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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, 1997
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:
(Title of each class) (Name of each exchange
on which registered)
Common Stock, no par value NASDAQ
Series A Warrants 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 24, 1997, the aggregate market value of the voting
stock held by non-affiliates of the Registrant was approximately
$3,438,000.
As of October 24, 1997, the Registrant had 3,599,990 shares 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.
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
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.
PART I
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 sell-through market. In 1990,
the Company acquired National Lampoon, Inc., a publisher of a
national satire and humor magazine and licensor of feature films.
Due to the increasing competitiveness of the videocassette
market, resulting in declining volume and profitability, the
Company has de-emphasized this segment of its business. The
Company expects that its videocassette business, which has been
declining in recent years, will continue to decline, and in the
future will not be a significant part of its operations. The
Company is now focusing on using the National Lampoon name in
virtually every segment of the entertainment business. 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 licenses the
"National Lampoon" name and has no risk of loss if theatrical
boxoffice revenues do not meet expectation. The Company does not
expect any significant contingent income from this film. 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 provides for the production of
seven (7) movies made for initial viewing on the Showtime
television channel over three (3) years. Four made-for-cable
pictures had been produced under this arrangement as of the
fiscal year ended July 31, 1997. As per the contract, Showtime
has paid the producer fees due for five (5) movies as of July 31,
1997. The producer fees due for the sixth (6) and seventh (7)
movies will be paid in the fiscal year ended July 31, 1998. The
Company is currently seeking to replace the Showtime license
agreement with a comparable entity that produces made-for-cable
movies under a similar licensing arrangement.
RECENT DEVELOPMENTS AND MATERIAL INFORMATION
1. Dependence on National Lampoon
In October 1990, J2 Communications ("J2" or the "Company")
acquired all of the outstanding stock of National Lampoon, Inc.
("NLI"), the publisher of the National Lampoon magazine and a
developer of other film programming. Although substantial sums
were expended by the Company in an attempt to return the magazine
publishing operations to profitability, the Company was unable to
achieve this objective. On December 23, 1992, as the sole
secured creditor of NLI, J2 foreclosed against all of NLI's
assets and the "National Lampoon" trademark. After this
foreclosure, NLI was left with no remaining assets, although the
Company has continued to exploit the trademark. The Company
anticipates that a majority of future revenue will be dependent
on exploiting the "National Lampoon" name. The Company is
subject to several agreements, including a feature film agreement
with New Line Cinema which led to the production of "National
Lampoon's Loaded Weapon I" and "National Lampoon's Senior Trip,"
and an agreement with Showtime Networks, Inc. regarding movies
made for cable television. The first movie made under this
latter agreement was entitled "National Lampoon's Attack of the
5'2" Women" which first aired in August 1994. The second movie,
"National Lampoon's Favorite Deadly Sins", was aired in
November, 1995. The third movie, "National Lampoon's Dad's Week
Off", aired in March 1997 and the fourth movie, "National
Lampoon's The Don's Analyst", aired in September 1997, both on
Showtime's affiliated network, The Movie Channel. The Showtime
agreement has now expired, with only four (4) made-for-cable
movies produced, and as such, the fifth thru seventh movies will
not be produced. As per the contract, Showtime has paid the
producer fees due for five (5) movies as of July 31, 1997. The
producer fees due for the sixth (6) and seventh (7) movies will
be paid in the fiscal year ended July 31, 1998. The Company is
currently seeking to replace the Showtime license agreement with
a comparable entity that produces made-for-cable movies under a
similar licensing arrangement. The Company is a profit
participant in these ventures and is substantially dependent on
the performance of third parties to such agreements and upon the
commercial success of the licensed products.
2. Management contract of the Magazine
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.
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's current agreement with Harvard Lampoon obligates
the Company to publish at least one issue of the magazine a year
with a minimum of 50,000 copies. The Company is complying with
this obligation, but has not determined when and if it would
publish more than the minimum requirement.
3. 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.
NATIONAL LAMPOON OPERATIONS
NLI and its subsidiaries were acquired by J2 effective October
24, 1990 upon approval of the shareholders of both companies. In
December 1992, J2 foreclosed on all of the assets of NLI. Since
that time, J2 has used the assets it acquired in such foreclosure
in a separate division. This division, together with the prior
NLI entity, is collectively referred to as "NL."
General
NL is engaged in various aspects of the entertainment business.
It is the publisher of National Lampoon, a magazine of
contemporary humor and satire. NL also creates, develops, and
has produced (but does not finance) the production of motion
pictures, television programs, and other entertainment media.
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 as of 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 box-office. The second
film, "National Lampoon's Senior Trip" was released in September,
1995 and was not a box office success. The New Line agreement
expired on May 10, 1996, and as such, the third motion picture
was never produced. Unless the Company licenses the rights and
obtains a significant advance, revenue from theatrical feature
film rights for fiscal year ended July 31, 1998 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, 1998, than in prior years.
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 provides 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. As per the contract,
Showtime has paid the producer fees due for five (5) movies as of
July 31, 1997. The producer fees due for the sixth (6) and
seventh (7) movies will be paid in the fiscal year ended July 31,
1998. The Company is currently seeking to replace the Showtime
license agreement with a comparable entity that produces made-
for-cable movies under a similar licensing arrangement.
In the event that the Company does not replace the Showtime
agreement with a comparable arrangement, filmed entertainment
revenues could be negatively impacted.
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 l, 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 picture 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 re-paid, NL shall have no further
obligations to GPEC with respect to television. To date,
$131,000 has been paid under the gross receipts provision of the
agreement.
In 1997 NL entered into an agreement with Western International
Syndication to develop a television awards spoof programs. In
addition, NL is currently in negotiation with a major supplier of
children's television programming to develop an animated
children's television series.
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 stars 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 great 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.
Other Activities
Internet: In August 1997, National Lampoon entered into an
agreement with Internet Ventures Inc. to develop a National
Lampoon site on the Worldwide Web.
As of October 1997, the Company began negotiations with On-Line
Entertainment Network, Inc. (a subsidiary of Global Net Systems,
Ltd.) to develop and distribute audio comedy programming over the
Internet on a pay-per-listen basis. The Company believes that if
an agreement is consummated, the site will develop into a multi-
layered site featuring pre-recorded material (including the
National Lampoon Radio Hour archives), new serialized
programming, live on-line comedy performances, and general comedy
merchandising.
Books: NL continues the publication of various books, including
"National Lampoon's Treasury of Humor" with Simon and Schuster,
and four "True Facts" books with Contemporary Books. Other NL
books published include the third edition of "National Lampoon's
Cartoon Book," and "National Lampoon White Bread Snaps".
