10-Q 1 jcom2017033110-q.htm 10-Q Document


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
ý    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the quarterly period ended March 31, 2017
OR
o    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, INC.
(Exact name of registrant as specified in its charter)
Delaware
47-1053457
(State or other jurisdiction
(I.R.S. Employer
of incorporation or organization)
Identification No.)
6922 Hollywood Boulevard, Suite 500
Los Angeles, California 90028
(Address of principal executive offices)
(323) 860-9200
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes ý    No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes ý    No  o   
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act). (Check one):
 
Large accelerated filer ý
Accelerated filer o
Non-Accelerated filer o
Smaller reporting company o
Emerging growth company o
 
 
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o        No ý

As of May 5, 2017, the registrant had 48,192,911 shares of common stock outstanding.

 




j2 GLOBAL, INC. AND SUBSIDIARIES
 
FOR THE QUARTER ENDED MARCH 31, 2017

INDEX
 
 
 
 
PAGE
 
 
 
 
PART I.
FINANCIAL INFORMATION
 
 
 
 
 
 
Item 1.  
Financial Statements
 
 
 
Condensed Consolidated Balance Sheets (unaudited)
 
 
Condensed Consolidated Statements of Income (unaudited)
 
 
Condensed Consolidated Statements of Comprehensive Income (unaudited)
 
 
Condensed Consolidated Statements of Cash Flows (unaudited)
 
 
Notes to Condensed Consolidated Financial Statements (unaudited)
 
 
 
 
 
Item 2.  
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
 
 
Item 3.  
Quantitative and Qualitative Disclosures About Market Risk
 
 
 
 
 
Item 4.  
Controls and Procedures
 
 
 
 
 
 
 
PART II.
OTHER INFORMATION
 
 
 
 
 
 
Item 1.  
Legal Proceedings
 
 
 
 
 
Item 1A.  
Risk Factors
 
 
 
 
 
Item 2.  
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
 
 
Item 3.  
Defaults Upon Senior Securities
 
 
 
 
 
Item 4.  
Mine Safety Disclosures
 
 
 
 
 
Item 5.  
Other Information
 
 
 
 
 
Item 6.  
Exhibits
 
 
 
 
 
 
Signature
 
 
 
 

-2-



PART I.  FINANCIAL INFORMATION
Item 1.
Financial Statements

j2 GLOBAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands except share and per share data)

March 31,
2017

December 31,
2016
ASSETS



Cash and cash equivalents
$
187,409


$
123,950

Short-term investments
65


60

Accounts receivable, net of allowances of $8,137 and $7,988, respectively
172,062


199,871

Prepaid expenses and other current assets
24,177


24,118

Total current assets
383,713


347,999

Property and equipment, net
69,714


68,094

Trade names, net
113,339


115,853

Patent and patent licenses, net
12,553


13,928

Customer relationships, net
204,920


208,155

Goodwill
1,138,700


1,122,810

Other purchased intangibles, net
166,388


173,755

Deferred income taxes, non-current
6,912


5,289

Other assets
6,313


6,445

TOTAL ASSETS
$
2,102,552


$
2,062,328

LIABILITIES AND STOCKHOLDERS’ EQUITY





Accounts payable and accrued expenses
$
145,927


$
178,071

Income taxes payable
21,599


16,753

Deferred revenue, current
85,431


80,384

Line of credit
224,123

 
178,817

Other current liabilities
34

 
64

Total current liabilities
477,114


454,089

Long-term debt
604,273


601,746

Deferred revenue, non-current
822

 
1,588

Liability for uncertain tax positions
47,178


46,537

Deferred income taxes, non-current
39,752


40,357

Other long-term liabilities
2,987


3,475

TOTAL LIABILITIES
1,172,126


1,147,792

Commitments and contingencies



Preferred stock - Series A, $0.01 par value. Authorized 6,000; total issued and outstanding zero



Preferred stock - Series B, $0.01 par value. Authorized 20,000; total issued and outstanding zero



Common stock, $0.01 par value. Authorized 95,000,000; total issued and outstanding 47,484,889 and 47,443,716 shares, respectively
475


474

Additional paid-in capital
312,468


308,329

Retained earnings
668,550


660,382

Accumulated other comprehensive loss
(51,067
)

(54,649
)
TOTAL STOCKHOLDERS’ EQUITY
930,426


914,536

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
2,102,552


$
2,062,328


See Notes to Condensed Consolidated Financial Statements

-3-



j2 GLOBAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited, in thousands except share and per share data)
 
Three Months Ended March 31,
 
2017
 
2016
Total revenues
$
254,669

 
$
200,502

 
 
 
 
Cost of revenues (1)
40,810

 
34,288

Gross profit
213,859

 
166,214

Operating expenses:
 
 
 

Sales and marketing (1)
77,477

 
48,112

Research, development and engineering (1)
11,752

 
8,988

General and administrative (1)
76,655

 
55,776

Total operating expenses
165,884

 
112,876

Income from operations
47,975

 
53,338

Interest expense, net
12,410

 
10,233

Other expense, net
323

 
126

Income before income taxes
35,242

 
42,979

Income tax expense
9,422

 
13,036

Net income
$
25,820

 
$
29,943

 
 
 
 
Net income per common share:
 
 
 

Basic
$
0.54

 
$
0.62

Diluted
$
0.52

 
$
0.61

Weighted average shares outstanding:
 
 
 

Basic
47,463,231

 
47,966,718

Diluted
48,766,031

 
48,238,098

Cash dividends paid per common share
$
0.3650

 
$
0.3250

 
 
 
 
 
 
 
 
(1) Includes share-based compensation expense as follows:
 
 
 
Cost of revenues
$
117

 
$
95

Sales and marketing
378

 
531

Research, development and engineering
238

 
207

General and administrative
2,881

 
1,976

Total
$
3,614

 
$
2,809

 
See Notes to Condensed Consolidated Financial Statements

-4-



j2 GLOBAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited, in thousands)
 
Three Months Ended March 31,
 
2017
 
2016
 
 
 
 
Net Income
$
25,820

 
$
29,943

Other comprehensive income (loss), net of tax:
 
 
 
Foreign currency translation adjustment
3,582

 
3,415

Change in fair value on available-for-sale investments, net of tax expense (benefit) of $0 and ($1,441) for the three months of 2017 and 2016, respectively

 
(2,361
)
Other comprehensive income, net of tax
3,582

 
1,054

Comprehensive Income
$
29,402

 
$
30,997


See Notes to Condensed Consolidated Financial Statements


-5-



j2 GLOBAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
 
Three Months Ended March 31,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net income
$
25,820

 
$
29,943

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 

Depreciation and amortization
39,323

 
27,174

Accretion and amortization of discount and premium of investments

 
331

Amortization of financing costs and discounts
2,853

 
2,370

Share-based compensation
3,614

 
2,809

Excess tax benefits from share-based compensation

 
(264
)
Provision for doubtful accounts
2,640

 
2,825

Deferred income taxes, net
(2,361
)
 
(3,101
)
Loss on sale of available-for-sale investment

 
182

Decrease (increase) in:
 
 
 

Accounts receivable
25,110

 
15,773

Prepaid expenses and other current assets
(291
)
 
370

Other assets
162

 
(715
)
Increase (decrease) in:
 
 
 

Accounts payable and accrued expenses
(53,166
)
 
(23,797
)
Income taxes payable
4,795

 
6,360

Deferred revenue
2,384

 
1,250

Liability for uncertain tax positions
573

 
1,742

Other long-term liabilities
(265
)
 
1,272

Net cash provided by operating activities
51,191

 
64,524

Cash flows from investing activities:
 
 
 

Purchase of certificates of deposit
(5
)
 

Maturity of available-for-sale investments

 
26,224

Purchase of available-for-sale investments

 
(21,402
)
Purchases of property and equipment
(9,660
)
 
(4,321
)
Acquisition of businesses, net of cash received
(3,563
)
 
(47,989
)
Purchases of intangible assets
(142
)
 
(316
)
Net cash used in investing activities
(13,370
)
 
(47,804
)
Cash flows from financing activities:
 
 
 

Proceeds from line of credit, net
44,981

 

Repurchases of common stock and restricted stock
(314
)
 
(1,786
)
Issuance of common stock under employee stock purchase plan
67

 
58

Exercise of stock options
695

 
1,312

Dividends paid
(17,575
)
 
(15,817
)
Excess tax benefits from share-based compensation

 
264

Deferred payments for acquisitions
(2,299
)
 
(14,386
)
Other
(26
)
 
(25
)
Net cash provided by (used in) financing activities
25,529

 
(30,380
)
Effect of exchange rate changes on cash and cash equivalents
109

 
885

Net change in cash and cash equivalents
63,459

 
(12,775
)
Cash and cash equivalents at beginning of period
123,950

 
255,530

Cash and cash equivalents at end of period
$
187,409

 
$
242,755


See Notes to Condensed Consolidated Financial Statements

-6-



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2017
(UNAUDITED)
1.    Basis of Presentation

j2 Global, Inc., together with its subsidiaries (“j2 Global” or the “Company”), is a leading provider of Internet services. Through its Business Cloud Services Division, the Company provides cloud services to businesses of all sizes, from individuals to enterprises, and licenses its intellectual property (“IP”) to third parties. In addition, the Business Cloud Services Division includes j2 Cloud Connect, which primarily focuses on our voice and fax products. The Digital Media Division specializes in the technology, gaming, lifestyle markets and healthcare markets, reaching in-market buyers and influencers in both the consumer and business-to-business space.

The accompanying interim condensed 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.

The accompanying interim condensed consolidated financial statements are unaudited and have been prepared in accordance with instructions for Form 10-Q and Article 10 of Regulation S-X issued by the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and note disclosures required by GAAP for complete financial statements although the Company believes that the disclosures made are adequate to make that information not misleading. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been reflected in these interim financial statements. It is suggested that these financial statements be read in conjunction with the audited financial statements and the related notes thereto for the year ended December 31, 2016 included in our Annual Report (Form 10-K) filed with the SEC on March 1, 2017. Accordingly, significant accounting policies and other disclosures normally provided have been omitted since such items are disclosed therein.
 
The results of operations for this interim period are not necessarily indicative of the operating results for the full year or for any future period.

Use of Estimates

The preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, including judgments about investment classifications, and the reported amounts of net revenue and expenses during the reporting period. We believe that our most significant estimates are those related to the valuation of assets acquired and liabilities assumed in connection with business combinations, long-lived and intangible asset impairment, contingent consideration, income taxes and contingencies and allowances for doubtful accounts. On an ongoing basis, management evaluates its estimates based on historical experience and on various other factors that the Company believes to be reasonable under the circumstances. Actual results could materially differ from those estimates.

Allowances for Doubtful Accounts

j2 Global reserves for receivables it may not be able to collect. These reserves for the Company’s Business Cloud Services segment are typically driven by the volume of credit card declines and past due invoices and are based on historical experience as well as an evaluation of current market conditions. These reserves for the Company’s Digital Media segment are typically driven by past due invoices based on historical experience. On an ongoing basis, management evaluates the adequacy of these reserves.

