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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Year Ended July 31, 1999
Commission File Number 0-15284
J2 COMMUNICATIONS
(Exact name of registrant as specified in charter)
California 95-4053296
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
10850 Wilshire Boulevard, Suite 1000
Los Angeles, California
(Address of principal executive office)
Registrant's telephone number, including area code
(310) 474-5252
Securities registered pursuant to Section 12(g) of the Act:
(Name of each exchange
(Title of each class) on which registered)
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Common Stock, no par value NASDAQ
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 (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 [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of October 27, 1999, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $13,178,034.
As of October 27, 1999, the Registrant had 1,233,712 of its common stock
("Common Stock"), no par value, issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
No documents are incorporated by reference into Parts I, II or III
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PART I
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
Certain statements in the Annual Report on Form 10-K, particularly under Items 1
through 8, 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.
ITEM 1: THE BUSINESS
The Company was founded in March, 1986 by its Chairman of the Board and
President, James P. Jimirro, the first President of both The Disney Channel and
Walt Disney Home Video. The Company was originally formed primarily to engage in
the acquisition, development and production of entertainment feature film and
special-interest videocassette programs, and the marketing of these programs in
the home video rental and sell-through markets. Due to increasing competition in
the videocassette market, resulting in declining profitability, the Company
de-emphasized this segment of its business and presently it is an insignificant
part of the Company's overall business. In late 1990, the Company acquired
National Lampoon, Inc. ("NL"), publisher of a national satire and humor magazine
and licensor of its name for feature films. In an effort to preserve capital the
Company at that time significantly scaled back its operations, and retained a
modest staff to administer the licensing of the National Lampoon name. The
Company did not actually engage in any production or development activity and
instead contracted with various licensees to exploit this trademark.
Altering its strategy to reflect current opportunities, in April, 1999 the
Company announced its intent to develop nationallampoon.com, a humor network
(the "Site") featuring a wide array of new comedic content including animation
and live action, as well as classic articles and features from the magazine.
Management expects to earn revenue on the Site through the sales of advertising
and National Lampoon-themed merchandise from a virtual store which is a part of
the Site. A further part of this Internet strategy is to spin off characters,
animation, and stories from the website into feature films, television, video,
audio and merchandise.
The Site, which launched on October 25, 1999, is a content provider, and will
deliver original programming, both developed by the Company and produced and
acquired from third parties, for exhibition and exploitation over the Internet.
The Site features a wide variety of original programming delivered via audio,
video and text as well as classic National Lampoon audio from "The National
Lampoon Radio Hour" and reprints of classic National Lampoon magazine articles
and features. During the first week of the site's launch, there had been over
1,100,000 hits on nationallampoon.com, providing an early indication that the
Site may be attractive to advertisers and that the quantity of visitors may
attain the level necessary to sell significant quantities of merchandise. The
Company believes that, despite the plethora of existing Internet sites, its
strong consumer positioning will allow it to establish its Site as a leader in
the delivery of comedic entertainment.
The Company believes that the Site will derive a substantial portion of its
revenue from "banner" and "sponsorship" advertising. The advertising model
emerging on the Internet is similar to that which has developed in more mature
media, in which revenue will depend upon the quantity and quality of impressions
delivered to advertisers. The Company anticipates that the Site will appeal to
the same demographic segments as did the magazine: males age 18-34, with a
strong overlay of college-age males and a contingent of under-18 year olds. In
addition, the Company believes that there is a significant segment of post-34
year olds who grew up with National Lampoon and, it is anticipated, will
regularly visit the Site.
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Nationallampoon.com demographics, especially 18-34 year old males, are extremely
attractive to advertisers. Thus, should the Site succeed in delivering large
quantities of this demographic segment, we believe that advertisers will be
attracted to the Site. In addition, Management believes that the highly
interactive nature of the Site and the frequent addition of new material will
encourage visitors to remain at the Site longer than they would otherwise stay
and to revisit it often, thus adding to its attractiveness to advertisers.
The site also log on E-commerce component. The Site's retail store, "Smash &
Grab," features a broad array of NL videos, books and CD's, as well as new
National Lampoon apparel and other themed merchandise. Management anticipates
that this selection of merchandise, as well as a schedule of promotions in the
store, may result in retail revenue.
Management anticipates that the Site will become the principal business of the
Company over the near term.
WEB RELATED BUSINESS ARRANGEMENTS
In the process of creating and launching nationallampoon.com, the Company has
been fortunate in attracting high caliber, experienced personnel, and in forming
alliances, on a cost effective basis, which afford the Site the opportunity of
achieving success.
During 1999 the Company hired an Editor-in-Chief of the site who has extensive
experience in comedy writing, editing and performing. In addition, the Company
added a nationallampoon.com Marketing Manager who brought with her experience in
creating, launching, and conducting online marketing for a website.
Management believes that a primary source of revenue from the Site will be from
advertising. The Company has entered into an agreement with Phase2Media to sell
banner ads, interstitial ads (i.e., ads which use video as opposed to static
images) and sponsorships (wherein an advertiser sponsors an entire section of
the Site). Phase2Media represents a number of other prestigious, "branded"
sites. As of November 1, 1999, no significant advertising space had been sold.
To maximize the revenue potential of the Site, the Company has contracted with
The eMarket Group to design and maintain a virtual retail outlet, "Smash &
Grab." Under the terms of this agreement, the Company has completely eliminated
inventory risk. Since all order fulfillment and customer service has, per the
contract, been outsourced, the Company has avoided the fixed costs normally
associated with managing a retail site.
In a further effort to minimize fixed costs, the Company has chosen to outsource
the hosting and maintaining of the Site to Concentric Network, which was chosen
because of its reputation for reliability and high technical quality. The
Company has a one year contract with Concentric, under what it considers to be
favorable terms.
The Company also has agreements with Reel Networks and inet regarding the
republishing (re broadcast) of "Classic" National Lampoon ceudro metered, and
the link of such sites to the National Lampoon site.
Management believes that these personnel decisions, as well as the alliances
described above, allow the Company to concentrate its resources, both human and
financial, on the tasks of creating high quality, new comedic material for the
Site and marketing it effectively.
INDUSTRY BACKGROUND
Due to its strong consumer appeal, the Internet is emerging as a medium that is
complimentary and, in several respects, superior to traditional electronic and
print media. Specifically, the Internet offers content providers and advertisers
the ability to quickly and efficiently reach highly-targeted audiences without
having to surmount the barriers to entry presented by traditional media. The
Company believes that the Internet offers it a significant opportunity to reach
its own target audience and deliver it to advertisers.
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PROPRIETARY RIGHTS
The Company regards its copyrights, trademarks, trade secrets and similar
intellectual property as critical to its success. The Company has obtained
copyrights and registration for its major properties and is in the process of
obtaining them for its new properties. Due to worldwide availability of the
Internet, copyright and trademark protection may not be available in every
country where nationallampoon.com is available.
MARKETING
The Company will pursue both online and offline marketing in an effort to
leverage National Lampoon's strong consumer positioning against
nationallampoon.com
Offline consumer marketing will, over the coming period, comprise a number of
activities, beginning with a publicity campaign directed to print and electronic
media. This will be supplemented by consumer promotions and paid advertising.
Marketing will be directed toward the site's core audience of men 18-34, with
specific emphasis on college age males and supplemented by targeting "baby
boomer" males who grew up with the National Lampoon.
In addition to consumer advertising and promotion, there will be an additional
emphasis on online marketing, including syndication of nationallampoon.com
material to other portals and websites. This "sampling" of National Lampoon
material with accompanying links to nationallampoon.com is designed to generate
interest among potential viewers and entice them to visit our site.
COMPETITION
The market for Internet access is relatively new, intensely competitive and
rapidly changing. Because there are no substantial barriers to entry, the number
of web sites competing for consumers' attention has proliferated and it is
expected that competition will continue to intensify.
Many proprietors of traditional offline media such as television, radio and
print have already established, or may establish Web sites, and may compete
directly with the Company. Many of these competitors are larger, more
established and have access to more capital than the Company. The Company may
need to raise additional capital to be able to be competitive in this market. It
is anticipated that the amount of competition will increase in the future. This
could result in price reductions for advertising revenue, reduced margins, loss
of market share and greater operating losses, any of which would materially and
adversely effect the business of the company, the results of its operations and
financial condition.
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CERTAIN CONSIDERATIONS
Dependence on the Internet
Since the Internet and other wide area networks are new and evolving, it is
difficult to predict with any certainty whether the Internet will prove to be a
viable commercial marketplace. The Internet has experienced and is expected to
continue to experience significant growth in users and traffic. There can be no
assurance that the Internet infrastructure will continue to be able to support
the demands on it by this continued growth. In addition, the Internet could lose
its viability due to delays in the development or adoption of new standards and
protocols to handle an increased level of activity. Further, if the necessary
infrastructure or complimentary services or facilities are not developed,
results of the Company's operations and financial conditions will be materially
affected.
The Company expects to derive a substantial amount of its revenues from
sponsorships and advertising for the foreseeable future, and demand and market
acceptance for Internet advertising is uncertain.
There are currently no standards for the measurement of the effectiveness of
Internet advertising, and the industry may need to develop standard measurements
to support and promote Internet advertising as a significant advertising medium.
If such standards do not develop, existing advertisers may not continue their
levels of Internet advertising. Furthermore, advertisers that have traditionally
relied upon other advertising media may be reluctant to advertise on the
Internet. The Company's business would be adversely affected if the market for
Internet advertising fails to develop or develops more slowly than expected.
The Company expects to be dependent on third parties for (i) establishment of
agreements to acquire or license products, and (ii) operation of the Site. In
particular, during its startup phase, the Company will be dependent on various
third parties for software, systems and related services. Many of these third
parties have a limited operating history, have relatively immature technology
and are themselves dependent on reliable delivery of services from others. As a
result, the Company's ability to deliver various services to its potential users
may be adversely affected by the failure of these third parties to provide
reliable software, systems and related services to us. In addition, there can be
no assurance that the Company will be successful in establishing and maintaining
such relationships with distributors and licensed entities on terms favorable to
the Company.
Risks Associated With Internet-Based Business
Although the Company has just commenced active operations of its Internet site,
shareholders should note the following:
(i) The Company may be sued for information disseminated on the Internet,
including claims for defamation, negligence, copyright or trademark
infringement, personal injury or other legal theories relating to the
information it publishes on the Site. These types of claims have been
brought, sometimes successfully, against online services as well as
print publications in the past. The Company could also be subjected to
claims based upon the content that is accessible from the Site or
through content and materials that may be posted by members in chat
rooms or bulletin boards. The Company may also offer e-mail services,
which may subject the Company to potential risks, such as liabilities or
claims resulting from unsolicited e-mail, lost or misdirected messages,
illegal or fraudulent use of e-mail or interruptions or delays in e-mail
service. The Company, which intends to maintain general liability, may
not adequately protect itself against these types of claims.
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(ii) The Company may incur potential liability for products sold over the
Internet. Consumers may sue it if any of the products that it sells
(either online or otherwise) are defective, fail to perform properly or
injure the user. The Company may foster relationships with manufacturers
or companies to offer such products directly on other websites. Such a
strategy involves numerous risks and uncertainties. Although the
Company's agreements with manufacturers typically contain provisions
intended to limit its exposure to liability claims, these limitations
may not prevent all potential claims. Liability claims could require the
Company to spend significant time and money in litigation or to pay
significant damages. As a result, any such claims, whether or not
successful, could seriously damage the Company's reputation and
business.
(iii) To the extent that the Company's growth is based on the Internet, the
Company will be dependent on its continued growth and integration into
daily commerce. The Company's intended business would be adversely
affected if Internet usage does not continue to grow. A number of
factors may inhibit Internet usage, including: inadequate network
infrastructure; security concerns; inconsistent quality of service; and
lack of availability of cost-effective, high speed service. If Internet
usage grows, the Internet infrastructure may not be able to support the
demands placed on it by this growth and its performance and reliability
may decline. In addition, websites have experienced interruptions in
their service as a result of outages and other delays occurring
throughout the Internet network infrastructure. If these outages or
delays frequently occur in the future, Internet usage, as well as the
usage of the Company's website, could grow more slowly or decline.
(iv) Internet security concerns could hinder e-commerce. The need to securely
transmit confidential information over the Internet has been a
significant barrier to electronic commerce and communications over the
Internet. Any well-publicized compromise of security could deter people
from using the Internet or using it to conduct transactions that involve
transmitting confidential information. The Company may incur significant
costs to protect against the threat of security breaches or to alleviate
problems caused by such breaches.
(v) Third parties may misappropriate personal information about the
Company's potential users. If third parties were able to penetrate the
Company's network security or otherwise misappropriate our users'
personal information or credit card information, the Company could be
subject to liability. This could include claims for unauthorized
purchases with credit card information, impersonation or other similar
fraud claims. They could also include claims for other misuses of
personal information, such as for unauthorized marketing purposes. These
claims could result in litigation. In addition, the Federal Trade
Commission and state agencies have been investigating certain Internet
companies regarding their use of personal information. The Company would
incur additional expenses if new regulations regarding the use of
personal information are introduced or if the Company's privacy
practices are investigated.
The Company Will Need To Expend Significant Resources On Internet Resources
The Site will need to accommodate a high volume of traffic and deliver
frequently updated information. If the Site has slow response times or decreased
traffic, for a variety of reasons these types of occurrences could cause users
to perceive the Site as not functioning properly and therefore cause them to use
another website or other methods to obtain information.
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In addition, the Company's potential users will depend on Internet service
providers, online service providers and other website operators for access to
the Site. Many of them have experienced significant outages in the past, and
could experience outages, delays and other difficulties due to system failures
unrelated to our systems. Fire, floods, earthquakes, power loss,
telecommunications failures, break-ins and similar events could damage these
systems. Computer viruses, electronic break-ins or other similar disruptive
problems could also adversely affect the Site. The Company's business could be
adversely affected if its systems were impacted by any of these occurrences. The
Company's insurance policies may not adequately compensate it for any losses
that may occur due to any failures or interruptions in our systems. The Company
does not presently have any secondary "off-site" systems or a formal disaster
recovery plan.
nationallampoon.com is a new venture
The Site is a new venture and its prospects are subject to risks, expenses and
uncertainties frequently encountered by young companies that operate exclusively
in the new and rapidly evolving markets for Internet products and services.
Successfully achieving its growth plan depends on, among other things: the
Company's ability to continue to develop new and original comedic material which
is equal or superior to that of its competitors; its ability to attract,
increase and maintain traffic on the Site; its ability to effectively integrate
the technology and operations of business; its ability to continually identify,
attract, retain and motivate qualified personnel and its ability to successfully
attract Internet based advertising.
J2 Common Stock Volatility
The trading price of the Company's stock has been and continues to be subject to
fluctuations. Since the Company began the full-scale development of the Site the
stock price of the Company has risen substantially. The closing price of the
Company's stock on March 25, 1999 was $1.875. The closing price of the Company's
stock on October 22, 1999 was $24.50. The stock price may fluctuate in response
to a number of events and factors, such as quarterly variations in operating
results, changes in financial estimates and recommendations by security
analysts, the operating and stock performance of other companies that investors
may deem as comparable, and news reports relating to trends in the marketplace.
In addition, the stock market in general and the market prices for Internet
related companies in particular have experienced extreme volatility that often
has been unrelated to the operating performance of such companies. These broad
market and industry fluctuations may adversely affect the price of the company's
common stock, regardless of the company's operating performance.
NASDAQ Listing Requirement
The NASDAQ listing requirements specify that a corporation meet certain minimum
requirements for continued listing. One of the requirements is that a company
maintain either 1) $2 million in net assets, or 2) $35 million in market
capitalization, or 3) $500,000 in net income in the latest fiscal year or 2 of
the last 3 fiscal years. The Company has an ongoing need to produce income or
capital or an increase in its stock price to continue to meet these
requirements. Management believes that it will be able to maintain compliance
with these requirements. However, it cannot offer any guarantee that it can do
so. The Company's inability to maintain compliance may affect its stock price.
Dependence on National Lampoon name
The Company's revenue is based primarily on the proceeds realized from
exploitation of the National Lampoon name. Lack of any continued demand for the
tradename could have an adverse effect on its business, the results of
operations, and its financial condition.
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Dependence on Key Personnel
The Company is substantially dependent on the services of James P. Jimirro, who
serves as the Company's Chairman of the Board and President. Although Mr.
Jimirro is party to an employment agreement with the Company, the loss of his
services could have a material adverse effect on the Company.
RESTATED AGREEMENT WITH HARVARD LAMPOON
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. The Company agreed to
deliver 16,667 shares (as adjusted per the reverse split) of common stock to HLI
(which were delivered in December, 1998) and increase the royalty level for
certain expanded rights of exploitation, but the financial terms between the
Company and HLI for the Company's ongoing and existing 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 or operations of the Company.
STOCKHOLDER RIGHTS AGREEMENT
In July 1999, the Board of Directors of the Company adopted a Stockholder Rights
Plan, and in connection therewith declared a dividend of one preferred share
purchase right (the "Rights") for each outstanding share of common stock, no par
value per share, of the Company (the "Common Shares") outstanding at the close
of business on August 5, 1999. Since such time the Company has issued the Rights
with each Common Share that has been subsequently issued. When exercisable, each
new Right will entitle its holder to buy one one-hundredth of a share of Series
A Junior Participating Preferred Stock (the "Preferred Shares") at a price of
$65.00 per one-one-hundredth of a share (the "Purchase Price") until July 15,
2009.
The Rights will become exercisable upon the earlier of (i) ten (10) business
days following public announcement that a person or a group of affiliated or
associated persons has acquired, or obtained the right to acquire, beneficial
ownership of 15% or, in the case of Messrs. Daniel Laikin and Paul Skjodt (or
any of their related persons, if any) as a group, 25%, or, in the case of Mr.
James Jimirro (or any of his related persons, if any) 39% or more of the
outstanding Common Shares (an "Acquiring Person"), or (ii) ten (10) business
days following the commencement or announcement of an intention to make a tender
offer or exchange offer the consummation of which would result in the beneficial
ownership by a person or group of 15% or more of the outstanding Common Shares.
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In the event of any merger, consolidation or other transaction in which Common
Shares are exchanged, each Preferred Shareholder will be entitled to receive 100
times the amount received per Common Share. In the event that a person becomes
an Acquiring Person or if the Company were the surviving corporation in a merger
with an Acquiring Person or any affiliate or associate of an Acquiring Person
and the Common Shares were not changed or exchanged, each holder of a Right,
other than the Rights that are or were acquired or beneficially owned by the
Acquiring Person (which Rights will thereafter be void), will thereafter have
the right to receive upon exercise that number of Common Shares having a market
value of two times the then current Purchase Price of one Right. In the event
that, after a person has become an Acquiring Person, the Company were acquired
in a merger or other business combination transaction or more than 50% of its
assets or earning power were sold, proper provision shall be made so that each
holder of a Right shall thereafter have the right to receive, upon the exercise
thereof at the then current Purchase Price of the Right, that number of shares
of common stock of the acquiring company which at the time of such transaction
would have a market value of two times the then current Purchase Price of one
Right.
The Rights may be redeemed in whole, but not in part, by the Board of Directors
of the Company at a price of $.001 per Right at any time prior to the time that
an Acquiring Person has become such. The redemption of the Rights may be made
effective at such time, on such basis and with such conditions as the Board of
Directors of the Company in its sole discretion may establish.
OTHER ACTIVITIES
The Company will continue its focus on using the National Lampoon name in
virtually every segment of the entertainment business. In the past, The first
significant result of this effort was realized with the release in February,
1993 of the feature film "National Lampoon's Loaded Weapon I". This film
achieved in excess of $28 million of theatrical revenue in its United States
theatrical release. The Company is participating in the film's revenue as
provided by the Company's licensing agreement with New Line Cinema, the producer
and distributor of the film. The second picture under this licensed agreement,
"National Lampoon's Senior Trip," was released in September of 1995. The
theatrical revenue from this film was disappointing. However, as the Company
only licensed the National Lampoon name with respect to the project, it had no
risk of loss if theatrical boxoffice and ancillary revenues were disappointing.
The Company intends to continue its efforts to license the National Lampoon name
to other producers of full-length motion pictures. In fiscal 1994, a licensing
agreement was entered into with Showtime Networks, Inc. which provided for the
production of seven (7) movies made for initial viewing on the Showtime
television channel over three (3) years. The Showtime Agreement expired during
the fiscal year ending July 31, 1997 with only four made-for-cable pictures
being produced and as such, the fifth through seventh movies were not produced.
In accordance with the contract, Showtime has paid the producer fees due for the
fifth (5) through seventh (7) movies as of July 31, 1998.
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 acquired 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
consisted 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 original made-for-television movies and series. The first two
projects resulting from this alliance are two made-for-television motion
pictures entitled "National Lampoon's Men in White" and "National Lampoon's Golf
Punks". These two movies were broadcast on Fox Family Channel during the months
of August and September of 1998 to favorable ratings. In addition, IFE's
exercise of the option entitled them to four (4) additional, consecutive,
conditional annual options to renew and extend this agreement through August,
2003. IFE has let this agreement lapse by not exercising its option during the
second consecutive year's option period.
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Motion Pictures, Television and Other Entertainment Activities
MOTION PICTURES: NL's motion picture activities have consisted principally of
developing ideas for feature films, suggesting script writers, providing
supervision of the scripting, and providing producer services in connection with
the production of such films. NL has not financed the development, production or
distribution of movies, and does not maintain a development department. Instead,
NL is typically presented with film ideas by major movie studios for
consideration with regard to financing of development, production, and
distribution by such studios and obtaining the right to use the National Lampoon
name. For these services, NL receives production and other fees and a
participation in the profits, if any, of the movie which bears its name. After
NL's first movie, "Animal House," NL's compensation arrangements for its comedy
film projects financed and distributed by studios traditionally fell into a
general pattern of cash fees for NL's producer services and for the use of the
name National Lampoon in the film title, and a small percentage of the studio's
"net profits" (after a certain level of revenues has been achieved) from the
film.
To date, NL has been involved in the production of eight feature films,
including the highly profitable 1978 film "Animal House," co-produced by NL and
Ivan Reitman. This movie starred John Belushi and was financed and distributed
by Universal Studios. For the last five years, revenues from this picture have
consisted mainly of NL's share of fees derived from the licensing of the picture
by Universal for showing by various independent television stations, and from
the sale of videocassettes.
NL's other films have included "National Lampoon's Vacation" (released in 1983)
and its sequels, "National Lampoon's European Vacation" (released in 1985), and
"National Lampoon's Christmas Vacation" (released in 1989), all starring Chevy
Chase and Beverly D'Angelo.
NL and New Line Cinema Corporation ("New Line") entered into an agreement, dated
September 11, 1991, regarding the development and production, financing, and
distribution of up to three (3) National Lampoon motion pictures, each at
budgets not greater than $10 million, within four and one-half years of
execution of the agreement (the "New Line Agreement"). The New Line Agreement
provided NL with an advance fee for the use of the National Lampoon name in
connection with each of the theatrical motion pictures to be produced and
additional contingent compensation based on the gross revenues produced by the
picture.
New Line released the first film under this agreement, "National Lampoon's
Loaded Weapon I," in February, 1993. The film grossed in excess of $28 million
at the domestic boxoffice. The second film, "National Lampoon's Senior Trip,"
was released in September, 1995 and was not a boxoffice success. The New Line
agreement expired on May 10, 1996, and as such, the third motion picture was
never produced.
In March, 1994, the Company signed an agreement with Showtime Networks, Inc.
("Showtime") to produce seven (7) movies over a three (3) year period to be
aired initially on the Showtime Network or The Movie Channel. The agreement
provided for the payment of a license fee to National Lampoon upon the
commencement of principal photography of each film and contingent compensation
based on revenues the films may generate from all sources. The Showtime
agreement has now expired, with only four (4) made-for-cable movies produced,
and as such, the fifth through seventh movies will not be produced. In
accordance with the contract, Showtime has paid the producer fees due for the
fifth (5th) through seventh (7th) movies as of July 31, 1998. Unless the Company
licenses the rights and obtains a significant advance, revenue from theatrical
feature film rights for fiscal year ended July 31, 2000 will be dependent on
contingent compensation from previously licensed rights. The results will be
lower feature film rights revenue for the fiscal year ended July 31, 2000, than
in prior years.
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TELEVISION: In July, 1987 NL entered into an exclusive television agreement with
Barris Industries, Inc. ("Barris"), a Los Angeles-based television production
company. Barris is a predecessor of Guber-Peter Entertainment Company ("GPEC"),
which was acquired by Sony Pictures (formerly Columbia Studios). Pursuant to the
Barris Agreement, NL granted Barris the exclusive right to produce television
programming of any kind utilizing the name National Lampoon for a term of five
years. NL had not previously been significantly active in creating television
programming, and this agreement did not produce any significant television
activity.
