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J2 GLOBAL, INC.
FORM 10-K
(Annual Report)
Filed 02/28/12 for the Period Ending 12/31/11
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 2012, 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, INC. FORM 10-K (Annual Report) Filed 02/28/12 for the Period Ending 12/31/11 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 CIK Symbol...

  • Page 2
    ...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...

  • Page 3
    ... 63 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 62 62 62...

  • Page 4
    -2-

  • Page 5
    ... sales and enhance productivity, mobility, business continuity and security. Our eFax® and MyFax® online fax services enable users to receive faxes into their email inboxes and to send faxes via the Internet. eVoice® and Onebox® provide our customers a virtual phone system with various available...

  • Page 6
    ... 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, which are particularly attractive to law firms and companies in...

  • Page 7
    ... 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") worldwide, a central data center in Los Angeles...

  • Page 8
    -5-

  • Page 9
    ..., a permanent injunction against continued infringement and attorneys' fees, interest and costs. We own and use a number of trademarks in connection with our services, including word and logo trademarks for eFax, MyFax, eFax Corporate, eVoice, Fusemail, KeepItSafeâ„¢ and Onebox, among others. Many...

  • Page 10
    ... 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...

  • Page 11
    ... to telecommunications taxes. In addition, the application of other 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. In November...

  • Page 12

  • Page 13
    ... 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 the overall traffic on our network is fax...

  • 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
    ... 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 acquisitions, which may materially increase operating expenses if an impairment issue is...

  • Page 16
    ... wireline broadband Internet access services (i.e., DSL) as information services. The decision enables incumbent local exchange carriers to charge higher rates for underlying broadband transmission service to competitive local exchange carriers that service some of our lines in various states. This...

  • Page 17
    ...to obtain access to new technologies on acceptable terms or at all, and may therefore be unable to offer services in a competitive manner. Any of the foregoing risks could have a material adverse effect on our business, prospects, financial condition, operating results and cash flows. We are subject...

  • Page 18
    - 13 -

  • Page 19
    ... international activities, foreign jurisdictions may claim that we are required to comply with their laws. Non-U.S. laws regulating Internet companies may give different rights to consumers, content owners and users than comparable U.S. laws. Compliance may be more costly or may require us to change...

  • Page 20
    as: • 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; - 14 -

  • Page 21
    ... business ("Open Text"), EasyLink Services International Corporation ("EasyLink") and RingCentral, Inc. ("RingCentral"). Three of the patents at issue in some of these lawsuits have been reaffirmed through reexamination proceedings with the United States Patent and Trademark Office (the "USPTO...

  • Page 22
    - 15 -

  • Page 23
    ..., "AGV") filed suit in the United States District Court for the District of Maryland against our newly acquired subsidiary Protus IP Solutions, Inc. (now known as j2 Global Canada, Inc.) ("Protus"), three of Protus' employees and other co-defendants for allegedly sending at least 974 unsolicited fax...

  • Page 24
    ... Numbers 5,572,576 and 5,283,818. Klausner is seeking a permanent injunction against continued infringement, compensatory damages, attorneys' fees, interest and costs. We filed an answer to the complaint on September 2, 2011. Discovery has commenced. We do not believe, based on current knowledge...

  • Page 25
    ...Purchases of Equity Securities 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...

  • Page 26
    ...options and/or the vesting of restricted stock issued to employees. Equity Compensation Plan Information The following table provides information as of December 31, 2011 regarding shares outstanding and available for issuance under j2 Global's existing equity compensation plans: Number of Securities...

  • Page 27
    j2 Global's peer group index consists of: Ariba Business Commerce Solutions, Athenahealth, Inc., Concur Technologies, Inc., Constant Contact, Inc., DealerTrack Holdings, Inc., DemandTec, Inc., Easylink Services International Corporation, Kenexa Corporation, LivePerson, Inc., LogMeIn, Inc., NetSuite ...

  • Page 28
    [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] - 20 -

  • Page 29
    ...,174 45,937,506 0.00 $ $ 2011 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 30
    ... to enterprises. These services, which we provide through the Internet to our customers' computers, mobile devices and telephones, deliver our customers increased sales and greater efficiency, flexibility, mobility, business continuity and security. We offer online fax, virtual phone systems, hosted...

  • Page 31
    ... costs over a subscriber's estimated useful life. Our patent revenues (included in "other revenues") consist of patent license revenues generated under license agreements that provide for the payment of contractually determined fully paid-up or royalty-bearing license fees to j2 Global in exchange...

  • Page 32
    ... 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, dividend rate and award cancellation rate. These inputs are subjective and are determined using management's judgment. If...