Revenue Recognition

Business Cloud Services

The Company’s Business Cloud Services revenues substantially consist of monthly recurring subscription and usage-based fees, which are primarily paid in advance by credit card. In accordance with GAAP, the Company recognizes revenue when persuasive evidence of an arrangement exists, services have been provided, the sales price is fixed and determinable and collection is probable. The Company defers the portions of monthly, quarterly, semi-annually and annually recurring subscription and usage-based fees collected in advance and recognizes them in the period earned. Additionally, the Company defers and recognizes subscriber activation fees and related direct incremental costs over a subscriber’s estimated useful life.


-7-



Along with our numerous proprietary Business Cloud Services solutions, the Company also generates revenues by reselling various third party solutions, primarily through our email security and online backup lines of business.  These third party solutions, along with our proprietary products, allow the Company to offer customers a variety of solutions to better meet their needs.  The Company determines whether reseller revenue should be reported on a gross or net basis by assessing whether the Company is acting as the principal or an agent in the transaction. If the Company is acting as the principal in a transaction, the Company reports revenue on a gross basis. If the Company is acting as an agent in a transaction, the Company reports revenue on a net basis. In determining whether the Company acts as the principal or an agent, the Company follows the accounting guidance for principal-agent considerations and the Company places the most weight on three factors: whether or not the Company (i) is the primary obligor in the arrangement, (ii) has latitude in determining pricing and (iii) bears credit risk.

The Company records revenue on a gross basis with respect to reseller revenue as the Company is the primary obligator in the arrangement, has latitude in determining pricing and bears all credit risk associated with our reseller program partners.

j2 Global’s Business Cloud Services also include 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 for the grant of non-exclusive, retroactive and future licenses to our intellectual property, including patented technology. Patent revenues may also consist of revenues generated from the sale of patents. Patent license revenues are recognized when earned over the term of the license agreements. With regard to fully paid-up license arrangements, the Company recognizes as revenue in the period the license agreement is executed the portion of the payment attributable to past use of the intellectual property and amortizes the remaining portion of such payments on a straight-line basis, or pro-rata revenue basis, as appropriate over the life of the licensed patent(s). With regard to royalty-bearing license arrangements, the Company recognizes revenues of license fees earned during the applicable period. With regard to patent sales, the Company recognizes as revenue in the period of the sale the amount of the purchase price over the carrying value of the patent(s) sold.

The Business Cloud Services business also generates revenues by licensing certain technology to third parties. These licensing revenues are recognized when earned in accordance with the terms of the underlying agreement. Generally, revenue is recognized as the third party uses the licensed technology over the period.

Digital Media

The Company’s Digital Media revenues primarily consist of revenues generated from the sale of advertising campaigns that are targeted to the Company’s proprietary websites and to those websites operated by third parties that are part of the Digital Media business’s advertising network. Revenues for these advertising campaigns are recognized as earned, either when an ad is placed for viewing by a visitor to the appropriate web page or when the visitor “clicks through” on the ad, depending upon the terms with the individual advertiser.

Revenues for Digital Media business-to-business operations consist of lead-generation campaigns for IT vendors and are recognized as earned when the Company delivers the qualified leads to the customer.

j2 Global also generates Digital Media revenues through the license of certain assets to clients, for the clients’ use in their own promotional materials or otherwise. Such assets may include logos, editorial reviews, or other copyrighted material. Revenues under such license agreements are recognized when the assets are delivered to the client. Also, Digital Media revenues are generated through the license of certain speed testing technology which is recognized when delivered to the client through providing data services primarily to Internet Service Providers (“ISPs”) and wireless carriers which is recognized as earned over the term of the access period. The Digital Media business also generates other types of revenues, including business listing fees, subscriptions to online publications, and from other sources. Such other revenues are recognized as earned.

The Company determines whether Digital Media revenue should be reported on a gross or net basis by assessing whether the Company is acting as the principal or an agent in the transaction. If the Company is acting as the principal in a transaction, the Company reports revenue on a gross basis. If the Company is acting as an agent in a transaction, the Company reports revenue on a net basis. In determining whether the Company acts as the principal or an agent, the Company follows the accounting guidance for principal-agent considerations and the Company places the most weight on three factors: whether or not the Company (i) is the primary obligor in the arrangement, (ii) has latitude in determining pricing and (iii) bears credit risk.

The Company records revenue on a gross basis with respect to revenue generated (i) by the Company serving online display and video advertising across its owned-and-operated web properties, on third party sites or on unaffiliated advertising networks, (ii) through the Company’s lead-generation business and (iii) through the Company’s Digital Media licensing program. The Company records revenue on a net basis with respect to revenue paid to the Company by certain third-party advertising

-8-



networks who serve online display and video advertising across the Company’s owned-and-operated web properties and certain third party sites.

Fair Value Measurements

j2 Global complies with the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Topic No. 820, Fair Value Measurements and Disclosures (“ASC 820”), in measuring fair value and in disclosing fair value measurements. ASC 820 provides a framework for measuring fair value and expands the disclosures required for fair value measurements of financial and non-financial assets and liabilities.

As of March 31, 2017, the carrying value of cash and cash equivalents, short-term investments, accounts receivable, interest receivable, accounts payable, accrued expenses, interest payable, customer deposits and long-term debt are reflected in the financial statements at cost. With the exception of long-term debt, cost approximates fair value due to the short-term nature of such instruments. The fair value of the Company’s outstanding debt was determined using the quoted market prices of debt instruments with similar terms and maturities, if available. As of the same dates, the carrying value of other long-term liabilities approximated fair value as the related interest rates approximate rates currently available to j2 Global.

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 1 to 10 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. 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 is evaluated for each specific project and ranges from 1 to 5 years.

Debt Issuance Costs and Debt Discount

j2 Global capitalizes costs incurred with borrowing and issuance of debt securities and records debt issuance costs and discounts as a reduction to the debt amount. These costs and discounts are amortized and included in interest expense over the life of the borrowing or term of the credit facility using the effective interest method.
 
Contingent Consideration

j2 Global measures the contingent earn-out liabilities in connection with acquisitions at fair value on a recurring basis using significant unobservable inputs classified within Level 3 of the fair value hierarchy (see Note 5 - Fair Value Measurements). The Company may use various valuation techniques depending on the terms and conditions of the contingent consideration including a Monte-Carlo simulation. This simulation uses a probability distribution for each significant input to produce hundreds or thousands of possible outcomes and the results are analyzed to determine probabilities of different outcomes occurring. Significant increases or decreases to these inputs in isolation would result in a significantly higher or lower liability with a higher liability capped by the contractual maximum of the contingent earn-out obligation. Ultimately, the liability will be equivalent to the amount paid, and the difference between the fair value estimate and the amount paid will be recorded in earnings. The amount paid that is less than or equal to the liability on the acquisition date is reflected as cash used in financing activities in our consolidated statements of cash flows. Any amount paid in excess of the liability on the acquisition date is reflected as cash used in operating activities.

j2 Global reviews and re-assesses the estimated fair value of contingent consideration on a quarterly basis, and the updated fair value could be materially different from the initial estimates or prior quarterly amounts. Changes in the estimated fair value of our contingent earn-out liabilities are reported in operating income, except for the time component of the present value calculation which is reported in interest expense. Adjustments to the estimated fair value related to changes in all other unobservable inputs are reported in operating income.

Segment Reporting

Accounting guidance establishes standards for the way that public business enterprises report information about operating segments in their annual consolidated financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. Accounting guidance also establishes standards for related disclosures about

-9-



products and services, geographic areas and major customers. The Company operates as two segments: (1) Business Cloud Services and (2) Digital Media.

Reclassifications

Certain prior year reported amounts have been reclassified to conform to the 2017 presentation.

2.Recent Accounting Pronouncements
 
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, as a new Topic, Accounting Standards Codification (“ASC”) Topic 606. The new revenue recognition standard provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date, which deferred the effective date of the new revenue standard for periods beginning after December 15, 2016 to December 15, 2017, with early adoption permitted but not earlier than the original effective date. This ASU must be applied retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. The Company is considering the alternatives of adoption of this ASU, has substantially completed a review of the likely impact to the existing portfolio of customer contracts entered into prior to this adoption and will continue to evaluate the effect of adopting this guidance upon the Company’s results of operations, cash flows and financial position. Currently, the Company does not expect the adoption of this ASU to have a material impact on our financial statements except that there are significant additional reporting requirements under the new standard.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this ASU modify how entities measure equity investments and present changes in the fair value of financial liabilities. Under the new guidance, entities will have to measure equity investments that do not result in consolidation and are not accounted under the equity method at fair value and recognize any changes in fair value in net income unless the investments qualify for the new practicality exception. A practicality exception will apply to those equity investments that do not have a readily determinable fair value and do not qualify for the practical expedient to estimate fair value under ASC 820, Fair Value Measurements, and as such these investments may be measured at cost. This ASU is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company does not expect the adoption of this ASU to have a material impact on our financial statements and related disclosures.

In February 2016, the FASB issued ASU No. 2016-02, Leases. This ASU establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently evaluating the impact of this ASU on our financial statements. The Company currently has both capital and operating leases both domestically and internationally with varying expiration dates through 2025 in the aggregate amount of $71.8 million for the period ended March 31, 2017.

In March 2016, the FASB issued ASU 2016-06, Derivatives and Hedging (Topic 815). This ASU is related to the embedded derivative analysis for debt instruments with contingent call or put options. This ASU clarifies that an exercise contingency does not need to be evaluated to determine whether it relates only to interest rates or credit risk. Instead, the contingent put or call option should be evaluated for possible bifurcation as a derivative in accordance with the four-step decision sequence detailed in FASB ASC 815-15, without regard to the nature of the exercise contingency. This ASU is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. The Company has adopted this ASU and determined that there is no impact on our financial statements and related disclosures.

In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606). This ASU is related to reporting revenue gross versus net, or principal versus agent considerations. This ASU is meant to clarify the guidance in ASU 2014-09, Revenue from Contracts with Customers, as it pertains to principal versus agent considerations. Specifically, the guidance addresses how entities should identify goods and services being provided to a customer, the unit of account for a principal versus agent assessment, how to evaluate whether a good or service is controlled before being transferred to a customer, and how to assess whether an entity controls services performed by another party. This ASU has the same effective date as the new revenue standard, which is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017. The

-10-



Company is considering the alternatives of adoption of this ASU, has substantially completed a review of the likely impact to the existing portfolio of customer contracts entered into prior to adoption and will continue to evaluate the effect of adopting this guidance upon the Company’s results of operations, cash flows and financial position. Currently, the Company does not expect the adoption of this ASU to have a material impact on our financial statements except that there are significant additional reporting requirements under the new standard.

In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation (Topic 718). This ASU is related to simplifications of employee share-based payment accounting. This pronouncement eliminates the APIC pool concept and requires that excess tax benefits and tax deficiencies be recorded in the income statement when awards are settled. The pronouncement also addresses simplifications related to statement of cash flows classification, accounting for forfeitures, and minimum statutory tax withholding requirements. This ASU is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted.

