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 January 31, 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
incorporation or organization) Indentification 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 March 1, 1998.
J2 COMMUNICATIONS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<S> <C> <C>
01/31/98 7/31/97
Unaudited
Assets
Cash and cash equivalents $ 923,000 $ 641,000
Short term investments 671,000 861,000
Accounts receivable - net 16,000 43,000
Inventories - net 13,000 12,000
Intangible assets, less accumulated
amortization of $2,189,000 and
$2,069,000 as of 01/31/98 and
7/31/97, respectively 3,776,000 3,896,000
Other assets 19,000 20,000
Total assets $5,418,000 $5,473,000
Liabilities and Shareholders' Equity
Liabilities:
Accounts payable $ 131,000 $ 130,000
Accrued expenses 619,000 629,000
Accrued royalties 395,000 499,000
Accrued income taxes 38,000 38,000
Deferred income 163,000 208,000
Common stock payable 203,000 203,000
Minority Interest 116,000 84,000
Total liabilities 1,665,000 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 01/31/98 and 7/31/97 8,657,000 8,654,000
Less: notes receivable on common stock (124,000) (121,000)
Accumulated deficit (4,780,000) (4,851,000)
Total shareholders' equity 3,753,000 3,682,000
Total liabilities and shareholders' equity $5,418,000 $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 SIX MONTHS ENDED JANUARY 31, 1998 AND 1997
<TABLE>
<S> <C> <C> <C> <C>
3 mos. ended 3 mos. ended 6 mos. ended 6 mos. ended
1/31/98 1/31/97 1/31/98 1/31/97
Revenues:
Movies, television
and theatrical $ 303,000 $ 309,000 $ 451,000 $ 740,000
Video sales, net of
returns (5,000) 49,000 (4,000) 75,000
Royalty income 3,000 1,000 52,000 28,000
Magazine - - - 1,000
Other 1,000 5,000 114,000 19,000
Total revenues 302,000 364,000 613,000 863,000
Costs and expenses:
Cost of videocassettes
sold 1,000 22,000 4,000 37,000
Royalty expense 8,000 13,000 17,000 25,000
Cost of movies, television
and theatrical - 53,000 - 53,000
Cost of magazine - - - -
Selling, general and
administrative 224,000 203,000 405,000 377,000
Amortization of intangible
assets 60,000 60,000 120,000 120,000
Total expenses 293,000 351,000 546,000 612,000
Income from operations 9,000 13,000 67,000 251,000
Other income:
Interest income 25,000 12,000 42,000 24,000
Minority Interest in income
of consolidated subsidiary (1,000) - (32,000) (82,000)
Income before income taxes 33,000 25,000 77,000 193,000
Provision for income taxes - - 6,000 7,000
Net income $ 33,000 $ 25,000 $ 71,000 $186,000
Income per common share:
Basic and diluted income
per share $0.01 $0.01 $0.02 $0.05
Weighted average number
of shares of 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)
SIX MONTHS ENDED JANUARY 31, 1998 AND 1997
<TABLE>
<S> <C> <C>
1998 1997
Cash flows from operating activities:
Net income $ 71,000 $186,000
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Amortization of intangible assets 120,000 120,000
Minority interest in income of
consolidated subsidiary 32,000 72,000
Changes in assets and liabilities:
Accounts receivable, net 27,000 (10,000)
Inventory (1,000) 1,000
Accounts payable 1,000 48,000
Accrued expenses (10,000) (16,000)
Accrued taxes - -
Accrued royalties (104,000) 19,000
Deferred revenues (45,000) 4,000
Other assets 1,000 (8,000)
Net cash provided by
operating activities 92,000 416,000
Cash flows from investing activities:
Purchase of short-term investments (385,000) (671,000)
Sale of short-term investments 575,000 533,000
Net cash provided by (used in)
investing activities 190,000 (138,000)
Cash flows from financing activities: - -
Net increase in cash
and cash equivalents 282,000 278,000
Cash and cash equivalents,
beginning of period 641,000 120,000
Cash and cash equivalents,
end of period $ 923,000 $ 398,000
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
J2 COMMUNICATIONS
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 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 January 31, 1998, and
the results of its operations and cash flows for the periods
ended January 31, 1998 and 1997 respectively, have been made.
Operating results for the three-month and six-month periods ended
January 31, 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 ending July 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 January 31, 1998
and January 31, 1997 and six months ended January 31, 1998 and
January 31, 1997 respectively. Options of 659,500 shares for
period ending January 31, 1998 and 567,500 shares for the period
ending January 31, 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 January 31, 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 January 31, 1998 Versus January 31, 1997
Total revenues for the current quarter were $302,000 compared
with $364,000 in the prior year quarter. Movies, television and
theatrical revenues remained virtually unchanged with $303,000 in
the current quarter compared with $309,000 in the prior year
quarter. Video sales net of returns posted negative sales of
$5,000 compared to sales of $49,000 in the corresponding prior
year quarter. This was primarily due to reduced video sales in
the current quarter which were offset by returns from
distributors. The company has de-emphasized this segment of its
business due to declining profitability.