Concurrent with the acquisition of NL by J2 Communications, the exclusive right
to produce television programming under the name National Lampoon was
re-acquired by NL on October 1, 1990 from GPEC ("GPEC Agreement"). The purpose
of this acquisition of rights was to ensure that NL had the ability to control
the use of its name in the valuable medium of television and to develop comedy
motion pictures and other programs for broadcast in all areas of television
distribution, including network, syndication and cable.
The GPEC Agreement required the re-payment of $1,000,000 to GPEC, which was the
consideration paid by GPEC to NL for the rights in 1987. This sum was payable by
NL, fifty-percent ($500,000) on execution of the contract (and so paid), and
fifty-percent ($500,000) payable out of seventeen and one-half percent (17 1/2%)
of the gross receipts received by NL as a result of the exploitation of any new
television programs bearing the National Lampoon name, with certain minimums due
on commencement of principal photography or taping of the applicable programs.
After this amount has been repaid, NL shall have no further obligations to GPEC.
To date, $182,500 has been paid under the gross receipt provision of the
agreement.
MADE-FOR-VIDEO MOVIES: "National Lampoon's Last Resort", a made-for-video movie
produced by Rose & Ruby Productions, completed filming in July, 1993. The
picture starred Corey Feldman & Corey Haim, and was distributed internationally
by Moonstone Entertainment and in the U. S. by Vidmark in early 1994.
MOTION PICTURE AND TELEVISION COMPETITION: Motion pictures and television
development activities are highly competitive. NL is in competition with the
major film studios as well as numerous independent motion picture and television
production companies for the acquisition of literary properties, the services of
creative and technical personnel, and available production financing. NL
believes it has been, and will continue to be, aided in these endeavors by the
recognition achieved by the National Lampoon name and by the success achieved by
its films, "National Lampoon's Animal House," "National Lampoon's Vacation," and
"National Lampoon Loaded Weapon I;" however, NL cannot guarantee that any
project will actually be produced or, if produced, will yield the success of
past projects.
BOOKS: NL has published various books, including "National Lampoon's Treasury of
Humor" with Simon and Schuster, and four "True Facts" books with Contemporary
Books. Other NL published books include the third edition of "National Lampoon's
Cartoon Book," and "National Lampoon's White Bread Snaps".
MERCHANDISE: NL has a number of merchandising arrangements, including a line of
trading and post cards based upon National Lampoon magazine art. In addition, At
A Glance Landmark, which published the Company's previous calendars is
distributing the 1999 NL Life Sucks! PAGE-A-DAY CALENDAR AND HORRORSCOPE.
RECORDINGS: Rhino Records continues to distribute a commemorative boxed set
titled "The Best of The National Lampoon Radio Hour," a compilation of classic
comedy from the early 1970's radio series.
10
<PAGE> 12
Publishing Operations
NATIONAL LAMPOON MAGAZINE: First published in March, 1970, National Lampoon was
distributed at newsstands, bookstores, and other retail outlets. Its audience
was largely young, college educated, and affluent. Each issue of the magazine
contained original articles, artwork, and photographs treating various matters
in a satirical manner.
National Lampoon became a bi-monthly magazine in late 1986 with a $3.95 cover
price and approximately 112 pages per issue. Commencing with the March, 1991
issue, National Lampoon increased to a ten (10) times per year frequency and
reduced its cover price to $2.95 and lowered the page count to 84 pages.
However, the continued economic recession and the advent of the Gulf War
depressed all magazine circulation and related advertising revenues.
Consequently, beginning with the December, 1991 issue, the Company reverted to
bi-monthly issues. In an effort to reverse the trend of NL losses over many
years, in March, 1992, the Company relocated the principal offices of National
Lampoon, Inc. to Los Angeles, California, and closed the New York offices. After
the April, 1992 issue, NL suspended publication of National Lampoon for several
months. NL recommenced publication of National Lampoon with the spring, 1993
issue.
In August, 1993 the Company entered into an agreement with CR Cooper
Publications, Inc., a magazine publisher, to print and distribute the magazine.
Editorial control of the magazine content remained with the Company. The
agreement called for the publication of a minimum of 4 issues during the first
year of the agreement, 6 issues the second year and 10 issues for the third and
subsequent years. The agreement was for a period of 3 years; however, in
February, 1996, the agreement was terminated by the Company because certain
minimum performance targets were not met by the Publisher. Beginning with the
25th anniversary issue published in May 1996, the Company again began publishing
the magazine. The Company published 55,000 copies of the 25th Anniversary 1996
issue and 62,000 copies of the 1997 issue. The Company's agreement with Harvard
Lampoon at the time obligated the Company to publish at least one issue of the
magazine a year with a minimum of 50,000 copies. The Company complied with this
obligation until the Company received a waiver from Harvard Lampoon from its
obligation to publish the magazine during the 1999 fiscal year, yet published an
issue of the magazine in October of 1998. The Company published 53,000 copies of
the magazine with a cover price of $4.95.
It became clear to the Company that continuing to publish the magazine was no
longer profitable. Therefore, in connection with the new agreement signed with
Harvard Lampoon, Inc. on October 1, 1998, the Company prevailed in its desire to
discontinue publishing the magazine.
Video Operations
The Company, which through 1993 was engaged in significant operations in the
sell-through video market, has drastically diminished its video operations. The
Company does not expect that its video operations will generate any significant
revenue in the near future.
EMPLOYEES
As of October 23, 1998, the Company employed six (6) employees of whom four (4)
are full time and two (2) are part-time.
11
<PAGE> 13
ITEM 2: PROPERTIES
The Company leases office space of approximately 3,912 square feet at 10850
Wilshire Boulevard, Suite 1000, Los Angeles, California 90024 for a five (5)
year period commencing on October 1, 1995. The Company's rental obligation is
$7,237 per month. The space is utilized for office space, as well as storage of
video masters, cassettes and back issues of the National Lampoon Magazine and
other NL archival materials. In addition, it provides storage for legal,
accounting and contract files related to past years for National Lampoon and J2
Communications. Management considers the Company's corporate offices generally
suitable and adequate for their intended purposes.
ITEM 3: LEGAL PROCEEDINGS
On August 13,1999, Heathdale Productions, Inc., a 25% partner with J2
Communications in the Yearbook Movie company--the participant in the royalties
from Universal Studios on the movie "Animal House"-- sued the Company for breach
of contract and other alleged 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
that this suit will not result in any material impact on its financial condition
or results of operations.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
12
<PAGE> 14
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
a. Stock: The Company's Common Stock has been traded in the NASDAQ
over-the-counter market since October 2, 1986 under the symbol JTWO. On October
21, 1998, the Company held a special shareholders meeting where a 3:1 reverse
stock split was voted on and approved. In consideration of this subsequent
event, all periods presented have been restated to retroactively reflect the
decreased number of shares and share prices outstanding. The reverse split
resulted in a decrease in the common shares from 3,600,000 to 1,200,000 for all
periods presented. The following table sets forth, for the periods shown, the
high and low sales prices of the common stock during each quarterly period
within the three most recent fiscal years, as reported by NASDAQ.
Common Stock
<TABLE>
<CAPTION>
High Low
------ ------
<S> <C> <C>
Fiscal 2000:
First Quarter (through October 31, 1999).... 26.31 14.50
Fiscal 1999:
First Quarter............................... 1.875 1.7814
Second Quarter.............................. 2.25 1.7814
Third Quarter............................... 2.25 1.875
Fourth Quarter.............................. 18.25 1.6875
Fiscal 1998:
First Quarter............................... 4.0314 2.8125
Second Quarter.............................. 3.2814 1.875
Third Quarter............................... 2.8125 1.50
Fourth Quarter.............................. 2.9064 2.3436
Fiscal 1997:
First Quarter............................... 3.6564 3.1875
Second Quarter.............................. 3.375 2.625
Third Quarter............................... 2.9064 2.3436
Fourth Quarter.............................. 3.00 2.4375
</TABLE>
13
<PAGE> 15
On October 25, 1999 the closing sales price for the Common Stock was $20.50 per
share. The approximate number of holders of record of Common Stock on that date
was 1,300. The Company has never paid a dividend on its Common Stock and
presently intends to retain all earnings for use in its business.
ITEM 6: SELECTED FINANCIAL DATA
The selected consolidated statements of operations data for each of the three
years in the period ended July 31, 1999 and the consolidated balance sheet data
at July 31, 1998 and 1997 are derived from the Company's consolidated financial
statements included elsewhere in this Annual Report that have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
report, which is also included elsewhere in this Annual Report. Such selected
consolidated financial data should be read in conjunction with those
consolidated financial statements and the notes thereto. The selected
consolidated income statement data for the years ended July 31, 1996 and 1995
are derived from audited consolidated financial statements of the Company which
are not included herein.
14
<PAGE> 16
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Years-ended July 31,
------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues $ 1,345,000 $ 868,000 $ 1,415,000 $ 1,041,000 $ 1,333,000
Costs and expenses:
Costs of revenue 124,000 45,000 262,000 259,000 193,000
Selling, general
and administrative 2,648,000 765,000 792,000 725,000 818,000
Amortization of intangible assets 240,000 240,000 240,000 240,000 240,000
------------ ---------- ------------ ------------ ------------
(Loss) income from operations (1,667,000) (182,000) 121,000 (183,000) 82,000
Other income and expense:
Settlement of royalty and other claims 436,000 343,000 -- -- --
Minority Interest in income
of consolidated subsidiary (68,000) (34,000) (82,000) (46,000) (30,000)
------------ ---------- ------------ ------------ ------------
(Loss) income before provision (benefit)
for income taxes (1,299,000) 127,000 39,000 (229,000) 52,000
Provision (benefit) for income taxes -- 6,000 9,000 7,000 (14,000)
------------ ---------- ------------ ------------ ------------
NET (LOSS) INCOME $ (1,299,000) $ 121,000 $ 30,000 $ (236,000) $ 66,000
============ ========== ============ ============ ============
(LOSS) INCOME PER COMMON SHARE
Basic $ (1.07) $ 0.10 $ 0.03 $ (0.20) $0,06
============ ========== ============ ============ ============
Diluted $ (1.07) $ 0.10 $ 0.02 $ (0.20) $ 0.06
============ ========== ============ ============ ============
</TABLE>
15
<PAGE> 17
<TABLE>
<CAPTION>
Years-ended July 31,
------------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Intangible assets $3,416,000 $3,656,000 $3,896,000 $4,136,000 $4,376,000
Total assets $5,350,000 $5,962,000 $5,473,000 $5,367,000 $5,667,000
========== ========== ========== ========== ==========
Shareholders' equity $2,590,000 $3,803,000 $3,682,000 $3,652,000 $3,888,000
========== ========== ========== ========== ==========
</TABLE>
16
<PAGE> 18
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
YEAR ENDED JULY 31, 1999 VERSUS JULY 31, 1998
Total revenues for 1999 increased $477,000 to $1,345,000 compared to $868,000
for 1998. Movies, television and theatrical revenues increased $516,000
primarily due to the receipt of $800,000 from International Family Entertainment
Inc. ("IFE") for the rights to exploit the National Lampoon brand in connection
with certain U.S. television rights. These revenues were partially offset by
reductions in amounts received from Showtime of approximately $306,000.
Videocassette sales increased $17,000 to $18,000 from $1,000 in the prior year
mainly due to increased sales of "Mother Goose" video titles. Royalty income
decreased $82,000 from $160,000 to $78,000 from the prior year due to decreased
video royalties. Publishing revenue increased $12,000 from last fiscal year to
$12,000 compared to $0 in 1998 due to the current fiscal year sales of the 1998
edition. Interest income for the year increased $14,000 to $99,000 from $85,000
in the prior fiscal year primarily due to increased interest income recognized
on short-term investment, as well as higher cash balances invested in interest
bearing accounts during the current fiscal year.
Cost of movies, television and video increased $27,000 to $58,000 from $31,000
in the prior fiscal year, primarily due to required payments on the "GPEC"
rights agreement.
Royalty expense increased $52,000 to $66,000, compared to $14,000 in 1998,
primarily due to increases in royalty income, video income and movie income.
Selling, general and administrative expenses increased $163,000 to $948,000 in
the current year as compared to $785,000 in the prior year. The increase was
primarily due to increase in personnel and support staff required in launching
the Site.
Compensation (benefit) related to SAR's increased by $1,719,000 to $1,700,000
from a benefit of $19,000, in 1998 due to a dramatic increase in the Company's
stock price resulting in a corresponding increase in the value of the SAR's.
This is described more fully under "Employment Agreement and Stock Options."
Other income of $436,000 in 1999 and $343,000 in 1998 primarily represents the
reversal of previous accruals related to royalty and other liabilities which
were extinguished at reduced amounts.
A Net Loss of $1,299,000 equal to $1.07 per diluted share was recorded in the
current year compared to $121,000 of Net Income equal to $.10 in 1998. The
dramatic decrease was due primarily to the increase in SAR expenses and expenses
associated with the launch of nationallampoon.com.
YEAR ENDED JULY 31, 1998 VERSUS JULY 31, 1997
Total revenues for 1998 decreased $547,000 to $868,000 compared to $1,415,000
for 1997. Movies, television and theatrical revenues decreased $348,000,
primarily due to decreased movie licensing revenue of previously licensed
movies. Videocassette sales decreased $218,000 to $1,000 from $219,000 from the
prior year due to the Company's continuing de-emphasis of the video segment of
its business because of declining profitability. Royalty income increased
$49,000 from $111,000 to $160,000 from the prior year, primarily due to the
recognition of income on the balance of advance license fees upon expiration of
the license agreements. Publishing revenue decreased $56,000 from last fiscal
year to zero this year due to the Company receiving a waiver from publishing the
National Lampoon magazine during the current fiscal year. Interest income for
the year increased $26,000 to $85,000 from $59,000 in the prior fiscal year
primarily due to increased interest income recognized on short-term investment,
as well as higher cash balances invested in interest bearing accounts during the
current fiscal year.
17
<PAGE> 19
Cost of movies and television decreased $27,000 to $26,000 from $53,000 in the
prior fiscal year, primarily due to no payments being required on the "GPEC"
rights agreement.
There was no cost of magazine due to the company obtaining a waiver from
publishing a magazine this fiscal year.
Royalty expenses decreased $49,000 to $14,000 compared to $63,000 in 1997,
primarily due to no royalty expense being due on the balance of advance license
fees upon expiration of the license agreements as mentioned above.
Selling, general and administrative expenses decreased $27,000 to $765,000 in
the current year as compared to $792,000 in the prior year. The decrease was
primarily due to a reduction in salary expense and insurance expense, partially
offset by an increase in accounting and corporate expenses.
Other income of $343,000 primarily represents the reversal of previous accruals
related to potential royalties, which were extinguished at a reduced amount, the
current year recognition of certain unearned revenues, and the settlement of
certain accrued expenses at reduced levels.
Net income for the current year was $121,000, equal to $.10 per diluted share
compared to $30,000, equal to $.02 per diluted share in the prior fiscal year.
The increase in net income was due primarily to an increase in royalty, interest
and other income, lower general and administrative expenses and cost of movies
and television. This was partially offset by lower movies, television and
theatrical revenue and reduced videocassette sales.
LIQUIDITY AND CAPITAL RESOURCES
Cash and short term investments at July 31,1999 totaled $1,858,000, a decrease
of $373,000 from the prior year-end.
The Company incurred significant expenditures in fiscal 1999, with approximately
$116,000 (without taking into consideration the share of the Company's overhead
allocated to developing the Site) due to the cost of developing and launching
the Site. There will be additional significant expenditures in the current line
of business and management believes that its present level of cash, augmented by
internally generated funds, will provide sufficient cash resources through
fiscal 2000. The Company is exploring ways of raising additional capital. No
assurance can be given that the Company will be successful in raising additional
capital, or if successful, that it will be on terms which are acceptable to the
Company. To the extent that the Web operations are not cash flow positive, or
that additional capital is not available, the Company may be forced to curtail
some of its new activities.
The Company has made a significant investment in the National Lampoon name and
other intangible assets through its acquisition of NLI. Realization of these
acquired assets $(3,416,000 as of July 31, 1999) is dependent on the success and
viability of nationallampoon.com as well as the continued licensing of the
National Lampoon name for use in feature films, video, television and audio
distribution and merchandising of other appropriate opportunities. The Company
has received approximately $7,407,000 in licensing revenues since the
acquisition of the National Lampoon name in 1990. The Company is in the process
of negotiating other licensing agreements and the development of other concepts,
programs, etc. that could generate additional licensing fees in the future. If
these and other licensing agreements that the Company may enter into in the
future do not result in sufficient revenues to recover these acquired intangible
assets over a reasonable period of time or if nationallampoon.com does not meet
with advertising and merchandising sales success, the Company's future results
of operations may be adversely affected by a write-off of or an adjustment to
these acquired intangible assets.
In evaluating if there has been an impairment in the value of its long-lived
assets, the Company follows the guidelines of SFAS No. 121. This statement
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets to be
held and used and for long-lived assets and certain identifiable intangibles to
be disposed of. Management has determined that through the realization of future
licensing agreements and revenues from nationallampoon.com, expected future cash
flows relating to the intangible assets will result in the recovery of the
carrying amount of such assets.
18
<PAGE> 20
IMPACT OF YEAR 2000 ISSUE
Introduction: The term "Year 2000 issue" is a general term used to describe the
various problems that may result from the improper processing of dates and
date-sensitive calculations by computers and other machinery as the Year 2000 is
approached and reached. These problems generally arise from the fact that most
of the world's computer hardware and software has historically used only two
digits to identify the year in a date, often meaning that the computer will fail
to distinguish dates in the "2000's" from dates in the "1900's." These problems
may also arise from other sources as well, such as the use of special codes and
conventions in software that make use of the date field.
State of Readiness: To date, we have completed the Year 2000 conversion with
respect to all of our computer systems and applications. We have completed
remediation and testing of our computer systems and applications. While we have
completed all required system remediation and testing for the Year 2000, we will
continue our testing efforts and make appropriate remediations as necessary
through January 1, 2000.
Because of the substantial progress made by us towards our Year 2000 conversion,
we do not anticipate that any additional significant changes will be required or
that the Year 2000 issue will pose significant operational problems for us.
However, if the Company, its customers and vendors are unable to make necessary
changes in a timely fashion and if unanticipated problems arise, the Year 2000
issue may take longer for us to address and may have a material impact on our
financial condition and results of operations.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Index to Financial Statements of the Company is included in Item 14.
ITEM 9: NONE
19
<PAGE> 21
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth below, as of the date of this filing, lists each
director and executive officer of the Company, the year in which he first became
a director or executive officer, and his principal occupation during the past
five years. Each Director is expected to hold office until the next annual
meeting of stockholders and until his successor has been elected and qualified.
<TABLE>
<CAPTION>
First
Name and Office to which Elected Age Elected
- -------------------------------- --- -------
<S> <C> <C>
James P. Jimirro 62 1986
Chairman of the Board of Directors,
President and Chief Executive Officer
James Fellows 64 1986
Director
Bruce P. Vann 43 1986
Director
John De Simio 47 1998
Director
Andrew Weeraratne 49 1999
Chief Financial Officer
Duncan Murray 53 1986
Vice President-Marketing
</TABLE>
JAMES P. JIMIRRO has been employed by the Company since its inception. From 1980
to 1985 he was the President of Walt Disney Telecommunications Company, which
included serving as President of Walt Disney Home Video, a producer and
distributor of family home video programming. While in this position, he also
served as Corporate Executive Vice President of Walt Disney Productions. In
addition, from 1983 until 1985, Mr. Jimirro served as the first President of The
Disney Channel, a national pay cable television channel, which Mr. Jimirro
conceived and implemented. Mr. Jimirro continued in a consulting capacity for
the Walt Disney Company through July, 1986. From 1973 to 1980 he served as
Director of International Sales and then as Executive Vice President of the Walt
Disney Educational Media Company, a subsidiary of Walt Disney Productions.
Before his move to Disney, Mr. Jimirro directed international sales for CBS,
Inc. and later, for Viacom International.
20
<PAGE> 22
JAMES FELLOWS has been a member of the Board of Directors and the President of
the Central Education Network, Inc., a Chicago, Illinois association of public
television and educational associations, since 1983. From 1962 through 1982, Mr.
Fellows worked in a variety of positions for the National Association of
Educational Broadcasters (NAEB) in Washington, D.C., and became its President
and Chief Executive Officer in 1978. Mr. Fellows is a director of numerous
non-profit corporations, including the Hartford Gunn Institute, a research and
planning service for public telecommunications; the Maryland Public Broadcasting
Foundation, a corporate fund-raiser for public television; and the American
Center for Children and Media, a coalition of organizations committed to
improving media services for children and youth.
BRUCE P. VANN has been a partner in the law firm of Kelly Lytton Mintz & Vann,
LLP since December, 1995, and from 1989 through December 1995 was a partner with
the law firm of Keck, Mahin & Cate and Meyer & Vann. In all firms (located in
Los Angeles, California), Mr. Vann has specialized in corporate and securities
matters. From 1994 through 1998 Mr. Vann served, on a non-exclusive basis, as
Senior Vice President of Largo Entertainment, a subsidiary of The Victor Company
of Japan.
JOHN DE SIMIO has been in the entertainment side of the public relations
business since 1976. From 1988 to 1996, Mr. De Simio was a Senior Vice
President, Publicity/Promotion for Castle Rock Entertainment, where he oversaw
publicity and national promotional campaigns for their theatrical and television
productions. Before moving to Castle Rock, Mr. De Simio was National Publicity
Director of Twentieth Century Fox Film Corporation from 1985-1988. Mr. De Simio
is presently on a disability leave due to a visual impairment. Mr. De Simio
currently serves on the boards of Theatre LA and The Broadcast Film Critics
Association.
ANDREW WEERARATNE joined the company in February,1999 as Chief Financial
Officer. He is a Certified Public Accountant, licensed in the State of Florida
(presently inactive), and has worked as Chief Financial Officer and Controller
for various companies over the last 10 years. Prior to that he owned and
operated his own Certified Public Accounting firm in Washington, D.C. for 6
years.
DUNCAN MURRAY has been with the Company since August, 1986. Before that, he
worked with The Walt Disney Company for fourteen years in a variety of
capacities including Vice President, Sales Administration for The Disney Channel
and Director of Sales for Walt Disney Telecommunications Company. Mr. Murray
also serves, on a non-exclusive basis, as Vice President and Treasurer of
Transactional Media Incorporated.
21
<PAGE> 23
ITEM 11: EXECUTIVE COMPENSATION
The Summary Compensation Table below includes, for each of the fiscal years
ended July 31, 1999, 1998 and 1996, individual compensation for services to the
Company and its subsidiaries of the Chief Executive Officer (the "Named
Officer").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
---------------------------------------------------
Annual Compensation Awards Payouts
--------------------------------------- ---------------------------- -------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other
Name Annual Restricted All Other
and Compen- Stock LTIP Compen-
Principal sation Award(s) Options/ Payouts sation
Position Year Salary($)(4) Bonus($)(4) ($)(1) ($) SARs(#) ($) ($)
- -------- ---- ------------ ----------- ------- ----------- -------------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1999 190,750 -- (2) (3) 16,667/16,667 -- 3
James P. 1998 190,750 -- (2) (3) 16,667/16,667 -- 3
Jimirro(2) 1997 190,750 -- (2) (3) 16,667/16,667 -- 3
</TABLE>
- ------------
(1) Does not include amounts of $18,887 in 1999, $12,000 in 1998, and
$12,500 in 1997 paid to Jim Jimirro, who is entitled to be reimbursed
for expenses relating to entertainment, travel and living expenses when
away from home.
(2) Does not include $6000 in 1999, $6,000 in 1998, and $7,000 in 1997,
which the Company paid for Mr. Jimirro's health plan. The Company also
provides Mr. Jimirro with a Company-leased vehicle for his use.
(3) Does not include SAR's granted to Mr. Jimirro pursuant to his employment
agreement. See the description of Mr. Jimirro's employment agreement
under "Employment Agreements and Stock Option Plans" below.
(4) Effective June 1, 1992, Mr. Jimirro reduced the amount of salary he
receives to $190,750. Mr. Jimirro does not expect to receive the unpaid
portion unless there is a change in the control of the Company as
defined by his employment agreement. The Company has not accrued any
salary or bonus for Mr. Jimirro in regards to the above for the fiscal
years ended July 31, 1999, 1998 and 1997.
22
<PAGE> 24
Option Grants in Last Fiscal Year
Shown below is information on grants of stock options pursuant to the 1994 Stock
Option Plan during the fiscal year ended July 31, 1999 to the Named Officer
which are reflected in the Summary Compensation Table on page 17.