The new standard requires prospective recognition of excess tax benefits and deficiencies resulting from stock-based compensation awards vesting and exercises be recognized in the income statement. Previously, these amounts were recognized in additional paid-in capital. Net excess tax benefits of $0.4 million for the three months ended March 31, 2017, were recognized as a reduction of income tax expense. In addition, ASU 2016-09 requires excess tax benefits and deficiencies to be prospectively excluded from the assumed future proceeds in the calculation of diluted shares, resulting in an insignificant increase in diluted weighted average shares outstanding for the three months ended March 31, 2017, which did not have a material impact on earnings per share.

The Company has elected to continue to estimate the number of stock-based awards expected to vest, as permitted by ASU 2016-09, rather than electing to account for forfeitures as they occur.

    The standard also requires that the excess tax benefits from share based compensation awards be reported as operating activities in the consolidated statements of cash flows. Previously, these cash flows were included in financing activities. We have elected to apply this change on a prospective basis, resulting in an increase in net cash provided by operating activities of $0.4 million for the three months ended March 31, 2017.

The prior period was not adjusted with the adoption of ASU 2016-09 due to the adoption of this standard on a prospective basis.

In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. This ASU is meant to clarify the guidance in FASB ASU 2014-09, Revenue from Contracts with Customers. Specifically, the guidance addresses an entity’s identification of its performance obligations in a contract, as well as an entity’s evaluation of the nature of its promise to grant a license of intellectual property and whether or not that revenue is recognized over time or at a point in time. This ASU has the same effective date as the new revenue standard, which is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017. The Company is considering the alternatives of adoption of this ASU, has substantially completed a review of the likely impact to the existing portfolio of customer contracts entered into prior to adoption and will continue to evaluate the effect of adopting this guidance upon the Company’s results of operations, cash flows and financial position. Currently, the Company does not expect the adoption of this ASU to have a material impact on our financial statements except that there are significant additional reporting requirements under the new standard.

In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. This ASU does not change the core principle of the guidance in Topic 606. Instead, the amendments provide clarifying guidance in a few narrow areas and add some practical expedients to the guidance. This ASU has the same effective date as the new revenue standard, which is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017. The Company is considering the alternatives of adoption of this ASU, has substantially completed a review of the likely impact to the existing portfolio of customer contracts entered into prior to adoption and will continue to evaluate the effect of adopting this guidance upon the Company’s results of operations, cash flows and financial position. Currently, the Company does not expect the adoption of this ASU to have a material impact on our financial statements except that there are significant additional reporting requirements under the new standard.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments in this ASU replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This ASU is effective for fiscal years, and for interim periods within those fiscal years,

-11-



beginning after December 15, 2019. The adoption of this standard is not expected to have a material impact on our financial statements and related disclosures.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The new guidance is intended to reduce diversity in practice in how transactions are classified in the statement of cash flows. This ASU is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017. The adoption of this standard is not expected to have a material impact on our financial statements.

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than Inventory. The amendments in this ASU reduce the complexity in the accounting standards by allowing the recognition of current and deferred income taxes for an intra-entity asset transfer, other than inventory, when the transfer occurs. Historically, the income tax consequence was not recognized until the asset was sold to an outside party. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. The Company is currently evaluating the impact of this ASU on our financial statements.

In November 2016, the FASB issued 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash - a consensus of the FASB Emerging Issues Task Force. The amendments in this ASU require restricted cash and restricted cash equivalents to be classified in the statement of cash flows as cash and cash equivalents. The guidance will be applied on a retrospective basis beginning with the earliest period presented. The amendments in this ASU are effective for annual and interim periods beginning after December 15, 2017. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on our financial statements.

In December 2016, the FASB issued 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. The amendments in this ASU represent changes to clarify the Codification or to correct unintended application of guidance. Areas for correction or improvement include: Loan Guarantee Fees, Contract Costs - Impairment Testing, Contract Costs - Interaction of Impairment Testing with Guidance in Other Topics, Provisions for Losses on Construction-Type and Production Type Contracts, Scope of Topic 606, Disclosure of Remaining Performance Obligations, Disclosure of Prior-Period Performance Obligations, Contract Modification Example, Contract Asset versus Receivable, Refund Liability, Advertising Costs, Fixed-Odd Wagering Contracts in the Casino Industry and Cost Capitalization for Advisors to Private Funds and Public Funds. This ASU has the same effective date as the new revenue standard, which is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017. The adoption of this standard is not expected to have a material impact on our financial statements except that there are significant additional reporting requirements under the new standard.

In January 2017, the FASB issued 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The amendments in this ASU provide a robust framework to use in determining when a set of assets and activities is a business. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted and the standard should be applied prospectively. The Company does not expect the adoption of this ASU to have a material impact on our financial statements and related disclosures.

In January 2017, the FASB issued 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The amendments in this ASU simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test and eliminating the requirement for a reporting unit with a zero or negative carrying amount to perform a qualitative assessment. Instead, under this pronouncement, an entity would perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and would recognize an impairment change for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized is not to exceed the total amount of goodwill allocated to that reporting unit. In addition, income tax effects will be considered, if applicable. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted and should be adopted on a prospective basis. The Company is currently evaluating the impact of this ASU on our financial statements and related disclosures.

In February 2017, the FASB issued 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. This ASU provides guidance which clarifies the scope and accounting for financial assets that meet the definition of an “in-substance nonfinancial asset” and defines the term, “in-substance nonfinancial asset.” In addition, this ASU also adds guidance for partial sales of nonfinancial assets. This ASU is effective for fiscal years beginning after December 15, 2017 and interim periods within those years. Early adoption is permitted and should be adopted retrospectively for all periods presented or retrospectively with a cumulative-effect adjustment at the date of adoption. The Company is currently evaluating the impact of this ASU on our financial statements and related disclosures.

-12-




In March 2017, the FASB issued 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. The amendments in this ASU shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. This ASU is effective for those fiscal years, beginning after December 15, 2018. Early adoption is permitted and should be adopted on a modified retrospective bases through a cumulative-effect directly to retained earnings as of the beginning of the period of adoption. The Company is currently evaluating the impact of this ASU on our financial statements and related disclosures.

3.Business Acquisitions

The Company uses acquisitions as a strategy to grow its customer base by increasing its presence in new and existing markets, expand and diversify its service offerings, enhance its technology, acquire skilled personnel and enter into other jurisdictions.

The Company completed the following acquisitions during the first three months of fiscal 2017, paying the purchase price in cash in each transaction: (a) an asset purchase of sFax, acquired on March 31, 2017, an Austin-based provider of mobile cloud faxing for healthcare; and (b) other immaterial acquisitions of email marketing and email security businesses.

The condensed consolidated statement of income, since the date of each acquisition, and balance sheet as of March 31, 2017, reflect the results of operations of all 2017 acquisitions. For the three months ended March 31, 2017, the contributions of the acquisitions were immaterial to the Company’s revenues. Net income contributed by these acquisitions was not separately identifiable due to j2 Global’s integration activities and is impracticable to provide. Total consideration for these transactions was $26.5 million, net of cash acquired and assumed liabilities and is subject to certain post-closing adjustments which may increase or decrease the final consideration paid.

The following table summarizes the allocation of the purchase consideration for these acquisitions (in thousands):
Assets and Liabilities
Valuation
Other assets
$
61

Trade names
375

Customer relationships
11,954

Other intangibles
2,273

Goodwill
13,005

Deferred revenue
(1,145
)
 Total
$
26,523


During the three months ended March 31, 2017, the purchase price accounting has been finalized for the following acquisitions: (i) Fonebox and (ii) other immaterial fax, online data backup and email marketing businesses. The initial accounting for all 2017 acquisitions is incomplete and subject to change, which may be significant. j2 Global has recorded provisional amounts which may be based upon past acquisitions with similar attributes for certain intangible assets (including trade names, software and customer relationships), preliminary acquisition date working capital and related tax items.

During the three months ended March 31, 2017, the Company recorded adjustments to prior period acquisitions due to the finalization of purchase accounting in the Business Cloud Services segment which resulted in a net decrease in goodwill in the amount of $(0.7) million. In addition, the Company recorded adjustments to the initial working capital related to prior period acquisitions in the Digital Media segment, which resulted in a net increase in goodwill in the amount of $0.8 million. Such adjustments had an immaterial impact to the amortization expense within the Condensed Consolidated Statement of Income for the three months ended March 31, 2017.

Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired and represents intangible assets that do not qualify for separate recognition. Goodwill recognized associated with these acquisitions during the three months ended March 31, 2017 is $13.0 million, of which $13.0 million is expected to be deductible for income tax purposes.


-13-



4.Investments

Short-term investments consist of certificates of deposits, which are stated at fair market value. 

5.Fair Value Measurements

j2 Global complies with the provisions of ASC 820, which defines fair value, provides a framework for measuring fair value and expands the disclosures required for fair value measurements of financial and non-financial assets and liabilities. ASC 820 clarifies that the fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, ASC 820 establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:
 
l
Level 1 – Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
 
 
 
 
l
Level 2 – Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
 
 
 
 
l
Level 3 – Unobservable inputs which are supported by little or no market activity.

The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The Company’s money market funds are classified within Level 1. The Company values these Level 1 investments using quoted market prices. The Company’s certificates of deposit are classified within Level 2. The Company values these Level 2 investments based on quoted market prices or model-driven valuations using significant inputs derived from or corroborated by observable market data.
 
The fair value of the Convertible Notes (see Note 7 - Long-Term Debt) is determined using recent quoted market prices or dealer quotes for such securities, which are Level 1 inputs. The fair value of the Senior Notes (see Note 7 - Long-Term Debt) is determined using quoted market prices or dealer quotes for instruments with similar maturities and other terms and credit ratings, which are Level 2 inputs. The fair value of long-term debt at March 31, 2017 and December 31, 2016 was $803.8 million and $792.2 million, respectively.

In addition, the Convertible Notes contain terms that may require the Company to pay contingent interest on the Convertible Notes which is accounted for as a derivative with fair value adjustments being recorded to interest expense. This derivative is fair valued using a binomial lattice convertible bond pricing model using historical and implied market information, which are Level 2 inputs.

The Company classifies its contingent consideration liability in connection with the acquisitions of Ookla and Salesify within Level 3 because factors used to develop the estimated fair value are unobservable inputs, such as volatility and market risks, and are not supported by market activity. The fair value of the contingent consideration liability was determined using option based approaches. This methodology was utilized because the distribution of payments is not symmetric and amounts are only payable upon certain earnings before interest, tax, depreciation and amortization (“EBITDA”) thresholds being reached. Such valuation approach included the Monte-Carlo simulation for the contingency since the financial metric driving the payments is path dependent. Significant increases or decreases in either of the inputs noted above in isolation would result in a significantly lower or higher fair value of measurement.
 

