-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MCluQznUNPtOvmdrdX8yozQwAE371AwSNhd1aZ6EwjrRvZOiZfsp+BdV41NXIZiB FeOdXnVAQySlUYNS1AOUTQ== 0000950148-01-502251.txt : 20020410 0000950148-01-502251.hdr.sgml : 20020410 ACCESSION NUMBER: 0000950148-01-502251 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010731 FILED AS OF DATE: 20011113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: J2 COMMUNICATIONS /CA/ CENTRAL INDEX KEY: 0000798078 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MOTION PICTURE & VIDEO TAPE PRODUCTION [7812] IRS NUMBER: 954053296 STATE OF INCORPORATION: CA FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-15284 FILM NUMBER: 1785065 BUSINESS ADDRESS: STREET 1: 10850 WILSHIRE BLVD STE 1000 CITY: LOS ANGELES STATE: CA ZIP: 90024 BUSINESS PHONE: 3104745252 MAIL ADDRESS: STREET 1: 10850 WILSHIRE BLVD STREET 2: SUITE 1000 CITY: LOS ANGELES STATE: CA ZIP: 90024 FORMER COMPANY: FORMER CONFORMED NAME: J2 COMMUNICATIONS DATE OF NAME CHANGE: 19880308 FORMER COMPANY: FORMER CONFORMED NAME: J2 TELECOMMUNICATIONS DATE OF NAME CHANGE: 19890731 10-K 1 v76607e10-k.txt FORM 10-K U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K Annual Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended July 31, 2001 Commission File No. 0-15284 J2 COMMUNICATIONS (Exact name of registrant as specified in its charter) California 95-4053296 (State or other jurisdiction (I.R.S. Employer of incorporation) Identification No.) 10850 Wilshire Blvd., Suite 1000 Los Angeles, California 90024 (Address of principal executive office) Registrant's telephone number: (310) 474-5252 Securities registered under Section 12(b) of the Exchange Act: None Securities registered under Section 12(g) of the Exchange Act: Common Stock, no par value 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 in response 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 23, 2001, the aggregate market value of the voting stock held by non-affiliates of the Registrant (based on the closing sales price as reported by NASDAQ) was $ 7,373,053 (assuming all officers and directors are deemed affiliates for this purpose). As of October 23, 2001 the registrant had 1,379,816 shares of its common stock, no par value, outstanding. Documents Incorporated by Reference: None PART I. ITEM 1. DESCRIPTION OF BUSINESS GENERAL J2 Communications ("Company" or "Registrant") was founded in 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 primarily engaged in the acquisition, production and distribution of videocassette programs for retail sale. In late 1990, the Company acquired National Lampoon, Inc. ("NLI"). NLI was incorporated in 1967 and was primarily engaged in publishing the "National Lampoon Magazine" and related activities including the development and production of motion pictures. Subsequent to the Company's acquisition of NLI, it de-emphasized the videocassette and publishing segments of its business and has primarily focused its activities on exploitation of the "National Lampoon" trademark including the October 1999 launch of its website, "nationallampoon.com." FORWARD-LOOKING STATEMENTS The foregoing discussion, as well as the other sections of this Annual Report on Form 10-K, contains forward-looking statements that reflect the Company's current views with respect to future events and financial results. Forward-looking statements usually include the verbs "anticipates," believes," "estimates," "expects," "intends," "plans," "projects," "understands" and other verbs suggesting uncertainty. The Company reminds shareholders that forward-looking statements are merely predictions and therefore inherently subject to uncertainties and other factors which could cause the actual results to differ materially from the forward-looking statements. Potential factors that could affect forward-looking statements include, among other things, the Company's ability to identify, produce and complete projects that are successful in the marketplace, to arrange financing, distribution and promotion for these projects on favorable terms and to attract and retain qualified personnel and to consummate the Laikin-Skjodt transactions (as defined below). RECENT DEVELOPMENTS 1. THE LAIKIN-SKJODT TRANSACTIONS The Laikin-Skjodt Agreement (as defined below) was amended by the parties thereto to provide that the termination date of the Laikin-Skjodt Agreement be extended until November 15, 2001. For more information regarding the Laikin-Skjodt Agreement and the transactions contemplated thereby, please see "Management's Discussion and Analysis of Financial Position and Results of Operations -- The Laikin-Skjodt Agreement." There can be no assurance that the Laikin-Skjodt Group will be able to raise the necessary financing to consummate the Laikin-Skjodt Transactions or that the Laikin-Skjodt Transactions will otherwise close. In August 2000, the Company received a notice from Daniel Laikin, a Director and member of a group purporting to own approximately 22.7% of the Company's outstanding common stock seeking, among other things, a special meeting of the Company's shareholders. At this meeting, Mr. Laikin intended to nominate a slate of six directors with a view to replacing all of the Company's existing directors. Subsequent to this request, the Company met on several occasions with Mr. Laikin and his representatives. During the course of these meetings, the Company and Mr. Laikin discussed a number of ways in which Mr. Laikin might increase his involvement in, and/or 2 ownership of, the Company and assure that a costly proxy solicitation and possible related litigation will be avoided. On March 5, 2001, the Company, James P. Jimirro, the Company's Chairman and Chief Executive Officer and Mr. Laikin and Paul Skjodt ("Laikin Skjodt Group") entered into an agreement (the "Laikin Agreement") pursuant to which the Laikin Skjodt Group will purchase all of the interests of Mr. Jimirro in the Company (including common shares, vested options and common shares issuable upon exercise of Jimirro's SARs) for total consideration of approximately $4.6 million, 227,273 common shares directly from the Company for a purchase price of between approximately $5.21 and $9.90 per share based on a formula, and, at the option of the Laikin Skjodt Group, up to an additional 300,000 common shares directly from the Company at a purchase price of $11 per share. The Laikin Skjodt Group agreed, in the event the Laikin Agreement was not consummated by June 30, 2001, to a 10-year standstill, which, among other things, precludes Messrs. Laikin and Skjodt (or their affiliates) from continuing their proxy contest for control of the Company. The Agreement also provides that the Laikin Skjodt Group will be obligated to make a tender offer to other shareholders, under certain conditions, at $15.00 per share during a period commencing 365 days from the closing of the transaction. Since the original anticipated closing date, the Laikin Agreement has been extended by a series of amendments. To date, the Laikin group has paid to the Company $450,000, in respect of these extensions. As of November, 2001, the Laikin Skjodt Group has been unable to obtain the financing to consummate the transaction. However, the standstill commitment is in full force and effect, regardless. During the course of the negotiations leading up to the execution of the Laikin Agreement, and subsequent thereto during the various extensions, the Company questioned the accuracy of the SEC filings made by Mr. Laikin and others. As of October 24, 2001, those questions have not been resolved to the Company's satisfaction. Nothing in this report on Form 10-K should be read as an acknowledgement of the accuracy of any of the statements made by the Laikin/ Skjodt group, among others, or a waiver of any rights of the Company or any other person with respect to such statements or related matters. SEE NOTE K - SUBSEQUENT EVENTS. 2. WORKING CAPITAL DEFICIENCIES As a result of the slowdown of the economy, the expenditure of considerable resources in respect of the negotiation of the Laikin-Skjodt Agreement, the failure of the Company to generate significant revenue from its internet operations, and the diminution in the pursuit of other business opportunities as a result of the Laikin-Skjodt Agreement, the Company has experienced a significant decline of available working capital. If the Laikin-Skjodt Agreement is not consummated, the Company may be forced to immediately obtain additional working capital. No assurance can be given that such funds can be obtained or that they can be obtained on terms acceptable to the Company. See "Risk Factors-Adequacy of Capital Resources." Moreover, the Company has not been apprised of any financing activities, which Mr. Laikin will undertake on behalf of the Company if the Laikin-Skjodt Agreement is consummated. Please see "Management's Discussion and Analysis of Financial Position and Results of Operations -- The Laikin-Skjodt Agreement" for a discussion of certain transactions affecting the ownership of the Company's Common Stock by certain of its executive officers and directors. 3 NOTE REGARDING OPERATING SEGMENTS The following discussion of the Company's business activities should be read in conjunction with NOTE H - SEGMENT Information contained in the Company's consolidated financial statements and related notes which summarizes the amounts of revenue, operating profit or loss and identifiable assets attributable to each of the Company's operating segments. INTERNET In October 1999, the Company launched "nationallampoon.com" (the "Site"), a website featuring a wide array of original comedy content as well as classic articles from "National Lampoon Magazine." Some of the Site's features have included: News on the March -- articles parody and satirize the news of the day. Word of the Week -- animated adventures parody the importance of a first-rate vocabulary. A dictionary in the "National Lampoon" style. NewsFlash -- authentic and topical newswire photos come to life in twisted stories. Online Confessional -- an interactive video features real people confessing their most bizarre sins: website viewers vote to absolve or condemn. Cybercops -- an animation/live action video hybrid explores the lives of two policemen on the prowl for Internet bad guys. Although as of October 16, 2001, the Company's Internet operations have not yet generated significant revenue, the Company anticipates that its Internet operations will become the core business of the Company in that they will be the incubator for the development of stories, characters and animation that will be spun off into other media. In the future, the Company may earn revenue from the Site and other Internet activities, as follows: Banner and Sponsorship Advertising - The advertising model emerging on the Internet is similar to that of more mature media in which revenue depends on the quantity and quality of impressions delivered to advertisers. The Company has engaged an advertising sales agent to handle the sale of advertising on its Site. The sales agent receives a percentage of the advertising revenue. From its inception through July 31, 2001, the website has generated approximately $10,000 in gross advertising revenue. E-Commerce - The Site's online store has a variety of "National Lampoon" branded merchandise including apparel, ceramics, audio entertainment and VHS and DVD copies of "National Lampoon" movies. Visitors to the website are encouraged to visit the online store and portions of the Site highlight special products or special offers currently available in the store. The Site's online store is hosted by a third party that processes and fulfills all orders and pays a percentage to the Company from all sales. During the year ended July 31, 2001, e-commerce revenues were approximately $5,000. Syndication of Content -- The Company has expanded its Internet operations to include the syndication to other websites of content created for the Site. Currently, the Company provides several of its features to other websites including neurotrash.com, isyndicate.com, streamingmedia.com and rioport.com. The Company generally receives a license fee or, in some cases, a portion of the advertising revenues generated by the content licensed. While the Company currently syndicates only programming that has appeared on the Site, the Company 4 also expects that in the future it may produce Internet programming for the exclusive use of other websites. During the year ended July 31, 2001, syndication revenues were approximately $8,000. Development of Motion Pictures and Television -- Using the properties and characters created for the Site, the Company plans to package this material for use in motion picture and television properties. This is similar to NLI's past use of magazine properties as the basis for "National Lampoon" motion pictures. The Company has and will continue to pursue both online and offline marketing strategies to attract visitors to the Site. Offline consumer marketing comprises a number of activities including publicity campaigns directed to print and electronic media. Marketing has and will be directed toward "National Lampoon's" historical core audience of men ages 18-34, with specific emphasis on the college age group. The number of content-based websites is substantial and the competition between websites for viewers is intense. Because there are few barriers to entry into this marketplace, the number of websites competing for consumers' attention has proliferated and it is expected that competition will continue to intensify. Many of these competitors are larger, more established and have greater capital resources than the Company. MOTION PICTURES AND TELEVISION In recent years, the Company has derived the bulk of its revenues from license fees relating to the production of new motion pictures and from contingent compensation for motion pictures previously produced by the Company and NLI. The Company generally licenses its "National Lampoon" trademark for use in the title of the film. For producing services and providing the "National Lampoon" trademark, the Company generally receives a fee at the time of production of the motion picture plus contingent compensation that is dependent on the motion picture's financial performance. To date, the Company has not financed the production or distribution of any "National Lampoon" motion pictures and does not maintain a dedicated film development or production staff. Instead, the Company relies upon third parties, primarily major motion picture studios, to provide a picture's financing and distribution. However, the Company may participate in such activities in the future if, subject to sufficient capital resources being made available, it believes circumstances warrant such investment. 5 As of July 31, 2001, the Company and/or NLI has been involved in the production of seventeen motion pictures, as follows:
