their
14
products and services than we can. There can be no assurance that
additional competitors will not enter markets that we are currently serving
and
plan to serve or that we will be able to compete effectively. Competitive
pressures may reduce our revenue, operating profits or both.
We
are exposed to risk if we cannot maintain or adhere to our internal controls
and
procedures.
We
have
established and continue to maintain, assess and update our internal controls
and procedures regarding our business operations and financial reporting.
Our
internal controls and procedures are designed to provide reasonable assurances
regarding our business
operations and financial reporting. However, because of the inherent
limitations in this process, internal controls and procedures may not prevent
or
detect all errors or misstatements. To the extent our internal controls
are
inadequate or not adhered to by our employees, our business, financial
condition
and operating results could be materially adversely
affected.
If
we are
not able to maintain internal controls and procedures in a timely manner, or
without adequate compliance, we may be unable to accurately report our financial
results or prevent fraud and may be subject to sanctions or investigations
by
regulatory authorities such as the SEC or NASDAQ. Any such action or restatement
of prior-period financial results could harm our business or investors’
confidence in j2 Global, and could cause our stock price to fall.
Risks
Related To Our Industry
Our
services may become subject to burdensome telecommunications regulation, which
could increase our costs or restrict our service offerings.
We
provide our services through data transmissions over public telephone lines
and
other facilities provided by carriers. These transmissions are subject to
foreign and domestic laws and regulation by the FCC, state public utility
commissions and foreign governmental authorities. These regulations affect
the
availability of telephone numbers, the prices we pay for transmission services,
the competition we face from other telecommunications service providers and
other aspects of our market. However, we believe that our services are
“information services” under the Telecommunications Act of 1996 and related
precedent and therefore would not currently be subject to U.S.
telecommunications services regulation. The FCC also views Internet-based
services as being interstate and subject to the protection of federal laws
preempting state efforts to impose traditional common carrier regulation on
such
services. However, as messaging and communications services converge and as
the
services we offer expand, there may be increased regulation of our business.
Therefore, in the future, we may become subject to FCC or other regulatory
agency regulation. Changes in the regulatory environment could decrease our
revenues, increase our costs and restrict our service offerings. In many of
our
international locations, we are subject to regulation by the governmental
authority.
In
the
U.S., Congress and the FCC regulations subsidize portions of the
telecommunications system out of the USF. Congress and the FCC are reviewing
the
way it collects USF payments from telecommunications carriers. Among the
proposed changes being considered is imposing a flat fee per telephone number.
If adopted without an exemption for our service, this change in rules could
have
a material adverse effect on the provision of our non-paid services, and could
cause us to raise the price of our paid service. Other changes to the USF
subsidy the Congress and the FCC are considering may also impact our
operations.
In
August
2005, the FCC reclassified wireline broadband Internet access services (i.e.,
DSL) as information services, thereby removing the regulation requiring
telephone companies to offer their lines to competing providers at low rates.
Incumbent local exchange carriers (“ILECs”) can now sell or lease their lines
for what they decide is a fair value. The decision could possibly enable ILECs
to charge higher rates for underlying broadband transmission service to
competitive local exchange carriers that service some of our lines in various
states. If one or more ILECs take this action, it could have an indirect impact
on our profitability and operations.
The
TCPA
and FCC rules implementing the TCPA prohibit the use of telephone fax machines,
computers or other devices to send unsolicited facsimile advertisements to
telephone fax machines. The Junk Fax Act and FCC rules implementing the Junk
Fax
Act amended the TCPA requirements to allow fax advertisements to be sent to
recipients with whom the sender has an established business relationship, as
long as the fax number was provided voluntarily by the recipient. The FCC is
authorized to take enforcement action against companies that send so-called
“junk faxes” and has held numerous fax broadcasters liable for violating the
TCPA. In addition, individuals may, under certain circumstances, have a private
cause of action for violations under the TCPA and recover monetary damages
for
such violations. Although entities that merely transmit facsimile messages
on
behalf of others are not liable for compliance with the prohibition on faxing
unsolicited advertisements, the exemption from liability does not apply to
fax
transmitters that have a high degree of involvement or actual notice of an
illegal use and have failed to take steps to prevent such transmissions. We
take
significant steps to ensure that our services are not used to transmit
unsolicited faxes on a large scale, and we do not believe that we have a high
degree of involvement or notice of the use of our service to broadcast junk
faxes. However, because fax transmitters do not enjoy an absolute exemption
from
liability under the TCPA and related FCC rules, we could face FCC inquiry and
enforcement or civil litigation, or private causes of action, if someone uses
our service for such impermissible purposes. If this were to
15
occur
and
we were to be held liable for someone’s use of our service for transmitting
unsolicited faxes, the financial penalties could cause a material adverse effect
on our operations. We are currently involved in litigation involving alleged
violations of the TCPA with Protus IP Solutions, Inc. For more information
about
this lawsuit, see Item 3 of this Annual Report on Form 10-K entitled “Legal
Proceedings.”
Also
in
the U.S., the Communications Assistance to Law Enforcement Act (“CALEA”)
requires telecommunications carriers to be capable of performing wiretaps
and
recording other call identifying information. In September 2005, the FCC
released an order defining telecommunications carriers that are subject to
CALEA
obligations as facilities-based broadband Internet access providers and
Voice-over-Internet-Protocol (“VoIP”) providers that interconnect with the
public switched telephone network. As a result of this definition, we do
not
believe that j2 Global is subject to CALEA. However, if the category of service
providers to which CALEA applies broadens to also include information services,
that change may impact our operations. For more information regarding
telecommunications regulation that may affect our business, please see Item
1 of
this Annual Report on Form 10-K entitled “Business – Government
Regulation.”
The
value-added messaging and communications services industry is undergoing rapid
technological changes and we may not be able to keep up.
The
value-added messaging and communications services industry is subject to rapid
and significant technological change. We cannot predict the effect of
technological changes on our business. Additionally, widely accepted standards
have not yet developed for the technologies we use. We expect that new services
and technologies will emerge in the markets in which we compete. These new
services and technologies may be superior to the services and technologies
that
we use or these new services may render our services and technologies obsolete.
Our future success will depend, in part, on our ability to anticipate and adapt
to technological changes and evolving industry standards. We may be unable
to
obtain access to new technologies on acceptable terms or at all, and may
therefore be unable to offer services in a competitive manner. If the global
communications industry fails to set standards to allow for the compatibility
of
various products and technologies on a timely basis or at all, any new services
and technologies may not be compatible with our existing technologies or operate
in a manner sufficient for us to execute our business plan, which could have
a
material adverse effect on our business, prospects, financial condition,
operating results and cash flows.
We
rely heavily on the revenue generated by our fax services.
Currently,
a substantial portion of the overall traffic on our network is fax related.
Our
future success is therefore dependent upon the continued use of fax as a
messaging medium and/or our ability to diversify our service offerings and
derive more revenue from other services, such as voice, email and unified
messaging solutions. If the demand for fax as a messaging medium decreases,
and
we are unable to replace lost revenues from decreased usage of our fax services
with a proportional increase in our customer base or with revenues from our
other services, our business, financial condition, operating results and cash
flows could be materially and adversely affected.
We
believe that one of the attractions to fax versus alternatives, such as email,
is that fax signatures are a generally accepted method of executing contracts.
There are on-going efforts by governmental and non-governmental entities, many
of which possess greater resources than we do, to create a universally accepted
method for electronically signing documents. Widespread adoption of so-called
“digital signatures” could reduce demand for our fax services and, as a result,
could have a material adverse effect on our business, prospects, financial
condition, operating results and cash flows.
We
are subject to regulations relating to consumer privacy.
Consumer
privacy has become a significant concern of regulators in the U.S. and
internationally. At least nine U.S. states have enacted legislation that limits
the uses and storage of personal information gathered online or offline. Many
non-U.S. jurisdictions also have such laws and continuously consider
strengthening them, especially against online services. In addition, more than
30 states have passed laws that require businesses to notify customers of the
occurrence of a data breach that may result in unauthorized acquisition of
personal data. In certain instances we are subject to some of these
laws.
Statutes
intended to protect user privacy have passed in many non-U.S. jurisdictions.
For
example, the E.U. Data Protection Directive protects personal data (defined
as
data that can reasonably be used to identify a living person) by instructing
E.U. Member States to enact laws requiring that personal information be
collected with consent for a reasonable purpose, used and disclosed for the
limited purpose for which it was collected, accurate, accessible for inspection
and correction, and stored securely. The E.U. Data Protection Directive also
requires that a data collector either establish a data officer in each member
state where it offers service or submit a formal notification of its collection
activities to the local data privacy agency. Finally, the E.U. Privacy Directive
prohibits the transfer of personal data from an E.U. country to a non-E.U.
country that lacks “adequate” data protection laws. Because the E.U. has
determined that the U.S. lacks adequate data protection laws, entities
transferring personal data must follow certain alternative procedures or risk
the interruption of data flows. For example, the U.S. Department of Commerce
has, in agreement with the E.U.,
16
created a Safe Harbor Registry where businesses
can voluntarily pledge to abide by prescribed data protection standards in
order
to permit transboundary data flow. The E.U. Directive also permits transboundary
data flow upon the express consent of the data subject. However, an informal
opinion from the E.U. Working Party that studies data privacy issues recommends
that the consent method should be used only when other transfer options are
not
available. Canada’s Personal Information Protection and Electronic Documents Act
(“PIPEDA”) law similarly regulates the collection of personal data.
Failure
to comply with these and other international data privacy laws could subject
us
to lawsuits, fines, criminal penalties, statutory damages, adverse publicity
and
other losses that could harm our business. Changes to existing laws or
the
passage of new laws
intended to address these privacy and data protection and retention issues
could
directly affect the way we do business or could create uncertainty on the
Internet. This could reduce demand for our services, increase the cost
of doing
business as a result of litigation costs or increase service or delivery
costs,
or otherwise harm our business.
New
and existing regulations could harm our business.
We
are
subject to the same foreign and domestic laws as other companies conducting
business on and off the Internet. There are relatively few laws specifically
directed towards online services. However, due to the increasing popularity
and
use of the Internet and online services, many laws relating to the Internet
are
being debated at all levels of government around the world and it is possible
that such laws and regulations will be adopted. These laws and regulations
could
cover issues such as user privacy, freedom of expression, pricing, fraud,
content and quality of products and services, taxation, advertising,
intellectual property rights and information security. It is not clear how
existing laws governing issues such as property ownership, copyrights and other
intellectual property issues, taxation, libel and defamation, obscenity and
personal privacy apply to online businesses. The vast majority of these laws
was
adopted prior to the advent of the Internet and related technologies and, as
a
result, does not contemplate or address the unique issues of the Internet and
related technologies. Those laws that do reference the Internet, such as the
U.S. Digital Millennium Copyright Act and the E.U.’s Directive on Distance
Selling and Electronic Commerce, have begun to be interpreted by the courts
and
implemented, but their applicability and scope remain somewhat uncertain.
Enactment of new laws and regulations, or the interpretation of existing laws
and regulations in a way that is adverse to us, could have a material adverse
effect on our business, prospects, financial condition, operating results and
cash flows.
The
Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003
(the “CAN-SPAM Act”) requires commercial emails to be identified as an
advertisement or solicitation, include a valid postal address and provide a
mechanism that will enable recipients to opt out of receiving future emails.
We
believe that our email practices comply with the requirements of the CAN-SPAM
Act. However, the statutory penalties for violating the CAN-SPAM Act can run
into millions of dollars. If we were ever found to be in violation of the
CAN-SPAM Act, such an adverse judgment could have a material adverse affect
on
our business, financial condition, operating results and cash
flows.
In
the
E.U., the European Parliament and Council amended the Communications Directive
with the Directive on the Retention of Data Processed in Connection with the
Provision of Public Electronic Communications Services (“Data Retention
Directive”). In the interests of public safety and terrorism prevention, the
Data Retention Directive requires telecommunications carriers and information
service providers to store traffic (e.g., time of communication, numbers,
identity of users) and location data from electronic communications for six
months to two years, at the discretion of the Member States. Member States
are
in the process of adopting this Directive into national laws and many have
requested extensions to the deadline by which the Data Retention Directive
is
required to be implemented. Implementation of the Data Retention Directive
may
impact some of our operations.
In
addition, because our services are accessible worldwide, foreign jurisdictions
may claim that we are required to comply with their laws. For example, the
Australian high court has ruled that a U.S. Website in certain circumstances
must comply with Australian laws regarding libel. As we expand and localize
our
international activities, we may become obligated to comply with laws of
additional jurisdictions. Non-U.S. laws regulating Internet companies may be
less favorable than U.S. laws, giving greater rights to consumers, content
owners and users. Compliance may be more costly or may require us to change
our
business practices or restrict our service offerings relative to those in the
U.S. Our failure to comply with foreign laws could subject us to penalties
ranging from criminal prosecution to bans on our services.
17
Risks
Related To Our Stock
Future
sales of our common stock may negatively affect our stock price.
As
of
February 13, 2008, substantially all of our outstanding shares of common
stock
were available for resale, subject to volume and manner of sale limitations
applicable to affiliates under SEC Rule 144. Sales of a substantial number
of
shares of common stock in the public market or the perception of such sales
could cause the market price of our common stock to decline. These sales
also
might make it more difficult for us to sell equity securities in the future
at a
price that we think is appropriate, or at all.
Anti-takeover
provisions could negatively impact our stockholders.
Provisions
of Delaware law and of our certificate of incorporation and bylaws could
make it
more difficult for a third party to acquire control of us. For example,
we are
subject to Section 203 of the Delaware General Corporation Law, which would
make
it more difficult for another party to acquire us without the approval
of our
board of directors. Additionally, our certificate of incorporation authorizes
our board of directors to issue preferred stock without requiring any
stockholder approval, and preferred stock could be issued as a defensive
measure
in response to a takeover proposal. These provisions could make it more
difficult for a third
party to acquire us even if an acquisition might be in the best interest
of our
stockholders.
Our
stock price may be volatile or may decline.
Our
stock
price and trading volumes have been volatile and we expect that this volatility
will continue in the future due to factors, such as:
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Assessments
of the size of our subscriber base and our average revenue per subscriber,
and comparisons of our results in these and other areas versus prior
performance and that of our
competitors;
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•
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Variations
between our actual results and investor
expectations;
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Regulatory
or competitive developments affecting our
markets;
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•
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Investor
perceptions of us and comparable public
companies;
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•
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A
large percentage of our stock being sold
short;
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Conditions
and trends in the communications, messaging and Internet-related
industries;
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Announcements
of technological innovations and
acquisitions;
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•
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Introduction
of new services by us or our
competitors;
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•
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Developments
with respect to intellectual property
rights;
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•
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Conditions
and trends in the Internet and other technology
industries;
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•
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Rumors,
gossip or speculation published on public chat or bulletin
boards;
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General
market conditions; and
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Geopolitical
events such as war, threat of war or terrorist
actions.
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In
addition, the stock market has from time to time experienced significant price
and volume fluctuations that have affected the market prices for the common
stocks of technology companies, particularly communications and Internet
companies. These broad market fluctuations have previously resulted in a
material decline in the market price of our common stock. In the past, following
periods of volatility in the market price of a particular company’s securities,
securities class action litigation has often been brought against that company.
We may become involved in this type of litigation in the future. Litigation
is
often expensive and diverts management’s attention and resources, which could
have a material adverse effect on our business, prospects, financial condition,
operating results and cash flows.
Item
1B. Unresolved Staff Comments
18
None.
Item
2. Properties
As
of
December 31, 2007, we leased approximately 40,000 square feet of office
space
for our headquarters in Los Angeles, California under a lease that expires
in
January 2010. We lease this space from an entity indirectly controlled
by our
Chairman of the Board. Additionally, we have smaller leased office facilities
in
British Columbia; California; Hong Kong; Illinois; Ireland; the Netherlands
and
the United Kingdom.
All
of
our network equipment is housed either at our leased properties and facilities
or at one of our multiple co-location facilities around the
world.
Item
3. Legal Proceedings
Overview
of Patent Litigation
As
part
of our continuing effort to prevent the unauthorized use of our intellectual
property, we have initiated litigation against the following two companies,
among others, for infringing our patents relating to Internet fax and other
messaging technologies: Venali, Inc. (“Venali”) and Protus IP Solutions, Inc.
(“Protus”). Venali and Protus have each filed counterclaims against us, which
are described in more detail below.
Overview
of Legal Proceedings Against Us
From
time
to time, we are involved in litigation and other disputes or regulatory
inquiries that arise in the ordinary course of our business. Many of these
actions are filed in response to patent actions filed by us against the
plaintiffs. The number and significance of these disputes and inquiries are
increasing as our business expands and j2 Global grows larger. Any claims or
regulatory actions against us, whether meritorious or not, could be
time-consuming, result in costly litigation, require significant amounts of
management time, and result in the diversion of significant operational
resources.
In
February 2004 and July 2005, we filed two lawsuits against Venali in the United
States District Court for the Central District of California for infringement
of
several of our U.S. patents. On June 21, 2006, Venali filed suit against us
and
our affiliate in the United States District Court for the Southern District
of
Florida, alleging violations of antitrust law and various related claims arising
out of our procurement and enforcement of our patents. In lieu of any response
to Venali’s complaint, the parties reached an agreement whereby Venali dismissed
its complaint without prejudice and re-filed certain of its claims as
counterclaims in the patent infringement actions in California. On December
27,
2006, Venali filed amended counterclaims in the July 2005 action alleging
several violations of antitrust law (fraudulent procurement of patents,
fraudulent enforcement of patents, tying and attempted monopolization) as well
as tortious interference with business relationships, trademark infringement
and
unfair and deceptive trade practices. Venali is seeking damages, including
treble damages for the antitrust claims, injunctive relief, attorneys’ fees and
costs. Venali’s claims relate in substantial part to the patent infringement
claims by us against Venali. On April 13, 2007, the court granted in part our
motion to dismiss Venali’s counterclaims, dismissing the tying claim with leave
to amend. Venali has also voluntarily dismissed all of its counterclaims except
those alleging antitrust violations based on our procurement and enforcement
of
our patents. On May 11, 2007, the court entered a claim construction order
regarding the disputed terms of the patents-in-suit. Since that time, the
parties have been engaged in extensive discovery. On December 7, 2007, Venali
filed a motion for partial summary judgment of non-infringement. Our opposition
to that motion is not yet due. Trial is currently scheduled for October
2008.
In
January 2006, we filed a complaint in the United States District Court for
the
Central District of California against Protus asserting causes of action for
violation of the Federal Telephone Consumer Protection Act, trespass to
chattels, and unfair business practices as a result of Protus sending “junk
faxes” to us and our customers. We are seeking statutory and treble damages,
attorneys fees, interest and costs, as well as a permanent injunction against
Protus continuing its junk fax sending practices. In September 2007, Protus
filed a counterclaim against us asserting the same causes of action as those
asserted against it, as well as claims for false advertising, trade libel,
tortious interference with prospective economic advantage and defamation. Protus
is seeking statutory and treble damages, attorneys fees, interest and
costs, as well as a permanent injunction against us sending any more junk faxes.
Trial is currently set for October 2008.
On
December 12, 2006, Venali filed suit against us in the United States District
Court for the Southern District of Florida, alleging infringement of U.S. Patent
Number 7,114,004 (the “ ’004 Patent”). Venali is seeking damages in the amount
of lost profits or a reasonable royalty, a permanent injunction against
continued infringement, treble damages, attorneys’ fees, interest and costs. On
March 6, 2007, we filed an answer to the complaint denying liability. On May
17,
2007, we filed a request with the U.S. Patent & Trademark Office for
reexamination of the ’004 Patent, which request was granted on July 27, 2007. On
August 13, 2007, we moved
19
to stay the action pending the reexamination. On August 20, 2007, the
court
granted the motion and stayed the action pending reexamination of the patent.
On
May 9,
2007, Bear Creek Technologies, Inc. (“Bear Creek”) filed suit against us in the
United States District Court for the Eastern District of Texas, alleging
infringement of U.S. Patent Number 6,685,494. Bear Creek is seeking damages
in
at least the amount of a reasonable royalty, a permanent injunction against
continued infringement, treble damages, attorneys’ fees, interest and costs. On
June 29, 2007, we filed an answer to the complaint denying liability, asserting
affirmative defenses, and asserting counterclaims of non-infringement and
invalidity. On September 21, 2007, Bear Creek filed its reply to our
counterclaims, denying each one. On February 11, 2008 we filed a request
for reexamination of the ‘494 patent. The claim construction hearing is set
for April 28, 2008, and jury selection for trial in the matter is set
for April 7, 2009.
On
June
21, 2007, Integrated Global Concepts, Inc. (“IGC”) filed a lawsuit against us,
certain of our current and former officers and/or directors, one of our
affiliates, and several other parties in the United States District Court
for
the Northern District of Illinois. The
suit
purports to allege violations of antitrust law, the Racketeer Influenced
and
Corrupt Organizations Act and various related statutory and common law
claims
arising out of our procurement and enforcement of our patents and our
acquisition of certain companies. IGC’s claims relate in substantial part to a
patent infringement action by our affiliate against IGC. The suit seeks
damages,
including treble and punitive damages, an injunction against further violations,
divestiture of certain assets, attorneys’ fees and costs. On October 31, 2007,
the Court stayed this action pending resolution of the related case in
the
Northern District of Georgia described below. On January 20, 2008, the
Court
dismissed this case with leave to reinstate it on or before December 31,
2008.
On
October 11, 2007, IGC filed substantially the same claims it previously filed
in
the Northern District of Illinois as counterclaims in a pending patent
infringement case in the United States District Court for the Northern District
of Georgia brought against IGC by our affiliate. Like the prior lawsuit, IGC’s
counterclaims name us, certain of our current and former officers and/or
directors, one of our affiliates, and several other parties, and purport to
allege violations of antitrust law, the Racketeer Influenced and Corrupt
Organizations Act and various related statutory and common law claims arising
out of our procurement and enforcement of our patents and our acquisition of
certain companies. The counterclaims seek damages, including treble and punitive
damages, an injunction against further violations, divestiture of certain
assets, attorneys’ fees and costs. On December 7, 2007, we filed motions to
dismiss IGC’s counterclaims that are pending before the court.