Computer Games: "National Lampoon's Chess Meister 5 Billion and
1," a computer game produced by Spectrum HoloByte, is currently
available nationwide. Also available is "The Personal Daily
PlanIt", a daily planner featuring National Lampoon's Joke of the
Day, distributed by Media Vision. In 1995, Trimark Interactive
developed and distributed the CD-ROM title "National Lampoon's
Blind Date." Other interactive titles being developed by
National Lampoon include "National Lampoon Goes To Hell" and
"National Lampoon I Can't Believe It's Not A Game Show".
NL has a number of merchandising arrangements, including a line
of trading and post cards based upon National Lampoon magazine
art. In addition, NL is in negotiations with At A Glance
Landmark, which published the Company's 1998 calendar, to
distribute the 1999 NL Life Sucks! PAGE-A-DAY CALENDAR AND
HORRORSCOPE.
Recordings: Rhino Records has released a commemorative box
titled The Best of The National Lampoon Radio Hour, a compilation
of classic comedy from the 1970's show.
Theme Restaurants: National Lampoon continuing to explore the
possibility of developing the "National Lampoon Cafe", a chain of
restaurants with a comedy theme. Should the "National Lampoon
Cafe" be funded, constructed and open to the public, it will be
operating in a very competitive environment, therefore, there is
no assurance that the Cafe would be successful.
Publishing Operations
National Lampoon Magazine: First published in March 1970,
National Lampoon is distributed at newsstands, bookstores, and
other retail outlets. Its audience is largely young, college
educated, and affluent. Each issue of the magazine contains
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 with approximately 112 pages per issue.
Commencing with the March 1991 issue, National Lampoon increased
to a ten (10) times per year frequency and also 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 current agreement with Harvard Lampoon obligates the
Company to publish at least one issue of the magazine a year with
a minimum of 50,000 copies. The Company is complying with this
obligation, but has not determined when and if it would publish
more than the minimum requirement.
An agreement between NL and The Harvard Lampoon, Inc. provides
that NL may use the "Lampoon" name perpetually, subject to, among
other things, publication of the magazine at least once a year.
Under the agreement, as amended, NL pays The Harvard Lampoon,
Inc. royalties of up to 2% of all revenues derived from sales of
publications using the name "National Lampoon," and royalties of
up to 2% of "pre-tax profits" (as defined in the agreement)
derived from non-publishing activities using such name. Except
for this royalty arrangement, there is no connection between
National Lampoon and The Harvard Lampoon. The name "National
Lampoon" is a registered trademark of the Company.
Competition in Publishing: The magazine publishing industry is
intensely competitive with respect to both readership and
advertising. National Lampoon is one of the few nationally
circulated magazines directed to an adult audience devoted
exclusively to contemporary humor and satire. There are,
however, a number of nationally distributed magazines devoted to
contemporary subjects and events, some of which occasionally
contain material similar to that contained in National Lampoon.
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 was currently
engaged in the exploitation of "Dorf on Golf", the rights to
which expired this year. After such time, the Company does not
expect that its video operations will generate any significant
revenue.
EMPLOYEES
As of October 24, 1997, the Company employed six (6) employees of
whom three (3) are full time and three (3) are part-time.
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 $6,454 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
The Company, NLI and the officers and directors of NLI became the
defendants in a lawsuit filed in 1990 in the Superior Court of the
Southern District of New York in regard to the acquisition of NLI by
the Company. The shareholders of NLI (the "Plaintiffs") filed
the claim with respect to the tax treatment of the transaction
with respect 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
issue an addition 125,000 shares of its common stock to the
Plaintiffs and provide for the payment of attorneys' fees. The
value of the shares to be issued is presented as a liability of
$203,000 as of July 31, 1997, and 1996, as the shares have not
yet been issued and the settlement has not been approved.
NLI had a motion picture development and consulting agreement
with Matty Simmons, a former officer of NLI. In November 1992,
Matty Simmons Productions, Inc. and Matty Simmons (collectively
"Simmons") filed a complaint against the Company alleging breach
of contract. In December 1993, this litigation was settled. The
terms of the settlement agreement provide for the Company to pay
Simmons a percentage (not to exceed $240,000 in total) of any
amounts earned by the Company from certain previously released
National Lampoon films. As of the fiscal year ended July 31,
1997, the Company has paid Matty Simmons the total amount owed
under the terms of the settlement agreement.
On March 10, 1997 counsel for Harvard Lampoon, Inc. ("HLI") filed
a demand for arbitration to 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 a mediation under the auspices of the Judicial
Arbitration and Mediation Services, which took place on May 8th
and 9th, 1997. Settlement negotiations commenced at the
mediation and arbitration proceedings continue to be stayed while
settlement negotiations proceed. If settlement is not reached,
J2 will vigorously contest HLI's claims in arbitration.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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
over-the-counter market since October 2, 1986 under the symbol
JTWO. The following table sets forth for the periods shown, the
high and low bid prices as reported by NASDAQ. The bid prices
reflect interdealer prices without retail mark-ups, mark-downs or
commissions and may not necessarily represent actual
transactions.
Common Stock
High Low
Fiscal 1998:
First Quarter (Through October 24, 1997) 1 17/32 7/8
Fiscal 1997:
First Quarter 1 5/16 1 1/16
Second Quarter 1 3/16 7/8
Third Quarter 15/16 25/32
Fourth Quarter 1 7/32 1 3/16
Fiscal 1996:
First Quarter 1 1/2 1
Second Quarter 1 5/8 1 3/16
Third Quarter 1 15/32 1 1/32
Fourth Quarter 1 3/16 1 1/16
On October 24, 1997, the closing bid price for the Common Stock
was 1 5/32 per share. The approximate number of holders of
record of Common Stock on that date was 551. The Company has
never paid a dividend on its Common Stock and presently intends
to retain all earnings for use in its business.
b. Warrants: The Company's Warrants were issued in connection
with its acquisition of National Lampoon, Inc. The warrants
began trading in the over-the-counter market on October 26, 1990
under the symbol JTWOW. The following table sets forth for the
period indicated, the high and low bid prices reflect interdealer
prices without retail mark-ups, mark-downs or commissions and may
not necessarily represent actual transactions.
Warrants
High Low
Fiscal 1998:
First Quarter (through October 24, 1997) 11/32 1/16
Fiscal 1997:
First Quarter 3/8 5/16
Second Quarter 9/32 9/32
Third Quarter 7/32 1/16
Fourth Quarter 3/16 1/16
Fiscal 1996:
First Quarter 3/8 1/4
Second Quarter 3/8 5/16
Third Quarter 3/8 7/32
Fourth Quarter 7/32 3/16
The approximate number of holders of record of Warrants are 180
as of October 24, 1997, although management has been advised that
the number of beneficial holders exceeds 1,000.
ITEM 6: SELECTED FINANCIAL DATA
The selected consolidated statement of operations data for the
years ended July 31, 1995, July 31, 1996 and 1997 and the
consolidated balance sheet data at July 31, 1996 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, 1993 and 1994
are derived from audited consolidated financial statements of the
Company which are not included herein.