  • Page 33
    ... assets to their carrying value at the reporting unit level. We completed the required impairment review at the end of 2011, 2010 and 2009 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 34
    ... due to direct marketing costs for acquisition of paying subscribers and international sales, business acquisitions and subscribers coming directly to our websites, corporate, enterprise and government sales, and free-to-paid subscriber upgrades, in each case net of cancellations. Other Revenues.

  • Page 35
    ... patent licensing revenues, patent sale-related revenues and advertising revenues generated by delivering email messages to our free customers on behalf of advertisers. The decrease in other revenues from 2010 to 2011 resulted primarily from the planned reduction in advertising to our free customers...

  • Page 36
    ... marketing worldwide to enhance the acquisition of free customers for telephony-based services and increased personnel and severance costs associated with businesses acquired in fiscal 2010. Research, Development and Engineering . Percentage Change 2011 versus 2010 Percentage Change 2010 versus 2009...

  • Page 37
    ...in fiscal 2010 and increased professional fees, compensation costs and office rent, offset by decreased customer refunds and credits and bad debt expense. Loss on disposal of long-lived asset . During the fourth quarter of 2009, we determined based upon our current and future business needs that the...

  • Page 38
    ... be recognized as a result of effectively settling the transfer pricing portion of the Internal Revenue Service's audit of our income tax returns for 2004 through 2008. The decrease in our annual effective income tax rate from 2009 to 2010 was primarily attributable to the following: 1. an increase...

  • Page 39
    ...; and 4. a reversal in 2010 of certain income tax contingencies allowed to be recognized as a result of effectively settling the transfer pricing portion of the Internal Revenue Service's audit of our income tax returns for 2004 through 2008. Significant judgment is required in determining our...

  • Page 40
    ...their services, employee compensation and tax payments. The increase in our net cash provided by operating activities in 2011 compared to 2010 was primarily attributable to cash received from our subscribers and the tax benefit from the exercise of stock options during the year. Certain tax payments...

  • Page 41
    ... the repurchase of up to ten million shares of our common stock through the end of April 30, 2012 (the "2010 Program"). During the year ended December 31, 2011, we did not repurchase any shares under the 2010 Program. Effective February 15, 2012, our Board of Directors terminated and replaced...

  • Page 42
    ... amounts and timing of cash settlements with taxing authorities. Credit Agreement On January 5, 2009, we entered into a Credit Agreement with Union Bank, N.A. in order to further enhance our liquidity in the event of potential acquisitions or other corporate purposes. On August 16, 2010, we entered...

  • Page 43
    We cannot ensure that future interest 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 interest rate hedging transactions to control or minimize these risks. - 30 -

  • Page 44
    ...have not hedged translation risks because cash flows from international operations were generally reinvested locally; however, we may do so in the future. Our objective in managing foreign exchange risk is to minimize the potential exposure to changes that exchange rates might have on earnings, cash...

  • Page 45
    ... with the standards of the Public Company Accounting Oversight Board (United States), j2 Global, Inc. and subsidiaries' internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring...

  • Page 46
    j2 GLOBAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 2011 and 2010 (In thousands, except share amounts) 2011 ASSETS Cash and cash equivalents Short-term investments Accounts receivable, net of allowances of $3,404 and $2,588, respectively Prepaid expenses and other current ...

  • Page 47
    ... 44,086 211,308 $ 2009 241,922 3,649 245,571 44,730 200,841 Cost of revenues (including share-based compensation of $982, $1,217 and $1,263 in 2011, 2010 and 2009, respectively) Gross profit Operating expenses: Sales and marketing (including share-based compensation of $1,431, $1,826 and $1,818 in...

  • Page 48
    j2 GLOBAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years Ended December 31, 2011, 2010 and 2009 (In thousands, ...available-for-sale investments (net) Comprehensive income Exercise of stock options Issuance of common stock under employee stock purchase plan Excess tax...

  • Page 49
    Plan Vested restricted stock Retirement of common shares Repurchase of restricted stock Share based compensation Excess tax benefit on share based compensation Balance, December 31, 2011 5,235 155,024 (248,152 ) (43,778 ) - - 55,389,636 $ - 1 (2 ) - - - 554 $ 142 (1 ) (3,616 ) (853 ) 8,968 13,561...

  • Page 50
    ... financing activities: Repurchases of common stock and restricted stock Issuance of common stock under employee stock purchase plan Exercise of stock options Dividends paid Excess tax benefits from share-based compensation Net cash provided by financing activities Effect of exchange rate changes on...

  • Page 51
    .... j2 Global provides cloud 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, hosted email, email...

  • Page 52
    ...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 estimated useful life of costs capitalized...