On
June
29, 2007, a purported class action was filed by Justin Lynch as the named
plaintiff in the United States District Court for the Central District of
California alleging that we have attempted to monopolize and/or monopolized
the
market for Internet facsimile services to home and small offices in violation
of
Section 2 of the Sherman Act. The claims relate in substantial part to the
patent infringement actions by us against various companies. The suit seeks
treble damages, injunctive relief, attorneys’ fees and costs. On August 24,
2007, we filed an answer to the complaint denying liability. On January 28,
2008, the court entered an order staying this case until June 2,
2008.
We
do not
believe, based on current knowledge, that the foregoing legal proceedings
are
likely to have a material adverse effect on our consolidated financial position,
results of operations or cash flows. However, we may incur substantial expenses
in defending against these claims. In the event of a determination adverse
to j2
Global, it may incur substantial monetary liability, which could have a material
adverse effect on its consolidated financial position, results of operations
or
cash flows. In accordance with SFAS 5, Accounting for Contingencies,
we have not accrued for a loss contingency relating to these legal proceedings
because we believe that, although unfavorable outcomes in the proceedings
may be
reasonably possible, they are not considered by management to be probable
or
reasonably estimable.
Item
4. Submission of Matters to a Vote of Security
Holders
We
held a
Special Meeting of Shareholders on October 24, 2007 in Los Angeles, California.
A proposal to approve j2 Global’s 2007 Stock Plan was submitted to our
shareholders for a vote at the Special Meeting. This proposal was approved
with
the following vote:
|
Number
of Votes
|
|
|
For
Against
Abstain
|
30,604,914
9,008,803
240,292
|
20
Market
Information
Our
common stock is traded on the NASDAQ Global Select Market under the symbol
“JCOM”. The following table sets forth the high and low closing sale prices for
our common stock for the periods indicated, as reported by the NASDAQ Global
Select Market. All share numbers and per share amounts have been retroactively
restated to reflect our May 2006 two-for-one stock split effected in the form
of
a stock dividend.
|
High
|
Low
|
|||||||
|
Year
ended December 31, 2007
|
||||||||
|
First
Quarter
|
$ | 28.75 | $ | 23.01 | ||||
|
Second
Quarter
|
35.37 | 27.92 | ||||||
|
Third
Quarter
|
37.23 | 32.45 | ||||||
|
Fourth
Quarter
|
35.07 | 21.17 | ||||||
|
Year
ended December 31, 2006
|
||||||||
|
First
Quarter
|
24.61 | 20.29 | ||||||
|
Second
Quarter
|
31.29 | 22.06 | ||||||
|
Third
Quarter
|
31.81 | 22.68 | ||||||
|
Fourth
Quarter
|
29.39 | 26.41 | ||||||
Holders
We
had
309 registered stockholders as of February 13, 2008. That number excludes the
beneficial owners of shares held in “street” names or held through participants
in depositories.
Dividends
We
have
never paid cash dividends on our stock and currently anticipate that we will
continue to retain any future earnings to finance the growth of our
business.
Recent
Sales of Unregistered Securities
We
did
not issue any unregistered securities during the fourth quarter of
2007.
Issuer
Purchases of Equity Securities
In
March
2006, our Board of Directors authorized a program to repurchase shares
of our
common stock. The Board approved the repurchase of up to 2,000,000 shares
from
time to time through December 31, 2008, depending on market conditions
and other
factors. During 2007, we repurchased all 1,529,100 of the remaining shares
of
common stock authorized under this repurchase program at an aggregate cost
of
approximately $42.4 million (including commission fees of approximately
$46,000).
The
following table details the repurchases that were made under the program
during
the fourth quarter of 2007:
|
Period
|
Total
Number of Shares Purchased
|
Average
Price Per Share (1)
|
Total
Number of Shares Purchased as Part of Publicly Announced
Program
|
Maximum
Number of Shares That May Yet Be Purchased Under the
Program
|
||||||||||||
|
October
1, 2007—October 31, 2007
|
232,100 | $ | 33.16 | 232,100 | 754,722 | |||||||||||
|
November
1, 2007—November 30, 2007
|
754,722 | 26.09 | 754,722 | — | ||||||||||||
|
Total
|
986,822 | $ | 27.75 | 986,822 | ||||||||||||
(1) Average
price per share excludes commissions.
In
February 2008, j2 Global’s Board of Directors approved a common stock repurchase
program authorizing the repurchase of up to five million shares of our
common
stock through the end of December 2010 (see Note 18 of the Notes to Consolidated
Financial Statements included elsewhere in this Annual Report on Form
10-K).
21
Equity
Compensation Plan Information
The
following table provides information as of December 31, 2007 regarding shares
outstanding and available for issuance under j2 Global’s existing equity
compensation plans:
|
Plan
Category
|
Number
of Securities
to
be Issued Upon
Exercise
of
Outstanding
Options,
Warrants
and
Rights
(a)
|
Weighted-Average
Exercise
Price of
Outstanding
Options,
Warrants
and
Rights
(b)
|
Number
of Securities
Remaining
Available
for
Future Issuance
Under
Equity
Compensation
Plans
(Excluding
Securities
Reflected in
Column
(a))
(c)
|
||||||||||
|
Equity
compensation plans
approved by security holders
|
4,383,174 | $ | 9.67 | 7,105,891 | |||||||||
|
Equity
compensation plans not
approved by security holders
|
— | — | — | ||||||||||
|
Total
|
4,383,174 | $ | 9.67 | 7,105,891 | |||||||||
The
number of securities remaining available for future issuance includes 5,428,924
and 1,676,967 under our 2007 Stock Plan and 2001 Employee Stock Purchase Plan,
respectively. Please refer to Note 10 to the accompanying consolidated financial
statements for a description of these Plans as well as our Second Amended and
Restated 1997 Stock Option Plan, which terminated in 2007.
Performance
Graph
This
performance graph shall not be deemed “filed” for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise
subject to the liabilities under that Section and shall not be deemed to be
incorporated by reference into any filing of j2 Global under the Securities
Act
of 1933, as amended, or the Exchange Act.
The
following graph compares the cumulative total stockholder return for j2 Global,
the NASDAQ Telecommunications Index and an index of companies that j2 Global
has
selected as its peer group. The peer group index included in the performance
graph consists of: deltathree, Inc., Easylink Services International Corporation
(formerly Easylink Services Corporation), C2 Global Technologies, Inc. (formerly
I-Link Corporation), iBasis, Inc., Premiere Global Services, Inc. (formerly
PTEK
Holdings, Inc.) and Tumbleweed Communications Corp. We believe that the peer
group index provides a representative group of companies in the outsourced
messaging and communications industry. Measurement points are December 31,
2002
and the last trading day in each of j2 Global’s fiscal quarters through the end
of fiscal 2007. The graph assumes that $100 was invested on December 31, 2002
in
j2 Global’s common stock at the split-adjusted price of $1.24 per share and in
each of the indices, and assumes reinvestment of any dividends. No dividends
have been declared or paid on j2 Global’s common stock. The stock price
performance on the following graph is not necessarily indicative of future
stock
price performance.
[PERFORMANCE
GRAPH IS SET FORTH ON THE FOLLOWING PAGE]
22
23
The
following selected consolidated financial data should be read in conjunction
with our consolidated financial statements, the related Notes contained in
this
Annual Report on Form 10-K and the information contained herein in Item 7,
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations”. Historical results are not necessarily indicative of future
results. All share numbers and per share amounts have been retroactively
restated to reflect our May 2006 and May 2003 two-for-one stock splits effected
in the form of a stock dividend.
|
Year
Ended December 31,
|
||||||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||||||
|
(In
thousands except share and per share amounts)
|
||||||||||||||||||||
|
Statement
of Operations Data:
|
||||||||||||||||||||
|
Revenues
|
$ | 220,697 | $ | 181,079 | $ | 143,941 | $ | 106,343 | $ | 71,622 | ||||||||||
|
Cost
of revenues
|
43,987 | 36,723 | 29,844 | 21,018 | 17,799 | |||||||||||||||
|
Gross
profit
|
176,710 | 144,356 | 114,097 | 85,325 | 53,823 | |||||||||||||||
|
Operating
expenses:
|
||||||||||||||||||||
|
Sales
and marketing
|
38,768 | 30,792 | 23,025 | 18,591 | 11,242 | |||||||||||||||
|
Research,
development and engineering
|
11,833 | 8,773 | 7,134 | 5,333 | 4,271 | |||||||||||||||
|
General
and administrative
|
39,683 | 38,754 | 23,464 | 16,049 | 11,642 | |||||||||||||||
|
Total
operating expenses
|
90,284 | 78,319 | 53,623 | 39,973 | 27,155 | |||||||||||||||
|
Operating
earnings
|
86,426 | 66,037 | 60,474 | 45,352 | 26,668 | |||||||||||||||
|
Other
income and expenses:
|
||||||||||||||||||||
|
Gain
on sale of investment
|
— | — | 9,808 | — | — | |||||||||||||||
|
Interest
and other income
|
9,272 | 7,269 | 3,416 | 1,244 | 486 | |||||||||||||||
|
Interest
and other expense
|
(237 | ) | (74 | ) | (76 | ) | (61 | ) | (67 | ) | ||||||||||
|
Total
other income and expenses
|
9,035 | 7,195 | 13,148 | 1,183 | 419 | |||||||||||||||
|
Earnings
before income taxes
|
95,461 | 73,232 | 73,622 | 46,535 | 27,087 | |||||||||||||||
|
Income
tax expense (benefit)
|
27,000 | 20,101 | 23,004 | 15,919 | (8,771 | ) | ||||||||||||||
|
Net
earnings
|
$ | 68,461 | $ | 53,131 | $ | 50,618 | $ | 30,616 | $ | 35,858 | ||||||||||
|
Net
earnings per common share:
|
||||||||||||||||||||
|
Basic
|
$ | 1.40 | $ | 1.08 | $ | 1.05 | $ | 0.66 | $ | 0.79 | ||||||||||
|
Diluted
|
$ | 1.35 | $ | 1.04 | $ | 0.99 | $ | 0.61 | $ | 0.73 | ||||||||||
|
Weighted
average shares outstanding:
|
||||||||||||||||||||
|
Basic
|
48,953,483 | 49,209,129 | 48,224,818 | 46,625,488 | 45,463,788 | |||||||||||||||
|
Diluted
|
50,762,007 | 51,048,995 | 51,171,794 | 49,828,208 | 49,150,674 | |||||||||||||||
|
December
31,
|
||||||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||||||
|
(In
thousands)
|
||||||||||||||||||||
|
Balance
Sheet Data:
|
||||||||||||||||||||
|
Cash
and cash equivalents
|
$ | 154,220 | $ | 95,605 | $ | 36,301 | $ | 18,814 | $ | 32,882 | ||||||||||
|
Working
capital
|
193,794 | 165,207 | 107,938 | 66,942 | 63,401 | |||||||||||||||
|
Total
assets
|
350,409 | 288,160 | 221,944 | 152,596 | 112,824 | |||||||||||||||
|
Long-term
debt
|
— | — | 149 | 866 | 221 | |||||||||||||||
|
Total
stockholders’ equity
|
282,614 | 254,741 | 202,255 | 139,013 | 102,659 | |||||||||||||||
Cash
Dividends
No
cash
dividends were paid for the years presented.
Item
7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
In
addition to historical information, the following discussion and analysis of
management 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 Item
1A
in this Annual Report on Form 10-K entitled “Risk Factors”. Readers are
cautioned not to place undue reliance on these forward-looking statements,
which
reflect management’s opinions only as of the date hereof. j2 Global undertakes
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 in this document as well as in other documents we file from time
to
time with the SEC, including the Quarterly Reports on Form 10-Q and any Current
Reports on Form 8-K filed or to be filed by us in 2008.
24
Overview
j2
Global
Communications, Inc. (“j2 Global”, “our”, “us” or “we”) is a Delaware
corporation founded in 1995. By leveraging the power of the Internet, we
provide
outsourced, value-added messaging and communications services to individuals
and
businesses throughout the world. We offer fax, voicemail, email and call
handling services and bundled suites of certain of these services. We market
our
services principally under the brand names eFax®,
eFax
Corporate®,
eFaxDeveloperTM,
Fax.comTM,
Send2Fax®,
eFax
BroadcastTM,
jBlast®,
jConnect®,
Onebox®,
Onebox
ReceptionistTM,
RapidFAXTM,
eVoice®,
eVoice
ReceptionistTM,
YAC®
and
Electric
Mail®.
We
deliver many of our services through our global telephony/Internet Protocol
(“IP”) network, which spans more than 3,000 cities in 42 countries across five
continents. We have created this network, and continuously seek to expand it,
through negotiating with U.S. and foreign telecommunications and co-location
providers for telephone numbers (also referred to as Direct Inward Dial numbers
or “DIDs”), Internet bandwidth and co-location space for our equipment. We
maintain and seek to grow an inventory of telephone numbers to be assigned
to
new customers. Most of these numbers are “local” (as opposed to toll-free),
which enables us to provide our paying subscribers telephone numbers with a
geographic identity. In addition to growing our business internally, we have
used small acquisitions to grow our customer base, enhance our technology and
acquire skilled personnel.
Our
core
services include fax, voicemail, email and call handling, as well as bundled
suites of certain of these services. These are business services that make
our
customers more efficient, more mobile, more cost-effective and more secure
than
traditional alternatives. We generate substantially all of our revenue from
subscribers that pay activation, subscription and usage fees. Activation and
subscription fees are referred to as “fixed” revenues, while usage fees are
referred to as “variable” revenues. We also generate revenues
from patent licensing fees, advertising and revenue share from our customers’
use of premium rate telephone numbers. Of the nearly 12.0 million telephone
numbers deployed as of December 31, 2007, more than one million were serving
paying subscribers, with the balance deployed to free subscribers, including
those with premium rate telephone numbers. We operate in one reportable segment:
value-added messaging and communications services, which provides for the
delivery of fax, voice and email messages and communications via the telephone
and/or Internet networks.
During
the past three years, we have derived a substantial portion of our revenues
from
our DID-based services, including eFax, Onebox, Onebox Receptionist,
eVoice and eVoice
Receptionist. As a result, we believe that paying DIDs and the revenues
associated therewith are an important metric for understanding our business.
It
has been and continues to be our objective to increase the number of paying
DIDs
through a variety of distribution channels and marketing arrangements and by
enhancing our brand awareness. In addition, we seek to increase revenues through
a combination of stimulating use by our customers of usage-based services,
introducing new services and instituting appropriate price increases to our
fixed monthly subscription and other fees.
For
the
past three years, 90% or more of our total revenues have been produced by our
DID-based services. DID-based revenues have increased to $202 million from
$134
million for the three-year period ending December 31, 2005 to December 31,
2007.
The primary reason for this increase was a 92% increase in the number of paid
DIDs over this period. We expect that DID-based revenues will continue to be
a
dominant driver of total revenues.
The
following table sets forth our key operating metrics for the years ended
December 31, 2007, 2006 and 2005 (in thousands except for percentages and
average revenue per paying telephone number):
|
December
31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Free
service telephone numbers
|
10,852 | 10,323 | 10,424 | |||||||||
|
Paying
telephone numbers
|
1,064 | 907 | 740 | |||||||||
|
Total
active telephone numbers
|
11,916 | 11,230 | 11,164 | |||||||||
|
Year
Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Subscriber
revenues:
|
||||||||||||
|
Fixed
|
$ | 162,128 | $ | 126,586 | $ | 98,721 | ||||||
|
Variable
|
50,201 | 48,585 | 40,985 | |||||||||
|
Total
subscriber revenues
|
$ | 212,329 | $ | 175,171 | $ | 139,706 | ||||||
|
Percentage
of total subscriber revenues:
|
||||||||||||
|
Fixed
|
76.4 | % | 72.3 | % | 70.7 | % | ||||||
|
Variable
|
23.6 | % | 27.7 | % | 29.3 | % | ||||||
|
Revenues:
|
||||||||||||
|
DID-based
|
$ | 201,776 | $ | 167,882 | $ | 134,018 | ||||||
|
Non-DID-based
|
18,921 | 13,197 | 9,923 | |||||||||
|
Total
revenues
|
$ | 220,697 | $ | 181,079 | $ | 143,941 | ||||||
|
Average
monthly revenue per paying telephone number (1)
|
$ | 16.46 | $ | 16.45 | $ | 16.75 | ||||||
|
(1)
|
See
calculation of average revenue per paying telephone number at the
end of
this section, Item 7, Management’s Discussion and Analysis of Financial
Condition and Results of
Operations.
|
25
Critical
Accounting Policies and Estimates
In
the
ordinary course of business, we have made a number of estimates and assumptions
relating to the reporting of results of operations and financial condition
in
the preparation of our financial statements in conformity with U.S. generally
accepted accounting principles (“GAAP”). Actual results could differ
significantly from those estimates under different assumptions and conditions.
We believe that the following discussion addresses our most critical accounting
policies, which are those that are most important to the portrayal of our
financial condition and results and require management’s most difficult,
subjective and complex judgments, often as a result of the need to make
estimates about the effect of matters that are inherently
uncertain.
Revenue. Our
revenue consists substantially of monthly recurring and usage-based subscription
fees. In accordance with GAAP and SEC issued Staff Accounting Bulletin No.
104,
Revenue Recognition,
which clarifies certain existing accounting principles for the timing of revenue
recognition and classification of revenues in the financial statements, we
defer
the portions of monthly recurring and usage-based fees collected in advance
and
recognize them in the period earned. Additionally,
we defer and recognize subscriber activation fees and related direct incremental
costs over a subscriber’s estimated useful life.
Investments. We
account for investments in equity securities in accordance with the provisions
of Statement of Financial Accounting Standards (“SFAS”) No 115, Accounting for Certain Investments
in Debt and Equity Securities (“SFAS 115”) and Emerging Issues Task Force
Issue No. 03-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments
(“EITF 03-1”). SFAS 115 requires that certain debt and equity securities
be classified into one of three categories; held-to-maturity, available-for-sale
or trading securities. We determine the appropriate classification of
our investments at the time of acquisition and reevaluate such determination
at
each balance sheet date. Held-to-maturity securities are those investments
in
which we have the ability and intent to hold until maturity. Held-to-maturity
securities are recorded at amortized cost. Available-for-sale securities are
recorded at fair value, with unrealized holdings gains or losses recorded as
a
separate component of accumulated other comprehensive income (loss) in
shareholders’ equity until realized. Trading securities are carried at fair
value, with unrealized holding gains and losses included in investment income.
None of our investments are held for trading purposes. All securities are
accounted for on a specific identification basis. In accordance with EITF 03-1,
we assess whether an other-than-temporary impairment loss on an investment
has
occurred due to declines in fair value or other market conditions.
Stock-Based
Compensation
Expense. Effective January 1, 2006, we adopted SFAS No. 123
(revised 2004), Share-Based
Payment (“SFAS 123(R)”). Accordingly, we measure stock-based compensation
expense at the grant date, based on the fair value of the award, and recognize
the expense over the employee’s requisite service period using the straight-line
method. The measurement of stock-based compensation expense is based on several
criteria including, but not limited to, the valuation model used and associated
input factors, such as expected term of the award, stock price volatility,
risk
free interest rate and award cancellation rate. These inputs are subjective
and
are determined using management’s judgment. If differences arise between the
assumptions used in determining stock-based compensation expense and the actual
factors, which become known over time, we may change the input factors used
in
determining future stock-based compensation expense. Any such changes could
materially impact our results of operations in the period in which the changes
are made and in periods thereafter.
In
November 2005, the Financial Accounting Standards Board (“FASB”) issued FASB
Staff Position No. 123(R)-3, Transition Election Related
to
Accounting for the Tax Effects of Share-Based Payment Awards (“FSP
123R-3”). We elected to adopt the alternative transition method for calculating
the tax effects of share-based compensation pursuant to FSP 123R-3. The
alternative transition method includes a simplified method to establish the
beginning balance of the additional paid-in capital pool related to the effects
of employee stock-based compensation, which is available to absorb tax
deficiencies recognized subsequent to the adoption of
SFAS 123(R).
In
March
2005, the SEC issued Staff Accounting Bulletin No. 107, Topic 14: Share-Based
Payment
(“SAB 107”). SAB 107 provides interpretive guidance regarding the application of
SFAS 123(R). The SEC staff believes that SAB 107 will assist registrants
in
their initial implementation of SFAS 123(R) and enhance the information received
by investors and other users of financial
26
statements.
The SEC staff recognizes that there is a range of conduct that a reasonable
issuer might use to make estimates and valuations and otherwise implement
SFAS
123(R). Thus, throughout SAB 107 the use of the terms “reasonable” and
“reasonably” is not meant to imply a single conclusion or methodology, but to
encompass the full range of potential conduct, conclusions or methodologies
upon
which a registrant may reasonably base its valuation decisions. In accordance
with SAB 107, we have considered the guidance regarding the application of
SFAS
123(R) and believe that we have adopted a reasonable methodology for measuring
stock-based compensation expense as described above.
In
December 2007, the SEC issued Staff Accounting Bulletin No. 110, Certain Assumptions
Used in
Valuation Methods – Expected Term (“SAB 110”). According to SAB 110,
under certain circumstances the SEC staff will continue to accept beyond
December 31, 2007 the use of the simplified method in developing an estimate
of
expected term of share options that possess certain characteristics in
accordance with SFAS 123(R) beyond December 31, 2007. We will adopt SAB
110
effective January 1, 2008 and continue to use the simplified method in
developing the expected term used for our valuation of stock-based
compensation.
Long-lived
and Intangible
Assets. We account for long-lived assets in accordance with
the provisions of SFAS No. 144, Accounting for the Impairment
or
Disposal of Long-Lived Assets (“SFAS 144”). SFAS 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived
assets.
In
accordance with SFAS 144, we assess the impairment of identifiable intangibles
and long-lived assets whenever events or changes in circumstances indicate
that
the carrying value may not be recoverable. Factors we consider important which
could individually or in combination trigger an impairment review include the
following:
|
|
•
|
significant
underperformance relative to expected historical or projected future
operating results;
|
|
|
•
|
significant
changes in the manner of our use of the acquired assets or the strategy
for our overall business;
|
|
|
•
|
significant
negative industry or economic
trends;
|
|
|
•
|
significant
decline in our stock price for a sustained period;
and
|
|
|
•
|
our
market capitalization relative to net book
value.
|
If
we
determined that the carrying value of intangibles and long-lived assets may
not
be recoverable based upon the existence of one or more of the above indicators
of impairment, we would record an impairment equal to the excess of the carrying
amount of the asset over its estimated fair value.
