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J2 GLOBAL COMMUNICATIONS INC
FORM 10-K
(Annual Report)
Filed 02/28/11 for the Period Ending 12/31/10
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 2011, 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
    J2 GLOBAL COMMUNICATIONS INC FORM 10-K (Annual Report) Filed 02/28/11 for the Period Ending 12/31/10 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 ...

  • Page 2
    ... EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2010 OR 3 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: 0-25965 j2 GLOBAL COMMUNICATIONS, INC. (Exact name of registrant as specified in...

  • Page 3
    .... Shares of common stock held by executive officers, directors and holders of more than 5% of the outstanding common stock have been excluded. ...connection with the Annual Meeting of Shareholders to be held May 12, 2011 are incorporated by reference into Part III of this Form 10-K. This Annual Report...

  • Page 4
    ... -264 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 63 63 63...

  • Page 5
    ...added communication, messaging and data backup services to businesses of all sizes, from individuals to enterprises. Our hosted solutions deliver our customers greater efficiency, flexibility, mobility, business continuity and security. We offer online fax, virtual phone systems, hosted email, email...

  • Page 6
    ... with added features geared to the broader needs of enterprises and their users. These include online account administration tools which enable customers to manually or automatically selfprovision fax numbers to employees as needed. eFax Corporate also offers the option of enhanced security features...

  • Page 7
    ... of our other branded services, as well as additional features to provide full virtual office functionality. Onebox includes a virtual phone system, hosted email, online fax, audio conferencing and web conferencing. Global Network and Operations We have multiple physical Points of Presence ("POPs...

  • Page 8
    ...infringement and attorneys' fees, interest and costs. We own and use a number of trademarks in connection with our products and services, including eFax and the eFax logo, MyFax and the MyFax logo, eFax Corporate and the eFax Corporate logo, eVoice and the eVoice logo, Electric Mail and the Electric...

  • Page 9
    ...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...

  • Page 10
    ... 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...

  • 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
    ...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...

  • Page 13
    - 10 -

  • Page 14
    ..., leverage and debt service requirements. We may also use cash to make acquisitions, which may limit our availability of cash for other uses, such as stock repurchases or dividends. We will be required to review goodwill and other intangible assets for impairment in connection with past and future...

  • Page 15
    ... subject to foreign and domestic laws and regulation by the Federal Communications Commission (the "FCC"), state public utility commissions and foreign governmental authorities. These regulations affect the availability of DIDs, the prices we pay for transmission services, the administrative costs...

  • Page 16
    ...condition, operating results and cash flows. 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 the Internet and online...

  • Page 17
    ... 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...

  • 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...

  • Page 19
    ... and costs. We filed an answer to the complaint on November 18, 2010. Discovery has not yet commenced. In December 2008, AGV Sports Group, Inc. and other co-plantiffs (collectively, "AGV") filed suit in the United States District Court for the District of Maryland against the Company's new-acquired...

  • Page 20
    • Our patent infringement suit against Venali in the United States District Court for the Central District of California. - 16 -

  • Page 21
    ... 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, 2010 First Quarter...

  • Page 22
    ... Paid Per Share $ - $ 27.69 - $ Total Number of Shares Purchased as Part of a Publicly Announced Program - - - - (1) Includes shares surrendered to the Company to pay the exercise price and/or to satisfy tax withholding obligations in connection with employee stock options and/or the vesting of...

  • Page 23
    ... we have historically used for comparison purposes (the "old peer group") was developed prior to the presence of an established SaaS market and is comprised of companies less comparable to j2 Global than those within the SaaS space in terms of industry and business dynamics. The new peer group index...

  • Page 24
    [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] - 20 -

  • Page 25
    ...35 48,953,483 50,762,007 $ 2010 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
    ...added communication, messaging and data backup services to businesses of all sizes, from individuals to enterprises. Our hosted solutions deliver our customers greater efficiency, flexibility, mobility, business continuity and security. We offer online fax, virtual phone systems, hosted email, email...

  • Page 27
    ... Securities ("ASC 320"). 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 investments are typically comprised primarily of readily marketable corporate debt securities, auction rate...

  • Page 28
    ... service period using the straight-line method. The measurement of share-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...

  • Page 29
    ... 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 2010, 2009 and 2008 and noted no impairment. Consequently, no impairment charges were recorded. Income Taxes . We account...

  • Page 30
    ... included elsewhere in this Annual Report on Form 10-K. Year Ended December 31, 2009 2010 2008 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...

  • Page 31
    ... primarily due to increased marketing worldwide to enhance the acquisition of free customers for fax and voice services and an increase in personnel and severance costs associated with personnel from businesses acquired in fiscal 2010 . The decrease in sales and marketing expenses as a percentage of...

  • Page 32
    ...In addition, as of December 31, 2010 and 2009, we had 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...

  • Page 33
    ...We currently anticipate that our existing cash and cash equivalents and short-term investment balances and cash generated from operations will be sufficient to meet our anticipated needs for working capital, capital expenditures and investment requirements for at least the next 12 months. Cash Flows...

  • 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
    ...2010, 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 securities...

