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J2 GLOBAL COMMUNICATIONS INC
FORM 10-K
(Annual Report)
Filed 02/23/10 for the Period Ending 12/31/09
Address 6922 HOLLYWOOD BLVD
LEGAL DEPT - 5TH FLOOR
LOS ANGELES, CA 90028
Telephone 3238609200
CIK 0001084048
Symbol JCOM
SIC Code 4822 - Telegraph and Other Message Communications
Industry Communications Services
Sector Services
Fiscal Year 12/31
http://www.edgar-online.com
© Copyright 2010, EDGAR Online, Inc. All Rights Reserved.
Distribution and use of this document restricted under EDGAR Online, Inc. Terms of Use.

Table of contents

  • Page 1
    ... GLOBAL COMMUNICATIONS INC FORM 10-K (Annual Report) Filed 02/23/10 for the Period Ending 12/31/09 Address 6922 HOLLYWOOD BLVD LEGAL DEPT - 5TH FLOOR LOS ANGELES, CA 90028 3238609200 0001084048 JCOM 4822 - Telegraph and Other Message Communications Communications Services Services 12/31 Telephone...

  • Page 2
    ...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...

  • Page 3
    ... 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 $695,301,411. Shares of common stock held by executive officers, directors and holders of more than 5% of the...

  • Page 4
    ... -265 Directors, Executive Officers and Corporate Governance Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Certain Relationships and Related Transactions, and Director Independence Principal Accounting Fees and Services 64 64 64...

  • Page 5
    ... 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...

  • Page 6
    ... user. We also offer limited versions of certain services on a free basis. Voice eVoice Receptionist TM and Onebox Receptionist TM are virtual PBX solutions that provide small and medium-sized businesses ondemand voice communications services, featuring a toll-free or local company telephone number...

  • Page 7
    ... telephone; and to store faxes and email messages online. Email Electric Mail ® is an outsourced hosted email service that we offer to businesses. Electric Mail develops and delivers email and related solutions that are hosted offsite and seamlessly integrate into a customer's existing email system...

  • Page 8
    ..., as an Internet messaging services provider, we generally are 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. Continued regulation arising from telephone number...

  • Page 9
    ... and regulations as to the services and sites that users can access through their broadband service providers. 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...

  • Page 10
    ... in increased numbers of rejected credit and debit card payments. We believe this has resulted in and may continue to result in increased customer cancellations and decreased customer signups. This also has required and may continue to require us to increase our reserves for doubtful accounts and...

  • Page 11
    ... 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. We rely heavily on the revenue generated by our fax services. Currently, a substantial portion of...

  • Page 12
    ... results and cash flows. 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...

  • Page 13
    ...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...

  • Page 14
    ... 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...

  • Page 15
    ...the availability of telephone numbers, the prices we pay for transmission services, the competition we face from telecommunications service providers and other aspects of our market. However, as messaging and communications services converge and as the services we offer expand, we may become subject...

  • Page 16
    ... 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 use of...

  • Page 17
    ... 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...

  • Page 18
    ... perceptions of us and comparable public companies; Conditions and trends in the communications, messaging and Internet-related industries; Announcements of technological innovations and acquisitions; Introduction of new services by us or our competitors; Developments with respect to intellectual...

  • Page 19
    ... our patents relating to Internet fax and other messaging technologies: Open Text Corporation and its Captaris business ("Open Text"), Integrated Global Concepts, Inc. ("IGC"), Venali, Inc. ("Venali"), Protus IP Solutions, Inc. ("Protus"), EasyLink Services International Corp. ("EasyLink") and...

  • Page 20
    ... descriptive and not entitled to trademark protection or registration and that Zilker's use of the eFax mark was a fair use. Zilker sought to recover attorney fees and costs in addition to declaratory relief. On September 14, 2009, Zilker filed a motion for summary judgment that it did not infringe...

  • Page 21
    ... 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. High Year ended December 31, 2009...