Consistent
with SFAS 144, we have assessed whether events or changes in circumstances
have
occurred that potentially indicate the carrying value of long-lived assets
may
not be recoverable. We concluded that there were no such events or changes
in
circumstances which would trigger an impairment review during 2007, 2006 or
2005.
Goodwill
and Purchased Intangible
Assets. We evaluate our goodwill and intangible assets
for impairment pursuant to SFAS No. 142, Goodwill and Other Intangible
Assets, which provides that goodwill and other intangible assets with
indefinite lives are not amortized but tested for impairment annually or more
frequently if circumstances indicate potential impairment. The impairment test
is comprised of two steps: (1) a reporting unit’s fair value is compared to its
carrying value; if the fair value is less than its carrying value, impairment
is
indicated; and (2) if impairment is indicated in the first step, it is measured
by comparing the implied fair value of goodwill and intangible assets to their
carrying value at the reporting unit level. We completed the required impairment
review at the end of 2007, 2006 and 2005 and noted no impairment. Consequently,
no impairment charges were recorded.
Income
Taxes. We account for income taxes in accordance with
SFAS No. 109, Accounting for
Income Taxes (“SFAS 109”), which requires that deferred tax assets and
liabilities be recognized using enacted tax rates for the effect of temporary
differences between the book and tax bases of recorded assets and liabilities.
SFAS 109 also requires that deferred tax assets be reduced by a valuation
allowance if it is more likely than not that some or all of the net deferred
tax
assets will not be realized. Our valuation allowance is reviewed quarterly
based
upon the facts and circumstances known at the time. In assessing this valuation
allowance, we review historical and future expected operating results and other
factors to determine whether it is more likely than not that deferred tax assets
are realizable. We had approximately $7.8 million and $8.0 million in net
deferred tax assets at December 31, 2007 and 2006, respectively. Based on our
review, we concluded that these net deferred tax assets do not require valuation
allowances as of December 31, 2007 and 2006. The net deferred tax assets should
be realized through future operating results and the reversal of temporary
differences.
27
Income
Tax
Contingencies. We calculate current and deferred tax
provisions based on estimates and assumptions that could differ from the actual
results reflected in income tax returns filed during the following year.
Adjustments based on filed returns are recorded when identified in the
subsequent year.
As
a
multinational corporation, we are subject to taxation in many jurisdictions,
and
the calculation of our tax liabilities involves dealing with uncertainties
in
the application of complex tax laws and regulations in various taxing
jurisdictions. Our estimate of the potential outcome of any uncertain tax issue
is subject to management’s assessment of relevant risks, facts and circumstances
existing at that time. Therefore, the actual liability for U.S. or foreign
taxes
may be materially different from our estimates, which could result in the need
to record additional tax liabilities or potentially to reverse previously
recorded tax liabilities. In addition, we are subject to periodic audits by
U.S.
and foreign taxing authorities. We are currently under audit by the Internal
Revenue Service for the 2005 tax year. While it is possible that the 2005 tax
audit may conclude in the next 12 months and that the unrecognized tax benefits
we have recorded in relation to this audit may change compared to the
liabilities recorded for the period, it is not possible to estimate the effect,
if any, of any amount of such change during the next 12 months to previously
recorded uncertain tax positions. We adequately establish reserves for these
tax
contingencies when we believe that certain tax positions might be challenged
despite our belief that our tax positions are fully supportable. We adjust
these
reserves when changing events and circumstances arise.
Effective
January 1, 2007, we adopted FASB Interpretation No. 48, Accounting for Uncertainty
in Income
Taxes—
an Interpretation of FASB Statement
No. 109 (“FIN 48”). FIN 48 provides guidance on the minimum threshold
that an uncertain tax benefit is required to meet before it can be recognized
in
the financial statements and applies to all tax positions taken by a company.
FIN 48 contains a two-step approach to recognizing and measuring uncertain
tax
positions accounted for in accordance with SFAS No. 109, “Accounting for
Income Taxes.” The first step is to evaluate the tax position for recognition by
determining if the weight of available evidence indicates that it is more
likely
than not that the position will be sustained on audit, including resolution
of
related appeals or litigation processes, if any. The second step is to measure
the tax benefit as the largest amount that is more than 50% likely of being
realized upon settlement. If it is not more likely than not that the benefit
will be sustained on its technical merits, no benefit will be recorded.
Uncertain tax positions that relate only to timing of when an item is included
on a tax return are considered to have met the recognition threshold. We
recognized accrued interest and penalties related to unrecognized tax benefits
in income tax expense on our consolidated statement of operations. At the
adoption date of January 1, 2007, we had $25.0 million in liabilities for
uncertain tax position, including $6.1 million recognized under FAS 5 and
carried forward from prior years and an additional charge of $18.9 million
to
retained earnings (see Note 8 of the Notes to Consolidated Financial Statements
included elsewhere in this Annual Report on Form 10-K).
Non-Income
Tax
Contingencies. In accordance with the provisions of SFAS No.
5, Accounting for
Contingencies, we make judgments regarding the future outcome of
contingent events and record loss contingency amounts that are probable
and
reasonably estimated based upon available information. The amounts recorded
may
differ from the actual income or expense that occurs when the uncertainty
is
resolved. The estimates that we make in accounting for contingencies and
the
gains and losses that we record upon the ultimate resolution of these
uncertainties could have a significant effect on the liabilities and expenses
in
our financial statements. As of December 31, 2007, we had $4.0 million
of
non-income tax related contingent liabilities.
Recent
Accounting Pronouncements
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements
(“SFAS 157”), which defines fair value, provides a framework for measuring fair
value and expands the disclosures required for fair value measurements. SFAS
157
applies to all accounting pronouncements that require fair value measurements;
it does not require any new fair value measurements. For fiscal years beginning
after November 15, 2007, companies will be required to implement SFAS 157 for
financial assets and liabilities, as well as for any other assets and
liabilities that are carried at fair value on a recurring basis in financial
statements. The FASB did, however, provide a one-year deferral for the
implementation of Statement 157 for other nonfinancial assets and liabilities.
An exposure draft will be issued for comment in the near future on this partial
deferral. Accordingly, we will adopt SFAS 157 for financial assets and
liabilities commencing in the first quarter of 2008. We are currently assessing
the potential impact of SFAS 157 on our consolidated financial
statements.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option
for Financial
Assets and Liabilities - Including an Amendment of FASB Statement No. 115
(“SFAS 159”).
SFAS 159
permits entities to choose to measure certain financial assets
and liabilities at fair value. Unrealized gains and losses, arising subsequent
to adoption are reported in earnings. SFAS 159 is effective for fiscal years
beginning after November 15, 2007 and, accordingly, we will adopt SFAS 159
in
the first quarter of 2008. We are currently assessing the impact of SFAS
159 on
our consolidated financial statements.
In
December 2007, the SEC issued SAB No. 110, Certain Assumptions
Used in
Valuation Methods – Expected Term (“SAB 110”). According to SAB 110,
under certain circumstances the SEC staff will continue to accept beyond
December 31, 2007 the use of the simplified method in developing an estimate
of
expected term of share options that possess certain characteristics in
accordance with SFAS 123(R) beyond December 31, 2007. We will adopt SAB
110
effective January 1, 2008 and continue to use the simplified method in
developing the expected term used for our valuation of stock-based
compensation.
28
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business
Combinations (“SFAS 141(R)”). SFAS 141(R) establishes principles and
requirements for how the acquiror of a business (a) recognizes and measures
in
its financial statements the identifiable assets acquired, the liabilities
assumed, and any noncontrolling interest in the acquiree; (b) recognizes
and
measures in its financial statements the goodwill acquired in the business
combination or a gain from a bargain purchase; and (c) determines what
information to disclose to enable users of the financial statements to
evaluate
the nature and financial effects of the business combination. SFAS 141(R)
is
effective for fiscal years beginning on or after December 15, 2008 and,
accordingly, we will apply SFAS 141(R) for acquisitions effected subsequent
to
the date of adoption.
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests
in
Consolidated Financial Statements—an Amendment of Accounting Research Bulletin
No. 51 (“SFAS 160”). SFAS 160 establishes accounting and
reporting standards for ownership interests in subsidiaries held by parties
other than the parent, the amount of consolidated net income attributable
to the
parent and to the noncontrolling interest, changes in a parent’s ownership
interest and the valuation of retained noncontrolling equity investments
when a
subsidiary is deconsolidated. SFAS 160 also establishes disclosure
requirements that clearly identify and distinguish between the interests
of the
parent and the interests of the noncontrolling owners. SFAS 160 is effective
beginning January 1, 2009. We are currently assessing the potential impact
of SFAS 160 on our consolidated financial
statements.
Results
of Operations
Years
Ended December 31, 2007, 2006 and 2005
The
following table sets forth, for the years ended December 31, 2007, 2006 and
2005, information derived from our statements of operations as a percentage
of
revenues. This information should be read in conjunction with the accompanying
financial statements and the Notes thereto.
|
Year
Ended December 31,
|
|||||
|
2007
|
2006
|
2005
|
|||
|
Revenues
|
100%
|
100%
|
100%
|
||
|
Cost
of revenues
|
20
|
20
|
21
|
||
|
Gross
profit
|
80
|
80
|
79
|
||
|
Operating
expenses:
|
|||||
|
Sales
and marketing
|
18
|
17
|
16
|
||
|
Research,
development and engineering
|
5
|
5
|
5
|
||
|
General
and administrative
|
18
|
21
|
16
|
||
|
Total
operating expenses
|
41
|
43
|
37
|
||
|
Operating
earnings
|
39
|
37
|
42
|
||
|
Gain
on sale of investment
|
—
|
—
|
7
|
||
|
Interest
and other income
|
4
|
4
|
2
|
||
|
Interest
and other expense
|
—
|
—
|
—
|
||
|
Earnings
before income taxes
|
43
|
41
|
51
|
||
|
Income
tax expense
|
12
|
11
|
16
|
||
|
Net
earnings
|
31%
|
30%
|
35%
|
||
Revenues
Subscriber
Revenues. Subscriber revenues consist of both a fixed monthly
recurring subscription component and a variable component that is driven by
the
actual usage of our service offerings. Over the past three years the fixed
portion of our subscriber revenues has contributed an increasing
percentage to our subscriber revenues of 76%, 72% and 71% for 2007, 2006 and
2005, respectively. Subscriber revenues were $212.3 million, $175.2 million
and
$139.7 million for the years ended December 31, 2007, 2006 and 2005,
respectively. The increase in subscriber revenues over this three-year period
was due primarily to an increase in the number of our paying subscribers. The
increase in our base of paying subscribers was primarily the result of new
sign-ups derived from subscribers coming directly to our Websites, free-to-paid
subscriber upgrades, small to mid-sized corporate and enterprise sales, direct
large enterprise and government sales, direct marketing spend for acquisition
of
paying subscribers and international sales, in each case net of
cancellations.
Other
Revenues. Other
revenues were $8.4 million, $5.9 million and $4.2 million for the years
ended
December 31, 2007, 2006 and 2005, respectively. Other revenues consist
primarily of patent licensing revenues and advertising revenues generated
by
delivering email messages to our free customers on behalf of advertisers.
The
increase in other revenues from 2005 through 2007 resulted primarily from
an
increase in patent licensing revenues.
29
Cost
of Revenues
Cost
of
revenues is primarily comprised of costs associated with data and voice
transmission, telephone numbers, network operations, customer service,
online
processing fees and equipment depreciation. Cost of revenues was $44.0
million,
or 20% of revenues, $36.7 million, or 20% of revenues, and $29.8 million,
or 21%
of revenues, for the years ended December 31, 2007, 2006 and 2005, respectively.
Cost of revenues as a percentage of revenues was consistent from 2006
to 2007
due to enhanced utilization of network capacity offset by costs associated
with
network expansion. Cost of revenues as a percentage of revenues decreased
from
2005 to 2006 primarily due to enhanced utilization of network
capacity.
Operating
Expenses
Sales
and
Marketing. Our sales and marketing costs consist primarily of
Internet-based advertising, sales and marketing personnel costs and other
business development-related expenses. Our Internet-based advertising
relationships consist primarily of fixed cost and performance-based
(cost-per-impression, cost-per-click and cost-per-acquisition) advertising
relationships with an array of online service providers. We have a disciplined
return-on-investment approach to our Internet-based advertising and marketing
spend, which causes sales and marketing costs as a percentage of total revenues
to vary from period to period. Sales and marketing expense was $38.8 million,
or
18% of revenues, $30.8 million, or 17% of revenues, and $23.0 million, or
16% of
revenues, for the years ended December 31, 2007, 2006, and 2005, respectively.
The increase from 2006 to 2007 was due primarily to increased expense in
2007 to
promote new brands and new services and promote our services internationally
together with testing of new advertising media. Our expenditures to promote
new
brands and services, to promote our services in new geographic locations
and to
test new advertising media are not expected to generate as high returns on
investment as we experience with our established brands, services, locations
and
advertising media. The increase from 2005 to 2006 was due primarily to increased
Internet-based advertising and additional personnel. Our Internet-based
advertising relationships consist primarily of fixed cost and performance-based
(cost-per-impression, cost-per-click and cost-per-acquisition) advertising
relationships with an array of online service providers.
Research,
Development and
Engineering. Our research, development and engineering costs
consist primarily of personnel-related expense. Research, development and
engineering expense was $11.8 million, or 5% of revenues, $8.8 million, or
5% of
revenues, and $7.1 million, or 5% of revenues, for the years ended December
31,
2007, 2006 and 2005, respectively. The increase in research, development
and
engineering costs over this three-year period was primarily due to an increase
in personnel costs to maintain our existing services, accommodate our service
enhancements, develop and implement additional service features and
functionality and continue to bolster our infrastructure security.
General
and
Administrative. Our general and administrative costs consist
primarily of personnel-related expenses, depreciation and amortization,
stock-based compensation expense, bad debt expense and insurance costs. General
and administrative expense was $39.7 million, or 18% of revenues, $38.8 million,
or 21% of revenues, and $23.5 million, or 16% of revenues, for the years
ended
December 31, 2007, 2006 and 2005, respectively. General and administrative
expense as a percentage of revenues decreased from 2006 to 2007 primarily
due to
costs incurred in 2006, but not in 2007, in connection with an independent
investigation by a special committee of our Board of Directors, partially
offset
by increases in personnel, legal and bad debt expense in 2007. The increase
in
general and administrative expense as a percentage of revenues from 2005
to 2006
was primarily attributable to the expense in 2006 of the independent
investigation, stock-based compensation expense and related payroll tax expense,
professional fees, bad debt expense and additional personnel due to internal
growth and acquisitions.
Stock-Based
Compensation
The
following table represents the stock-based compensation expense included
in cost
of revenues and operating expenses in the accompanying consolidated statements
of operations for the years ended December 31, 2007, 2006 and 2005 (in
thousands):
|
Year
Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Cost
of revenues
|
$ | 668 | $ | 316 | $ | 43 | ||||||
| Operating expenses: | ||||||||||||
|
Sales
and marketing
|
1,187 | 1,038 | 75 | |||||||||
|
Research,
development and engineering
|
771 | 556 | 326 | |||||||||
|
General
and administrative
|
4,788 | 3,782 | 325 | |||||||||
| $ | 7,414 | $ | 5,692 | $ | 769 | |||||||
30
Non-Operating
Income and Expenses
Gain
on Sale of
Investment. In 2005, we recognized $9.8 million as a gain on
sale of an investment. The gain resulted from the acquisition by SigmaTel,
Inc.
of Oasis Semiconductor, Inc., a business in which we owned a minority equity
interest, and a related dividend by Oasis immediately prior to the closing
of
the merger.
Interest
and Other
Income. Our interest and other income is generated primarily
from interest earned on cash, cash equivalents and short and long-term
investments. Interest and other income amounted to $9.3 million, $7.3
million
and $3.4 million for the years ended December 31, 2007, 2006 and 2005,
respectively. The increase in interest and other income from 2006 to
2007 was
due to a combination of higher cash and investment balances and higher
interest
rates. The increase in interest and other income from 2005 to 2006 was
due to a
combination of higher cash and investment balances, higher interest rates
and
approximately $1.3 million in other income in 2006 from litigation settlement
proceeds. Due to falling interest rates, the interest earned on our cash,
cash
equivalents and short and long-term investments may decrease in 2008,
which may
or may not be offset by increasing cash and investment balances and efforts
to
invest in higher return investments.
Interest
and Other
Expense. Our interest and other expense amounted to
approximately $237,000, $74,000 and $76,000 for the years ended December
31,
2007, 2006 and 2005, respectively. Interest and other expense were primarily
related to realized losses from foreign currency transactions for 2007.
For 2006
and 2005, interest and other expense was primarily related to interest
on
capital lease obligations and long term debt.
Income
Taxes. Our effective
income tax rate is based on pre-tax income, statutory tax rates, tax regulations
(including those related to transfer pricing) and different tax rates in the
various jurisdictions in which we operate. The tax bases of our assets and
liabilities reflect our best estimate of the tax benefits and costs we expect
to
realize. We establish valuation allowances to reduce our deferred tax assets
to
an amount that will more likely than not be realized.
As
of
December 31, 2007, we had utilizable federal and state (California) net
operating loss carryforwards (“NOLs”) of approximately $6.2 million and $6.7
million, respectively, after considering substantial restrictions on the
utilization of these NOLs due to “ownership changes”, as defined in the Internal
Revenue Code. We currently estimate that all of the above-mentioned federal
and
state NOLs will be available for use before their expiration. These NOLs expire
through the year 2021 for the federal and 2014 for the state. In addition,
as of
December 31, 2007, we had state research and development tax credits of $0.4
million, which last indefinitely.
Income
tax expense amounted to $27.0 million, $20.1 million and $23.0 million for
the
years ended December 31, 2007, 2006 and 2005, respectively. Our effective
tax rates for 2007, 2006 and 2005 were approximately 28%, 27% and 31%,
respectively. The increase in our annual effective income tax rate from 2006
to
2007 was primarily attributable to an increase in the proportion of our taxable
income being sourced in the U.S. and subject to higher tax rates than in
foreign
jurisdictions, offset in part by the favorable impact of the lapse of a statute
of limitations, which caused a reduction in our liability for unrecognized
tax
benefits of approximately $1.1 million in 2007. The decrease in our income
tax
rate from 2005 to 2006 was primarily attributable to an increasing proportion
of
our taxable income being sourced in foreign jurisdictions with tax rates
lower
than those in the U.S.
Significant
judgment is required in determining our provision for income taxes and in
evaluating our tax positions on a worldwide basis. We believe our tax positions,
including intercompany transfer pricing policies, are consistent with the tax
laws in the jurisdictions in which we conduct our business. It is possible
that
these positions may be challenged, which may have a significant impact on our
effective tax rate.
The
amount of income taxes we pay is subject to audit by federal, state and foreign
tax authorities. Our estimate of the potential outcome of any uncertain tax
issue is subject to management’s assessment of relevant risks, facts, and
circumstances existing at that time. We believe that we have adequately provided
for reasonably foreseeable outcomes related to these matters in accordance
with
FIN 48. We recorded a
liability for unrecognized tax benefits of approximately $5.9 million in
accordance with FIN 48 for the year ended December 31, 2007. However, our
future results may include material favorable or unfavorable adjustments to
the
estimated tax liabilities in the period the assessments are made or resolved,
which may impact our effective tax rate.
Liquidity
and Capital Resources
Cash
and Cash Equivalents and Investments
At
December 31, 2007, we had total cash and investments of $229.8 million,
consisting of cash and cash equivalents of $154.2 million, short-term
investments of $54.3 million and long-term investments of $21.2 million.
Our
investments are comprised primarily of readily marketable corporate debt
securities, debt instruments of the U.S. government and its agencies, auction
rate debt preferred
31
securities
and certificates of deposits. For financial statement presentation, we
classify
our investments primarily as held-to-maturity, and, thus, they are reported
as
short-term and long-term based upon their maturity dates. Short-term
investments
mature within one year of December 31, 2007 and long-term investments
mature one
year or more from December 31, 2007.
A
portion
of our investment portfolio is invested in auction rate debt securities
and if
an auction fails for amounts we have invested, our investment will
not be liquid
until a future auction on these investments is successful. If the issuer
is
unable to successfully close future auctions and their credit rating
deteriorates, we may be required to adjust the carrying value of the
investment
through an impairment charge. We classify auction rate debt securities
as
short-term investments as the established interest rate reset periods
are less
than one year. However, in the event of a failed auction rate debt
security, we
may determine to hold such security until maturity and reclassify such
security
to long-term investments. During the fourth quarter of 2007, as a result
of such
failed auctions, we reclassified short-term available-for-sale investments
of
$11.4 million to long-term held-to-maturity investments and recognized
an
unrealized loss of $0.3 million in accumulated other comprehensive
income/(loss)
in our consolidated financial statements. Based on our ability to access
our
cash and other short-term investments, our expected operating cash
flows, and
our other sources of cash, we do not anticipate the lack of liquidity
on these
investments to affect our ability to operate our business as usual.
Except as
noted above, there have been no significant changes in the maturity
dates and
average interest rates for our investment portfolio and debt obligations
subsequent to December 31, 2007.
Cash
Flows
Our
primary sources of liquidity are cash flows generated from operations, together
with cash and cash equivalents and short-term investments. Net cash provided
by
operating activities was $94.2 million, $73.0 million and $64.3 million for
the
years ended December 31, 2007, 2006 and 2005, respectively. Our operating
cash
flows result primarily from cash received from our subscribers, offset by
cash
payments we make to third parties for their services, employee compensation
and
tax payments. More than two-thirds of our subscribers pay us via credit cards
and therefore our receivables from subscribers generally settle quickly.
Our
cash and cash equivalents and short-term investments were $208.5 million,
$179.1
million and $112.8 million at December 31, 2007, 2006 and 2005,
respectively.
We
currently anticipate that our existing cash, cash equivalents, short-term
investments and cash generated from operations will be sufficient to meet our
anticipated needs for working capital, capital expenditures, investment
requirements, and commitments.
