SECURITIES AND EXCHANGE COMMISSION
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Washington, D.C. 20549
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FORM 10-Q
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QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended January 31, 1999 Commission File #0-15284
J2 COMMUNICATIONS
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(Exact name of registrant as specified in its charter)
California 95-4053296
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(State or other jurisdiction (IRSEmployer Identification
incorporation or organization) Number)
10850 Wilshire Blvd., Ste. 1000, Los Angeles, CA 90024
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(Address of principal executive office)
Registrant's telephone number, including area code: 310-474-5252
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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: 1,217,000 common shares, no par value were
outstanding as of March 1, 1999.
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<PAGE>
J2 COMMUNICATIONS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Unaudited
01/31/99 07/31/98
Assets
Cash and cash equivalents .................... $ 1,272,000 $ 879,000
Short-term investments ....................... 770,000 1,352,000
Accounts receivable - net .................... 34,000 7,000
Intangible assets, less accumulated
amortization of $2,428,000 and
$2,308,000 as of 01/31/99 and
7/31/98, respectively ...................... 3,536,000 3,656,000
Other assets ................................. 69,000 68,000
Total assets ................................. $ 5,681,000 $ 5,962,000
=========== ===========
Liabilities and Shareholders' Equity
Liabilities:
Accounts payable ............................. $ 184,000 $ 154,000
Accrued expenses ............................. 458,000 519,000
Accrued royalties ............................ 308,000 327,000
Accrued income taxes ......................... 38,000 38,000
Deferred income .............................. 334,000 800,000
Common stock payable ......................... 203,000 203,000
Minority Interest ............................ 183,000 118,000
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Total liabilities ............................ 1,708,000 2,159,000
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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, 1,217,000
as of 01/31/99 and 1,200,000
as of 7/31/98 .............................. 8,700,000 8,661,000
Less: notes receivable on common stock ....... (131,000) (128,000)
Deficit ...................................... (4,596,000) (4,730,000)
Total shareholders' equity ................... 3,973,000 3,803,000
Total liabilities and
shareholders' equity ......................... $ 5,681,000 $ 5,962,000
=========== ===========
The accompanying notes are an integral part of these consolidated balance
sheets.
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<TABLE>
J2 COMMUNICATIONS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS AND SIX MONTHS ENDED JANUARY 31, 1999 AND 1998
3 mos. 3 mos. 6 mos. 6 mos.
Ended Ended Ended Ended
01/31/99 01/31/98 01/31/99 01/31/98
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Revenues:
<S> <C> <C> <C> <C>
Movies, television, and theatrical ........ $ 167,000 $ 303,000 $ 721,000 $ 451,000
Video sales, net of returns .............. 4,000 (5,000) 6,000 (4,000)
Royalty income ............................ 6,000 3,000 34,000 52,000
Other .................................... -- 1,000 21,000 114,000
----------- ----------- ----------- -----------
Total revenues .......................... 177,000 302,000 782,000 613,000
Costs and expenses:
Cost of videocassettes sold .............. 4,000 1,000 65,000 4,000
Royalty expense .......................... -- 8,000 12,000 17,000
Cost of movies, television and theatrical -- -- 54,000 --
Selling, general and administrative ...... 199,000 224,000 361,000 405,000
Amortization of intangible assets ........ 60,000 60,000 120,000 120,000
Total expenses ......................... 263,000 293,000 612,000 546,000
Income from operations .................... (86,000) 9,000 170,000 67,000
Other Income (Expense)
Interest income .......................... 25,000 25,000 38,000 42,000
Minority Interest in income of
consolidated subsidiary ................. -- (1,000) (64,000) (32,000)
Income (loss) before income taxes ......... (61,000) 33,000 144,000 77,000
Provision for income taxes ................ -- -- 11,000 6,000
Net income (loss) ......................... $ (61,000) $ 33,000 $ 133,000 $ 71,000
=========== =========== =========== ===========
Income per common share:
Basic and diluted income (loss) per share ($ 0.05) $ 0.01 $ 0.11 $ 0.02
=========== =========== =========== ===========
Weighted average number of shares
of common stock outstanding ............. 1,211,000 3,600,000 1,206,000 3,600,000
=========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
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J2 COMMUNICATIONS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JANUARY 31, 1999 AND 1998
1999 1998
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Cash flows from operating activities:
Net income ................................... $ 133,000 $ 71,000
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 ............. 65,000 32,000
Changes in assets and liabilities:
Accounts receivable, net ................. (27,000) 27,000
Other Assets ............................. (1,000) --
Accounts payable ......................... 30,000 1,000
Accrued expenses ......................... (24,000) (10,000)
Accrued royalties ........................ (19,000) (104,000)
Deferred revenues ........................ (466,000) (45,000)
Net cash provided by (used in)
operating activities ..................... (189,000) 92,000
Cash flows from investing activities:
Purchase of short-term investments ....... -- (385,000)
Sale of short-term investments ........... 582,000 575,000
Net cash provided by investing
activities .............................. 582,000 190,000
Net increase in cash
and cash equivalents ........................ 393,000 282,000
Cash and cash equivalents,
beginning of period ......................... 879,000 641,000
Cash and cash equivalents,
end of period ............................... $ 1,272,000 $ 923,000
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Non Cash transaction:
Harvard Lampoon settlement
through issuance of stocks 38,000 -
The accompanying notes are an integral part of these consolidated financial
statements.