Cost of videocassettes sold represent duplication, shipping and
other costs which decreased $21,000 to $1,000 in the current year
quarter from $22,000 in the prior year quarter. This was
primarily due to reduced video sales in the current year quarter.
Royalty expense decreased $5,000 to $8,000 in the current year
quarter compared to $13,000 in the prior year quarter due to
reduced video royalties payable to licensors based on reduced
video sales as noted above.
Cost of movies, television and theatrical decreased $53,000 to $0
in the current year quarter compared to $53,000 in the prior year
quarter, primarily due to payments being required under a movie-
for-cable licensing agreement in the prior year quarter which did
not occur in the current year quarter.
Selling, general and administrative expenses increased $21,000 to
$224,000, in the current quarter, compared with $203,000 in the
corresponding prior year quarter. The increase was primarily due
to increased legal fees incurred for the period, related to the
ongoing settlement negotiations taking place between the company
and Harvard Lampoon.
There was no provision for income taxes in the current quarter
because of the utilization of the tax loss carryforwards.
Interest income increased $13,000 to $25,000 in the current year
quarter compared to $12,000 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 $33,000 equal to $0.01
per share compared with net income of $25,000 in the
corresponding prior year quarter, also equal to $0.01 per share.
The increase in net income is primarily due to an increase in
interest income and a reduction in cost of movies, television and
theatrical in the current year quarter, partially offset by a
reduction in video sales and increased general and administrative
expenses.
Six Months Ended January 31, 1998 Versus January 31, 1997
Total revenues for the period were $613,000 compared to $863,000
in the prior year period. Movies, television and theatrical
revenues decreased $289,000 to $451,000 in the current year
period compared with $740,000 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
$85,000 in the profit participation from the New Line Cinema film
"National Lampoon's Loaded Weapon I" which was originally
released in 1993. Video sales net of returns posted negative
sales of $4,000 compared to $75,000 in the corresponding prior
year period primarily due to reduced video sales which were
offset by returns from distributors. Royalty income increased
$24,000 to $52,000 from $28,000 from the prior year period
primarily due to the recognition of the balance of an advance
license fee upon expiration of the license agreement. Other
income increased $95,000 to $114,000 from $19,000 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 $33,000 to $4,000 in the current year
period from $37,000 in the prior year period. This was primarily
due to reduced video sales in the current year period.
Royalty expense decreased $8,000 to $17,000 in the current year
period compared to $25,000 in the prior year period due to
reduced video royalties payable to licensors based on reduced
video sales as noted above.
Cost of movies, television and theatrical decreased $53,000 to $0
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.
Selling, general and administrative expenses increased $28,000 to
$405,000, in the current quarter, compared with $377,000 in the
corresponding prior year quarter. The increase was primarily due
to increased legal fees incurred for the period, related to the
ongoing settlement negotiations taking place between the company
and Harvard Lampoon.
There was no significant provision for income taxes in either
quarter because of the utilization of the tax loss carryforwards.
Interest income increased $17,000 to $41,000 in the current year
period compared to $24,000 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 $71,000 equal to $0.02
per share compared with net income of $186,000 in the
corresponding prior year period equal to $0.05 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 January 31, 1998 totaled
$1,594,000, an increase of $92,000 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
Six months ended January 31, 1998 compared to the six months
ended January 31, 1997.
Net cash provided by operating activities decreased $324,000
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
$328,000 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 is 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 will be provided 90 calendar days, which
expires May 28, 1998, in order to regain compliance with this
standard. The company may regain compliance if its security
trades at or above the minimum bid price requirement of $1.00 for
at least 10 consecutive trade days within the 90 days period
which began on February 28, 1998. If the security does not
regain compliance within 90 days, Nasdaq will issue a delisting
letter which will identify the review procedures available to the
company. The company may request a review at that time, which
will generally stay delisting, according to Nasdaq.
The company, believes that it will be able to comply with
the above minimum bid price requirement within the given 90 day
period, but no assurance can be given that the Company will be
able to meet and then maintain the minimum bid price requirement
on a going forward basis.
Item 6 - Exhibits And Reports On Form 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
None filed during the Quarter
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)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-END> JAN-31-1998
<CASH> 923
<SECURITIES> 671
<RECEIVABLES> 16
<ALLOWANCES> 0
<INVENTORY> 13
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 5418
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 8657
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 5418
<SALES> (5)
<TOTAL-REVENUES> 302
<CGS> 1
<TOTAL-COSTS> 1
<OTHER-EXPENSES> 292
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 33
<INCOME-TAX> 0
<INCOME-CONTINUING> 33
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 33
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0
</TABLE>