Selected Consolidated Financial Data
Year ended July 31,
1997 1996 1995 1994 1993
STATEMENT OF OPERATIONS DATA:
Total revenues $1,356,000 $ 964,000 $1,284,000 $1,848,000 $ 1,726,000
Costs and expenses:
Costs of revenue 262,000 259,000 193,000 203,000 1,078,000
Selling, general
and administrative 792,000 725,000 818,000 1,129,000 2,234,000
Amortization of intangible assets 240,000 240,000 240,000 240,000 307,000
Income (loss) from operations 62,000 (260,000) 33,000 276,000 (1,893,000)
Other income:
Settlement of IRS claims - - - - 181,000
Settlement of royalty claims - - - 84,000 374,000
Interest income 59,000 77,000 49,000 15,000 19,000
Minority Interest in income
of consolidated subsidiary (82,000) (46,000) (30,000) (30,000) (33,000)
Interest expense - - - (18,000) (18,000)
Income (loss) before provision for
(benefit from) income taxes and
extra-ordinary incom 39,000 (229,000) 52,000 327,000 (1,370,000)
Provision for (benefit from)
income taxes 9,000 7,000 (14,000) 22,000 9,000
Income (loss) before extraordinary
item 30,000 (236,000) 66,000 305,000 (1,379,000)
Extraordinary item - troubled debt
restructuring - - - - 69,000
NET INCOME (LOSS) $ 30,000 $ (236,000) $ 66,000 $ 305,000 $(1,310,000)
INCOME (LOSS) PER COMMON SHARE
Income (Loss) before
extraordinary income $ 0.01 $ (0.07) $ 0.02 $ 0.09 $ (0.43)
Extraordinary income 0.02
Net income (loss) $ 0.01 $ (0.07) $ 0.02 $ 0.09 $ (0.41)
YEAR ENDED JULY 31
1997 1996 1995 1994 1993
BALANCE SHEET DATA:
Intangible assets $3,896,000 $4,136,000 $4,376,000 $4,616,000 $ 4,856,000
Total assets $5,473,000 $5,367,000 $5,667,000 $5,801,000 $ 5,653,000
Shareholders' equity $3,682,000 $3,652,000 $3,888,000 $3,814,000 $ 3,262,000
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
YEAR ENDED JULY 31, 1997 VERSUS JULY 31, 1996
Total revenues for 1997 increased $392,000 to $1,356,000 compared
to $964,000 for 1996. Movies, television and theatrical revenues
increased $431,000 primarily due to increased movie licensing
revenue of previously licensed movies and payment of the license
fees for two Showtime movies during fiscal year 1997.
Videocassette sales decreased $92,000 to $219,000 from $311,000
from the prior year due to the company de-emphasizing the video
segment of its business because of declining profitability.
Royalty income increased $20,000 to $65,000 from $45,000 from the
prior year, primarily due to increased revenue received from a
newly licensed distributor. Publishing revenue increased $48,000
to $56,000 from $8,000 in the prior year due to a majority of
revenue for the 25th anniversary issue of the National Lampoon
magazine, which went on sale late in fiscal 1996, being recorded
in fiscal 1997, along with the fiscal 1997 magazine issue. Other
income fell to $46,000 in 1997 from $61,000 in the prior year
1996.
Cost of videocassettes sold as a percentage of sales increased to
48% in fiscal 1997 compared to 45% in 1996, primarily due to
reductions in the sales price of certain videos as they are in
the latter stages of their release pattern.
Costs of movies and television expenses increased $27,000 to
$53,000 from $26,000 in the prior fiscal year, due primarily to
additional payments required to be made on increased television
revenue on the "GPEC" rights agreement.
Magazine editorial, production and distribution expense decreased
$11,000 to $41,000 from $55,000 due primarily to last fiscal
year's expense having included costs associated with prior
editions of the magazine.
Royalty expenses increased $26,000 to $63,000 compared to $37,000
in 1996, primarily due to an increase in royalty income.
Selling, general and administrative expenses increased $67,000 to
$792,000 in the current year as compared with $725,000 in the
prior year. The increase was primarily due to an increase in
salary expense, partially offset by a reduction in legal and
accounting expenses.
Interest and other income for the year decreased $18,000 to
$59,000 from $77,000 in the prior fiscal year primarily due to a
decrease in yields on short term investment, as well as a
reduction in the average short term investment balance during
1997.
Net income for the current year was $30,000, equal to $0.01 per
share compared with a net loss of $236,000, equal to $0.07 per
share. The increase in net income was due primarily to increased
television and theatrical revenues which were partially offset by
a reduction in video sales.
YEAR ENDED JULY 31, 1996 VERSUS JULY 31, 1995
Total revenues for the year were $964,000 compared with
$1,284,000 in the prior year. Movies, television and theatrical
revenues were $539,000 compared with $736,000 in the prior year.
In the prior year, payments under a movie licensing agreement of
$430,000 were received which were significantly higher than the
$166,000 received in the current year. Video sales of $311,000
were reduced from $336,000 recorded in 1995. Royalty income from
video licensing fell from $83,000 in the prior year to $45,000 in
the current year. In 1995, a payment from a video licenses of
$40,000 was received which related to revenues from prior years.
The Company has de-emphasized the video segment of its business
due to declining profitability. Other income fell to $61,000
from $129,000 in the prior year. In 1995 there was a payment of
$50,000 received from a National Lampoon Audio product that did
not recur in the current year.
Cost of videocassettes sold as a percentage of sales increased to
45% in fiscal 1996 compared with 31% in 1995 due primarily to
reductions in the sales price of certain films in the current
period as they are in the latter stages of their release period.
Cost of movies and television expenses remained unchanged between
fiscal years 1996 versus 1995 primarily due to a fixed percentage
payment made per agreement on certain television revenues, which
was received in the same amounts in the current and prior fiscal
years.
Cost of magazine primarily covers costs associated with prior
editions of the magazine.
Royalty expenses for fiscal 1996 decreased $25,000 to $37,000
compared to $62,000 in 1995, primarily due to a settlement
between the Company and a producer of a certain video which
settlement reduced royalty expenses by $20,000.
Selling, general and administrative expenses were $725,000 in the
current year as compared with $818,000 in the corresponding prior
period. The decrease primarily reflects a reduction in salary
related costs of $179,000, offset in part by an increase in legal
expenses of $98,000.
The net loss for the current year was $236,000 equal to $0.07 per
share compared with net income of $66,000 in the prior year,
equal to $0.02 per share. The loss was due to sharply lower
revenues, higher costs associated with publishing of the
magazine, and higher legal expenses offset in part by lower
salary costs as discussed above.