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J2 COMMUNICATIONS
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1999
Item 1
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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, 1998, as included in the Company's 1998
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, 1998 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, 1999, and the results of its operations and
cash flows for the periods ended January 31, 1999 and 1998 respectively, have
been made. Operating results for the three-month period ended January 31, 1999
and six months ended January 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", 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 1,211,000 in the
three months ended January 31, 1999, 1,206,000 in the six month ended January
31, 1999, and 3,600,00 in the three months ended January 31, 1998 and six months
ended January 31, 1998. Options of 266,167 shares for the period ending January
31, 1999 and 659,000 shares for the period ending January 31, 1998, were
antidilutive for the periods.
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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. The minority
interest's share in the joint venture's revenue is deducted from movies,
television and theatrical revenue. Total revenues received by the joint venture
related to this motion picture were $0.00 and $123,000 for the periods ended
January 31, 1999 and 1998. Of this revenue, the minority interest's share
totaled $0.00 and $31,000, respectively.
Revenue
Through a memorandum of agreement made as of April 15, 1998 between the Company
and International Family Entertainment, Inc. ("IFE"), an exclusive option was
granted by the Company to IFE for the use of "National Lampoon" trade name for
television movies and series for an annual fee of $800,000. IFE exercised the
first year option in August 1998. IFE has an option to renew this agreement for
four additional consecutive years. However, there are indications that they may
not renew this option. This would deprive the Company of $800,000 in income for
the next year, which would represent a significant share of any projected
revenues. Although management believes the trade name National Lampoon can
generate revenue from other television producers, it is too early to project
whether a similar arrangement could be put into place.
Item 2. Management's Discussion and Analysis of Financial Condition and
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Results of Operations
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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, 1999 Versus January 31, 1998
Total revenues for the current quarter were $177,000 compared with $302,000 in
the prior year quarter. Movies, television and theatrical revenues were $167,000
compared with $303,000 in the prior year quarter. The decrease was due primarily
to recognizing only $167,000 as the pro-rata share of income for this quarter
from the lump-sum of $800,000 licensing fee the Company received from
International Family Entertainment, Inc. as licensing fee for "National Lampoon"
tradename. In addition, there were no proceeds in this quarter from the profit
participation from the film "National Lampoon's Animal House" that was
originally released in 1978. Video sales net of returns were $4,000 up $9,000
from the prior year quarter. The Company has de-emphasized this segment of its
business due to declining profitability. Royalty income increased $3,000 to
$6,000 from $3,000 from the prior year quarter.
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Royalty expense decreased $8,000 to $0.00 compared to $8,000 in the prior year
quarter.
Selling, general and administrative expenses decreased by $25,000 in the current
quarter compared with the corresponding prior year quarter.
There was no significant provision for income taxes in either quarter because of
the utilization of tax loss carryforwards and the incurring of net losses.
The current quarter had a net loss of $61,000, equal to $0.05 per share,
compared with a net income of $33,000 in the corresponding prior year quarter,
equal to $0.01 per share.
On October 1, 1998, the Company entered into two agreements with Harvard
Lampoon, Inc. ("HLI") to settle all outstanding past disputes and to confirm the
Company's exclusive ownership of the National Lampoon trademark in a wide
variety of areas, including all media currently being used as well as restaurant
services and new electronic media not contemplated in earlier agreements. Under
the agreement the Company will give up the right and obligation to publish new
issues in print of National Lampoon magazine, which in recent years detracted
from the Company's financial results. The Company has retained full rights to
its extensive library of past issues of the magazine. On December 17, 1998, the
Company delivered 16,667 of common stock of the company to Harvard Lampoon as
per agreement for a price of $2.25 per share. Also, per the agreement, the
royalty level for certain expanded rights of exploitation increased, but the
financial terms between the Company and HLI for the Company's ongoing and
exiting operations remain the same.