-14-



The following tables present the fair values of the Company’s financial assets or liabilities that are measured at fair value on a recurring basis (in thousands):
March 31, 2017
Level 1
 
Level 2
 
Level 3
 
Fair Value
Assets:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
   Money market and other funds
$
19,836

 
$

 
$

 
$
19,836

Certificates of deposit

 
65

 

 
65

Total assets measured at fair value
$
19,836

 
$
65

 
$

 
$
19,901

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Contingent consideration
$

 
$

 
$
17,050

 
$
17,050

Contingent interest derivative

 
958

 

 
958

Total liabilities measured at fair value
$

 
$
958

 
$
17,050

 
$
18,008

 
 
 
 
 
 
 
 
December 31, 2016
Level 1
 
Level 2
 
Level 3
 
Fair Value
Assets:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
   Money market and other funds
$
7,737

 
$

 
$

 
$
7,737

Certificates of deposit

 
60

 

 
60

Total assets measured at fair value
$
7,737

 
$
60

 
$

 
$
7,797

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Contingent consideration
$

 
$

 
$
17,450

 
$
17,450

Contingent interest derivative

 
958

 

 
958

Total liabilities measured at fair value
$

 
$
958

 
$
17,450

 
$
18,408


At the end of each reporting period, management reviews the inputs to the fair value measurements of financial and non-financial assets and liabilities to determine when transfers between levels are deemed to have occurred. For the three months ended March 31, 2017, there were no transfers that have occurred between levels.

The following table presents a reconciliation of the Company’s Level 3 financial assets or liabilities that are measured at fair value on a recurring basis (in thousands):
 
Level 3
 
Affected line item in the Statement of Income
Balance as of January 1, 2017
$
17,450

 
 
Total fair value adjustments reported in earnings
(400
)
 
General and administrative
Balance as of March 31, 2017
$
17,050

 
 

In connection with the acquisition of Ookla, on December 1, 2014, contingent consideration of up to an aggregate of $40.0 million may be payable upon achieving certain future income thresholds and had a fair value of $17.0 million and $17.0 million at March 31, 2017 and December 31, 2016, respectively. Due to the Company’s achievement of certain earnings targets for the year ended December 31, 2016, $20.0 million ($17.0 million of contingent consideration and $3.0 million of compensation) is payable and is classified as a current liability on the consolidated balance sheet.

In connection with the acquisition of Salesify, on September 17, 2015, contingent consideration of up to an aggregate of $17.0 million may be payable upon achieving certain future income thresholds and had a fair value of $0.2 million and $0.6 million at March 31, 2017 and December 31, 2016, respectively, which was recorded as an other long-term liability on the consolidated balance sheet at March 31, 2017.

-15-




During the three months ended March 31, 2017, the Company recorded a decrease in the fair value of the contingent consideration of $0.4 million and reported such decrease in general and administrative expenses.

The following table presents a reconciliation of the Company’s derivative instruments (in thousands):
 
Amount
 
Affected line item in the Statement of Income
Derivative Liabilities:
 
 
 
Level 2:
 
 
 
Balance as of January 1, 2017
$
958

 
 
Total fair value adjustments reported in earnings

 
 
Balance as of March 31, 2017
$
958

 
 

Losses associated with other-than-temporary impairments are recorded as a component of other income (expenses). Gains and losses not associated with other-than-temporary impairments are recorded as a component of other comprehensive income. 

6.Goodwill and 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 acquisition 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. The fair values of these identified intangible assets are based upon expected future cash flows or income, which take into consideration certain assumptions such as customer turnover, trade names and patent lives. These determinations are primarily based upon the Company’s historical experience and expected benefit of each intangible asset. If it is determined that such assumptions are not accurate, then the resulting change will impact the fair value of the intangible asset. Identifiable intangible assets are amortized over the period of estimated economic benefit, which ranges from one to 20 years.

The changes in carrying amounts of goodwill for the three months ended March 31, 2017 are as follows (in thousands):
 
Business Cloud Services
 
Digital Media
 
Consolidated
Balance as of January 1, 2017
$
559,152

 
$
563,658

 
$
1,122,810

Goodwill acquired (Note 3)
13,005

 

 
13,005

Purchase accounting adjustments (1)
(689
)
 
759

 
70

Foreign exchange translation
2,705

 
110

 
2,815

Balance as of March 31, 2017
$
574,173

 
$
564,527

 
$
1,138,700


(1) Purchase accounting adjustments relate to adjustments to goodwill in connection with prior year business acquisitions (see Note 3 - Business Acquisitions).

Intangible Assets with Indefinite Lives:

Intangible assets are summarized as of March 31, 2017 and December 31, 2016 as follows (in thousands):
 
March 31,
2017
 
December 31,
2016
Trade name
$
27,379

 
$
27,379

Other
5,432

 
5,432

Total
$
32,811

 
$
32,811


-16-




Intangible Assets Subject to Amortization:

As of March 31, 2017, intangible assets subject to amortization relate primarily to the following (in thousands):
 
Weighted-Average
  Amortization
Period
 
Historical
Cost
 
Accumulated
Amortization
 
Net
Trade names
11.5 years
 
$
127,893

 
$
41,933

 
$
85,960

Patent and patent licenses
6.6 years
 
65,614

 
53,061

 
12,553

Customer relationships (1)
9.5 years
 
405,167

 
200,247

 
204,920

Other purchased intangibles
6.0 years
 
198,470

 
37,514

 
160,956

Total
 
 
$
797,144

 
$
332,755

 
$
464,389


(1) Historically, the Company has amortized its customer relationship assets in a pattern that best reflects the pace in which the asset’s benefits are consumed. This pattern results in a substantial majority of the amortization expense being recognized in the first 4 to 5 years, despite the overall life of the asset.

As of December 31, 2016, intangible assets subject to amortization relate primarily to the following (in thousands):
 
Weighted-Average
  Amortization
Period
 
Historical
Cost
 
Accumulated
Amortization
 
Net
Trade names
11.5 years
 
$
127,342

 
$
38,868

 
$
88,474

Patent and patent licenses
6.6 years
 
65,605

 
51,677

 
13,928

Customer relationships (1)
9.6 years
 
390,930

 
182,775

 
208,155

Other purchased intangibles
6.0 years
 
195,913

 
27,590

 
168,323

Total
 
 
$
779,790

 
$
300,910

 
$
478,880


(1) Historically, the Company has amortized its customer relationship assets in a pattern that best reflects the pace in which the asset’s benefits are consumed. This pattern results in a substantial majority of the amortization expense being recognized in the first 4 to 5 years, despite the overall life of the asset.

Amortization expense, included in general and administrative expense, approximated $30.9 million and $21.1 million for the three month periods ended March 31, 2017 and 2016, respectively. Amortization expense is estimated to approximate $137.3 million, $97.4 million, $68.3 million, $37.0 million and $29.8 million for fiscal years 2017 through 2021, respectively, and $125.4 million thereafter through the duration of the amortization period.

7.Long-Term Debt

8.0% Senior Notes

On July 26, 2012, the Company’s subsidiary issued in a private offering exempt from the registration requirements of the Securities Act of 1933, as amended, $250 million aggregate principal amount of 8.0% senior unsecured notes (the “Senior Notes”) due August 1, 2020. j2 Cloud Services, LLC (formerly j2 Cloud Services, Inc.) received proceeds of $245 million in cash, net of initial purchaser’s discounts and commissions of $5 million. The net proceeds were available for general corporate purposes, including acquisitions. Interest is payable semi-annually on February 1 and August 1 of each year. j2 Cloud Services, LLC has the option to call the Senior Notes in whole or in part after August 1, 2016, subject to certain premiums as defined in the indenture governing the Senior Notes plus accrued and unpaid interest. Upon a change in control, the holders may put the Senior Notes at 101% of the principal amount of the Senior Notes plus accrued and unpaid interest, if any, to the repurchase date. In connection with the issuance of the Convertible Notes (defined below), j2 Global, Inc. unconditionally guaranteed, on an unsecured basis, the obligations of j2 Cloud Services, LLC under the Senior Notes.

The indenture governing the Senior Notes contains certain restrictive and other covenants applicable to j2 Cloud Services, LLC and subsidiaries designated as restricted subsidiaries including, but not limited to, limitations on debt and disqualified or

-17-



preferred stock, restricted payments, liens, sale and leaseback transactions, dividends and other payment restrictions, asset sales and transactions with affiliates. Restricted payments are applicable only if j2 Cloud Services, LLC and subsidiaries designated as restricted subsidiaries has a pro forma leverage ratio of greater than 1.75 to 1.0. In addition, if such leverage ratio is in excess of 1.75 to 1.0, restricted payments are permitted up to $50 million. As of March 31, 2017, j2 Cloud Services was in compliance with all such covenants. Violation of these covenants could result in a default which could result in the acceleration of outstanding amounts if such default is not cured or waived within the time periods outlined in the indenture.

As of March 31, 2017 and December 31, 2016, the estimated fair value of the Senior Notes was approximately $259.4 million and $275.4 million, respectively, and was based on the quoted market prices of debt instruments with similar terms, credit rating and maturities of the Senior Notes which are Level 2 inputs (see Note 5 - Fair Value Measurements).

3.25% Convertible Notes

On June 10, 2014, j2 Global issued $402.5 million aggregate principal amount of 3.25% convertible senior notes due June 15, 2029 (the “Convertible Notes”). The Convertible Notes bear interest at a rate of 3.25% per annum, payable semiannually in arrears on June 15 and December 15 of each year. Beginning with the six-month interest period commencing on June 15, 2021, the Company must pay contingent interest on the Convertible Notes during any six-month interest period if the trading price per $1,000 principal amount of the Convertible Notes for each of the five trading days immediately preceding the first day of such interest period equals or exceeds $1,300. Any contingent interest payable on the Convertible Notes will be in addition to the regular interest payable on the Convertible Notes.

Holders may surrender their Convertible Notes for conversion at any time prior to the close of business on the business day immediately preceding the maturity date only if one or more of the following conditions is satisfied: (i) during any calendar quarter commencing after the calendar quarter ending on September 30, 2014 (and only during such calendar quarter), if the closing sale price of j2 Global common stock for at least 20 trading days in the period of 30 consecutive trading days ending on the last trading day of the calendar quarter immediately preceding the calendar quarter in which the conversion occurs is more than 130% of the applicable conversion price of the Convertible Notes on each such trading day; (ii) during the five consecutive business day period following any ten consecutive trading day period in which the trading price for the Convertible Notes for each such trading day was less than 98% of the product of (a) the closing sale price of j2 Global common stock on each such trading day and (b) the applicable conversion rate on each such trading day; (iii) if j2 Global calls any or all of the Convertible Notes for redemption, at any time prior to the close of business on the business day prior to the redemption date; (iv) upon the occurrence of specified corporate events; or (v) during either the period beginning on, and including, March 15, 2021 and ending on, but excluding, June 20, 2021 or the period beginning on, and including, March 15, 2029 and ending on, but excluding, the maturity date. j2 Global will settle conversions of Convertible Notes by paying or delivering, as the case may be, cash, shares of j2 Global common stock or a combination thereof at j2 Global’s election. The Company currently intends to satisfy its conversion obligation by paying and delivering a combination of cash and shares of the Company’s common stock, where cash will be used to settle each $1,000 of principal and the remainder, if any, will be settled via the Company’s common stock.

As of March 31, 2017, the conversion rate is 14.5242 shares of j2 Global common stock for each $1,000 principal amount of Convertible Notes, which represents a conversion price of approximately $68.85 per share of j2 Global common stock. The conversion rate is subject to adjustment for certain events as set forth in the indenture governing the Convertible Notes, but will not be adjusted for accrued interest. In addition, following certain corporate events that occur on or prior to June 20, 2021, j2 Global will increase the conversion rate for a holder that elects to convert its Convertible Notes in connection with such a corporate event.

j2 Global may not redeem the Convertible Notes prior to June 20, 2021. On or after June 20, 2021, j2 Global may redeem for cash all or part of the Convertible Notes at a redemption price equal to 100% of the principal amount of the Convertible Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for the Convertible Notes.

