SECURITIES AND EXCHANGE COMMISSION
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Washington, D.C. 20549
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FORM 10-Q
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QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended April 30, 1999 Commission File #0-15284
J2 COMMUNICATIONS
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(Exact name of registrant as specified in its charter)
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California 95-4053296
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(State or other jurisdiction (IRS Employer Identification
incorporation or organization) Number)
10850 Wilshire Blvd., Ste. 1000, Los Angeles, CA 90024
(Address of principal executive office)
Registrant's telephone number, including area code: 310-474-5252
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Number of shares outstanding of each of the issuers classes of common stock as
of the latest practicable date: 1,217,000 common shares, no par value were
outstanding as of June 10, 1999.
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J2 COMMUNICATIONS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Unaudited
04/30/99 07/31/98
-------- --------
Assets
Cash and cash equivalents .................... $ 1,679,000 $ 879,000
Short-term investments ....................... 191,000 1,352,000
Accounts receivable - net .................... 34,000 7,000
Intangible assets, less accumulated
amortization of $2,488,000 and
$2,310,000 as of 04/30/99 and
7/31/98, respectively ...................... 3,476,000 3,656,000
Other assets ................................. 60,000 68,000
Total assets ................................. $ 5,440,000 $ 5,962,000
=========== ===========
Liabilities and Shareholders' Equity
Liabilities:
Accounts payable ............................. $ 99,000 $ 154,000
Accrued expenses ............................. 466,000 519,000
Accrued royalties ............................ 308,000 327,000
Accrued income taxes ......................... 38,000 38,000
Deferred income .............................. 167,000 800,000
Common stock payable ......................... 203,000 203,000
Minority interest ............................ 182,000 118,000
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Total liabilities ............................ 1,463,000 2,159,000
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Shareholders' Equity:
Preferred stock, no par value;
authorized 2,000,000 shares;
none issued and outstanding ................ -- --
Common stock, no par value;
authorized 15,000,000 shares;
issued and outstanding, 1,217,000
as of 04/30/99 and 1,200,000
as of 7/31/98 .............................. 8,699,000 8,661,000
Less: notes receivable on common stock ....... (133,000) (128,000)
Accumulated deficit .......................... (4,589,000) (4,730,000)
Total shareholders' equity ................... 3,977,000 3,803,000
Total liabilities and
shareholders' equity ......................... $ 5,440,000 $5,962,000
=========== ===========
The accompanying notes are an integral part of these consolidated balance
sheets.
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<TABLE>
J2 COMMUNICATIONS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS AND NINE MONTHS ENDED APRIL 30, 1999 AND 1998
3 mos 3 mos. 9 mos. 9 mos.
Ended Ended Ended Ended
04/30/99 04/30/98 04/30/99 04/30/98
--------- ----------- ----------- ---------
Revenues:
<S> <C> <C> <C> <C>
Movies, television, and theatrical .......................... $ 167,000 $ 156,000 $ 888,000 $ 607,000
Video sales, net of returns ................................. 3,000 1,000 9,000 (3,000)
Royalty income 22,000 81,000 57,000 133,000
Other ....................................................... 16,000 19,000 37,000 133,000
----------- ----------- ----------- -----------
Total revenues ............................................. 208,000 257,000 991,000 870,000
Costs and expenses:
Cost of videocassettes sold ................................. 1,000 1,000 48,000 5,000
Royalty expense ............................................. -- 12,000 12,000 29,000
Cost of movies, television and theatrical ................... -- -- 55,000 --
Selling, general and administrative ......................... 166,000 183,000 555,000 588,000
Amortization of intangible assets ........................... 60,000 60,000 180,000 180,000
Total expenses ............................................ 227,000 256,000 850,000 802,000
(Loss)Income from operations ................................. (19,000) 1,000 141,000 68,000
Other Income (Expense)
Interest income ............................................. 35,000 25,000 74,000 67,000
Minority Interest in income of
consolidated subsidiary .................................... -- (1,000) (64,000) (33,000)
Income before income taxes ................................... 16,000 25,000 151,000 102,000
Provision for income taxes ................................... 10,000 -- 10,000 6,000
Net income ................................................... $ 6,000 $ 25,000 $ 141,000 $ 96,000