  • Page 22

  • Page 23
    ...the peer group index provides a representative group of companies in the outsourced messaging and communications industry. Measurement points are December 31, 2004 and the last trading day in each of j2 Global's fiscal quarters through the end of fiscal 2009. The graph assumes that $100 was invested...

  • Page 24
    ...-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ j2 Global 100.00 99.48 99.83 117.16 123.88 136.23 180.99 157.51 157.97 160.70 202.32 189.74 122...

  • Page 25
    ...04 49,209,129 51,048,995 $ 2009 Statement of Operations Data: Revenues Cost of revenues Gross profit Operating expenses: Sales and marketing Research, development and engineering General and administrative Loss on disposal of long-lived asset Total operating expenses Operating earnings Other income...

  • Page 26
    ...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...

  • Page 27
    ...ASC 320 requires that certain debt and equity securities be classified into one of three categories; trading, available-for-sale or held-to-maturity securities. These j2 Global investments are typically comprised primarily of readily marketable corporate debt securities, auction rate debt, preferred...

  • Page 28
    ..., 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 share-based compensation expense and the...

  • Page 29
    ... assets to their carrying value at the reporting unit level. We completed the required impairment review at the end of 2009, 2008 and 2007 and noted no impairment. Consequently, no impairment charges were recorded. Income Taxes . We account for income taxes in accordance with FASB ASC Topic No...

  • Page 30
    ... 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, international sales and business...

  • Page 31
    ... costs associated with new personnel from businesses acquired in fiscal 2007 and 2008, and increased 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...

  • Page 32
    ... available unrecognized state research and development tax credits of $0.8 million, which last indefinitely. In 2008, the Governor of California signed into law new tax legislation that suspended the use of NOLs for tax years beginning on or after January 1, 2008 and 2009. Despite the Company having...

  • Page 33
    ... within Prepaid expenses and other current assets on the consolidated balance sheet. Our prepaid tax payments were $7.2 million and $3.1 million at December 31, 2009 and 2008, respectively. More than two-thirds of our subscribers pay us via credit cards and therefore our receivables from subscribers...

  • Page 34
    ... and timing of cash settlement with the taxing authorities. Credit Agreement On January 5, 2009, we entered into a Credit Agreement (the "Credit Agreement") with Union Bank, N.A. ("Lender") in order to further enhance our liquidity in the event of potential acquisitions or other corporate purposes...

  • Page 35
    ... 31, 2009, the carrying value of our cash and cash equivalents approximated fair value. Our return on these investments is subject to interest rate fluctuations. Our short and long-term investments are typically comprised primarily of readily marketable corporate debt securities, auction rate debt...

  • Page 36
    ... Lender to be used for working capital and general corporate purposes (see Note 8 of the Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K). If we were to borrow from the Credit Agreement we would be subject to the prevailing interest rates and could be...

  • Page 37
    ... - Debt and Equity Securities, " on June 30, 2009. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), j2 Global Communications, Inc. and subsidiaries' internal control over financial reporting as of December 31, 2009, based on...

  • Page 38
    j2 GLOBAL COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 2009 and 2008 (In thousands, except share amounts) 2009 ASSETS Cash and cash equivalents Short-term investments Accounts receivable, net of allowances of $3,077 and $2,896, respectively Prepaid expenses and ...

  • Page 39
    j2 GLOBAL COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended December 31, 2009, 2008 and 2007 (In thousands, except share and per share data) 2009 Revenues: Subscriber Other $ 241,922 3,649 245,571 44,730 200,841 $ 2008 236,841 4,672 241,513 46,250 195,263 $ 2007...

  • Page 40
    ...loss on available-for-sale - investments Comprehensive income - Exercise of stock options 226,760 Issuance of common stock under employee stock purchase plan 9,632 Tax benefit of stock option exercises and restricted stock (313,288) Repurchase of common stock - Repurchase of restricted stock (19,024...

  • Page 41
    Comprehensive income Exercise of stock options Issuance of shares under Employee stock purchase plan Vested restricted stock Repurchase of restricted stock Share based compensation Excess tax benefit on share based compensation Balance, December 31, 2009 - 523,290 5,808 95,266 (21,966) - - 52,907,...

