SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended April 30, 1998 Commission File #0-15284
J2 COMMUNICATIONS
(Exact name of registrant as specified in its charter)
California 95-4053296
(State or other jurisdiction (IRS Employer Identification
incorporation or organization) Number)
10850 Wilshire Blvd., Ste. 1000, Los Angeles, CA 90024
(Address of principal executive office)
Registrant's telephone number, including area code: 310-474-5252
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months and
(2) has been subject to such filing requirements for the past 90
days. Yes X No
Number of shares outstanding of each of the issuers classes of
common stock as of the latest practicable date: 3,599,990
common shares, no par value were outstanding as of June 8, 1998.
J2 COMMUNICATIONS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<S> <C> <C>
04/30/98 7/31/97
Unaudited
Assets
Cash and cash equivalents $ 920,000 $ 641,000
Short term investments 677,000 861,000
Accounts receivable, net 9,000 43,000
Inventories, net 13,000 12,000
Intangible assets, less accumulated
amortization of $2,249,000 and
$2,069,000 as of 04/30/98 and
7/31/97, respectively 3,716,000 3,896,000
Other assets 35,000 20,000
Total assets $5,370,000 $5,473,000
Liabilities and Shareholders' Equity
Liabilities:
Accounts payable $ 149,000 $ 130,000
Accrued expenses 614,000 629,000
Accrued royalties 390,000 499,000
Accrued income taxes 38,000 38,000
Deferred revenues 81,000 208,000
Common stock payable 203,000 203,000
Minority interest 117,000 84,000
Total liabilities 1,592,000 1,791,000
Shareholders' Equity:
Preferred stock, no par value;
authorized 2,000,000 shares;
none issued and outstanding - -
Common stock, no par value;
authorized 8,000,000 shares; issued
and outstanding, 3,600,000
as of 04/30/98 and 7/31/97 8,659,000 8,654,000
Less: notes receivable on common stock (126,000) (121,000)
Accumulated deficit (4,755,000) (4,851,000)
Total shareholders' equity 3,778,000 3,682,000
Total liabilities and shareholders' equity $5,370,000 $5,473,000
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
J2 COMMUNICATIONS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS AND NINE MONTHS ENDED APRIL 30, 1998 AND 1997
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<S> <C> <C> <C> <C>
3 mos. ended 3 mos. ended 9 mos. ended 9 mos. ended
4/30/98 4/30/97 4/30/98 4/30/97
Revenues:
Movies, television and
theatrical $ 156,000 $ 234,000 $ 607,000 $ 975,000
Video sales, net of
returns 1,000 23,000 (3,000) 98,000
Royalty income 81,000 22,000 133,000 50,000
Magazine - 55,000 - 56,000
Other 19,000 18,000 133,000 37,000
Total revenues 257,000 352,000 870,000 1,216,000
Costs and expenses:
Cost of videocassettes sold 1,000 9,000 5,000 46,000
Royalty expense 12,000 8,000 29,000 34,000
Cost of movies, television
and theatrical - - - 53,000
Cost of magazine - 39,000 - 39,000
Selling, general and
administrative 183,000 220,000 588,000 595,000
Amortization of intangible
assets 60,000 60,000 180,000 180,000
Total expenses 256,000 336,000 802,000 947,000
Income from operations 1,000 16,000 68,000 269,000
Other income:
Interest income 25,000 15,000 67,000 38,000
Minority Interest in income
of consolidated subsidiary (1,000) - (33,000) (82,000)
Income before income taxes 25,000 31,000 102,000 225,000
Provision for income taxes - - 6,000 7,000
Net income $ 25,000 $ 31,000 $ 96,000 $218,000
Income per common share:
Basic and diluted income
per share $0.01 $0.01 $0.03 $0.06
Weighted average number
of sharesof common
stock outstanding 3,600,000 3,600,000 3,600,000 3,600,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
J2 COMMUNICATIONS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED APRIL 30, 1998 AND 1997
<TABLE>
<S> <C> <C>
1998 1997
Cash flows from operating activities:
Net income $ 96,000 $218,000
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Amortization of intangible assets 180,000 180,000
Minority interest in income of
consolidated subsidiary 33,000 72,000
Changes in assets and liabilities:
Accounts receivable, net 34,000 (18,000)
Inventory (1,000) 2,000
Accounts payable 19,000 101,000
Accrued expenses (15,000) (62,000)
Accrued royalties (109,000) 3,000
Deferred revenues (127,000) 4,000
Other assets (15,000) 22,000
Net cash provided by
operating activities 95,000 522,000
Cash flows from investing activities:
Purchase of short-term investments (676,000) (1,053,000)
Sale of short-term investments 860,000 822,000
Net cash provided by (used in) investing
activities 184,000 (231,000)
Net increase in cash
and cash equivalents 279,000 291,000
Cash and cash equivalents,
beginning of period 641,000 120,000
Cash and cash equivalents,
end of period $ 920,000 $ 411,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
J2 COMMUNICATIONS
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1998
Item 1
Basis of Financial Statement Presentation
The consolidated financial statements of J2 Communications and
subsidiaries (collectively the "Company") have been prepared in
accordance with generally accepted accounting principles for
interim financial information. Interim financial statements do
not include all of the information and footnotes required by
generally accepted accounting principles for complete year-end
financial statements. The accompanying financial statements
should be read in conjunction with the more detailed financial
statements and related footnotes for the fiscal year ended July
31, 1997, as included in the Company's 1997 Annual Report on Form
10-K (the "Annual Report") filed with the Securities and Exchange
Commission. A signed independent accountants' report relating to
the July 31, 1997 balance sheet is included in the Annual Report.