Year of Financier/ Title Release Distributor ----- ------- ----------- National Lampoon's Animal House 1979 Universal Studios National Lampoon Goes to the Movies 1981 United Artists National Lampoon's Class Reunion 1982 ABC/Disney National Lampoon's Vacation 1983 Warner Bros. National Lampoon's European Vacation 1985 Warner Bros. National Lampoon's Class of `86 1986 Paramount National Lampoon's Christmas Vacation 1989 Warner Bros. National Lampoon's Loaded Weapon I 1993 New Line National Lampoon's Last Resort 1994 Trimark National Lampoon's Attack of the 5'2" Women 1994 Showtime National Lampoon's Senior Trip 1995 New Line National Lampoon's Favorite Deadly Sins 1995 Showtime Vegas Vacation 1996 Warner Bros. National Lampoon's Dad's Week Off 1997 Paramount National Lampoon's The Don's Analyst 1997 Paramount National Lampoon's Men in White 1998 Fox National Lampoon's Golf Punks 1998 Fox
As discussed above, the Company does not directly distribute the motion pictures it produces. Typically, the financier is also a distributor and subsequent to production of the picture handles distribution of the picture. The Company has also been involved in the production of television programs and currently has one television project in development. The project, a National Lampoon awards spoof program, is being developed by Oliver Wilson Productions under license from National Lampoon. Pursuant to a July 24, 1987 Rights Agreement, NLI granted the right to produce "National Lampoon" television programming to Guber-Peters Entertainment Company ("GPEC"). NLI reacquired these rights from GPEC pursuant to an October 1, 1990 Termination Agreement for the sum of $1,000,000, of which $500,000 was paid upon execution. The remaining $500,000 is contingent and payable through a 17.5% royalty on NLI's cash receipts from each program produced by NLI or any licensee (subject to certain minimum royalties for each program produced). As of July 31, 2001, the Company has recorded a liability of approximately $166,000 relating to the Termination Agreement. 6 The motion picture and television industry is highly competitive. The Company faces intense competition from motion picture studios and numerous independent production companies, many of which have significantly greater financial resources than the Company. All of these companies compete for motion picture and television projects and talent and are producing products that compete for exhibition time at theaters, on television, and on home video with products produced by the Company. OTHER ACTIVITIES The Company has been and continues to be involved in various other activities to exploit the "National Lampoon" trademark including books, audio entertainment and other merchandise as well as the distribution of videocassette programming. In addition, the Company, and previously NLI, published "National Lampoon Magazine" from March 1970 until October 1998 when the magazine was discontinued. Although in recent years, these activities have not generated significant amounts of revenue, the Company believes that such activities reinforce the "National Lampoon" trademark and provide cross-promotional opportunities for its motion picture, television and Internet operations. It is also anticipated that these activities might be enhanced by the new creative content created by the Company's Internet operations. REGULATION The Company's trademarks and other intellectual properties are granted legal protection under the trademark or copyright laws of the United States and most foreign countries, which provide substantial civil and criminal sanctions for infringement. The Company takes all appropriate and reasonable measures to obtain agreements from licensees to secure, protect and maintain trademark and copyright protection for the Company's properties under the laws of all applicable jurisdictions. EMPLOYEES As of October 30, 2001, the Company employed four (4) full-time employees and six (6) part-time employees. The Company considers its employee relations to be satisfactory at the present time. IN ADDITION TO OTHER INFORMATION IN THIS FORM 10-K, THE FOLLOWING RISK FACTORS SHOULD BE CAREFULLY CONSIDERED IN EVALUATING OUR BUSINESS BECAUSE SUCH FACTORS MAY HAVE A SIGNIFICANT IMPACT ON OUR BUSINESS, OPERATING RESULTS AND FINANCIAL POSITION. ADEQUACY OF CAPITAL RESOURCES The Company is not certain its existing capital resources are sufficient to fund its activities for the next six to twelve months. Unless the Company's Internet revenues or revenues from other business activities significantly increase during that period, the Company will need to raise additional capital to continue to fund its current Internet operations or, in the alternative, significantly reduce or even eliminate its Internet operations. There can be no assurance that the Company will be able to raise such capital on reasonable terms, or at all. The Company, Mr. James P. Jimirro, the Company's Chairman and Chief Executive Officer, and Mr. Daniel Laikin, a Director of the Company have entered into the Laikin-Skjodt Agreement. Please see "Management's Discussion and Analysis of Financial Position and Results of Operations -- The Laikin-Skjodt Agreement." As a result of the closing of the Laikin-Skjodt Transaction, the Company may need to raise additional capital to continue to fund its 7 current Internet operations or, in the alternative, significantly reduce or even eliminate its Internet operations. There can be no assurance that the Company will be able to raise such capital on reasonable terms, or at all. DEPENDENCE ON THE INTERNET Since the Internet and other wide area networks are new and evolving, it is difficult to predict with any certainty whether the Internet will prove to be a viable commercial enterprise. Growth in the Company's Internet revenues will be dependent on the Internet's continued growth and integration into daily commerce, among other factors. The Company's business will be adversely affected if Internet usage does not continue to grow. A number of factors may inhibit Internet usage, including: inadequate network infrastructure; security concerns; inconsistent quality of service; and lack of availability of cost-effective, high-speed service. If Internet usage grows, the Internet infrastructure may not be able to support the demands placed on it by this growth and its performance and reliability may decline. In addition, websites have experienced interruptions in their service as a result of outages and other delays occurring throughout the Internet network infrastructure. To date, the Company has not encountered any significant outages or delays; however, if these outages or delays occur in the future, Internet usage, including usage of the Company's website could be adversely affected. INTERNET ADVERTISING The Company expects to derive a portion of its Internet revenues from sponsorships and advertising for the foreseeable future, and demand and market acceptance for Internet advertising solutions is uncertain. There are currently no reliable standards for the measurement of the effectiveness of Internet advertising, and the industry may need to develop standard measurements to support and promote Internet advertising as a significant advertising medium. If such standards do not develop, existing advertisers may not continue their levels of Internet advertising. Furthermore, advertisers that have traditionally relied upon other advertising media may be reluctant to advertise on the Internet. The Company's business would be adversely affected if the market for Internet advertising fails to develop or develops more slowly than expected. THIRD PARTY CLAIMS The Company may be sued for information disseminated on the Internet, including claims for defamation, negligence, copyright or trademark infringement, personal injury or other legal theories relating to the information we publish on the Site. These types of claims have been brought, sometimes successfully, against online services as well as print publications in the past. The Company could also be subjected to claims based upon the content that is accessible from the Site or through content and materials that may be posted by members in chat rooms or bulletin boards. The Company may also offer e-mail services, which may subject the Company to potential risks, such as liabilities or claims resulting from unsolicited e-mail, lost or misdirected messages, illegal or fraudulent use of e-mail or interruptions or delays in e-mail service. Although the Company maintains general liability insurance, such insurance may not adequately protect the Company against these types of claims. INTERNET SECURITY Internet security concerns could hinder e-commerce. The need to securely transmit confidential information over the Internet has been a significant barrier to electronic commerce and communications over the Internet. Any well-publicized compromise of security could deter people from using the Internet or using it to conduct transactions that involve transmitting 8 confidential information. The Company may incur significant costs to protect against the threat of security breaches or to alleviate problems caused by such breaches. Third parties may misappropriate personal information about the Company's potential users. If third parties were able to penetrate the Company's network security or otherwise misappropriate our users' personal information or credit card information, the Company could be subject to liability. This could include claims for unauthorized purchases with credit card information, impersonation or other similar fraud claims. They could also include claims for other misuses of personal information such as for unauthorized marketing purposes. These claims could result in litigation. In addition, the Federal Trade Commission and state agencies have been investigating certain Internet companies regarding their use of personal information. The Company would incur additional expenses if new regulations regarding the use of personal information are introduced or if our privacy practices are investigated. NATIONALLAMPOON.COM IS A NEW VENTURE The Site is a new venture and its prospects are subject to risks, expenses and uncertainties frequently encountered by young companies that operate exclusively in the new and rapidly evolving markets for Internet products and services. Successfully achieving its growth plan depends upon the Company's ability to continue to develop new and original comedic material which is equal or superior to that of its competitors, its ability to attract visitors to the Site, its ability to effectively integrate technology into the operations of its business and its ability to identify, attract, retain and motivate qualified personnel, among other things. STOCK PRICE VOLATILITY The trading price of the Company's stock has been and continues to be subject to fluctuations. The stock price may fluctuate in response to a number of events and factors, such as quarterly variations in operating results, changes in recommendations by security analysts, the operating and stock performance of other companies that investors may deem as comparable and news reports relating to trends in the marketplace, among other factors. In addition, the stock prices for Internet related companies in particular have recently experienced extreme volatility that may be unrelated to the operating performance of such companies. These broad market and industry fluctuations may adversely affect the price of the Company's common stock, regardless of the company's operating performance. DEPENDENCE ON "NATIONAL LAMPOON" TRADEMARK AND RELATED PROPERTIES The Company's revenues are primarily derived from exploitation of the "National Lampoon" trademark. Any erosion of brand recognition of that trademark and its related properties or the failure of the Company to adequately protect its intellectual property could have a materially adverse effect on the Company's business, results of operations and financial position. DEPENDENCE ON KEY PERSONNEL The Company is dependent upon the services of James P. Jimirro. The loss of his services could have a materially adverse effect on the Company's business, results of operations and financial position. 9 ITEM 2. PROPERTIES The Company leases approximately 3,912 square feet of office space in Los Angeles, California under a lease expiring in September 2005. Management considers the Company's office space generally suitable and adequate for its current needs. ITEM 3. LEGAL PROCEEDINGS None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Company's shareholders during the fourth quarter of the fiscal year covered by this report. PART II. ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock trades on the Nasdaq SmallCap Market tier of the Nasdaq Stock Market under the symbol: "JTWO". The following table sets forth the high and low bid prices of the Company's common stock during the years ended July 31, 2000 and 2001:
FISCAL YEAR 2000 HIGH LOW ---------------- ---- --- First Quarter 26 5/16 14 1/16 Second Quarter 19 1/2 9 13/16 Third Quarter 17 3/8 5 7/16 Fourth Quarter 14 7/16 5 1/2 FISCAL YEAR 2001 HIGH LOW ---------------- ---- --- First Quarter 13 1/2 9 Second Quarter 12 7/8 8 1/8 Third Quarter 14 15/16 11 1/2 Fourth Quarter 13 1/2 10 1/2
As of October 30, 2001, the Company had approximately 471 stockholders of record. The Company may not meet certain minimum NASDAQ continued listing requirements. As a result, Nasdaq may seek to delist the Company's common stock from The Nasdaq Small Cap Market. If the Company's common stock were to be delisted it may trade only on the OTC Bulletin Board (or through other vehicles offering limited trading options), and the liquidity of the Company's common stock may, accordingly, be materially diminished. In addition, the ability of the Company to take action with respect to any deficiencies may be impacted by the Letter Agreement described in ITEM 2 - RECENT DEVELOPMENTS which, among other things, restricts the ability of the Company to undertake transactions that would materially change its current capital structure. 10 ITEM 6. SELECTED FINANCIAL DATA The following table shows selected consolidated financial data for the Company for each of the last five fiscal years. This financial data should be read in conjunction with the Company's consolidated financial statements and related footnotes contained herein for the fiscal year ended July 31, 2001 and for the other periods presented. SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
For the fiscal years ended July 31, 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- Revenues $ 306 $ 1,480 $ 1,246 $ 783 $ 1,356 Operating income/(loss) ($3,130) $ 854 ($1,765) ($ 267) $ 62 Net income/(loss) ($3,076) $ 826 ($1,299) $ 121 $ 30 Net income/(loss) per share - basic $ (2.26) $ 0.64 ($ 1.07) $ 0.10 $ 0.03 Net income/(loss) per share - diluted $ (2.26) $ 0.62 ($ 1.07) $ 0.10 $ 0.02 Total assets $ 3,302 $ 5,119 $ 5,350 $ 5,962 $ 5,473 Long term obligations $ 0 $ 0 $ 1,717 $ 17 $ 0
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS RECENT DEVELOPMENTS In August 2000, the Company received a notice from Daniel Laikin, a Director and member of a group of shareholders of the Company purporting to own approximately 22.7% of the Company's outstanding common stock. Mr. Laikin sought, among other things, a special meeting of the Company's shareholders at which Mr. Laikin intended to nominate a slate of six directors to replace in its entirety the Company's existing Board of Directors (other than Mr. Laikin himself). Subsequent to this request, representatives of the Company met on several occasions with Mr. Laikin and his representatives. On March 5, 2001, the Company, James P. Jimirro, the Company's Chairman and Chief Executive Officer, Daniel Laikin and Paul Skjodt, another shareholder of the Company acting in concert with Mr. Laikin, entered into an agreement (the "Laikin-Skjodt Agreement"; the transactions contemplated by the Laikin-Skjodt Agreement are referred to herein as the "Laikin-Skjodt Transactions") pursuant to which the parties agreed, among other things and subject to various conditions, that Mr. Laikin and Mr. Skjodt and/or their associates and affiliates (collectively referred to herein as the "Laikin-Skjodt Group") would purchase all of the interests of Mr. Jimirro in the Company (including common stock, vested stock options and common stock issuable upon exercise of Mr. Jimirro's stock appreciation rights) for aggregate consideration of approximately $4.6 million and, in accordance with Mr. Jimirro's employment agreement, the Company would pay Mr. Jimirro $2.5 million of deferred 11 compensation due upon a change in control of the Company ("Deferred Compensation"). The Laikin-Skjodt Agreement further provided, subject to various conditions, that the Laikin-Skjodt Group would purchase 227,273 shares of the Company's common stock from the Company for a purchase price of between approximately $5.21 and $9.90 per share, based on a formula, to partially fund the Company's Deferred Compensation obligation to Mr. Jimirro and may also acquire, at the Laikin-Skjodt Group's option, up to an additional 300,000 shares of the Company's common stock directly from the Company at a purchase price of $11.00 per share. The Laikin-Skjodt Group's obligations set forth above are subject to the satisfaction of certain conditions including due diligence and financing. The Laikin-Skjodt Agreement further provided that at the closing of the Laikin-Skjodt Transactions, Mr. Jimirro would resign as an officer and Director of the Company and enter into a long-term consulting and non-compete agreement with the Company providing for aggregate payments to Mr. Jimirro over time of approximately $3.8 million plus fringe benefits expected to cost the Company approximately $360,000 and would receive options, vesting over four years, to purchase up to 250,000 shares of the Company's common stock at a price equal to the average market price of such common stock during the five days immediately preceding the closing date of Laikin-Skjodt Transactions. The Company's obligations under the consulting and non-compete agreement would be secured by a lien on the Company's assets. Pursuant to the Laikin-Skjodt Agreement, Messrs. Laikin and Skjodt agreed to a standstill agreement effective during the period prior to the closing of the Laikin-Skjodt Transactions, which standstill agreement generally precludes Messrs. Laikin and Skjodt from purchasing or selling the Company's securities or exerting influence over the Company's governance, by solicitation of proxies or otherwise, and agreed to the same standstill agreement in the event that the closing of the Laikin-Skjodt Transactions does not occur prior to the termination date of the Laikin-Skjodt Agreement. The Company subsequently consented to a waiver of the initial standstill commitment in order to allow Messrs. Laikin and Skjodt to purchase up to 67,700 shares of the Company's common stock on the open market. The Laikin-Skjodt Agreement also provides for a tender offer by Messrs. Laikin and Skjodt for all the remaining outstanding shares of the Company's common stock at a price of $15.00 per share no later than the first anniversary of the closing of the Laikin-Skjodt Transactions if the Company's common stock does not trade at or above $15.00 per share for any twenty (20) days during any period of thirty (30) consecutive trading days during the 365 days following the consummation of the Laikin-Skjodt Transactions. Completion of the Laikin-Skjodt Transactions, which have been approved by the Company's board of directors, are subject to due diligence and financing contingencies, shareholder approval (if reasonably deemed necessary by the Company based upon the advice of counsel) and customary closing conditions and regulatory approvals. Messrs. Jimirro, Laikin and Skjodt, collectively holders of over 39% of the Company's outstanding common stock, have agreed to vote in favor of the Laikin-Skjodt Transactions if they are submitted to the Company's shareholders. The Laikin-Skjodt Transactions were originally scheduled to close on or before June 30, 2001 and the Laikin-Skjodt Agreement originally terminated in accordance with its terms on August 31, 2001. However, the termination date has been extended on four occasions by the agreement of the parties, most recently until November 15, 2001. There can be no assurance that the Laikin-Skjodt Group will be able to raise the necessary financing to consummate the Laikin-Skjodt Transactions or that the Laikin-Skjodt Transactions will otherwise close. 12 RESULTS OF OPERATIONS THE YEAR ENDED JULY 31, 2001 VS. THE YEAR ENDED JULY 31, 2000 For the year ended July 31, 2001, total revenues decreased by approximately 79% to $306,244 from $1,480,215 for the year ended July 31, 2000. This decrease resulted primarily from reduced trademark revenues from motion pictures including; "Animal House", "National Lampoon's Vacation," "National Lampoon's Dad's Week Off" and "National Lampoon's The Don's Analyst." Internet revenue of $13,685 while not material in the aggregate, was represented a 37% increase over July 2000 Internet revenues of $9,956. Internet revenue consists primarily of banner and sponsorship advertising. Video revenues of $22,151 in fiscal 2001 increased 38% from year 2000 video revenues of $16,020. This increase was due to additional sales of library video product in 2001 versus 2000. Costs related to trademark revenue, primarily royalties and commissions payable to third parties based on the Company's trademark revenues, decreased by approximately 85% to $22,221 for the year ended July 31, 2001 versus $144,578 during the same period last year. The decline in costs resulted primarily from decreased royalties due to reduced trademark revenues during the fiscal year ended July 31, 2001. Costs related to Internet revenues were approximately $36,040 for the year ended July 31, 2001 versus $283,929 for fiscal 2000, which represents a decline of 87%. Internet costs are direct expenses incurred by the Company to develop, maintain, and promote the Company's website excluding salaries and other general and administrative expenses incurred in connection with the Company's Internet operations. The Company developed its website during fiscal 2000, therefore expenditures to develop and promote the website were far more extensive for the year ended July 31, 2000 than they were for fiscal 2001. During the year ended July 31, 2001, and through November 15, 2001, the Company made significant expenditures to its lawyers, independent accountants, and investment bankers for advice and preparation of documentation related to the change of control pursued by Mr. Laikin. Proxy solicitation expenses for the year ended July 31, 2001 totaled $1,532,837. There were no equivalent proxy solicitation expenditures made by the Company during fiscal 2000. Selling, general and administrative expenses for the fiscal year ended July 31, 2001 increased to $1,221,338 versus $1,101,784 for the fiscal year ended July 31, 2000. This increase of approximately 11% resulted primarily from additional full-time staff in fiscal year 2001, and increases in rent, and insurance costs. During the year ended July 31, 2001, the Company recorded an expense of $379,695 related to stock appreciation rights ("SARs") granted to the Company's Chief Executive Officer. This expense resulted from an increase in the Company's stock price from July 31, 2000 to July 31, 2001 that increased the amount payable by the Company to the Chief Executive Officer upon exercise of the outstanding SARs, and the granting of additional shares during fiscal 2001. During the year ended July 31, 2000 the Company recorded a benefit of approximately $1,148,000 related to the SARs that resulted from a significant decrease in the Company's stock price from July 31, 1999 to July 31, 2000. The decrease in stock price decreased the amount payable by the Company to the Chief Executive Officer upon exercise of the outstanding SARs. Interest income during the year ended July 31, 2001 decreased to $55,551 versus approximately $87,365 for the same period last year. This decrease results from lower cash balances held during the year ended July 31, 2001 versus the year ended July 31, 2000. 13 There was no minority interest income or expense during fiscal 2001 because during the year ended July 31, 2000 there was a settlement of various claims made by the subsidiary's minority interest and a new structure was established that permanently separated the subsidiary from National Lampoon, and therefore from the Company. For the year ended July 31, 2001, the Company recorded a net loss of $3,076,516 versus a net income of $826,416 for the year ended July 31, 2000. This substantial decrease resulted primarily from; reduced trademark revenues of nearly $1.2 million, costs of attorneys and others pursuant to the Laikin groups desire to change control of the Company of over $1.5 million, and a change from an SAR benefit of over $1.1 million during the year ended July 31, 2000 to an SAR expense of $379.695 for fiscal 2001 which represents an increase in SAR expenses of over $1.5 million from fiscal 2000 to fiscal 2001. For additional explanation of the items just mentioned see above. Some of these increases in costs/decreases in revenues were offset by somewhat lower royalty costs due to lower revenues, and lower development costs for the Company's website during fiscal 2001. THE YEAR ENDED JULY 31, 2000 VS. THE YEAR ENDED JULY 31, 1999 For the year ended July 31, 2000, total revenues increased by approximately 19% to approximately $1,480,000 versus approximately $1,246,000 for the year ended July 31, 1999. This increase results primarily from increased trademark revenues from the motion pictures "National Lampoon's Vacation," "National Lampoon's Loaded Weapon I," "National Lampoon's Dad's Week Off" and "National Lampoon's The Don's Analyst." Internet revenue was approximately $10,000 resulting from banner and sponsorship advertising sales on the Company's website. During the year ended July 31, 1999, there was no Internet revenue as the Company's website was not launched until October 1999. Costs related to trademark revenue, primarily royalties and commissions payable to third parties based on the Company's trademark revenues, increased by approximately 30% to approximately $145,000 for the year ended July 31, 2000 versus approximately $112,000 during the same period last year. This increase results primarily from increased trademark revenues during the fiscal year ended July 31, 2000 for motion pictures that have significant third party obligations. Costs related to Internet revenues were approximately $284,000 for the year ended July 31, 2000. These costs are direct expenses incurred by the Company to develop, maintain and promote the Company's website excluding salaries and other general and administrative expenses incurred in