<TABLE>
<CAPTION>
Potential Realized Value at
Individual Grants in 1999 Assigned Annual Rates of Stock
-------------------------------------------------------- Price Appreciation
Percentage for 7 year Option Term
of Total -----------------------------------------
Options/SARs Exercise 5% 10%
Options/ granted to or Base ------------------- -------------------
SARS Employees in Price Per Expiration Stock Dollar Stock Dollar
Name Granted(#) Fiscal Year Share($) Date Price($) Gains($) Price($) Gains($)
- ---- ---------- ------------ --------- ---------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
James Jimirro 16,667(1) 40.0 $1.94(2) 12-28-2005 $2.73 $13,167 $3.78 $30,667
16,667 100.0 $1.94 12-28-2005 $2.73 $13,167 $3.78 $30,667
</TABLE>
- ----------
(1) Options/SARS granted are immediately exercisable.
(2) Options/SARS granted with an exercise price (or initial valuation in the
case of SARs) equal to the average of the high and low bid and asked
price for one share of Common Stock during the five (5) business days
preceding the date of grant Stock as quoted on the National Association
of Securities Dealers Automated Quotation System ("NASDAQ") on December
28, 1999, the date of grant for Mr. Jimirro.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
Shown below is information with respect to (i) options exercised by the Named
Officer pursuant to the 1994 Plan during fiscal 1999 (of which there were none);
and (ii) unexercised options granted in fiscal 1999 and prior years under the
1994 Plan to the Named Officer and held by them at July 31, 1999.
<TABLE>
<CAPTION>
Value of
Unexercised
Unexercised In-the-Money
Options/SARs at Options/SARS at
7/31/99 7/31/99(1)
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise(#) Realized($) Unexercisable(#) Unexercisable($)
- ---- --------------- ----------- ---------------- ----------------
<S> <C> <C> <C> <C>
James Jimirro -0- -0- 233,338/0 $3,433,752/0
</TABLE>
- ----------
(1) Based on the closing sale price as quoted on NASDAQ on that date.
Director Compensation
Directors, with the exception of Mr. Jimirro, receive 1,333 stock options per
year exercisable at the then market price as compensation for their services as
a director.
23
<PAGE> 25
Compensation Committee Interlocks and Insider Participation
The Company does not have a Compensation Committee or similar Board committee.
The compensation of Mr. Jimirro as Chief Executive Officer ("CEO") is determined
under the provisions of Mr. Jimirro's employment agreement with the Company,
which was approved by the Board of Directors in 1994 and then in 1999. James
Jimirro, James Fellows, Bruce Vann and John De Simio were each directors of the
Company during fiscal 1999.
EMPLOYMENT AGREEMENTS AND STOCK OPTIONS
In 1999, the Company entered into a new employment agreement with James P.
Jimirro, effective July 1, 1999 (the "1999 Agreement"). Under the 1999
Agreement, which has a term of seven years, Mr. Jimirro will receive a base
salary plus an incentive bonus following the end of each fiscal year during
which Mr. Jimirro is employed by the Company. Mr. Jimirro's base salary for the
first year will be $475,000 and will be adjusted annually by the greater of (i)
9% or (ii) 5% plus the percentage increase in the CPI Index. Effective July 1,
1999, the President reduced the amount of salary he receives to $191,000. The
President does not expect to receive the unpaid portion unless there is a change
in the control of the Company as defined by the agreement. The decision by Mr.
Jimirro to forego compensation is similar to the actions by Mr. Jimirro under
the terms of his prior employment agreement. Accordingly, and as specifically
provided by the terms of the 1999 Agreement, the company has entered into a
contingent note (the "Contingent Note") in the amount of $2,150,625, which
amount represents the principal of all amounts previously waived by Mr. Jimirro.
The Contingent Note is due only upon a change of control by the Company (as
discussed below), and is considered a contingent obligation of the Company. To
the extent that amounts are waived by Mr. Jimirro in the future, the 1999
Agreement provides that the Company is obligated to issue additional Contingent
Notes, due on the same basis, for the amounts so waived.
Mr. Jimirro's bonus is to be an amount equal to 5% of the Company's earnings in
excess of $500,000 and up to $1 million; plus 6% of the next $1 million of
earnings; plus 7% of the next $1 million of earnings; plus 8% of the next $2
million of earnings; and plus 9% of the next $2 million of earnings. If earnings
exceed $7 million, then Executive shall, in addition to foregoing compensation,
be entitled to such additional incentive compensation as may be determined by
the Board based upon Executive's services and performance on behalf of the
Company and the profitability of the Company.
The 1999 Agreement also provides that, on the date of each annual meeting of
shareholders during its term, Mr. Jimirro will be granted stock options with
respect to 25,000 shares of Common Stock and stock appreciation rights (SARs)
with respect to 25,000 shares of Common Stock. The exercise price of each option
and the initial valuation of each SAR will be equal to the average of the high
and low bid and asked price for a share of common stock during the five (5)
business days preceding the date of grant as reported by NASDAQ automated
quotation system. The options and SARs will be immediately exercisable
non-statutory stock options, will have a term of seven years, and will be
subject to all other terms identical to those contained in the Company's 1999
Employee Stock Option Incentive Plan (the "1999 Plan"). The 1999 Plan
specifically provides for the grant of stock options and SARs to Mr. Jimirro in
accordance with his employment agreement. The 1999 Agreement provides that if
Mr. Jimirro's employment is terminated without cause, or is terminated by Mr.
Jimirro for cause or under certain other circumstances, including a change in
control of the Company (as defined below), then Mr. Jimirro generally is
entitled to receive all payments and other benefits which would be due under the
1999 Agreement during its entire term; provided, that such payments are to be
"grossed up" to the extent that such payments would constitute an "excess
parachute payment" under the Internal Revenue Code of 1986, or any successor law
applicable to payments of severance compensation to Mr. Jimirro. A "change in
control" would be deemed to occur if (a) any person or group becomes the direct
or indirect owner of securities with 25% or more of the combined voting power of
the Company's then outstanding securities, (b) if there is a significant change
in the composition of the Board of
24
<PAGE> 26
Directors of the Company, (c) upon the sale of all or substantially all of the
assets of the Company, (d) upon the merger of the Company with any other
corporations if the shareholders of the Company prior to the merger owned less
than 75% of the voting stock of the corporation surviving the merger or (e) in
certain other events. In addition to the foregoing benefits, Mr. Jimirro has the
right, if he terminates his employment under certain circumstances (including
following a change in control or a breach of the 1999 Agreement by the Company)
to serve as a consultant to the Company for a period of five years (the
"Consulting Period"). During the Consulting Period, Mr. Jimirro would be
required to devote no more than 600 hours per year to the affairs of the
Company, and would receive 50% of his salary as in effect on the date of
termination of his employment. As a result of the foregoing, the Company would
incur substantial expenses if Mr. Jimirro terminates his employment with the
Company following a change in control of the Company, which may make the Company
a less attractive acquisition candidate. The 1999 Agreement also provides Mr.
Jimirro with certain registration rights pursuant to which, beginning in 2000,
the Company will be required upon the request of Mr. Jimirro to register the
sale of shares of the Company's Common Stock owned by Mr. Jimirro under the
Securities Act of 1933. The 1999 Agreement is terminable by the Company only
"for cause" as defined therein.
Any employee may participate in any bonus plan, which may be established, as
well as all Employee Stock Option Plans.
STOCK OPTION PLANS
In 1994 the Board of Directors approved an Employee Stock Option Plan and a
Stock Option Plan for Non-Employee Directors. Both Plans were approved by
Shareholders at the Shareholders' Meeting held March 2, 1995.
The Employee Stock Option Plan is to be administered by a committee consisting
of at least two members of the Board of Directors. All prior options granted
under previous stock option plans are to be replaced by options granted under
the 1994 Plan.
The 1994 Plan provides for the maximum number of options to be granted to be the
greater of 358,333 or 30% of the Company's outstanding shares less 41,667 shares
reserved for issuance under the Non-Employee Director Plan.
The term of the options granted shall not exceed 10 years and the exercise price
shall be equal to 100% of the fair market value of the common stock on the date
of grant.
The Non-Employee Directors Stock Option Plan is to be administered by a
committee consisting of at least two members of the Board of Directors. All
prior options granted under previous stock option plans are to be replaced by
options granted under the 1994 Plan.
The 1994 Plan provided for a maximum number of 41,667 options to be granted and
further provides for the granting of 1,333 option shares per year to each
Non-Employee Director as compensation for his services.
A maximum of 41,667 shares may be issued under the Plan at an exercise price
equal to the fair market value of the stock on the date of grant. All options
are to be immediately exercisable.
The Board of Directors has approved, and the Company will be submitting to
shareholders, a 1999 Stock Option Plan which will provide for the issuance of
shares equal to 20% of the aggregate number of shares of the Company's Common
Stock then outstanding. The options outstanding under the 1994 Plan will be
transferred to the 1999 Plan. The provisions of the proposed 1999 Plan are
substantially similar to the 1994 Non-Employee Director Plan and Employee Plan,
on a combined basis.
25
<PAGE> 27
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the expected beneficial ownership of Common Stock
as of October 27, 1999. The table shows the beneficial ownership to each person
known to J2 who beneficially owns more than 5% of the shares of J2 Common Stock,
each current director, and all directors and officers as a group. Except as
otherwise indicated, J2 believes that the beneficial owners of the Common Stock
listed below, based on information furnished by such owners, have sole
investment and voting power with respect to such shares, subject to community
property laws where applicable.
<TABLE>
<CAPTION>
Shares Percent
Beneficially of
Owned Class
------------ --------
Number Percent
<S> <C> <C>
James P. Jimirro(2)(3) 325,336 26.4%
Daniel S. Laikin(7) 151,200 12.42%
Paul Skjodt(7) 127,000 10.44%
James Fellows(2)(4) 13,500 (1)
Bruce P. Vann(2)(5) 1,665 (1)
John De Simio(2)(6) 1,333 (1)
All directors and executive officers
as a group (4 persons) 620,034 50.26%
</TABLE>
- ----------
(1) Less than 1 percent.
(2) The address for each shareholder listed is 10850 Wilshire Boulevard,
Suite 1000, Los Angeles, California 90024.
(3) Includes 116,669 stock options granted under the Company's Stock Option
Plan pursuant to Mr. Jimirro's Executive Employment Agreement.
(4) Includes 13,500 shares of Common Stock purchasable under the Company's
Stock Option Plan.
(5) Includes 1,665 shares of Common Stock purchasable under the Company's
Stock Option Plan.
(6) Includes 1,333 shares of Common Stock purchasable under the Company's
Stock Option Plan
(7) The address for each shareholder listed is c/o Biltmore Homes, Inc.,
25 West 9th Street, Indianapolis, IN 46204
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Bruce P. Vann and the law firms of Kelly Lytton Mintz & Vann LLP, of
which he is a partner, performed services as attorneys for the Company. For the
fiscal year ended July 31, 1999, Kelly & Lytton Mintz & Vann LLP earned
approximately $13,185. Mr. Vann is a director of the Company and, as such, he
(or his law firm) may receive additional compensation for services rendered to
the Company.
26
<PAGE> 28
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this annual report:
1. Financial Statements:
The financial statements listed in the accompanying Index to
Financial Statements are filed as part of this annual report.
2. Exhibits:
The Exhibits listed below are filed as a part of this annual
report.
3.1 Restated Articles of Incorporation.(1)
3.2 By-laws of the Company.(1)
3.3 Certificate of amendment to Articles of Incorporation.(10)
4.1 Right Agreement between J2 Communications and U.S. Stock
Transfer Corporation, dated July 15, 1999.(3)
10.1 Restated Employment Agreement between the Company and
James P. Jimirro, dated as of July 1, 1999.(9)
10.3 Lease between the Company and Pacific Properties.(4)
10.4 Amended lease between the Company and Pacific
Properties.(5)
10.5 Second amended lease between the Company and Pacific
Properties(6)
10.7 1994 Stock Option Plan for Employees.(7)
10.8 1994 Stock Option Plan for Non-Employee Directors.(7)
10.9 1998 Agreement between The Harvard Lampoon, Inc. and J2
Communications and settlement agreement and mutual
general release agreement.(8)
10.10 Form of Contingent Note.
10.11 Form of Restated Indemnity Agreement.(9)
21.1 List of subsidiaries of Registrant.(8)
- ----------
(1) Filed as an Exhibit to that certain Form S-1 Registration Statement of
the Company as filed with the Securities and Exchange Commission on July
28, 1986, September 22, 1986 and October 2, 1986 (the "S-1 Registration
Statement").
(2) Filed as Exhibit to the Company's Annual Report on Form 10-K for the
Fiscal Year ended July 31, 1991.
(3) Filed as an Exhibit to that certain current report on Form 8-K, dated
July 16, 1999.
27
<PAGE> 29
(4) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
Fiscal Year Ended July 31, 1988.
(5) Filed as an Exhibit to the Company's Annual Report of Form 10-K for the
Fiscal Year Ended as of July 31, 1989.
(6) Filed as an Exhibit to that certain Registration Statement of the
Company filed with the Securities and Exchange Commission on May 28,
1993.
(7) Filed as an Exhibit to that certain Registration Statement of the
Company on Form S-8 filed with the Securities and Exchange Commission on
May 8, 1995.
(8) Filed as an Exhibit to that certain quarterly report on Form 10-Q, dated
December 15, 1998.
(9) Filed herewith.
(10) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
Fiscal Year Ended July 31, 1998.
28
<PAGE> 30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of Los Angeles,
State of California, on the 26th day of October, 1998.
J2 COMMUNICATIONS
NOVEMBER 4, 1999 BY: /s/ JAMES P. JIMIRRO
-----------------------------------------
JAMES P. JIMIRRO
CHAIRMAN OF THE BOARD,
PRESIDENT, AND CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of Los Angeles,
State of California, on the 26th day of October, 1998.
<TABLE>
<CAPTION>
Signatures Title Date
- ---------- ----- ----
<S> <C> <C>
/s/ James P. Jimirro Chairman of the Board, November 4, 1999
- ----------------------------- President, Chief Executive Officer
JAMES P. JIMIRRO (Principal Executive Officer)
and Director
/s/ Andrew Weeraratne Chief Financial Officer November 4, 1999
- ----------------------------- (Principal Financial Officer)
ANDREW WEERARATNE
/s/ James Fellows Director November 4, 1999
- -----------------------------
JAMES FELLOWS
/s/ Bruce P. Vann Director November 4, 1999
- -----------------------------
BRUCE P. VANN
/s/ John De Simio Director November 4, 1999
- -----------------------------
JOHN DE SIMIO
</TABLE>
29
<PAGE> 31
J2 COMMUNICATIONS AND SUBSIDIARIES
FINANCIAL STATEMENTS
AS OF JULY 31, 1999 AND 1998
TOGETHER WITH AUDITOR'S REPORT
30
<PAGE> 32
J2 COMMUNICATIONS AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
JULY 31, 1999
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of
July 31, 1999 and 1998
Consolidated Statements of Operations
for each of the three years in the period ended July 31, 1999
Consolidated Statements of Shareholders' Equity for each of the
three years in the period ended July 31, 1999
Consolidated Statements of Cash Flows
for each of the three years in the period ended July 31, 1999
Notes to Consolidated Financial Statements
31
<PAGE> 33
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To J2 Communications:
We have audited the accompanying consolidated balance sheets of J2
Communications and subsidiaries (a California corporation) as of July 31, 1999
and 1998, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended July 31,
1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
As discussed in Note 1 to the consolidated financial statements, a significant
portion of the Company's assets is composed of certain intangible assets.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of J2 Communications and
subsidiaries as of July 31, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended July 31,
1999 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Los Angeles, California
October 19, 1999
32
<PAGE> 34
J2 COMMUNICATIONS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JULY 31, 1999 AND 1998
ASSETS
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $1,858,000 $ 879,000
Short-term investments, at cost -- 1,352,000
Other current assets 41,000 55,000
---------- ----------
Total current assets 1,899,000 2,286,000
---------- ----------
NONCURRENT ASSETS:
Equipment, less accumulated
depreciation of $8,000 and
$0 in 1999 and 1998, respectively 19,000 --
Intangible assets, less accumulated
amortization of $2,549,000 and
$2,309,000 in 1999 and 1998, respectively 3,416,000 3,656,000
Other 16,000 20,000
---------- ----------
Total noncurrent assets 3,451,000 3,676,000
---------- ----------
TOTAL ASSETS $5,350,000 $5,962,000
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
33
<PAGE> 35
J2 COMMUNICATIONS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JULY 31, 1999 AND 1998
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 197,000 $ 154,000
Accrued expenses 432,000 829,000
Deferred revenues -- 800,000
Income taxes payable 25,000 38,000
Common stock payable 203,000 203,000
Minority interest 186,000 118,000
---------- ----------
Total current liabilities 1,043,000 2,142,000
---------- ----------
Deferred Compensation 1,717,000 17,000
---------- ----------
Total liabilities 2,760,000 2,159,000
---------- ----------
</TABLE>
34
<PAGE> 36
COMMITMENTS AND CONTINGENCIES (Note 5)
<TABLE>
<S> <C> <C>
SHAREHOLDERS' EQUITY:
Preferred stock, no par value:
Authorized -- 2,000,000 shares,
issued and outstanding --
0 shares in 1999 and 1998 -- --
Common stock, no par value:
Authorized--15,000,000 shares,
issued
1,233,712 and 1,200,000 shares in
1999 and 1998, respectively 8,754,600 8,662,600
Note receivable on common stock (134,000) (128,000)
Deficit (6,029,000) (4,730,000)
Less: treasury stock at cost, 1,166 shares (1,600) (1,600)
----------- -----------
Total shareholders' equity 2,590,000 3,803,000
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 5,350,000 $ 5,962,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
35
<PAGE> 37
J2 COMMUNICATIONS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JULY 31, 1999
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES:
Movies, television and theatrical $ 1,138,000 $ 622,000 $ 970,000
Videocassette sales 18,000 1,000 219,000
Royalty income 78,000 160,000 111,000
Publishing 12,000 -- 56,000
Interest 99,000 85,000 59,000
------------ ------------ ------------
Total revenues 1,345,000 868,000 1,415,000
------------ ------------ ------------
EXPENSES:
Costs of movies and television 45,000 26,000 53,000
Cost of videocassettes sold 13,000 5,000 105,000
Royalty expense 66,000 14,000 63,000
Magazine editorial, production and
distribution -- -- 41,000
Selling, general and administrative 948,000 784,600 755,000
Compensation (benefit) related to SAR 1,700,000 (19,600) 37,000
Amortization of intangible assets 240,000 240,000 240,000
------------ ------------ ------------
Total expenses 3,012,000 1,050,000 1,294,000
------------ ------------ ------------
</TABLE>
36
<PAGE> 38
<TABLE>
<S> <C> <C> <C>
OTHER INCOME 436,000 343,000 --
------------ ------------ ------------
(Loss) income from
consolidated operations (1,231,000) 161,000 121,000
MINORITY INTEREST IN INCOME OF
CONSOLIDATED SUBSIDIARY (68,000) (34,000) (82,000)
------------ ------------ ------------
(Loss) income before provision
for income taxes (1,299,000) 127,000 39,000
PROVISION FOR INCOME TAXES -- 6,000 9,000
------------ ------------ ------------
NET (LOSS) INCOME $ (1,299,000) $ 121,000 $ 30,000
============ ============ ============
(LOSS) INCOME PER COMMON SHARE:
Basic $ (1.07) $ 0.10 $ 0.03
============ ============ ============
Diluted $ (1.07) $ 0.10 $ 0.02
============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
AND COMMON EQUIVALENT SHARES OUTSTANDING
Basic 1,211,728 1,200,000 1,200,000
============ ============ ============
Diluted 1,211,728 1,212,347 1,214,937
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
36
<PAGE> 39
J2 COMMUNICATIONS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JULY 31, 1999
<TABLE>
<CAPTION>
Notes
Common Stock Receivable Less:
------------------------ on Common Treasury
Shares Amount Stock Deficit Stock Total
--------- ---------- --------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, July 31, 1996 1,200,000 $8,649,600 $(115,000) $(4,881,000) $(1,600) $3,652,000
Accrued interest on notes receivable -- 6,000 (6,000) -- -- --
Net income -- -- -- 30,000 -- 30,000
--------- ---------- --------- ----------- ------- ----------
BALANCES, July 31, 1997 1,200,000 8,655,600 (121,000) (4,851,000) (1,600) 3,682,000
Accrued interest on notes receivable -- 7,000 (7,000) -- -- --
Net income -- -- -- 121,000 -- 121,000
--------- ---------- --------- ----------- ------- ----------
BALANCES, July 31, 1998 1,200,000 8,662,600 (128,000) (4,730,000) (1,600) 3,803,000
Accrued interest on notes receivable -- 6,000 (6,000) -- -- --
Stock options exercised 17,045 49,000 -- -- -- 49,000
Shares issued in settlement of liabilities 16,667 37,000 -- -- -- 37,000
Net loss -- -- -- 1,299,000 -- 1,299,000
--------- ---------- --------- ----------- ------- ----------
BALANCES, July 31, 1999 1,233,712 $8,754,600 $(134,000) $(6,029,000) $(1,600) $2,590,000
========= ========== ========= =========== ======= ==========
</TABLE>
The accompanying notes are integral part of these consolidated financial
statements.
37
<PAGE> 40
J2 COMMUNICATIONS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JULY 31, 1999
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (1,299,000) $ 121,000 $ 30,000
Adjustments to reconcile net (loss)
income to net cash (used in)
provided by operating activities:
Amortization of intangible assets 240,000 240,000 240,000
Depreciation 8,000 -- --
Deferred compensation 1,700,000 (19,600) 37,000
Shares issued in settlement of liabilities 37,000 -- --
Minority interest in income of
consolidated subsidiary 68,000 34,000 82,000
Changes in assets and liabilities:
Accounts payable 43,000 24,000 18,000
Accrued expenses (397,000) (262,400) (56,000)
Income taxes payable (13,000) -- --
Deferred revenues (800,000) 592,000 (5,000)
Other 14,000 20,000 22,000
------------ ------------ ------------
Net cash (used in) provided by
operating activities (399,000) 749,000 368,000
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term investments -- (1,641,000) (1,053,000)
Sale of short-term investments 1,352,000 1,150,000 1,206,000
Purchase of equipment (27,000) (20,000) --
Acquisition of other long-term assets 4,000 -- --
------------ ------------ ------------
Net cash provided by (used in)
investing activities 1,329,000 (511,000) 153,000
------------ ------------ ------------
</TABLE>
38
<PAGE> 41
<TABLE>
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 49,000 -- --
------------ ------------ ------------
Net cash provided by financing
activities 49,000 -- --
------------ ------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 979,000 238,000 521,000
CASH AND CASH EQUIVALENTS,
beginning of year 879,000 641,000 120,000
------------ ------------ ------------
CASH AND CASH EQUIVALENTS,
end of year $ 1,858,000 $ 879,000 $ 641,000
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION--
Cash paid during the year for
income taxes $ 23,000 $ 6,000 $ 9,000
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
39
<PAGE> 42
J2 COMMUNICATIONS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1999
1. Summary of Significant Accounting Policies
Organization and Principles of Consolidation
J2 Communications (the "Company"), a California Corporation, was formed
in March 1986, and was primarily engaged in the acquisition,
development and production of entertainment and special-interest
videocassette programs and the marketing, distribution and licensing of
these programs for retail sale in the home video market. In fiscal year
1991, the Company acquired all of the outstanding shares of National
Lampoon, Inc. ("NLI"). NLI was incorporated in 1967 and was primarily
engaged in various aspects of the publishing and entertainment
industries. In December 1992, in consideration for the default of
certain intercompany notes from NLI to the Company, NLI assigned the
rights to the majority of its assets in full satisfaction of the notes.
Included in these assets was NLI's 100 percent ownership interest in NL
Communications, Inc. and Heavy Metal, Inc., which, upon this
assignment, became subsidiaries of the Company.
During April 1999, the Company refocused its business strategy by
positioning itself as an internet based comedic content provider by
developing "nationallampoon.com" ("the Website"). The Company believes
that the world wide web is emerging as a form complimentary to, and in
many respects superior to, traditional television and print media in
terms of its ability to deliver content to its target audience. The
Website was launched during October 1999.
The Company's primary source of revenues currently are derived through
exploitation of the "National Lampoon" trademark in a variety of areas
including motion pictures, home video, television, publishing and other
entertainment media. Although continued licensing revenues are expected
from these forms of media, the Company anticipates that the new Website
will become the primary source of income through advertising revenue,
electronic commerce and the spinning off of original characters and
stories introduced on the Website to feature films and television.
Until the time where a normalized revenue stream can be generated from
the Website, the Company's revenues and income will continue to
fluctuate based on the size, nature and timing of transactions whereby
its names and trademarks are licensed.
40
<PAGE> 43
The consolidated financial statements include the accounts of the
Company and its majority owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
Cash Equivalents
Cash equivalents include certificates of deposit with original maturity
dates of three months or less.
Short-Term Investments
In accordance with the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt
and Equity Securities," the Company determines the appropriate
classification of marketable securities at the time of purchase and
reevaluates such designation at each balance sheet date. Marketable
securities have been classified as held-to-maturity and are carried at
cost.