Liquidity and Capital Resources
Cash and short term investments at July 31, 1997 totaled
$1,502,000, an increase of $368,000 from the prior year end.
The Company has no current plans for any significant capital
expenditures in its current line of business and believes that
its present level of cash and cash equivalents, augmented by
internally generated funds, will provide sufficient cash
resources through fiscal 1998.
The Company is considering establishing a restaurant chain to be
called "National Lampoon Cafe." Should it enter this new line of
business, significant capital would be required.
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 ($3,896,000 at July
31, 1997) is dependent on 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 $5,583,000 in licensing revenues (including
revenues received in connection with an agreement for the
licensing of the name for three feature films - see Note 4) 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, 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 assets will result
in the recovery of the carrying amount of such assets.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Index to Financial Statements of the Company is included in
Item 14.
ITEM 9: NONE
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.
First
Name and Office to which Elected Age Elected
James P. Jimirro 60 1986
Chairman of the Board of Directors,
President and Chief Executive Officer
James Fellows 62 1986
Director
Bruce P. Vann 41 1986
Director
Rudy R. Patino 49 1997
Chief Financial Officer
Duncan Murray 51 1986
Vice President-Marketing
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.
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. NAEB was a
non-profit organization concerned with educational and public
telecommunications. Mr. Fellows is a director of numerous non-
profit corporations including the Educational Development Center
in Boston, Massachusetts, a producer of written and filmed
educational materials; the Maryland Public Broadcasting
Foundation, a corporate fund raiser for public television; and
American Children's Television Festival.
Bruce P. Vann has been a partner in the law firm of Kelly Lytton
Mintz & Vann 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.
Mr. Vann also serves, on a non-exclusive basis, as Senior Vice
President of Largo Entertainment, a subsidiary of The Victor
Company of Japan.
Rudy R. Patino joined the company on August 8, 1997 as Chief
Financial Officer. He is a Certified Public Accountant, licensed
in the State of California, and has worked as Chief Financial
Officer and Controller for various entertainment companies over
the last 15 years. From 1995 to 1997 he was Chief Financial
Officer for Prism Entertainment Corporation, a producer and
distributor of feature motion pictures. Prior to that, from 1986
to 1995, he was Vice President/Controller for Avalon Attractions,
Inc. one of the largest live concert promoters in Southern
California.
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.
ITEM 11: EXECUTIVE COMPENSATION
The Summary Compensation Table below includes, for each of the
fiscal years ended July 31, 1997, 1996 and 1995, individual
compensation for services to the Company and its subsidiaries of
the Chief Executive Officer (the "Named Officer").
SUMMARY COMPENSATION TABLE
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 ($)(5) Bonus ($)(5) ($)(1) ($) SARs (#) ($) ($)
1997 190,750 --- (2) (3) 100,000 - -
James P. 1996 190,750 --- (2) (3) 100,000 - -
Jimirro(2) 1995 190,750 100,000(4) (2) (3) 100,000 - -
___________________
(1) Does not include amounts of $12,500 in 1997, $9,700 in 1996, and
$9,800 in 1995 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 $7,000 in 1997, $8,900 in 1996 and $12,500 in
1995 which the Company paid for Mr. Jimirro's health plan. The
Company also provides Mr. Jimirro with a Company-owned 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) The bonus for 1995 was accrued but not paid.
(5) Effective June 1, 1992, Mr. Jimirro reduced the amount of salary
he receives to $190,750. Mr. Jimirro does not expect to receive
the unpaid portion unless there is a change in the control of the
Company as defined by his employment agreement. The Company has
not accrued any salary or bonus for Mr. Jimirro in regards to the
above for the fiscal year ended July 31, 1996 and 1997.
Option Grants in Last Fiscal Year
Shown below is information on grants of stock options pursuant
to the 1994 Stock Option Plan during the fiscal year ended July
31, 1997, to the Named Officer which are reflected in the Summary
Compensation Table on page 17.
___________________________________________________________________________
Potential Realized Value at Assigned
Annual Rates of Stock
Price Appreciation
Individual Grants in 1997 for 7 year Option Term
Percentage
of Total
Options/SARs Exercise
Options/ granted to or Base 5% 10%
SARS Employees in Price Per Expiration Stock Dollar Stock Dollar
Name Granted(#) Fiscal Year Share($) Date Price($) Gains($) Price($) Gains($)
James Jimirro 100,000(1) 63.7 1.066 12-28-2003 $1.51 $44,400 $2.08 $108,400
___________________
(1) Options/SARS granted are immediately exercisable.
(2) Options/SARS granted with an exercise price (or initial valuation in
the case of SARs) equal to the closing sale price of the Common Stock as
quoted on the National Association of Securities Dealers Automated
Quotation System ("NASDAQ") on December 28, 1996, the date of grant for Mr.
Jimirro.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-
End Option Values
Shown below is information with respect to (i) options
exercised by the Named Officer pursuant to the 1994 Plan during
fiscal 1997 (of which there were none); and (ii) unexercised
options granted in fiscal 1997 and prior years under the 1994
Plan to the Named Officer and held by them at July 31, 1997.
Value of
Unexercised
Unexercised In-the-Money
Options/SARs at Options/SARS at
7/31/97 7/31/97(1)
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise (#) Realized($) Unexercisable(#) Unexercisable($)
James Jimirro -0- -0- 800,000/0 $73,400/0
(1) Based on the closing sale price as quoted on NASDAQ on that date.
Director Compensation
Directors, with the exception of Mr. Jimirro, receive 4,000 stock
options per year exercisable at the then market price as
compensation for their services as a director.
Compensation Committee Interlocks and Insider Participation
During fiscal 1997, all matters concerning executive officer
compensation were addressed by the entire Board of Directors as
the Company did not have a compensation committee. Jim Jimirro,
James Fellows, Gary Cowan and Bruce Vann were each directors of
the Company during fiscal 1997.
EMPLOYMENT AGREEMENTS AND STOCK OPTIONS
In 1994, the Company entered into a new employment agreement with
James P. Jimirro, effective July 1, 1994 (the "1994 Agreement").
Under the 1994 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 June 1, 1992, 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.
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 1994 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 50,000 shares of Common
Stock and stock appreciation rights (SARs) with respect to 50,000
shares of Common Stock. The exercise price of each option and
the initial valuation of each SAR will be equal to the fair
market value of the Common Stock of the Company at the date of
the grant. 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 1991 Employee Stock Option Incentive Plan (the
"1991 Plan"). The 1991 Plan specifically provides for the grant
of stock options and SARs to Mr. Jimirro in accordance with his
employment agreement. The 1994 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 1994
Agreement during its entire term; provided, that such payments
would be reduced 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 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 1994 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 1994 Agreement also
provides Mr. Jimirro with certain registration rights pursuant to
which, beginning in 1992, 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 1994 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 all Employee Stock Option Plans.