=========== =========== =========== ==========
Income per common share:
Basic and diluted income per share .......................... $ 0.01 $ 0.02 $ 0.12 $ 0.08
=========== =========== =========== ===========
Weighted average number of shares
of common stock outstanding ................................ 1,217,000 1,200,000 1,209,000 1,200,000
=========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
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J2 COMMUNICATIONS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
nine MONTHS ENDED APRIL 30, 1999 AND 1998
1999 1998
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Cash flows from operating activities:
Net income ........................... $ 141,000 $ 96,000
Adjustments to reconcile net income to
net cash used in) provided by
operating activities:
Amortization of intangible assets 180,000 180,000
Minority interest in income
of consolidated subsidiary ..... 64,000 33,000
Changes in assets and liabilities:
Accounts receivable, net ......... (27,000) 34,000
Accounts payable ................. (55,000) 19,000
Accrued expenses ................. (20,000) (15,000)
Accrued royalties ................ (19,000) (109,000)
Deferred income .................. (633,000) (127,000)
Other assets ..................... 8,000 (16,000)
Net cash (used in) provided by
operating activities ............. (361,000) 95,000
Cash flows from investing activities:
Net sale of short-term investments 1,161,000 184,000
Net cash provided by investing
activities ...................... 1,161,000 184,000
Net increase in cash
and cash equivalents ................ 800,000 279,000
Cash and cash equivalents,
beginning of period ................. 879,000 641,000
Cash and cash equivalents,
end of period ....................... $ 1,679,000 $ 920,000
=========== ===========
Non Cash transaction:
Harvard Lampoon settlement
through issuance of stock ....... 38,000
The accompanying notes are an integral part of these consolidated financial
statements.
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J2 COMMUNICATIONS
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1999
Item 1
Basis of Financial Statement Presentation
The consolidated financial statements of J2 Communications and subsidiaries
(collectively the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information. Interim
financial statements do not include all of the information and footnotes
required by generally accepted accounting principles for complete year-end
financial statements. The accompanying financial statements should be read in
conjunction with the more detailed financial statements and related footnotes
for the fiscal year ended July 31, 1998, as included in the Company's 1998
Annual Report on Form 10-K (the "Annual Report") filed with the Securities and
Exchange Commission. A signed independent accountant's report relating to the
July 31, 1998 balance sheet is included in the Annual Report. Significant
accounting policies used by the Company are summarized in Note 1 to the
financial statements included in the Annual Report.
In the opinion of management, all adjustments (which include only recurring
normal adjustments) required for a fair presentation of the financial position
of the Company as of April 30, 1999, and the results of its operations and cash
flows for the periods ended April 30, 1999 and 1998 respectively, have been
made. Operating results for the three-month period ended April 30, 1999 and nine
months ended April 30, 1999 are not necessarily indicative of the operating
results for the entire fiscal year.
Earnings Per Share
The Company has adopted SFAS No. 128,"Earnings Per Share", for the period
commencing in its quarter ending January 31, 1998. Under SFAS No. 128, primary
EPS is replaced by "Basic" EPS, which excludes dilution and is computed by
dividing income available to common shareholders by the weighted average number
of common shares outstanding for the period. "Diluted" EPS, which is computed
similarly to fully diluted EPS, reflects the potential dilution that could occur
if securities or other contracts to issue common stock were exercised or
converted into common stock.
When dilutive, stock options are included as share equivalents in computing
diluted earnings per share using the treasury stock method. The weighted average
number of shares used in computing basic earnings per share was 1,217,000 in the
three months ended April 30, 1999, 1,209,000 in the nine months ended April
30,1999, and 1,200,00 in the three months ended April 30, 1998 and nine months
ended April 30, 1998. Options of 283,000 shares for the period ending April 30,
1999 and 659,000 shares for the period ending April 30, 1998, were antidilutive
for the periods.
At a special meeting of stockholders of the Company held on September 16, 1998,
an amendment was approved to the Company's article of incorporation to effect a
1 for 3 reverse stock split of the Company's outstanding common stock. Prior
period financial information in the statements have been adjusted to
reflect corresponding changes.