Revenue Recognition
The Company recognizes licensing revenues based upon information
provided by the licensee, with the exception of non-refundable advances
from the licensing of the "National Lampoon" name, which are recognized
when received. Revenues from the sale of videocassettes, net of
estimated provisions for sales returns (which are not material for any
period presented), are recognized when the units are shipped. Advances
for future sales of videocassettes are deferred until the units are
shipped. Publishing revenues include magazine sales and revenue from
advertising included in the magazines. Single copy magazine sales are
recognized as income in the month the issue becomes available for sale
at the newsstand. Advertising revenue is recognized concurrently with
the recognition of magazine sales.
Intangible Assets
Intangible assets consist primarily of the right to license the
"National Lampoon" name and are being amortized straight-line over a
twenty-five year period. Management continually evaluates whether
events and circumstances have occurred that indicate the remaining
estimated useful life of intangible assets may warrant revision or that
the remaining balance of intangible assets may not be recoverable.
Factors that would indicate the occurrence of such events or
circumstances include current period operating or cash flow losses
combined with a history of operating or cash flow losses, a projection
or forecast that demonstrates continuing losses, or the inability of
the Company to renew,
41
<PAGE> 44
extend or replace existing contracts as they expire, including
licensing of the "National Lampoon" name. When factors indicate that
intangible assets should be evaluated for possible impairment, the
Company uses an estimate of the related business's undiscounted net
income over the remaining life of the intangible assets in measuring
whether the intangible assets are recoverable.
The Company has made a significant investment in the "National Lampoon"
name and other intangible assets through its acquisition of NLI.
Realization of these acquired assets is dependent on the continued
exploitation of the "National Lampoon" name through licensing for use
in feature films, video, television and audio distribution and
merchandising or other appropriate opportunities, as well as the
ability to generate revenue through other business ventures, such as
the Website. The Company has received approximately $7,407,000 in
licensing revenues since the acquisition of the "National Lampoon" name
in 1990. The Company is in the process of identifying other licensing
opportunities and developing concepts, programs and other opportunities
that could generate future revenue. If these and other ventures that
the Company may enter into in the future do not result in sufficient
revenues to recover these acquired intangible assets over a reasonable
period of time, the Company's future results of operations may be
adversely affected by a write-off of or an adjustment to these acquired
intangible assets.
In evaluating if there has been an impairment in the value of its
long-lived assets, the Company follows the guidelines of SFAS No. 121.
This statement establishes accounting standards for the impairment of
long-lived assets, certain identifiable intangibles and goodwill
related to those assets to be held and used and for long-lived assets
and certain identifiable intangibles to be disposed of. Management has
determined that through the realization of future licensing agreements,
expected future cash flows relating to the intangible asset will result
in the recovery of the carrying amount of such asset.
PER SHARE INFORMATION
The Company has adopted SFAS No. 128, "Earnings Per Share" ("EPS"),
effective for the quarter-ended January 31, 1998. All prior period EPS
data presented has been restated to conform with the provisions of this
statement. 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 options are included as share equivalents in computing
diluted earnings per share using the treasury stock method.
42
<PAGE> 45
On October 21, 1998, the Company held a special shareholders meeting
where a 3:1 reverse stock split was voted on and approved. In
consideration of this event, all periods presented have been restated
to retroactively reflect the decreased number of shares outstanding.
A summary of the shares used to compute earnings per share is as
follows:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
July 31, July 31, July 31,
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Weighted average common shares used
to compute basic EPS 1,211,728 1,200,000 1,200,000
Stock options -- 12,347 14,937
--------- --------- ---------
Weighted average common shares used
to compute diluted EPS 1,211,728 1,212,347 1,214,937
========= ========= =========
</TABLE>
Dilutive stock options of 182,167 are not included in the calculation
of diluted EPS in the year ending July 31, 1999 because they are
antidilutive.
Income Taxes
Deferred income tax assets and liabilities are computed annually for
differences between the financial statement and tax basis of assets and
liabilities that will result in taxable or deductible amounts in the
future. Such deferred income tax asset and liability computations are
based on enacted tax laws and rates applicable to periods in which the
differences are expected to effect taxable income. Valuation allowances
are established when necessary to reduce deferred tax assets to the
amount expected to be realized. Income tax expense is the tax payable
or refundable for the period plus or minus the change during the period
in deferred tax assets and liabilities.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that effect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
43
<PAGE> 46
Reclassifications
Certain items in the 1998 and 1997 financial statements have been
reclassified to conform with the 1999 presentation.
2. Short-Term Investments
Short-term investments consist of United States Treasury bills and
notes with original maturities of between three and twelve months. The
following is an analysis of short-term investments:
<TABLE>
<CAPTION>
1999 1998
---- ----------
<S> <C> <C>
US Government obligations, cost $ -- $1,352,000
Gross unrealized holding gains -- 12,000
---- ----------
US Government obligations, fair value $ -- $1,364,000
==== ==========
</TABLE>
No provision has been made for the change in market value for these investments,
as the Company intends to hold them until maturity. In determining realized net
gains, the cost of the securities sold is based on specific identification.
3. Deferred Revenues
Deferred revenues consist of the following:
<TABLE>
<CAPTION>
1999 1998
---- --------
<S> <C> <C>
Deferred television revenues $ -- $800,000
---- --------
$ -- $800,000
==== ========
</TABLE>
44
<PAGE> 47
4. Accrued Expenses
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Accrued royalties $ 50,000 $312,000
Reserve for contract payment on
sale of stock (Note 5) -- 158,000
Deferred salary 189,000 189,000
Legal expenses and other 193,000 170,000
-------- --------
$432,000 $829,000
======== ========
</TABLE>
Certain royalties and other expenses (including the contingent payment
on sale of stock) accrued in previous years were settled in fiscal year
1999 and 1998 at reduced levels. The reduction in these accruals is
reflected in other income in the accompanying consolidated statement of
operations.
5. Commitments and Contingencies
Made-For-Cable Agreement
In March 1994, the Company signed an agreement with Showtime Networks,
Inc. ("Showtime") to produce seven movies over a three year period to
be aired initially on the Showtime Network or The Movie Channel. The
agreement provides for the payment of a license fee to NLI upon the
commencement of principal photography of each film and contingent
compensation based on revenues the films may generate from all sources.
The Showtime agreement has now expired, with only four made-for-cable
movies produced, and as such, the fifth through seventh movies will not
be produced. Showtime has paid the producer fees due for all movies as
of July 31, 1999.
Revenue recognized under this agreement totaled $0, $300,000 and
$300,000 for the years ended July 31, 1999, 1998 and 1997,
respectively.
45
<PAGE> 48
In April 1998, the Company entered into an $800,000 agreement with
International Family Entertainment, Inc. ("IFE"), whereby IFE had
certain exclusive rights to the "National Lampoon" brand (including
name, logos and related elements) in connection with US television
series and made-for-TV movies during the 1998-99 telecast season. As
the $800,000 annual fee was received by the Company in June 1998 for
the television season beginning in August 1998, the Company deferred
this income until fiscal year 1999. This income was reflected as
movies, television and theatrical in the accompanying consolidated
statements of operations. IFE did not exercise an option to extend this
agreement through the 1999-2000 telecast season.
Motion Picture Agreement
NLI and New Line Cinema Corporation ("New Line") entered into an
agreement, effective September 11, 1991, regarding the development,
production, financing and distribution of up to three "National
Lampoon" motion pictures. The agreement provided NLI with a
non-refundable advance of $375,000 upon the execution of the agreement.
The agreement was subsequently amended to extend its term through April
1, 1996.
The compensation to be received by NLI as a result of the use of its
name is $250,000 for each motion picture produced (payable on
commencement of principal photography of the applicable film) plus
2-1/2 percent of distributors' gross receipts, as defined from all
media in connection with the motion pictures. Revenues recognized under
this agreement totaled $0, $84,000 and $118,000 for the years ended
July 31, 1999, 1998 and 1997, respectively.
Reserve for Contract Payment on Sale of Stock
The Company has its videocassettes for the domestic market duplicated
primarily by an independent duplication company, Technicolor
Videocassette, Inc. ("Technicolor"), which warehouses the
videocassettes and fulfills and ships orders for the Company. In April
1993, pursuant to a settlement agreement regarding an outstanding
balance, the Company issued to Technicolor 52,333 shares of its common
stock valued at $176,000, and a note in the amount of $87,000 to
satisfy obligations owed to Technicolor. The Company paid the balance
of the note in full during fiscal year 1995. The agreement provides for
an additional cash payment in the event that such common stock is sold,
46
<PAGE> 49
within a specified time period, for less than $6 per share. A reserve
for this contingent payment of $158,000 was included in accrued
expenses at July 31, 1998 and 1997. The current year appreciation of
the Company's share price in excess of $6 per share allowed Technicolor
to recoup its monies due without additional payment from the Company
which eliminated the need for the liability previously recorded (see
Note 4). Accordingly, reversal of the reserve has been reflected as
other income in the accompanying consolidated statement of operations
for the year ended July 31, 1999.
Joint Venture
As part of the acquisition of NLI, the Company acquired a 75 percent
interest in a joint venture, which 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 $251,000, $124,000 and $328,000 for each of the three years in the
period ended July 31, 1999. Of this revenue, the minority interest's
share totaled $68,000, $34,000 and $82,000, respectively.
Leases
The Company is obligated under an operating lease expiring on September
30, 2000 for its office facility in Los Angeles, California. The
facility lease includes certain provisions for rent adjustments based
upon changes in the lessor's operating costs and increases in the
Consumer Price Index.
The Company is obligated under an operating lease expiring in September
2002 for equipment located at its office facility.
The Company is also obligated under an operating lease expiring in
November 1999 for an automobile leased on behalf of an employee of the
Company.
47
<PAGE> 50
The Company is committed to future minimum lease payments for the
following years:
<TABLE>
<CAPTION>
Building Equipment Total
-------- --------- --------
<S> <C> <C> <C>
2000 89,000 6,000 95,000
2001 15,000 2,000 17,000
2002 -- 2,000 2,000
-------- ------- --------
Total $104,000 $10,000 $114,000
======== ======= ========
</TABLE>
Rent expense totaled $79,000, $89,000 and $79,000 for the years ended
July 31, 1999, 1998 and 1997, respectively.
Equipment lease expense totaled $2,000, $2,000 and $8,000 for the years
ended July 31, 1999, 1998 and 1997, respectively.
Royalty Agreements
Pursuant to a royalty agreement between NLI and The Harvard Lampoon,
Inc. ("HLI"), as amended on October 1, 1998, NLI is required to pay HLI
a royalty equal to 2 percent on the aggregate "net sales price", as
defined by the agreement, from sales of any permitted publication using
the name "Lampoon" as part of its title and a royalty of up to 2
percent of "pretax profits", as defined in the agreement, on any movie,
stage show, television show or radio show using the name. Royalties
payable under this agreement totaled $5,000, $13,000 and $19,000 for
the years ended July 31, 1999, 1998 and 1997, respectively.
The Company has entered into various royalty agreements with the
producers of videocassettes distributed by the Company. The Company is
required to pay a royalty, according to each individual agreement, of a
percentage of gross receipts, less certain expenses. Royalty expense
under these agreements totaled $2,000, $2,000 and $45,000 for the years
ended July 31, 1999, 1998 and 1997, respectively.
48
<PAGE> 51
GPEC Agreement
In 1987, NLI sold the exclusive rights to produce television
programming utilizing the name "National Lampoon" to Guber-Peter
Entertainment Company ("GPEC"). In 1991, under agreement with GPEC, NLI
reacquired this right for $1,000,000, of which $500,000 was paid on
execution of the agreement. The remaining $500,000 was payable out of
the gross receipts of television programming, if any. To date, $182,500
has been paid under the gross receipts provision of the agreement.
Employment Agreement
The Company has entered into a restated employment agreement, dated
July 1, 1999 ("1999 Agreement"), with its President and Chief Executive
Officer. The agreement is for seven years and provides annual base
compensation of $475,000, with annual increases of the greater of 9
percent or 5 percent, plus the percentage increase in the Consumer
Price Index. Previously, the President had reduced the amount of salary
he receives to $191,000. The President does not expect to receive the
difference between the amount received and the amount provided for
under the 1999 Agreement unless there is a change in control of the
Company, as defined by the agreement. The decision by the President to
forego compensation is similar to the actions by the President under
the terms of his prior employment agreement. Accordingly, and as
specifically provided by the terms of the 1999 Agreement, the Company
has entered into ("the Contingent Note") in the amount of $2,150,625,
which amount represents the principal and interest (computed at 10% per
annum) of all amounts previously waived by the President. The
Contingent Note is due only upon change of control by the Company (as
defined in the 1999 Agreement), and is a contingent obligation of the
Company. To the extent that amounts are waived by the President in the
future, the 1999 Agreement provides that the Company is obligated to
issue additional contingent notes, due on the same basis, for the
amounts so waived.
In addition, an annual bonus is payable to the President if the
Company's pretax income exceeds specified levels. The amount is based
on pretax earnings of the Company ranging from 5 percent to 9 percent
over certain minimums. If earnings exceed $7,000,000, the President
shall be entitled to such incentive compensation, as may be determined
by the Board of Directors based upon the President's service and
performance on behalf of the Company and the profitability of the
Company. No bonus was earned in 1999, 1998 or 1997. Deferred bonuses
for the President, included in accrued expenses, totaled $100,000 at
July 31, 1999 and 1998. In addition, certain officers have deferred
salary totaling $89,000 at July 31, 1999 and 1998, also included in
accrued expenses.
49
<PAGE> 52
The Company has also granted the President options to purchase 25,000
shares of its common stock and 25,000 stock appreciation rights (see
Note 7) for each year of his employment contract. The price for each
will be based on the average of the high and low bid and asked price
for one share of common stock during the five (5) business days
preceding the date of grant as reported by NASDAQ automated quotation
system.
The 1999 Agreement provides that if the President's employment is
terminated without cause, or is terminated by the President for cause
or under certain other circumstances, including a change in control of
the Company (as defined in the 1999 Agreement), then the President
generally is entitled to receive all payments and other benefits which
would be due under the 1999 Agreement during its entire term; provided,
that such payments are to be "grossed up" to the extent that such
payments wold constitute an "excess parachute payment" under the
Internal Revenue Code of 1986, or any successor law applicable to
payments of severance compensation to the President. In addition to the
foregoing benefits, the President has the right, if he terminates his
employment under certain circumstances to serve as a consultant to the
Company for a period of five years. During this consulting period the
President would earn 50% of his salary as in effect on the date of
termination of his employment.
LITIGATION
The Company, NLI and the officers and directors of NLI became the
defendants in a lawsuit related to the acquisition of NLI by the
Company. The shareholders of NLI (the "Plaintiffs") filed the claim in
respect to the tax treatment of the transaction to the individual
shareholders of NLI. The Company entered into a settlement agreement in
August 1991, which must still be approved by the courts, under which
the Company will pay in cash or stock the Plaintiffs for the payment of
attorneys' fees. The value of the consideration to be paid of
approximately $203,000 has been reflected as a liability at July 31,
1999, 1998 and 1997 as the shares have not been issued and the
settlement has not been approved.
On August 20, 1996, counsel for HLI filed a demand for arbitration with
the American Arbitration Association, asserting that the Company
underpaid royalties payable under the HLI royalty agreement by
approximately $226,000, plus unspecified late charges, for the period
July 1, 1992 through June 30, 1995, based upon HLI's interpretation of
the agreement. After considerable arbitration, HLI and the Company
entered into a new, perpetual license agreement which clarified certain
new rights for the Company. As part of the arbitration, the Company
agreed to issue HLI 16,667 shares of its common stock. The Company
delivered the stock to HLI during the current year.
50
<PAGE> 53
The Company is party to other legal matters arising in connection with
its business. While the final resolution of any matter may have an
impact on the Company's results of operations for a particular
reporting period, management believes, based in part on discussions
with legal counsel, that the final outcomes of these matters will not
have a material adverse effect upon the Company's financial position or
results of operations.
6. Notes Receivable on Common Stock
In 1986, the Company issued 266,667 shares of common stock to certain
of its officers and directors pursuant to its Restated Stock Purchase
Plan. The shares were issued with 50 percent of the purchase price
payable at the time of issuance and the remainder due in five years.
The unpaid balance is due from the Company's President and Chief
Executive Officer and bears interest at the rate of 10 percent, under
promissory notes secured by the stock in favor of the Company.
7. Stock Options and Stock Appreciation Rights
Stock Option Plans
In March, 1995, shareholders approved the 1994 Employee Stock Option
Plan and the 1994 Option Plan for Non-Employee Directors. These plans
replaced the 1991 Stock Option Plan. All stock options subject to these
plans are granted with an exercise price equivalent to the fair market
value of the common stock at the time of the grant, except that in the
case of the incentive stock options granted to a holder of 10 percent
or more of the outstanding shares of common stock, such exercise price
may not be less than 110 percent of the fair market value and may not
be exercisable after the expiration of five years, versus ten years for
regular stock options.
51
<PAGE> 54
A summary of the stock options outstanding is below:
<TABLE>
<CAPTION>
Number of Option Weighted Average
Options Price Exercise Price
Outstanding Range Per Share
----------- ------------- ----------------
<S> <C> <C> <C>
Balance, July 31, 1996 198,000 $1.68 - $4.44 $3.30
Granted 38,000 $2.64 - $3.39 $3.00
Canceled (23,000) $3.18 - $3.57 $3.39
------- ------------- -----
Balance, July 31, 1997 213,000 $1.68 - $4.44 $3.24
Granted 44,000 $1.68 - $3.00 $2.10
Canceled (8,000) $2.63 - $3.19 $3.09
------- ------------- -----
Balance, July 31, 1998 249,000 $1.68 - $4.44 $3.03
Granted 42,000 $1.94 - $2.08 $2.02
Exercised (17,000) $1.69 - $3.56 $2.91
Canceled (92,000) $1.69 - $3.57 $3.04
======= ============= =====
Balance, July 31, 1999 182,000 $1.68 - $4.44 $2.82
</TABLE>
Of the options outstanding as of July 31, 1999, 1998 and 1997, 149,833, 214,000
and 192,000, respectively, were exercisable with a weighted average exercise
price of $2.99, $3.18 and $3.27, respectively. The weighted average remaining
contractual life of the options outstanding as of July 31, 1999 was 3.95 years.
The Company has adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation", issued in October 1995. In accordance
with provisions of SFAS No.123, the Company applies APB Opinion 25 and related
interpretations in accounting for its stock option plans and, accordingly, does
not recognize compensation cost for employee options granted at of above market
value. If the Company had elected to recognize compensation cost based on the
fair value of the options granted at grant date as prescribed by SFAS No. 123,
net income (loss) and earnings (loss) per share would have been reduced to the
pro forma amounts indicated in the table below:
52
<PAGE> 55
<TABLE>
<CAPTION>
Years Ended July 31,
------------------------------------------
1999 1998 1997
----------- -------- --------
<S> <C> <C> <C>
Net (loss) income-as reported $(1,299,000) $121,000 $ 30,000
Net (loss) income-pro-forma $(1,343,000) $ 76,000 $(11,000)
Basic (loss) earnings per share-
as reported $ (1.07) $ 0.10 $ 0.03
Diluted (loss) earnings per share-
as reported $ (1.07) $ 0.10 $ 0.02
Basic (loss) earnings per share-pro-forma $ (1.11) $ 0.06 $ 0.00
Diluted (loss) earnings per share-pro-forma $ (1.11) $ 0.06 $ 0.00
</TABLE>
Because the SFAS No. 123 method of accounting has not been applied to options
granted prior to August 1, 1995, the resulting pro-forma compensation cost may
not be representative of the cost to be expected in future years.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following
assumptions:
<TABLE>
<S> <C>
Expected dividend yield 0.00%
Expected stock price volatility 85.77%
Risk free interest rate 4.95%
Expected life of options 3.34 years
</TABLE>
The weighted average fair value of options granted during fiscal 1999
and 1998 was $1.53 and $1.50, respectively.
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<PAGE> 56
Stock Appreciation Rights
The President and Chief Executive Officer of the Company has stock
appreciation rights which entitle the officer to receive cash equal to
the difference between the fair market value and the appreciation base
of the rights when they are exercised. The rights are payable to the
President on demand. However, the President has represented that unless
there is a change in control in the Company's ownership, he does not
intend to call in these rights during fiscal year 2000. As of July 31,
1999 and 1998, appreciation in these rights amounted to approximately
$1,717,000 and $17,000, respectively. This amount has been classified
as non-current and is reflected in deferred compensation in the
accompanying consolidated balance sheets.
At July 31, 1999, a total of 116,669 rights were outstanding with
exercise prices of between $1.94 and $4.42 per share.
8. Related Party Transactions
Legal fees of $13,200, $7,000 and $3,000, included in selling, general
and administrative expenses, were incurred during fiscal 1999, 1998 and
1997, respectively, for services from legal firms, one of whose
partners is a director of the Company.
See Note 6 for discussion of a note receivable from the Company's
President and Chief Executive Officer.
9. Income Taxes
The provision for income taxes is comprised as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ------ ------
<S> <C> <C> <C>
Current:
State $ -- $6,000 $9,000
Federal -- -- --
Adjustment to valuation allowance:
State -- -- --
---- ------ ------
$ -- $6,000 $9,000
==== ====== ======
</TABLE>
54
<PAGE> 57
A reconciliation between the statutory federal rate and the Company's
effective rate follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Statutory federal
income tax rate (34)% 34% 34%
State income taxes -- 7 19
Benefit of unrecognized prior
year losses -- (190) (185)
Amortization of intangible
assets 6 64 173
Other 28 92 (22)
---- ---- ----
Effective rate --% 7% 19%
==== ==== ====
</TABLE>
At July 31, 1999 and 1998, the tax effect of deductible timing
differences and carryforwards is comprised of the following:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Net operating loss carryforwards $ 550,000 $ 507,000
Accrued liabilities and contingencies 705,000 136,000
Royalty reserves 108,000 131,000
Deferred income -- 320,000
------------ ------------
1,363,000 1,094,000
Valuation allowance (1,363,000) (1,094,000)
------------ ------------
Net deferred tax asset $ -- $ --
============ ============
</TABLE>
At July 31, 1998, the Company had available for federal income tax
purposes net operating loss carryforwards of approximately $1,572,000,
expiring at various dates through 2019.
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<PAGE> 58
10. Major Customers
During the year ended July 31, 1999, the Company received $800,000 in
revenues from one motion picture/television license agreement
representing 59% of total revenues. During the year ended July 31,
1998, the Company received $300,000 in revenues from two motion picture
licensees representing 25% of total revenues. During the year ended
July 31, 1997, the Company received $300,000 in revenues from a motion
picture licensee representing 24% of total revenues.
11. Stockholder Rights Plan
In July of 1999, the Board of Directors of the Company adopted a
Stockholder Rights Plan ("the Plan"). In connection therewith a
dividend of one preferred share purchase right ("the Rights") for each
outstanding share of common stock outstanding at the close of business
on August 5, 1999. Since that time the Company has issued the Rights
with each Common Share that has been subsequently issued. When
exercisable, each new right will entitle its holder to buy
one-hundredth of a share of Series A Junior Participating Preferred
Stock ("the Preferred Shares") at a price of $65 per one-one-hundredth
of a share until July 15, 1999.
The Rights will become exercisable upon the earlier of (i) ten business
days following public announcement that a person or a group of
affiliated or associated persons has acquired, or obtained the right to
acquire, beneficial ownership of 15% (with certain exceptions as
defined in the Plan) or more of the outstanding Common Shares or (ii)
ten business days following the commencement or announcement of an
intention to make a tender offer or exchange offer the consummation of
which would result in the beneficial ownership by a person or group of
15% or more of the outstanding Common Shares.
In the event of any merger, consolidation or other transaction in which
Common Shares are exchanged, each Preferred Shareholder will be
entitled to receive 100 times the amount received per Common Share. In
the event that a person becomes an Acquiring Person or if the Company
were the surviving corporation on a merger with an Acquiring Person or
any affiliate or associate of an Acquiring Person and the Common Shares
were not changed or exchanged, each holder of a Right, other than the
Rights that are or were acquired or beneficially owned by the Acquiring
Person (which Rights will thereafter be
56
<PAGE> 59
void), will thereafter have the right to receive upon exercise that
number of Common Shares having a market value of two times the then
current Purchase Price of one Right. In business combination
transaction or more than 50% of its assets or earning power was sold,
proper provision shall be made so that each holder of a Right shall
thereafter have the right to receive, upon the exercise thereof at the
then current Purchase Price of the Right, that number of shares of
common stock of the acquiring company which at the time of such
transaction would have a market value of two times the then current
Purchase of one Right.