Net
cash
used in investing activities was $7.0 million, $5.0 million and $49.1 million
for the years ended December 31, 2007, 2006 and 2005, respectively. Net cash
used in investing activities in 2007 and 2006 was primarily attributable
to
purchases of investments, acquisitions of businesses, purchases of property
and
equipment and purchases of intangible assets, offset by proceeds from sales
and
maturities of investments. Net cash used in investing activities in 2005
was
primarily attributable to purchases of investments and acquisition of
businesses, offset by maturities of investments and proceeds from sale of
an
investment.
Net
cash
provided by (used in) financing activities was $(29.9) million, $(9.4) million
and $2.8 million for the years ended 2007, 2006 and 2005, respectively. For
2007, net cash used by financing activities was primarily comprised of
repurchases of our common stock offset by proceeds from the exercise of stock
options and common shares issued under our employee stock purchase plan.
For
2006, net cash used in financing activities was primarily comprised of
repurchases of our common stock and repayment of long-term debt, offset by
proceeds from the exercise of stock options and common shares issued under
our
employee stock purchase plan. Net cash provided by financing activities in
2005
was primarily comprised of proceeds from the exercise of stock options and
warrants partially offset by debt repayment.
Capital
Expenditures
We
have
financed a portion of our operating technology equipment, software and office
equipment through capital lease and loan arrangements. Amounts due under
these
arrangements were zero, $0.1 million and $0.7 million at December 31, 2007,
2006
and 2005, respectively.
Income
Taxes
For
2005 our cash flows were positively impacted by the utilization of our NOLs
and tax credit carryforwards. As of December 31, 2006 and 2007, our available
NOLs and tax credit carryforwards are not expected to have a material
impact on
future cash flows. As such, we expect our cash tax payments to be higher
than in
2005. However, we continue to expect our cash tax payments to be reduced
by the
tax deduction related to stock option exercises and restricted stock
vesting.
Stock
Repurchase Program
In
March
2006, our Board of Directors approved a program authorizing the repurchase
of up
to 2,000,000 shares of our common
32
stock
through December 31, 2008. During 2007, we repurchased all 1,529,100
of the
remaining shares of common stock authorized under this repurchase program
at an
aggregate cost of approximately $42.4 million (including commission fees
of
approximately $46,000). In February 2008, j2 Global’s Board of Directors
approved a common stock repurchase program authorizing the repurchase
of up to
five million shares of our common stock through the end of December 2010
(see
Note 18 of the Notes to Consolidated Financial Statements included elsewhere
in
this Annual Report on Form 10-K).
Off-Balance
Sheet Entities
As
of December 31, 2007, we did
not have interests in any variable interest entities, as defined by
FASB
Interpretation No. 46 (Revised 2003), Consolidation of
Variable Interest
Entities—An Interpretation of ARB No. 51.
Contractual
Obligations and Commitments
The
following table summarizes our contractual obligations and commitments
as of
December 31, 2007:
|
Payments
Due by Period
|
||||||||||||||||||||
|
(In
thousands)
|
||||||||||||||||||||
|
Contractual
Obligations
|
Total
|
1
Year
|
2-3
Years
|
4-5
Years
|
More
than 5
Years
|
|||||||||||||||
|
Operating
leases
|
$ | 4,286 | $ | 1,486 | $ | 1,684 | $ | 224 | $ | 892 | ||||||||||
|
Telecom
services and co-location facilities
|
10,858 | 4,560 | 6,298 | — | — | |||||||||||||||
|
Computer
software and related services
|
1,300 | 1,300 | — | — | — | |||||||||||||||
| $ | 16,444 | $ | 7,346 | $ | 7,982 | $ | 224 | $ | 892 | |||||||||||
|
December
31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(In
thousands except average monthly revenue per paying telephone
number)
|
||||||||||||
|
DID-based
revenues
|
$ | 201,776 | $ | 167,882 | $ | 134,018 | ||||||
|
Less
other revenues
|
(7,232 | ) | (5,355 | ) | (3,993 | ) | ||||||
|
Total
paying telephone number revenues
|
$ | 194,544 | $ | 162,527 | $ | 130,025 | ||||||
|
Average
paying telephone number monthly revenue (total divided by number
of
months)
|
$ | 16,212 | $ | 13,544 | $ | 10,835 | ||||||
|
Number
of paying telephone numbers
|
||||||||||||
|
Beginning
of period
|
907 | 740 | 554 | |||||||||
|
End
of period
|
1,064 | 907 | 740 | |||||||||
|
Average
of period
|
985 | 823 | 647 | |||||||||
|
Average
monthly revenue per paying telephone number (1)
|
$ | 16.46 | $ | 16.45 | $ | 16.75 | ||||||
(1) Due
to rounding, individual numbers may not recalculate.
33
Item
7A. 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.
Interest
Rate Risk
Our
exposure to market risk for changes in interest rates relates primarily
to our
investment portfolio. We maintain an investment portfolio of various holdings,
types and maturities. The primary objectives of our investment activities
are to
preserve our principal while at the same time maximizing yields without
significantly increasing risk. To achieve these objectives, we maintain
our
portfolio of cash equivalents and investments in a mix of tax-exempt and
taxable
instruments that meet high credit quality standards, as specified in our
investment policy. Our cash and cash equivalents are not subject to significant
interest rate risk due to the short maturities of these instruments. As
of
December 31, 2007, the carrying value of our cash and cash equivalents
approximated fair value. Our return on these investments is subject to
interest
rate fluctuations. None of our investments are held for trading
purposes.
Our
short
and long-term investments are comprised primarily of readily marketable
corporate debt securities, debt instruments of the U.S. government and
its
agencies, auction rate debt, preferred securities and certificates of deposits.
Investments in fixed rate interest earning instruments carry a degree of
interest rate risk. Fixed rate securities may have their fair market value
adversely impacted due to a rise in interest rates. Our interest income
is
sensitive to changes in the general level of U.S. and foreign countries’
interest rates. Due in part to these factors, our future investment income
may
fall short of expectations due to changes in interest rates. As of December
31,
2007 and 2006, we had investments in debt securities with effective maturities
between three months and one year of approximately $54.3 million and $83.5
million, respectively. Such investments had a weighted-average yield of
approximately 4.2% and 3.9%, respectively. As of December 31, 2007 and
2006, we
had investments in debt securities with effective maturities between one
and
four years of approximately $21.2 million and $12.5 million, respectively.
Such
investments had a weighted average yield of approximately 5.7% and 5.0%,
respectively. Based on our cash and cash equivalents and short-term and
long-term investment holdings as of December 31, 2007, an immediate 100
basis
point decline in interest rates would decrease our annual interest income
by
approximately $2.3 million.
Foreign
Currency Risk
We
conduct business in certain foreign markets, primarily in Canada and the
European Union. Our primary exposure to foreign currency risk relates to
investment in foreign subsidiaries that transact business in functional
currencies other than the U.S. Dollar, primarily the Canadian Dollar, Euro
and
British Pound Sterling. However, the exposure is mitigated by our practice
of
generally reinvesting profits from international operations in order to grow
that business.
As
we
increase our operations in international markets we become increasingly exposed
to changes in currency exchange rates. The economic impact of currency exchange
rate movements is often linked to variability in real growth, inflation,
interest rates, governmental actions and other factors. These changes, if
material, could cause us to adjust our financing and operating
strategies.
As
currency exchange rates change, translation of the income statements of the
international businesses into U.S. Dollars affects year-over-year comparability
of operating results. Historically, we have not hedged translation risks because
cash flows from international operations were generally reinvested locally;
however, we may do so in the future.
Foreign
exchange gains and losses were not material to our earnings in 2007, 2006
or
2005. For the years ended December 31, 2007, 2006 and 2005, translation
adjustments amounted to $2.1 million, $2.3 million and $(1.7) million,
respectively. As of December 31, 2007, cumulative translation adjustments
included in other comprehensive income amounted to $2.6 million. We periodically
review our strategy for hedging transaction risks. Our objective in managing
foreign exchange risk is to minimize the potential exposure to changes
that
exchange rates might have on earnings, cash flows and financial
position.
We
currently do not have derivative financial instruments for hedging, speculative
or trading purposes and therefore are not subject to such hedging risk. However,
we may in the future engage in hedging transactions to manage our exposure
to
fluctuations in foreign currency exchange rates.
[REMAINDER
OF THIS PAGE INTENTIONALLY LEFT BLANK]
34
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Shareholders
j2
Global
Communications, Inc.
We
have
audited the consolidated balance sheet of j2 Global Communications, Inc.
and its
subsidiaries (collectively, the “Company”) as of December 31, 2007, and the
related consolidated statement of operations, stockholders’ equity, and cash
flows for the year then ended. Our audit also included the financial statement
schedule of j2 Global Communications, Inc. and its subsidiaries listed in
Item
15. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express
an
opinion on these financial statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our
audit provides a reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present
fairly,
in all material respects, the financial position of j2 Global Communications,
Inc. and its subsidiaries as of December 31, 2007, and the results of their
operations and their cash flows for the year ended December 31, 2007, in
conformity with U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly
in all material respects the information set forth therein.
As
discussed in Note 2 to the consolidated financial statements, the Company
has adopted the provisions of Statement of Financial Accounting Standards
Interpretation No. 48, “Accounting
for
Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109” on
January 1, 2007.
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), j2 Global Communications, Inc. and its
subsidiaries’ internal control over financial reporting as of December 31, 2007,
based on the criteria
established in Internal
Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) and our report dated February 18, 2008 expressed an unqualified
opinion
on the effectiveness of j2 Global Communications, Inc.’s internal control over
financial reporting.
/s/
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los
Angeles, California
February
18, 2008
35
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Stockholders of
j2
Global
Communications, Inc.
Los
Angeles, California
We
have
audited the accompanying consolidated balance sheet of j2 Global Communications,
Inc. and subsidiaries (the “Company”) as of December 31, 2006, and the related
consolidated statements of operations, stockholders’ equity, and cash flows for
each of the two years in the period ended December 31, 2006. Our audits also
included the financial statement schedule listed in the Index at Item 15.
These
financial statements and financial statement schedule are the responsibility
of
the Company’s management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of j2 Global Communications, Inc. and
subsidiaries as of December 31, 2006 and the results of their operations
and
their cash flows for each of the two years in the period ended December 31,
2006, in conformity with accounting principles generally accepted in the
United
States of America. Also, in our opinion, such financial statement schedule,
when
considered in relation to the basic consolidated financial statements taken
as a
whole, presents fairly, in all material respects, the information set forth
therein.
As
discussed in Note 2 to the consolidated financial statements, the Company
has adopted the provisions of Statement of Financial Accounting Standards
No. 123(R), “Share-Based Payment,” on January 1, 2006 and accordingly,
has changed its method of accounting for share-based compensation.
/s/
DELOITTE & TOUCHE LLP
Los
Angeles, California
March
11,
2007
36
j2
GLOBAL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
December
31, 2007 and 2006
(In
thousands, except share amounts)
|
2007
|
2006
|
|||||||
|
ASSETS
|
||||||||
|
Cash
and cash equivalents
|
$ | 154,220 | $ | 95,605 | ||||
|
Short-term
investments
|
54,297 | 83,498 | ||||||
|
Accounts
receivable, net of allowances of $1,378 and $1,105,
respectively
|
15,365 | 11,989 | ||||||
|
Prepaid
expenses and other
|
5,061 | 4,779 | ||||||
|
Deferred
income taxes
|
1,724 | 2,643 | ||||||
|
Total
current assets
|
230,667 | 198,514 | ||||||
|
Long-term
investments
|
21,241 | 12,493 | ||||||
|
Property
and equipment, net
|
23,511 | 18,951 | ||||||
|
Goodwill
|
39,452 | 30,954 | ||||||
|
Other
purchased intangibles, net
|
29,220 | 21,400 | ||||||
|
Deferred
income taxes
|
6,113 | 5,406 | ||||||
|
Other
assets
|
205 | 442 | ||||||
|
Total
assets
|
$ | 350,409 | $ | 288,160 | ||||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
|
Accounts
payable and accrued expenses
|
$ | 17,516 | $ | 17,117 | ||||
|
Income
taxes payable
|
4,649 | 4,511 | ||||||
|
Deferred
revenue
|
14,708 | 11,530 | ||||||
|
Current
portion of long-term debt
|
— | 149 | ||||||
|
Total
current liabilities
|
36,873 | 33,307 | ||||||
|
Accrued
income tax liability
|
30,863 | — | ||||||
|
Other
|
59 | 112 | ||||||
|
Total
liabilities
|
67,795 | 33,419 | ||||||
|
Commitments
and contingencies
|
||||||||
|
Stockholders’
Equity:
|
||||||||
|
Preferred
stock, $0.01 par value. Authorized 1,000,000 and none
issued
|
— | — | ||||||
|
Common
stock, $0.01 par value. Authorized 95,000,000 at December 31,
2007 and
2006; total issued and outstanding 48,665,612 and 49,318,144
shares at
December 31, 2007 and 2006, respectively
|
543 | 535 | ||||||
|
Additional
paid-in capital
|
121,503 | 144,935 | ||||||
|
Treasury
stock, at cost (5,660,324 and 4,131,224 shares at December 31,
2007 and
2006, respectively)
|
(4,662 | ) | (4,647 | ) | ||||
|
Retained
earnings
|
162,281 | 112,735 | ||||||
|
Accumulated
other comprehensive income
|
2,949 | 1,183 | ||||||
|
Total
stockholders’ equity
|
282,614 | 254,741 | ||||||
|
Total
liabilities and stockholders’ equity
|
$ | 350,409 | $ | 288,160 | ||||
See
Notes
to Consolidated Financial Statements
37
j2
GLOBAL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
Years
Ended December 31, 2007, 2006 and 2005
(In
thousands, except share and per share data)
|
2007
|
2006
|
2005
|
||||||||||
|
Revenues:
|
||||||||||||
|
Subscriber
|
$ | 212,329 | $ | 175,171 | $ | 139,706 | ||||||
|
Other
|
8,368 | 5,908 | 4,235 | |||||||||
| 220,697 | 181,079 | 143,941 | ||||||||||
|
|
||||||||||||
|
Cost
of revenues (including stock-based compensation of $668,
$316 and $43 in
2007,
2006 and 2005,
respectively)
|
43,987 | 36,723 | 29,844 | |||||||||
|
Gross
profit
|
176,710 | 144,356 | 114,097 | |||||||||
|
Operating
expenses:
|
||||||||||||
|
Sales
and marketing (including stock-based compensation of $1,187,
$1,038 and
$75 in 2007, 2006 and 2005, respectively)
|
38,768 | 30,792 | 23,025 | |||||||||
|
Research,
development and engineering (including stock-based compensation
of $771,
$556, and $326 in 2007, 2006 and 2005, respectively)
|
11,833 | 8,773 | 7,134 | |||||||||
|
General
and administrative (including stock-based compensation of
$4,788, $3,782
and $325 in 2007, 2006 and 2005, respectively)
|
39,683 | 38,754 | 23,464 | |||||||||
|
Total
operating expenses
|
90,284 | 78,319 | 53,623 | |||||||||
|
Operating
earnings
|
86,426 | 66,037 | 60,474 | |||||||||
|
Other
income (expenses):
|
||||||||||||
|
Gain
on sale of investment
|
— | — | 9,808 | |||||||||
|
Interest
and other income
|
9,272 | 7,269 | 3,416 | |||||||||
|
Interest
and other expense
|
(237 | ) | (74 | ) | (76 | ) | ||||||
|
Total
other income and expenses
|
9,035 | 7,195 | 13,148 | |||||||||
|
Earnings
before income taxes
|
95,461 | 73,232 | 73,622 | |||||||||
|
Income
tax expense
|
27,000 | 20,101 | 23,004 | |||||||||
|
Net
earnings
|
$ | 68,461 | $ | 53,131 | $ | 50,618 | ||||||
|
Net
earnings per common share:
|
||||||||||||
|
Basic
|
$ | 1.40 | $ | 1.08 | $ | 1.05 | ||||||
|
Diluted
|
$ | 1.35 | $ | 1.04 | $ | 0.99 | ||||||
|
Weighted
average shares outstanding:
|
||||||||||||
|
Basic
|
48,953,483 | 49,209,129 | 48,224,818 | |||||||||
|
Diluted
|
50,762,007 | 51,048,995 | 51,171,794 | |||||||||
See
Notes to
Consolidated Financial Statements
38
j2
GLOBAL COMMUNICATIONS, INC. AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
Years
Ended December 31, 2007, 2006 and 2005
(In
thousands, except share amounts)
|
Common
stock
|
Treasury
stock
|
|||||||||||||||||||||||||||||||||||
|
Shares
|
Amount
|
Additional
paid-in
capital
|
Shares
|
Amount
|
Notes
receivable
from
stockholders
|
Retained
earnings
|
Accumulated
other
comprehensive
income/(loss)
|
Stockholders’
equity
|
||||||||||||||||||||||||||||
|
Balance,
December 31, 2004
|
50,876,416 | $ | 509 | $ | 133,570 | (3,660,324 | ) | $ | (4,643 | ) | $ | (9 | ) | $ | 8,986 | $ | 600 | $ | 139,013 | |||||||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||||||||||||||||
|
Net
earnings
|
— | — | — | — | — | — | 50,618 | — | 50,618 | |||||||||||||||||||||||||||
|
Foreign
currency translation
adjustment
|
— | — | — | — | — | — | — | (1,736 | ) | (1,736 | ) | |||||||||||||||||||||||||
|
Comprehensive
income
|
— | — | — | — | — | — | 50,618 | (1,736 | ) | 48,882 | ||||||||||||||||||||||||||
|
Exercise
of stock options
|
1,517,718 | 15 | 2,899 | — | — | — | — | — | 2,914 | |||||||||||||||||||||||||||
|
Issuance
of common stock under employee stock purchase plan
|
33,160 | — | 508 | — | — | — | — | — | 508 | |||||||||||||||||||||||||||
|
Tax
benefit of stock option exercises
|
— | — | 9,489 | — | — | — | — | — | 9,489 | |||||||||||||||||||||||||||
|
Exercise
of warrants
|
432,002 | 5 | 666 | — | — | — | — | — | 671 | |||||||||||||||||||||||||||
|
Issuance
of restricted stock
|
325,000 | 3 | (3 | ) | — | — | — | — | — | — | ||||||||||||||||||||||||||
|
Stock-based
compensation
|
— | — | 769 | — | — | — | — | — | 769 | |||||||||||||||||||||||||||
|
Write-off
of notes receivable from stockholders
|
— | — | — | — | — | 9 | — | — | 9 | |||||||||||||||||||||||||||
|
Balance,
December 31, 2005
|
53,184,296 | 532 | 147,898 | (3,660,324 | ) | (4,643 | ) | — | 59,604 | (1,136 | ) | 202,255 | ||||||||||||||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||||||||||||||||
|
Net
earnings
|
— | — | — | — | — | — | 53,131 | — | 53,131 | |||||||||||||||||||||||||||
|
Foreign
currency translation
adjustment
|
— | — | — | — | — | — | — | 2,319 | 2,319 | |||||||||||||||||||||||||||
|
Comprehensive
income
|
— | — | — | — | — | — | 53,131 | 2,319 | 55,450 | |||||||||||||||||||||||||||
|
Exercise
of stock options
|
228,883 | 3 | 925 | — | — | — | — | — | 928 | |||||||||||||||||||||||||||
|
Issuance
of common stock under employee stock purchase plan
|
20,849 | — | 472 | — | — | — | — | — | 472 | |||||||||||||||||||||||||||
|
Tax
benefit of stock option exercises and restricted stock
|
— | — | 1,556 | — | — | — | — | — | 1,556 | |||||||||||||||||||||||||||
|
Repurchase
of common stock
|
(11,608 | ) | (470,900 | ) | (4 | ) | — | — | — | (11,612 | ) | |||||||||||||||||||||||||
|
Issuance
of restricted stock, net
|
15,340 | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
|
Stock-based
compensation
|
— | — | 5,692 | — | — | — | — | — | 5,692 | |||||||||||||||||||||||||||
|
Balance,
December 31, 2006
|
53,449,368 | 535 | 144,935 | (4,131,224 | ) | (4,647 | ) | — | 112,735 | 1,183 | 254,741 | |||||||||||||||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||||||||||||||||
|
Adoption
of FIN
48
|
— | — | — | — | — | — | (18,915 | ) | — | (18,915 | ) | |||||||||||||||||||||||||
|
Net
earnings
|
— | — | — | — | — | — | 68,461 | — | 68,461 | |||||||||||||||||||||||||||
|
Foreign
currency
translation
|
— | — | — | — | — | — | — | 2,111 | 2,111 | |||||||||||||||||||||||||||
|
Unrealized
loss on
held-to-maturity investments
|
— | — | — | — | — | — | — | (345 | ) | (345 | ) | |||||||||||||||||||||||||
|
Comprehensive
income
|
— | — | — | — | — | — | 49,546 | 1,766 | 51,312 | |||||||||||||||||||||||||||
|
Exercise
of stock options
|
776,273 | 7 | 7,693 | — | — | — | — | — | 7,700 | |||||||||||||||||||||||||||
|
Issuance
of common stock under employee stock purchase plan
|
9,282 | — | 266 | — | — | — | — | — | 266 | |||||||||||||||||||||||||||
|
Tax
benefit of stock option exercises and restricted stock
|
— | — | 3,608 | — | — | — | — | — | 3,608 | |||||||||||||||||||||||||||
|
Repurchase
of common stock
|
— | — | (42,349 | ) | (1,529,100 | ) | (15 | ) | — | — | — | (42,364 | ) | |||||||||||||||||||||||
|
Repurchase
of restricted stock
|
(9,784 | ) | — | (63 | ) | — | — | — | — | — | (63 | ) | ||||||||||||||||||||||||
|
Issuance
of restricted stock, net
|
100,794 | 1 | (1 | ) | — | — | — | — | — | — | ||||||||||||||||||||||||||
|
Stock-based
compensation
|
— | — | 7,414 | — | — | — | — | — | 7,414 | |||||||||||||||||||||||||||
|
Balance,
December 31, 2007
|
54,325,933 | $ | 543 | $ | 121,503 | (5,660,324 | ) | $ | (4,662 | ) | $ | — | $ | 162,281 | $ | 2,949 | $ | 282,614 | ||||||||||||||||||
See Notes to Consolidated
Financial
Statements
39
j2
GLOBAL COMMUNICATIONS, INC. AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Years
Ended December 31, 2007, 2006 and 2005
(In
thousands)
|
2007
|
2006
|
2005
|
||||||||||
|
Cash
flows from operating activities:
|
||||||||||||
|
Net
earnings
|
$ | 68,461 | $ | 53,131 | $ | 50,618 | ||||||
|
Adjustments
to reconcile net earnings to net cash provided by operating
activities:
|
||||||||||||
|
Depreciation
and amortization
|
10,134 | 8,228 | 7,109 | |||||||||
|
Gain
on sale of investment
|
— | — | (9,808 | ) | ||||||||
|
Share-based
compensation
|
7,414 | 5,692 | 769 | |||||||||
|
Tax
benefit of vested restricted stock
|
— | 108 | — | |||||||||
|
Tax
benefit of stock option exercises
|
— | 1,478 | 9,489 | |||||||||
|
Excess
tax benefit from share-based compensation
|
(4,731 | ) | (1,458 | ) | — | |||||||
|
Deferred
income taxes
|
212 | (1,961 | ) | 2,133 | ||||||||
|
Loss
on disposal of fixed assets
|
229 | 130 | 12 | |||||||||
|
Changes
in assets and liabilities, net of effects of business
combinations:
|
||||||||||||
|
Decrease
(increase) in:
|
||||||||||||
|
Accounts
receivable
|
(3,106 | ) | (2,463 | ) | (554 | ) | ||||||
|
Prepaid
expenses and other current assets
|
(133 | ) | (1,394 | ) | (512 | ) | ||||||
|
Other
assets
|
(201 | ) | (118 | ) | (267 | ) | ||||||
|
Increase
(decrease) in:
|
||||||||||||
|
Accounts
payable and accrued expenses
|
(2,580 | ) | 5,773 | 1,368 | ||||||||
|
Income
taxes payable
|
9,672 | 1,635 | 2,640 | |||||||||
|
Deferred
revenue
|
2,991 | 4,112 | 1,348 | |||||||||
|
Accrued
income tax liability
|
5,898 | — | — | |||||||||
|
Other
|
(53 | ) | 112 | — | ||||||||
|
Net
cash provided by operating activities
|
94,207 | 73,005 | 64,345 | |||||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Purchases
of available-for-sale investments
|
(311,003 | ) | (144,803 | ) | (107,495 | ) | ||||||
|
Sales
of available-for-sale investments
|
279,088 | 121,858 | 91,025 | |||||||||
|
Purchases
of held-to-maturity investments
|
(26,498 | ) | (36,705 | ) | (41,844 | ) | ||||||
|
Maturities
of held-to-maturity investments
|
78,954 | 71,931 | 25,110 | |||||||||
|
Purchases
of property and equipment
|
(10,315 | ) | (7,199 | ) | (8,928 | ) | ||||||
|
Proceeds
from the sale of property and equipment
|
— | 10 | 1 | |||||||||
|
Acquisition
of businesses, net of cash received
|
(11,165 | ) | (7,351 | ) | (10,863 | ) | ||||||
|
Purchases
of intangible assets
|
(6,038 | ) | (3,517 | ) | (5,240 | ) | ||||||
|
Proceeds
from sale of investment
|
— | 822 | 9,169 | |||||||||
|
Net
cash used in investing activities
|
(6,977 | ) | (4,954 | ) | (49,065 | ) | ||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Repurchases
of common stock and restricted stock
|
(42,427 | ) | (11,612 | ) | — | |||||||
|
Issuance
of common stock under employee stock purchase plan
|
266 | 472 | 508 | |||||||||
|
Exercise
of stock options and warrants
|
7,700 | 928 | 3,586 | |||||||||
|
Excess
tax benefit on stock option exercises
|
4,731 | 1,458 | — | |||||||||
|
Repayment
of long-term debt
|
(153 | ) | (599 | ) | (1,325 | ) | ||||||
|
Net
cash provided by (used in) financing activities
|
(29,883 | ) | (9,353 | ) | 2,769 | |||||||
|
Effect
of exchange rate changes on cash and cash equivalents
|
1,268 | 606 | (562 | ) | ||||||||
|
Net
increase in cash and cash equivalents
|
58,615 | 59,304 | 17,487 | |||||||||
|
Cash
and cash equivalents at beginning of year
|
95,605 | 36,301 | 18,814 | |||||||||
|
Cash
and cash equivalents at end of year
|
$ | 154,220 | $ | 95,605 | $ | 36,301 | ||||||
See Notes to Consolidated
Financial
Statements
40
j2
GLOBAL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007, 2006 and 2005
1.