connection with the Company's Internet operations. No similar costs were incurred during the year ended July 31, 1999 as the Company's website was not launched until October 1999. Selling, general and administrative expenses for the fiscal year ended July 31, 2000 increased to approximately $1,102,000 versus approximately $948,000 for the fiscal year ended July 31, 1999. This increase of approximately 16% results primarily from the addition of six full-time employees for its internet operations resulting in increased salaries and related payroll taxes and public company expenses that were partially offset by reductions in storage and legal expenditures. During the year ended July 31, 2000, the Company recorded a benefit of approximately $1,148,000 related to stock appreciation rights ("SARs") granted to the Company's Chief Executive Officer. This benefit resulted from a significant decrease in the Company's stock price from July 31, 1999 to July 31, 2000 that lowered the amount payable by the Company to the Chief Executive Officer upon exercise of the outstanding SARs. During the year ended July 31, 1999 the Company recorded an expense of approximately $1,700,000 related to the SARs that resulted from a significant increase in the Company's stock price from July 31, 1998 to July 14 31, 1999 that increased the amount payable by the Company to the Chief Executive Officer upon exercise of the outstanding SARs. Interest income during the year ended July 31, 2000 decreased to approximately $87,000 versus approximately $99,000 for the same period last year. This decrease results from lower cash balances held during the year ended July 31, 2000 versus the year ended July 31, 1999. The minority interest in the income of a consolidated subsidiary increased to approximately $114,000 during the year ended July 31, 2000 versus approximately $68,000 during the year ended July 31, 1999. This increase results primarily from increased interest income earned by the subsidiary during the year ended July 31, 2000 versus the year ended July 31, 1999 and a one-time charge of approximately $23,000 recorded during the year ended July 31, 2000 to reflect the settlement of various claims made by the subsidiary's minority interest. During the year ended July 31, 1999, the Company recorded other income of approximately $436,000 related to the reduction of certain royalties and other expenses (including a contingent payment on the sale of stock issued to settle certain liabilities) accrued in previous years that were settled or otherwise satisfied at reduced levels. There were no such items recorded during the year ended July 31, 2000. For the year ended July 31, 2000, the Company recorded net income of approximately $826,000 versus a net loss of approximately $1,299,000 for the year ended July 31, 1999. This substantial increase in net income results primarily from the benefit recorded during the year ended July 31, 2000 of approximately $1,148,000 relating to SARs and increased trademark revenues from motion pictures partially offset by Internet operations expenditures and increased general and administrative expenses. LIQUIDITY AND CAPITAL RESOURCES The Company's principal sources of working capital during the fiscal year ended July 31, 2001 included; trademark and other income of approximately $306,000 and $200,000 from the Laikin group in order to extend the deadline reflected in the Letter Agreement dated March 5, 2001, to complete the purchase of the Company. The Company's management is not certain that its existing cash resources will be sufficient to fund its ongoing operations for the next six to twelve months, assuming that the transaction contemplated by the Laikin-Skjodt Agreement is not consummated. Unless the Company's Internet revenues or revenues from other business activities significantly increase during that period, the Company may need to raise additional capital to continue to fund its current operations or, in the alternative, significantly reduce or even eliminate some of its operations. There can be no assurance that the Company will be able to raise such capital on reasonable terms, or at all. If a change of control results as part of the Letter Agreement dated March 5, 2001, the significant contingent amounts due an officer discussed below and in ITEM 11. - EXECUTIVE COMPENSATION could be triggered which would result in a net capital deficiency and the need for the Company to obtain additional capital. In the event the transactions discussed in Recent Developments are consummated, the Company's new management will need to evaluate the Company's liquidity and capital resources in relation to their intended plans for the Company. Substantially all of the proceeds from the sale of the 227,273 common shares which the Laikin-Skjodt Group are obligated to purchase if the transactions discussed in Recent Developments are consummated will be used to satisfy a portion of the Deferred Compensation due to Mr. Jimirro. However, the Letter Agreement does allow the Laikin-Skjodt Group, at the closing, to 15 purchase up to an additional 300,000 common shares directly from the Company at a purchase price of $11.00 per share. If the Laikin-Skjodt Group does not purchase these shares, the Company may need to obtain third party financing to continue its operations. There can be no assurance that the Company will be able to obtain such financing on reasonable terms or at all. As indicated above, if the Laikin-Skjodt Agreement is consummated, the Company has been advised by its independent auditors that it will be required to record an expense related to the difference between the purchase price and the fair market value of the shares or stock options sold by the Company and Mr. Jimirro. The exact amount of these charges cannot be determined until consummation of the transactions and are dependent upon the market price of the Company's common stock on the closing date and dependent on the number of additional shares purchased by the Laikin-Skjodt Group. However, if the Laikin-Skjodt Group purchases all 300,000 additional shares and if the market price for the Company's common stock on the closing date of the transactions is between $10.00 and $15.00, these charges are estimated to be between $2.5 million and $2.8 million. In addition, pursuant to the transactions, Mr. Jimirro will resign his officer and director positions with the Company, receive deferred compensation owed to him of approximately $2.5 million and enter into a long-term consulting and non-compete agreement with the Company with aggregate payments to Mr. Jimirro over time of approximately $3.8 million plus fringe benefits expected to cost approximately $360,000 over the life of the consulting and non-compete agreement. At the closing of the transactions, Mr. Jimirro will also receive options that vest over four years to purchase up to 250,000 shares of the Company's common stock at a price equal to the average market price of such common stock during the five trading days immediately preceding the closing date of the transactions. The Company's obligations under the consulting and non-compete agreement will be secured by a lien on its assets. If the transactions are consummated, the Company estimates that it will record expenses upon closing relating to Mr. Jimirro's deferred compensation and consulting and non-compete agreement in the aggregate amount of approximately $6.7 million. In addition, the Company will be required to record an expense1 relating to the grant of options to Mr. Jimirro that is dependent upon the market price of the Company's common stock on the closing date. If the price for the Company's common stock on that date is between $10.00 and $15.00, this charge is estimated to be between $2.0 million and $2.5 million. For the twelve months ended July 31, 2001, the Company's net cash flows used in its operating activities was $1,486,834, a decrease of $1,253,535 versus $233,299 of net cash flow used in operating activities during the twelve months ended July 31, 2000. This decrease resulted primarily from a decrease in trademark licensing income during the year ended July 31, 2001, and expenditures related to the Company's activities concerning the Laikin group. At October 15, 2001, the Company had cash and cash equivalents of approximately $471,880 as compared to $1,883,941 at July 31, 2000. FUTURE COMMITMENTS The Company does not have any material future commitments for capital expenditures, subject however, to the consummation of the Laikin-Skjodt Agreement, which will entail the incurrence of significant future payments to Mr. Jimirro as indicated above. However, the Company has and will continue to use its working capital to fund its Internet operations that, during the twelve months ended July 31, 2001, generated approximately $14,000 of revenue 16 and have resulted in segment operating losses of approximately $787,000 (SEE NOTE H - SEGMENT INFORMATION). Due to substantial competition among companies with internet-based business strategies and the developing economics of the internet in general, it is uncertain when, and if, the Company will be able to generate revenues from its Internet operations sufficient to offset the significant costs incurred to date and the ongoing costs that the Company expects to incur in the future to support its Internet operations. In connection with Mr. Laikin's notice and the subsequent discussions with Mr. Laikin as discussed in LIQUIDITY AND CAPITAL RESOURCES, the Company has, as of October 24, 2001, received a total of $450,000 from the Laikin group. Please See "Management's Discussion and Analysis of Financial Position and Results of Operations -- The Laikin-Skjodt Agreement." New Accounting Pronouncements: In July 2001, the FASB issued SFAS No. 141 "Business Combinations." SFAS No. 141 supersedes Accounting Principles Board ("APB") No. 16 and requires that any business combinations initiated after June 30, 2001 be accounted for as a purchase; therefore, eliminating the pooling-of-interest method defined in APB 16. The statement is effective for any business combination initiated after June 30, 2001 and shall apply to all business combinations accounted for by the purchase method for which the date of acquisition is July 1, 2001 or later. The Company does not expect the adoption to have a material impact to the Company's financial position or results of operations since the Company has not participated in such activities covered under this pronouncement. In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangibles." SFAS No. 142 addresses the initial recognition, measurement and amortization of intangible assets acquired individually or with a group of other assets (but not those acquired in a business combination) and addresses the amortization provisions for excess cost over fair value of net assets acquired or intangibles acquired in a business combination. The statement is effective for fiscal years beginning after December 15, 2001, and is effective July 1, 2001 for any intangibles acquired in a business combination initiated after June 30, 2001. The Company is evaluating any accounting effect, if any, arising from the recently issued SFAS No. 142, "Goodwill and Other Intangibles" on the Company's financial position or results of operations. In October 2001, the FASB recently issued SFAS No. 143, "Accounting for Asset Retirement Obligations," which requires companies to record the fair value of a liability for asset retirement obligations in the period in which they are incurred. The statement applies to a company's legal obligations associated with the retirement of a tangible long-lived asset that results from the acquisition, construction, and development or through the normal operation of a long-lived asset. When a liability is initially recorded, the company would capitalize the cost, thereby increasing the carrying amount of the related asset. The capitalized asset retirement cost is depreciated over the life of the respective asset while the liability is accreted to its present value. Upon settlement of the liability, the obligation is settled at its recorded amount or the company incurs a gain or loss. The statement is effective for fiscal years beginning after June 30, 2002. The Company does not expect the adoption to have a material impact to the Company's financial position or results of operations. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". Statement 144 addresses the accounting and reporting for the impairment or disposal of long-lived assets. The statement provides a single accounting model 17 for long-lived assets to be disposed of. New criteria must be met to classify the asset as an asset held-for-sale. This statement also focuses on reporting the effects of a disposal of a segment of a business. This statement is effective for fiscal years beginning after December 15, 2001. The Company does not expect the adoption to have a material impact to the Company's financial position or results of operations. ITEM 8. FINANCIAL STATEMENTS The consolidated financial statements of J2 Communications are listed on the Index to Financial Statements set forth on page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Please refer to Form 8-K filed with the SEC on July 30, 2001 reflecting the selection of Stonefield Josephson as the Company's independent auditors for the fiscal year ending July 31, 2001 and replacing the firm of Arthur Andersen LLP who has served as the Company's independent auditors since the fiscal year ended July 31, 1995 PART III. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth information with respect to the directors and executive officers of the Company. Directors are elected at the annual meeting of stockholders to serve a one-year term and until their successors are elected and qualified. Officers serve at the request of the Board of Directors of the Company. There are no family relationships among any of the directors or executive officers.