Holders have the right to require j2 Global to repurchase for cash all or part of their Convertible Notes on each of June 15, 2021 and June 15, 2024 at a repurchase price equal to 100% of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the relevant repurchase date. In addition, if a fundamental change, as defined in the indenture governing the Convertible Notes, occurs prior to the maturity date, holders may require j2 Global to repurchase for cash all or part of their Convertible Notes at a repurchase price equal to 100% of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.


-18-



The Convertible Notes are the Company’s general senior unsecured obligations and rank: (i) senior in right of payment to any of the Company’s future indebtedness that is expressly subordinated in right of payment to the Convertible Notes; (ii) equal in right of payment to the Company’s existing and future unsecured indebtedness that is not so subordinated, including in respect of j2 Global’s guarantee of the obligations of our subsidiary, j2 Cloud Services, LLC, with respect to its outstanding Senior Notes; (iii) effectively junior in right of payment to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and (iv) structurally junior to all existing and future indebtedness (including trade payables) incurred by the Company’s subsidiaries.

Accounting for the Convertible Notes

In accordance with ASC 470-20, Debt with Conversion and Other Options, convertible debt that can be settled for cash is required to be separated into the liability and equity component at issuance, with each component assigned a value. The value assigned to the liability component is the estimated fair value, as of the issuance date, of similar debt without the conversion feature. The difference between the cash proceeds and estimated fair value of the liability component, representing the value of the conversion premium assigned to the equity component, is recorded as a debt discount on the issuance date. This debt discount is amortized to interest expense using the effective interest method over the period from the issuance date through the first stated repurchase date on June 15, 2021.

j2 Global estimated the borrowing rates of similar debt without the conversion feature at origination to be 5.79% for the Convertible Notes and determined the debt discount to be $59.0 million. As a result, a conversion premium after tax of $37.7 million was recorded in additional paid-in capital. The aggregate debt discount is amortized as interest expense over the period from the issuance date through the first stated repurchase date on June 15, 2021, which management believes is the expected life of the Convertible Notes using an interest rate of 5.81%. As of March 31, 2017, the remaining period over which the unamortized debt discount will be amortized is 4.2 years.

The Convertible Notes are carried at face value less any unamortized debt discount and debt issuance costs. The fair value of the Convertible Notes at each balance sheet date is determined based on recent quoted market prices or dealer quotes for the Convertible Notes, which are Level 1 inputs (see Note 5 - Fair Value Measurements). If such information is not available, the fair value is determined using cash-flow models of the scheduled payments discounted at market interest rates for comparable debt without the conversion feature. As of March 31, 2017 and December 31, 2016, the estimated fair value of the Convertible Notes was approximately $544.4 million and $516.8 million, respectively.

Long-term debt as of March 31, 2017 and December 31, 2016 consists of the following (in thousands):
 
 
March 31, 2017
 
December 31, 2016
8% Senior Notes
$
247,521

 
$
247,359

3.25% Convertible Notes
364,141

 
362,144

Less: Deferred issuance costs
(7,389
)
 
(7,757
)
Total long-term debt
604,273

 
601,746

Less: current portion

 

Total long-term debt, less current portion
$
604,273

 
$
601,746


8.Commitments and Contingencies

Litigation

From time-to-time, j2 Global and its affiliates are involved in litigation and other legal disputes or regulatory inquiries that arise in the ordinary course of business. Any claims or regulatory actions against j2 Global and its affiliates, whether meritorious or not, could be time consuming and costly, and could divert significant operational resources. The outcomes of such matters are subject to inherent uncertainties, carrying the potential for unfavorable rulings that could include monetary damages and injunctive relief.
On February 17, 2011, Emmanuel Pantelakis (“Pantelakis”) filed suit against a j2 Global affiliate in the Ontario Superior Court of Justice (No. 11-50673), alleging that the j2 Global affiliate breached a contract relating to Pantelakis’s use of the Campaigner® service. The j2 Global affiliate filed a responsive pleading on March 23, 2011 and responses to undertakings on

-19-



July 16, 2012. On November 6, 2012, Pantelakis filed a second amended statement of claim, reframing his lawsuit as a negligence action. The j2 Global affiliate filed an amended statement of defense on April 8, 2013. Discovery is ongoing.

On January 17, 2013, the Commissioner of the Massachusetts Department of Revenue (“Commissioner”) issued a notice of assessment to a j2 Global affiliate for sales and use tax for the period of July 1, 2003 through December 31, 2011. On July 22, 2014, the Commissioner denied the j2 Global affiliate’s application for abatement. On September 18, 2014, the j2 Global affiliate petitioned the Massachusetts Appellate Tax Board for abatement of the tax asserted in the notice of assessment (No. C325426). A trial was held on December 16, 2015. The Massachusetts Appellate Tax Board has not yet rendered its decision.

On January 18, 2013, Paldo Sign and Display Co. filed an amended complaint adding two j2 Global affiliates and a former employee as additional defendants in an existing putative class action pending in the U.S. District Court for the Northern District of Illinois (the “Northern District of Illinois”) (No. 1:13-cv-01896). The amended complaint alleged violations of the Telephone Consumer Protection Act (“TCPA”), the Illinois Consumer Fraud and Deceptive Business Practices Act (“ICFA”), and common law conversion, arising from an indirect customer’s alleged use of a j2 Global affiliate’s systems to send unsolicited facsimile transmissions. The j2 Global affiliates filed a motion to dismiss the ICFA and conversion claims, which was granted. The Northern District of Illinois also dismissed the former employee for lack of personal jurisdiction. On August 23, 2013, a second plaintiff, Sabon, Inc., was added. On March 7, 2016, the j2 Global affiliates moved for summary judgment. The Northern District of Illinois granted summary judgment on March 10, 2017, dismissing all claims against the j2 Global affiliates. The time for appeal has not yet lapsed.

On August 28, 2013, Phyllis A. Huster (“Huster”) filed suit in the Northern District of Illinois (No. 1:13-cv-06143) against two j2 Global affiliates and three other parties for correction of inventorship for nine j2 Global patents. Huster seeks, among other things, a declaration that she was an inventor of the patents-in-suit, an order directing the U.S. Patent & Trademark Office to substitute or add her as an inventor, and payment of at least half of defendants’ earnings from licensing the patents-in-suit. On September 19, 2014, the Northern District of Illinois granted the defendants’ motion to dismiss for improper venue and transferred the case to the U.S. District Court for the Northern District of Georgia (the “Northern District of Georgia”) (No. 1:14-cv-03304). Huster filed an amended complaint on February 11, 2015, which she corrected on February 12, 2015. The corrected amended complaint added various common law claims. On November 12, 2015, the Northern District of Georgia dismissed all claims against the j2 Global affiliates. On January 28, 2016, all remaining claims were dismissed on summary judgment. Huster appealed to the U.S. Court of Appeals for the Federal Circuit (the “Federal Circuit”) (No. 16-1639). On March 29, 2017, the Federal Circuit modified the dismissal of the correction of inventorship claim to be without prejudice and affirmed the judgment as modified.

On October 16, 2013, a j2 Global affiliate entered an appearance as a plaintiff in a multi-district litigation pending in the Northern District of Illinois (No. 1:12-cv-06286). In this litigation, Unified Messaging Solutions, LLC (“UMS”), a company with rights to assert certain patents owned by the j2 Global affiliate, has asserted five j2 Global patents against a number of defendants. While claims against some defendants have been settled, other defendants have filed counterclaims for, among other things, non-infringement, unenforceability, and invalidity of the patents-in-suit. On December 20, 2013, the Northern District of Illinois issued a claim construction opinion and, on June 13, 2014, entered a final judgment of non-infringement for the remaining defendants based on that claim construction. UMS and the j2 Global affiliate filed a notice of appeal to the Federal Circuit on June 27, 2014 (No. 14-1611). The appeal is pending.

On June 23, 2014, Andre Free-Vychine (“Free-Vychine”) filed a putative class action against two j2 Global affiliates in the Superior Court for the State of California, County of Los Angeles (“Los Angeles Superior Court”) (No. BC549422). The complaint alleged two California statutory violations relating to late fees levied in certain eVoice® accounts. Free-Vychine sought, among other things, damages and injunctive relief on behalf of himself and a purported nationwide class of similarly situated persons. On August 26, 2014, Law Enforcement Officers, Inc. (“LEO”) and IV Pit Stop, Inc. (“IV Pit Stop”) filed a separate putative class action against the same j2 Global affiliates in Los Angeles Superior Court (No. BC555721). The complaint alleged three California statutory violations, negligence, breach of the implied covenant of good faith and fair dealing, and various other common law claims relating to late fees levied on any of the j2 Global affiliates’ customers, including those with eVoice® and Onebox® accounts. LEO and IV Pit Stop sought, among other things, damages and injunctive relief on behalf of themselves and a purported nationwide class of similarly situated persons. On September 29, 2014, the Los Angeles Superior Court related and consolidated both cases for discovery purposes. On March 13, 2015, a third amended complaint was filed in the case brought by LEO, which no longer included IV Pit Stop as a plaintiff but added Christopher Dancel (“Dancel”) as a plaintiff. On June 26, 2015, the case filed by Free-Vychine was dismissed pursuant to a settlement agreement. On October 7, 2015, the parties in the case brought by LEO and Dancel reached a tentative class-based settlement. On September 12, 2016, the Los Angeles Superior Court certified the class for settlement purposes only and provided its preliminary approved the settlement. The court will consider final approval of the settlement in early 2017.


-20-



On January 21, 2016, Davis Neurology, P.A. filed a putative class action against two j2 Global affiliates in the Circuit Court for the County of Pope, State of Arkansas (58-cv-2016-40), alleging violations of the TCPA. The case was ultimately removed to the U.S. District Court for the Eastern District of Arkansas (the “Eastern District of Arkansas”) (No. 4:16-cv-00682). On June 6, 2016, the j2 Global affiliates filed a motion for judgment on the pleadings. On March 20, 2017, the Eastern District of Arkansas dismissed all claims against the j2 Global affiliates. On April 17, 2017, Davis Neurology filed a noticed of appeal to the Federal Circuit (No. 17-1820).

j2 Global does not believe, based on current knowledge, that the foregoing legal proceedings or claims, after giving effect to existing reserves, are likely to have a material adverse effect on the Company’s consolidated financial position, results of operations, or cash flows. However, depending on the amount and timing, an unfavorable resolution of some or all of these matters could have a material effect on j2 Global’s consolidated financial position, results of operations, or cash flows in a particular period.
The Company has not accrued for any material loss contingencies relating to these legal proceedings because materially unfavorable outcomes are not considered probable by management.
Credit Agreement

On December 5, 2016, j2 Global, Inc. entered into a Credit Agreement (the “Credit Agreement”) with MUFG Union Bank, N.A., as administrative agent, and certain other lenders from time to time party thereto (collectively, the “Lenders”). Pursuant to the Credit Agreement, the Lenders have provided j2 with a credit facility of $225.0 million (the “Credit Facility”), $180.0 million of which was drawn at closing of the Everyday Health acquisition and used to finance a portion of the cash consideration in the acquisition. In the first quarter, the Company drew an additional $45.0 million making the total draw on the line of credit $225.0 million. The Company must repay $75.0 million six months subsequent to December 5, 2016.