The Rights may be redeemed in whole, but not in part, by the Board of
Directors of the Company at a price of $0.001 per Right at any time
prior to the time that an Acquiring Person has become such. The
redemption of the Rights may be made effective at such time, on such
basis and with such conditions as the Board of Directors of the Company
in its sole discretion may establish.
12. Segment Information
The Company adopted SFAS No. 131, "Disclosures About Segments 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, goodwill amortization, compensation related to SAR's
and other unallocated corporate expenses. With the development of
internet operations beginning in January 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:
57
<PAGE> 60
<TABLE>
<CAPTION>
Trademark Internet Video Total
----------- --------- --------- -----------
<S> <C> <C> <C> <C>
Year Ended July 31, 1999:
Revenues $ 1,228,000 $ -- $ 18,000 $ 1,246,000
Segment income (loss) 425,000 (324,000) 5,000 106,000
Identifiable assets -- 19,000 10,000 29,000
Capital expenditures -- 27,000 -- 27,000
Depreciation expense -- 8,000 -- 8,000
Year Ended July 31, 1998:
Revenues $ 782,000 $ -- $ 1,000 $ 783,000
Segment income (loss) (76,600) -- (4,000) (80,600)
Identifiable assets -- -- 14,000 14,000
Capital expenditures -- -- -- --
Depreciation expense -- -- -- --
Year Ended July 31, 1997:
Revenues $ 1,137,000 $ -- $ 219,000 $ 1,356,000
Segment income (loss) 143,000 -- 114,000 257,000
Identifiable assets -- -- 12,000 12,000
Capital expenditures -- -- -- --
Depreciation expense -- -- -- --
</TABLE>
58
<PAGE> 61
The following is a reconciliation of reportable segment income to
consolidated income (loss) before taxes:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
July 31, July 31, July 31,
1999 1998 1997
----------- ---------- ---------
<S> <C> <C> <C>
Segment income (loss) $ 106,000 $ (80,600) $ 257,000
(Compensation) benefit related to SAR (1,700,000) 19,600 (37,000)
Goodwill amortization (240,000) (240,000) (240,000)
Other income 436,000 343,000 --
----------- --------- ---------
Operating (loss) income (1,398,000) 42,000 (20,000)
Interest income 99,000 85,000 59,000
----------- --------- ---------
Consolidated (loss) income before taxes $(1,299,000) $ 127,000 $ 39,000
=========== ========= =========
</TABLE>
The following is a reconciliation of reportable segment assets to
consolidated total assets:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
July 31, July 31, July 31,
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Total assets for reportable segments $ 29,000 $ 14,000 $ 12,000
Goodwill not allocated to segments 3,416,000 3,656,000 3,896,000
Cash and cash equivalents 1,858,000 879,000 641,000
Short-term investments -- 1,352,000 861,000
Other unallocated amounts 47,000 61,000 63,000
---------- ---------- ----------
Consolidated total assets $5,350,000 $5,962,000 $5,473,000
========== ========== ==========
</TABLE>
59
<PAGE> 1
EXHIBIT 10.1
RESTATED EMPLOYMENT
AGREEMENT
BETWEEN J2 COMMUNICATIONS
AND
JAMES P. JIMIRRO
This RESTATED EMPLOYMENT AGREEMENT dated as of July 1, 1999 (the
"Agreement"), is by and between J2 COMMUNICATIONS, a California corporation (the
"Company"), and JAMES P. JIMIRRO ("Executive").
RECITALS
WHEREAS, Executive has served since 1986 and continues to serve as
Chairman of the Board of Directors, President and Chief Executive Officer of the
Company;
WHEREAS, Executive and the Company are parties to a Restated Employment
Agreement dated as of July 1, 1994 (the "1994 Employment Agreement");
WHEREAS, the Board of Directors of the Company (the "Board") recognizes
the possibility that a "change in control" (as defined in Section 4(e) (iv) may
occur and that this possibility, and the uncertainty which it raises to
Executive, may result in the distraction of Executive to the detriment of the
Company and its shareholders;
WHEREAS, the Board has determined that it is in the best interests of
the Company to foster and encourage the continued attention and dedication of
Executive without distraction arising from the possibility of a change in
control of the Company; and
WHEREAS, the Company and Executive have mutually agreed to extend
Executive's terms of employment to secure to the Company the continued valuable
services of Executive, and have agreed to restate the 1994 Agreement as provided
herein:
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants herein contained, the parties hereto agree to amend and restate the
1994 Employment Agreement in its entirety as follows:
1. EMPLOYMENT
(a) Executive Employment. The Company hereby employs Executive, and
Executive hereby agrees to perform services for the Company for an during the
term hereof, and to serve as President and Chief Executive Officer of the
Company and, for so long as Executive is a director of the Company, as Chairman
of the Board. Executive shall perform such duties and have such
<PAGE> 2
responsibilities as are customarily performed by the president, chief executive
officer and chief managing officer of a corporation engaging in the business of
the Company, including, without limitation, such executive duties and
responsibilities as may from time to time be assigned to Executive by the Board.
The Executive shall report solely to the Board and shall be subject to direction
solely from the Board in the performance of his duties hereunder. Unless
Executive otherwise consents in writing, Executive shall also serve in the same
positions, and shall have similar responsibilities with respect to, each of the
Company's direct and indirect subsidiaries (the "Subsidiaries"). For purposes of
this Agreement, unless the context otherwise requires, references to the
business of "the Company" shall include all Subsidiaries of the Company and any
successor corporation or corporations which may be the eventual successor to the
present future business and/or assets of the Company.
(b) Duties. Throughout the period that the Executive is employed by
the Company hereunder (the "Employment Term"), Executive shall devote
substantially all of his time, energy and skill during normal business hours to
the business and affairs of the Company, except for vacation periods and periods
of illness or incapacity, but nothing in this Agreement shall preclude Executive
from devoting reasonable amounts of time to serve as a director or member of a
committee of any organization involving no material and substantial conflict of
interest with the Company or from pursuing personal investments provided that
Employee shall not, directly or indirectly, as employee, consultant, agent,
investor, principal, partner, stockholder (except as a holder of less that 1% of
the issued and outstanding stock or debt of a publicly held corporation),
officer, director or otherwise, engage or participate in any business similar to
or in competition in any manner whatsoever with the business as now or hereafter
conducted.
(c) Election of Directors. It is the intent of the parties that
during the Employment Term the Executive shall serve as a director of the
Company, and at each meeting of shareholders of the Company at which Executive's
term as a director ends, the Company shall include Executive in its slate of
nominees to be elected as directors at such meeting, and shall take all action
within its power to cause the Executive to be elected and maintained as a member
of the Board in preference to all other nominees of the Board, including
soliciting and voting proxies from shareholders in support of such election, and
invoking cumulative voting, if available. Unless Executive otherwise consents in
writing, the Company shall also take all actions within its power to cause
Executive to be elected and maintained as a member of the Board of Directors of
each of the Subsidiaries.
(d) Place of Employment. The Company shall not change the location
of the principal office of the Company or Executive's principal place of
employment during the Employment Term of this Agreement without the prior
written approval of Executive. The Executive shall not be required to travel
from Los Angeles on business for unreasonable periods of time or on an
unreasonable number of business trips.
2. COMPENSATION. The Company shall provide to Executive and pay the
following forms of compensation:
(a) Base Salary.
2
<PAGE> 3
(i) During the Employment Term, the Company shall pay to
Executive an annual salary (the "Base Salary") for the services to be rendered
by him hereunder, including all services to be rendered as an officer and
director of the Company, which shall initially be Four Hundred Seventy-five
Thousand Dollars ($475,000) per year. Such salary shall be payable in accordance
with the Company's executive payroll policies as in effect from time to time.
The Executive's Base Salary as in effect from time to time shall not be subject
to reduction without the Executive's prior written consent.
(ii) Company and Employee acknowledge that prior to the date
hereof, Employee has waived $2,150,625 principal amount of compensation, as more
fully set forth on Schedule 1 attached hereto. Company agrees that such amounts
shall be evidenced by a note (the "Contingent Note"), which note shall be due
and payable upon a "Change of Control", as defined therein to the extent that
Employee elects to waive any additional compensation the Company shall issue one
or more additional Contingent notes to reflect such waived amount.
(b) Adjustments to Base Salary. On July 1, 2000, and on each
anniversary of that date (each, an "Anniversary Date"), the Base Salary shall be
increased by the greater of (i) 9%, or (ii) 5% plus the Percentage Increase in
the CPI Index. The "Percentage Increase in the CPI Index" shall mean a
percentage equal to a fraction, the numerator of which shall be the Index in
effect on the Anniversary Date less the Index in effect on the date one year
prior to the Anniversary Date (the "Prior Index") and the denominator of which
shall be the Prior Index. "Index" shall mean, on any date on which the Index is
determined, the most recent Consumer Price Index - All Urban Consumers Los
Angeles - Long Beach - Anaheim - All Items (the "Index"), published by the
United States Department of Labor's Bureau of Labor Statistics (the "Bureau").
Should the Bureau discontinue the publication of the Index, or publish the Index
less frequently than quarterly, or alter the Index in some other manner, the
Company shall adopt a substitute index or substitute procedure which reasonably
reflects variations in consumer prices.
(c) Bonus Compensation. During the Employment Term, the Company
shall pay a bonus (the "Bonus") to Executive, which may be part of a general
bonus plan established by the Company. The bonus paid to Executive with respect
to each fiscal year of the Company during the Employment Term shall be at least
equal to the Bonus described below. The bonus shall be payable on the earlier of
one hundred twenty (120) days following the end of each fiscal year of the
Company, or within thirty (30) days following the date on which the Company
files with the Securities Exchange Commission its Annual Report or Form 10-K.
The Company agrees that it shall not change its fiscal year or materially modify
its corporate structure unless the Company and Executive reach an agreement on
an equitable adjustment of the bonus formula set forth in this Section 2(c),
which agreement shall not be unreasonably withheld by either party. The Bonus
shall be based on the consolidated earnings, before taxes of J2 Communications
("Consolidated EBIT") computed using generally accepted accounting principles,
applied consistently with past periods.
The Bonus shall be in an amount equal to 5% of Company's Consolidated
EBIT in excess of $500,000 and up to $1 million; plus 6% of the next $1 million
of Consolidated EBIT; plus 7% of the next $1 million of Consolidated EBIT; plus
8% of the next $2 million of Consolidated
3
<PAGE> 4
EBIT; and, plus 9% of the next $2 million of Consolidated EBIT. If Consolidated
EBIT for any fiscal year of the Company exceed $7 million, then Executive shall,
in addition to foregoing compensation, be entitled to such additional incentive
compensation as may be determined by the Board based upon Executive's services
and performance on behalf of the Company and the profitability of the Company.
In determining Consolidated EBIT, the Company shall exclude the effects of
extraordinary gains and losses, non recurring expense amortization of intangible
assets arising out of transactions included without the approval of Executive,
any expenses accrued by the Company in respect to any Stock Option or SAR grant
to Executive under this Agreement or any predecessor agreement.
(d) Stock Options. During the Employment Term, the Board shall grant
to Executive during each one-year period on the earlier of the date of the
Annual Meeting of Stockholders or one hundred fifty (150) days following the end
of the Company's fiscal year, options to purchase 25,000 shares of the Company's
Common Stock, no par value (the "Common Stock") and stock appreciation rights
("SARS") relating to an additional 25,000 shares of the Company's Common Stock,
each on the following terms and conditions:
(i) The exercise price of each option and the initial valuation
of each SAR shall be equal to (A) if the Common Stock is traded on the NASDAQ
Automated Quotation System, the average of the high and low bid and asked price
for one share of Common Stock during the five (5) business days preceding the
date of grant as reported by such system or exchange, as reported on the NASDAQ
Automated Quotation System; (B) if transactions in the Common Stock are reported
on the NASDAQ National Market System or the Common Stock is listed on any
national stock exchange, the average closing price for one share of Common Stock
during the five (5) business days preceding the date of grant, as reported on
such system or by such exchange; or (C) if neither (A) nor (B) is applicable,
then the fair market value of one share of the Common Stock, as determined by
the Board.
(ii) All stock options and SARS granted to Executive pursuant to
this Section 4(d): (A) shall be immediately exercisable; (B) shall expire to the
extent not exercised prior to the close of business on the day ten (10) years
from the date of grant; (C) may be exercised as to the whole or any part, by
written notice to the Company, stating the number of shares with respect to
which the option is being exercised and specifying a date, not less than ten
(10) nor more than twenty (20) days after the date of such notice, as the date
on which the stock will be taken up and payment, if any, made therefor at the
principal office of the Company; (D) in the case of options, shall, to the
maximum extent permitted under the Internal Revenue Code, be options intended to
qualify as "Incentive Stock Options" pursuant to Section 422 of the Internal
Revenue Code; (E) shall be governed by agreements substantially in the form of
the agreements which are Exhibits to the Company's 1991 Employee Stock Incentive
Plan approved by the Board of Directors of the Company on December 13, 1990, or
as otherwise agreed upon by the parties; and (F) shall be subject to all other
terms identical to those contained in the Company's 1991 Employee Stock
Incentive Plan. The Company shall use its best efforts to assure that all
options and SARS are granted to Executive under the Company's 1991 Employee
Incentive Stock Option Plan, or a similar plan later adopted by the Company
which satisfies the conditions of Rule 16b-3 of the Securities and Exchange
Commission or any successor thereto.
4
<PAGE> 5
(iii) In the event of a change in the number of the Company's
shares of Common Stock outstanding caused by an event listed in Section 10 of
the Company's 1991 Employee Stock Incentive Plan, the number of shares subject
to options granted after the date of such event shall be adjusted in accordance
with the procedures contained in such Section and the number of options and SARS
to be granted to Executive pursuant to this Section 4(d) shall be
correspondingly adjusted.
(iv) Notwithstanding the foregoing, if and to the extent that, in
the opinion of counsel, the Company is unable to grant the Executive any stock
options or SARS due Executive pursuant to this Section 2(d), because such grant
would violate any state or federal securities law, regulation, permit or
approval obtained by the Company, then the Company shall to the extent it is
able to do so without violation of the foregoing, at the time such stock options
or SARS would otherwise be granted to Executive hereunder: agree with the
Executive on a reasonably equivalent, alternative form of compensation, with the
agreement of neither party to be unreasonably withheld.
(v) To the extent such Options or SARS are unavailable under any
Stock Option Plan, the Company shall nevertheless be required to issue such
options and register such options as soon as productable as herein provided.
(e) Insurance. During the Employment Term, the Company shall pay the
premiums on term life insurance on Executive's life in the face amount of
$700,000. Executive shall have the right to designate the beneficiary or
beneficiaries of said insurance policies, to change such designations at any
time by written notice to the Company and, if available, at his own expense, to
maintain the policy in force following the termination of the Company's
obligation to pay premiums on the policy.
(f) Vacation. During the Employment Term, Executive shall be
entitled to four (4) weeks paid vacation to be taken at such times as are
mutually satisfactory to Executive and to the Company.
(g) Other Benefits. During the Employment Term, the Company shall
continue to provide Executive with benefits substantially similar to those
enjoyed by him under any of the Company's vacation, pension, retirement, life
insurance, medical, health and accident, or disability plans or policies in
which he is presently participating and the Company shall not take any action
which would directly or indirectly materially reduce any of such benefits or
deprive Executive of any material fringe benefit presently enjoyed by him
immediately prior to the date of this Agreement. During the Employment Term,
Executive shall also be entitled to participate or continue to participate in or
receive benefits under all of the Company's employee benefit plans, policies,
practices and arrangements made available by the Company in the future to its
executive employees subject to and on a basis consistent with the terms,
conditions and overall administration of such benefit plans and the terms of
this Agreement. At its discretion, the Board may grant to Executive benefits
under the Company's existing employee benefit plans in addition to those
presently enjoyed by Executive or specified herein, based upon Executive's
contributions to the success of the Company.
5
<PAGE> 6
(h) Excise Tax Gross-Up Payment. In the event that any payment
and/or the value of any benefit, or any portion thereof, received or to be
received by Executive (other than any amount paid to Executive pursuant to this
Section 2(h)) (collectively, "Payments") will make Executive liable for payment
of the excise tax (the "Excise Tax") provided for under Section 4999 of the
Internal Revenue Code of 1986, as amended (the "Code"), then the Company or the
acquiring or successor entity of the Company shall pay to Executive within
ninety (90) days of the date Executive becomes subject to the Excise Tax, an
additional amount (the "Excise Tax Gross-Up Payment") such that the net
after-tax amount retained by the Executive, after deduction of (i) any Excise
Tax on the Payments, and (ii) any federal, state, local or foreign income,
employment or other tax and Excise Tax upon any payment provided for by this
Section 2(h), shall be equal to the Payments, reduced by the amount of any
United States federal, state and local income or employment tax liability of the
Executive calculated as if the Payments were not subject to the Excise Tax.
Under no circumstances shall the terms of this Section 2(h) be construed to
alter the timing, form, or any other provisions of the Payments. For the
purposes of determining whether any of the Payments will be subject to the
Excise Tax and the amount of such Excise Tax:
(1) Any other payments or benefits received or to be received by
Executive in connection with the transactions contemplated by a Change in
Control or Executive's termination of employment (whether pursuant to the terms
of this Agreement or any other plan, arrangement or agreement with the Company),
shall be treated as "parachute payments" within the meaning of Section 280G of
the Code, and all "excess parachute payments" within the meaning of Section 280G
shall be treated as subject to the Excise Tax, unless in the opinion of tax
counsel selected by the Company and acceptable to Executive, such other payments
or benefits (in whole or in part) do not constitute parachute payments, or such
excess parachute payments (in whole or in part) represent reasonable
compensation for services actually rendered within the meaning of Section 280G
in excess of the "base amount" within the meaning of Section 280G, or are
otherwise not subject to the Excise Tax.
(2) The amount of the Payments which shall be treated as subject
to the Excise Tax shall be equal to the lesser of (1) the total amount of the
Payments, or (2) the amount of the excess parachute payments within the meaning
of Section 280G (after applying the above provisions).
(3) The value of the non-cash benefits, or any deferred payment
or benefit, shall be determined by an independent public accounting firm
mutually agreeable to the Company and Executive (the "Accountants") in
accordance with the principles of Section 280G of the Code.
For purposes of determining the amount of the Excise Tax Gross-Up
Payment, Executive shall be deemed to pay federal income taxes at the highest
marginal rate of federal income taxation for the calendar year with respect to
which the Excise Tax Gross-Up Payment is to be made, and state and local income
taxes at the highest marginal rate of taxation in the state and locality of the
Executive's residence on the date of the Excise Tax Gross-Up Payment is to be
6
<PAGE> 7
made, net of the maximum reduction in federal income taxes which could be
obtained from deduction of such state and local taxes.
In the event that the Excise Tax is subsequently determined to be
less than the amount taken into account under this Section 2(h), Executive shall
repay to the Company at the time that the amount of such reduction of Excise Tax
is finally determined, an amount equal to the sum of the following: (i) the
amount of the reduction of the Excise Tax, (ii) the amount of the reduction in
all other taxes generated by the reduction in the Excise Tax, and (iii) interest
on the amount of the sum of (i) and (ii) at the rate provided in Section
1274(b)(2)(B) of the Code.
In the event that the Excise Tax is determined to exceed the
amount previously taken into account under the Section 2(h) (including by reason
of any payment the existence or amount of which cannot be determined at the time
of the Excise Tax Gross-Up Payment), the Company shall make an additional Excise
Tax Gross-Up Payment in respect to such excess (plus any interest payable with
respect to such excess) at the time that the amount of such excess is finally
determined in accordance with the principles set forth above.
Unless the Company and Executive otherwise agree in writing, any
determination required under this Section 2(h) shall be made in writing by the
Accountants, whose determination shall be conclusive and binding upon Executive
and the Company for all purposes. For purposes of making the calculations
required by this Section 2(h), the Accountants may make reasonable assumptions
and approximations concerning applicable taxes and may rely on reasonable, good
faith interpretations concerning the application of Sections 280G and 4999 of
the Code. The Company and Executive shall furnish to the Accountants such
information and documents as the Accountants may reasonably request in order to
make a determination under this Section 2(h). The Company shall bear all costs
the Accountants may reasonably incur in connection with any calculations
contemplated by this Section 2(h).
References to Sections 280G and 4999 of the Code shall include
any provisions which are similar to or are a successor to such Code section.
3. EXPENSES. Executive shall be reimbursed for expenses incurred for
business purposes by the Company upon presenting satisfactory vouchers
evidencing such expenses. Executive shall be provided with and the Company shall
pay all insurance, maintenance, license, registration and operational expenses
for an automobile of his choice (luxury class).
4. TERMINATION.
(a) Term. This Agreement shall be in effect from the date hereof
through a period of seven (7) years following the date hereof, unless extended
or earlier terminated in accordance with this Section 4. Any early termination
of this Agreement shall be subject to delay if a Notice of Dispute is delivered
in accordance with Section 4(g).
(b) Death. This Agreement shall be terminated automatically upon the
death of Executive.
7
<PAGE> 8
(c) Disability. This Agreement shall be terminated automatically
upon the permanent disability of Executive. For purposes of this Agreement, a
permanent disability shall be deemed to have occurred if (i) Executive is unable
to perform his material duties hereunder for a period of ninety (90) consecutive
days, or one hundred eighty (180) days in any one (1) year, on account of any
physical or mental disability; or (ii) a licensed physician selected by the
Company and approved by Executive (or his closest relative if Executive is
unable to act), which approval shall not be unreasonably withheld, makes a
medical determination of physical or medical disability or incapacity of
Executive.
(d) Cause. This Agreement may be terminated voluntarily by the
Company immediately at any time during its term for "Cause" which shall mean (i)
the willful and continued failure by Executive to substantially perform his
duties with the Company in good faith (other than any such failure resulting
from his incapacity due to physical or mental illness or any such actual or
anticipated failure resulting from his termination pursuant to Section 4(e)),
after a demand for substantial performance is delivered to him by the Board
which specifically identifies the manner in which the Board believes that
Executive has not substantially performed his duties in good faith; or (ii) the
willful engaging by Executive in conduct which is demonstrably and materially
injurious to the Company, monetarily or otherwise. For purposes of this Section
4(d), no act, or failure to act, on the Company's part shall be considered
"willful" unless done, or omitted to be done, by him in bad faith and without
reasonable belief that his action or omission was in the best interest of the
Company. Notwithstanding the foregoing, Executive shall not be deemed to have
been terminated for cause unless and until there shall have been delivered to
him a Notice of Termination (as defined in Section 4(f) below) and a copy of a
resolution duly adopted by the affirmative vote of not less than three-quarters
of the entire membership of the Board at a meeting of the Board called and held
for such purpose (after reasonable notice to him and an opportunity for him,
together with his counsel, to be heard before such meeting), finding that in the
good faith opinion of the Board, Executive was guilty of conduct set forth above
in clause (i) or (ii) of the first sentence of this Section 4(d) and specifying
the particulars thereof in detail.
(e) Termination by Executive. Executive shall be entitled to
terminate his employment upon any of the "Executive Termination Events" listed
below by delivery to the Company of a Notice of Termination. The right of
Executive to terminate his employment shall be in addition to all rights to
damages or other remedies to which Executive may be entitled by law. The term
"Executive Termination Events" shall mean the occurrence of any one or more of
the following:
(i) the material breach of this Agreement by the Company;
(ii) the failure of the Company to cause the election of
Executive to the Board upon the end of any term of office of Executive as a
member of the Board, or the failure to maintain Executive in office as a
director at any other time;
(iii) any purported termination of Executive's employment upon
which a Notice of Dispute is properly given if pursuant to Section 4(g) it is
determined, either by a
8
<PAGE> 9
binding arbitration award or by a final judgment, order or decree of a court of
competent jurisdiction (the time for appeal therefrom having expired and no
appeal having been perfected), that such purported termination was invalid;
provided, however, that in the event Executive terminates his employment
pursuant to this clause (iii), the compensation payable under Section 5 as a
result of such termination shall be reduced by any damages awarded by such court
or arbitration panel and paid to Executive;
(iv) the occurrence of a "Change in Control of the Company" which
shall be deemed to occur: (A) upon a change in control of a nature that would be
required to be reported in response to Item 6(e) of Schedule 14A of Regulation
14A promulgated under the Securities Exchange Act of 1934, as amended ("Exchange
Act"), whether or not the Company is then subject to such reporting requirement;
(B) any "person" (as such term is defined in Section 3(a) (9) of the Exchange
Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 promulgated
under the Exchange Act), directly or indirectly, of securities of the Company
representing 25% or more of the combined voting power of the Company's then
outstanding securities; (C) during any period of two (2) consecutive years (the
"Period"), individuals who at the beginning of the Period constitute the Board,
including for this purpose any new director whose election or nomination for
election by the Company's shareholders was approved by a vote of at least
two-thirds of the directors then still in office who were directors at the
beginning of the Period (or whose election or nomination was similarly approved
by the Board), cease for any reason to constitute a majority thereof; (D) the
sale of all or substantially all of the assets of the Company; or, (E) the
merger of the Company with any other corporation if shareholders of the Company
prior to the effective date of the merger own, immediately following the merger,
less than seventy-five percent of the combined voting power of the surviving
corporation excluding from such ownership any voting securities not received in
exchange for or in respect of voting securities of the Company; and
(v) the failure of the Company to obtain an assumption agreement
as required by Section 6 hereof prior to the effectiveness of any such
succession as defined therein.