  • Page 53
    ... reporting unit's goodwill and intangible assets with the respective carrying values. j2 Global completed the required impairment review at the end of 2011, 2010 and 2009 and concluded that there were no impairments. Consequently, no impairment charges were recorded. (m) Income Taxes j2 Global...

  • Page 54
    ... period in which the changes are made and in periods thereafter. j2 Global uses the simplified method in developing the expected term used for the Company's valuation of sharebased compensation in accordance with ASC 718. j2 Global accounts for option grants to non-employees in accordance with FASB...

  • Page 55
    ... associated with the email hosting and email marketing businesses of FuseMail, LLC, (5) the assets of Alban 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...

  • Page 56
    ... tradename acquired in connection with Protus will be used by the Company indefinitely. Accordingly, this asset will have an indefinite life and will be tested annually or more frequently if j2 Global believes indicators of impairment exists. Goodwill represents the excess of the purchase price over...

  • Page 57
    ... quarter 2010; however, this accounting remained subject to change during the measurement period. Based upon an income tax position taken by the seller during the third quarter 2011 for a tax deduction prior to the acquisition in connection with certain acquired liabilities, the Company recorded...

  • Page 58
    ... at the dates of acquisition: (1) the digital faxing business and certain intellectual property of CallWave, Inc., a provider of Internet unified communications solutions and (2) the email business of Quexion, LLC. j2 Global accounted for all of the above transactions using the "purchase method" and...

  • Page 59
    ... changes in the maturity dates and average interest rates for the Company's investment portfolio and debt obligations subsequent to December 31, 2011. At December 31, 2011, j2 Global's long-term availablefor-sale securities are carried at fair value, with the unrealized gains and losses reported...

  • Page 60
    ... 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 61
    ... by the U.S. Treasury and other U.S. government corporations and agencies Debt securities issued by states of the United States and political subdivisions of the states Debt securities issued by foreign governments Corporate debt securities Total Level 1 Level 2 Level 3 Fair Value $ 79,945 7,082...

  • Page 62
    - 46 -

  • Page 63
    ...-line method over estimated useful lives ranging from one to 20 years. The changes in carrying amounts of goodwill for the year ended December 31, 2011 and 2010 are as follows (in thousands): Balance as of January 1, 2010 Goodwill acquired Purchase Accounting Adjustments Foreign Exchange Translation...

  • Page 64
    ... asserted. Trial is currently scheduled to begin on November 13, 2012. On June 1, 2011, j2 Global and one of its affiliates filed suit against RingCentral in the United States District Court for the Central District of California. The complaint alleges infringement of U.S. Patent Numbers 6,208,638...

  • Page 65
    ..., 2009, COA Network, Inc. ("COA") filed a complaint in the United States District Court for the District of New Jersey, seeking declaratory judgment of non-infringement, invalidity and unenforceability of several of j2 Global's patents. On March 3, 2010, the Company filed an answer to the complaint...

  • Page 66
    ...' e-mail marketing services. Pantelakis is seeking damages, attorneys' fees, interest and costs. Protus filed a responsive pleading on March 23, 2011. Discovery is ongoing. On March 7, 2011, Xpedite Systems, LLC, a subsidiary of Easylink ("Xpedite"), filed suit against j2 Global in the United States...

  • Page 67
    ... of the issued stock of j2 Global Holdings Limited, a wholly owned Irish subsidiary of j2 Global. j2 Global will also be required to grant a security interest to Lender in 65% of the issued stock of any future non-U.S. based significant subsidiary. The Credit Agreement contains customary affirmative...

  • Page 68
    ... income tax rate with j2 Global's effective income tax rate is as follows: Years Ended December 31, 2010 35.0 % 35.0 % 0.9 1.9 (16.0 ) (17.7 ) (5.7 ) 5.9 (0.1 ) (1.4 ) 2.2 1.2 16.3 % 24.9 % 2011 Statutory tax rate State income taxes, net Foreign rate differential Reserve for uncertain tax positions...

  • Page 69
    ... "Internal Revenue Code"). j2 Global currently estimates that all of the abovementioned federal and state NOLs will be available for use before their expiration. These NOLs expire through the year 2028 for the federal and 2017 for the state. In addition, as of December 31, 2011 and 2010, the Company...

  • Page 70
    ...commission fees). j2 Global has accounted for these repurchases using the cost method. No shares were repurchased during the year ended December 31, 2011. Effective February 15, 2012, the Company's Board of Directors terminated and replaced this 2010 Program with a program with a program authorizing...