Director Name Age Position Since ---- --- -------- ----- James Jimirro 64 Chairman, President and Chief 1986 Executive Officer James Fellows 65 Director 1986 Bruce Vann 45 Director 1987 John De Simio 49 Director 1998 Gary Cowan 66 Director 2000 Daniel Laikin 39 Director 2000
18 EXECUTIVE OFFICERS AND DIRECTORS JAMES P. JIMIRRO has been employed by the Company as President and Chief Executive Officer 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 to 1985, Mr. Jimirro served as the first President of the Disney Channel, a national cable pay-television channel, which Mr. Jimirro conceived and implemented. Mr. Jimirro continued in a consulting capacity for the Walt Disney Company through July of 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 the Walt Disney Company. Prior to 1973, Mr. Jimirro directed international sales for CBS, Inc., and later for Viacom International. Mr. Jimirro also served as a member of the Board of Directors of Rentrak Corporation between January 1990 and September 2000. 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 in Washington, D.C., and became its President and Chief Executive Officer in 1978. Mr. Fellows is a director of numerous nonprofit corporations including the Hartford Gunn Institute, a research and planning service for public telecommunications; the Maryland Public Broadcasting Foundation, a corporate fund-raiser for public television; and the American Center for Children and Media, a coalition of organizations committed to improving media services for children and youth. BRUCE P. VANN has been a principal of the law firm of Kelly, Lytton, Mintz & Vann LLP since December 1995. From 1989 through December 1995 he was a partner in the law firms of Keck, Mahin & Cate and Meyer & Vann. Mr. Vann specializes in corporate and securities matters. From January 1994 through December 1998, Mr. Vann served, on a non-exclusive basis, as Senior Vice President, Business and Legal Affairs, of Largo Entertainment, Inc., a subsidiary of the Victor Company of Japan. JOHN DE SIMIO has been in the entertainment side of the public relations business since 1976. From 1988 to 1996, Mr. De Simio was a Senior Vice President, Publicity/Promotion for Castle Rock Entertainment, where he oversaw publicity and national promotional campaigns for their theatrical and television productions. Before moving to Castle Rock, Mr. De Simio was National Publicity Director of Twentieth Century Fox Film Corporation from 1985 to 1988. Mr. De Simio currently serves on the boards of Theatre LA and The Broadcast Film Critics Association. GARY COWAN, a certified public accountant, has served as Chief Financial Officer for a broad range of companies, including U.S. Vacation Resorts, Inc., the Coastland Corporation, and Superscope Inc. In addition, he was Vice President, Financial Analysis and Review, for Dart Industries. From 1993 through 1997, Mr. Cowan served as Chief Financial Officer of the Company and was a member of the Board of Directors. He is currently an independent consultant in strategic financial planning and accounting. Mr. Cowan holds a B.S. in accounting and a M.B.A. from U.C.L.A. 19 DANIEL LAIKIN currently serves as co-Chairman of Biltmore Homes, Inc., an Indiana based home building and real estate development company. He is also managing partner of Four Leaf Partners, LLC, a closely held investment company, concentrating on the startup and financing of high tech and Internet related companies. He is currently an advisor to the board of directors of Focus Affiliates, Inc. and is on the advisory board of iNetNow. ITEM 11. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The following table sets forth the compensation for each of the last three fiscal years of the Company's Chief Executive Officer and up to four other executive officers of the Company ("Named Officers") whose annual salary and bonus exceeded $100,000 during the fiscal year ended July 31, 2001.
Long Term Annual Compensation Compensation ------------------------ --------------------- Other Annual Stock All Other Compensation SARs Options Compensation Name and Position Year Salary ($) ($) (Shares) (Shares) ($) ----------------- ---- ---------- ----------- -------- -------- ----------- James Jimirro 2001 190,750(1) 0 25,000 25,000 Chairman, President and 2000 190,750(1) 913,724 25,000 25,000 287,812(3) Chief Executive Officer 1999 190,750(1) 0 16,667 16,667 441,000(3) Christopher Trunkey (4) 2001 117,500 0 0 21,000 0 Vice President, Chief Financial Officer
--------------- (1) Mr. Jimirro has voluntarily deferred all "Base Salary," as defined by the applicable employment agreement, in excess of $190,750. Such deferred amounts are payable only upon a "Change of Control" of the Company as defined by the applicable employment agreement and are included in "All Other Compensation" hereunder. (2) Represents the difference between the exercise price and the market price on the date of exercise for 66,668 stock options exercised by Mr. Jimirro on November 30, 1999. (3) Represents salary voluntarily deferred by Mr. Jimirro that is payable only upon a "Change of Control" as defined by the applicable employment agreement. Does not include interest at the rate of 5% per annum on amounts deferred also payable upon a "Change in Control." (4) Mr. Trunkey joined the Company on January 31, 2000 and is included hereunder pursuant to Item 402(a)(3)(iii) of Regulation S-K. Mr. Trunkey resigned from the Company on August 24, 2001. STOCK OPTION AND STOCK APPRECIATION RIGHTS GRANTS The following table sets forth the individual grants of stock options and stock appreciation rights made during the fiscal year ended July 31, 2001 to the Named Officers:
Potential Realized Valu at Assumed Annual % of Total Rates of Stock Price Options/SARs Appreciation Options/ Granted to Exercise for Option Term SARs Employees Or Base Expiration ---------------------- Name Granted in Fiscal Year Price($/Sh) Date 5%($) 10%($) ---- ------- -------------- ----------- ------------ --------- --------- James Jimirro 25,000(1) 17% 14.76 12/28/2009 203,750 501,750 25,000(1) 100% 14.76 12/28/2009 203,750 501,750 Christopher Trunkey 21,000(2) 14% 12.75 01/31/2007 91,140 206,640
20 - ------------ (1) The options and SARs granted to Mr. Jimirro were immediately exercisable upon grant. The exercise and base prices of the options and SARs granted to Mr. Jimirro are equal to the average of the high and low bid and asked price during the five (5) business days preceding the date of grant. The market price on the date of grant was $14.50. (2) The options granted to Mr. Trunkey are exercisable one-third one year from the date of grant, one-third two years from the date of grant and one-third three years from the date of grant. STOCK OPTION AND STOCK APPRECIATION RIGHTS EXERCISES AND YEAR-END VALUES Shown below is information for the Named Officers with respect to the exercise of stock options and the ownership of stock options and stock appreciation rights and their values as of July 31, 2001.
Value of Unexercised Number of Unexercised In-the-Money Options/ Options/SARs at July 31, 2001 SARs at July 31, 2001 (1) Shares --------------------------- --------------------------- Acquired Value Exercisable Unexercisable Exercisable Unexercisable Name On Exercise Realized ($) (Shares) (Shares) ($) ($) ---- ----------- ------------ -------- ------------ --------- --------- James Jimirro 0 0 158,335 0 847,771 0 Christopher Trunkey 0 0 0 21,000 0 0
- --------------- (1) Based upon the difference between the closing price on July 31, 2000 and the option exercise price or stock appreciation rights base price. DIRECTOR COMPENSATION On the date of each annual meeting held by the Company, all directors, excluding Mr. Jimirro, completing a year of service receive options to purchase up to 1,333 shares at the market price on the date of grant that are immediately exercisable. Mr. Jimirro's compensation as a director is pursuant to the employment agreement described under "Employment Agreements." EMPLOYMENT AGREEMENTS The Company has entered into a Restated Employment Agreement dated July 1, 1999 ("1999 Agreement") with James P. Jimirro, its Chairman, President and Chief Executive Officer. The 1999 Agreement has a term of seven years ("Term") and provides for a base salary of $475,000 with annual increases equal to the greater of 9% or 5% plus the percentage increase in the Consumer Price Index. The 1999 Agreement also provides for (i) an annual bonus of 5% to 9% of the Company's pre-tax earnings in excess of $500,000, (ii) an annual grant of immediately exercisable stock options covering 25,000 shares of the Company's common stock, (iii) an annual grant of immediately exercisable stock appreciation rights relating to 25,000 shares of the Company's common stock, and (iv) such other benefits including medical insurance, an automobile and the reimbursement of business expenses as have previously been provided to Mr. Jimirro. Also, pursuant to the 1999 Agreement, Mr. Jimirro received a contingent note ("Contingent Note") in the principal sum of approximately $2,151,000 representing salary payable to Mr. Jimirro pursuant to previous employment agreements that was voluntarily deferred by Mr. Jimirro between January 1, 1993 and June 30, 1999. The Contingent Note bears interest at the rate of 7% per year. Mr. Jimirro has continued to voluntarily defer all salary in excess of approximately $191,000 payable under the 1999 Agreement and has the right to request the issuance of additional contingent notes to reflect such additional deferrals. The 21 deferred compensation due to Mr. Jimirro as part of the March 5, 2001 "Letter Agreement" with the "Laikin-Skjodt Group" is $2.5 million (see Item 7. Recent Developments above). The Contingent Note and any subsequent salary deferrals are payable only upon a "Change of Control" as defined in the 1999 Agreement. In addition, upon any "Change of Control" of the Company or any one of the "Executive Termination Events," all as defined in the 1999 Agreement, Mr. Jimirro is generally entitled to receive a lump sum payment of all salary due for the remaining Term (excluding subsequent annual increases) and to continue to receive all benefits, bonuses, stock options and stock appreciation rights for the remaining Term. Further, to the extent the aforesaid payments result in any excise tax liability under the Internal Revenue Code of 1986, the Company is obligated to make an additional payment to Mr. Jimirro equal to the amount of such excise taxes plus any income or other payroll taxes resulting from such excise tax payment. In addition, Mr. Jimirro, at his request, shall be engaged as a consultant to the Company for a term of five years at the annual rate of 50% of his salary at the time of termination. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Company's Board of Directors does not have a compensation or similar committee. Mr. Jimirro's employment agreement was negotiated on behalf of the Company by Mr. Vann and approved by all of the Company's directors, other than Mr. Jimirro who abstained, at a special meeting of the Board of Directors held on October 14, 1999. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT PRINCIPAL STOCKHOLDERS The following table sets forth certain information, as of October 16, 2001, concerning ownership of shares of Common Stock by each person who is known by the Company to beneficially own more than 5% of the issued and outstanding Common Stock of the Company:
Number of Percent of Name of Beneficial Owner Shares Class ------------------------ ----------- --------- James Jimirro (1) 308,668(2) 22.4% Daniel Laikin (1) 166,900(3) 12.1% Paul Skjodt (1) 159,300(3) 11.1% Christopher Williams (1) 129,900(4) 9.1% Carroll Edwards (1) 95,000(5) 6.6% Timothy S.Durham (6) 87,699(7) 6.3%
- --------------- (1) The address for Mr. Jimirro is 10850 Wilshire Blvd., Suite 1000, Los Angeles, California 90024. The address for Mr. Laikin and Mr. Skjodt is 25 West 9th Street, Indianapolis, Indiana 46204. The address for Mr. Williams is PO Box 21207, Santa Barbara, California 93121. The address for Mr. Edwards is PO Box 219, Marshville, North Carolina 28103. (2) Includes options to purchase up to 75,001 shares that are presently exercisable. (3) Based upon a joint Schedule 13D filed by Mr. Laikin and Mr. Skjodt as amended August 11, 2001. Mr. Laikin and Mr. Skjodt ---- disclaim voting power or any voting agreement or arrangements over the shares beneficially owned by the other. 22 (4) Mr. Williams filed a Schedule 13G on January 20, 2000 claiming beneficial ownership of 89,000 shares. The Company has information that as of August 22, 2000 Mr. Williams is the beneficial owner of the shares indicated. (5) To the Company's knowledge, Mr. Edwards has not filed any Schedule 13D or 13G with the Securities and Exchange Commission. The Company has information that as of August 22, 2000 Mr. Edwards is the beneficial owner of the shares indicated. (6) The address for Mr. Durham is 111 Monument Circle, Suite 3680, Indianapolis, Indiana 46204. (7) Based on a Schedule 13d filed by Mr. Durham on August 10, 2001. The information contained in this table is derived, in part, from a listing of Non-objecting Beneficial Owners of the Company's common stock dated as of August 22, 2000 and information filed by various holders on Schedules 13D and 13G. By presenting the foregoing information, the Company does not necessarily accept the accuracy of the information disclosed herein including, but not limited to, the number of shareholders in the Laikin/Skjodt group, the number of shares owned or controlled by the Laikin/Skjodt group and/or the relationship of Christopher Williams or Carroll Edwards, among others, to such group. SECURITY OWNERSHIP OF MANAGEMENT The following table sets forth, as of October 23, 2001, certain information concerning ownership of shares of Common Stock by each executive officer and director of the Company and by all executive officers and directors of the Company as a group:
Name of Director Number of Percent of or Executive Officer Shares Class -------------------- ------ ----- James Jimirro (1) 308,668(2) 22.4% Daniel Laikin (1) 166,900(3) 12.1% James Fellows (1) 15,833(4) 1.1% Bruce Vann (1) 14,998(4) 1.1% John De Simio (1) 3,666(5) *** Gary Cowan (1) 2,333(4) *** Christopher Trunkey (1) -- -- All directors and executive officers as A group (7 persons) 512,398(6) 37.1%
- --------------- *** Less than one percent (1) The address for each director or officer except for Mr. Laikin is 10850 Wilshire Blvd., Suite 1000, Los Angeles, California 90024. The address for Mr. Laikin is 25 West 9th Street, Indianapolis, Indiana 46204. (2) Includes options to purchase up to 75,001 shares that are presently exercisable. (3) Based upon a joint Schedule 13D filed by Mr. Laikin and Mr. Skjodt as amended August 11, 2000. Mr. Laikin and Mr. Skjodt disclaim voting power or any voting agreement or arrangements over the shares beneficially owned by the other. (4) Represents options to purchase up to the number of shares indicated that are presently exercisable. (5) Includes options to purchase up to 1,333 shares that are presently exercisable. (6) Includes options to purchase up to 95,498 shares that are presently exercisable. Please see "Management's Discussion and Analysis of Financial Position and Results of Operations - The Laikin-Skjodt Agreement" for a discussion of certain transactions affecting the ownership of the Company's Common Stock by certain of its executive officers and directors. Except for the Laikin-Skjodt Agreement, the Company does not know of any arrangements, including any pledge of the Company's securities, the operation of which at a subsequent date may result in a change of control of the Company. 23 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS Bruce Vann, one of the Company's directors, is a partner of the law firm Kelly, Lytton and Vann retained by the Company for various legal matters. Legal expenses of approximately $46,000 were incurred with respect to work performed by Mr. Vann's firm for the Company during the fiscal year ended July 31, 2001. On July 14, 1986, James P. Jimirro, the Company's Chairman, President and Chief Executive Officer purchased 192,000 shares of the Company's common stock for approximately $115,000. For such shares, the Company received the sum of approximately $58,000 and a note ("Note") for approximately $58,000. The Note bears interest at the rate of 10% per annum and, pursuant to a July 14, 1986 Pledge and Security Agreement, is secured by the shares purchased. The unpaid principal and interest outstanding at July 31, 2001 was approximately $146,000. The Company, Mr. James P. Jimirro, the Company's Chairman and Chief Executive Officer, and Mr. Daniel Laikin, a Director of the Company have entered into the Laikin-Skjodt Agreement. Please see "Management's Discussion and Analysis of Financial Position and Results of Operations - The Laikin-Skjodt Agreement." PART IV. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (A) EXHIBITS (NUMBERED IN ACCORDANCE WITH ITEM 601 OF REGULATION S-K) 2.1 Acquisition Agreement dated as of July 31, 1990 between Registrant, J2 Acquisition Corp., National Lampoon, Inc., Daniel L. Grodnick and Tim Matheson and related Agreement and Plan of Merger. (1) 3.1 Restated Articles of Incorporation of Registrant filed July 17, 1986. (2) 3.2 Certificate of Amendment of Restated Articles of Incorporation filed April 27, 1989. (9) 3.3 Certificate of Amendment of Restated Articles of Incorporation filed July 14, 1993. (9) 3.4 Certificate of Amendment of Restated Articles of Incorporation filed October 29, 1998. (3) 3.5 Bylaws of Registrant. (2) 3.6 Amendment to Bylaws of Registrant dated July 15, 1999. (4) 3.7 Amendment to Bylaws of Registrant dated August 18, 2000. (5) 4.1 Rights Agreement between Registrant and U.S. Stock Transfer Corporation dated July 15, 1999. (4) 4.2 Amendment to Rights Agreement between Registrant and U.S. Stock Transfer Corporation dated March 5, 2001. (9) 10.1 Employee Stock Purchase Plan adopted June 30, 1986. (2) 10.2 Agreement between Registrant and Harvard Lampoon, Inc. dated October 1, 1998. (6) 24 10.3 Restated Employment Agreement between Registrant and James Jimirro dated as of July 1, 1999. (7) 10.4 Contingent Note issued by Registrant to James Jimirro dated as of July 1, 1999. (7) 10.5 Registrant's Amended and Restated 1999 Stock Option, Deferred Stock and Restricted Stock Plan dated October 14, 1999. (8) 10.6 Employment Agreement between Registrant and Christopher Trunkey dated January 21, 2000. (9) 10.7 First Amendment to Office Lease between Registrant and Avco Center Corporation dated April 21, 2000. (9) 10.8 Letter Agreement between Registrant and Batchelder & Partners, Inc. dated August 16, 2000. (9) 10.9 Amendment to Letter Agreement between Registrant and Batchelder & Partners, Inc. dated August 30, 2000. (9) 10.10 Warrant issued by Registrant to George Vandemann dated August 18, 2000. (9) 10.11 Form of Restated Indemnification Agreement. (6) 10.12 Laikin-Skjodt Agreement, dated March 5, 2001 (10) 21 Subsidiaries of Registrant. (11) 27 Financial Data Schedule. (11) - ------------ (1) Incorporated by reference to Form S-4 filed on August 2, 1990, as amended September 18, 1990. (2) Incorporated by reference to Form S-1 filed on July 28, 1986, as amended September 22, 1986 and October 2, 1986. (3) Incorporated by reference to Form 10-K for the fiscal year ended July 31, 1998. (4) Incorporated by reference to Form 8-K filed July 16, 1999. (5) Incorporated by reference to Form 8-K filed August 22, 2000. (6) Incorporated by reference to Form 10-Q for the period ended October 31, 1998. (7) Incorporated by reference to Form 10-K for the fiscal year ended July 31, 1999. (8) Incorporated by reference to Schedule 14A filed December 13, 1999. (9) File herewith. (10) Incorporated by reference to the Form 10-Q filed by the Company on March 14, 2001. (11) Filed electronically herewith with the Securities and Exchange Commission, omitted in copies distributed to shareholders or other persons. (b) FORMS 8-K On August 11, 2000, the Company filed a Current Report on Form 8-K reporting under Item 5. thereof that on August 11, 2000, the Company received a request from Daniel Laikin, a member of the Company's Board of Directors, requesting a special meeting of the Company shareholders be called for September 18, 2000 for the purpose of removing the Company's incumbent directors and electing a new Board of Directors, among other things. On August 21, 2000, the Company filed a current Report on Form 8-K reporting under Item 5. thereof the adoption of an amendment to the Company's Bylaws. (c) SEE (a) ABOVE 25 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. Date: November 13, 2001 By: /s/ James Jimirro ---------------------- James Jimirro, Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ James Jimirro Chairman of the Board of November 12, 2001 - ---------------------------- Directors and Chief Executive James Jimirro Officer (Principal Executive Officer) /s/ James Toll Chief Financial Officer November 12, 2001 - ---------------------------- James Toll /s/ James Fellows Director November 12, 2001 - ---------------------------- James Fellows /s/ Bruce Vann Director November 12, 2001 - ---------------------------- Bruce Vann /s/ John De Simio Director November 12, 2001 - ---------------------------- John De Simio /s/ Gary Cowan Director November 12, 2001 - ---------------------------- Gary Cowan Director November 12, 2001 - ---------------------------- Daniel Laikin
26 J2 COMMUNICATIONS AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED JULY 31, 2000 Reports of Independent Public Accountants F-2/F3 Consolidated Balance Sheets as of July 31, 2001 and 2000 F-4 Consolidated Statements of Operations for the Years Ended July 31, 2001, 2000 and 1999 F-5 Consolidated Statements of Shareholders' Equity for the Years Ended July 31, 2001, 2000 and 1999 F-6 Consolidated Statements of Cash Flows for the Years Ended July 31, 2001, 2000 and 1999 F-7 Notes to Consolidated Financial Statements F-8
F-1 INDEPENDENT AUDITORS' REPORT Board of Directors J2 Communications Los Angeles, California We have audited the accompanying consolidated balance sheets of J2 Communications and Subsidiaries (the "Company") as of July 31, 2001, and the related consolidated statements of operations, shareholders' equity and cash flows for the year ended July 31, 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. 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 consolidated 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. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of J2 Communications as of July 31, 2001 and the results of their operations and their cash flows for the year ended July 31, 2001 in conformity with accounting principles generally accepted in the United States. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note C to the consolidated financial statements, the Company has significant contingent payments due an officer upon a change of control event. The Company and its Chairman are currently in negotiations with certain shareholders to acquire all interests in the Company held by the Chairman (Note K), after which the Chairman will resign. Consummation of this transaction would trigger the obligations due discussed in Note C, which as the Company may not be able to meet raises substantial doubt about its ability to continue as a going concern. The Company's new management will need to evaluate the Company's liquidity and capital measures. Management's plans in regard to these matters are also described in Note K. The financial statements do not include any adjustments to asset carrying amounts or the amount and classification of liabilities that might result from the outcome of this uncertainty. CERTIFIED PUBLIC ACCOUNTANTS Santa Monica, California October 8, 2001 F-2 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To J2 Communications: We have audited the accompanying consolidated balance sheet of J2 Communications and Subsidiaries (the "Company") as of July 31, 2000, and the related consolidated statements of operations, shareholders' equity and cash flows for the years ended July 31, 2000 and 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. 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 consolidated 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 A to the consolidated financial statements, a significant portion of the Company's assets is composed of certain intangible assets. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of J2 Communications as of July 31, 2000 and the results of their operations and their cash flows for the two years ended July 31, 2000 and 1999 in conformity with accounting principles generally accepted in the United States. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note K to the consolidated financial statements, in August 2000, the Company received notice from a member of the Board of Directors requesting that a special meeting of the Company's shareholders be called for the purported purpose of nominating a slate of six new directors and replacing all of the Company's incumbent directors. As of October 24, 2000, the Company is currently engaged in discussions with this Director regarding the notice and related matters. Management cannot predict the outcome of these discussions at this time. As discussed in Note C to the consolidated financial statements, the Company has significant contingent payments due an officer upon a change of control event. If a change of control event results as part of these discussions, the amounts due discussed in Note C would be triggered and result in a net capital deficiency that raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note K. The consolidated financial statements do not include any adjustments to asset carrying amounts or the amount and classification of liabilities that might result from the outcome of this uncertainty. Arthur Andersen LLP Los Angeles, California October 24, 2000 F-3 J2 COMMUNICATIONS AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