Any purported termination of employment by Executive pursuant to
this Section 4(e) shall be made by giving a Notice of Termination within one (1)
year in the case of clause (iv) and six (6) months in the case of clauses (i),
(ii), (iii) and (v) hereof of the event giving rise to the right to terminate.
The failure of Executive to give a Notice of Termination within such period
shall not be construed to prevent the giving of Notice of Termination upon the
next occurrence of any event set forth in clauses (i) through (v) of this
Section 4(e). Executive's right to terminate his employment pursuant to this
Section 4(e) shall not be affected by his incapacity due to physical or mental
illness.
(f) Notice of Termination. "Notice of Termination" shall be a
written notice terminating Executive's employment hereunder which shall indicate
the specific termination provision in this Agreement relied upon and shall set
forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination of employment under the provision so indicated.
9
<PAGE> 10
(g) Notice of Dispute. Within fifteen (15) days after Notice of
Termination is given, the party receiving such Notice of Termination may notify
the other party that a dispute exists concerning the termination ("Notice of
Dispute"), and the Date of Termination shall be the date on which the dispute is
finally resolved, either by mutual written agreement of the parties, by a
binding arbitration award, or by a final judgment, order or decree of a court of
competent jurisdiction (the time for appeal therefrom having expired and no
appeal having been perfected); and provided, however, that the Date of
Termination shall be extended by a Notice of Dispute only if the party
delivering such notice pursues the resolution of such dispute with reasonable
diligence. Notwithstanding the pendency of a Notice of Dispute, the Company will
continue to pay Executive his full compensation in effect when the notice giving
rise to the dispute was given and continue him as a participant in all
compensation, bonus, benefit and insurance plans in which he was participating
when the notice giving rise to the dispute was given, until the dispute is
finally resolved.
(h) Extension. By written agreement executed by the Company and
Executive, the Employment Term may be extended for such additional periods as
the Executive and the Company may from time to time agree in writing.
(i) Date of Termination. Subject to Section 4(g), "Date of
Termination" means (i) if employment is terminated upon the death of Executive,
the date of such death; (ii) if employment is terminated upon the permanent
disability of Executive as provided for in Section 4(c), on the date permanent
disability is first established pursuant to that Section; (iii) if employment is
terminated pursuant to Section 4(d), the date specified in the last sentence of
Section 4(d); (iv) if employment is terminated pursuant to Section 4(e) (other
than Section 4(e)(v)), the date specified in the Notice of Termination, which
shall be not less than thirty (30) nor more than sixty (60) days following the
date the Notice of Termination is delivered to the Company; or (v) if employment
is terminated pursuant to clause (v) of Section 4(e), the date on which any such
succession becomes effective.
5. COMPENSATION AND BENEFITS UPON TERMINATION. In addition to any
benefits mandated by law, upon termination of employment, Executive shall be
entitled to the compensation and benefits described below, plus such amounts as
may be due and owing from time to time pursuant to Section 4(h) hereof. Upon
payment of such amounts, the Company shall have no further liability or
obligation hereunder to Executive to pay the compensation or provide the
benefits specified in Sections 2 hereof, or to his executors or administrators,
his heirs or assigns or any other person claiming under or through him therefor;
provided, however, that the foregoing shall not relieve the Company from its
obligations under Section 4(h).
(a) Death. Upon the death of Executive, the Company shall pay to the
estate of Executive:
(i) (A) to the extent not previously paid, any Bonus due to
Executive pursuant to Section 2(c) for the fiscal year preceding that in which
the Date of Termination occurs, and (B) a pro rata portion of the Bonus which
would be due for Executive pursuant to Section 2(c) with respect to the fiscal
year in which the Date of Termination occurs, based on the number of
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<PAGE> 11
days of such fiscal year elapsed through the Date of Termination; such Bonus
amounts shall be due and payable to Executive's estate not later than five (5)
days after Executive's Date of Termination, provided, that if the amount of any
such Bonus due Executive's estate shall not be determinable within five (5) days
following the Date of Termination, the Company shall use its best efforts to
determine and pay such amounts to the estate of Executive at the earliest
possible date, which under no circumstances shall be later than the date for the
determination and payment of such amounts pursuant to the terms of this
Agreement under Section 2(c) if Executive had not died;
(ii) the compensation which would otherwise be payable to
Executive pursuant to Section 2(a) and 2(b) up to end of the month in which the
Date of Termination occurs, which amounts shall be paid as soon as practicable
but in any event no later than two (2) weeks after the Date of Termination;
(b) Disability. Upon the termination of Executive's employment as a
result of his disability pursuant to Section 4(c), the Company shall pay to the
Executive:
(i) (A) to the extent not previously paid, any Bonus due to
Executive pursuant to Section 2(c) for the fiscal year preceding that in which
the Date of Termination occurs, and a (B) pro rata portion of the Bonus which
would be due for Executive pursuant to Section 2(c) with respect to the fiscal
year in which the Date of Termination occurs, based on the number of days of
such fiscal year elapsed through the Date of Termination; such Bonus amounts
shall be due and payable to Executive not later than five (5) days after
Executive's Date of Termination, provided, that if the amount of any such Bonus
due Executive shall not be determinable within five (5) days following the Date
of Termination, the Company shall use its best efforts to determine and pay such
amounts to Executive at the earliest possible date, which under no circumstances
shall be later than the date for the determination and payment of such amounts
pursuant to the terms of this Agreement under Section 2(c) if Executive's
employment hereunder had not terminated;
(ii) the compensation which would otherwise be payable to
Executive pursuant to Section 2(a) and 2(b) up to the Date of Termination, which
amounts shall be paid as soon as practicable but in any event no later than two
(2) weeks after the Date of Termination;
(iii) a sum equal to two and one-half (2-1/2) times his Base
Salary in effect at the Date of Termination, which shall be paid as soon as
practicable but in any event no later than six (6) months after the Date of
Termination.
(c) Cause. If Executive's employment shall be terminated for Cause,
the Company shall pay Executive his full Base Salary in effect at the Date of
Termination and other benefits to which he is entitled through the Date of
Termination at the rate in effect at the time Notice of Termination is given.
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<PAGE> 12
(d) Termination by Executive. If Executive's employment by the
Company shall be terminated by the Company other than for Cause, death or
disability, or by Executive pursuant to Section 4(e), then Executive shall be
entitled to the compensation provided below:
(i) the Company shall pay Executive, not later than the fifth
(5th) day following the Date of Termination, a lump sum equal to the aggregate
total of all Base Salary payments due pursuant to Sections 2(a) and 2(b) during
the remaining Employment Term based upon the Base Salary in effect on the Date
of Termination, provided that, in calculating such amount, notwithstanding
Section 2(b), the Base Salary shall not be increased above the Base Salary in
effect on the Date of Termination, and the amount shall not be discounted to
"present value,"
(ii) the Company shall pay to Executive any Bonus due to
Executive pursuant to Section 2(c) for the remaining Employment Term
notwithstanding the fact that Executive is no longer providing services under
this Agreement, which payments of Bonuses shall be paid from time to time not
later than the dates specified in Section 2(c) hereof;
(iii) for the remaining period of the Employment Term, the
Company shall provide and pay to Executive (A) stock options as required
pursuant to Section 2(d) hereof, (B) insurance pursuant to Section 2(e) hereof,
(C) an automobile as required pursuant to Section 3 hereof, (D) disability,
accident and health insurance and all other benefits substantially similar to
those which Executive is receiving immediately prior to the Date of Termination,
and (E) all other benefits pursuant to Section 2(g) to which Executive would be
entitled if he remained in the employment of the Company.
(e) No Mitigation of Damages. Executive shall not be required to
mitigate the amount of any payment provided for in Sections 2 or 3 or in this
Section 5 by seeking other employment or otherwise, nor shall the amount of any
payment or benefit provided for in Sections 2 or 3 or in this Section 5 be
reduced by any compensation earned by him as the result of employment by another
employer or by retirement benefits after the Date of Termination. The Company
shall not be entitled to any rights to offset, mitigate or otherwise reduce the
amounts owing to Executive by virtue of Sections 2 or 3 or this Section 5 with
respect to any rights, claims or damages which the Company may have against
Executive.
(f) Services as Consultant In addition to the other benefits payable
hereunder, if Executive's employment shall be terminated pursuant to Section
4(e) hereof, then, at the written request of Executive given to the Company not
later than 30 days after the relevant Date of Termination, the Company shall
retain Executive as a Consultant for a period of five (5) years commencing on
the Date of Termination (the "Consulting Period"). During the Consulting Period,
Executive shall furnish consulting and advisory services to the Company with
respect to the operation of the Company's business. Without limiting the
generality of the foregoing, Executive shall cooperate fully with the senior
executive officers of the Company, provide such assistance and information as
may be reasonably requested by the Board and officers of the Company and be
available by telephone or in person at the Company's offices in Los Angeles,
California, at such times and places as may reasonably be requested by the
Company and as may
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<PAGE> 13
be mutually convenient to Executive and the Company. During the Consulting
Period (a) Executive shall not be required to devote more than 600 hours per
calendar year to such consulting and advisory services; and (b) Executive's
consulting and advisory services shall be subject to Executive's reasonable
business and professional commitments and vacations. During the Consulting
Period, the Company shall pay Executive consulting fees, payable in monthly
installments or in such other manner that parties hereto mutually agree upon, at
a rate per annum equal to 50% of the Base Salary in effect on the Date of
Termination of employment of Executive. Executive shall be entitled to terminate
his engagement as a Consultant hereunder on not less than 10 business days prior
written notice. Any such termination shall be without liability to the Executive
and shall not diminish or adversely affect the benefits payable to Executive
under Sections 2 and 5 hereof, except that effective with such termination
Executive shall no longer be entitled to receive the consulting fees provided in
this Section 5(f).
6. SUCCESSORS. The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place.
7. REGISTRATION SHARES OF COMMON STOCK
(a) Demand Registration. At any time on or after January 1, 2000,
Executive shall have the right to request that the Company effect the
registration under the Securities Act, of any or all of the Common Stock now or
hereafter owned by Executive and whether or not such Common Stock was acquired
pursuant hereto(the Common Stock requested to be registered is hereinafter
referred to as the "Requested Registration Shares"); provided, however, that
each such Requested Registration shall cover at least fifty (50) shares of the
Common Stock (as presently constituted). In such event, the Company shall use
its best efforts to cause the Requested Registration Shares to be registered
under the Securities Act and to effect and to comply with all such
qualifications, compliances and requirements as may be necessary to permit the
sale or other transfer of such Requested Registration Shares in the manner
described in such request, including, without limitation, qualifications under
applicable Blue Sky or other state securities laws (provided that the Company
shall not be required in connection therewith to qualify as a foreign
corporation or to execute a general consent to service of process in any state);
provided, however that (i) the Company shall not be obligated to file and cause
to become effective more than three (3) registration statements in which
Requested Registration Shares are sold pursuant to this Section 7(a), (ii) in
the event that, for any reason, less than one-half of the number of Requested
Registration Shares shall be registered under the Securities Act in accordance
with a request made pursuant to this Section 7(a), then such registration shall
not constitute one of the three registration statements referred to in clause
(i) above, and (iii) the Company shall not be obligated to effect such
registration for a period of ninety (90) days following the request by Executive
to do so if the Board determines in good faith (and so certifies to the
Executive in writing) that the Company is preparing a public offering of
securities and that the registration of the Requested Registration Shares would
adversely affect the Company's ability to offer its securities to the public,
provided, however, the Company shall be
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<PAGE> 14
entitled to only one such ninety (90) day period delay during any twelve (12)
month period. In connection with any registration of Common Stock hereunder, the
Company may allow any other stockholder of the Company to register shares of
Common Stock in the same registration statement; provided that if not all
Requested Registration Shares may be included as determined by any managing
underwriter, Executive shall be entitled to priority over other stockholders.
The Executive's rights under this Section 7 shall survive Executive's employment
hereunder and Executive's engagement as a Consultant hereunder, but shall
terminate at such time as Executive may, within a three (3) month period, offer
and sell all of his Common Stock pursuant to Rule 144 of the Securities Act, or
any successor law or regulation thereto, without any adverse effect on the price
at which such shares of Common Stock may be sold.
(b) Piggyback Registration. In the event that, at any time or from
time to time, the Company proposes to register any securities of any type (the
"Registration Shares") under the Securities Act other than pursuant to a
registration statement on Form S-8 or any successor to such Form for the purpose
of the sale or other transfer of the Registration Shares by the Company or by
any present or future holder of shares of Common Stock, the Company shall mail
or deliver to Executive, at least forty-five (45) days prior to the
effectiveness of the registration statement covering such Registration Shares, a
written notice (a "Registration Notice") of its intention so to register the
Registration Shares. In the event that a Registration Notice shall have been so
mailed or delivered, Executive at its election, may mail or deliver to the
Company a written notice (a "Supplemental Notice") (i) specifying the number of
shares of Common Stock ("Supplemental Registration Shares") proposed to be sold
or otherwise transferred by Executive, (ii) describing the proposed manner of
sale or other transfer thereof and (iii) requesting the registration thereof
under the Securities Act; provided, however, that such Supplemental Notice shall
be so mailed or delivered by Executive not more than twenty (20) days after the
date of delivery to Executive of a Registration Notice. From and after receipt
of a Supplemental Notice, the Company shall use its best efforts to cause the
Supplemental Registration Shares specified in such Supplemental Notice to be
registered under the Securities Act and to effect and to comply with all such
qualifications, compliances and requirements as may be necessary to permit the
sale or other transfer of such Supplemental Registration Shares in the manner
described in such Supplemental Notice, including, without limitation,
qualifications under applicable Blue Sky or other state securities laws
(provided that the Company shall not be required in connection therewith to
qualify as a foreign corporation or to execute a general consent to service of
process in any state); provided, however, that in the case of an underwritten
public offering of securities proposed to be made by the Company, the managing
underwriter shall advise the Company in writing that inclusion of some or all of
such Supplemental Registration Shares would, in such managing underwriter's
opinion, interfere with the proposed distribution of the securities to be issued
by the Company in respect of which registration was originally to be effected,
then the Company may upon notice to Executive and, if such notice is given by
the Company, the Company shall by written notice to any and all other holders of
securities which otherwise were to be included in such registration (the
"Includable Shares") (other than the Company which shall have first priority as
to any securities to be registered for sales by it), allocate the Supplemental
Registration Shares and other Includable Shares such that the Company shall
include the Supplemental Registration Shares and other Includable Shares in the
registration statement contemplated by the applicable Registration Notice on a
pro rata basis among holders of shares
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<PAGE> 15
of Common Stock included in the Supplemental Registration Shares, based on the
number of Supplemental Registration Shares or other Includable Shares held by
each. If any firm of counsel representing the Company in connection with such
registration which is reasonably acceptable to Executive shall advise the
Company in writing that in their opinion one or more of the steps contemplated
hereby is not necessary to permit the sale of the Supplemental Registration
Shares in a transaction constituting a public offering within the meaning of the
Securities Act, then the Company shall not be required to take any action with
respect to such step or steps.
(c) Holdback. During Executive's Employment Term, Executive agrees
not to effect any public sale or distribution of any shares of Common Stock,
including a sale pursuant to Rule 144, during the fourteen (14) day period
preceding or the ninety (90) day period following, effective date of any
registration statement covering similar securities of the Company (except
pursuant to such registration statement), if and to the extent the Company (in
the case of a non- underwritten offering) or the managing underwriter (in the
case of any underwritten offering) so requests.
(d) Registration Requirements. If and wherever the Company is
required by the provisions of this Section 7 to use its best efforts to effect
the registration under the Securities Act of any shares of Common Stock
requested to be so registered by Executive, the Company will, as promptly as
reasonably practicable:
(i) prepare and file with the Securities and Exchange Commission
a registration statement with respect to such shares of Common Stock and use its
best efforts to cause such registration statement to become and remain effective
for a period of not less than two hundred seventy (270) days or such shorter
period which will terminate when all shares of Common Stock included in such
registration statement have been sold;
(ii) prepare and file with the Securities and Exchange Commission
such amendments and supplements to such registration statement and the
prospectus used in connection therewith as may be necessary to keep such
registration statement effective for the period set forth in clause (i) above
and to comply with the provisions of the Securities Act with respect to the sale
or other disposition of all shares of Common Stock covered by such registration
statement whenever the purchaser shall desire to sell or otherwise dispose of
the same within the period set forth in clause (i) above;
(iii) furnish to Executive such number of copies of a prospectus,
including a preliminary prospectus, in conformity with the requirements of the
Securities Act, and such other documents as may reasonably be requested thereby
in order to facilitate the public sale or other disposition of such shares of
Common Stock owned thereby;
(iv) promptly notify Executive, during any time when a prospectus
relating to such shares of Common Stock is required to be delivered under the
Securities Act within the appropriate period mentioned in clause (i) of the
happening of any event as a result of which the prospectus included in such
registration statement, as then in effect, includes an untrue statement
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<PAGE> 16
of a material fact or omits to state a material fact required to be stated
therein or necessary to make the statements therein not misleading in the light
of circumstances then existing, and at Executive's request, promptly prepare and
furnish to it a reasonable number of copies of a supplement to or an amendment
of such prospectus as may be necessary so that, as thereafter delivered to the
purchasers of such shares of Common Stock, such prospectus shall not Include an
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not misleading in
the light of the circumstances then existing, and Executive agrees that, upon
receipt of any written notice from the Company of the happening of any event of
the kind described in this clause (iv), it will forthwith discontinue
disposition of shares of Common Stock pursuant to the registration statement
until receipt of the copies of the supplemented or amended prospectus
contemplated by this clause (iv) (which the Company agrees to prepare, file and
deliver promptly after the written notice referred to above), and, if so
directed by the Company within five (5) days after the written notice referred
to above, Executive will deliver to the Company all copies, other than permanent
file copies, then in its possession of the most recent prospectus covering
shares of Common Stock at the time or receipt of such notice. In the event the
Company shall give any written notice under this subsection, the Company shall
extend the period during which such registration statement shall be maintained
effective by the number of days during the period from and including the date of
the giving of notice under this subsection to the date when the Company shall
make available to Executive a prospectus supplemented or amended to conform with
the requirements hereunder;
(v) make available such officers of the Company as Executive may
reasonably request for purposes of making analysis and presentations to
securities analysts, underwriters, selling and placement agents, prospective
purchasers and other persons involved in any public offering of Common Stock.
(e) Registration Expenses. The Company will pay all expenses
necessary to effect under the Securities Act any registration statements,
amendments or supplements filed pursuant to this Section 7 (other than
underwriters, discounts and commissions and brokerage commission and fees, if
any, payable with respect to shares of Common Stock sold by Executive and other
than legal fees incurred by Executive), including without limitation, printing
expenses, fees of the Securities and Exchange Commission and the National
Association of Securities Dealers, Inc., expenses of compliance with Blue Sky
and other state securities laws, and accounting and legal fees and expenses
incurred by the Company.
(f) Exchange Act Reports. The Company covenants that it will, so
long as any shares of Common Stock remain outstanding, file all reports required
to be filed by it under the Securities Act or the Securities Exchange Act and
the rules and regulations promulgated by the Securities and Exchange Commission
thereunder (or, if it is not required to file such reports, it will make
publicly available such information as will enable the Executive to sell any
restricted shares of Common Stock held by him without registration as described
below in this Section 7(f)), and will take such further action as Executive may
reasonably request, all to the extent required from time to time to enable
Executive to sell such restricted shares held by him without registration within
the limitations of the exemptions provided by (i) Rule 144 promulgated under
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<PAGE> 17
the Securities Act, as such rule may be amended from time to time, or (ii) any
similar rule or regulation hereafter promulgated by the Securities and Exchange
Commission.
(g) Indemnification by Company. In the event of any registration
pursuant to this Section 7 covering shares of Common Stock beneficially owned by
Executive, the Company will indemnify and hold harmless Executive, against any
losses, claims, damages, costs, expenses (including reasonable attorneys' fees),
or liabilities (or actions in respect thereof) under the Securities Act or
otherwise, which arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in any such registration
statement, any preliminary prospectus or final prospectus or any amendment or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading; provided, however, that
the Company will not be liable in any such case to the extent that any such
loss, claim damage or liability arises out of or is based upon an alleged
omission made in said registration statement, said preliminary prospectus, said
prospectus, or any said amendment or supplement, in reliance upon and in
conformity with written information furnished by Executive specifically for use
in the preparation thereof. The Company also agrees to reimburse Executive for
any legal or other expenses reasonably incurred by Executive in connection with
investigating or defending any such loss, claim, liability or action.
(h) Indemnification by Executive. In the event of any registration
pursuant to this Section 7 covering shares of Common Stock beneficially owned by
Executive, Executive shall indemnify and hold harmless the Company, each of its
directors, each of its officers who have signed any registration statement, and
each person, if any, who controls the Company within the meaning of the
Securities Act, and each other stockholder whose shares of Common Stock are
covered by such registration and each person, if any, who controls any such
stockholder, against any losses, claims, damages, costs, expenses (including
reasonable attorneys' fees), or liabilities (or actions in respect thereof) to
which the Company or any such director, officer, stockholder, or controlling
person may become subject, under the Securities Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon any untrue or alleged untrue statement of any
material fact contained in such registration statement, any preliminary
prospectus or final prospectus or final amendment or supplement thereto, or
arise out of or are based upon the omission or the alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, in each case to the extent, but only to the
extent, that such untrue statement or alleged untrue statement or omission or
alleged omission was made in said registration statement, said preliminary
prospectus, said final prospectus, or said amendment or supplement, in reliance
upon and in conformity with written information furnished by Executive
specifically for use in the preparation thereof. Executive will reimburse any
legal or other expenses reasonably incurred by the Company or any such director,
officer, stockholder, or controlling person in connection with investigating or
defending any such loss, claim, damage, liability or action, but only in the
circumstances and to the extent as aforesaid.
(i) Notice of Indemnity Claim. Promptly after receipt by an
indemnified party under this Section 7 of notice of the commencement of any
action, such indemnified party shall, if a
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claim in respect thereof is to be made against any indemnifying party under this
Section 7, notify the indemnifying party of the commencement thereof; provided,
however, that failure so to notify the indemnifying party shall not affect any
indemnifying party's obligations hereunder unless and then only to the extent
that such failure over an extended period of time shall have materially
prejudiced the indemnifying party. In case any such action is brought against
any indemnified party, and it notifies any indemnifying party of the
commencement thereof, the indemnifying party will be entitled to participate in
the defense thereof, with counsel reasonably satisfactory to such indemnified
party. Notwithstanding the foregoing, the indemnified party may retain its own
counsel, who shall be reasonably satisfactory to the indemnifying party. The
reasonable fees and expenses of such counsel shall be borne by the indemnifying
party. An indemnified party shall not enter into a compromise or settlement of
any claim or agree to a judgment without the consent of the indemnifying party.
(j) Indemnification of Underwriters. With respect to any
underwritten offering, the Executive and the Company shall, in addition to the
foregoing, provide the underwriter of such offering with customary
representations and warranties, and customary indemnification, in each instance
as shall be reasonably requested by the underwriter; provided, however, that any
such agreement to indemnify an underwriter with respect to any preliminary
prospectus shall not inure to the benefit of any such underwriter to the extent
that any loss, claim, damage or liability of any such underwriter results solely
from an untrue statement of material fact contained in, or the omission of a
material fact from, such preliminary prospectus which untrue statement or
omission was corrected in the final prospectus, if such underwriter failed to
send or give a copy of the final prospectus to the person asserting such loss,
claim, damage or liability at or prior to the written confirmation of the sale
of such shares of Common Stock to such person, and provided that any such
agreement by the Executive to indemnify an underwriter shall be on a several
(and not joint) basis in proportion to the number of shares of Common Stock sold
by the Executive in such underwritten offering and shall be limited in amount to
the net proceeds received by Executive in such underwritten offering.
8. INDEMNITY. Concurrently with the execution of this Agreement, the
Company and the Executive shall execute and deliver to each other an Indemnity
Agreement in the form attached as Exhibit "B" hereto. The delivery of such
agreement by the Company is in consideration for the performance by Executive of
his obligations under this Agreement.
9. MISCELLANEOUS.
(a) Severability, The provisions of this Agreement shall be
severable and if any provision hereof shall be judged to be invalid, such
invalidity shall not affect any other portion of this Agreement which can be
given effect.