Significant accounting policies used by the Company are
summarized in Note 1 to the financial statements included in the
Annual Report.
In the opinion of management, all adjustments (which include only
recurring normal adjustments) required for a fair presentation of
the financial position of the Company as of April 30, 1998, and
the results of its operations and cash flows for the periods ended
April 30, 1998 and 1997 respectively, have been made. Operating
results for the three-month and nine-month periods ended April 30,
1998, are not necessarily indicative of the operating results for
the entire fiscal year.
Earnings Per Share
The Company has adopted SFAS No. 128, "Earnings Per Share", for
the period commencing in its quarter ending January 31, 1998.
Under SFAS No. 128, primary EPS is replaced by "Basic" EPS, which
excludes dilution and is computed by dividing income available to
common shareholders by the weighted average number of common
shares outstanding for the period. "Diluted" EPS, which is
computed similarly to fully diluted EPS, reflects the potential
dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock.
When dilutive, stock options are included as share equivalents in
computing diluted earnings per share using the treasury stock
method. The weighted average number of shares used in computing
basic earnings per share was 3,600,000 in the three months ended
April 30, 1998 and April 30, 1997 and nine months ended April 30,
1998 and April 30, 1997 respectively. Options of 659,500 shares
for the period ending April 30, 1998 and 567,500 shares for the
period ending April 30, 1997 and Warrants to purchase 1,753,211
shares at $2.00 per share are not included in the calculation of
Diluted EPS, because they are antidilutive. There was no change
in the basic and dilutive income per share due to adoption of SFAS
No. 128.
Shareholders Equity
The increase in common stock during the period relates to accrued
interest on notes receivable on common stock.
Joint Venture
As part of the acquisition of NLI, the Company acquired a 75
percent interest in a joint venture of which the only operations
consist of revenues received from the licensing of a certain
"National Lampoon" motion picture. Total revenues received by the
joint venture related to this motion picture were $123,000 and
$287,000 for the periods ended April 30, 1998 and 1997.
Item 2. Management's Discussions and Analysis of Financial
Condition and Results of Operations
Special Note Regarding Forward Looking Statements
Certain statements in this Quarterly Report on Form 10-Q,
particularly under Item 2, may constitute "forward-looking
statements" within the meaning of Private Securities Litigation
Reform Act of 1995 (the "Reform Act"). Such forward-looking
statements involve known and unknown risks, uncertainties, and
other factors which may cause the actual results, performance or
achievements of the company to be materially different from any
future results, performance or achievements, expressed or implied
by such forward-looking statements.
Results of Operations
Quarter Ended April 30, 1998 Versus April 30, 1997
Total revenues for the current quarter were $257,000 compared with
$352,000 in the prior year quarter. Movies, television and
theatrical revenues were $156,000 in the current quarter compared
with $234,000 in the prior year quarter. The reduction of $78,000
was due primarily to a decrease of $81,000 in the profit
participation from the film "National Lampoon's Vacation" as well
as $12,000 from the film "National Lampoon's European Vacation"
which were originally released in 1983 and 1985, respectively.
