<PAGE> 1
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 October 31, 1999 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: 1,302,388 common shares, no par value were
outstanding as of December 13, 1999.
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<PAGE> 2
J2 COMMUNICATIONS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Unaudited
10/31/99 7/31/99
---------- ---------
<S> <C> <C>
Assets
Cash and cash equivalents $1,715,000 $1,858,000
Other current assets 35,000 41,000
Equipment, less accumulated
depreciation of $10,000 and
$8,000 as of 10/31/99 and
7/31/99, respectively 17,000 19,000
Intangible assets, less accumulated
amortization of $2,609,000 and
$2,549,000 as of 10/31/99 and
7/31/99, respectively 3,356,000 3,416,000
Other assets 16,000 16,000
---------- ----------
Total assets $5,139,000 $5,350,000
========== ==========
Liabilities and Shareholders' Equity
Liabilities:
Accounts payable $ 108,000 $ 197,000
Accrued expenses 362,000 432,000
Accrued income taxes 25,000 25,000
Common stock payable 203,000 203,000
Minority interest 268,000 186,000
---------- ----------
Total liabilities 966,000 1,043,000
---------- ----------
Deferred compensation $1,739,000 $1,717,000
Shareholders' equity:
Preferred stock, no par value;
Authorized 2,000,000 shares;
none issued and outstanding - -
Common stock, no par value;
Authorized 15,000,000 shares;
issued and outstanding, 1,234,718
and 1,233,712 shares respectively
as of 10/31/99 and 7/31/99 8,757,600 8,754,600
Less: notes receivable on common stock (136,000) (134,000)
Accumulated deficit (6,186,000) (6,029,000)
Less: treasury stock at cost,
1,166 shares (1,600) (1,600)
---------- ----------
Total shareholders' equity 2,434,000 2,590,000
---------- ----------
Total liabilities and
shareholders' equity $5,139,000 $5,350,000
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
2
<PAGE> 3
J2 COMMUNICATIONS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED OCTOBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
--------- --------
<S> <C> <C>
Revenues:
Movies, television, and theatrical $ 310,000 $ 554,000
Video sales, net of returns 4,000 3,000
Royalty income 4,000 20,000
Magazine 3,000 27,000
---------- ---------
Total revenues 321,000 604,000
---------- ---------
Costs and expenses:
Cost of videocassettes sold 1,000 2,000
Royalty expense 4,000 9,000
Cost of movies, television and theatrical - 55,000
Cost of magazine - 45,000
Cost of web development 107,000 -
Selling, general and administrative 221,000 197,000
Compensation (benefit) related to SAR 22,000 (17,000)
Amortization of intangible assets 60,000 60,000
---------- ---------
Total expenses 415,000 351,000
---------- ---------
(Loss) income from operations (94,000) 253,000
Other (expense) income
Interest income 19,000 16,000
Minority interest in income of
consolidated subsidiary (82,000) (64,000)
---------- ---------
(Loss) income before income taxes (157,000) 205,000
Provision for income taxes - 11,000
---------- ---------
Net (loss) income $ (157,000) $ 194,000
========== =========
(Loss) income per common share:
Basic and diluted (loss) income per share ($ 0.13) $0.16
========== =========
Weighted average number of shares
of common stock outstanding 1,234,379 1,200,000
========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 4
J2 COMMUNICATIONS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED OCTOBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (157,000) $ 194,000
Adjustments to reconcile net (loss) income
to net cash (used in) provided by
operating activities:
Depreciation of fixed assets 2,000 -
Amortization of intangible assets 60,000 60,000
Minority interest in income
of consolidated subsidiary 82,000 64,000
Interest on note receivable-common stock (2,000)
Changes in assets and liabilities:
Accounts receivable, net - (27,000)
Other current assets 6,000 18,000
Accounts payable (89,000) 39,000
Accrued expenses (70,000) 11,000
Deferred revenues - (300,000)
Deferred compensation 22,000 -
---------- ----------
Net cash (used in) provided by
operating activities (146,000) 37,000
---------- ----------
Cash flows from investing activities:
Purchase of property and equipment - (23,000)
Sale of short-term investments - 194,000
---------- ----------
- 171,000
Cash flow from financing activities
Exercise of stock options 3,000 -
---------- ----------
Net cash provided by investing
activities 3,000 -
---------- ----------
Net (decrease) increase in cash
and cash equivalents (143,000) 208,000
Cash and cash equivalents,
beginning of quarter 1,858,000 879,000
---------- ----------
Cash and cash equivalents,
end of quarter $1,715,000 $1,087,000
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 5
J2 COMMUNICATIONS
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED OCTOBER 31, 1999
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, 1999, as included in the Company's 1999
Annual Report on Form 10-K (the "Annual Report") filed with the Securities and
Exchange Commission. A signed independent accountant's report relating to the
July 31, 1999 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 October 31, 1999, and the results of its operations and
cash flows for the periods ended October 31, 1999 and 1998 respectively, have
been made. Operating results for the three-month period ended October 31, 1999,
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". The weighted average
number of shares used in computing basic earnings per share was 1,234,379 and
1,200,000, respectively in the three months ended October 31, 1999 and October
31, 1998. Securities of 150,559 shares for the period ending October 31, 1999
were antidilutive for the period.