The Company believes the new agreement represents a significant improvement for
the Company as the agreement clarifies the relationship with HLI, expands
opportunities for business activities, and reduces the possibility of future
disputes with HLI (which have occurred periodically over three decades).
Moreover, the Company is now relieved of the financial obligation of publishing
the magazine.
The impact of the settlement resulted in no material impact on the financial
results of operations of the Company.
Liquidity and Capital Resources
Cash and short-term investments at January 31, 1999 totaled $2,042,000, a
decrease of $189,000 from the July 31, 1998 fiscal year end.
The Company has plans to develop a National Lampoon internet website which will
require significant capital expenditures, but believes that its current level of
cash and cash equivalents, augmented by internally generated funds, will provide
sufficient cash resources through fiscal 1999.
Cash Flows
For six months ended January 31, 1999 compared to six months ended January 31,
1998.
Net cash provided by operating activities decreased $296,000, primarily due to a
decrease in deferred revenue. Net cash provided by investing activities
increased by $407,000 from the prior year quarter due to increased cash flow
from sales of short-term investments. The Company had no cash flows from
financing activities in either quarter.
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PART II. OTHER INFORMATION
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Item 1 - Legal Proceedings
On March 10, 1997 counsel for Harvard Lampoon, Inc. ("HLI") filed a demand for
arbitration with the American Arbitration Association, asserting that the
Company underpaid royalties under the HLI royalty agreement by approximately
$226,000, plus unspecified late charges, for the period from July 1, 1992,
through June 30, 1995, based on HLI's interpretation of the agreement. By
agreement of both parties arbitration was stayed in order to mediate the dispute
under the auspices of the Judicial Arbitration and Mediation Services.
On October 1, 1998, the parties participated again in a mediation in New York,
outcome of which resulted in an agreement which consolidates the terms of the
1969 agreement and the 1977, 1983, and 1998 amendments thereto into a new
"Agreement" which became effective as of October 1, 1998. Concurrently with the
execution of this Agreement, the parties have entered into the "Settlement
Agreement and Mutual General Releases" agreement effective as of October 1,
1998, which releases and forever discharges J2 and HLI from any and all actions
against each other. The full terms and conditions set out in the new agreements
are included as Exhibit 1 under Item 6.
The impact of the settlement resulted in no material impact on the financial
condition or results of operation of the Company.
Item 2 - Changes in Securities
None
Item 3 - Defaults Upon Senior Securities
None
Item 4 - Submission of Matters to a Vote of Security Holders
A Special Meeting of Stockholders of the Company was held on September 16, 1998.
James Jimirro, James Fellows, Bruce Vann and John DeSimio were each elected to
the board of directors until the next annual meeting or until their successors
are elected and qualified. The other proposal submitted for shareholder approval
at the special meeting along with the results of voting is as follows:
The approval of an amendment to the Company's Articles of Incorporation to
effect a 1 for 3 reverse stock split of the Company's outstanding common stock.
This proposal was approved by a vote of 3,038,536 for and 234,652 against with
14,698 abstentions and no broker non-votes. The split has been retroactively
reflected in the income statements.
Item 5 - Other Events
On August 13, 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 November 13, 1998, in order to regain compliance with this standard.
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On November 9, 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.
Item 6 - Exhibits And Reports On Form 8-K
(a) Reports on Form 8-K
None filed during the Quarter
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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 March 16,1999 By: /S/ JAMES P. JIMIRRO
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JAMES P. JIMIRRO
Chairman of the Board
President
(Principal Executive Officer)
Date MARCH 16, 1999 By: /S/ ANDREW I. WEERARATNE
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ANDREW WEERARATNE
Chief Financial Officer
(Principal Financial Officer)
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<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> NOV-01-1999
<PERIOD-END> JAN-01-1999
<CASH> 1,272,000
<SECURITIES> 770,000
<RECEIVABLES> 34,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,042,000
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 5,681,000
<CURRENT-LIABILITIES> 1,708,000
<BONDS> 0
0
0
<COMMON> 8,700,000
<OTHER-SE> 4,727,000
<TOTAL-LIABILITY-AND-EQUITY> 5,681,000
<SALES> 0
<TOTAL-REVENUES> 177,000
<CGS> 4,000
<TOTAL-COSTS> 4,000
<OTHER-EXPENSES> 259,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