At the Company’s option, amounts borrowed under the Credit Agreement will bear interest at either (i) the London interbank offered rate multiplied by the Statutory Reserve Rate (as defined in the Credit Agreement) (the “Eurocurrency Rate”) or (ii) a base rate (the “Base Rate”) equal to the highest of (x) the federal funds rate, plus 0.50%, (y) the Reference Rate (as defined in the Credit Agreement) then in effect and (z) the Eurocurrency Rate for an interest period of one month, plus 1.0%, in each case, plus an applicable margin. Until the date that is six months after the Closing Date, the applicable margin relating to any Eurocurrency Rate loan is 1.75% and the applicable margin relating to any Base Rate loan is 0.75%. From and after the date that is six months after the Closing Date, the applicable margin relating to any Eurocurrency Rate loan is 2.25% and the applicable margin relating to any Base Rate loan is 1.25%.

The final maturity of the Credit Facility will occur on December 4, 2017 (the “Maturity Date”). j2 Global is permitted to make voluntary prepayments of the Credit Facility at any time without payment of a premium or penalty. Amounts repaid cannot be re-borrowed. The Company is required to make mandatory prepayments of loans under the Credit Facility with (i) net cash proceeds from issuances of debt (other than certain permitted debt), (ii) net cash proceeds from certain non-ordinary course asset sales (subject to reinvestment rights and other exceptions) and (iii) casualty proceeds and condemnation awards (subject to reinvestment rights and other exceptions). The Company is also required to make prepayments of loans under the Credit Facility in the amount equal to the then-outstanding loans under the Credit Facility minus $150.0 million, if on the date that is six months after the Closing Date, the aggregate principal amount of the loans under the Credit Facility is greater than $150.0 million.

The obligations under the Credit Facility and certain cash management and hedging obligations are and will be fully and unconditionally guaranteed by certain of j2 Global’s existing and subsequently acquired or organized direct and indirect subsidiaries (including Ziff Davis, LLC and Everyday Health) pursuant to a guarantee agreement and secured by a lien on the equity interests of certain of j2 Global’s subsidiaries, subject to customary exceptions.

The Credit Agreement contains financial maintenance covenants, including maintenance of (i) a maximum total leverage ratio as of the last date of any fiscal quarter not to exceed 3.25:1.00; and (ii) a minimum Consolidated EBITDA (as defined in the Credit Agreement) of not less than $75.0 million for any fiscal quarter. The Credit Agreement also contains restrictive covenants that limit, among other things, the Company’s and its restricted subsidiaries’ ability to incur additional indebtedness, create, incur or assume liens, consolidate, merge, liquidate or dissolve, pay dividends or make other distributions or other restricted payments, make or hold any investments, enter into certain transactions with affiliates, sell assets other than on terms specified by the Credit Agreement, amend the terms of certain other indebtedness and organizational documents and change their lines of business and fiscal years, in each case, subject to customary exceptions. j2 Global was in compliance with all such covenants. The Credit Agreement also sets forth customary events of default, including, among other things, the failure to make timely payments under the Credit Facility, the failure to satisfy certain covenants, cross-default and cross-acceleration to other material debt for borrowed money, the occurrence of a change of control and specified events of bankruptcy and insolvency.

-21-




The Company has capitalized the total of $1.3 million in debt issuance costs, which are being amortized to interest expense over the life of the Credit Facility. As of March 31, 2017, these debt issuance costs, net of amortization, were $0.9 million. The related interest expense was $1.2 million for the three months ended March 31, 2017.

Non-Income Related Taxes
As a provider of cloud services for business, the Company does not provide telecommunications services. Thus, it believes that its business and its users (by using the Company’s services) are generally not subject to various telecommunication taxes. Moreover, the Company generally does not believe that its business and its users (by using the Company’s services) are subject to other indirect taxes, such as sales, business tax and gross receipt tax. However, several state and municipal taxing authorities have challenged these beliefs and have and may continue to audit and assess the Company’s business and operations with respect to telecommunications and other indirect taxes.
On February 24, 2016, President Obama signed into law H.R. 644, the “Trade Facilitation and Trade Enforcement Act of 2015”, which included a provision to permanently ban state and local authorities from imposing access or discriminatory taxes on the Internet. The new law allows “grandfathered” states and local authorities to continue their existing taxes on Internet access through June 2020.
The Company is currently under audit for indirect taxes in several states and municipalities including New York State, Massachusetts, Ohio, and the City of Los Angeles. The Company currently has no reserves established for these matters, as the Company has determined that the liability is not probable and estimable. However, it is reasonably possible that such a liability could be incurred, which would result in additional expense, which could materially impact our financial results.
9.Income Taxes

The Company’s tax provision for interim periods is determined using an estimate of the Company’s annual effective tax rate. Each quarter the Company updates its estimated annual effective tax rate and, if the estimate changes, makes a cumulative adjustment. j2 Global’s annual effective tax rate is normally lower than the 35% U.S. federal statutory rate and applicable apportioned state tax rates primarily due to anticipated earnings of the Company’s subsidiaries outside of the U.S. in jurisdictions where the Company’s effective tax rate is lower than in the U.S. The Company’s effective tax rate was 26.7% and 30.3% for the three months ended March 31, 2017 and 2016, respectively. j2 Global does not provide for U.S. income taxes on the undistributed earnings of the Company’s foreign operations because the Company intends to permanently reinvest such earnings in foreign jurisdictions and any determination of the amount of unrecognized deferred tax liability related to these earnings is not practicable. Income before income taxes included income from domestic operations of $0.1 million and $12.3 million for the three months ended March 31, 2017 and 2016, respectively, and income from foreign operations of $35.1 million and $30.7 million for the three months ended March 31, 2017 and 2016, respectively.

As of March 31, 2017 and December 31, 2016, the Company had $47.2 million and $46.5 million, respectively, in liabilities for uncertain income tax positions. Accrued interest and penalties related to unrecognized tax benefits are recognized in income tax expense on the Company’s consolidated statement of income.

Cash paid for income taxes net of refunds received was $6.5 million and $8.9 million for the three months ended March 31, 2017 and 2016, respectively.

Certain taxes are prepaid during the year and, where appropriate, included within prepaid expenses and other current assets on the consolidated balance sheet. The Company’s prepaid taxes were zero at March 31, 2017 and December 31, 2016, respectively.

Income Tax Audits:

The Company is under income tax audit by the U.S. Internal Revenue Service (“IRS”) for its 2012 through 2014 tax years. Additionally, the Company was notified on March 22, 2017 that the IRS will be auditing Everyday Health’s 2014 tax year.

j2 Global is also under income tax audit by the California Franchise Tax Board (the “FTB”) for its tax years 2012 and 2013. The FTB, however, has agreed to suspend its audit for 2012 and 2013 pending the outcome of the IRS audit for such tax years.


-22-



The Company is under income tax audit by the New York State Department of Taxation and Finance (“NYS”) for tax years 2011 through 2013. On March 16, 2017, the Company was notified that NYS would be auditing its 2014 tax year.

It is reasonably possible that these audits may conclude in the next 12 months and that the uncertain tax positions the Company has recorded in relation to these tax years may change compared to the liabilities recorded for these periods. If the recorded uncertain tax positions are inadequate to cover the associated tax liabilities, the Company would be required to record additional tax expense in the relevant period, which could be material. If the recorded uncertain tax positions are adequate to cover the associated tax liabilities, the Company would be required to record any excess as a reduction in tax expense in the relevant period, which could be material. However, it is not currently possible to estimate the amount, if any, of such change.

10.Stockholders’ Equity

Common Stock Repurchase Program

In February 2012, the Company’s Board of Directors approved a program authorizing the repurchase of up to five million shares of our common stock through February 20, 2013 (the “2012 Program”) which was subsequently extended through February 19, 2018. During the three month period ended March 31, 2017, we repurchased zero shares under this program. Cumulatively at March 31, 2017, 2.1 million shares were repurchased at an aggregate cost of $58.6 million (including an immaterial amount of commission fees).

Periodically, participants in j2 Global’s stock plans surrender to the Company shares of j2 Global stock to pay the exercise price or to satisfy tax withholding obligations arising upon the exercise of stock options or the vesting of restricted stock. During the three month period ended March 31, 2017, the Company purchased 3,692 shares from plan participants for this purpose.

Dividends
 
The following is a summary of each dividend declared during fiscal year 2017 and 2016:
Declaration Date
 
Dividend per Common Share
 
Record Date
 
Payment Date
February 10, 2016
 
$
0.3250

 
February 23, 2016
 
March 10, 2016
May 5, 2016
 
$
0.3350

 
May 18, 2016
 
June 2, 2016
August 2, 2016
 
$
0.3450

 
August 17, 2016
 
September 1, 2016
November 1, 2016
 
$
0.3550

 
November 18, 2016
 
December 5, 2016
February 9, 2017
 
$
0.3650

 
February 22, 2016
 
March 9, 2017

Future dividends are subject to Board approval.

11.Stock Options and Employee Stock Purchase Plan

j2 Global’s share-based compensation plans include the Second Amended and Restated 1997 Stock Option Plan (the “1997 Plan”), 2007 Stock Plan (the “2007 Plan”), 2015 Stock Option Plan (the “2015 Plan”) and 2001 Employee Stock Purchase Plan (the “Purchase Plan”). Each plan is described below.

The 1997 Plan terminated in 2007. A total of 12,000,000 shares of j2 Global 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. As of March 31, 2017, 8,998 shares underlying options and zero shares of restricted stock were outstanding under the 1997 Plan, all of which continue to be governed by the 1997 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. 4,500,000 shares of j2 Global common stock are authorized to be used for 2007 Plan purposes. 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. As of March 31, 2017, 319,011 shares underlying options and 15,720 shares of restricted stock were outstanding under the 2007 Plan.

-23-




The 2015 Plan provides for the granting of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance share units and other share-based awards and is intended as a successor plan to the 2007 Stock Plan since no further grants will be made under the 2007 Stock Plan. 4,200,000 shares of j2 Global common stock are authorized to be used for 2015 Plan purposes. Options under the 2015 Plan may be granted at exercise prices determined by the Board of Directors, provided that the exercise prices shall not be less than the higher of the par value or 100% of the fair market value of j2 Global’s common stock subject to the option on the date the option is granted. As of March 31, 2017, 62,000 shares underlying options and 33,500 shares of restricted stock units were outstanding under the 2015 Plan.

All stock option grants are approved by “outside directors” within the meaning of Internal Revenue Code Section 162(m).
 