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<PAGE> 6
Segment Information
The Company adopted SFAS No.131, "Disclosures About Segment of an Enterprise and
Related Information", for its fiscal year ended July 31,1999, which changed the
way the Company reports information about its operating segments. The Company
business units have been aggregated into three reportable operating segments:
exploitation of the "National Lampoon" trademark, Internet operations and video
distribution. The factors for determining the reportable segments were based on
the distinct nature of their operations. They are managed as separate business
units because each requires and is responsible for executing a unique business
strategy. Earnings of industry segments exclude interest income, amortization of
intangible assets, compensation related to SAR's and other unallocated corporate
expenses. With the development of Internet operations beginning in April 1999,
the Company began allocating unidentifiable selling, general and administrative
expenses evenly between the trademark and Internet segments. Identifiable assets
are those assets used in the operations of the segments. Corporate assets
consist of cash, certain corporate receivables and intangibles. Summarized
financial information concerning the Company's reportable segments is shown in
the following tables:
<TABLE>
<CAPTION>
Trademark Internet Video Total
--------- -------- ----- -----
<S> <C> <C> <C> <C>
Quarter Ended October 31,1999:
Revenue $317,000 $ - $4,000 $321,000
Segment income(loss) 156,000 (171,000) 3,000 (12,000)
<CAPTION>
Trademark Internet Video Total
--------- -------- ----- -----
<S> <C> <C> <C> <C>
Quarter Ended October 31,1998:
Revenue $601,000 $ - $3,000 $604,000
Segment income 295,000 - 1,000 296,000
</TABLE>
The following is a reconciliation of reportable income to consolidate
(loss)income before taxes:
<TABLE>
<CAPTION>
Quarter Ended Quarter Ended
October 31,1999 October 31,1998
--------------- ---------------
<S> <C> <C>
Segment (loss)income $ (12,000) $296,000
(Compensation) benefit related to SAR (22,000) 17,000
Amortization of intangible assets (60,000) (60,000)
Minority interest in consolidation (82,000) (64,000)
-------- --------
Operating (loss)income (176,000) 189,000
Interest income 19,000 16,000
--------- --------
Consolidated (loss)income before taxes $(157,000) $205,000
========= ========
</TABLE>
Joint Venture
As part of the acquisition of NLI, the Company acquired a 75 percent interest in
a joint venture whose only operations consist of receiving revenues derived from
the licensing of "National Lampoon's Animal House," a motion picture. The
minority interest's share in the joint venture's revenue is deducted from movie,
television and theatrical revenue. Total revenues received by the joint venture
related to this motion picture were, respectively, $298,000 and $251,000 for the
periods ended October 31, 1999 and 1998. Of this revenue, the minority
interest's share totaled $82,000 and $64,000, respectively.
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<PAGE> 7
Item 2. Management's Discussion 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 those
under Item 2, may constitute "forward-looking statements" within the meaning of
the 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 October 31, 1999 Versus October 31, 1998
Total revenues for the current quarter were $321,000, compared with $604,000 in
the prior year quarter. Movies, television and theatrical revenues were
$310,000, compared with $554,000 in the prior year quarter. The decrease was
primarily due to the elimination of revenue from International Family
Entertainment, Inc. (IFE). During the current year IFE did not renew the annual
option on the license agreement it was party to with the Company. Video sales
net of returns were $4,000, up $1,000 from the prior year quarter. The Company
has de-emphasized this segment of its business due to declining profitability.
Royalty income decreased $16,000, to $4,000, from $20,000 for the prior year
quarter, primarily due to deemphasizing the video segment of the business.
Magazine revenue was $3,000 in the current year quarter, compared to $27,000 in
the prior year quarter as the Company is no longer publishing the "National
Lampoon" magazine.
Royalty expense decreased $5,000, to $4,000, compared to $9,000 in the prior
year quarter, due principally to lower movies, television and theatrical
revenues.
Cost of movies, television and theatrical decreased by $55,000 in the current
year quarter primarily due to no payment being required under the terms of the
"GPEC" rights agreement.
Cost of Magazine was $0 in the current year quarter for the publication of the
magazine, compared to $45,000 in the prior year quarter, due to discontinuation
of the publication.