In October of 1995 the Financial Accounting Standards Board
issued SFAS No. 123. This statement establishes accounting
standards for stock-based employee compensation plans. This
statement will become effective for the consolidated financial
statements in fiscal 1997 and encourages, but does not require, a
fair-value based method of accounting for employee stock options
or similar equity instruments. Management does not believe the
impact of the provisions of the Statement on its assets will be
material.
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 a maximum number of options to be
granted to be the greater of 1,075,000 or 30% of the Company's
outstanding shares less 125,000 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 125,000 options to
be granted and further provides for the granting of 4,000 option
shares per year to each Non-Employee Director as compensation for
his services.
A maximum of 125,000 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.
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 24, 1997. The table shows the
beneficial ownership to each person known to J2 who beneficially
own 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.
Shares Percent
Beneficially of
Owned Class
Number Percent
James P. Jimirro(2)(3) 1,136,000 26.9%
James Fellows(2)(4) 35,000 (1)
Bruce P. Vann(2)(5) 30,000 (1)
All Directors and Officers
as a group
(4 persons)(6) 1,237,500 29.4%
______________________________
(1) Less than 1 percent.
(2) The address for each shareholder listed is 10850 Wilshire
Boulevard, Suite 1000, Los Angeles, California 90024.
(3) Includes 450,000 stock options (See "Stock Option" section)
as well as 60,000 Warrants purchased in the open market.
(4) Includes 35,000 shares of Common Stock purchasable under the
Company's Stock Option Plan.
(5) Includes 30,000 shares of Common Stock purchasable under the
Company's Stock Option Plan.
(6) Includes 36,500 options granted to officers not listed on
stock table.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Bruce P. Vann and the law firms of Kelly Lytton Mintz &
Vann, of which he is a partner, and Meyer & Vann, of which he was
a partner for a portion of the year, performed services as
attorneys for the Company. For the fiscal year ended July 31,
1997, Kelly & Lytton and Meyer & Vann earned approximately
$3,000. 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.
PART IV
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.
2.1 Acquisition Agreement, dated as of July 31, 1990
between the Company, J2 Acquisition Corp.,
National Lampoon, Inc., Daniel L. Grodnik, and Tim
Matheson, and related Agreement and Plan of
Merger. (2)
3.1 Restated Articles of Incorporation. (3)
3.2 By-laws of the Company. (3)
4.1 Warrant Agreement dated as of October 15, 1990
between the Company and U.S. Stock of Transfer
Corp. (2)
10.1 Amendment to Employment Agreement between the
Company and James P. Jimirro, dated as of May 26,
1988. (3)
10.2 Agreement between National Lampoon, Inc. and New
Line Cinema Corporation, dated as of April 20,
1990. (2)
10.3 Lease between the Company and Pacific Properties.
(5)
10.4 Amended lease between the Company and Pacific
Properties. (4)
10.5 Second amended lease between the Company and
Pacific Properties. (1)
10.6 "National Lampoon" License Agreement
Termination between National Lampoon, Inc. and
Guber-Peters Entertainment Company, previously
named Barris Industries, Inc., dated October 1,
1990. (1)
10.7 Showtime Agreement (8)
10.8 Jim Jimirro Employment Agreement (8)
10.9 1994 Stock Option Plan for Employees (9)
10.10 1994 Stock Option Plan for Non-
Employee Directors (9)
21.1 List of subsidiaries of Registrant (8)
(1) Filed as exhibit to the Company's Annual
Report on Form 10-K for the Fiscal Year ended July
31, 1991.
(2) Filed as an exhibit to Company Registration
Statement on Form S-4, File No. 33-36203
(3) 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").
(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-1
filed with the Securities and Exchange Commission
on October 28, 1993.
(8) Filed as an Exhibit to the Company's Annual
Report on Form 10-K for the Fiscal year Ended July
31, 1995.
(9) 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.
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 24th day of
October, 1997.
J2 COMMUNICATIONS
October 24, 1997 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 24th day of
October, 1997.
Signatures Title Date
/s/ James P. Jimirro Chairman of the Board, October 24, 1997
JAMES P. JIMIRRO President, Chief Executive
Officer (Principal
Executive Officer)
and Director
/s/ Rudy R. Patino Chief Financial Officer October 24, 1997
RUDY R. PATINO (Principal Financial Officer)
/s/ James Fellows Director October 24, 1997
JAMES FELLOWS
/s/ Bruce P. Vann Director October 24, 1997
BRUCE P. VANN
EXHIBIT 21.1
J2 COMMUNICATIONS
SUBSIDIARIES % OWNED
NATIONAL LAMPOON, INC. 100
NL COMMUNICATIONS, INC. 100
STUDIO 21 PRODUCTIONS, INC. 100
NATIONAL LAMPOON PLAYERS 100
J2 COMMUNICATIONS AND SUBSIDIARIES
FINANCIAL STATEMENTS
AS OF JULY 31, 1997 AND 1996
TOGETHER WITH AUDITOR'S REPORT
J2 COMMUNICATIONS AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
JULY 31, 1997
REPORTS OF INDEPENDENT PUBLIC ACCOUNTANTS
FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of
July 31, 1997 and 1996
Consolidated Statements of Operations
for each of the three years in the period ended July 31, 1997
Consolidated Statements of Shareholders' Equity
for each of the three years in the period ended July 31, 1997
Consolidated Statements of Cash Flows
for each of the three years in the period ended July 31, 1997
Notes to Consolidated Financial Statements
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, 1997 and 1996, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three
years in the period ended July 31, 1997. 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, 1997 and
1996, and the results of their operations and their cash flows
for each of the three years in the period ended July 31, 1997 in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
September 29, 1997
Los Angeles, California
J2 COMMUNICATIONS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JULY 31, 1997 AND 1996
ASSETS
1997 1996
CURRENT ASSETS:
Cash and cash equivalents $ 641,000 $ 120,000
Short-term investments at, cost 861,000 1,014,000
Other current assets 75,000 97,000
---------- ----------
Total current assets 1,577,000 1,231,000
NONCURRENT ASSETS:
Intangible assets, less accumulated
amortization of $2,069,000 and
$1,829,000 in 1997 and 1996, respectively 3,896,000 4,136,000
---------- ----------
Total noncurrent assets 3,896,000 4,136,000
---------- ----------
TOTAL ASSETS $5,473,000 $5,367,000
========== ==========
The accompanying notes are an integral part of these consolidated
balance sheets.