(b) Notices. All notices, requests, demands and other communications
hereunder shall be in writing and shall be duly given if actually received or if
duly mailed, registered or certified mail, return receipt requested, postage
prepaid:
If to the Company, to:
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J2 Communications
10850 Wilshire Blvd.
Suite 1000
Los Angeles, CA 90024
If to Executive, to:
James P. Jimirro
10787 Wilshire Blvd.
Suite 1702
Los Angeles, CA 90024
or to such other address as either party may furnish to the other in writing,
making specific reference to this Section 9(b).
(c) Arbitration. In the event that there shall be a dispute between
the parties hereto concerning the meaning, application or interpretation of this
Agreement or of the legal relations connected therewith, or concerning any
alleged breach hereof, or to enforce the terms hereof or to seek damages in
respect of a breach hereof or otherwise relating hereto, then such dispute shall
be referred to the American Arbitration Association for arbitration before a
single arbitration in Los Angeles, California, according to the rules of the
arbitrator appointed by said Association; and the decision of such Association
shall be final and binding on the parties hereto.
(d) Rights to Work Product. Except as provided in Section 9(e)
below, Executive grants to the Company all rights of every kind whatsoever,
exclusively and perpetually, in and to all services performed by him for the
Company hereunder, during the term hereof, and the results and proceeds thereof,
including all of Executive's creative works including without limitation ideas,
concepts, formats, themes, screenplays, and/or adaptations of the foregoing,
whether or not reduced to writing, and whether or not otherwise protected by
copyrights, or rights thereto, or at common law or otherwise during the term
hereof. Executive agrees that all films, film rights, videotapes, distribution
rights, literary material, photoplays, music rights, ideas for photoplays,
scripts and similar rights, presentations, ideas, formats and all other material
(collectively referred to as "Material") submitted to him by third parties
during the term of his employment hereunder shall be deemed to be submitted to
the Company and upon the termination of his employment hereunder Executive shall
forthwith deliver all such Material in his possession, if any, to the Company.
(e) Confidentiality. Without the express prior written consent of
the Company, Executive shall not, except in the ordinary course of performing
his duties for the Company, disclose or make available to anyone outside the
Company, any confidential or proprietary information of the Company its
subsidiaries, or affiliated corporations or entities including, without
limitation, trade secrets, customer lists, financial data, programming plans or
other information not generally known to any competitor of the Company, its
subsidiaries or affiliated corporations or entities. Upon termination of his
employment, Executive shall deliver to the Company all documents in his
possession containing any such confidential or proprietary
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information; provided, however, that Employee shall be entitled to retain a copy
of his personal correspondence file. The agreements of Executive set forth in
this Section 9(e) shall survive the end of the Employment Term and the
termination of Executive's period of serving as a Consultant pursuant to Section
______ of this Agreement.
(f) Name. The Company acknowledges that part of its name ("J2")
relates and refers to Executive's initials and that such corporate name will be
inevitably associated with Executive within the entertainment industry.
Executive hereby grants the Company the right to use his initials as part of its
name without additional compensation therefor; provided however, that should
Executive's employment with the Company be terminated for any reason, the
Company shall, upon written request of Executive, change its name from "J2" to a
name that does not utilize J2 or Executive's initials within a reasonable time
period (not to exceed one year) following such request.
(g) Attorneys' Fees. In the event of any dispute hereunder, or in
the event of any action to enforce the terms and provisions of this Agreement,
the prevailing party shall be entitled to recover from the other his reasonable
attorneys' fees and disbursements and other costs incurred in connection
therewith.
(h) Assignment. Neither this Agreement nor any right or interest
under this Agreement shall be assignable by Executive. This Agreement shall not
be assignable by the Company without the prior written consent of Executive.
(i) Entire Agreement. This Agreement sets forth the entire
understanding and agreement of the parties. Said Agreement is binding upon the
heirs, administrators, successors and assigns of the parties hereto. There are
no oral agreements, modifications, representations or understandings which are
not specifically set forth herein. All negotiations are merged into this
Agreement.
(j) Governing Law. This Agreement and each of the provisions
hereunder shall be interpreted according to and governed by the internal laws of
the State of California regardless of the principles of choice of law of that or
any other jurisdiction. The parties hereto submit to the jurisdiction of the
state and federal courts of the State of California.
Signature page follows
20
<PAGE> 21
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed
by its officer thereunto duly authorized, and Executive has executed this
Agreement as of the day and year first above written.
"The Company"
J2 COMMUNICATIONS
By:_________________________
"Executive"
JAMES P. JIMIRRO
____________________________
21
<PAGE> 1
EXHIBIT 10.10
FORM OF CONTINGENT NOTE
$2,150,625 July 1, 1999
FOR VALUE RECEIVED, the undersigned, J2 Communications ("Obligor")
promises to pay to the order of James P. Jimirro or his lawful assignee
("Holder"), the principal sum of Two Million One Hundred Fifty Thousand Six
Hundred Dollars ($2,150,625) in lawful money of the United States, or if less
than such principal amount has been advanced hereunder, the aggregate unpaid
principal balance of this Note, with interest thereon in like lawful money, at
the rate provided below from the date such principal is advanced until payment
in full thereof.
This Note is referred to and is executed and delivered pursuant to that
certain Restated Employment Agreement, dated as of September , 1999 (as it may
be amended, supplemented or otherwise modified from time to time, the
"Employment Agreement"), between the Obligor and the Holder. Capitalized terms
not otherwise defined herein, shall have the meanings ascribed thereto in the
Employment Agreement. Reference is hereby made to the terms and conditions of
the Employment Agreement for a more complete statement of the terms and
conditions of the under which the amounts due hereunder are to be paid. The
Employment Agreement, among other things, provides (a) for the issuance of one
or more Contingent Notes upon Holders election to waive all or a portion of his
compensation, (b) the acceleration of the maturity hereof upon the happening of
certain stated events, including but not limited to a Change of Control (as
defined in the Employment Agreement) and also for prepayments of principal
hereof prior to the maturity hereof upon the terms and conditions therein
specified, and (c) for changes in the interest rate hereof upon the terms and
conditions specified therein.
The outstanding principal amount hereof (including, to the extent
permitted by law, on interest thereon not paid when due) shall bear interest
from the date made until paid in full in cash at a fluctuating rate equal 7% per
annum (the "Base Rate"). The total amount owing hereunder is referred to herein
as the "Obligation."
All interest charges shall be computed on the basis of a year of 360
days and actual days elapsed. Interest not paid when due at the Maturity Date
(as defined below) shall accrue at a rate equal to 5% per annum (the "Default
Rate) over the Base Rate. The maturity date (the "Maturity Date") for the
Obligations owing hereunder shall be 5 business days after the occurrence of a
"Change of Control."
Except as otherwise provided herein, all interest shall be payable in
arrears upon a "Change of Control." "Change in Control" means either (i) a
Change of Control as defined under the Employment Agreement of (ii) a change in
control of the Company occurring after the date of this Note of a nature that
would be required to be reported in response to Item 6(e) of Schedule 14A of
Regulation 14A (or in response to any similar item on any similar schedule or
form) promulgated under the Securities Exchange Act of 1934 (the "Act"), whether
or not the Company is then subject to such reporting requirement; provided,
however, that, without limitation, such a
<PAGE> 2
Change in Control shall be deemed to have occurred if after the date of this
Agreement
Each of the following specified events hereby constitutes and is herein
referred to individually as an "Event of Default":
(a) Obligor's failure to make (or cause to be made) any
payments to the Holder under this Note when the same are due and not cured; or
(b) Default in the due and timely observance or performance of
the material terms, provisions, covenants, conditions, agreements or obligations
of Obligor contained in this Note which would adversely and materially affect
the validity, perfection or priority of the security interest of the Holder in
the Collateral, or the value of the Collateral or the Note and failure to cure
same within ten (10) business days of Holder's written notice concerning such
failure; or
(c) Suspension by Obligor of its business operations and
failure to reinstate operations within twenty (20) business days of such
suspension; or
(d) Obligor transfers all or substantially all of its assets
to a third party other than Holder who is approved by Holder, in Holder's sole
and absolute discretion; or
(e) The acquisition by a third party, other than Holder or an
affiliate of Obligor, of all of the outstanding shares of common stock of
Obligor.
At the Holder's option, upon the occurrence of an Event of Default, and
at any time thereafter if such Event of Default shall then be continuing:
(a) Unless such Event of Default is cured within the time
period provided for hereunder, the Indebtedness may, without presentment,
demand, protest, or notice of any kind, all of which are hereby expressly waived
by Obligor, be forthwith called due and payable, if not otherwise then due and
payable (anything in this Note or other agreement, contract, indenture, document
or instrument contained to the contrary notwithstanding) and the Maturity Date
shall be accelerated accordingly;
(b) The Holder may pursue the remedies afforded to it
hereunder or under any of the documents executed in connection herewith, or any
other remedy afforded to it by law or equity, and the Holder may, at its option,
do and perform all other acts and things reasonably necessary for the proper
preservation and protection of its rights hereunder, or pursuant to the Restated
Security Agreement, all at the cost and expense of Obligor, which amount so
expended shall constitute costs recoupable by the Holder; and
2
<PAGE> 3
(c) The Holder may, at its option, engage others to exercise
or discharge any of its rights or obligations hereunder. The amounts payable to
such others by the Holder shall be recoupable by the Holder.
No provision of this Note shall be deemed to establish or require the
payment of interest of a rate in excess of the maximum rate permitted by
applicable law (the "Maximum Legal Rate"). In the event that the interest
required to be paid under this the Note exceeds the Maximum Legal Rate, the
interest required to be paid hereunder or under the Note shall be automatically
reduced to the Maximum Legal Rate. In the event any interest paid exceeds the
then applicable interest rate, the excess of such interest over the maximum
amount of interest permitted to be charged shall automatically be deemed to
reduce the accrued and unpaid fees and expenses due to the Holder under this
Note, if any; then to reduce the accrued and unpaid interest, if any; and then
to reduce principal of the Loan; the balance of any excess interest remaining
after the application of the foregoing, if any, shall be refunded to the
Obligor.
If any of the Obligations owed hereunder are not paid when due (whether
by acceleration or otherwise), then all of the Obligations shall bear interest
at the Default Rate applicable thereto until so paid; and if any other Default
or Event of Default occurs, then at the election of the Holder, while any such
Default or Event of Default is outstanding, all of the Obligations shall bear
interest at the Default Rate applicable thereto. Interest calculated at the
Default Rate shall be immediately due and owing and shall accrue and be payable
from the date such payment was due to and including the date of payment.
All payments in respect of this Note shall be made to Holder at 10787
Wilshire Blvd., Penthouse Two, Los Angeles, CA 90024, or at such other place as
may be designated in writing by the Holder for such purpose in accordance with
the terms of the Employment Agreement.
The principal and all accrued and unpaid interest thereon shall be due
and payable in full as provided herein. Such payment is subject to earlier
acceleration and/or mandatory prepayments as provided in the Employment
Agreement. Upon the occurrence of an Event of Default the whole sum of principal
and interest then due and owing hereunder shall be immediately due and payable.
If this Note is not paid in full on the Maturity Date, the Obligor
promises to pay all reasonable costs and expenses of collection and reasonable
attorneys' fees and expenses and court costs incurred by the holder hereof on
account of such collection whether or not suit is filed thereon.
The amounts and rates of all Loans made pursuant hereto and all amounts
paid or repaid on this Note shall be indicated on the Holder's books with
respect to this Note and shall constitute prima facie evidence of the amounts
and dates of such Loans.
The Obligor waives protest, diligence, presentment, demand for payment,
notice of
3
<PAGE> 4
default or nonpayment, notice of dishonor and all other demands and notices in
connection with the delivery, acceptance, performance and enforcement of this
Note, and to the fullest extent permitted by law, all rights to assert any
statute of limitations to an action hereunder.
Each controversy, dispute or claim between the parties arising out of
or relating to this Note, which controversy, dispute or claim is not settled in
writing within thirty (30) days after the "Claim Date" (defined as the date on
which Holder or Obligor gives written notice to all other parties that a
controversy, dispute or claim exists), will be settled by a reference proceeding
in California in accordance with the provisions of Section 638 et seq. of the
California Code of Civil Procedure, or their successor section ("CCP"), which
shall constitute the exclusive remedy for the settlement of any controversy,
dispute or claim concerning this Note, including whether such controversy,
dispute or claim is subject to the reference proceeding and except as set forth
above, the parties waive their rights to initiate any legal proceedings against
each other in any court or jurisdiction other than the Superior Court in Los
Angeles County (the "Court"). The referee shall be a retired Judge of the Court
selected by mutual agreement of the parties, and if they cannot so agree within
forty-five (45) days after the Claim Date, the referee shall be promptly
selected by the Presiding Judge of the Court (or his representative). The
referee shall be appointed to sit as a temporary judge, with all of the powers
for a temporary judge, as authorized by law, and upon selection should take and
subscribe to the oath of office as provided for in Rule 244 of the California
Rules of Court (or any subsequently enacted Rule). Each party shall have one
peremptory challenge pursuant to CCP Section 170.6. The referee shall (a) be
requested to set the matter for hearing within sixty (60) days after the Claim
Date and (b) try any and all issues of law or fact and report a statement of
decision upon them, if possible, within ninety (90) days of the Claim Date. Any
decision rendered by the referee will be final, binding and conclusive and
judgment shall be entered pursuant to CCP Section 644 in any court in the state
of California having jurisdiction. Any party may apply for a reference
proceeding at any time after thirty (30) days following notice to any other
party of the nature of the controversy, dispute or claim, by filing a petition
for a hearing and/or trial. All discovery permitted by this paragraph shall be
completed no later than fifteen (15) days before the first hearing date
established by the referee. The referee may extend such period in the event of a
party's refusal to provide requested discovery for any reason whatsoever,
including, without limitation, legal objections raised to such discovery or
unavailability of a witness due to absence or illness. No party shall be
entitled to "priority" in conducting discovery. Depositions may be taken by
either party upon seven (7) days written notice, and request for production or
inspection of documents shall be responded to within ten (10) days after
service. All disputes relating to discovery which cannot be resolved by the
parties shall be submitted to the referee whose decision shall be final and
binding upon the parties. Pending appointment of the referee as provided herein,
the Superior Court is empowered to issue temporary and/or provisional remedies,
as appropriate.
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<PAGE> 5
Except as expressly set forth in this paragraph, the referee shall
determine the manner in which the reference proceeding is conducted including
the time and place of all hearings, the order of presentation of evidence, and
all other questions that arise with respect to the course of the reference
proceeding. All proceedings and hearings conducted before the referee, except
for trial, shall be conducted without a court reporter, except that when any
party so requests, a court reporter will be used at any hearing conducted before
the referee. The party making such a request shall have the obligation to
arrange for and pay for the court reporter. The costs of the court reporter at
the trial shall be borne equally by the parties. The referee shall be required
to determine all issues in accordance with existing case law and the statutory
laws of the state of California. The rules of evidence applicable to proceedings
at law in the state of California will be applicable to the reference
proceeding. The referee shall be empowered to enter equitable as well as legal
relief, to provide all temporary and/or provisional remedies and to enter
equitable orders that will be binding upon the parties. The referee shall issue
a single judgment at the close of the reference proceeding that shall dispose of
all of the claims of the parties that are the subject of the reference. The
parties hereto expressly reserve the right to contest or appeal from the final
judgment or any appealable order or appealable judgment entered by the referee.
The parties hereto expressly reserve the right to findings of fact, conclusions
of law, a written statement of decision, and the right to move for a new trial
or a different judgment, which new trial, if granted, is also to be a reference
proceeding under this provision.
In the event that the enabling legislation which provides for
appointment of a referee is repealed (and no successor statute is enacted), any
dispute between the parties that would otherwise be determined by the reference
procedure herein described will be resolved and determined by arbitration. The
arbitration will be conducted by a retired judge of the Court, in accordance
with the California Arbitration Act, Section 1280 through Section 1294.2 of the
CCP as amended from time to time. The limitations with respect to discovery as
set forth hereinabove shall apply to any such arbitration proceeding.
This Note shall be governed by and construed in accordance with the
laws of the state of California without reference to conflicts of law principles
in the state of California.
IN WITNESS WHEREOF, the Obligor has executed this Note as of the date
first written above.
"OBLIGOR"
J2 Communications
By_______________________________
Its______________________________
5
<PAGE> 1
EXHIBIT 10.10
RESTATED INDEMNIFICATION AGREEMENT
THIS AGREEMENT (the "Agreement") is made and entered into this ____day
of _______________, 1999 between J2 Communications, a California corporation
(the "Company") and ____________________ ("Indemnitee").
WITNESSETH THAT:
WHEREAS, Indemnitee performs a valuable service for the Company; and
WHEREAS, the Board of Directors of the Company having adopted an
Amended and Restated Certificate of Incorporation (the "Certificate") permitting
the Board of Directors to indemnify certain officers and employees designated by
the Board of Directors or Chief Executive Officer (the "Officers") and directors
(the "Directors") of the Company; and
WHEREAS, the Certificate and Section 317 of the California General
Corporation Law, as amended ("Law"), permits the Company to indemnify its
Officers and Directors; and
WHEREAS, as a result of recent developments affecting the terms, scope
and availability of D & O Insurance there exists general uncertainty as to the
extent of protection afforded the Company's Officers and Directors by such D&O
INSURANCE and said uncertainty also exists under statutory and bylaw
indemnification provisions; and
WHEREAS, in recognition of past services and in order to induce
Indemnitee to continue to serve as an officer and/or a director of the Company,
the Company has determined and agreed to enter into this contract with
Indemnitee;
NOW, THEREFORE, in consideration of Indemnitee's continued service as
an Officer and/or a Director after the date hereof, the parties hereto agree as
follows:
1. INDEMNITY OF INDEMNITEE. The Company hereby agrees to hold harmless
and indemnify Indemnitee to the full extent authorized or permitted by the
provisions of the Law, as such may be amended from time to time, and Article V
of the Certificate, as such may be amended. In furtherance of the foregoing
indemnification, and without limiting the generality thereof:
(a) Proceedings Other Than Proceedings by or in the Right of
the Company. Indemnitee shall be entitled to the rights of indemnification
provided in this Section 1(a) if, by reason of his Corporate Status (as
hereinafter defined), he is, or is threatened to be made, a party to or
participant in any Proceeding (as hereinafter defined) other than a Proceeding
by or in the
<PAGE> 2
right of the Company. Pursuant to this Section 1(a), Indemnitee shall be
indemnified against all Expenses (as hereinafter defined), judgments, penalties,
fines and amounts paid in settlement actually and reasonably incurred by him or
on his behalf in connection with such Proceeding or any claim, issue or matter
therein, if he acted in good faith and in a manner he reasonably believed to be
in or not opposed to the best interests of the Company and, with respect to any
criminal Proceeding, had no reasonable cause to believe his conduct was
unlawful.
(b) Proceedings by or in the Right of the Company. Indemnitee
shall be entitled to the rights of indemnification provided in this Section 1(b)
if, by reason of his Corporate Status, he is, or is threatened to be made, a
party to or participant in any Proceeding brought by or in the right of the
Company to procure a judgment in its favor. Pursuant to this Section 1(b),
Indemnitee shall be indemnified against all Expenses actually and reasonably
incurred by him or on his behalf in connection with such Proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the Company; provided, however, that, if applicable law so
provides, no indemnification against such Expenses shall be made in respect of
any claim, issue or matter in such Proceeding as to which Indemnitee shall have
been adjudged to be liable to the Company unless and to the extent that the
Court of Chancery of the State of California, or the court in which such
Proceeding shall have been brought or is pending, shall determine that such
indemnification may be made.
(c) Indemnification for Expenses of a Party Who is Wholly or
Partly Successful . Notwithstanding any other provision of this Agreement, to
the extent that Indemnitee is, by reason of his Corporate Status, a party to and
is successful, on the merits or otherwise, in any Proceeding, he shall be
indemnified to the maximum extent permitted by law against all Expenses actually
and reasonably incurred by him or on his behalf in connection therewith. If
Indemnitee is not wholly successful in such Proceeding but is successful, on the
merits or otherwise, as to one or more but less than all claims, issues or
matters in such Proceeding, the Company shall indemnify Indemnitee against all
Expenses actually and reasonably incurred by him or on his behalf in connection
with each successfully resolved claim, issue or matter. For purposes of this
Section and without limitation, the termination of any claim, issue or matter in
such a Proceeding by dismissal, with or without prejudice, shall be deemed to be
a successful result as to such claim, issue or matter.
2. ADDITIONAL INDEMNITY.
(a) Subject only to the exclusions set forth in Section
2(b)hereof, the Company hereby further agrees to hold harmless and indemnify
Indemnitee against any and all Expenses, judgments, fines and amounts paid in
settlement actually and reasonably incurred by Indemnitee in connection with any
Proceeding (including an action by or on behalf of the Company) to which
Indemnitee is, was or at any time becomes a party, or is threatened to be made a
party, by reason of his Corporate Status; provided, however, that with respect
to actions by or on behalf of the Company, indemnification of Indemnitee against
any judgments shall be made by the Company only as authorized in the specific
case upon a determination that
2
<PAGE> 3
Indemnitee acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the Company; and
(b) No indemnity pursuant to this Section 2 shall be paid by
the Company:
(i) In respect to remuneration paid to
Indemnitee if it shall be determined by a final judgment or other final
adjudication that such remuneration was in violation of law;
(ii) On account of any suit in which judgment is
rendered against Indemnitee for an accounting of profits made from the purchase
or sale by Indemnitee of securities of the Company pursuant to the provisions of
Section 16(b) of the Securities Exchange Act of 1934 and amendments thereto or
similar provisions of any federal, state or local statutory law;
(iii) On account of Indemnitee's conduct which is
finally adjudged to have been knowingly fraudulent or deliberately dishonest,
or to constitute willful misconduct; or
(iv) If a final decision by a court having
jurisdiction in the matter shall
determine that such indemnification is not lawful.
3. CONTRIBUTION. If the indemnification provided in Sections 1 and 2 is
unavailable and may not be paid to Indemnitee for any reason other than those
set forth in paragraphs (i), (ii) and (iii) of Section 2(b), then in respect to
any Proceeding in which the Company is jointly liable with Indemnitee (or would
be if joined in such Proceeding), the Company shall contribute to the amount of
Expenses, judgments, fines and amounts paid in settlement actually and
reasonably incurred and paid or payable by Indemnitee in such proportion as is
appropriate to reflect (i) the relative benefits received by the Company on the
one hand and by the Indemnitee on the other hand from the transaction from which
such Proceeding arose, and (ii) the relative fault of the Company on the one
hand and of the Indemnitee on the other hand in connection with the events which
resulted in such Expenses, judgments, fines or settlement amounts, as well as
any other relevant equitable considerations. The relative fault of the Company
on the one hand and of the Indemnitee on the other hand shall be determined by
reference to, among other things, the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent the circumstances
resulting in such Expenses, judgments, fines or settlement amounts. The Company
agrees that it would not be just and equitable if contribution pursuant to this
Section 3 were determined by pro rata allocation or any other method of
allocation which does not take account of the foregoing equitable
considerations.
4. INDEMNIFICATION FOR EXPENSES OF A WITNESS. Notwithstanding any other
provision of this Agreement, to the extent that Indemnitee is, by reason of his
Corporate Status, a witness in any Proceeding to which Indemnitee is not a
party, he shall be
3
<PAGE> 4
indemnified against all Expenses actually and reasonably incurred by him or on
his behalf in connection therewith.
5. ADVANCEMENT OF EXPENSES. Notwithstanding any other provision of this
Agreement, the Company shall advance all reasonable Expenses incurred by or on
behalf of Indemnitee in connection with any Proceeding by reason of Indemnitee's
Corporate Status within ten days after the receipt by the Company of a statement
or statements from Indemnitee requesting such advance or advances from time to
time, whether prior to or after final disposition of such Proceeding. Such
statement or statements shall reasonably evidence the Expenses incurred by
Indemnitee and shall include or be preceded or accompanied by an undertaking by
or on behalf of Indemnitee to repay any Expenses advanced if it shall ultimately
be determined that Indemnitee is not entitled to be indemnified against such
Expenses. Any advances and undertakings to repay pursuant to this Section 5
shall be unsecured and interest free. Notwithstanding the foregoing, the
obligation of the Company to advance Expenses pursuant to this Section 5 shall
be subject to the condition that, if, when and to the extent that the Company
determines that Indemnitee would not be permitted to be indemnified under
applicable law, the Company shall be entitled to be reimbursed, within thirty
(30) days of such determination, by Indemnitee (who hereby agrees to reimburse
the Company) for all such amounts theretofore paid; provided, however, that if
Indemnitee has commenced or thereafter commences legal proceedings in a court of
competent jurisdiction to secure a determination that Indemnitee should be
indemnified under applicable law, any determination made by the Company that
Indemnitee would not be permitted to be indemnified under applicable law shall
not be binding and Indemnitee shall not be required to reimburse the Company for
any advance of Expenses until a final judicial determination is made with
respect thereto (as to which all rights of appeal therefrom have been exhausted
or lapsed).