The Company
j2
Global
Communications, Inc. (“j2 Global”, “our”, “us’ or “we”) is a Delaware
corporation founded in 1995. By leveraging the power of the Internet, we
provide
outsourced, value-added messaging and communications services to individuals
and
businesses throughout the world. We offer fax, voicemail, email and call
handling services and bundled suites of certain of these services. We market
our
services principally under the brand names eFax®,
eFax
Corporate®,
eFaxDeveloperTM,
Fax.comTM,
Send2Fax®,
eFax
BroadcastTM,
jBlast®,
jConnect®,
Onebox®,
Onebox
ReceptionistTM,
RapidFAXTM,
eVoice®,
eVoiceReceptionistTM,
YAC®
and Electric Mail®.
We
deliver many of our services through our global telephony/Internet Protocol
(“IP”) network, which spans more than 3,000 cities in 42 countries across five
continents. We have created this network, and continuously seek to expand
it,
through negotiating with U.S. and foreign telecommunications and co-location
providers for telephone numbers (also referred to as Direct Inward Dial numbers
or “DIDs”), Internet bandwidth and co-location space for our equipment. We
maintain and seek to grow an inventory of telephone numbers to be assigned
to
new customers. Most of these numbers are “local” (as opposed to toll-free),
which enables us to provide our paying subscribers telephone numbers with
a
geographic identity. As of December 31, 2007, j2 Global had nearly 12 million
telephone numbers deployed to its customers. In addition to growing our business
internally, we have used small acquisitions to grow our customer base, enhance
our technology and acquire skilled personnel.
2.
Basis of Presentation and Summary of Significant Accounting
Policies
(a)
Principles of Consolidation
The
consolidated financial statements include the accounts of j2 Global and its
direct and indirect wholly-owned subsidiaries. All intercompany accounts
and
transactions have been eliminated in consolidation.
(b) Stock
Split
On
May
25, 2006, we effected a two-for-one stock split of our common stock in
the form
of a stock dividend to each shareholder of record at the close of business
on
May 15, 2006. All historical share and per share amounts contained in the
accompanying consolidated financial statements and related notes have been
retroactively restated to reflect this change in our capital
structure.
(c) Use
of Estimates
The
preparation of financial statements
in accordance with accounting principles generally accepted in the United
States
(“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 net revenue and expenses during the
reporting period. On an ongoing basis, management evaluates its estimates,
including those related to revenue recognition, allowances for doubtful
accounts, the valuation of deferred income taxes, tax contingencies, long-lived
and intangible assets and goodwill and stock-based compensation. These estimates
are based on historical experience and on various other factors that we believe
to be reasonable under the circumstances. Actual results could differ from
those
estimates.
(d) Revenue
Recognition
Our
subscriber revenues substantially consist of monthly recurring subscription
and
usage-based fees, which are primarily paid in advance by credit card. In
accordance with GAAP and with Securities and Exchange Commission (“SEC”) issued
Staff Accounting Bulletin No. 104, Revenue Recognition, which
clarifies certain existing accounting principles for the timing of revenue
recognition and classification of revenues in the financial statements,
we defer
the portions of monthly recurring subscription and usage-based fees collected
in
advance and recognize them in the period earned. Additionally, we defer
and
recognize subscriber activation fees and related direct incremental costs
over a
subscriber’s estimated useful life.
Our
advertising revenues (included in “other revenues”) primarily consist of
revenues derived by delivering email messages on behalf of advertisers to
our
customers who elect to receive such messages. Revenues are recognized in
the
period in which the advertising services are performed, provided that no
significant j2 Global obligations remain and the collection of the resulting
receivable is reasonably assured.
41
Our
patent revenues (included in “other revenues”) consist of revenues generated
under license agreements that provide for the payment of contractually
determined fully paid-up or royalty-bearing license fees to us in exchange
for
the grant of a non-exclusive, retroactive and future license to manufacture
and/or sell products covered by our patented technologies. Patent revenues
are
recognized when earned over the term of the license agreement. With regard
to
fully-paid up license arrangements, we generally recognize as revenue in
the
quarter the agreement is executed the portion of the payment attributable
to
past use of the patented technology and amortize the remaining portion of
such
payments on a straight line basis over the life of the licensed patent(s).
With
regard to royalty-bearing license arrangements, we recognize revenue of license
fees earned during the applicable period.
(e) Fair
Value of Financial Instruments
Statement
of Financial Accounting Standards (“SFAS”) No. 107, Disclosure about Fair
Value of
Financial Instruments (“SFAS 107”), requires entities to disclose the
fair value of financial instruments, both assets and liabilities recognized
and
not recognized on the balance sheet, for which it is practicable to estimate
fair value. SFAS 107 defines fair value of a financial instrument as the
amount
at which the instrument could be exchanged in a current transaction between
willing parties. As of December 31, 2007 and 2006, the carrying value of
cash
and cash equivalents, short-term and long-term investments, accounts receivable,
interest receivable, accounts payable, accrued expenses, interest payable
and
customer deposits approximates fair value due to the short-term nature of
such
instruments. The carrying value of long-term debt approximates fair value
as the
related interest rates approximate rates currently available to j2
Global.
(f) Cash
and Cash Equivalents
We
consider cash equivalents to be only those investments that are highly liquid,
readily convertible to cash and with maturities of 90 days or less at the
purchase date.
(g) Investments
We
account for our short-term and long-term investments in debt securities
in
accordance with SFAS No. 115, Accounting for Certain
Investments
in Debt and Equity Securities, and Emerging Issues Task Force (“EITF”)
Issue No. 03-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain
Investments. These investments are comprised primarily of readily
marketable corporate debt securities, debt instruments of the U.S. government
and its agencies and auction rate debt and preferred securities. We determine
the appropriate classification of our investments at the time of acquisition
and
reevaluate such determination at each balance sheet date. Held-to-maturity
securities are those investments in which we have the ability and intent
to hold
until maturity. Held-to-maturity securities are recorded at amortized cost.
Available-for-sale securities are recorded at fair value, with unrealized
gains
or losses recorded as a separate component of accumulated other comprehensive
income (loss) in shareholders’ equity until realized. Trading securities are
carried at fair value, with unrealized gains and losses included in investment
income. None of our investments are held for trading purposes. All securities
are accounted for on a specific identification basis.
The
following table summarizes the estimated fair value of our short-term and
long-term investments designated as available-for-sale and held-to-maturity
classified by the contractual maturity date of the security (in
thousands):
|
|
As
of
December 31,
2007
|
|||
|
Due
within 1 year
|
$ | 54,297 | ||
|
Due
within more than 1 year but less than 5 years
|
9,949 | |||
|
Due
within more than 5 years but less than 10 years
|
6,200 | |||
|
Due
10 years or after
|
5,092 | |||
|
Total
available-for-sale and held-to-maturity investments
|
$ | 75,538 | ||
At
December 31, 2007 and 2006, auction rate securities aggregated $47.6 million
and
$60.5 million, respectively, and were included in short-term available-for-sale
investments in the accompanying consolidated balance sheets, except for
those
that were reclassified to long-term held-to-maturity investments as described
below. As of December 31, 2007, the auction rate debt securities have
stated maturities through 2045. The auction rate preferred securities have
no
stated maturity dates. Each of these securities has interest rates that
reset
periodically at established intervals of 90 days or less. At each auction
reset,
we have the option to hold the
42
position,
bid for a new interest rate or sell. In the event of a failed auction rate
debt
security, we may reclassify the auction rate debt security from short-term
to
long-term investments based on the actual maturity of the security rather
than
the auction reset period. In addition, if an auction fails our investment
will
not be liquid. In the event we need to access these funds, we will not be
able
to until a future auction on these investments is successful. If the issuer
is
unable to successfully close future auctions and their credit rating
deteriorates, we may be required to adjust the carrying value of the investment
through an impairment charge. During the fourth quarter of 2007, as a result
of
such failed auctions, we reclassified short-term available-for-sale investments
of $11.4 million to long-term held-to-maturity investments and recognized
an
unrealized loss of $0.3 million in accumulated other comprehensive income/(loss)
in our consolidated financial statements. We have the ability and intent
to hold
these auction rate debt securities until maturity. Based on our ability to
access our cash and other short-term investments, our expected operating
cash
flows and our other sources of cash we do not anticipate the lack of liquidity
on these investments to affect our ability to operate our business as usual.
Except as noted above, there have been no significant changes in the maturity
dates and average interest rates for our investment portfolio and debt
obligations subsequent to December 31, 2007.
At
December 31, 2007 and 2006, long-term held-to-maturity securities mature
between
one year or more from the date of the financial statements. These securities
are
carried at fair value, with the unrealized gains and losses, net of taxes,
reported as a component of stockholders’ equity, except for unrealized losses
determined to be other than temporary which are recorded as interest income
and
other, net, in accordance with our policy and FASB Staff Position Nos.
FAS 115-1
and FAS 124-1, The Meaning of
Other-Than-Temporary Impairment and its Application to Certain
Investments. Unrealized losses on held-to-maturity securities were $0.3
million and $0.2 million for 2007 and 2006, respectively. The unrealized
loss is
amortized over the remaining live of the held-to-maturity investment. We
currently intend to hold all of these securities to
maturity.
Proceeds
from the sale of available-for-sale investments amounted to $279.1 million,
$121.9 million and $91.0 million for 2007, 2006 and 2005, respectively.
The cost
of the available-for-sale investments sold is purchase price paid, net
of
amortization, if applicable.
We
assess
whether an other-than-temporary impairment loss on an investment has occurred
due to declines in fair value or other market conditions. There were no
other-than-temporary impairment losses in the years ended December 31, 2007,
2006 and 2005. There were no restrictions on cash and cash equivalents or
investments as of December 31, 2007.
(h) Foreign
Currency
Some
of
our foreign subsidiaries use the local currency of their respective
countries as their functional currency. Assets and liabilities are translated
at
exchange rates prevailing at the balance sheet dates. Revenues, costs and
expenses are translated into U.S. Dollars at average exchange rates for
the
period. Gains and losses resulting from translation are recorded as a component
of accumulated other comprehensive income/(loss). Realized gains and losses
from
foreign currency transactions are recognized as interest and other
income/expense.
(i) Property
and Equipment
Property
and equipment are stated at cost. Equipment under capital leases is stated
at
the present value of the minimum lease payments. Depreciation is calculated
using the straight-line method over the estimated useful lives of the assets.
The estimated useful lives of property and equipment range from one to ten
years. Fixtures, which are comprised primarily of leasehold improvements
and
equipment under capital leases, are amortized on a straight-line basis over
their estimated useful lives or for leasehold improvements, the related lease
term, if less. We have capitalized certain internal use software and Website
development costs which are included in property and equipment. The estimated
useful life of costs capitalized is evaluated for each specific project and
ranges from one to seven years.
(j) Goodwill
and Purchased Intangible Assets
Goodwill
represents the excess of the purchase price over the fair value of the net
tangible and identifiable intangible assets acquired in a business combination.
Intangible assets resulting from the acquisitions of entities accounted for
using the purchase method of accounting are recorded at the estimated fair
value
of the assets acquired. Identifiable intangible assets are comprised of
purchased customer relationships, trademarks and trade names, developed
technologies and other intangible assets. Identifiable intangible assets
are
amortized using the straight-line method over estimated useful lives ranging
from two to twenty years. In accordance with SFAS No. 142, Goodwill and Other Intangible
Assets (“SFAS 142”), goodwill and other intangible assets with indefinite
lives are not amortized but tested annually for impairment or more frequently
if
we believe indicators of impairment exist. The performance of the impairment
test involves a two-step process. The first step involves comparing the fair
values of the applicable
43
reporting
units with their aggregate carrying values, including goodwill. We generally
determine the fair value of our reporting units using the income approach
methodology of valuation. If the carrying value of a reporting unit exceeds
the
reporting unit’s fair value, we perform the second step of the test to determine
the amount of impairment loss. The second step involves measuring the impairment
by comparing the implied fair values of the affected reporting unit’s goodwill
and intangible assets with the respective carrying values. We completed the
required impairment review at the end of 2007, 2006 and 2005 and concluded
that
there were no impairments. Consequently, no impairment charges were
recorded.
(k) Long-Lived
Assets
We
account for long-lived assets, which include property 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 (“SFAS 144”). SFAS 144 requires that
long-lived assets be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability is measured by comparing the carrying amount
of an
asset to the expected future net cash flows generated by the asset. If it
is
determined that the asset may not be recoverable, and if the carrying amount
of
an asset exceeds its estimated fair value, an impairment charge is recognized
to
the extent of the difference.
We
assessed whether events or changes in circumstances have occurred that
potentially indicate the carrying amount of long-lived assets may not be
recoverable. We concluded that there were no such events or changes in
circumstances during 2007, 2006 or 2005. Net long-lived assets, including
intangible assets subject to amortization, amounted to $50.3 million and
$38.3
million as of December 31, 2007 and 2006, respectively.
(l) Income
Taxes
Our
income is subject to taxation in both the U.S. and numerous foreign
jurisdictions. Significant judgment is required in evaluating our tax positions
and determining our provision for income taxes. During the ordinary course
of
business, there are many transactions and calculations for which the ultimate
tax determination is uncertain. We establish reserves for tax-related
uncertainties based on estimates of whether, and the extent to which, additional
taxes will be due. These reserves for tax contingencies are established
when we
believe that certain positions might be challenged despite our belief that
our
tax return positions are fully supportable. We adjust these reserves in
light of
changing facts and circumstances, such as the outcome of a tax audit. The
provision for income taxes includes the impact of reserve provisions and
changes
to reserves that are considered appropriate.
Deferred
income taxes are accounted for using the asset and liability method as
prescribed by SFAS No. 109, Accounting for Income
Taxes
(“SFAS 109”). Under SFAS 109, deferred tax assets are evaluated for
future realization and reduced by a valuation allowance to the extent a portion
will not be realized. We consider many factors when assessing the likelihood
of
future realization of our deferred tax assets, including our recent cumulative
earnings experience and expectations of future taxable income by taxing
jurisdiction, the carryforward periods available to us for tax reporting
purposes, and other relevant factors. Deferred income tax balances reflect
the
effects of temporary differences between the carrying amounts of assets and
liabilities and their tax bases and are stated at enacted tax rates expected
to
be in effect when taxes are actually paid or recovered. The majority of our
gross deferred tax assets relate to net operating loss carryforwards that
related to differences in stock-based compensation between the financial
statements and our tax returns.
Effective
January 1, 2007, we adopted the provisions of FASB Interpretation
No. 48, Accounting for
Uncertainty in Income Taxes—An Interpretation of FASB Statement No. 109
(“FIN 48”). FIN
48 contains a
two-step approach to recognizing and measuring uncertain tax positions.
The
first step is to evaluate the tax position for recognition by determining
if the
weight of available evidence indicates it is more likely than not that
the
position will be sustained on audit, including resolution of related
appeals or
litigation processes, if any. The second step is to measure the tax benefit
as
the largest amount which is more than 50% likely of being realized upon
ultimate
settlement. We consider many factors when evaluating and estimating our tax
positions and tax benefits, which may require periodic adjustments. At
the
adoption date of January 1, 2007, we had $25.0 million in liabilities
for
uncertain tax position, including $6.1 million recognized under FAS 5
and
carried forward from prior years and an additional charge of $18.9 million
to
retained earnings (see Note 8. Income Taxes).
Effective
January 1, 2006, we adopted the provisions of SFAS No. 123 (revised 2004),
Share-Based Payment (“SFAS
123(R)”), which requires the measurement and recognition of compensation expense
based on estimated fair value of all stock-based payment awards, including
stock
options, employee stock purchases under employee stock purchase plans and
non-vested stock awards (such as restricted stock). SFAS 123(R) supersedes
SFAS
No. 123, Accounting for
Stock-Based Compensation (“SFAS 123”). We elected to use the modified
prospective method as permitted by SFAS 123(R), under which the consolidated
financial statements
44
for
prior
periods are not restated for comparative purposes to reflect the impact of
SFAS
123(R). The modified prospective method requires that stock-based compensation
expense be recorded for (a) any stock-based payments granted through December
31, 2005, but not yet vested as of December 31, 2005, based on the grant
date
fair value estimated in accordance with the pro forma provisions of SFAS
123,
and (b) any stock-based payments granted or modified subsequent to December
31,
2005, based on the grant date fair value estimated in accordance with the
provisions of SFAS 123(R). In
March
2005, the SEC issued Staff Accounting Bulletin (“SAB”) No. 107 (“SAB 107”),
which provided supplemental implementation guidance for SFAS 123(R). We have
applied the provisions of SAB 107 in our adoption of SFAS
123(R).
SFAS
123(R) requires companies to estimate the fair value of stock-based payment
awards on the date of the grant using an option pricing model. The fair
value of
the awards is recognized as stock-based compensation expense over the requisite
employee service period (see Note 10. Stock Options and Employee Stock
Purchase
Plan).
Prior
to
the adoption of SFAS 123(R), we accounted for stock-based compensation awards
using the intrinsic value method under Accounting Principles Board Opinion
No. 25, Accounting for Stock
Issued to Employees (“APB 25”) and related guidance. The cumulative
effect upon adoption of SFAS 123(R) was not material.