J2 COMMUNICATIONS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JULY 31, 1997 AND 1996
LIABILITIES AND SHAREHOLDERS' EQUITY
1997 1996
CURRENT LIABILITIES:
Accounts payable $ 130,000 $ 112,000
Accrued expenses 629,000 681,000
Accrued royalties 499,000 466,000
Deferred revenues 208,000 213,000
Income taxes payable 38,000 38,000
Common stock payable 203,000 203,000
Minority interest 84,000 2,000
---------- ----------
Total current liabilities 1,791,000 1,715,000
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, no par value:
Authorized--2,000,000 shares,
none issued and outstanding - -
Common stock, no par value:
Authorized--8,000,000 shares,
issued and outstanding--
3,600,000 shares in 1997
and 1996 8,654,000 8,648,000
Note receivable on common stock (121,000) (115,000)
Deficit (4,851,000) (4,881,000)
---------- ----------
Total shareholders' equity 3,682,000 3,652,000
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $5,473,000 $5,367,000
========== ==========
The accompanying notes are an integral part of these consolidated
balance sheets.
J2 COMMUNICATIONS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JULY 31, 1997
1997 1996 1995
REVENUES:
Movies, television and theatrical $ 970,000 $ 539,000 $ 736,000
Videocassette sales 219,000 311,000 336,000
Royalty income 65,000 45,000 83,000
Publishing 56,000 8,000 -
Other 46,000 61,000 129,000
---------- ---------- ----------
Total revenues 1,356,000 964,000 1,284,000
EXPENSES:
Costs of movies and television 53,000 26,000 26,000
Cost of videocassettes sold 105,000 141,000 105,000
Royalty expense 63,000 37,000 62,000
Magazine editorial, production and
distribution 41,000 55,000 -
Selling, general and administrative 792,000 725,000 818,000
Amortization of intangible assets 240,000 240,000 240,000
---------- ---------- ----------
Total expenses 1,294,000 1,224,000 1,251,000
---------- ---------- ----------
Income (loss) from
consolidated operations 62,000 (260,000) 33,000
OTHER INCOME (EXPENSE):
Interest and other 59,000 77,000 49,000
Minority interest in income of
consolidated subsidiary (82,000) (46,000) (30,000)
---------- ---------- ----------
Income (loss) before provision
for income taxes 39,000 (229,000) 52,000
PROVISION FOR (BENEFIT FROM) INCOME TAXES 9,000 7,000 (14,000)
---------- ---------- ----------
NET INCOME (LOSS) $ 30,000 $ (236,000) $ 66,000
========== ========== ==========
INCOME (LOSS) PER COMMON SHARE $ 0.01 $ (0.07) $ 0.02
========== ========== ==========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 3,600,000 3,600,000 3,597,000
========== ========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
J2 COMMUNICATIONS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JULY 31, 1997
Notes
Common Stock Receivable
-------------------------- on Common
Shares Amount Stock Deficit Total
BALANCES, July 31, 1994 3,602,000 $8,630,000 $(105,000) $(4,711,000) $3,814,000
Shares issued 8,000 8,000 - - 8,000
Shares retired (10,000) - - - -
Accrued interest on note receivable
on common stock - 5,000 (5,000) - -
Net income - - - 66,000 66,000
--------- ---------- --------- ---------- --------
BALANCES, July 31, 1995 3,600,000 8,643,000 (110,000) (4,645,000) 3,888,000
Accrued interest on note receivable
on common stock - 5,000 (5,000) - -
Net loss - - - (236,000) (236,000)
--------- ---------- --------- ----------- ----------
BALANCES, July 31, 1996 3,600,000 8,648,000 (115,000) (4,881,000) 3,652,000
Accrued interest on note receivable
on common stock - 6,000 (6,000) - -
Net income - - - 30,000 30,000
--------- ---------- --------- ----------- ----------
BALANCES, July 31, 1997 3,600,000 $8,654,000 $(121,000) $(4,851,000) $3,682,000
========= ========== ========= =========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
J2 COMMUNICATIONS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JULY 31, 1997
1997 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 30,000 $ (236,000) $ 66,000
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Amortization of intangible assets 240,000 240,000 240,000
Minority interest in income of
Consolidated subsidiary 82,000 46,000 30,000
Changes in assets and liabilities
Accounts payable 18,000 3,000 (103,000)
Accrued expenses (52,000) 8,000 (33,000)
Accrued royalties 33,000 (41,000) 28,000
Accrued income taxes - 7,000 (78,000)
Deferred revenues (5,000) 4,000 (10,000)
Other 22,000 (61,000) 8,000
---------- ---------- ----------
Net cash provided by (used in)
operating activities 368,000 (30,000) 148,000
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term investments (1,053,000) (1,349,000) (1,492,000)
Sale of short-term investments 1,206,000 1,289,000 1,368,000
Distribution to minority shareholders - (91,000) -
---------- ---------- ----------
Net cash provided by (used in)
investing activities 153,000 (151,000) (124,000)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on notes payable - - (42,000)
Proceeds from exercise of stock options - - 8,000
---------- ---------- ----------
Net cash used in financing
activities - - (34,000)
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 521,000 (181,000) (10,000)
CASH AND CASH EQUIVALENTS,
beginning of year 120,000 301,000 311,000
---------- ---------- ----------
CASH AND CASH EQUIVALENTS,
end of year $ 641,000 $ 120,000 $ 301,000
========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION--
Cash paid during the year for
income taxes $ 9,000 $ 2,000 $ 9,000
========== ========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
J2 COMMUNICATIONS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1997
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 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.
Currently, the Company is primarily engaged in the licensing of
the name "National Lampoon" in a variety of areas including
motion pictures, home video, television, publishing and other
entertainment media. The Company's revenues and income have and
will continue to fluctuate based on the size, nature and timing
of transactions whereby its names and trademarks are licensed.
Despite the existence of a working capital deficit of $206,000 as
of July 31, 1997, management of the Company believes that its
cash and short-term investments at July 31, 1997, and projected
cash flows in fiscal 1998 will be adequate to pay its liabilities
as they become due.
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. Subscription revenues are
apportioned equally over the subscription period. Advertising
revenues are 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,
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 licensing of the "National Lampoon" name for use in
feature films, video, television and audio distribution and
merchandising or other appropriate opportunities. The Company
has received approximately $5,583,000 in licensing revenues
(including revenues received in connection with an agreement for
the licensing of the name for three feature films - see Note 5)
since the acquisition of the "National Lampoon" name in fiscal
1991. The Company is in the process of negotiating other
licensing agreements and the development of concepts, programs,
and other opportunities 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, 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 assets will result
in the recovery of the carrying amount of such assets.
Per Share Information
Primary earnings per share are computed by dividing net earnings
by the weighted average common shares outstanding and common
share equivalents during the period. Common stock equivalents
include, if dilutive, the number of shares issuable on exercise
of the outstanding options less the number of shares that could
have been purchased with the proceeds from the exercise of the
options based on the average price of common stock during the
year. The assumed exercise of all options and warrants during
the years ended July 31, 1997, 1996 and 1995 was not dilutive
and, therefore, was not included in the computation of weighted
average shares outstanding.