Cost of web development of $107,00 in the current year quarter represents the
additional cost incurred to further develop nationallampoon.com.
7
<PAGE> 8
Selling, general and administrative expenses were $221,000 in the current year
quarter, compared with $197,000 in the prior year quarter. The increased
expenses reflect the hiring of additional staff and consultants needed to launch
and maintain the Company's new venture, nationallampoon.com
Stock Appreciation Rights (SAR) resulted in a compensation of $22,000 in the
current year quarter compared to a benefit of $17,000 in the prior year quarter
due to Company's share price appreciations/depreciations in the respective
quarters.
There was no significant provision for income taxes in either quarter because of
the utilization of tax loss carryforwards.
Net loss for the current quarter was $157,000, equal to ($0.13) per share,
compared with a net income of $194,000 in the corresponding prior year quarter,
equal to $0.16 per share. The decrease is primarily due to the increase in
expenses directed towards start-up of nationallampoon.com., and the cancellation
of IFE license agreement.
Liquidity and Capital Resources
Cash at October 31, 1999 totaled $1,715,000, a decrease of $143,000 from the
July 31, 1999 fiscal year end. This decrease reflects the Company's additional
investment incurred in setting up nationallampoon.com.
There will be additional significant expenditures in the ongoing development and
maintenance of nationallampoon.com. Management believes that its present level
of cash, augmented by internally generated funds, will provide sufficient cash
resources through at least fiscal 2000.
Cash Flows
For three months ended October 31, 1999 compared to three months ended October
31, 1998.
Net cash provided by operating activities decreased $183,000, primarily due to
increased development and personnel costs related to nationallampoon.com. Net
cash provided by investing activities decreased by $171,000 from the prior year
quarter due to no cash flow from sales of short-term investments. The Company
had $3,000 in cash flow from exercise of employee stock options in the current
year quarter.
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings
On August 13, 1999, Heathdale productions, Inc., a 25% partner with J2
Communications in the Yearbook Movie Company - the participants in the royalties
from Universal Studios on the movie "Animal House" - filed an action in Los
Angeles Supreme Court against the Company for breach of contract and other
violations they claim the Company committed in distributing their share of
"Animal House" revenue. The Company believes this suit is without merit and
plans to defend it vigorously. Management believes this will not result in any
material impact on its financial condition or results of operations.
8
<PAGE> 9
Item 2 - Changes in Securities
None
Item 3 - Defaults Upon Senior Securities
None
Item 4 - Submission of Matters to a Vote of Security Holders
None
Item 5 - Other Events
None
Item 6 - THE NEW VENTURE
In October, 1999, the Company launched its new Web site,
nationallampoon.com (the "Site"). Positioned as a "network" because of its wide
range of original comedic programming, the Site also features certain classic
National Lampoon material. It is available at no charge over the Internet.
The Company expects to generate future revenues from the site
through sales of advertising, and through the sale of National Lampoon themed-
merchandise from its e-commerce store. Over the longer term, the Company expects
to earn revenues through adaptation of characters, stories, and animation from
the Site into filmed entertainment, video, audio and merchandise although there
can be no assurance that revenues will ever be realized, or if received, in
amount sufficient to cover operating costs.
The Company believes that there is a substantial market for
the Site. Therefore, management has invested, and will continue to invest, a
substantial portion of the Company's capital in the development, production and
marketing of the Site.
Item 7 - Exhibits And Reports On Form 8-K
(a) Exhibits
Exhibit27- Financial Date Schedule
(b) Reports on Form 8-K
None filed during the Quarter
9
<PAGE> 10
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 12/20 By: /s/ JAMES P. JIMIRRO
---------- ----------------------------------------
JAMES P. JIMIRRO
Chairman of the Board
President
(Principal Executive Officer)
Date 12/20 By: /s/ ANDREW WEERARATNE
---------- ----------------------------------------
ANDREW WEERARATNE
Chief Financial Officer
(Principal Financial Officer)
10
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-2000
<PERIOD-START> AUG-01-1999
<PERIOD-END> OCT-31-1999
<CASH> 1,715,000
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 35,000
<PP&E> 5,992,000
<DEPRECIATION> (2,619,000)
<TOTAL-ASSETS> 5,139,000
<CURRENT-LIABILITIES> 966,000
<BONDS> 0
0
0
<COMMON> 8,757,600
<OTHER-SE> (6,323,600)
<TOTAL-LIABILITY-AND-EQUITY> 5,139,000
<SALES> 321,000
<TOTAL-REVENUES> 340,000
<CGS> 112,000
<TOTAL-COSTS> 415,000
<OTHER-EXPENSES> 82,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (157,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (157,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (157,000)
<EPS-BASIC> (0.13)
<EPS-DILUTED> (0.13)
</TABLE>