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Joint Venture
As part of the acquisition of NLI, the Company acquired a 75 percent interest in
a joint venture of which the only operations consist of revenues received from
the licensing of a certain "National Lampoon" motion picture. The minority
interest's share in the joint venture's revenue is deducted from movies,
television and theatrical revenue. Total revenues received by the joint venture
related to this motion picture were $251,017 and $123,000 for the periods ended
April 30, 1999 and 1998.
Revenue
Through a memorandum of agreement made as of April 15, 1998 between the Company
and International Family Entertainment, Inc. ("IFE"), an exclusive option was
granted by the Company to IFE for the use of "National Lampoon" trade name for
television movies and series for an annual fee of $800,000. IFE exercised the
first year option in August 1998. IFE had an option to renew this agreement for
four additional consecutive years, but has elected not to do so. This deprives
the Company of $800,000 income for the next year, which would have represented a
significant share of any projected revenues. Although management believes the
trade name National Lampoon can generate revenue from other television
producers, it is too early to project whether a similar arrangement could be put
into place.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Special Note Regarding Forward Looking Statements
Certain statements in this Quarterly Report on Form 10-Q, particularly under
Item 2, may constitute "forward-looking statements" within the meaning of
Private Securities Litigation Reform Act of 1995 (the "Reform Act"). Such
forward-looking statements involve known and unknown risks, uncertainties, and
other factors which may cause the actual results, performance or achievements of
the Company to be materially different from any future results, performance or
achievements, expressed or implied by such forward-looking statements.
Results of Operations
Quarter Ended April 30, 1999 Versus April 30, 1998
Total revenues for the current quarter were $208,000 compared with $257,000 in
the prior year quarter. Movies, television and theatrical revenues were $167,000
compared with $156,000 in the prior year quarter. Video sales net of returns was
$3,000 up $1,000 from the corresponding prior year quarter. The Company has
de-emphasized this segment of its business due to declining profitability.
Royalty income decreased $59,000 in the current year quarter to $81,000 from
$22,000 from the prior year quarter, primarily due to the recognition of the
balance of an advance license fee upon expiration of the license agreement.
Other income decrease $3,000 to $16,000 in the current quarter, compared to
$19,000 in the prior year quarter.
Cost of videocassettes sold represents duplication, shipping and other costs,
remained at $1,000 in the current year quarter as well as in the prior year
quarter.
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Royalty expense decreased $12,000 to $0.00 in the current year quarter compared
to $12,000 in the prior year quarter.
Selling, general and administrative expenses decreased $17,000 to $166,000, in
the current quarter, compared with $183,000 in the corresponding prior year
quarter. The decrease was primarily due to a reduction in salary, legal and
insurance expenses partially offset by increased corporate expenses related to
the Company's efforts to increase its visibility within the financial community.
Interest income increased $10,000 to $35,000 in the current year quarter
compared to $25,000 in the prior year quarter primarily due to increased
interest income recognized on the maturity of short-term investments, as well as
higher cash balances invested in interest bearing accounts during the current
quarter.
The net income for the current quarter was $6,000 equal to $0.01 per share
compared with net income of $25,000 in the corresponding prior year quarter,
equal to $0.02 per share. The decrease in net income is primarily due to a
reduction in movies, television and theatrical as well as video sales, partially
offset by a reduction in general and administrative expenses and an increase in
interest income.
On October 1, 1998, the Company entered into two agreements with Harvard
Lampoon, Inc. ("HLI") to settle all outstanding past disputes and to confirm the
Company's exclusive ownership of the National Lampoon trademark in a wide
variety of areas, including all media currently being used as well as restaurant
services and new electronic media not contemplated in earlier agreements. Under
the agreement the Company will give up the right and obligation to publish new
issues in print of National Lampoon magazine, which in recent years detracted
from the Company's financial results. The Company has retained full rights to
its extensive library of past issues of the magazine. On December 17, 1998, the
Company delivered 16,667 of common stock of the company to Harvard Lampoon as
per agreement for a price of $2.25 per share. Also, per the agreement, the
royalty level for certain expanded rights of exploitation increased, but the
financial terms between the Company and HLI for the Company's ongoing and
exiting operations remain the same.