National Lampoon's original movie for Showtime "National Lampoon's
Favorite Deadly Sins" generated $26,000 of profit participation in
the prior year quarter compared to no profit participation in the
current year quarter. These reductions were partially offset by
an increase of $51,000 in profit participation from the film
"National Lampoon's Loaded Weapon I", originally released in 1993,
which produced $67,000 in the current quarter compared to $16,000
in the prior year quarter. Video sales net of returns were $1,000
in the current year quarter down $22,000 from the $23,000 from the
corresponding prior year quarter. The company has de-emphasized
this segment of its business due to declining profitability.
Royalty income increased $59,000 in the current year quarter to
$81,000 from $22,000 from the prior year quarter, primarily due to
the recognition of the balance of an advance license fee upon
expiration of the license agreement. There were no revenues
related to the magazine for the current quarter compared to
$55,000 in the prior year quarter due to the company receiving a
waiver from any obligation to publish the magazine during the
current fiscal year. Other income increased $1,000 to $19,000 in
the current quarter, compared to $18,000 in the prior year
quarter.
Cost of videocassettes sold represents duplication, shipping and
other costs, which decreased $8,000 to $1,000 in the current year
quarter from $9,000 in the prior year quarter. This was primarily
due to reduced video sales in the current year quarter.
Royalty expense increased $4,000 to $12,000 in the current year
quarter compared to $8,000 in the prior year quarter.
There was no cost of magazine due to the company not publishing a
magazine this fiscal quarter.
Selling, general and administrative expenses decreased $37,000 to
$183,000, in the current quarter, compared with $220,000 in the
corresponding prior year quarter. The decrease was primarily due
to a reduction in salary, legal and insurance expenses partially
offset by increased corporate expenses related to the Company's
efforts to increase its visibility within the financial community.
There was no provision for income taxes in the current quarter
because of the utilization of the tax loss carryforwards.
Interest income increased $10,000 to $25,000 in the current year
quarter compared to $15,000 in the prior year quarter primarily
due to increased interest income recognized on the maturity of
short-term investments, as well as higher cash balances invested
in interest bearing accounts during the current quarter.
The net income for the current quarter was $25,000 equal to $0.01
per share compared with net income of $31,000 in the corresponding
prior year quarter, also equal to $0.01 per share. The decrease
in net income is primarily due to a reduction in movies,
television and theatrical as well as video sales, partially offset
by a reduction in general and administrative expenses and an
increase in interest income.
On April 15, 1998 the Company entered into an agreement with
International Family Entertainment, Inc. ("IFE"), a wholly-owned
subsidiary of Fox Kids Worldwide, Inc., whereby IFE entered into
an exclusive option to acquire certain exclusive rights in and to
the "National Lampoon" brand (including name, logos, and related
elements). On June 10, 1998 IFE elected to exercise that option.
The rights acquired by IFE consist of the right to use the
National Lampoon name in connection with a Monday through Friday
half-hour comedy strip, a once-weekly movie and/or comedy night as
well as in connection with original made-for-TV movies and series.
We anticipate that the first two projects resulting from this
alliance to be original made-for-television motion pictures
entitled "National Lampoon's Men In White" and "National Lampoon's
Golf Punks". This programming would be produced for initial
telecast on the new Fox Family Channel, which debuts on August 15,
1998. In addition, IFE's exercise of the option entitles them to
four (4) additional, consecutive, conditional annual options to
renew and extend this agreement through August 2003.
In consideration of the exercise of each option, the Company will
receive a guaranteed annual fee for each broadcast season with
annual increases for each subsequent option renewal. In addition
to the guaranteed fees, the Company will receive a contingent
participation in revenues generated from the exploitation of
original programming, in all media including domestic home video,
network, foreign distribution and worldwide interactive/
multimedia.
Nine Months Ended April 30, 1998 Versus April 30, 1997
Total revenues for the period were $870,000 compared to $1,216,000
in the prior year period. Movies, television and theatrical
revenues decreased $368,000 to $607,000 in the current year period
compared with $975,000 in the prior year period. The reduction
was primarily due to a decrease of $205,000 in the profit
participation from the film "National Lampoon's Animal House" that
was originally released in 1978 and a decrease of $36,000 in the
profit participation from the New Line Cinema film "National
Lampoon's Loaded Weapon I" which was originally released in 1993.