Stock Options
 
The following table represents stock option activity for the three months ended March 31, 2017:
 
Number of Shares
 
Weighted-
Average
Exercise
Price
 
Weighted-Average
Remaining
Contractual
Term (in years)
 
Aggregate
Intrinsic
Value
Outstanding at January 1, 2017
413,858

 
$
31.09

 
 
 
 
Granted

 

 
 
 
 
Exercised
(23,847
)
 
29.18

 
 
 
 
Canceled

 

 
 
 
 
Outstanding at March 31, 2017
390,011

 
$
31.20

 
3.8
 
$
20,556,234

Exercisable at March 31, 2017
334,411

 
$
25.93

 
3.1
 
$
19,388,798

Vested and expected to vest at March 31, 2017
378,897

 
$
30.16

 
3.6
 
$
20,364,506


The total intrinsic values of options exercised during the three months ended March 31, 2017 and 2016 were $1.3 million and $1.8 million, respectively.
 
The Company recognized $0.1 million and $0.1 million of compensation expense related to stock options for the three months ended March 31, 2017 and 2016, respectively. As of March 31, 2017 and December 31, 2016, unrecognized stock compensation related to non-vested stock options granted under each of the share-based compensation plans approximated $0.6 million and $0.7 million, respectively. Unrecognized stock compensation expense related to non-vested stock options granted under these plans is expected to be recognized ratably over a weighted-average period of 2.8 years (i.e., the remaining 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 the Company’s common stock. The Company estimates the expected term based upon the historical exercise behavior of our employees. 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. The Company uses an annualized dividend yield based upon the per share dividends declared by its Board of Directors. Estimated forfeiture rates were 15.31% and 14.35% as of March 31, 2017 and 2016, respectively.

 Restricted Stock and Restricted Stock Units
 
j2 Global has awarded restricted stock and restricted stock units to its Board of Directors and senior staff pursuant to certain share-based compensation plans. Compensation expense resulting from restricted stock and restricted unit grants is measured at fair value on the date of grant and is recognized as share-based compensation expense over the applicable vesting period. Beginning in fiscal year 2012, vesting periods are approximately one year for awards to members of the Company’s Board of Directors and five years for senior staff (excluding market-based awards discussed below).


-24-



Restricted Stock - Awards with Market Conditions

In May 2016, certain key employees were granted market-based restricted stock awards. The market-based awards have vesting conditions that are based on specified stock price targets of the Company’s common stock. Market conditions were factored into the grant date fair value using a Monte Carlo valuation model, which utilized multiple input variables to determine the probability of the Company achieving the specified stock price targets with a 20 day lookback (trading days). Stock-based compensation expense related to an award with a market condition will be recognized over the requisite service period using the graded-vesting method regardless of whether the market condition is satisfied, provided that the requisite service period has been completed. During the three months ended March 31, 2017 and 2016, the Company awarded zero market-based restricted stock awards, respectively.

Restricted stock award activity for the three months ended March 31, 2017 is set forth below:
 
Shares
 
Weighted-Average
Grant-Date
Fair Value
Nonvested at January 1, 2017
705,015

 
$
41.40

Granted
15,270

 
82.69

Vested
(13,031
)
 
41.02

Canceled

 

Nonvested at March 31, 2017
707,254

 
$
42.30

  
Restricted stock unit award activity for the three months ended March 31, 2017 is set forth below:
 
Number of
Shares
 
Weighted-Average
Remaining
Contractual
Term (in years)
 
Aggregate
Intrinsic
Value
Outstanding at January 1, 2017
51,950

 
 
 
 
Granted
7,100

 
 
 
 
Vested
(7,150
)
 
 
 
 
Canceled
(2,680
)
 
 
 
 
Outstanding at March 31, 2017
49,220

 
2.0
 
$
4,130,050

Vested and expected to vest at March 31, 2017
35,901

 
1.8
 
$
3,012,481


The Company recognized $3.5 million and $2.7 million of compensation expense related to restricted stock and restricted stock units for the three months ended March 31, 2017 and 2016, respectively. As of March 31, 2017 and December 31, 2016, the Company had unrecognized share-based compensation cost of approximately $35.5 million and $37.9 million, respectively, associated with these awards. This cost is expected to be recognized over a weighted-average period of 3.1 years for awards and 3.6 years for units.

Employee Stock Purchase Plan
 
The Purchase Plan provides for the issuance of a maximum of two million shares of the Company’s 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 common stock at certain plan-defined dates. The price of the j2 Global common stock purchased under the Purchase Plan for the offering periods is equal to 95% of the fair market value of the j2 Global common stock at the end of the offering period. For the three months ended March 31, 2017 and 2016, 837 and 842 shares were purchased under the plan, respectively. Cash received upon the issuance of j2 Global common stock under the Purchase Plan was $67,000 and $58,000 for the three months ended March 31, 2017 and 2016, respectively. As of March 31, 2017, 1,625,689 shares were available under the Purchase Plan for future issuance.


-25-



12.Earnings Per Share
 
The components of basic and diluted earnings per share are as follows (in thousands, except share and per share data):
 
Three Months Ended March 31,
 
2017
 
2016
Numerator for basic and diluted net income per common share:
 
 
 
Net income attributable to j2 Global, Inc. common shareholders
$
25,820

 
$
29,943

Net income available to participating securities (a)
(309
)
 
(412
)
Net income available to j2 Global, Inc. common shareholders
$
25,511

 
$
29,531

Denominator:
 
 
 
Weighted-average outstanding shares of common stock
47,463,231

 
47,966,718

Dilutive effect of:
 
 
 
Equity incentive plans
242,920

 
232,674

Convertible debt (b)
1,059,880

 
38,706

Common stock and common stock equivalents
48,766,031

 
48,238,098

Net income per share:
 
 
 
Basic
$
0.54

 
$
0.62

Diluted
$
0.52

 
$
0.61


(a) 
Represents unvested share-based payment awards that contain certain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid).

(b) 
Represents the incremental shares issuable upon conversion of the Convertible Notes due June 15, 2029 by applying the treasury stock method when the average stock price exceeds the conversion price of the Convertible Notes (see Note 7 - Long Term Debt).

For the three months ended March 31, 2017 and 2016, there were zero 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 stock.


-26-



13.Segment Information

The Company’s business segments are based on the organization structure used by management for making operating and investment decisions and for assessing performance. j2 Global’s reportable business segments are: (i) Business Cloud Services and (ii) Digital Media.

Information on reportable segments and reconciliation to consolidated income from operations is as follows (in thousands):
 
Three Months Ended March 31,
 
2017
 
2016
Revenues by segment:
 
 
 
Business Cloud Services
$
141,544

 
$
138,139

Digital Media
113,131

 
62,409

Elimination of inter-segment revenues
(6
)
 
(46
)
Total revenues
254,669

 
200,502

 
 
 
 
Direct costs by segment(1):
 
 
 
Business Cloud Services
85,244

 
87,862

Digital Media
116,633

 
54,676

Direct costs by segment(1):
201,877

 
142,538

 
 
 
 
Business Cloud Services operating income(2)
56,300

 
50,277

Digital Media operating income
(3,502
)
 
7,733

Segment operating income
52,798

 
58,010

 
 
 
 
Global operating costs(2)
4,823

 
4,672

Income from operations
$
47,975

 
$
53,338

 
 
 
 
(1) Direct costs for each segment include cost of revenues and other operating expenses that are directly attributable to the segment, such as employee compensation expense, local sales and marketing expenses, engineering and network operations expense, depreciation and amortization and other administrative expenses.
(2) Global operating costs include general and administrative and other corporate expenses that are managed on a global basis and that are not directly attributable to any particular segment.
 
March 31, 2017
 
December 31, 2016
Assets:
 
 
 
Business Cloud Services
$
971,639

 
$
911,327

Digital Media
1,114,708

 
1,124,535

Total assets from reportable segments
2,086,347

 
2,035,862

Corporate
16,205

 
26,466

Total assets
$
2,102,552

 
$
2,062,328

 
 
 

 
Three Months Ended March 31,
 
2017
 
2016
Capital expenditures:
 
 
 
Business Cloud Services
$
1,456

 
$
1,121

Digital Media
8,204

 
3,200

Total from reportable segments
9,660

 
4,321

Corporate

 

Total capital expenditures
$
9,660

 
$
4,321


-27-



 
Three Months Ended March 31,
 
2017
 
2016
Depreciation and amortization:
 
 
 
Business Cloud Services
$
16,764

 
$
17,502

Digital Media
22,558

 
9,672

Total from reportable segments
39,322

 
27,174

Corporate

 

Total depreciation and amortization
$
39,322

 
$
27,174


The Company’s Business Cloud Services segment consists of several services which have similar economic characteristics, including the nature of the services and their production processes, the type of customers, as well as the methods used to distribute these services.

j2 Global groups its Business Cloud services into three main categories based on the similarities of these services: Cloud Connect, Cloud Services and Intellectual Property. Cloud Connect consists of our Fax and Voice services. Cloud Services consist of Backup, Email Security, Email Marketing and Web Hosting.
 
 
Three Months Ended March 31, 2017
 
Revenue
 
Depreciation and Amortization
 
Operating Income
 
 
 
 
 
 
Cloud Connect
(Fax/Voice)
$
93,632

 
$
5,883

 
$
44,438

Cloud Services
46,714

 
9,534

 
12,416

Intellectual Property
1,198

 
1,347

 
(554
)
   Total
$
141,544

 
$
16,764

 
$
56,300


 
Three Months Ended March 31, 2016
 
Revenue
 
Depreciation and Amortization
 
Operating Income
 
 
 
 
 
 
Cloud Connect
(Fax/Voice)
$
90,244

 
$
5,570

 
$
40,520

Cloud Services
46,719

 
10,318

 
10,974

Intellectual Property
1,176

 
1,614

 
(1,217
)
   Total
$
138,139

 
$
17,502

 
$
50,277


-28-




j2 Global maintains operations in the U.S., Canada, Ireland, Japan and other countries. Geographic information about the U.S. and all other countries for the reporting periods is presented below. Such information attributes revenues based on jurisdictions where revenues are reported (in thousands).
 
 
Three Months Ended March 31,
 
2017
 
2016
Revenues:
 
 
 
United States
$
185,762

 
$
137,639

Canada
19,401

 
18,366

Ireland
17,901

 
12,549

All other countries
31,605

 
31,948

 
$
254,669

 
$
200,502


 
March 31,
2017
 
December 31,
2016
Long-lived assets:
 
 
 
United States
$
441,631

 
$
453,053

All other countries
92,472

 
93,430

Total
$
534,103

 
$
546,483


14.Unrestricted Subsidiaries (unaudited)

Reorganization

On August 12, 2016, all of the equity interests in Ziff Davis, LLC, a Delaware limited liability company, and all of the equity interests in Advanced Messaging Technologies, Inc., a Delaware corporation, held by j2 Cloud Services, LLC, a Delaware limited liability company, were distributed to j2 Global, the parent company of j2 Cloud Services, LLC.

Until the reorganization noted above, the Company’s Board of Directors had designated the following entities as “Unrestricted Subsidiaries” under the indenture governing j2 Cloud Services’ Senior Notes:

Ziff Davis, LLC and subsidiaries
Advanced Messaging Technologies, Inc. and subsidiaries

The financial position and results of operations of these Unrestricted Subsidiaries are included in the Company’s condensed consolidated financial statements.

-29-




As required by the indenture governing j2 Cloud Services’ Senior Notes, information sufficient to ascertain the financial condition and results of operations excluding the Unrestricted Subsidiaries must be presented for any period in which j2 Cloud Services had Unrestricted Subsidiaries. Accordingly, the Company is presenting the following tables.