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
affect 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.
Stock-Based Compensation
During the current year the Company adopted SFAS No. 123. This
statement establishes accounting standards for stock-based
employee compensation plans. This statement encourages, but does
not require, a fair-value based method of accounting for employee
stock options or similar equity instruments. The adoption of the
statement did not have a material effect on the consolidated
financial statements.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect 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.
New Financial Accounting Pronouncements
The Company has adopted the requirements of SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed of," issued in October 1995 and the
pro-forma disclosure requirements of SFAS No. 123, "Accounting
for Stock-Based Compensation," issued in October 1995. The
effect of the new financial accounting pronouncements was not
material to the Company's consolidated financial statements.
In March 1997, the Financial Accounting Standard Board
("FASB")issued SFAS No. 128, "Earnings per Share" and SFAS No.
129, "Disclosure of Information about Capital Structure" which
are effective for financial statements for periods ending after
December 15, 1997.
In June, 1997 the FASB issued SFAS No. 130, "Reporting
Comprehensive Income" and Statement of Financial Accounting
Standards No. 131, "Disclosure about Segments of An Enterprise
and Related Information" which are effective for the financial
statements for periods ending after December 31, 1998.
Management does not believe adoption of SFAS No. 128, SFAS No.
129 and SFAS No. 130 will have a material effect on the Company's
consolidated financial statements.
Reclassifications
Certain items in the 1996 and 1995 financial statements have been
reclassified to conform with the 1997 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:
1997 1996
U.S. Government obligations, cost $861,000 $1,014,000
Gross unrealized holding gains 26,000 15,000
-------- ---------
U.S. Government obligations, fair value $887,000 $1,029,000
======== =========
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:
1997 1996
Deferred videocassette revenues $126,000 $131,000
Unearned subscription revenues 82,000 82,000
-------- --------
$208,000 $213,000
======== ========
4. Accrued Expenses
Accrued expenses consist of the following:
1997 1996
Reserve for contingent payment on
sale of stock $158,000 $158,000
Deferred salary 189,000 199,000
Legal expenses 100,000 121,000
Stock appreciation rights 37,000 -
Other 145,000 203,000
-------- --------
$629,000 $681,000
======== ========
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 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 made-for-cable
movies produced, and as such, the fifth through seventh movies
will not be produced. Pursuant to the contract terms, Showtime
has paid the producer fees due for five movies as of July 31,
1997. The producer fees due for the sixth and seventh movies of
$300,000 will be paid in the fiscal year ended July 31, 1998.
The Company is currently seeking to replace the Showtime license
agreement. In the event that the Company is unable to replace
the Showtime agreement with a comparable arrangement, movies,
television, and theatrical revenues could be adversely impacted.
Revenue recognized under this agreement totaled $300,000,
$150,000, and $150,000 for the years ended July 31, 1997, 1996,
and 1995, respectively.
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 three
"National Lampoon" motion pictures, each at a budget not greater
than $10 million, within four and one-half years of execution of
the agreement. 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 of three motion pictures (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 $118,000, $166,000 and
$430,000 for the years ended July 31, 1997, 1996 and 1995,
respectively.
As of April 1, 1996, New Line had failed to produce the third
motion picture due under the agreement, which was not extended
further.
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
157,000 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 1995. The agreement provides for an additional
cash payment in the event that such common stock is sold, within
a specified time period, for less than $2 per share. The Company
has recorded a liability, included in accrued expenses, at
July 31, 1997 and 1996, in the amount of $158,000 as a reserve
against such contingent payments.
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 $287,000, $117,000, and
$78,000 for each of the three years in the period ended July 31,
1997. Of this revenue the minority interest's share totaled
$82,000, $46,000 and $30,000, respectively.
Leases
The Company is obligated under an operating lease expiring on
September 30, 2001, 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 2003 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.
The Company is committed to future minimum lease payments for the
following years:
Building Equipment Total
1998 $ 82,000 $20,000 $102,000
1999 86,000 8,000 94,000
2000 89,000 2,000 91,000
2001 15,000 2,000 17,000
2002 - 2,000 2,000
-------- ------- --------
Total $272,000 $34,000 $306,000
======== ======= ========
Rent expense totaled $79,000 for the year ended July 31, 1997,
and $79,000 and $86,000, net of sublease income of $5,000 and
$30,000 for the years ended July 31, 1996 and 1995,
respectively.
Equipment lease expense totaled $8,000, $18,000 and $31,000 for
the years ended July 31, 1997, 1996 and 1995, respectively.
Royalty Agreements
Pursuant to a royalty agreement between NLI and The Harvard
Lampoon, Inc. ("HLI") NLI is required to pay HLI a royalty of up
to 2 percent on all revenues derived from sales of any magazine
or other 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 non-publishing activities using
such name. Royalties payable under this agreement totaled
$19,000, $11,000, and $15,000 for the years ended July 31, 1997,
1996, and 1995, 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. Royalties payable under these agreements
totaled $45,000, $26,000 and $47,000 for the years ended July 31,
1997, 1996, and 1995, respectively.
GPEC Agreement
In 1987, NLI sold the exclusive rights to produce television
programming utilizing the name "National Lampoon" to Gurber-
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, $131,000 has been paid under the
gross receipts provision of the agreement.
Employment Agreement
The Company has entered into an employment agreement dated
July 1, 1994, with its President and Chief Executive Officer.
The agreement is for seven years and provides for 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 agreement unless there is
a change in control of the Company, as defined by the agreement.
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. A bonus of
$100,000 was earned during the year ended July 31, 1995. No
bonus was earned in 1997 or 1996. Deferred bonuses for the
President, included in accrued expenses, totaled $100,000 and
$100,000 as of July 31, 1997 and 1996. In addition, certain
officers have deferred salary of $89,000 and $99,000 as of
July 31, 1997 and 1996, respectively, also included in accrued
expenses.
The Company has also granted the President options to purchase
50,000 shares of its common stock and 50,000 stock appreciation
rights (see Note 7) for each year of his employment contract.
The price for each will be based on the fair value of the stock
at the date of issuance.
Management Contract of Magazine
In August 1993, the Company entered into an agreement for a
magazine publisher to print and distribute the National Lampoon
magazine. In accordance with the terms of this agreement, the
Company retained editorial control of the magazine's content and
received a fee equal to 5 percent of all revenues generated by
the magazine in its first year of publication, 6 percent in the
second year and 7 percent for each year thereafter. In February
1996, the agreement was terminated by the Company because
certain minimum performance targets had not been met by the
publisher. The Company resumed publishing the magazine in May
1996. The Company earned revenues of $8,000 under this
agreement during the year ended July 31, 1995. No revenues were
earned related to this agreement in fiscal 1996 prior to
termination of the agreement.