The Company believes the new agreement represents a significant improvement for
the Company as the agreement clarifies the relationship with HLI, expands
opportunities for business activities, and reduces the possibility of future
disputes with HLI (which have occurred periodically over three decades).
Moreover, the Company is now relieved of the financial obligation of publishing
the magazine.
Nine Months Ended April 30, 1999 Versus April 30, 1998
Total revenues for the period were $991,000 compared to $870,000 in the prior
year period. Movies, television and theatrical revenues increased $281,000 to
$888,000 in the current year period compared with $607,000 in the prior year
period. The increase was primarily due to $800,000 annual fee paid by
International Family Entertainment, Inc. for the current year, of which $633,000
is reflected in the current period. Video sales net of returns is $9,000
compared to negative $3,000 in the corresponding prior year period
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primarily due to reduction of video sales which were offset by returns from
distributors. Royalty income for the current period increased $57,000 from $0.00
in the prior year period primarily due to the recognition of the balance from
two advance license fees upon expiration of the license agreements. Other income
decreased $37,000 from $133,000 from the prior year period, primarily due to the
reversal of previous accruals related to potential royalties, which were
extinguished at a reduced amount, shown in the prior period.
Cost of videocassettes sold represent duplication, shipping and other costs
which increased $43,000 to $48,000 in the current year period from $5,000 in the
prior year period. This was primarily due to an increase in distribution fee in
the current year period.
Royalty expense increased $12,000 in the current year period compared to $0.00
in the prior year period due to a lump sum payment made to Harvard Lampoon
during this period.
Cost of movies for the current period reflects $55,000 compared with no cost of
movies in the prior year period. These results from certain payments made over
the new agreement made with Harvard Lampoon as of October 1, 1998.
Selling, general and administrative expenses decreased $33,000 to $555,000 in
the current year period, compared with $588,000 in the corresponding prior year
period. The decrease was primarily due to reduced legal and insurance expenses,
partially offset by increased corporate expenses related to the Company's
efforts to increase its visibility within the financial community.
Interest income increased $7,000 to $74,000 in the current year period compared
to $67,000 in the prior year period primarily due to increased interest income
recognized on the maturity of short-term investments, as well as higher cash
balances invested in interest bearing accounts during the current period.
The net income for the current period was $141,000 equal to $0.12 per share
compared with net income of $96,000 in the corresponding prior year period equal
to $0.08 per share. The increased in net income is primarily due to the increase
in revenues from movies from the annual fee paid by International Family
Entertainment, Inc.
Liquidity and Capital Resources
Cash and short-term investments at April 30, 1999 totaled $1,870,000, a
decrease of $361,000 from the July 31, 1998 fiscal year end.
Cash Flows
For nine months ended April 30, 1999 compared to the nine months ended April 30,
1998.
Net cash provided by operating activities decreased $456,000, primarily due to a
decrease in deferred revenues. Net cash provided by investing activities
increased by $977,000 from the prior year quarter due to increased cash flow
from sales of short-term investments. The Company had no cash flows from
financing activities in either periods.
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PART II. OTHER INFORMATION
Item 1 - Legal Proceedings
On March 10, 1997 counsel for Harvard Lampoon, Inc. ("HLI") filed a demand for
arbitration with the American Arbitration Association, asserting that the
Company underpaid royalties under the HLI royalty agreement by approximately
$226,000, plus unspecified late charges, for the period from July 1, 1992,
through June 30, 1995, based on HLI's interpretation of the agreement. By
agreement of both parties arbitration was stayed in order to mediate the dispute
under the auspices of the Judicial Arbitration and Mediation Services.
On October 1, 1998, the parties participated again in a mediation in New York,
outcome of which resulted in an agreement which consolidates the terms of the
1969 agreement and the 1977, 1983, and 1998 amendments thereto into a new
"Agreement" which became effective as of October 1, 1998. Concurrently with the
execution of this Agreement, the parties have entered into the "Settlement
Agreement and Mutual General Releases" agreement effective as of October 1,
1998, which releases and forever discharges J2 and HLI from any and all actions
against each other. The full terms and conditions set out in the new agreements
are included as Exhibit 1 under Item 6.