  • Page 42
    ...common stock and restricted stock Issuance of common stock under employee stock purchase plan Exercise of stock options Excess tax benefits on from share-based compensation Repayment of other long-term liabilities Net cash provided by (used in) financing activities Effect of exchange rate changes on...

  • Page 43
    ...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...

  • Page 44
    ... 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...

  • Page 45
    ... reporting unit's goodwill and intangible assets with the respective carrying values. We completed the required impairment review at the end of 2009, 2008 and 2007 and concluded that there were no impairments. Consequently, no impairment charges were recorded. (l ) Long-Lived Assets We account...

  • Page 46
    ... 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. (r) Comprehensive Income Comprehensive...

  • Page 47
    ... of the business combination. Accordingly, we applied such guidance for acquisitions effected subsequent to January 1, 2009. In December 2007, the FASB issued new accounting guidance regarding noncontrolling interest. This guidance, found under FASB ASC Topic 810, Consolidation, requires that the...

  • Page 48
    ... effective for interim and annual reporting periods ending after June 15, 2009. This guidance amends the other-than-temporary impairment guidance in GAAP for debt securities to modify the requirement for recognizing other-thantemporary impairments, changes the existing impairment model and modifies...

  • Page 49
    ... of Internet unified communications solutions and (2) the email business of Quexion, LLC. These acquisitions are designed to be accretive and to provide us additional customers in the digital fax and email markets. The consolidated statement of operations and balance sheet as of December 31, 2009...

  • Page 50
    ... 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 $5.3 million, of which $0.8 million was a contingent holdback on...

  • Page 51
    ... been no significant changes in the maturity dates and average interest rates for our investment portfolio and debt obligations subsequent to June 30, 2009. At December 31, 2009, our long-term available-for-sale securities are carried at fair value, with the unrealized gains and losses reported as...

  • Page 52
    .... An unrealized loss exists when the current fair value of an individual security is less than its amortized cost basis. Unrealized losses that are determined to be temporary in nature are recorded, net of tax, in accumulated other comprehensive income for available-for-sale securities, while such...

  • Page 53
    ... are valued primarily using quoted market prices utilizing market observable inputs. Our investments in auction rate securities are classified within Level 3 because there are no active markets for the auction rate securities and therefore we are unable to obtain independent valuations from...

  • Page 54
    ...summary of changes in fair value of our Level 3 financial assets as of December 31, 2009 (in thousands): Level 3 Financial Assets Year Ended December 31, 2009 Beginning ...and equipment, stated at cost, at December 31, 2009 and 2008 consisted of the following (in thousands): 2009 Computers and related...

  • Page 55
    ... amortization for each of the years ended December 31, 2008 is $0.6 million related to capital leases. During the fourth quarter of 2009, we determined based upon our current and future business needs that the rights to certain external administrative software will not provide any future benefit...

  • Page 56
    ... most recently ended. Also pursuant to the Credit Agreement, we entered into a Security Pledge Agreement whereby j2 Global granted to Lender a security interest in 65% of the issued stock of j2 Global Holdings Limited, a wholly owned Irish subsidiary of j2 Global. We will also be required to grant...

  • Page 57
    ... another company, make loans or investments or repurchase stock, in each case subject to exceptions customary for a credit facility of this size and type. The Credit Agreement also contains financial covenants that establish minimum EBITDA, net worth and liquid asset levels and limit the amount...

  • Page 58
    ... federal income tax rate with j2 Global's effective income tax rate is as follows: Years Ended December 31, 2009 2008 35.0 % 35.0 % 1.1 1.7 (15.7) (15.0) 8.4 7.2 2.0 - 0.9 0.1 31.7 % 29.0 % Statutory tax rate State income taxes, net Foreign rate differential Tax contingency reserve Valuation...

  • Page 59
    ..., we had state research and development tax credits of $0.8 million, which last indefinitely. In 2008, the Governor of California signed into law new tax legislation that suspended the use of NOLs for tax years beginning on or after January 1, 2008 and 2009. Despite the Company having taxable income...