  • Page 36
    ... rates change, translation of the income statements of the international businesses into U.S. Dollars affects yearover-year comparability of operating results. Historically, we have not hedged translation risks because cash flows from international operations were generally reinvested locally...

  • Page 37
    ... respects the information set forth therein. 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, 2010, based on criteria...

  • Page 38
    j2 GLOBAL COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 2010 and 2009 (In thousands, except share amounts) 2010 ASSETS Cash and cash equivalents Short-term investments Accounts receivable, net of allowances of $2,588 and $3,077, respectively Prepaid expenses and ...

  • Page 39
    j2 GLOBAL COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended December 31, 2010, 2009 and 2008 (In thousands, except share and per share data) 2010 Revenues: Subscriber Other Cost of revenues (including share-based compensation of $1,217, $1,263 and $901 in 2010, ...

  • Page 40
    ... loss on available-for-sale investments Comprehensive income Exercise of stock options Issuance of common stock under employee stock purchase plan Excess tax benefit on share based compensation Repurchase of common stock Repurchase of restricted stock Retirement of treasury stock Vested restricted...

  • Page 41
    Repurchase of restricted stock Share based compensation Excess tax benefit (deficit) on share based compensation Balance, December 31, 2010 (53,587) - - 53,700,629 $ (1) - - 537 $ (1,099) 10,937 62 164,769 - - - - - - - - - - - - (2,035) $ (1,100) 10,937 62 431,745 (8,680,568) $ (112,671) $...

  • Page 42
    ... assets Proceeds from sale of intangible assets Net cash provided by (used in) investing activities Cash flows from financing activities: Repurchases of common stock and restricted stock Issuance of common stock under employee stock purchase plan Exercise of stock options Excess tax benefits from...

  • Page 43
    ...-added communication, messaging and data backup services to businesses of all sizes, from individuals to enterprises. The Company's hosted solutions deliver its customers greater efficiency, flexibility, mobility, business continuity and security. j2 Global offers online fax, virtual phone systems...

  • Page 44
    ... 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. The Company has capitalized certain internal use software and Website development costs which are included in property and equipment. The...

  • Page 45
    .... 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. j2 Global completed the required impairment review at the end of 2010, 2009 and 2008 and concluded that there...

  • Page 46
    ... transition method for calculating the tax effects of share-based compensation and continue to use the simplified method in developing the expected term used for the Company's valuation of share-based compensation in accordance with ASC 718. j2 Global accounts for option grants to non-employees in...

  • Page 47
    ...Telecom Limited, a UK enhanced voice services provider, (6) Venali, Inc., a Miami-based provider of enterprise Internet fax messaging solutions, (7) keepITsafe Data Solutions Ltd., an Ireland-based provider of online backup services, and (8) Protus IP Solutions, Inc., a Canadian provider of Software...

  • Page 48
    ...which is non-deductible for income tax purposes. 2010 The above referenced acquisitions are designed to be accretive and to provide the Company additional customers and technology in the cloud-based, value-added communication, messaging and data backup services segment. The consolidated statement of...

  • Page 49
    ...) (10,720) 247,697 $ The initial accounting for the acquisition of Venali, Inc. was completed during the fourth quarter 2010, however, is subject to change during the measurement period. The Company completed the valuation of certain acquired tax net operating loss carryforwards ("NOLs") and has...

  • Page 50
    ...the date of each respective acquisition. 4. Investments Short-term investments of $14.0 million consist primarily of corporate bonds and are stated at fair market value. The following table summarizes j2 Global's debt securities designated as available-for-sale classified by the contractual maturity...

  • Page 51
    December 31, 2009 Debt Securities $ 13,996 - 44 - $ 891 $ - $ 14,887

  • Page 52
    ... subsequent to December 31, 2010. At December 31, 2010, j2 Global's long-term available-for-sale securities are carried at fair value, with the unrealized gains and losses reported as a component of stockholders' equity. For the year ended December 31, 2010, the Company recorded gains from the...

  • Page 53
    ... valued primarily using quoted market prices utilizing market observable inputs. The Company's investments in auction rate securities are classified within Level 3 because there are no active markets for the auction rate securities and therefore j2 Global is unable to obtain independent valuations...

  • Page 54
    ... of changes in fair value of j2 Global's Level 3 financial assets as of December 31, 2010 (in thousands): Level 3 Financial Assets Year Ended December 31, 2010 Beginning Balance...and equipment, stated at cost, at December 31, 2010 and 2009 consisted of the following (in thousands): 2010 Computers and ...

  • Page 55
    ...the years ended December 31, 2010, 2009 and 2008, respectively. During the fourth quarter of 2009, the Company determined based upon its current and future business needs that the rights to certain external administrative software would not provide any future benefit. Accordingly, j2 Global recorded...

  • Page 56
    ... use of its intellectual property, j2 Global has initiated litigation against the following companies, among others, for infringing its patents relating to Internet fax and other messaging technologies: Open Text Corporation and its Captaris business ("Open Text") and EasyLink Services International...