The
table
below sets forth the pro forma effect on 2005 net earnings and net earnings
per
share computed as if we had valued stock-based awards to employees using
the
Black-Scholes option pricing model and recorded stock-based compensation
expense
instead of applying the guidelines provided by APB 25 (in thousands, except
share and per share amounts):
|
Year
Ended
|
|||||
|
December
31, 2005
|
|||||
|
Net
earnings, as reported
|
$ | 50,618 | |||
|
Add:
|
Amortization
of stock-based compensation
|
||||
|
included
in reported net income, net of related
|
|||||
|
tax
effects
|
505 | ||||
|
Deduct:
|
Stock
based employee compensation expense
|
||||
|
determined
under the fair value-based method,
|
|||||
|
net
of related tax effect
|
(3,526 | ) | |||
|
Pro
forma net earnings
|
$ | 47,597 | |||
|
Basic
net earnings per common share:
|
|||||
|
As
reported
|
$ | 1.05 | |||
|
Pro
forma
|
$ | 0.99 | |||
|
Diluted
net earnings per common share:
|
|||||
|
As
reported
|
$ | 0.99 | |||
|
Pro
forma
|
$ | 0.94 | |||
|
Weighted
average shares outstanding
|
|||||
|
Basic
|
48,224,818 | ||||
|
Diluted
|
50,609,630 | ||||
We
account for option grants to non-employees using the guidance of SFAS 123(R)
and
EITF No. 96-18, Accounting for
Equity Instruments That are Issued to Other Than Employees for Acquiring,
or in
Conjunction with Selling, Goods and Services, 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
December 2007, the SEC issued SAB No. 110, Certain Assumptions
Used in
Valuation Methods – Expected Term (“SAB 110”). According to SAB 110,
under certain circumstances the SEC Staff will continue to accept beyond
December 31, 2007 the use of the simplified method in developing an estimate
of
expected term of share options that possess certain characteristics in
accordance with SFAS 123(R) beyond December 31, 2007. We will adopt SAB
110
effective January 1, 2008 and continue to use the simplified method in
developing the expected term used for our valuation of stock-based
compensation.
45
(n) Earnings
Per Common Share
In
December 2007, the SEC issued SAB No. 110, Certain Assumptions
Used in
Valuation Methods – Expected Term (“SAB 110”). According to SAB 110,
under certain circumstances the SEC Staff will continue to accept beyond
December 31, 2007 the use of the simplified method in developing an estimate
of
expected term of share options that possess certain characteristics in
accordance with SFAS 123(R) beyond December 31, 2007. We will adopt SAB
110
effective January 1, 2008 and continue to use the simplified method in
developing the expected term used for our valuation of stock-based
compensation.
(o) Research,
Development and Engineering
Research,
development and engineering costs are expensed as incurred. Costs for software
development incurred subsequent to establishing technological feasibility,
in
the form of a working model, are capitalized and amortized over their estimated
useful lives. To date, software development costs incurred after technological
feasibility has been established have not been material.
(p) Segment
Reporting
SFAS
No.
131, Disclosure About Segments
of an Enterprise and Related Information (“SFAS 131”), establishes
standards for the way that public business enterprises report information
about
operating segments in annual consolidated financial statements and requires
that
those enterprises report selected information about operating segments in
interim financial reports. SFAS 131 also establishes standards for related
disclosures about products and services, geographic areas and major customers.
We
operate in one reportable segment: value-added messaging and communications
services, which provides for the delivery and handling of fax, voice and
email
messages and communications via the telephone and/or Internet
networks.
(q) Comprehensive
Income
SFAS
130,
Reporting Comprehensive
Income, establishes standards for reporting and displaying comprehensive
income and its components in the consolidated financial statements.
Comprehensive income includes net earnings and accumulated other comprehensive
income/(loss). The change in accumulated other comprehensive income/(loss)
for
all periods presented resulted from foreign currency translation
adjustments.
(r) Recent
Accounting Pronouncements
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements
(“SFAS 157”), which defines fair value, provides a framework for measuring fair
value and expands the disclosures required for fair value measurements. SFAS
157
applies to all accounting pronouncements that require fair value measurements;
it does not require any new fair value measurements. For fiscal years beginning
after November 15, 2007, companies will be required to implement SFAS 157
for
financial assets and liabilities, as well as for any other assets and
liabilities that are carried at fair value on a recurring basis in financial
statements. On November 14, 2007, the FASB deferred the effective date of
Statement 157 for all nonfinancial assets and nonfinancial liabilities, except
those that are recognized or disclosed at fair value in the financial statements
on a recurring basis (at least annually), until fiscal years beginning after
November 15, 2008. Accordingly, we will adopt SFAS 157 with respect to financial
assets and liabilities commencing in the first quarter of 2008. We are currently
assessing the potential impact of SFAS 157 on our consolidated financial
statements.
In
February 2007, the FASB issued SFAS
No. 159, The
Fair Value
Option for Financial Assets and Liabilities - Including an Amendment of
FASB
Statement No. 115 (“SFAS
159”).
SFAS 159 permits
entities
to choose to measure certain financial assets and liabilities at fair value.
Unrealized gains and losses, arising subsequent to adoption, are reported
in
earnings. SFAS 159 is effective for fiscal years beginning after November
15,
2007 and, accordingly, we will adopt SFAS 159 in the first quarter of 2008.
We
are currently assessing the impact of SFAS 159 on our consolidated financial
statements.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business
Combinations (“SFAS 141(R)”). SFAS 141(R) establishes principles and
requirements for how the acquiror of a business (a) recognizes and measures
in
its financial statements the identifiable assets acquired, the liabilities
assumed, and any noncontrolling interest in the acquiree; (b) recognizes
and
measures in its financial statements the goodwill acquired in the business
combination or a gain from a bargain purchase; and (c) determines what
information to disclose to enable users of the financial statements to
evaluate
the nature and financial effects of the business combination. SFAS 141(R)
is
effective for fiscal years beginning on or after December 15, 2008 and,
accordingly, we will apply SFAS 141(R) for acquisitions effected subsequent
to
the date of adoption.
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests
in
Consolidated Financial Statements—an Amendment of Accounting Research Bulletin
No. 51 (“SFAS 160”). SFAS 160 establishes accounting and
reporting standards for
46
ownership
interests in subsidiaries held by parties other than the parent, the amount
of
consolidated net income attributable to the parent and to the noncontrolling
interest, changes in a parent’s ownership interest, and the valuation of
retained noncontrolling equity investments when a subsidiary is deconsolidated.
SFAS 160 also establishes disclosure requirements that clearly identify and
distinguish between the interests of the parent and the interests of the
noncontrolling owners. SFAS 160 is effective beginning January 1, 2009. We
are currently assessing the potential impact of SFAS 160 on our
consolidated financial statements.
In
December 2007, the SEC issued SAB No. 110, Certain Assumptions
Used in
Valuation Methods – Expected Term (“SAB 110”). According to SAB 110,
under certain circumstances the SEC staff will continue to accept beyond
December 31, 2007 the use of the simplified method in developing an estimate
of
expected term of share options that possess certain characteristics in
accordance with SFAS 123(R) beyond December 31, 2007. We will adopt SAB
110
effective January 1, 2008 and continue to use the simplified method in
developing the expected term used for our valuation of stock-based
compensation.
3.
Business Acquisitions
During
2007, we completed two acquisitions, neither of which was material to our
financial position at the dates of acquisition. In July 2007, we acquired
YAC
Limited (“YAC”), an Ireland-based provider of messaging services whose customers
are predominantly located in the United Kingdom. In connection with the
acquisition, we paid cash in exchange for all outstanding shares of capital
stock. The purchase price, including acquisition costs, was $8.5 million
of
which $1.6 million was a contingent holdback on the date of acquisition.
The
purchase price included $58,000 of property and equipment and $321,000
of other
assets acquired and liabilities assumed at acquisition. The excess of the
purchase price over the fair value of identifiable net tangible liabilities
acquired amounted to $7.9 million, of which $3.9 million was allocated
to
identifiable intangible assets and $4.0 million was allocated to goodwill.
In
December 2007, we paid $1.1 million of capital gain tax in lieu of the
holdback
and received from the seller a purchase price adjustment of $0.1 million
in cash
and an additional $0.1 million as an offset to the
holdback.
In
December 2007, we purchased for cash substantially all of the operations
of
RapidFAX, a division of EasyLink Services International Corporation, a
Georgia
provider of digital fax, electronic data interchange and other services.
The
purchase price, including acquisition costs, was approximately $5.3 million,
of
which $795,000 was a contingent holdback on the date of acquisition. Of
the $5.3
million purchase price, $1.6 million was allocated to identifiable intangible
assets and $3.7 million was allocated to goodwill.
During
2006, we completed one acquisition, which was not material to our financial
position at the date of acquisition. In July 2006, we purchased substantially
all of the assets and operations of Send2Fax, LLC (“Send2Fax”), a South Carolina
provider of Internet fax services. The purchase price, including acquisition
costs, was $7.2 million of which $800,000 was a contingent holdback on
the date
of acquisition. The purchase price also included current assets of $41,000,
property and equipment of $99,000 and current liabilities assumed at acquisition
of $248,000. The contingent holdback amount was released in full. Additionally,
a revenue-based contingent earn-out of $850,000 was paid in January 2007.
The
excess of the purchase price over the fair value of identifiable net tangible
liabilities acquired amounted to $8.2 million, of which $1.8 million was
allocated to identifiable intangible assets and $6.4 million was allocated
to
goodwill.
During
2005, we completed three acquisitions, none of which was material to our
financial position at the dates of acquisition. In January 2005, we purchased
for cash substantially all of the assets and operations of a European provider
of fax-to-email and unified messaging services. The purchase price (in
U.S.
Dollars), including acquisition costs, was $3.6 million. The excess of
the
purchase price over the fair value of identifiable net tangible assets
acquired
amounted to $3.7 million, of which $1.4 million was allocated to identifiable
intangible assets and $2.3 million was allocated to goodwill. In June 2005,
we
purchased for cash substantially all of the assets and operations of a
California provider of fax-to-email and unified messaging services. The
purchase
price, including acquisition costs, was $4.4 million of which $500,000
was a
contingent holdback on the date of acquisition. In December 2005, we released
one half, or $250,000, of the unused portion of the contingent holdback
amount
and the remaining unused portion was released in June 2006. The excess
of the
purchase price over the fair value of identifiable net tangible assets
acquired
amounted to $3.7 million, of which $1.5 million was allocated to identifiable
intangible assets and $2.2 million was allocated to goodwill. In November
2005,
we purchased for cash substantially all of the assets and operations of
a
European provider of fax-to-email and unified messaging services. The purchase
price (in U.S. Dollars), including acquisition costs, was $3.1 million.
The
excess of the purchase price over the fair value of identifiable net tangible
assets acquired amounted to $3.5 million, of which $0.7 million was allocated
to
identifiable intangible assets and $2.8 million was allocated to
goodwill.
We
accounted for all of the above transactions using the “purchase method” and,
accordingly, the results of operations related to these acquisitions have
been
included in the consolidated results of j2 Global since the date of each
respective acquisition. The results of operations for these entities during
periods prior to our acquisition were not material to our consolidated
results
of operations and, accordingly, pro forma results of operations have not
been
presented.
47
4. Property
and Equipment
Property
and equipment, stated at cost, at December 31, 2007 and 2006 consisted of
the
following (in thousands):
|
2007
|
2006
|
|||||||
|
Computers
and related equipment
|
$ | 49,982 | $ | 39,880 | ||||
|
Furniture
and equipment
|
984 | 793 | ||||||
|
Capital
leases
|
569 | 1,016 | ||||||
|
Leasehold
improvements
|
2,663 | 1,755 | ||||||
| 54,198 | 43,444 | |||||||
|
Less:
Accumulated depreciation and amortization
|
(30,687 | ) | (24,493 | ) | ||||
|
Total
property and equipment, net
|
$ | 23,511 | $ | 18,951 | ||||
Included
in accumulated amortization at December 31, 2007 and 2006 is $569,000 and
$832,000, respectively, related to capital leases. Amortization expense related
to capital leases aggregated $3,000, $38,000 and $186,000 for the years ended
December 31, 2007, 2006 and 2005, respectively. Depreciation expense was
$6.2
million, $5.7 million and $5.1 million for the years ended December 31, 2007,
2006 and 2005, respectively.
5.
Goodwill and Intangible Assets
Pursuant
to SFAS 142, we completed the
annual impairment review of our goodwill and indefinite-lived intangible
assets
for the years 2007, 2006 and 2005. We concluded that the fair values of our
goodwill and indefinite-life intangible assets were in excess of their carrying
values as of December 31, 2007, 2006 and 2005. Consequently, no impairment
charges were recorded.
The
changes in carrying amounts of goodwill and other intangible assets for the
year
ended December 31, 2007 were as follows (in thousands):
|
Balance
as of
January
1, 2007
|
Additions
|
Amortization
|
Deductions
(1)
|
Foreign
Exchange Translation
|
Balance
as of
December
31, 2007
|
|||||||||||||||||||
|
Goodwill
|
$ | 30,954 | $ | 8,019 | $ | — | $ | — | $ | 479 | $ | 39,452 | ||||||||||||
|
Intangible
assets with indefinite lives
|
2,063 | 321 | — | — | — | 2,384 | ||||||||||||||||||
|
Intangible
assets subject to amortization
|
19,337 | 11,187 | (3,896 | ) | — | 208 | 26,836 | |||||||||||||||||
|
Other
– unallocated
|
— | — | — | — | — | — | ||||||||||||||||||
|
Total
|
$ | 52,354 | $ | 19,527 | $ | (3,896 | ) | $ | — | $ | 687 | $ | 68,672 | |||||||||||
48
The
changes in carrying amount of goodwill and other intangible assets for the
year
ended December 31, 2006 were as follows (in thousands):
|
Balance
as of
January
1, 2006
|
Additions
|
Amortization
|
Deductions
(1)
|
Foreign
Exchange Translation
|
Balance
as of
December
31, 2006
|
|||||||||||||||||||
|
Goodwill
|
$ | 19,942 | $ | 10,180 | $ | — | $ | (160 | ) | $ | 992 | $ | 30,954 | |||||||||||
|
Intangible
assets with indefinite lives
|
1,590 | 470 | — | — | 3 | 2,063 | ||||||||||||||||||
|
Intangible
assets subject to amortization
|
15,270 | 6,081 | (2,553 | ) | — | 539 | 19,337 | |||||||||||||||||
|
Other
– unallocated
|
3,439 | (3,439 | ) | — | — | — | — | |||||||||||||||||
|
Total
|
$ | 40,241 | $ | 13,292 | $ | (2,553 | ) | $ | (160 | ) | $ | 1,534 | $ | 52,354 | ||||||||||
The
changes in carrying amount of goodwill and other intangible assets for the
year
ended December 31, 2005 were as follows (in thousands):
|
Balance
as of
January
1, 2005
|
Additions
|
Amortization
|
Deductions
(1)
|
Foreign
Exchange Translation
|
Balance
as of
December
31, 2005
|
|||||||||||||||||||
|
Goodwill
|
$ | 19,434 | $ | 5,099 | $ | — | $ | (3,772 | ) | $ | (819 | ) | $ | 19,942 | ||||||||||
|
Intangible
assets with indefinite lives
|
1,409 | 182 | — | — | (1 | ) | 1,590 | |||||||||||||||||
|
Intangible
assets subject to amortization
|
9,847 | 7,754 | (1,988 | ) | — | (343 | ) | 15,270 | ||||||||||||||||
|
Other
– unallocated
|
— | 3,485 | — | — | (46 | ) | 3,439 | |||||||||||||||||
|
Total
|
$ | 30,690 | $ | 16,520 | $ | (1,988 | ) | $ | (3,772 | ) | $ | (1,209 | ) | $ | 40,241 | |||||||||
(1) Deductions
principally relate to the reversal of deferred tax asset valuation allowances
related to acquired entities.
Intangible
assets with indefinite lives relate primarily to a trade name. As of December
31, 2007, intangible assets subject to amortization relate primarily to the
following (in thousands):
|
Weighted-Average
Amortization
Period
|
Historical
Cost
|
Accumulated
Amortization
|
Net
|
||||||||||
|
Patents
|
8.82
years
|
20,841 | $ | 5,451 | $ | 15,390 | |||||||
|
Technology
|
2.97
years
|
4,106 | 3,168 | 938 | |||||||||
|
Customer
relationships
|
3.86
years
|
5,601 | 2,528 | 3,073 | |||||||||
|
Trade
name
|
16.02
years
|
8,404 | 969 | 7,435 | |||||||||
|
Total
|
$ | 38,952 | $ | 12,116 | $ | 26,836 | |||||||
As
of
December 31, 2006, intangible assets subject to amortization relate primarily
to
the following (in thousands):
|
Weighted-Average
Amortization
Period
|
Historical
Cost
|
Accumulated
Amortization
|
Net
|
||||||||||
|
Patents
|
10.7
years
|
$ | 15,189 | $ | 3,059 | $ | 12,130 | ||||||
|
Technology
|
2.5
years
|
3,372 | 2,982 | 390 | |||||||||
|
Customer
relationships
|
4.7
years
|
3,603 | 1,686 | 1,917 | |||||||||
|
Trade
name
|
16.6
years
|
5,420 | 520 | 4,900 | |||||||||
|
Total
|
$ | 27,584 | $ | 8,247 | $ | 19,337 | |||||||
As
of
December 31, 2005, intangible assets subject to amortization relate primarily
to
the following (in thousands):
|
Weighted-Average
Amortization
Period
|
Historical
Cost
|
Accumulated
Amortization
|
Net
|
||||||||||
|
Patents
|
10.4
years
|
$ | 11,600 | $ | 1,566 | $ | 10,034 | ||||||
|
Technology
|
2.0
years
|
2,901 | 2,801 | 100 | |||||||||
|
Customer
relationships
|
4.9
years
|
2,942 | 1,073 | 1,869 | |||||||||
|
Trade
name
|
17.5
years
|
3,467 | 200 | 3,267 | |||||||||
|
Total
|
$ | 20,910 | $ | 5,640 | $ | 15,270 | |||||||
Expected
amortization expense for intangible assets subject to amortization at December
31, 2007, are as follows (in thousands):
|
Fiscal
Year:
|
||||
|
2008
|
$ | 4,785 | ||
|
2009
|
4,517 | |||
|
2010
|
3,519 | |||
|
2011
|
2,336 | |||
|
2012
|
2,122 | |||
|
Thereafter
|
9,557 | |||
|
Total
expected amortization expense
|
$ | 26,836 | ||
Amortization
expense was $3.9 million, $2.6 million and $2.0 million for the years ended
December 31, 2007, 2006 and 2005, respectively.
49
6.
Commitments and Contingencies
Leases
We
lease
certain facilities and equipment under non-cancelable capital and operating
leases, which expire at various dates through 2021. Future minimum lease
payments at December 31, 2007, under non-cancelable operating leases (with
initial or remaining lease terms in excess of one year) and future minimum
capital lease payments are as follows (in thousands):
|
Operating
Leases
|
||||
|
Fiscal
Year:
|
||||
|
2008
|
$ | 1,486 | ||
|
2009
|
1,337 | |||
|
2010
|
347 | |||
|
2011
|
112 | |||
|
2012
|
112 | |||
|
Thereafter
|
892 | |||
|
Total
minimum lease payments
|
$ | 4,286 | ||
Rental
expense for the years ended December 31, 2007, 2006 and 2005 was approximately
$1.6 million, $1.7 million and $1.5 million, respectively.
7.
Litigation
In
February 2004 and July 2005, we filed two lawsuits against Venali in the
United
States District Court for the Central District of California for infringement
of
several of our U.S. patents. On June 21, 2006, Venali filed suit against
us and
our affiliate in the United States District Court for the Southern District
of
Florida, alleging violations of antitrust law and various related claims
arising
out of our procurement and enforcement of our patents. In lieu of any response
to Venali’s complaint, the parties reached an agreement whereby Venali dismissed
its complaint without prejudice and re-filed certain of its claims as
counterclaims in the patent infringement actions in California. On December
27,
2006, Venali filed amended counterclaims in the July 2005 action alleging
several violations of antitrust law (fraudulent procurement of patents,
fraudulent enforcement of patents, tying and attempted monopolization) as
well
as tortious interference with business relationships, trademark infringement
and
unfair and deceptive trade practices. Venali is seeking damages, including
treble damages for the antitrust claims, injunctive relief, attorneys’ fees and
costs. Venali’s claims relate in substantial part to the patent infringement
claims by us against Venali. On April 13, 2007, the court granted in part
our
motion to dismiss Venali’s counterclaims, dismissing the tying claim with leave
to amend. Venali has also voluntarily dismissed all of its counterclaims
except
those alleging antitrust violations based on our procurement and enforcement
of
our patents. On May 11, 2007, the court entered a claim construction order
regarding the disputed terms of the patents-in-suit. Since that time, the
parties have been engaged in extensive discovery. On December 7, 2007, Venali
filed a motion for partial summary judgment of non-infringement. Our opposition
to that motion is not yet due. Trial is currently scheduled for October
2008.
In
January 2006, we filed a complaint in the United States District Court for
the
Central District of California against Protus asserting causes of action
for
violation of the Federal Telephone Consumer Protection Act, trespass to
chattels, and unfair business practices as a result of Protus sending “junk
faxes” to us and our customers. We are seeking statutory and treble damages,
attorneys fees, interest and costs, as well as a permanent injunction against
Protus continuing its junk fax sending practices. In September 2007, Protus
filed a counterclaim against us asserting the same causes of action as those
asserted against it, as well as claims for false advertising, trade libel,
tortious interference with prospective economic advantage and defamation.
Protus
is seeking statutory and treble damages, attorneys fees, interest and
costs, as well as a permanent injunction against us sending any more junk
faxes.
Trial is currently set for October 2008.
On
December 12, 2006, Venali filed suit against us in the United States District
Court for the Southern District of Florida, alleging infringement of U.S.
Patent
Number 7,114,004 (the “ ’004 Patent”). Venali is seeking damages in the amount
of lost profits or a reasonable royalty, a permanent injunction against
continued infringement, treble damages, attorneys’ fees, interest and costs. On
50
March
6,
2007, we filed an answer to the complaint denying liability. On May 17, 2007,
we
filed a request with the U.S. Patent & Trademark Office for reexamination of
the ’004 Patent, which request was granted on July 27, 2007. On August 13, 2007,
we moved to stay the action pending the reexamination. On August 20, 2007,
the
court granted the motion and stayed the action pending reexamination of the
patent.
On
May 9,
2007, Bear Creek Technologies, Inc. (“Bear Creek”) filed suit against us in the
United States District Court for the Eastern District of Texas, alleging
infringement of U.S. Patent Number 6,685,494. Bear Creek is seeking damages
in
at least the amount of a reasonable royalty, a permanent injunction against
continued infringement, treble damages, attorneys’ fees, interest and costs. On
June 29, 2007, we filed an answer to the complaint denying liability, asserting
affirmative defenses, and asserting counterclaims of non-infringement and
invalidity. On September 21, 2007, Bear Creek filed its reply to our
counterclaims, denying each one. On February 11, 2008 we filed a request
for reexamination of the ‘494 patent. The claim construction hearing is set
for April 28, 2008, and jury selection for trial in the matter is set
for April 7, 2009.