  • Page 60
    .... 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...

  • Page 61
    ... stock and other share-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, 2009 and changes during the year ended December 31, 2009...

  • Page 62
    ...): Year Ended December 31, 2008 1,263 $ 901 $ 1,818 853 7,084 11,018 1,268 803 5,014 7,986 2009 Cost of revenues Operting expenses: Sales and marketing Research, development and engineering General and administrative $ 2007 668 1,187 771 4,788 7,414 $ Restricted Stock $ $ j2 Global has awarded...

  • Page 63
    ..., 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 95% of the fair market value of the common stock at the end of the offering period. During 2009, 2008 and...

  • Page 64
    ...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, 2008 $ $ 204,444 37,069 241,513 $ $ 2009 Revenue: United States All other...

  • Page 65
    ... digital faxing business of Comodo Communications, Inc., for $5.9 million and certain voice assets of Reality Telecom, Ltd. for $0.9 million. These acquisitions are designed to be accretive and to provide us additional customers in the voice and digital fax market. The financial impact to j2 Global...

  • Page 66
    ... that j2 Global's internal control over financial reporting was effective as of December 31, 2009. Management's report on internal control over financial reporting was not subject to attestation by the Company's registered public accounting firm pursuant to rules of the Securities and Exchange...

  • Page 67
    ...Registered Public Accounting Firm REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders j2 Global Communications, Inc. Los Angeles, CA We have audited j2 Global Communications, Inc. and its subsidiaries' (collectively, the "Company") internal control over...

  • Page 68
    ... is incorporated by reference to the information to be set forth in our 2009 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...

  • Page 69
    ... and Restated 1997 Stock Option Plan (9) j2 Global Communications, Inc. 2007 Stock Plan (10) Amended and Restated j2 Global Communications, Inc. 2001 Employee Stock Purchase Plan (8) Letter Agreement dated April 1, 2001 between j2 Global and Orchard Capital Corporation (4) Amendment dated December...

  • Page 70
    ... the Commission on July 17, 2001, Registration No. 333-55402. Incorporated by reference to j2 Global's Annual Report on Form 10-K filed with the Commission on April 1, 2002. Incorporated by reference to j2 Global's Current Report on Form 8-K filed with the Commission on May 3, 2006. Incorporated by...

  • Page 71
    ..., on February 23, 2010. j2 Global Communications, Inc. By: NEHEMIA ZUCKER Nehemia Zucker Chief Executive Officer (Principal Executive Officer) /s/ 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...

  • Page 72
    ...: Charged to Costs and Expenses 799 (2,255) 2,815 780 $ $ $ Deductions: Write-offs (1) and recoveries (618) - (1,297) (507) $ $ $ Balance at End of Period 3,077 (2,255) 2,896 1,378 Description Year Ended December 31, 2009: Allowance for doubtful accounts Deferred tax asset valuation allowance...

  • Page 73

  • Page 74
    EXHIBIT 21 List of Subsidiaries of j2 Global Communications, Inc. Name Electric Mail (International) L.P. j2 Global Holdings Limited j2 Global Ireland Limited Phone People Holdings Corp. State or Other Jurisdiction of Incorporation Alberta, Canada Ireland Ireland California

  • Page 75
    ... consolidated financial statements, the financial statement schedule and internal control over financial reporting, which appear in this Annual Report on Form 10-K of j2 Global Communications, Inc. for the year ended December 31, 2009. /s/ SINGER LEWAK LLP Los Angeles, California February 23, 2010

  • Page 76
    ... end of the period covered by this report based on such evaluation; and Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual...

  • Page 77
    ... end of the period covered by this report based on such evaluation; and Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual...

  • Page 78
    ... the Annual Report on Form 10-K of j2 Global Communications, Inc. (the "Company") for the year ended December 31, 2009 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Nehemia Zucker, as Chief Executive Officer (Principal Executive Officer) of the Company, and...