In addition, the profit participation from the Warner Brothers
film "National Lampoon's Vacation" which was originally released
in 1983 decreased $81,000 to $81,000 this period from $162,000 in
the prior year period. Video sales net of returns posted negative
sales of $3,000 compared to $98,000 in the corresponding prior
year period primarily due to reduced video sales which were offset
by returns from distributors. Royalty income for the current
period increased $83,000 to $133,000 from $50,000 in the prior
year period primarily due to the recognition of the balance from
two advance license fees upon expiration of the license
agreements. There were no revenues related to the magazine for
the current period compared with $56,000 for the prior year period
due to the company receiving a waiver from any obligation to
publish the magazine during the current fiscal year. Other income
increased $96,000 to $133,000 from $37,000 from the prior year
period, primarily due to the reversal of previous accruals related
to potential royalties which were extinguished at a reduced
amount.
Cost of videocassettes sold represent duplication, shipping and
other costs which decreased $41,000 to $5,000 in the current year
period from $46,000 in the prior year period. This was primarily
due to reduced video sales in the current year period.
Royalty expense decreased $5,000 to $29,000 in the current year
period compared to $34,000 in the prior year period due to reduced
video royalties payable to licensors based on reduced video sales
as noted above.
There were no cost of movies, television and theatrical in the
current year period compared to $53,000 in the prior year period,
primarily due to payments being required under a movie-for-cable
licensing agreement in the prior period which did not occur in the
current year period.
There was no cost of magazine this period compared to $39,000 in
the prior year period due to the company not publishing a magazine
this fiscal year.
Selling, general and administrative expenses decreased $7,000 to
$588,000, in the current year period, compared with $595,000 in
the corresponding prior year period. The decrease was primarily
due to reduced legal and insurance expenses, partially offset by
increased corporate expenses related to the Company's efforts to
increase its visibility within the financial community.
There was no significant provision for income taxes in either
quarter because of the utilization of the tax loss carryforwards.
Interest income increased $29,000 to $67,000 in the current year
period compared to $38,000 in the prior year period primarily due
to increased interest income recognized on the maturity of short-
term investments, as well as higher cash balances invested in
interest bearing accounts during the current period.
The net income for the current period was $96,000 equal to $0.03
per share compared with net income of $218,000 in the
corresponding prior year period equal to $0.06 per share. The
decrease in net income is primarily due to the decrease in
revenues from movies partially offset by an increase in royalty
and other income as explained above.
Liquidity and Capital Resources
Cash and short term investments at April 30, 1998 totaled
$1,597,000, an increase of $95,000 from the July 31, 1997 fiscal
year end.
The Company has no current plans for any significant capital
expenditures in its current line of business and believes that its
current level of cash and cash equivalents, augmented by
internally generated funds, will provide sufficient cash resources
through fiscal 1998.
Cash Flows
Nine months ended April 30, 1998 compared to the nine months ended
April 30, 1997.
Net cash provided by operating activities decreased $427,000
primarily due to a decrease in net income, accrued royalties,
deferred revenues and minority interest income of consolidated
subsidiary, partially offset by a reduction in net accounts
receivable. Net cash provided by investing activities increased
$415,000 from the prior year due to increased cash flow from the
maturity of short term investments. The company had no cash flows
from financing activities in either quarter.
PART II. OTHER INFORMATION
Item 5 - Other events
On February 27, 1998 the company was notified by Nasdaq that the
company's security was not in compliance with the new minimum bid
price requirement, pursuant to NASD Marketplace Rule 431(c)(04),
which became effective February 23, 1998. As a result, the
Company was provided with 90 calendar days, which expired May 28,
1998, in order to regain compliance with this standard.
On May 29, 1998 the company was notified by Nasdaq that its staff
had reviewed the company's common stock trading history with
respect to the closing bid price and had deemed that the Company
was in compliance with the new bid requirement for continued
listing on the Nasdaq Stock Market.
The Company believes that it will be able to comply with the
Nasdaq requirements for minimum bid price, pursuant to NASD
Marketplace Rule 431(c)(04), but no assurance can be given that
the Company will be able to continue to maintain the minimum bid
price requirement on a going forward basis.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed
on its behalf by its duly authorized officers.
J2 COMMUNICATIONS
Date_________________ By:____________________________
JAMES P. JIMIRRO
Chairman of the Board
President
(Principal Executive
Officer)
Date_________________ By:____________________________
RUDY R. PATINO
Chief Financial Officer
(Principal Financial
Officer)
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