On
June
21, 2007, Integrated Global Concepts, Inc. (“IGC”) filed a lawsuit against us,
certain of our current and former officers and/or directors, one of our
affiliates, and several other parties in the United States District Court
for
the Northern District of Illinois. The suit purports to allege violations
of
antitrust law, the Racketeer Influenced and Corrupt Organizations Act and
various related statutory and common law claims arising out of our procurement
and enforcement of our patents and our acquisition of certain companies.
IGC’s
claims relate in substantial part to a patent infringement action by our
affiliate against IGC. The suit seeks damages, including treble and punitive
damages, an injunction against further violations, divestiture of certain
assets, attorneys’ fees and costs. On October 31, 2007, the Court stayed this
action pending resolution of the related case in the Northern District of
Georgia described below. On January 20, 2008, the Court dismissed this case
with
leave to reinstate it on or before December 31, 2008.
On
October 11, 2007, IGC filed substantially the same claims it previously filed
in
the Northern District of Illinois as counterclaims in a pending patent
infringement case in the United States District Court for the Northern District
of Georgia brought against IGC by our affiliate. Like the prior lawsuit,
IGC’s
counterclaims name us, certain of our current and former officers and/or
directors, one of our affiliates, and several other parties, and purport
to
allege violations of antitrust law, the Racketeer Influenced and Corrupt
Organizations Act and various related statutory and common law claims arising
out of our procurement and enforcement of our patents and our acquisition
of
certain companies. The counterclaims seek damages, including treble and punitive
damages, an injunction against further violations, divestiture of certain
assets, attorneys’ fees and costs. On December 7, 2007, we filed motions to
dismiss IGC’s counterclaims that are pending before the court.
On
June
29, 2007, a purported class action was filed by Justin Lynch as the named
plaintiff in the United States District Court for the Central District of
California alleging that we have attempted to monopolize and/or monopolized
the
market for Internet facsimile services to home and small offices in violation
of
Section 2 of the Sherman Act. The claims relate in substantial part to the
patent infringement actions by us against various companies. The suit seeks
treble damages, injunctive relief, attorneys’ fees and costs. On August 24,
2007, we filed an answer to the complaint denying liability. On January 28,
2008, the court entered an order staying this case until June 2,
2008.
We
do not
believe, based on current knowledge, that the foregoing legal proceedings
are
likely to have a material adverse effect on our consolidated financial position,
results of operations or cash flows. However, we may incur substantial expenses
in defending against these claims. In the event of a determination adverse
to j2
Global, it may incur substantial monetary liability, which could have a material
adverse effect on its consolidated financial position, results of operations
or
cash flows. In accordance with SFAS 5, Accounting for Contingencies,
we have not accrued for a loss contingency relating to these legal proceedings
because we believe that, although unfavorable outcomes in the proceedings
may be
reasonably possible, they are not considered by management to be probable
or
reasonably estimable.
8. Income
Taxes
The
provision for income tax consisted of the following (in thousands):
|
Years
Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Current:
|
||||||||||||
|
Federal
|
$ | 21,764 | $ | 17,660 | $ | 17,548 | ||||||
|
State
|
3,557 | 2,613 | 2,770 | |||||||||
|
Foreign
|
1,467 | 1,789 | 553 | |||||||||
|
Total
current
|
26,788 | 22,062 | 20,871 | |||||||||
|
Deferred:
|
||||||||||||
|
Federal
|
136 | (1,535 | ) | 827 | ||||||||
|
State
|
141 | (208 | ) | 1,200 | ||||||||
|
Foreign
|
(65 | ) | (218 | ) | 106 | |||||||
|
Total
deferred
|
212 | (1,961 | ) | 2,133 | ||||||||
|
Total
provision
|
$ | 27,000 | $ | 20,101 | $ | 23,004 | ||||||
51
A
reconciliation of the statutory federal income tax rate with j2 Global’s
effective income tax rate is as follows:
|
Years
Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Statutory
tax rate
|
35.0 | % | 35.0 | % | 35.0 | % | ||||||
|
State
income taxes, net
|
2.5 | 2.1 | 3.5 | |||||||||
|
Foreign
rate differential
|
(15.1 | ) | (15.9 | ) | (9.8 | ) | ||||||
|
Tax
contingency reserve
|
6.3 | 6.0 | 2.2 | |||||||||
|
Other
|
(0.4 | ) | 0.2 | 0.3 | ||||||||
|
Effective
tax rates
|
28.3 | % | 27.4 | % | 31.2 | % | ||||||
Our
effective rate for each year is normally lower than the 35.0% U.S. federal
statutory income tax rate primarily due to earnings of our subsidiaries outside
of the U.S. in jurisdictions where the effective tax rate is lower than in
the
U.S.
Uncertain
Tax Positions
We
adopted FIN 48 as of January 1, 2007 (See Note 2. Basis of Presentation
and Summary of Significant Accounting Policies) and accrued liabilities
for
unrecognized tax benefits in accordance with the requirement of FIN 48.
At the
adoption date of January 1, 2007, we had $25.0 million in liabilities for
uncertain tax position, including $6.1 million recognized under FAS 5 and
carried forward from prior years and $18.9 million recognized upon adoption
of
FIN 48 as a reduction to retained earnings. During 2007, we recognized
a net
increase of $5.9 million in liabilities and at December 31, 2007, had $30.9
million in liabilities for unrecognized tax benefits. Included in this
liability
amount were $1.9 million accrued for the related interest, net of federal
income
tax benefits, and $0.5 million for the related penalty recorded in income
tax
expense on our Consolidated Statements of Operations.
The
reconciliation of our unrecognized tax benefits is as follows (in
thousands):
|
Balance
at January 1, 2007
|
$ | 24,965 | ||
|
Increases
related to positions taken on items from prior years
|
197 | |||
|
Decreases
related to positions taken on items from prior years
|
(645 | ) | ||
|
Increases
related to positions taken in 2007
|
6,233 | |||
|
Decreases
due to expiration of statues of limitations
|
(1,091 | ) | ||
|
Related
interest and penalty, tax effected
|
1,204 | |||
|
Balance
at December 31, 2007
|
$ | 30,863 |
At
this
point it is not possible to provide an estimate of the amount, if any,
of
significant changes in unrecorded tax benefits that are reasonably possible
to
occur in the next 12 months. Uncertain tax positions that are
reasonably possible to significantly change during the next 12 months as a
result of the expiration of statute of limitations for specific taxing
jurisidctions relate to transfer pricing, utilized net operating losses
and
foreign permanent establishments.
Deferred
tax assets and liabilities result from differences between the financial
statement carrying amounts and the tax bases of existing assets and liabilities.
Temporary differences and carryforwards which give rise to deferred tax assets
and liabilities are as follows (in thousands):
|
Years
Ended December 31,
|
||||||||
|
2007
|
2006
|
|||||||
|
Deferred
tax assets:
|
||||||||
|
Net
operating loss carryforwards
|
$ | 2,991 | $ | 3,128 | ||||
|
Tax
credit carryforwards
|
400 | 400 | ||||||
|
Accrued
expenses
|
634 | 2,728 | ||||||
|
Stock-based
compensation expense
|
2,815 | 1,735 | ||||||
|
Other
|
996 | 58 | ||||||
|
Net
deferred assets
|
$ | 7,836 | $ | 8,049 | ||||
52
As
of
December 31, 2007, we had utilizable federal and state (California) net
operating loss carryforwards (“NOLs”) of approximately $6.2 million and $6.7
million, respectively, after considering substantial restrictions on the
utilization of these NOLs due to “ownership changes”, as defined in the Internal
Revenue Code. We currently estimate that all of the above-mentioned federal
and
state NOLs will be available for use before their expiration. These NOLs
expire
through the year 2021 for the federal and 2014 for the state. In addition,
as of
December 31, 2007, we had state research and development tax credits of $0.4
million, which last indefinitely.
As
of
December 31, 2007, 2006 and 2005, U.S. income taxes have not been assessed
on
approximately $82.8 million, $62.8 million and $22.1 million, respectively,
of
undistributed earnings of foreign subsidiaries because management considers
these earnings to be invested indefinitely.
During
2007, 2006 and 2005, we recorded
tax benefits of approximately $0.8 million, $1.6 million and $9.5 million
from
the exercise of non-qualifying stock options, restricted stock and disqualifying
dispositions of incentive stock options as a reduction of our income tax
liability and an increase in equity, respectively.
We
are currently under audit by the
Internal Revenue Service for the 2005 tax year. While it is possible that
the
2005 tax audit may conclude in the next 12 months and that the unrecognized
tax
benefits we have recorded in relation to this audit may change compared to
the
liabilities recorded for the period, it is not possible to estimate the effect,
if any, of any amount of such change during the next 12 months to recorded
liabilities.
9.
Stockholders’ Equity
(a) Warrants
In
connection with a private placement offering completed in June 1998, we issued
warrants (“Warrants”) to acquire shares of our common stock with an exercise
price of $2.40 per share, which expired in June 2005. During 2005, warrants
to
acquire 455,936 shares were exercised resulting in 432,002 shares of common
stock being issued. There were no Warrants outstanding at December 31, 2007
and
2006.
In
addition to the Warrants described above, in 1999 we issued warrants to a
financing company and an Internet service provider to purchase an aggregate
of
279,164 shares of common stock at $2.40 per share. As of December 31, 2007,
none of these warrants were outstanding as the remaining warrants to purchase
29,164 shares expired in April 2005.
(b) Share
Repurchase Program
In
March
2006, j2 Global’s Board of Directors approved a common stock repurchase program
authorizing the repurchase of up to two million shares of our common
stock
through December 2008. On April 26, 2006, we entered into a Rule 10b5-1
trading
plan with a broker to facilitate the repurchase program. For the years
ended
December 31, 2007 and 2006, we purchased 1,529,100 and 470,900 shares
of common
stock under this program, respectively, at a total cost of $42.4 million
and
$11.6 million, respectively, representing an average price per share
of $27.71
and $24.62, respectively. During 2007, we completed the repurchase program,
having repurchased all two million shares of common stock authorized
under the
program. In February 2008, j2 Global’s Board of Directors approved a common
stock repurchase program authorizing the repurchase of up to five million
shares
of our common stock through the end of December 2010 (see Note 18. Subsequent
Events).
On
May 25, 2006, we effected a
two-for-one stock split of our common stock in the form of a stock dividend,
to
each shareholder of record at the close of business on May 15, 2006. All
historical share and per share amounts contained in the accompanying
consolidated financial statements and related notes have been retroactively
restated to reflect this change in our capital structure.
10.
Stock Options and Employee Stock Purchase Plan
Effective
January 1, 2006, j2 Global adopted the provisions of SFAS 123(R), which
require
the measurement and recognition of compensation expense based on estimated
fair
value of all stock-based payment awards including stock options, employee
stock
purchases under employee stock purchase plans and non-vested stock awards
(such
as restricted stock). (see section (m) Stock-Based Compensation
contained in Note 2 of the Notes to Consolidated Financial
Statements).
Our
stock-based compensation plans include the 2007 Stock Option Plan, Second
Amended and Restated 1997 Stock Option Plan and 2001 Employee Stock
Purchase Plan (each is described below).
53
(a) Second
Amended and Restated 1997 Stock Option Plan and 2007 Stock Option
Plan
In
October 2007, j2 Global’s Board of Directors adopted the j2 Global
Communications, Inc. 2007 Stock Option Plan (the “2007 Plan”). The 2007 Plan
provides for the granting of incentive stock options, nonqualified stock
options, stock appreciation rights, restricted stock, restricted stock
units and
other stock-based awards. The number of authorized shares of common stock
that
may be used for 2007 Plan purposes is 4,500,000. Options under the
2007 Plan may be granted at exercise prices determined by the Board of
Directors, provided that the exercise prices shall not be less than the
fair
market value of j2 Global’s common stock on the date of grant for incentive
stock options and not less than 85% of the fair market value of j2 Global’s
common stock on the date of grant for non-statutory stock options.
In
November 1997, j2 Global’s Board of Directors adopted the j2 Global
Communications, Inc. 1997 Stock Option Plan (the “1997 Plan”), which was twice
amended and restated. The 1997 Plan terminated in 2007. A total of 12,000,000
shares of common stock were authorized to be used for 1997 Plan purposes
. An
additional 840,000 shares were authorized for issuance upon exercise of
options
granted outside the 1997 Plan.
At
December 31, 2007, 2006 and 2005, options to purchase 2,827,439, 3,091,596,
and
2,611,966 shares of common stock were exercisable under and outside of
the 2007
Plan and the 1997 Plan combined, at weighted average exercise prices of
$4.77,
$4.36 and $2.32, respectively. Stock options generally expire after 10
years and
vest over a four- to five-year period.
Stock
Options
Stock
option activity for the years ended December 31, 2007, 2006 and 2005 is
summarized as follows:
|
Number
of
Shares
|
Weighted-Average
Exercise
Price
|
Weighted-Average
Remaining
Contractual
Life (In
Years)
|
Aggregate
Intrinsic
Value
|
|||||||||||||
|
Options
outstanding at December 31, 2004
|
5,128,244 | $ | 3.42 | |||||||||||||
|
Granted
|
1,457,098 | 18.88 | ||||||||||||||
|
Exercised
|
(1,517,718 | ) | 1.92 | |||||||||||||
|
Canceled
|
(196,032 | ) | 13.88 | |||||||||||||
|
Options
outstanding at December 31, 2005
|
4,871,592 | 8.09 | ||||||||||||||
|
Granted
|
150,000 | 23.73 | ||||||||||||||
|
Exercised
|
(228,883 | ) | 4.05 | |||||||||||||
|
Canceled
|
(153,095 | ) | 17.93 | |||||||||||||
|
Options
outstanding at December 31, 2006
|
4,639,614 | 8.58 | ||||||||||||||
|
Granted
|
682,100 | 30.44 | ||||||||||||||
|
Exercised
|
(776,273 | ) | 9.92 | |||||||||||||
|
Canceled
|
(162,267 | ) | 24.26 | |||||||||||||
|
Options
outstanding at December 31, 2007
|
4,383,174 | 11.19 |
5.8
|
$ | 49,886,992 | |||||||||||
|
Exercisable
at December 31, 2007
|
2,827,439 | 4.77 |
5.4
|
$ | 46,462,387 | |||||||||||
|
Vested
and expected to vest at December 31, 2007
|
4,072,027 | 10.30 |
5.6
|
$ | 49,202,071 | |||||||||||
The
per
share weighted–average grant-date fair value of options granted during the years
2007, 2006 and 2005 was $20.53, $18.81 and $10.01, respectively.
The
total
intrinsic value of options exercised during the years ended December 31,
2007,
2006 and 2005 was $14.8 million, $4.5 million and $26.7 million,
respectively.
The
total
fair value of options vested during the years ended December 31, 2007, 2006
and
2005 was $4.6 million, $5.0 million and $3.0 million, respectively.
Cash
received from options exercised under all stock-based payment arrangements
for
the years ended December 31, 2007, 2006 and 2005 was $7.7 million, $0.9 million
and $3.6 million, respectively. The actual tax benefit realized for the tax
deductions from option exercises under the stock-based payment arrangements
totaled $3.6 million, $1.5 million and $9.5 million, respectively, for the
years
ended December 31, 2007, 2006 and 2005.
54
At
December 31, 2007, the exercise prices of options granted under and outside
the
2007 Plan and the 1997 Plan ranged from $0.55 to $34.73, with a weighted-average
remaining contractual life of 5.78 years. The following table summarizes
information concerning outstanding and exercisable options as of December
31,
2007:
|
Options
Outstanding
|
Exercisable
Options
|
||||||||||||||||||||
|
Range
of
Exercise
Prices
|
Number
Outstanding
December
31,
2007
|
Weighted
Average
Remaining
Contractual
Life
|
Weighted
Average
Exercise
Price
|
Number
Exercisable
December
31,
2007
|
Weighted
Average
Exercise
Price
|
||||||||||||||||
|
$0.55
|
11,000 | 2.97 | $ | 0.55 | 11,000 | $ | 0.55 | ||||||||||||||
|
0.94
|
930,798 | 3.99 | 0.94 | 930,798 | 0.94 | ||||||||||||||||
|
0.99
– 1.72
|
469,304 | 3.68 | 1.20 | 469,304 | 1.20 | ||||||||||||||||
|
1.78
– 3.53
|
506,970 | 2.64 | 2.32 | 506,970 | 2.32 | ||||||||||||||||
|
4.45
– 9.55
|
689,034 | 5.69 | 8.41 | 564,034 | 8.15 | ||||||||||||||||
|
11.25
– 18.58
|
131,004 | 6.56 | 13.64 | 73,969 | 13.29 | ||||||||||||||||
|
18.77
|
881,300 | 7.67 | 18.77 | 229,700 | 18.77 | ||||||||||||||||
|
21.88
– 32.45
|
578,764 | 8.99 | 27.71 | 41,664 | 23.24 | ||||||||||||||||
|
33.51
– 33.54
|
|
125,000 | 9.50 | 33.52 | — | — | |||||||||||||||
|
34.73
|
60,000 | 9.56 | 34.73 | — | — | ||||||||||||||||
|
$0.55 – $34.73
|
4,383,174 | 5.78 | $ | 11.19 | 2,827,439 | $ | 4.77 | ||||||||||||||
At
December 31, 2007, there were 5,428,924 additional shares underlying options,
shares of restricted stock and other stock-based awards available for grant
under the 2007 Plan, and no additional shares available for grant under
or
outside of the 1997 Plan.
The
following table summarizes j2 Global’s nonvested options as of December 31, 2007
and changes during the year ended December 31, 2007:
|
Nonvested
Options
|
Shares
|
Weighted
Average
Grant-Date
Fair
Value
|
||||||
|
Nonvested
at January 1, 2007
|
1,548,018 | $ | 10.05 | |||||
|
Granted
|
682,100 | 20.53 | ||||||
|
Vested
|
(512,116 | ) | 8.91 | |||||
|
Canceled
|
(162,267 | ) | 16.61 | |||||
|
Nonvested
at December 31, 2007
|
1,555,735 | $ | 14.56 | |||||
As
of
December 31, 2007, there was $10.1 million of total unrecognized compensation
expense related to nonvested stock-based compensation awards granted under
the
2007 Plan and the 1997 Plan. That expense is expected to be recognized ratably
over a weighted average period of 2.75 years (i.e., the remaining requisite
service period).
Fair
Value
Disclosure
We
use
the Black-Scholes option pricing model to calculate the fair-value of each
option grant. The expected volatility is based on historical volatility of
j2
Global’s common stock. We elected to use the simplified method for estimating
the expected term as allowed by SAB 107 for options granted through December
31,
2007. Under the simplified method, the expected term is equal to the midpoint
between the vesting period and the contractual term of the stock option.
The
risk-free interest rate is based on U.S. Treasury zero-coupon issues with
a term
equal to the expected term of the option assumed at the date of grant.
Forfeitures are estimated at the date of grant based on historical experience.
The weighted-average fair values of stock options granted have been estimated
utilizing the following assumptions:
|
Years
Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Expected
dividend
|
0.0%
|
0.0%
|
0.0%
|
|||||||||
|
Risk
free interest rate
|
4.5%
|
4.8%
|
4.1%
|
|||||||||
|
Expected
volatility
|
72.7%
|
92.0%
|
67.0%
|
|||||||||
|
Expected
term (in years)
|
6.5
|
6.5
|
4.0
|
|||||||||
55
Stock-Based
Compensation
Expense
The
following table represents the stock-based compensation expense that was
included in cost of revenues and operating expenses in the consolidated
statement of operations for the years ended December 31, 2007, 2006 and 2005
(in
thousands):
|
Year
Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Cost
of revenues
|
$ | 668 | $ | 316 | $ | 43 | ||||||
| Operating expenses: | ||||||||||||
|
Sales
and marketing
|
1,187 | 1,038 | 75 | |||||||||
|
Research,
development and engineering
|
771 | 556 | 326 | |||||||||
|
General
and administrative
|
4,788 | 3,782 | 325 | |||||||||
| $ | 7,414 | $ | 5,692 | $ | 769 | |||||||
Restricted
Stock
j2
Global
has awarded restricted shares of common stock to its executive officers
and
directors pursuant to the 1997 Plan and 2007 Plan. Compensation expense
resulting from restricted stock grants is measured at fair value on the
date of
grant and is recognized as stock-based compensation expense over a five-year
vesting period. We granted 112,800 shares and 33,340 shares of restricted
stock
to Board members and management pursuant to the 2007 Plan and the 1997
Plan
during the years ended December 31, 2007 and 2006 and recognized approximately
$1.3 million and $1.0 million of related compensation expense relating
to
restricted stock awards in 2007 and 2006, respectively. As of December
31, 2007,
we have unrecognized stock-based compensation cost of approximately $6.5
million
associated with these awards. This cost is expected to be recognized
over a
weighted-average period of 3.56 years. The actual tax benefit realized
for the
tax deductions from the vesting of restricted stock totaled $0.2 million,
$0.1
million and zero, respectively, for the years ended December 31, 2007,
2006 and
2005.
Restricted
stock activity for the year ended December 31, 2007 is set forth
below:
|
Weighted-Average
|
||||||||
|
Grant-Date
|
||||||||
|
Shares
|
Fair
Value
|
|||||||
|
Nonvested
at January 1, 2007
|
307,840 | $ | 19.32 | |||||
|
Granted
|
112,800 | 31.55 | ||||||
|
Vested
|
(49,084 | ) | 19.18 | |||||
|
Canceled
|
(12,006 | ) | 22.10 | |||||
|
Nonvested
at December 31, 2007
|
359,550 | 22.94 | ||||||
(b) EmployeeStock
Purchase
Plan
In
May of
2001, j2 Global established the j2 Global Communications, Inc. 2001 Employee
Stock Purchase Plan (the “Purchase Plan”), which provides for the issuance of a
maximum of 2,000,000 shares of common stock. Under the Purchase Plan, eligible
employees can have up to 15% of their earnings withheld, up to certain maximums,
to be used to purchase shares of j2 Global’s common stock at certain
plan-defined dates. The price of the common stock purchased under the Purchase
Plan for the offering periods is equal to 90% of the lower of the fair market
value of the common stock on the commencement date of each three-month offering
period or the specified purchase date. Effective May 1, 2006, j2 Global’s Board
of Directors removed the compensatory features of the Purchase Plan by changing
the purchase price of a share of common stock for each offering period to
95% of
its fair value at the end of the offering period. During 2007, 2006 and 2005,
9,282, 20,849 and 33,160 shares, respectively, were purchased under the Purchase
Plan at prices ranging from $25.16 to $32.00 per share. As of December 31,
2007,
1,676,967 shares were available under the Purchase Plan for future
issuance.