6. PROCEDURE FOR DETERMINATION OF ENTITLEMENT TO
INDEMNIFICATION.
(a) To obtain indemnification (including, but not limited to,
the advancement of Expenses and contribution by the Company) under this
Agreement, Indemnitee shall submit to the Chief Executive Officer or Chief
Financial Officer a written request, including therein or therewith such
documentation and information as is reasonably available to Indemnitee and is
reasonably necessary to determine whether and to what extent Indemnitee is
entitled to indemnification. The Secretary or any Assistant Secretary of the
Company shall, promptly upon receipt of such a request for indemnification,
advise the Board of Directors in writing that Indemnitee has requested
indemnification.
(b) Upon written request by Indemnitee for indemnification
pursuant to the first sentence of Section 6(a) hereof, a determination, if
required by applicable law, with respect to Indemnitee's entitlement thereto
shall be made in the specific case:
4
<PAGE> 5
(i) if a Change in Control (as hereinafter
defined) shall have occurred, by Independent Counsel (as hereinafter defined)
in a written opinion to the Board of Directors, a copy of which shall be
delivered to Indemnitee (unless Indemnitee shall request that such determination
be made by the Board of Directors or the stockholders, in which case the
determination shall be made in the manner provided in Clause (ii) below), or
(ii) if a Change in Control shall not have
occurred, (A) by the Board of Directors by a majority vote of a quorum
consisting of Disinterested Directors (as hereinafter defined),or (B) if a
quorum of the Board of Directors consisting of Disinterested Directors is not
obtainable or, even if obtainable, said Disinterested Directors so direct, by
Independent Counsel in a written opinion to the Board of Directors, a copy of
which shall be delivered to Indemnitee, or (C) if so directed by said
Disinterested Directors, by the stockholders of the Company; and, if it is
determined that Indemnitee is entitled to indemnification, payment to
Indemnitee shall be made within ten (10) days after such determination.
Indemnitee shall cooperate with the person, persons or entity making such
determination with respect to Indemnitee's entitlement to indemnification,
including providing to such person, persons or entity upon reasonable advance
request any documentation or information which is not privileged or otherwise
protected from disclosure and which is reasonably available to Indemnitee and
reasonably necessary to such determination. Any Independent Counsel, member of
the Board of Directors, or stockholder of the Company shall act reasonably and
in good faith in making a determination under the Agreement of the Indemnitee's
entitlement to indemnification. Any costs or expenses (including attorneys'
fees and disbursements) incurred by Indemnitee in so cooperating with the
person, persons or entity making such determination shall be borne by the
Company (irrespective of the determination as to Indemnitee's entitlement to
indemnification) and the Company hereby indemnifies and agrees to hold
Indemnitee harmless therefrom.
(c) If the determination of entitlement to indemnification is
to be made by Independent Counsel pursuant to Section 6(b) hereof, the
Independent Counsel shall be selected as provided in this Section 6(c). If a
Change in Control shall not have occurred, the Independent Counsel shall be
selected by the Board of Directors, and the Company shall give written notice to
Indemnitee advising him of the identity of the Independent Counsel so selected.
If a Change in Control shall have occurred, the Independent Counsel shall be
selected by Indemnitee (unless Indemnitee shall request that such selection be
made by the Board of Directors, in which event the preceding sentence shall
apply), and Indemnitee shall give written notice to the Company advising it of
the identity of the Independent Counsel so selected. In either event, Indemnitee
or the Company, as the case may be, may, within 10 days after such written
notice of selection shall have been given, deliver to the Company or to
Indemnitee, as the case may be, a written objection to such selection; provided,
however, that such objection may be asserted only on the ground that the
Independent Counsel so selected does not meet the requirements of "Independent
Counsel" as defined in Section 14 of this Agreement, and the objection shall set
forth with particularity the factual basis of such assertion. Absent a proper
and timely objection, the person so selected shall act as Independent Counsel.
If a written objection is made and substantiated, the Independent Counsel
selected may not serve as Independent Counsel unless and until such
5
<PAGE> 6
objection is withdrawn or a court has determined that such objection is without
merit. If, within 20 days after submission by Indemnitee of a written request
for indemnification pursuant to Section 6(a)hereof, no Independent Counsel shall
have been selected and not objected to, either the Company or Indemnitee may
petition the Court of Chancery of the State of California or other court of
competent jurisdiction for resolution of any objection which shall have been
made by the Company or Indemnitee to the other's selection of Independent
Counsel and/or for the appointment as Independent Counsel of a person selected
by the court or by such other person as the court shall designate, and the
person with respect to whom all objections are so resolved or the person so
appointed shall act as Independent Counsel under Section 6(b) hereof. The
Company shall pay any and all reasonable fees and expenses of Independent
Counsel incurred by such Independent Counsel in connection with acting pursuant
to Section 6(b) hereof, and the Company shall pay all reasonable fees and
expenses incident to the procedures of this Section 6(c), regardless of the
manner in which such Independent Counsel was selected or appointed. Upon the due
commencement of any judicial proceeding or arbitration pursuant to Section
8(a)(iii) of this Agreement, Independent Counsel shall be discharged and
relieved of any further responsibility in such capacity (subject to the
applicable standards of professional conduct then prevailing).
(d) The Company shall not be required to obtain the consent of
the Indemnitee to the settlement of any Proceeding which the Company has
undertaken to defend if the Company assumes full and sole responsibility for
such settlement and the settlement grants the Indemnitee a complete and
unqualified release in respect of the potential liability.
7. PRESUMPTIONS AND EFFECT OF CERTAIN PROCEEDINGS.
(a) In making a determination with respect to entitlement to
indemnification hereunder, the person or persons or entity making such
determination shall presume that Indemnitee is entitled to indemnification under
this Agreement if Indemnitee has submitted a request for indemnification in
accordance with Section 6(a) of this Agreement, and the Company shall have the
burden of proof to overcome that presumption in connection with the making by
any person, persons or entity of any determination contrary to that presumption.
(b) If the person, persons or entity empowered or selected
under Section 6 of this Agreement to determine whether Indemnitee is entitled to
indemnification shall not have made a determination within thirty (30) days
after receipt by the Company of the request therefor, the requisite
determination of entitlement to indemnification shall be deemed to have been
made and Indemnitee shall be entitled to such indemnification, absent
(i) a misstatement by Indemnitee of a material
fact, or an omission of a material fact necessary to make Indemnitee's
statement not materially misleading, in connection with the request for
indemnification, or
6
<PAGE> 7
(ii) a prohibition of such indemnification under
applicable law; provided, however, that such 30 day period may be extended for a
reasonable time, not to exceed an additional fifteen (15) days, if the person,
persons or entity making the determination with respect to entitlement to
indemnification in good faith requires such additional time for the obtaining or
evaluating documentation and/or information relating thereto; and provided,
further, that the foregoing provisions of this Section 7(b) shall not apply if
the determination of entitlement to indemnification is to be made by the
stockholders pursuant to Section 6(b) of this Agreement and if (A) within
fifteen (15) days after receipt by the Company of the request for such
determination the Board of Directors or the Disinterested Directors, if
appropriate, resolve to submit such determination to the stockholders for their
consideration at an annual meeting thereof to be held within seventy five (75)
days after such receipt and such determination is made thereat, or (B) a special
meeting of stockholders is called within fifteen (15) days after such receipt
for the purpose of making such determination, such meeting is held for such
purpose within sixty (60) days after having been so called and such
determination is made thereat, or
(iii) if the determination of entitlement to
indemnification is to be made by Independent Counsel pursuant to Section 6(b)
of this Agreement.
(c) The termination of any Proceeding or of any claim, issue
or matter therein, by judgment, order, settlement (with or without court
approval),conviction, or upon a plea of nolo contendere or its equivalent, shall
not (except as otherwise expressly provided in this Agreement) of itself
adversely affect the right of Indemnitee to indemnification or create a
presumption that Indemnitee did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the Company
or, with respect to any criminal Proceeding, that Indemnitee had reasonable
cause to believe that his conduct was unlawful.
(d) For purposes of any determination of good faith,
Indemnitee shall be deemed to have acted in good faith if Indemnitee's action is
based on the records or books of account of the Enterprise (as hereinafter
defined), including financial statements, or on information supplied to
Indemnitee by the Officers and Directors of the Enterprise in the course of
their duties, or on the advice of legal counsel for the Enterprise or on
information or records given or reports made to the Enterprise by an independent
certified public accountant or by an appraiser or other expert selected with
reasonable care by the Enterprise. In addition, the knowledge and/or actions, or
failure to act, of any director, officer, agent or employee of the Enterprise
shall not be imputed to Indemnitee for purposes of determining the right to
indemnification under this Agreement. The provisions of this Section 7(d) shall
not be deemed to be exclusive or to limit in any way the other circumstances in
which the Indemnitee may be deemed to have met the applicable standard of
conduct set forth in this Agreement.
7
<PAGE> 8
8. REMEDIES OF INDEMNITEE.
(a) In the event that:
(i) a determination is made pursuant to
Section 6 of this Agreement that Indemnitee is not entitled to indemnification
under this Agreement,
(ii) advancement of Expenses is not timely made
pursuant to Section 5 of this Agreement,
(iii) no determination of entitlement to
indemnification shall have been made pursuant to Section 6(b) of this Agreement
within ninety (90) days after receipt by the Company of the request for
indemnification,
(iv) payment of indemnification is not made
pursuant to Section 3 or 4 of this Agreement within ten (10) days after receipt
by the Company of a written request therefor, or
(v) payment of indemnification is not made
within ten (10) days after a determination has been made that Indemnitee is
entitled to indemnification or such determination is deemed to have been made
pursuant to Section 6 or 7 of this Agreement, Indemnitee shall be entitled to an
adjudication in an appropriate court of the State of California, or in any other
court of competent jurisdiction, of his entitlement to such indemnification.
Alternatively, Indemnitee, at his option, may seek an award in arbitration to be
conducted by a single arbitrator pursuant to the Commercial Arbitration Rules of
the American Arbitration Association. Indemnitee shall commence such proceeding
seeking an adjudication or an award in arbitration within one hundred eighty
(180) days following the date on which Indemnitee first has the right to
commence such proceeding pursuant to this Section 8(a). The Company shall not
oppose Indemnitee's right to seek any such adjudication or award in arbitration.
(b) In the event that a determination shall have been made
pursuant to Section 6(b) of this Agreement that Indemnitee is not entitled to
indemnification, any judicial proceeding or arbitration commenced pursuant to
this Section 8 shall be conducted in all respects as a de novo trial, or
arbitration, on the merits and Indemnitee shall not be prejudiced by reason of
that adverse determination.
(c) If a determination shall have been made pursuant to
Section 6(b) of this Agreement that Indemnitee is entitled to indemnification,
the Company shall be bound by such determination in any judicial proceeding or
arbitration commenced pursuant to this Section 8, absent
8
<PAGE> 9
(i) a misstatement by Indemnitee of a material
fact, or an omission of a material fact necessary to make Indemnitee's statement
not materially misleading, in connection with the request for indemnification,
or
(ii) a prohibition of such indemnification under
applicable law.
(d) In the event that Indemnitee, pursuant to this Section 8,
seeks a judicial adjudication of or an award in arbitration to enforce his
rights under, or to recover damages for breach of, this Agreement, Indemnitee
shall be entitled to recover from the Company, and shall be indemnified by the
Company against, any and all expenses (of the types described in the definition
of Expenses in Section 16 of this Agreement) actually and reasonably incurred by
him in such judicial adjudication or arbitration, but only if he prevails
therein. If it shall be determined in said judicial adjudication or arbitration
that Indemnitee is entitled to receive part but not all of the indemnification
sought, the expenses incurred by Indemnitee in connection with such judicial
adjudication or arbitration shall be appropriately prorated. The Company shall
indemnify Indemnitee against any and all expenses and, if requested by
Indemnitee, shall (within ten (10) days after receipt by the Company of a
written request therefor) advance such expenses to Indemnitee, which are
incurred by Indemnitee in connection with any action brought by Indemnitee to
recover under any Directors' and Officers' liability insurance policies
maintained by the Company, regardless of whether Indemnitee ultimately is
determined to be entitled to such indemnification, advancement of expenses or
insurance recovery, as the case may be.
(e) The Company shall be precluded from asserting in any
judicial proceeding or arbitration commenced pursuant to this Section 8 that the
procedures and presumptions of this Agreement are not valid, binding and
enforceable and shall stipulate in any such court or before any such arbitrator
that the Company is bound by all the provisions of this Agreement.
9. NON-EXCLUSIVITY; SURVIVAL OF RIGHTS; INSURANCE;
SUBROGATION.
(a) The rights of indemnification as provided by this
Agreement shall not be deemed exclusive of any other rights to which Indemnitee
may at anytime be entitled under applicable law, the Certificate, any agreement,
a vote of stockholders or a resolution of Directors, or otherwise. No amendment,
alteration or repeal of this Agreement or of any provision hereof shall limit or
restrict any right of Indemnitee under this Agreement in respect of any action
taken or omitted by such Indemnitee in his Corporate Status prior to such
amendment, alteration or repeal. To the extent that a change in the Law, whether
by statute or judicial decision, permits greater indemnification than would be
afforded currently under the Certificate and this Agreement, it is the intent
oft he parties hereto that Indemnitee shall enjoy by this Agreement the greater
benefits so afforded by such change. No right or remedy herein conferred is
intended to be exclusive of any other right or remedy, and every other right and
remedy shall be cumulative and in addition to every other right and remedy given
hereunder or now or hereafter existing at law or in equity or otherwise. The
assertion or employment of any right or remedy hereunder, or
9
<PAGE> 10
otherwise, shall not prevent the concurrent assertion or employment of any
other right or remedy.
(b) To the extent that the Company maintains an insurance
policy or policies providing liability insurance for Directors, Officers,
employees, or agents or fiduciaries of the Company or of any other corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise
which such person serves at the request of the Company, Indemnitee shall be
covered by such policy or policies in accordance with its or their terms to the
maximum extent of the coverage available for any such director, officer,
employee or agent under such policy or policies.
(c) In the event of any payment under this Agreement, the
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all papers required and take all
action necessary to secure such rights, including execution of such documents as
are necessary to enable the Company to bring suit to enforce such rights.
(d) The Company shall not be liable under this Agreement to
make any payment of amounts otherwise indemnifiable hereunder if and to the
extent that Indemnitee has otherwise actually received such payment under any
insurance policy, contract, agreement or otherwise.
10. EXCEPTION TO RIGHT OF INDEMNIFICATION. Notwithstanding any other
provision of this Agreement, Indemnitee shall not be entitled to indemnification
under this Agreement with respect to any Proceeding brought by Indemnitee, or
any claim therein, unless
(a) the bringing of such Proceeding or making of such
claim shall have been approved by the Board of Directors or
(b) such Proceeding is being brought by the Indemnitee to
assert his rights under this Agreement.
11. DURATION OF AGREEMENT. All agreements and obligations of the
Company contained herein shall continue during the period Indemnitee is an
officer and/or a director of the Company (or is or was serving at the request of
the Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise) and shall continue
thereafter so long as Indemnitee shall be subject to any Proceeding (or any
proceeding commenced under Section 8 hereof) by reason of his Corporate Status,
whether or not he is acting or serving in any such capacity at the time any
liability or expense is incurred for which indemnification can be provided under
this Agreement. This Agreement shall be binding upon and inure to the benefit of
and be enforceable by the parties hereto and their respective successors
(including any direct or indirect successor by purchase, merger, consolidation
or otherwise to all or substantially all of the business or assets of the
Company), assigns, spouses, heirs, executors and personal and legal
representatives. This Agreement shall continue in effect
10
<PAGE> 11
regardless of whether Indemnitee continues to serve as an officer and/or a
director of the Company or any other enterprise at the Company's request.
12. SECURITY. To the extent requested by the Indemnitee and approved by
the Board of Directors, the Company may at any time and from time to time
provide security to the Indemnitee for the Company's obligations hereunder
through an irrevocable bank line of credit, funded trust or other collateral.
Any such security, once provided to the Indemnitee, may not be revoked or
released without the prior written consent of the Indemnitee.
13. ENFORCEMENT.
(a) The Company expressly confirms and agrees that it has
entered into this Agreement and assumed the obligations imposed on it hereby in
order to induce Indemnitee to serve as an officer and/or a director of the
Company, and the Company acknowledges that Indemnitee is relying upon this
Agreement in serving as an officer and/or a director of the Company.
(b) This Agreement constitutes the entire agreement between
the parties hereto with respect to the subject matter hereof and supersedes all
prior agreements and understandings, oral, written and implied, between the
parties hereto with respect to the subject matter hereof.
14. DEFINITIONS. For purposes of this Agreement:
(a) "Change in Control" means a change in control of the
Company occurring after the date of this Agreement of a nature that would be
required to be reported in response to Item 6(e) of Schedule 14A of Regulation
14A (or in response to any similar item on any similar schedule or form)
promulgated under the Securities Exchange Act of 1934 (the "Act"), whether or
not the Company is then subject to such reporting requirement; provided,
however, that, without limitation, such a Change in Control shall be deemed to
have occurred if after the date of this Agreement
(i) any "person" (as such term is used in
Sections 13(d) and 14(d) of the Act, as amended) other than a trustee or other
fiduciary holding securities under an employee benefit plan of the Company or a
corporation owned directly or indirectly by the stockholders of the Company
insubstantially the same proportions as their ownership of stock of the Company,
is or becomes the "beneficial owner" (as defined in Rule 13d3 under the Act),
directly or indirectly, of securities of the Company representing (15%) or more
of the combined voting power of the Company's then outstanding securities (other
than any such person or any affiliate thereof that is such a 15% beneficial
owner as of the date hereof) without the prior approval of at least two-thirds
of the members of the Board of Directors in office immediately prior to such
person attaining such percentage interest;
11
<PAGE> 12
(ii) there occurs a proxy contest, or the Company
is a party to a merger, consolidation, sale of assets, plan of liquidation or
other reorganization, as a consequence of which members of the Board of
Directors in office immediately prior to such transaction or event constitute
less than a majority of the Board of Directors thereafter; or
(iii) during any period of two (2) consecutive years,
other than as a result of an event described in clause (a)(ii) of this Section
16, individuals who at the beginning of such period constituted the Board of
Directors (including for this purpose any new director whose election or
nomination for election by the Company's stockholders was approved by a vote of
at least two-thirds of the Directors then still in office who were Directors at
the beginning of such period) cease for any reason to constitute at least a
majority of the Board of Directors.
A Change in Control shall not be deemed to have occurred under
item (i) above if the"person" described under item (i) is entitled to report its
ownership on Schedule 13G promulgated under the Act and such person is able to
represent that it acquired such securities in the ordinary course of its
business and not with the purpose nor with the effect of changing or influencing
the control of the Company, nor in connection with or as a participant in any
transaction having such purpose or effect. If the "person" referred to in the
previous sentence would at any time not be entitled to continue to report such
ownership on Schedule 13G pursuant to Rule 13d1(b)(3)(i)(B) of the Act, then a
Change in Control shall be deemed to have occurred at such time.
(b) "Corporate Status" describes the status of a person who
is or was a director, officer, employee or agent or fiduciary of the Company or
of any other corporation, partnership, joint venture, trust, employee benefit
plan or other enterprise which such person is or was serving at the express
written request of the Company.
(c) "Disinterested Director" means a director of the Company
who is not and was not a party to the Proceeding in respect of which
indemnification is sought by Indemnitee.
(d) "Enterprise" shall mean the Company and any other
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise of which Indemnitee is or was serving at the express written request
of the Company as a director, officer, employee, agent or fiduciary.
(e) "Expenses" shall include all reasonable attorneys' fees,
retainers, court costs, transcript costs, fees of experts, witness fees, travel
expenses, duplicating costs, printing and binding costs, telephone charges,
postage, delivery service fees, and all other disbursements or expenses of the
types customarily incurred in connection with prosecuting, defending, preparing
to prosecute or defend, investigating, participating, or being or preparing to
be a witness in a Proceeding.
12
<PAGE> 13
(f) "Independent Counsel" means a law firm, or a member of a
law firm, that is experienced in matters of corporation law and neither
presently is, nor in the past five years has been, retained to represent:
(i) the Company or Indemnitee in any matter
material to either such party (other than with respect to matters concerning the
Indemnitee under this Agreement, or of other indemnitees under similar
indemnification agreements), or
(ii) any other party to the Proceeding giving
rise to a claim for indemnification hereunder. Notwithstanding the foregoing,
the term "Independent Counsel" shall not include any person who, under the
applicable standards of professional conduct then prevailing, would have a
conflict of interest in representing either the Company or Indemnitee in an
action to determine Indemnitee's rights under this Agreement. The Company agrees
to pay the reasonable fees of the Independent Counsel referred to above and to
fully indemnify such counsel against any and all Expenses, claims, liabilities
and damages arising out of or relating to this Agreement or its engagement
pursuant hereto.
(g) "Proceeding" includes any threatened, pending or
completed action, suit, arbitration, alternate dispute resolution mechanism,
investigation, inquiry, administrative hearing or any other actual, threatened
or completed proceeding, whether brought by or in the right of the Company or
otherwise and whether civil, criminal, administrative or investigative, in which
Indemnitee was, is or will be involved as a party or otherwise, by reason of the
fact that Indemnitee is or was an officer and/or a director of the Company, by
reason of any action taken by him or of any inaction on his part while acting as
an officer and/or a director of the Company, or by reason of the fact that he is
or was serving at the request of the Company as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise; in each case whether or not he is acting or serving in any such
capacity at the time any liability or expense is incurred for which
indemnification can be provided under this Agreement; including one pending on
or before the date of this Agreement; and excluding one initiated by an
Indemnitee pursuant to Section 8 of this Agreement to enforce his rights under
this Agreement.
15. SEVERABILITY. If any provision or provisions of this Agreement
shall be held by a court of competent jurisdiction to be invalid, void, illegal
or otherwise unenforceable for any reason whatsoever:
(a) the validity, legality and enforceability of the remaining
provisions of this Agreement (including without limitation, each portion of any
section of this Agreement containing any such provision held to be invalid,
illegal or unenforceable, that is not itself invalid, illegal or unenforceable)
shall not in any way be affected or impaired thereby and shall remain
enforceable to the fullest extent permitted by law; and
(b) to the fullest extent possible, the provisions of this
Agreement (including, without limitation, each portion of any section of this
Agreement containing any such provision
13
<PAGE> 14
held to be invalid, illegal or unenforceable, that is not itself invalid,
illegal or unenforceable) shall be construed so as to give effect to the intent
manifested thereby.
16. MODIFICATION AND WAIVER. No supplement, modification, termination
or amendment of this Agreement shall be binding unless executed in writing by
both of the parties hereto. No waiver of any of the provisions of this Agreement
shall be deemed or shall constitute a waiver of any other provisions hereof
(whether or not similar) nor shall such waiver constitute a continuing waiver.
17. NOTICE BY INDEMNITEE. Indemnitee agrees promptly to notify the
Company in writing upon being served with any summons, citation, subpoena,
complaint, indictment, information or other document relating to any Proceeding
or matter which may be subject to indemnification covered hereunder. The failure
to so notify the Company shall not relieve the Company of any obligation which
it may have to the Indemnitee under this Agreement or otherwise.
18. NOTICES. All notices, requests, demands and other communications
hereunder shall be in writing and shall be deemed to have been duly given if (i)
delivered by hand and receipted for by the party to whom said notice or other
communication shall have been directed, or (ii) mailed by certified or
registered mail with postage prepaid, on the third business day after the date
on which it is so mailed:
(a) If to Indemnitee, to:
(b) If to the Company, to:
J2 Communications
10850 Wilshire Blvd. #1000
Los Angeles, CA 90024
Attention: James P. Jimirro
Facsimile: 310\ 474-1219
or to such other address as may have been furnished to Indemnitee by the Company
or to the Company by Indemnitee, as the case may be.
19. IDENTICAL COUNTERPARTS. This Agreement may be executed in one or
more counterparts, each of which shall for all purposes be deemed to be an
original but all of which together shall constitute one and the same Agreement.
Only one such counterpart signed by the party against whom enforceability is
sought needs to be produced to evidence the existence of this Agreement.
14
<PAGE> 15
20. HEADINGS. The headings of the paragraphs of this Agreement are
inserted for convenience only and shall not be deemed to constitute part of this
Agreement or to affect the construction thereof.
21. GOVERNING LAW. The parties agree that this Agreement shall be
governed by, and construed and enforced in accordance with, the laws of the
State of California without application of the conflict of laws principles
thereof.
22. GENDER. Use of the masculine pronoun shall be deemed to include
usage of the feminine pronoun where appropriate.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
and as of the day and year first above written.
COMPANY:
J2 Communications, a California corporation
By _________________________________
James P. Jimirro
INDEMNITEE:
By _________________________________
15
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