  • Page 71
    ... of $0.21 per share of common stock to be paid on March 12, 2012 to all stockholders of record as of the close of business on February 27, 2012. Future dividends will be subject to Board approval. See Note 8 - Commitments and Contingencies - for further details regarding the Credit Agreement. - 53 -

  • Page 72
    ... the meaning of Internal Revenue Code Section 162(m). Stock Options Stock option activity for the years ended December 31, 2011, 2010 and 2009 is summarized as follows: WeightedAverage Remaining Contractual Life (In Years) Options outstanding at December 31, 2008 Granted Exercised Canceled Options...

  • Page 73
    ... requisite service period). Fair Value Disclosure j2 Global uses 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. The Company elected to use the simplified method for...

  • Page 74
    ... 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. Prior to the initial declaration of a cash dividend on August 1, 2011, the fair value of stock options, restricted stock and restricted stock units...

  • Page 75
    Vested Canceled Outstanding at December 31, 2010 Granted Vested Canceled Outstanding at December 31, 2011 Vested and expected to vest at December 31, 2011 - - 17,500 17,000 (1,750 ) - 32,750 22,037 2.8 2.7 $921,585 $620,134 - 56 -

  • Page 76
    ... market price of the common shares. 14. Geographic Information j2 Global maintains operations in the U.S., Canada, Ireland, the United Kingdom and other international territories. Information about the Company's revenues and assets in the U.S. and international territories for the reporting period...

  • Page 77
    .... The Company acquired property and equipment for $0.8 million, $0.3 million and $0.2 million during 2011, 2010 and 2009, respectively, which had not been yet paid at the end of each such year. During 2011, 2010 and 2009, j2 Global recorded the tax benefit from the exercise of stock options and...

  • Page 78
    ..., the Company purchased for cash: (a) Landslide Technologies, Inc., a Boston-based provider of online customer relationship management solutions designed for small to mid-sized businesses, and (b) Zimo Communications, a UK provider of cloud-based voice services. The financial impact to j2 Global for...

  • Page 79
    ... that j2 Global's internal control over financial reporting was effective as of December 31, 2011. 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 80
    ... and Stockholders j2 Global, Inc. Los Angeles, California We have audited j2 Global, Inc. and its subsidiaries' (collectively, the "Company") internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control - Integrated Framework issued by the...

  • Page 81
    ... III Item 10. Directors, 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 ("2011 Proxy Statement") for the 2012 annual meeting of stockholders to be filed with the SEC within 120...

  • Page 82
    ... Plan (6) Amendment No. 1 to j2 Global, Inc. Second Amended and Restated 1997 Stock Option Plan (9) j2 Global, Inc. 2007 Stock Plan (10) Amended and Restated j2 Global, Inc. 2001 Employee Stock Purchase Plan (8) Letter Agreement dated April 1, 2001 between j2 Global and Orchard Capital Corporation...

  • Page 83
    ... 14A filed with the Commission on September 18, 2007. (11) Incorporated by reference to j2 Global's Current Report on Form 8-K filed with the Commission on January 9, 2009. (12) Incorporated by reference to j2 Global's Current Report on Form 8-K filed with the Commission on December 7, 2011. - 64...

  • Page 84
    ... thereunto duly authorized, on February 27, 2012. j2 Global, 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...

  • Page 85
    ... QUALIFYING ACCOUNTS (In thousands) Balance at Beginning of Period $ $ $ 2,588 (1,091) 3,077 (2,255) 2,896 - $ $ $ Additions: Charged to Costs and ...2011: Allowance for doubtful accounts Deferred tax asset valuation allowance Year Ended December 31, 2010: Allowance for doubtful accounts Deferred tax...

  • Page 86
    ... 21 List of Subsidiaries of j2 Global, Inc. Name Electric Mail (International) L.P. Electric Mail (Ireland) Limited j2 Global Holdings Limited j2 Global Ireland Limited j2 Global Canada, Inc. State or Other Jurisdiction of Incorporation Alberta, Canada Ireland Ireland Ireland Ontario, Canada

  • Page 87
    ... to our audits 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, Inc. for the year ended December 31, 2011. SingerLewak LLP Los Angeles, California February 27, 2012

  • Page 88
    ... 31.1 CERTIFICATIONS I, Nehemia Zucker, certify that: 1. 2. I have reviewed this Annual Report on Form 10-K of j2 Global, 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 made, in light...

  • Page 89
    ... 31.2 CERTIFICATIONS I, Kathleen M. Griggs, certify that: 1. 2. I have reviewed this Annual Report on Form 10-K of j2 Global, 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 made, in...

  • Page 90
    ... OF 2002 In connection with the Annual Report on Form 10-K of j2 Global, Inc. (the "Company") for the year ended December 31, 2011 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...