  • Page 57
    ...' e-mail marketing services. Pantelakis is seeking damages, attorneys' fees, interest and costs. Protus has not yet filed a responsive pleading in the case. j2 Global does not believe, based on current knowledge, that any of the foregoing legal proceedings or claims, after giving effect to existing...

  • Page 58
    • The Company's patent infringement suit against Venali in the United States District Court for the Central District of California. - 50 -

  • Page 59
    ... Protus had acquired) business unit in the United States District Court for the Central District of California. • The Company's patent infringement suit against Protus in Canada. • Protus' opposition to j2 Global's eFax trademark at the United States Patent and Trademark Office Trademark Trial...

  • Page 60
    ... federal income tax rate with j2 Global's effective income tax rate is as follows: Years Ended December 31, 2009 35.0 % 35.0 % 1.9 1.1 (17.7) (15.7) 5.9 8.4 (1.4) 2.0 1.2 0.9 24.9 % 31.7 % 2010 Statutory tax rate State income taxes, net Foreign rate differential Tax contingency reserve Valuation...

  • Page 61
    .... In addition, as of December 31, 2010 and 2009, the Company 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...

  • Page 62
    ... accounted for these repurchases using the cost method. At December 31, 2010 and December 31, 2009, 8,680,568 common shares at a cost of $112.7 million were held as treasury stock. Periodically, participants in j2 Global's stock plans surrender to the Company shares of j2 Global stock to satisfy tax...

  • Page 63
    ... adopted the j2 Global Communications, Inc. 2007 Stock 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 share-based awards. The number of authorized...

  • Page 64
    ...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, 2010 and changes during the year ended December 31, 2010: Weighted Average Grant...

  • Page 65
    ... Grant-Date Fair Value $ 19.36 23.34 20.17 18.98 19.59 Nonvested at January 1, 2010 Granted Vested Canceled Nonvested at December 31, 2010 Restricted stock unit activity for the year ended December 31, 2010 is set forth below: Shares 947,831 83,582 (190,683) (24,060) 816,670 Shares Nonvested at...

  • Page 66
    ..., 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 2010, 2009 and...

  • Page 67
    ... a voice services public relations program. In exchange for these services, Mr. Rieley receives annual compensation of $0.1 million payable monthly in advance. In addition, in the event that j2 Global requests that Mr. Rieley work more than 20 hours in any calendar month, j2 Global will pay Mr...

  • Page 68
    ...Effective January 14, 2011, the federal statutes of limitations for assessment of tax expired in connection with the tax years 2004 to 2006. As a result, in the first quarter 2011, the Company will recognize approximately $12.4 million of tax benefits and associated interest and penalties that were...

  • Page 69
    ... that j2 Global's internal control over financial reporting was effective as of December 31, 2010. 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 70
    ... PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders j2 Global Communications, Inc. Los Angeles, California We have audited j2 Global Communications, Inc. and its subsidiaries' (collectively, the "Company") internal control over financial reporting as of December 31, 2010, based...

  • Page 71
    ..., Executive Officers and Corporate Governance The information required by this item is incorporated by reference to the information to be set forth in our proxy statement ("2010 Proxy Statement") for the 2011 annual meeting of stockholders to be filed with the SEC within 120 days after the end of...

  • Page 72
    ... 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 73
    ... 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 reference to j2 Global's Quarterly Report on Form 10-Q filed with...

  • Page 74
    ... duly authorized, on February 25, 2011 . j2 Global Communications, Inc. NEHEMIA ZUCKER Nehemia Zucker Chief Executive Officer (Principal Executive Officer) /s/ By: Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on...

  • Page 75
    ... to Costs and Expenses 1,965 (707) 799 (2,255) 2,815 $ $ $ Deductions: Write-offs (1) and recoveries (2,454) 1,871 (618) - (1,297) $ $ $ Balance at End of Period 2,588 (1,091) 3,077 (2,255) 2,896 Description Year Ended December 31, 2010: Allowance for doubtful accounts Deferred tax asset valuation...

  • Page 76

  • Page 77
    ...List of Subsidiaries of j2 Global Communications, Inc. Name Electric Mail (International) L.P. Electric Mail (Ireland) Limited j2 Global Holdings Limited j2 Global Ireland Limited Protus IP Solutions, Inc. State or Other Jurisdiction of Incorporation Alberta, Canada Ireland Ireland Ireland Ontario...

  • Page 78
    ... of the 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, 2010. SingerLewak LLP Los Angeles, California February 25, 2011

  • Page 79
    ... 31.1 CERTIFICATIONS I, Nehemia Zucker, certify that: 1. 2. I have reviewed this Annual Report on Form 10-K of j2 Global Communications, Inc.; Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements...

  • Page 80
    ... CERTIFICATIONS I, Kathleen M. Griggs, certify that: 1. 2. I have reviewed this Annual Report on Form 10-K of j2 Global Communications, Inc.; Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements...

  • Page 81
    ...In connection with the Annual Report on Form 10-K of j2 Global Communications, Inc. (the "Company") for the year ended December 31, 2010 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Nehemia Zucker, as Chief Executive Officer (Principal Executive Officer) of...