The financial position of the Unrestricted Subsidiaries as of March 31, 2017 and December 31, 2016 is as follows (in thousands):
 
March 31, 2017
 
December 31, 2016
ASSETS
 
 
 
Cash and cash equivalents
$
46,633

 
$
17,931

Accounts receivable
133,488

 
158,730

Prepaid expenses and other current assets
14,464

 
13,494

Total current assets
194,585

 
190,155

Property and equipment, net
42,575

 
38,752

Trade names, net
67,005

 
69,093

Patent and patent licenses, net
11,964

 
13,303

Customer relationships, net
89,415

 
95,855

Goodwill
564,527

 
563,658

Other purchased intangibles, net
153,723

 
163,023

Deferred income taxes, non-current
47

 
482

Other assets
5,408

 
5,541

Total assets
$
1,129,249

 
$
1,139,862

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Accounts payable and accrued expenses
$
128,877

 
$
163,130

Income taxes payable
5,099

 
4,353

Deferred revenue, current
17,476

 
13,773

Total current liabilities
151,452

 
181,256

Long-term debt
642,662

 
602,662

Deferred income taxes, non-current
11,075

 
11,816

Other long-term liabilities
1,065

 
1,454

Total liabilities
806,254

 
797,188

Additional paid-in capital
318,127

 
318,160

Retained earnings
7,680

 
27,004

Accumulated other comprehensive loss
(2,812
)
 
(2,490
)
Total stockholders’ equity
322,995

 
342,674

Total liabilities and stockholders’ equity
$
1,129,249

 
$
1,139,862


-30-



The results of operations of the Unrestricted Subsidiaries for the three months ended March 31, 2017 and 2016 is as follows (in thousands):
 
Three Months Ended March 31,
 
2017
 
2016
Revenues
$
113,131

 
$
62,457

 
 
 
 
Cost of revenues
11,712

 
5,311

Gross profit
101,419

 
57,146

Operating expenses:
 
 
 
Sales and marketing
55,327

 
26,461

Research, development and engineering
5,499

 
2,482

General and administrative
45,847

 
22,819

Total operating expenses
106,673

 
51,762

Income (loss) from operations
(5,254
)
 
5,384

Interest expense, net
13,611

 
4,127

Other (income) expense, net
(624
)
 
172

Income (loss) before income taxes
(18,241
)
 
1,085

Income tax expense
1,083

 
580

Net income (loss)
$
(19,324
)
 
$
505


15.Accumulated Other Comprehensive Income

The following table summarizes the changes in accumulated balances of other comprehensive income, net of tax, for the three months ended March 31, 2017 (in thousands):
 
Unrealized Gains (Losses) on Investments
 
Foreign Currency Translation
 
Total
Beginning balance
$

 
$
(54,649
)
 
$
(54,649
)
     Other comprehensive income before reclassifications

 
3,582

 
3,582

     Amounts reclassified from accumulated other comprehensive income

 

 

Net current period other comprehensive income

 
3,582

 
3,582

Ending balance
$

 
$
(51,067
)
 
$
(51,067
)

16.Condensed Consolidating Financial Statements

In connection with the June 2014 Convertible Note issuance, j2 Global, Inc. entered into a supplemental indenture related to the Senior Notes, pursuant to which it fully and unconditionally guaranteed, on an unsecured basis, the full and punctual payment of the Senior Notes issued by its wholly owned subsidiary, j2 Cloud Services, LLC. j2 Cloud Services, LLC is subject to restrictions on dividends in its existing indenture with respect to the Senior Notes. While substantially all of the Company’s assets (other than the net cash proceeds from the issuance of the Convertible Notes) are owned directly or indirectly by j2 Cloud Services, LLC, those contractual provisions did not, as of June 30, 2014, meaningfully restrict j2 Cloud Services, LLC’s ability to pay dividends to j2 Global, Inc.

The following condensed consolidating financial statements present, in separate columns, financial information for (i) j2 Global, Inc. (the “Parent”) on a parent-only basis, (ii) j2 Cloud Services, LLC, (iii) the non-guarantor subsidiaries on a combined basis, (iv) the eliminations and reclassifications necessary to arrive at the information for the Company on a consolidated basis, and (v) the Company on a consolidated basis. The condensed consolidating financial statements are presented in accordance with the equity method. Under this method, the investments in subsidiaries are recorded at cost and adjusted for the Company’s share

-31-



of subsidiaries’ cumulative results of operations, capital contributions, distributions and other equity changes. Intercompany charges (income) between the Parent and subsidiaries are recognized in the condensed consolidating financial statements during the period incurred and the settlement of intercompany balances is reflected in the condensed consolidating statement of cash flows based on the nature of the underlying transactions. Consolidating adjustments include consolidating and eliminating entries for investments in subsidiaries, intercompany activity and balances.





-32-



j2 GLOBAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
March 31, 2017
(Unaudited, in thousands except share and per share data)

BALANCE SHEET
j2 Global, Inc.
 
j2 Cloud Services
 
Non-guarantor Subsidiaries
 
Consolidating Adjustments
 
j2 Global Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
15,150

 
$
34,395

 
$
137,864

 
$

 
$
187,409

Short-term investments

 

 
65

 

 
65

Accounts receivable, net
1

 
10,143

 
161,919

 
(1
)
 
172,062

Prepaid expenses and other current assets
38,296

 
1,766

 
22,295

 
(38,180
)
 
24,177

Intercompany receivable
679,103

 
299,743

 
149,971

 
(1,128,817
)
 

Total current assets
732,550

 
346,047

 
472,114

 
(1,166,998
)
 
383,713

Property and equipment, net

 
6,088

 
63,626

 

 
69,714

Trade names, net

 
10,439

 
102,900

 

 
113,339

Patent and patent licenses, net

 
565

 
11,988

 

 
12,553

Customer relationships, net

 
10,810

 
194,110

 

 
204,920

Goodwill

 
70,480

 
1,068,220

 

 
1,138,700

Other purchased intangibles, net

 
6,944

 
159,444

 

 
166,388

Investment in subsidiaries
1,121,423

 
751,821

 
(1,073
)
 
(1,872,171
)
 

Deferred income taxes, non-current

 
32,667

 
1,752

 
(27,507
)
 
6,912

Other assets

 
422

 
5,891

 

 
6,313

Total assets
$
1,853,973

 
$
1,236,283

 
$
2,078,972

 
$
(3,066,676
)
 
$
2,102,552

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
Accounts payable and accrued expenses
$
6,697

 
$
44,117

 
$
133,294

 
$
(38,181
)
 
$
145,927

Income taxes payable

 
94,709

 

 
(73,110
)
 
21,599

Deferred revenue, current

 
20,324

 
65,107

 

 
85,431

Line of credit
224,123

 

 

 

 
224,123

Other current liabilities

 

 
34

 

 
34

Intercompany payable
303,492

 

 
752,214

 
(1,055,706
)
 

Total current liabilities
534,312

 
159,150

 
950,649

 
(1,166,997
)
 
477,114

Long-term debt
357,462

 
246,811

 

 

 
604,273


-33-



Deferred revenue, non-current

 
822

 

 

 
822

Liability for uncertain tax positions

 
41,833

 
5,345

 

 
47,178

Deferred income taxes, non-current
31,738

 

 
35,521

 
(27,507
)
 
39,752

Other long-term liabilities
1,107

 
559

 
1,321

 

 
2,987

Total liabilities
924,619

 
449,175

 
992,836

 
(1,194,504
)
 
1,172,126

Commitments and contingencies

 

 

 

 

Preferred stock - Series A, $0.01 par value

 

 

 

 

Preferred stock - Series B, $0.01 par value

 

 

 

 

Common stock, $0.01 par value
475

 

 

 

 
475

Additional paid-in capital
468,359

 
89,066

 
424,399

 
(669,356
)
 
312,468

Retained earnings
460,520

 
697,822

 
713,024

 
(1,202,816
)
 
668,550

Accumulated other comprehensive income (loss)

 
220

 
(51,287
)
 

 
(51,067
)
Total stockholders’ equity
929,354

 
787,108

 
1,086,136

 
(1,872,172
)
 
930,426

Total liabilities and stockholders’ equity
$
1,853,973

 
$
1,236,283

 
$
2,078,972

 
$
(3,066,676
)
 
$
2,102,552


-34-



j2 GLOBAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2016
(Unaudited, in thousands except share and per share data)

BALANCE SHEET
j2 Global, Inc.
 
j2 Cloud Services
 
Non-guarantor Subsidiaries
 
Consolidating Adjustments
 
j2 Global Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
23,935

 
$
22,949

 
$
77,066

 
$

 
$
123,950

Short-term investments

 

 
60

 

 
60

Accounts receivable, net

 
11,464

 
188,498

 
(91
)
 
199,871

Prepaid expenses and other current assets
25,922

 
2,266

 
21,246

 
(25,316
)
 
24,118

Intercompany receivable
635,740

 
281,078

 
166,210

 
(1,083,028
)
 

Total current assets
685,597

 
317,757

 
453,080

 
(1,108,435
)
 
347,999

Property and equipment, net

 
6,318

 
61,776

 

 
68,094

Trade names, net

 
10,097

 
105,756

 

 
115,853

Patent and patent licenses, net

 
601

 
13,327

 

 
13,928

Customer relationships, net

 
2,519

 
205,636

 

 
208,155

Goodwill

 
58,310

 
1,064,500

 

 
1,122,810

Other purchased intangibles, net

 
4,804

 
168,951

 

 
173,755

Investment in subsidiaries
1,091,412

 
730,153

 
(1,071
)
 
(1,820,494
)
 

Deferred income taxes, non-current
1,346

 
26,667

 
2,171

 
(24,895
)
 
5,289

Other assets

 
443

 
6,002

 

 
6,445

Total assets
$
1,778,355

 
$
1,157,669

 
$
2,080,128

 
$
(2,953,824
)
 
$
2,062,328

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
Accounts payable and accrued expenses
$
4,545

 
$
28,179

 
$
170,754

 
$
(25,407
)
 
$
178,071

Income taxes payable

 
82,795

 

 
(66,042
)
 
16,753

Deferred revenue, current

 
19,277

 
61,107

 

 
80,384

Line of credit
178,817

 

 

 

 
178,817

Other current liabilities

 

 
64

 

 
64

Intercompany payable
296,658

 
11

 
720,317

 
(1,016,986
)
 

Total current liabilities
480,020

 
130,262

 
952,242

 
(1,108,435
)
 
454,089

Long-term debt
355,143

 
246,604

 
(1
)
 

 
601,746

Deferred revenue, non-current

 
1,588

 

 

 
1,588

Liability for uncertain tax positions

 
41,259

 
5,278

 

 
46,537


-35-



Deferred income taxes, non-current
28,687

 

 
36,565

 
(24,895
)
 
40,357

Other long-term liabilities
1,040

 
505

 
1,930

 

 
3,475

Total liabilities
864,890

 
420,218

 
996,014

 
(1,133,330
)
 
1,147,792

Commitments and contingencies

 

 

 

 

Preferred stock - Series A, $0.01 par value

 

 

 

 

Preferred stock - Series B, $0.01 par value