As part of this agreement, the publisher had agreed to assume
the Company's liabilities relating to the magazine, including
unearned subscription revenues and accrued retail display
allowances of $79,000, included in accrued expenses as of July
31, 1997 and 1996, owed to various vendors for magazine shelf
space. Because the Company holds title to the "National
Lampoon" name, the Company continued to record liabilities for
these amounts after termination of the agreement.
Litigation
The Company, NLI and the officers and directors of NLI became the
defendants in a lawsuit in regard 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 issue an
additional 125,000 shares of its common stock to the Plaintiffs
and for the payment of attorneys' fees. The value of the shares
to be paid is presented as a liability of $203,000 as of
July 31, 1997, and 1996, as the shares have not yet been issued
and the settlement has not been approved.
NLI had a motion picture development and consulting agreement
with Matty Simmons, a former officer of NLI. In November 1992,
Matty Simmons Productions, Inc. and Matty Simmons (collectively
"Simmons") filed a complaint against the Company alleging breach
of contract. In December 1993, this litigation was settled.
The terms of the settlement agreement provide for the Company to
pay Simmons a percentage (not to exceed $240,000 in total) of
any amounts earned by the Company from certain previously
released National Lampoon films. A total of $42,000, $66,000
and $62,000 was paid to Simmons during the years ended July 31,
1997, 1996 and 1995, respectively.
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 from July 1, 1992, through June 30,
1995, based upon HLI's interpretation of the agreement. By
agreement of both parties arbitration has been stayed and the
dispute is currently under mediation. Settlement discussions are
continuing. Management believes that this claim will not have a
material effect on the consolidated financial statements.
6. Notes Receivable on Common Stock
In 1986, the Company issued 800,000 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.
A summary of the stock options outstanding is below:
Number of Option Weighted Average
Options Price Exercise Price
Outstanding Range Per Share
Balance, July 31, 1994 559,000 $0.56 - $2.63 $1.43
Granted 174,000 $1.06 - $1.37 $1.18
Exercised (8,000) $0.72 - $1.10 $0.91
Canceled (193,000) $0.69 - $2.63 $2.30
--------- ------------- ------
Balance, July 31, 1995 532,000 $0.56 - $1.48 $1.09
Granted 62,000 $1.08 - $1.19 $1.10
--------- ------------- ------
Balance, July 31, 1996 594,000 $0.56 - $1.48 $1.10
Granted 115,000 $0.88 - $1.13 $1.00
Canceled (70,000) $1.06 - $1.19 $1.13
--------- ------------- -----
Balance, July 31, 1997 639,000 $0.56 - $1.19 $1.08
========= ============= =====
Of the options outstanding as of July 31, 1997, 1996, and 1995,
577,000, 564,000, and 481,000, respectively, were exercisable
with a weighted average exercise price of $1.09, $1.1, and $1.1,
respectively. The weighted average remaining contractual life of
the options outstanding as of July 31, 1997 was 3.4 years.
The Company has adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock Based Compensation"
issued 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. 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 and earnings per share would have been
reduced to the pro forma amounts indicated in the table below:
Years ended July 31,
--------------------
1997 1996
Net income (loss)-as reported $30,000 $(236,000)
Net loss-pro-forma $(11,000) $(243,000)
Earnings (loss) per share-as reported $.01 $(.07)
Loss per share-pro-forma $.00 $(.07)
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:
Expected dividend yield 0.00%
Expected stock price volatility 52.9%
Risk free interest rate 5.68%
Expected life of options 2 years
The weighted average fair value of options granted during fiscal
1997 and 1996 is $.36 and $.1, respectively.
Warrants
In connection with its acquisition of NLI in 1990, the Company
issued 1,753,000 Series A warrants (including 148,000 warrants
issued to certain creditors). The warrants expire on December
31, 1997, and entitle each holder to exchange one warrant for a
share of the Company's common stock at a price of $2.00 per
share. The Series A warrants are callable at a price of $2.00
per warrant on or after October 15, 1992, at the option of the
Company if the closing price per share of common stock equals or
exceeds 175% for a period of 20 trading days. There were
1,737,000 Series A warrants outstanding at July 31, 1997.
Stock Appreciation Rights
As of July 31, 1997, the President and Chief Executive Officer of
the Company had 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. As of July 31, 1997, appreciation in these rights
amounted to approximately $37,000. This amount has been included
as an accrued liability on the accompanying consolidated balance
sheet.
As of July 31, 1997, a total of 350,000 rights were outstanding
with appreciation basis of between $0.56 and $1.48 per share.
8. Related Party Transactions
Legal fees of $3,000, $12,000 and $16,000, included in selling,
general and administrative expenses, were incurred during fiscal
1997, 1996 and 1995, respectively, for services from legal firms,
one of whose partners is a director of the Company.
See Note 6 for discussion of notes receivable from the Company's
President and Chief Executive Officer.
9. Income Taxes
The provision for income taxes is comprised as follows:
1997 1996 1995
Current:
State $9,000 $7,000 $ 11,000
Federal - - 1,000
Adjustment to valuation
allowance:
State - - (26,000)
------ ------ --------
$9,000 $7,000 $(14,000)
====== ====== ========
A reconciliation between the statutory federal rate and the
Company's effective rate follows:
1997 1996 1995
Statutory federal
income tax rate (benefit) 34% (34%) 34%
State income taxes 19 3 19
Amortization of intangible
assets 173 36 158
Recognition of previously
unrecognized deferred tax asset,
including net operating losses,
net (213) (4) (244)
Other 6 2 6
----- ----- -----
Effective rate (benefit) 19% 3% (27%)
===== ===== =====
As of July 31, 1997, the tax effect of deductible timing
differences and carryforwards is comprised of the following:
1997 1996
Net operating loss carryforwards $ 987,000 $1,283,000
Accrued liabilities and contingencies 146,000 171,000
Royalty reserves 199,000 186,000
Deferred income 83,000 85,000
---------- ----------
1,415,000 1,725,000
Valuation allowance (1,415,000) (1,725,000)
---------- ---------
Net deferred tax asset $ - $ -
========== =========
As of July 31, 1997, the Company had available for federal and
state income tax purposes net operating loss carryforwards of
approximately $1,721,000 and $747,000, respectively, expiring at
various dates through 2011. Certain of the state net operating
losses may be limited through statutory provisions.
10. Major Customers
During the year ended July 31, 1997, the Company received
$300,000 in revenues from a motion picture licensee representing
24 percent of total revenues. During the year ended July 31,
1996, the Company received $166,000 and $150,000 in revenues from
two motion picture licensees representing 17 percent and 15
percent of total revenues, respectively. During the year ended
July 31, 1995, the Company received $430,000 and $188,000 from
two motion picture licensees representing 34 percent and 15
percent of total revenues.