The impact of the settlement resulted in no material impact on the financial
condition or results of operation of the Company.
Item 2 - Changes in Securities
None
Item 3 - Defaults Upon Senior Securities
None
Item 4 - Submission of Matters to a Vote of Security Holders
A Special Meeting of Stockholders of the Company was held on September 16, 1998.
James Jimirro, James Fellows, Bruce Vann and John DeSimio were each elected to
the board of directors until the next annual meeting or until their successors
are elected and qualified. The other proposal submitted for shareholder approval
at the special meeting along with the results of voting is as follows:
The approval of an amendment to the Company's Articles of Incorporation to
effect a 1 for 3 reverse stock split of the Company's outstanding common stock.
This proposal was approved by a vote of 3,038,536 for and 234,652 against with
14,698 abstentions and no broker non-votes. The split has been retroactively
reflected in the income statements.
Item 5 - Other Events
On August 13, 1998 the Company was notified by Nasdaq that the Company's
security was not in compliance with the new minimum bid price requirement,
pursuant to NASD Marketplace Rule 431(c) (04), which became effective February
23, 1998. As a result, the Company was provided with 90 calendar days, which
expired November 13, 1998, in order to regain compliance with this standard.
9
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On November 9, 1998 the Company was notified by Nasdaq that its staff had
reviewed the Company's common stock trading history with respect to the closing
bid price and had deemed that the Company was in compliance with the new bid
requirement for continued listing on the Nasdaq Stock market.
The Company believes that it will be able to comply with the Nasdaq requirements
for minimum bid price, pursuant to NASD Marketplace Rule 431(c) (04), but no
assurance can be given that the Company will be able to continue to maintain the
minimum bid price requirement on a going forward basis.
Item 6 - Future Activity
The Company this spring embarked on a new project which involves the development
of a National Lampoon Website. This site will be comprised of a wide range of
comedic entertainment and activities, and will be marketed as a new "network"
delivered via Internet. The entertainment will be made available free to
internet users, and the Company will generate revenues through the sale of
advertising on the site as well as merchandising sales, so called "e-commerce."
The Company will be investing substantial capital in the project and believes
that its current level of funds augmented by internally generated funds, will
provide sufficient resources to satisfactorily complete this venture.
While the prospects for Internet ventures such as these are promising and the
Company believes there is a good market for this Internet site, a substantial
amount of the Company's capital is being invested in this project with no
guarantee that sufficient revenues will be generated to make the project a
success.
Since the company began a full-scale development of this Website, the stock
prices of the company has gone up from $2.00 per share(as of April 26, 1999) to
$3.50 per share (as of June 11, 1999). There is no guarantee that the company
will be able to maintain this trend and the current market value of the company
shares.
Item 7 - Exhibits And Reports On Form 8-K
(a) Reports on Form 8-K
None filed during the Quarter
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by its
duly authorized officers.
J2 COMMUNICATIONS
Date: June 11, 1999 By: SIGNED
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JAMES P. JIMIRRO
Chairman of the Board
President
(Principal Executive Officer)
Date: June 11, 1999 By: SIGNED
- ---------------------- ----------------------------
ANDREW WEERARATNE
Chief Financial Officer
(Principal Financial Officer)
11
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> JAN-1-1999
<PERIOD-END> APR-30-1999
<CASH> 1,679,000
<SECURITIES> 191,000
<RECEIVABLES> 34,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,964,000
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 5,440,000
<CURRENT-LIABILITIES> 1,463,000
<BONDS> 0
0
0
<COMMON> 8,699,000
<OTHER-SE> 4,722,000
<TOTAL-LIABILITY-AND-EQUITY> 5,440,000
<SALES> 167,000
<TOTAL-REVENUES> 208,000
<CGS> 1,000
<TOTAL-COSTS> 1,000
<OTHER-EXPENSES> 227,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 16,000
<INCOME-TAX> 10,000
<INCOME-CONTINUING> 6,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,000
<EPS-BASIC> .01
<EPS-DILUTED> 0
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