56
11.
Defined Contribution 401(k) Savings Plan
We
have a
401(k) Savings Plan covering substantially all of our employees. Eligible
employees may contribute through payroll deductions. We may make annual
contributions to the 401(k) Savings Plan at the discretion of our Board of
Directors. For the years ended December 31, 2007 and 2006, we accrued $80,000
and $57,000 for contributions to the 401(k) Savings Plan, respectively. No
employer contribution was made in 2005.
12.
Earnings Per Share
Basic
earnings per share is computed on the basis of the weighted average number
of
common shares outstanding. Diluted earnings per share is computed on the
basis
of the weighted average number of common shares outstanding plus the effect
of
outstanding stock options, warrants and restricted stock using the “treasury
stock” method. The components of basic and diluted earnings per share are as
follows (in thousands, except share and per share data):
|
Years
Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Numerator
for basic and diluted income per common share:
|
||||||||||||
|
Net
earnings
|
$ | 68,461 | $ | 53,131 | $ | 50,618 | ||||||
|
Denominator:
|
||||||||||||
|
Weighted
average outstanding shares of common stock
|
48,953,483 | 49,209,129 | 48,224,818 | |||||||||
|
Dilutive
effect of:
|
||||||||||||
|
Employee
stock options
|
1,689,691 | 1,755,867 | 2,546,968 | |||||||||
|
Warrants
|
— | — | 169,780 | |||||||||
|
Restricted
stock
|
118,833 | 83,999 | 230,228 | |||||||||
|
Common
stock and common stock equivalents
|
50,762,007 | 51,048,995 | 51,171,794 | |||||||||
|
Net
earnings per share:
|
||||||||||||
|
Basic
|
$ | 1.40 | $ | 1.08 | $ | 1.05 | ||||||
|
Diluted
|
$ | 1.35 | $ | 1.04 | $ | 0.99 | ||||||
For
the
years ended December 31, 2007, 2006 and 2005, there were 3,818,414, zero
and
91,474 warrants and options outstanding, respectively, which were excluded
from
the computation of diluted earnings per share because the exercise prices
were
greater than the average market price of the common shares.
13.
Sale of Investment
In
2005,
we recognized $9.8 million as a gain on sale of an investment. The gain resulted
from the acquisition by SigmaTel, Inc. of Oasis Semiconductor, Inc., a business
in which we owned a minority equity interest, and a related dividend by Oasis
immediately prior to the closing of the merger.
14.
Geographic Information
We
maintain operations in the U.S., Canada, Ireland, the United Kingdom and
other
international territories. Geographic information about the U.S. and
international territories for the reporting period is presented below. Such
information attributes revenues based on the location of a customer’s Direct
Inward Dial number for services using such a number or a customer’s residence
for other services (in thousands).
|
Year
Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Revenue:
|
||||||||||||
|
United
States
|
$ | 192,445 | $ | 161,336 | $ | 128,760 | ||||||
|
All
other countries
|
28,252 | 19,743 | 15,181 | |||||||||
|
Total
|
$ | 220,697 | $ | 181,079 | $ | 143,941 | ||||||
|
As
of December 31,
|
||||||||
|
2007
|
2006
|
|||||||
|
Long-lived
assets:
|
||||||||
|
United
States
|
$ | 42,078 | $ | 17,377 | ||||
|
All
other
countries
|
8,269 | 1,574 | ||||||
|
Total
|
$ | 50,347 | $ | 18,951 | ||||
57
15.
Related Party Transactions
(a) Leaseand
Related Cost Sharing
Arrangements
During
the last three fiscal years, j2 Global entered into several transactions
with
companies that are affiliated with the Chairman of j2 Global’s Board of
Directors. These transactions arose because j2 Global and these firms affiliated
with its Chairman have maintained offices at the same location, and consist
primarily of lease and related cost-sharing arrangements.
We
lease
our headquarters office from a company that is affiliated with the Chairman
of
the Board. For fiscal 2007, 2006 and 2005, we paid approximately $1,129,000,
$833,000 and $904,000, respectively in rent expense to this company. We also
incurred approximately $15,000, $16,000 and $23,000 for expenses for services
rendered by firms affiliated with our Chairman of the Board during 2007,
2006
and 2005, respectively.
We
believe that the lease referred to above was entered into at prevailing market
rates, and that all cost-sharing arrangements were based on actual amounts
paid
to third parties without markup or markdown.
(b) ConsultingServices
j2
Global
engages the consulting services of its Chairman of the Board through an
agreement with Orchard Capital Corporation, a company controlled by its Chairman
of the Board. For each of the years ended December 31, 2007, 2006 and 2005,
j2
Global paid Orchard Capital $276,000 for these services.
On
January 16, 2006, j2 Global entered into a Consultancy Agreement with John
F.
Rieley, a member of j2 Global’s Board of Directors. The Consultancy Agreement
had a one year term, which was renewed for an additional year in 2007 and
expired effective January 15, 2008. Pursuant to the Consultancy Agreement,
Mr.
Rieley assisted j2 Global in expanding its public relations efforts
internationally, with an initial emphasis on Europe, and agreed to create
and recommend to j2 Global for its adoption an overall public relations program
for the company. In exchange for these services, Mr.
Rieley received annual compensation of $100,000 for both 2007 and
2006, payable quarterly in advance.
16.
Supplemental Cash Flows Information
Interest
income received during the years ended December 31, 2007, 2006 and 2005
was $9.3 million, $7.3 million and $3.4 million respectively, substantially
all of which related to interest earned on cash, cash equivalents and short
and
long-term investments.
Cash
paid
for interest during the years ended December 31, 2007, 2006 and 2005
approximated $2,000, $26,000 and $59,000, respectively, substantially all
of
which related to long-term debt and capital leases.
We
paid
cash of $12.3 million, $20.0 million and $8.6 million for taxes during
the years
ended December 31, 2007, 2006 and 2005, respectively.
We
acquired property and equipment for $758,000, $254,00 and $283,000 during
2007,
2006 and 2005, respectively, which had not been yet paid at the end of
each such
year.
During
2007, 2006 and 2005, we recorded the tax benefit from the exercise of
non-qualified stock options and restricted stock as a reduction of our
income
tax liability of $3.6 million, $1.6 million and $9.5 million,
respectively.
Included
in the purchase prices of the acquisitions during 2007, 2006 and 2005
were
contingent holdbacks of $1.1 million, $0.8 million and $0.5 million,
respectively (see Note 3. Business Acquisitions).
58
17.
Quarterly Results (unaudited)
The
following tables contain selected unaudited statement of operations information
for each quarter of 2007 and 2006 (in thousands, except share and per share
data). We believe that the following information reflects all normal recurring
adjustments necessary for a fair presentation of the information for the
periods
presented. The operating results for any quarter are not necessarily indicative
of results for any future period.
|
Year
Ended December 31,
2007
|
||||||||||||||||
|
Fourth
Quarter
|
Third
Quarter
|
Second
Quarter
|
First
Quarter
|
|||||||||||||
|
Revenues
|
$ | 56,830 | $ | 55,746 | $ | 53,980 | $ | 54,141 | ||||||||
|
Gross
profit
|
45,233 | 44,578 | 43,748 | 43,151 | ||||||||||||
|
Net
earnings
|
16,856 | 18,088 | 17,078 | 16,439 | ||||||||||||
|
Net
earnings per common share:
|
||||||||||||||||
|
Basic
|
$ | 0.35 | $ | 0.37 | $ | 0.35 | $ | 0.34 | ||||||||
|
Diluted
|
$ | 0.34 | $ | 0.35 | $ | 0.33 | $ | 0.32 | ||||||||
|
Weighted
average shares outstanding
|
||||||||||||||||
|
Basic
|
48,652,001 | 49,215,250 | 49,108,309 | 48,822,735 | ||||||||||||
|
Diluted
|
50,268,781 | 51,075,957 | 51,007,561 | 50,680,093 | ||||||||||||
|
Year
Ended December 31,
2006
|
||||||||||||||||
|
Fourth
Quarter
|
Third
Quarter
|
Second
Quarter
|
First
Quarter
|
|||||||||||||
|
Revenues
|
$ | 48,904 | $ | 45,891 | $ | 44,266 | $ | 42,018 | ||||||||
|
Gross
profit
|
40,128 | 36,243 | 34,977 | 33,008 | ||||||||||||
|
Net
earnings
|
14,831 | 12,790 | 13,199 | 12,311 | ||||||||||||
|
Net
earnings per common share:
|
||||||||||||||||
|
Basic
|
$ | 0.30 | $ | 0.26 | $ | 0.27 | $ | 0.25 | ||||||||
|
Diluted
|
$ | 0.29 | $ | 0.25 | $ | 0.26 | $ | 0.24 | ||||||||
|
Weighted
average shares outstanding
|
||||||||||||||||
|
Basic
|
49,020,695 | 49,218,918 | 49,349,536 | 49,249,778 | ||||||||||||
|
Diluted
|
50,979,088 | 51,107,362 | 51,186,073 | 51,925,868 | ||||||||||||
18.
Subsequent Events
In
February 2008, j2 Global’s Board of Directors approved a common stock repurchase
program authorizing the repurchase of up to five million shares of our common
stock through the end of December 2010. On February 19, 2008, we entered
into a
Rule 10b5-1 trading plan with a broker to facilitate the repurchase program.
59
Item
9. Changes In And Disagreements With Accountants On Accounting
And Financial Disclosure
None.
Item
9A. Controls and Procedures
(a)
Evaluation of Disclosure Controls and Procedures
As
of the
end of the period covered by this report, j2 Global’s management, with the
participation of Nehemia Zucker, our principal executive officer, and Kathleen
Griggs, our principal financial officer, carried out an evaluation of the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based
upon
that evaluation, Mr. Zucker and Ms. Griggs concluded that these disclosure
controls and procedures were effective as of the end of the period covered
in
this Annual Report on Form 10-K.
(b)
Management’s Report on Internal Control Over Financial Reporting
j2
Global’s management is responsible for establishing and maintaining adequate
internal control over financial reporting for j2 Global. In order to evaluate
the effectiveness of internal control over financial reporting, as required
by
Section 404 of the Sarbanes-Oxley Act, management has conducted an assessment,
including testing, using the criteria in Internal Control – Integrated
Framework, issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Our system of internal control over financial
reporting is designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. Because
of
its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may
become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate. Based on its assessment,
management has concluded that j2 Global’s internal control over financial
reporting was effective as of December 31, 2007.
(c)
Changes
in Internal Control Over Financial Reporting
No
change
in our internal control over financial reporting (as defined in Rule 13a-15(f)
under the Securities Exchange Act of 1934) occurred during the fourth quarter
of
our fiscal year ended December 31, 2007 that has materially affected, or
is
reasonably likely to materially affect, our internal control over financial
reporting.
60
(d)
Report of Independent Registered Public Accounting Firm
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Shareholders
j2
Global
Communications, Inc.
We
have
audited j2 Global Communications, Inc. and its subsidiaries’ internal control
over financial reporting as of December 31, 2007, based on criteria
established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). j2 Global Communications,
Inc.’s management is responsible for maintaining effective internal control
over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting included in the accompanying Management’s
Report on Internal Control Over Financial Reporting. Our responsibility
is to
express an opinion on the Company's internal control over financial reporting
based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control
over
financial reporting, assessing the risk that a material weakness exists,
and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company's internal control over financial reporting is a process designed
to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control
over
financial reporting includes those policies and procedures that (1) pertain
to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary
to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company
are
being made only in accordance with authorizations of management and directors
of
the company; and (3) provide reasonable assurance regarding prevention or
timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may
become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In
our
opinion, j2 Global Communications, Inc. maintained, in all material respects,
effective internal control over financial reporting as of December 31,
2007,
based on criteria
established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
We
have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements and
financial statement schedule of j2 Global Communications, Inc. and its
subsidiaries and our report dated February 18, 2008 expressed an unqualified
opinion.
/s/
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los
Angeles, California
February
18, 2008
Item
9B. Other Information
None.
61
Item
10. Directors, Executive Officers and Corporate
Governance
The
information required by this item concerning our directors and executive
officers is incorporated by reference to the information to be set forth in
our
proxy statement (“2007 Proxy
Statement”)
for the 2008 annual meeting of stockholders to be filed with the SEC within
120
days after the end of our fiscal year ended December 31, 2007.
Item
11. Executive Compensation
The
information required by this item regarding executive compensation is
incorporated by reference to the information to be set forth in our 2007 Proxy
Statement.
Item
12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
The
information required by this item regarding security ownership and related
stockholder matters is incorporated by reference to the information to be set
forth in our 2007 Proxy Statement.
Item
13. Certain Relationships and Related Transactions, and
Director Independence
The
information required by this item regarding certain relationships and related
transactions is incorporated by reference to the information to be set forth
in
our 2007 Proxy Statement.
Item
14. Principal Accounting Fees and Services
The
information required by this item regarding principal accountant fees and
services is incorporated by reference to the information to be set forth in
our
2007 Proxy Statement.
62
PART
IV
Item
15. Exhibits and Financial Statement Schedules
|
|
(a)
|
1. Financial
Statements.
|
The
following financial statements are filed as a part of this Annual Report on
Form
10-K:
Report
of
Independent Registered Public Accounting Firm
Consolidated
Balance Sheets
Consolidated
Statements of Operations
Consolidated
Statements of Stockholders’ Equity
Consolidated
Statements of Cash Flows
Notes
to
Consolidated Financial Statements
|
2.
|
Financial
Statement Schedule
|
|
|
The
following financial statement schedule is filed as part of this Annual
Report on Form 10-K:
|
Schedule
II—Valuation and Qualifying Accounts
All
other
schedules are omitted because they are not required or the required information
is shown in the financial statements or notes thereto.
|
3.
|
Exhibits
|
The
following exhibits are filed with this Annual Report on Form 10-K or are
incorporated herein by reference as indicated below (numbered in accordance
with
Item 601 of Regulation S-K). We shall furnish copies of exhibits for a
reasonable fee (covering the expense of furnishing copies) upon
request.
|
Exhibit No.
|
Exhibit
Title
|
|
|
3.1
|
Certificate
of Incorporation, as amended and restated (1)
|
|
|
3.1.1
|
Certificate
of Designation of Series B Convertible Preferred Stock
(2)
|
|
|
3.1.2
|
Certificate
of Amendment to Amended and Restated Certificate of Incorporation
(3)
|
|
|
3.1.3
|
Certificate
of Amendment to Amended and Restated Certificate of Incorporation
(7)
|
|
|
3.1.4
|
Certificate
of Amendment to Amended and Restated Certificate of Incorporation
(7)
|
|
|
3.1.5
|
Certificate
of Amendment to Amended and Restated Certificate of
Incorporation (10)
|
|
|
3.2
|
By-laws,
as amended and restated (1)
|
|
|
4.1
|
Specimen
of Common Stock certificate (5)
|
|
|
9.1
|
Securityholders’
Agreement, dated as of June 30, 1998, with the investors in the June
and
July 1998 private placements
(1)
|
|
|
10.1
|
j2
Global Communications, Inc. Second Amended and Restated 1997 Stock
Option
Plan (6)
|
|
|
10.1.1
|
Amendment
No. 1 to j2 Global Communications, Inc. Second Amended and Restated
1997
Stock Option Plan (10)
|
|
|
10.2
|
j2
Global Communications, Inc. 2007 Stock Option Plan (12)
|
|
|
10.3
|
Amended
and Restated j2 Global Communications, Inc. 2001 Employee Stock Purchase
Plan (9)
|
|
|
10.4
|
Letter
Agreement dated April 1, 2001 between j2 Global and Orchard Capital
Corporation (4)
|
|
|
10.4.1
|
Amendment
dated December 31, 2001 to Letter Agreement dated April 1, 2001 between
j2
Global and Orchard Capital Corporation (7)
|
|
|
10.5
|
Employment
Agreement for Nehemia Zucker, dated March 21, 1997 (1)
|
|
|
10.6
|
Put
Rights, for the benefit of the investors in the June and July 1998
private
placements (1)
|
|
|
10.7
|
Registration
Rights Agreement dated as of June 30, 1998 with the investors in
the June
and July 1998 private placements (1)
|
|
|
10.8
|
Registration
Rights Agreement dated as of March 17, 1997 with Orchard/JFAX Investors,
LLC, Boardrush LLC (Boardrush Media LLC), Jaye Muller, John F. Rieley,
Nehemia Zucker and Anand Narasimhan
(1)
|
63
|
Exhibit No.
|
Exhibit
Title
|
|
10.9
|
Consultancy
Agreement between j2 Global and John F. Rieley, dated as of January
16,
2006 (8)
|
|
|
10.9.1
|
Amendment
No. 1 to the Consulting Agreement (11)
|
|
|
21
|
List
of subsidiaries of j2 Global
|
|
|
23.1
|
Consent
of Independent Registered Public Accounting Firm – Singer Lewak Greenbaum
& Goldstein, LLP
|
|
|
23.2
|
Consent
of Independent Registered Public Accounting Firm – Deloitte & Touche,
LLP
|
|
|
31.1
|
Certification
by Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
31.2
|
Certification
by Principal Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
32
|
Certification
of Principal Executive Officer and Principal Financial Officer pursuant
to
18 U.S.C. section 1350
|
|
(1)
|
Incorporated
by reference to j2 Global’s Registration Statement on Form S-1 filed with
the Commission on April 16, 1999, Registration No.
333-76477.
|
|
(2)
|
Incorporated
by reference to j2 Global’s Annual Report on Form 10-K filed with the
Commission on March 30, 2000.
|
|
(3)
|
Incorporated
by reference to j2 Global’s Registration Statement on Form S-3 with the
Commission on December 29, 2000, Registration No.
333-52918.
|
|
(4)
|
Incorporated
by reference to j2 Global’s Annual Report on Form 10-K/A filed with the
Commission on April 30, 2001.
|
|
(5)
|
Incorporated
by reference to j2 Global’s Quarterly Report on Form 10-Q filed with the
Commission on May 15, 2001.
|
|
(6)
|
Incorporated
by reference to j2 Global’s Amended Registration Statement on Form S-8
filed with the Commission on July 17, 2001, Registration No.
333-55402.
|
|
(7)
|
Incorporated
by reference to j2 Global’s Annual Report on Form 10-K filed with the
Commission on April 1, 2002.
|
|
(8)
|
Incorporated
by reference to j2 Global’s Current Report on Form 8-K filed with the
Commission on January 20, 2006.
|
|
(9)
|
Incorporated
by reference to j2 Global’s Current Report on Form 8-K filed with the
Commission on May 3, 2006.
|
|
(10)
|
Incorporated
by reference to j2 Global’s Quarterly Report on Form 10-Q filed with the
Commission on March 12, 2007.
|
|
(11)
|
Incorporated
by reference to j2 Global’s Current Report on Form 8-K filed with the
Commission on March 9, 2007.
|
|
(12)
|
Incorporated
by reference to j2 Global’s proxy statement on Schedule 14A filed with the
Commission on September 18,
2007.
|
64
Pursuant
to the requirements of Section 13 or 15(d) 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, on February 22, 2008.
|
j2
Global Communications, Inc.
|
|||
|
By:
|
/s/ NEHEMIA
ZUCKER
|
||
|
Nehemia
Zucker
|
|||
|
Co-President
and Chief Operating Officer
(Principal
Executive Officer)
|
|||
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated, in each case on February
22, 2008.
|
Signature
|
Title
|
|
|
/s/ NEHEMIA
ZUCKER
|
Co-President
and Chief Operating Officer (Principal Executive
Officer)
|
|
|
Nehemia
Zucker
|
||
|
/s/ KATHLEEN
M. GRIGGS
|
Chief
Financial Officer (Principal Financial Officer)
|
|
|
Kathleen
M. Griggs
|
|
/s/ RICHARD
S. RESSLER
|
Chairman
of the Board and a Director
|
|
|
Richard
S. Ressler
|
||
|
/s/ DOUGLAS
Y. BECH
|
Director
|
|
|
Douglas
Y. Bech
|
||
|
/s/ ROBERT
J. CRESCI
|
Director
|
|
|
Robert
J. Cresci
|
|
/s/ WILLIAM
B. KRETZMER
|
Director
|
|
|
William
B. Kretzmer
|
||
|
/s/ JOHN
F. RIELEY
|
Director
|
|
|
John
F. Rieley
|
||
|
/s/ STEPHEN
ROSS
|
Director
|
|
|
Stephen
Ross
|
|
/s/ MICHAEL
P. SCHULHOF
|
Director
|
|
|
Michael
P. Schulhof
|
65
SCHEDULE
II – VALUATION AND QUALIFYING ACCOUNTS
(In
thousands)
|
Description
|
Balance
at
Beginning
of
Period
|
Additions:
Charged
to
Costs
and
Expenses
|
Deductions:
Write-offs
(1)
and
recoveries
|
Balance
at
End
of
Period
|
||||||||||||
|
Year
Ended December 31, 2007:
|
||||||||||||||||
|
Allowance
for doubtful accounts
|
$ | 1,105 | $ | 780 | $ | (507 | ) | $ | 1,378 | |||||||
|
Year
Ended December 31, 2006:
|
||||||||||||||||
|
Allowance
for doubtful accounts
|
$ | 627 | $ | 797 | $ | (319 | ) | $ | 1,105 | |||||||
|
Year
Ended December 31, 2005:
|
||||||||||||||||
|
Allowance
for doubtful accounts
|
$ | 550 | $ | 644 | $ | (567 | ) | $ | 627 | |||||||
(1) Represents
specific amounts written off that were considered to be
uncollectible.