AS OF JULY 31, 2001 2000 ------------ ------------ CURRENT ASSETS Cash and cash equivalents $ 324,472 $ 1,883,750 Accounts receivable 0 6,580 Inventory 0 0 Prepaid expenses and other current assets 32,685 22,214 ----------- ----------- Total current assets 357,157 1,912,544 NON-CURRENT ASSETS Fixed assets, net of accumulated depreciation 8,451 19,816 Intangible assets, net of accumulated amortization 2,936,154 3,176,154 Other assets 0 10,758 ----------- ----------- Total non-current assets 2,944,605 3,206,728 ----------- ----------- TOTAL ASSETS $ 3,301,762 $ 5,119,272 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 242,451 $ 291,567 Accrued expenses 620,705 374,692 Settlement payable 203,117 203,117 Stock appreciation rights payable 843,096 568,820 Extension payments (Note K) 200,000 0 ----------- ----------- Total current liabilities 2,109,369 1,438,196 ----------- ----------- TOTAL LIABILITIES 2,109,369 1,438,196 ----------- ----------- SHAREHOLDERS' EQUITY Preferred Stock, no par value, 2,000,000 shares authorized, no shares issued and outstanding 0 0 Common Stock, no par value, 15,000,000 shares authorized, 1,371,116 and 1,337,046 shares issued, respectively 9,616,767 9,024,778 Less: Note receivable on common stock (145,700) (139,940) Less: Treasury stock, at cost, 1,166 shares 0 (1,603) Deficit (8,278,674) (5,202,159) ----------- ----------- TOTAL SHAREHOLDERS' EQUITY 1,192,393 3,681,076 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 3,301,762 $ 5,119,272 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-4 J2 COMMUNICATIONS AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JULY 31, 2001 2000 1999 ----------- ----------- ---------- REVENUES Trademark $ 270,408 $ 1,454,239 1,230,284 Video 22,151 16,020 16,188 Internet 13,685 9,956 0 ----------- ----------- ----------- Total revenue 306,244 1,480,215 1,246,472 COSTS AND EXPENSES Costs related to trademark revenue 22,221 144,578 111,598 Costs related to video revenue 4,580 3,583 12,793 Costs related to internet revenue 36,040 283,929 0 Amortization of intangible assets 240,000 240,000 240,000 Proxy solicitation 1,532,837 0 0 Selling, general & administrative expenses 1,221,338 1,101,784 947,632 Stock appreciation rights (benefit)/expense 379,695 (1,148,056) 1,699,745 ----------- ----------- ----------- Total costs and expenses 3,436,711 625,818 3,011,768 ----------- ----------- ----------- OPERATING INCOME/(LOSS) (3,130,467) 854,397 (1,765,296) OTHER INCOME/(EXPENSE) Interest income 55,551 87,365 98,845 Minority interest in income of consolidated subsidiary 0 (113,846) (68,102) Reduction of accrued liabilities 0 0 435,665 ----------- ----------- ----------- Total other (expense)/income 55,551 (26,481) 466,408 ----------- ----------- ----------- INCOME/(LOSS) BEFORE INCOME TAXES (3,074,916) 827,916 (1,298,888) Provision for income taxes 1,600 1,500 0 ----------- ----------- ----------- NET INCOME/(LOSS) ($3,076,516) $ 826,416 ($1,298,888) =========== =========== =========== Earnings/(loss) per share - basic ($ 2.26) $ 0.64 ($ 1.07) =========== =========== =========== Weighted average number of common shares -basic 1,358,342 1,289,930 1,211,728 =========== =========== =========== Earnings/(loss) per share - diluted ($ 2.26) $ 0.62 ($ 1.07) =========== =========== =========== Weighted average number of common and common equivalent shares - diluted 1,358,342 1,341,661 1,211,728 =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-5 J2 COMMUNICATIONS AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Common Note Total Stock Stock Receivable on Treasury Shareholders' Shares Amount Common Stock Stock Deficit Equity --------- ------ ------------ -------- ------- ------------- Balance at July 31, 1998 1,200,000 8,662,995 (128,420) (1,603) (4,729,687) 3,803,285 Interest on note receivable -- 5,760 (5,760) -- -- -- Exercise of stock options 17,045 47,836 -- -- -- 47,836 Stock issued in settlement of liabilities 16,667 37,501 -- -- -- 37,501 Net loss -- -- -- -- (1,298,888) (1,298,888) ---------- --------- ---------- -------- ----------- ----------- Balance at July 31, 1999 1,233,712 8,754,092 (134,180) (1,603) (6,028,575) 2,589,734 Interest on note receivable -- -- (5,760) -- -- (5,760) Exercise of stock options 103,334 270,686 -- -- -- 270,686 Net income -- -- -- -- 826,416 826,416 ---------- --------- ---------- -------- ----------- ----------- Balance at July 31, 2000 1,337,046 $ 9,024,778 ($ 139,940) ($ 1,603) ($5,202,159) $ 3,681,076 Interest on note receivable -- (5,760) -- (5,760) Cancel Treasury Stock (1,166) (1,603) 1,603 -- Stock issued for services 23,214 271,263 271,263 Options granted for services 287,000 287,000 Exercise of stock options 12,022 35,329 -- -- -- 35,329 Net loss -- -- -- -- (3,076,516) (3,076,516) ---------- --------- ---------- -------- ----------- ----------- Balance at July 31, 2001 1,371,116 $ 9,616,767 ($ 145,700) 0 ($8,278,674) $ 1,192,393 =========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-6 J2 COMMUNICATIONS AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JULY 31, 2001 2000 1999 ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income/(loss) ($3,076,516) $ 826,416 ($1,298,888) Adjustments to reconcile net income/(loss) to net cash (used in)/provided by operating activities: Depreciation and amortization 253,720 250,661 248,327 Stock appreciation rights (benefit)/expense 379,695 (1,148,056) 1,699,745 Minority interest in income of consolidated subsidiary 0 113,846 68,102 Other (5,760) (5,760) 0 Stock issued in settlement of liabilities 0 37,501 Stock issued for services 271,263 Options granted for services 287,000 Changes in assets and liabilities: Decrease/(increase) in accounts receivable 6,580 2,063 (1,339) Decrease/(increase) in inventory 0 9,642 4,650 Decrease/(increase) in prepaid expenses and other current assets (10,472) 415 16,327 Decrease/(increase) in other assets 10,758 4,895 (912) (Decrease)/Increase in accounts payable (49,115) 94,922 42,389 (Decrease) /increase in accrued expenses 246,013 (56,885) (396,373) Decrease in income taxes payable (25,378) (12,801) (Decrease)/increase in minority interest payable 0 (300,080) 0 (Decrease)/increase in deferred revenue 200,000 0 (800,000) ---------- ----------- ----------- NET CASH AND CASH EQUIVALENTS (USED IN)/ PROVIDED BY OPERATING ACTIVITIES (1,486,834) (233,299) (393,272) ---------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of fixed assets (2,356) (11,578) (27,227) Sale/(purchase) of marketable securities 0 0 1,351,805 ---------- ----------- ----------- NET CASH AND CASH EQUIVALENTS (USED IN)/ PROVIDED BY INVESTING ACTIVITIES (2,356) (11,578) 1,324,578 ---------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Exercise of stock options 35,329 270,686 47,836 Exercise of Stock Appreciation Rights shares (105,419) 0 0 ---------- ----------- ----------- NET CASH AND CASH EQUIVALENTS PROVIDED BY FINANCING ACTIVITIES (70,090) 270,686 47,836 ---------- ----------- ----------- NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS (1,559,278) 25,809 979,142 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,883,750 1,857,941 878,799 ---------- ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 324,472 $ 1,883,750 $ 1,857,941 =========== =========== =========== Cash paid for: Taxes $ 5,401 $ 3,230 $ 23,289 =========== =========== =========== Supplemental disclosure of non-cash financing Activities: Stock and options issued for services 558,263 0 0 =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-7 J2 COMMUNICATIONS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A - SIGNIFICANT ACCOUNTING POLICIES Organization and Principles of Consolidation - The consolidated financial statements include the accounts of J2 Communications and its subsidiaries ("Company") after elimination of all inter-company items and transactions. The Company, a California corporation, was formed in 1986 and was primarily engaged in the acquisition, production and distribution of videocassette programs for retail sale. During fiscal year 1991, the Company acquired all of the outstanding shares of National Lampoon, Inc. ("NLI"). NLI was incorporated in 1967 and was primarily engaged in publishing the "National Lampoon Magazine" and related activities. Subsequent to the Company's acquisition of NLI, it has de-emphasized its videocassette business and publishing operations and has focused primarily on exploitation of the "National Lampoon" trademark including the October 1999 launch of the Company's website, "nationallampoon.com." Revenue Recognition - The Company's trademark licensing revenues are generally recognized when received or when earned under the terms of the associated agreement and when the collection of such revenue is reasonably assured. Revenues from the sale of videocassettes, net of estimated provisions for returns (which are not material for any period presented) are recognized when the units are shipped. Revenues from Internet operations are recognized when earned under the terms of the associated agreement and the collection of such revenue is reasonably assured. 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. Depreciation - Depreciation of fixed assets is computed by the straight-line method over the estimated useful lives of the assets ranging from three to five years. Cash Concentration and Cash Equivalents - The Company maintains its cash balances at financial institutions that are federally insured, however, at times such balances may exceed federally insured limits. The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Intangible Assets - Intangible Assets consists primarily of the "National Lampoon" trademark and related assets acquired through the Company's acquisition of NLI and are being amortized on a straight-line basis over twenty-five years. The Company continually evaluates whether events or circumstances have occurred that indicate the remaining estimated useful life of intangible assets should be revised or 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, a projection or forecast of future operating or cash flow losses, or the inability of the Company to identify and pursue trademark licensing opportunities on terms favorable to the Company. F-8 J2 COMMUNICATIONS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The Company has adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." This statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. When factors indicate that intangible assets should be evaluated for possible impairment, the recoverability of such assets is measured by a comparison of the carrying value of an asset to the estimated future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying value of the asset exceeds the fair value of the asset. As of July 31, 2001, the Company has determined that expected future cash flows relating to its intangible assets will result in the recovery of the carrying value of such asset. The continued realization of these intangible assets, however, is dependent upon the continued exploitation of the "National Lampoon" trademark for use in motion pictures, television, the Internet, merchandising and other appropriate opportunities. If these and other ventures that the Company may enter into do not result in sufficient revenues to recover the associated intangible assets, the Company's future results of operations may be adversely affected by adjustments to the carrying values of such intangible assets. New Accounting Pronouncements: In July 2001, the FASB issued SFAS No. 141 "Business Combinations." SFAS No. 141 supersedes Accounting Principles Board ("APB") No. 16 and requires that any business combinations initiated after June 30, 2001 be accounted for as a purchase; therefore, eliminating the pooling-of-interest method defined in APB 16. The statement is effective for any business combination initiated after June 30, 2001 and shall apply to all business combinations accounted for by the purchase method for which the date of acquisition is July 1, 2001 or later. The Company does not expect the adoption to have a material impact to the Company's financial position or results of operations since the Company has not participated in such activities covered under this pronouncement. In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangibles." SFAS No. 142 addresses the initial recognition, measurement and amortization of intangible assets acquired individually or with a group of other assets (but not those acquired in a business combination) and addresses the amortization provisions for excess cost over fair value of net assets acquired or intangibles acquired in a business combination. The statement is effective for fiscal years beginning after December 15, 2001, and is effective July 1, 2001 for any intangibles acquired in a business combination initiated after June 30, 2001. The Company is evaluating any accounting effect, if any, arising from the recently issued SFAS No. 142, "Goodwill and Other Intangibles" on the Company's financial position or results of operations. In October 2001, the FASB recently issued SFAS No. 143, "Accounting for Asset Retirement Obligations," which requires companies to record the fair value of a liability for asset retirement obligations in the period in which they are incurred. The statement applies to a company's legal obligations associated with the retirement of a tangible long-lived asset that results from the acquisition, construction, and development or through the normal operation of a long-lived asset. When a liability is initially recorded, the company would capitalize the cost, thereby increasing the carrying amount of the related asset. The capitalized asset retirement cost is F-9 depreciated over the life of the respective asset while the liability is accreted to its present value. Upon settlement of the liability, the obligation is settled at its recorded amount or the company incurs a gain or loss. The statement is effective for fiscal years beginning after June 30, 2002. The Company does not expect the adoption to have a material impact to the Company's financial position or results of operations. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". Statement 144 addresses the accounting and reporting for the impairment or disposal of long-lived assets. The statement provides a single accounting model for long-lived assets to be disposed of. New criteria must be met to classify the asset as an asset held-for-sale. This statement also focuses on reporting the effects of a disposal of a segment of a business. This statement is effective for fiscal years beginning after December 15, 2001. The Company does not expect the adoption to have a material impact to the Company's financial position or results of operations. F-10 J2 COMMUNICATIONS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Basic and Fully Diluted Loss Per Share - The Company computes earnings per share in accordance with the provisions of SFAS No. 128, "Earnings Per Share." Basic earnings per share includes no dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of securities that could share in the earnings of an entity that were outstanding for the period, similar to fully diluted earnings per share. A summary of the number of shares used to compute earnings per share is as follows:
For the Fiscal Year Ended July 31, 2001 July 31, 2000 July 31, 1999 ------------- ------------- ------------- Weighted average number of common shares used to compute basic EPS 1,358,342 1,289,930 1,211,728 Weighted average number of common share equivalents 0 51,731 0 --------- --------- --------- Weighted average number of common shares used to compute diluted EPS 1,358,342 1,341,661 1,211,728 ========= ========= =========
Options to purchase 182,167 common shares are not included in the calculation of diluted EPS in the fiscal year ended July 31, 1999 because they are anti-dilutive. Reclassification - Certain amounts for the fiscal year ended July 31, 1999 have been reclassified to conform with the presentation of the July 31, 2000 amounts. These reclassifications have no effect on reported net income. NOTE B - ACCRUED EXPENSES Accrued expenses consist of:
As of As of July 31, 2001 July 31, 2000 ------------- ------------- Accrued legal fees $15,000 $10,000 Accrued accounting fees $20,000 40,000 Accrued payroll and related items 85,889 79,922 Accrued video royalties 49,017 49,971 Accrued television and other royalties 168,914 0 Deferred payroll- officers/shareholders 188,845 188,845 Other 93,040 5,954 --------- --------- $620,705 $374,692 ========= =========
F-11 J2 COMMUNICATIONS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE B - ACCRUED EXPENSES (CONTINUED) Accounting for Stock-Based Compensation: The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, which applies the fair-value method of accounting for stock-based compensation plans. In accordance with this standard, the Company accounts for stock-based compensation in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. In March 2000, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 44 (Interpretation 44), "Accounting for Certain Transactions Involving Stock Compensation." Interpretation 44 provides criteria for the recognition of compensation expense in certain stock-based compensation arrangements that are accounted for under APB Opinion No. 25, Accounting for Stock-Based Compensation. Interpretation 44 became effective July 1, 2000, with certain provisions that were effective retroactively to December 15, 1998 and January 12, 2000. Interpretation 44 did not have any material impact on the Company's financial statements. Certain royalties and other expenses (including a contingent payment on the sale of stock issued to settle certain liabilities) accrued in previous years were settled or otherwise satisfied at reduced levels during fiscal year 1999. The reduction in these accruals is reflected as other income in the accompanying consolidated statement of operations. NOTE C - COMMITMENTS AND CONTINGENCIES Leases - The Company is obligated under an operating lease expiring on September 30, 2005 for approximately 3,912 square fee of office space in Los Angeles, California. The lease agreement includes certain provisions for rent adjustments based upon the lessor's operating costs and increases in the Consumer Price Index. The Company is obligated under an operating lease expiring September 2002 for office equipment located at its Los Angeles offices. The Company is obligated under an operating lease expiring in December 2001 for an automobile provided by the Company to it chairman, President and Chief Executive Officer. The Company's minimum future lease payments for the fiscal years indicated are as follows:
Office Auto/ Year Space Equipment Total ---- ----- --------- ----- 2002 126,748 1,754 128,502 2003 129,878 292 130,170 2004 136,138 0 136,138 2005 136,138 0 136,138 2006 22,690 0 22,690 -------- -------- -------- $551,592 $2,046 $553,638
F-12 The Company's aggregate lease payments were approximately $142,433, $99,000 and $81,000 for the years ended July 31, 2001, 2000 and 1999, respectively. Harvard Lampoon Agreement - Pursuant to an agreement between the Company and The Harvard Lampoon, Inc. ("HLI"), as restated October 1, 1998, the Company is obligated to pay HLI a royalty of from 1.5% to 2% on the Company's net receipts from exploitation of the "National Lampoon" trademark. Royalty payments under this agreement were approximately $3,000, $9,000 and $19,000 for the years ended July 31, 2001, 2000 and 1999, respectively. In addition, pursuant to a Settlement Agreement dated November 24, 1998, the Company issued 16,667 shares of its common stock to HLI (which at the time of issue had a value of approximately $38,000), in settlement of various claims made by HLI against the Company. Guber-Peters Agreement -- Pursuant to a July 24, 1987 Rights Agreement, NLI granted the right to produce "National Lampoon" television programming to Guber-Peters Entertainment Company ("GPEC"). NLI reacquired these rights from GPEC pursuant to an October 1, 1990 Termination Agreement ("Termination Agreement") for the sum of $1,000,000, of which $500,000 was paid upon execution. The remaining $500,000 is contingent and payable through a 17.5% royalty on NLI's cash receipts from each program produced by NLI or any licensee (subject to certain minimum royalties for each program produced). The Company guaranteed all of NLI's obligations under the Termination Agreement and is the successor-in-interest to NLI as a result of its acquisition of NLI. As of July 31, 2001, the Company has recorded royalty expense of approximately $274,000 relating to the Termination Agreement including approximately $9,000, $83,000 and $53,000 during the years ended July 31, 2001, 2000 and 1999, respectively. F-13 J2 COMMUNICATIONS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE C - COMMITMENTS AND CONTINGENCIES (CONTINUED) Employment Agreement -- The Company has entered into a Restated Employment Agreement dated July 1, 1999 ("1999 Agreement") with James P. Jimirro, its Chairman, President and Chief Executive Officer. The 1999 Agreement has a term of seven years ("Term") and provides for a base salary of $475,000 with annual increases equal to the greater of 9% or 5% plus the percentage increase in the Consumer Price Index. The 1999 Agreement also provides for (i) an annual bonus of 5% to 9% of the Company's pre-tax earnings in excess of $500,000, (ii) an annual grant of immediately exercisable stock options covering 25,000 shares of the Company's common stock, (iii) an annual grant of immediately exercisable stock appreciation rights relating to 25,000 shares of the Company's common stock, and (iv) such other benefits including medical insurance, an automobile and the reimbursement of business expenses as have previously been provided to Mr. Jimirro. Also, pursuant to the 1999 Agreement, Mr. Jimirro received a contingent note ("Contingent Note") in the principal sum of approximately $2,151,000 representing salary payable to Mr. Jimirro pursuant to previous employment agreements that was voluntarily deferred by Mr. Jimirro between January 1, 1993 and June 30, 1999. The Contingent Note bears interest at the rate of 7% per year. Mr. Jimirro has continued to voluntarily defer all salary in excess of approximately $191,000 payable under the 1999 Agreement and has the right to request the issuance of additional contingent notes to reflect such additional deferrals. The Contingent Note and any subsequent salary deferrals are payable only upon a "Change of Control" as defined in the 1999 Agreement. In addition, upon any "Change of Control" of the Company or any one of the "Executive Termination Events," all as defined in the 1999 Agreement, Mr. Jimirro is generally entitled to receive a lump sum payment of all salary due for the remaining Term (excluding subsequent annual increases) and to continue to receive all benefits, bonuses, stock options and stock appreciation rights for the remaining Term. Further, to the extent the aforesaid payments result in any excise tax liability under the Internal Revenue Code of 1986, the Company is obligated to make an additional payment to Mr. Jimirro equal to the amount of such excise taxes plus any income or other payroll taxes resulting from such excise tax payment. In addition, Mr. Jimirro, at his request, shall be engaged as a consultant to the Company for a term of five years at the annual rate of 50% of his salary at the time of termination. Litigation -- The Company, NLI and certain of their officers and directors became defendants in a lawsuit filed in March 1990 in the Supreme Court of the State of New York, County of Kings, alleging that the then proposed merger between the Company and NLI was financially unfair to the shareholders, among other things. In August 1991, a settlement was reached between the parties ("Settlement Agreement") whereby the Company would issue an additional 25,000 shares of its common stock to NLI shareholders plus issue up to 16,667 shares of its common stock to plaintiff's attorneys' for their fees and expenses. Subsequent to August 1991, to the Company's knowledge, the plaintiffs have not executed the Settlement Agreement or otherwise pursued their causes of action. The Company established a reserve of approximately $203,000 during the fiscal year ended July 31, 1992 for its obligations under the Settlement Agreement. F-14 J2 COMMUNICATIONS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE C - COMMITMENTS AND CONTINGENCIES (CONTINUED) On August 13, 1999, Heathdale Productions, Inc. ("Heathdale") filed an action against the Company in the Superior Court of the State of California for the County of Los Angeles alleging, among other things, breach of contract relating to a joint venture ("Joint Venture") formed to produce the film "National Lampoon's Animal House." The Company and Heathdale entered into a Mutual Release and Settlement Agreement ("Heathdale Agreement") as of June 30, 2000 pursuant to which approximately $1,027,000, representing all monies then held by the Joint Venture, was disbursed approximately $727,000 to the Company and $300,000 to Heathdale. The Company recorded an expense of approximately $23,000 during the fiscal year ended July 31, 2000 for its obligations under the Heathdale Agreement in excess of normally recurring expenses previously recorded relating to the Joint Venture. (SEE NOTE I - JOINT VENTURE). Shareholder Rights Plan -- On July 15, 1999, the Company's Board of Directors adopted a Shareholder Rights Plan ("Rights Plan"). The Rights Plan is designed to assure that all of the Company's shareholders receive fair and equal treatment in the event of any proposed takeover of the Company and to guard against partial tender offers, open market accumulations and other abusive tactics to gain control of the Company without paying all shareholders a premium. In connection with such adoption, a dividend was declared of one preferred share purchase right ("Purchase Right") for each outstanding share of common stock outstanding on August 5, 1999. Subject to certain exceptions, each share of common stock issued by the Company subsequent to such date also carries a Purchase Right. After the Purchase Rights become exercisable, each Purchase Right will initially entitle the holder to purchase 1/100th of a share of Series A Junior Participating Preferred Stock ("Preferred Shares") at a price of $65.00 per 1/100th of a share until the close of business on July 15, 2009 or such earlier date as defined in the Plan. In the event any person or any of such person's affiliates or associates ("Acquiring Person") becomes the beneficial owner of 15% or more of the Company's outstanding common stock (with certain exceptions as set forth in the Plan), each shareholder, other than the Acquiring Person, shall thereafter, upon the terms and subject to the conditions set forth in the Rights Plan, have the right to receive upon exercise that number of shares of the Company's common stock having a market value of two times the then current exercise price of one Purchase Right. Subject to certain exceptions, the Purchase Rights are redeemable at a price of $0.001 per right at the approval of the Board of Directors. The foregoing description is qualified in its entirety by reference to the terms of the Rights Plan that has been filed by the Company as an exhibit to its Form 8-K filed on July 16, 1999. NOTE D - NOTE RECEIVABLE ON COMMON STOCK On July 14, 1986, James P. Jimirro, the Company's Chairman, President and Chief Executive Officer purchased 192,000 shares of the Company's common stock for approximately $115,000. For such shares, the Company received the sum of approximately $58,000 and a note ("Note") for approximately $58,000. The Note bears interest at the rate of 10% per annum and, pursuant to a July 14, 1986 Pledge and Security Agreement, is secured by the shares purchased. The unpaid principal and interest outstanding at July 31, 2001 and 2000 was approximately $146,000 and $140,000, respectively. F-15 J2 COMMUNICATIONS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE E - MAJOR CUSTOMERS During the year ended July 31, 2001, the Company earned revenue from three significant customer of approximately $245,000 representing 41%, 23%, and 16% of revenues respectively. During the year ended July 31, 2000, the Company earned revenue from three significant customers of approximately $1,056,000 representing 27%, 24% and 20% of revenues, respectively. During the year ended July 31, 1999, the Company earned revenue from one significant customer of approximately $800,000 representing 59% of revenues. NOTE F - STOCK OPTIONS AND STOCK APPRECIATION RIGHTS The Company periodically grants stock options to its employees and directors as financial incentives directly linked to increases in shareholder value. Such grants are subject to the Company's Amended and Restated 1999 Stock Option, Deferred Stock and Restricted Stock Plan ("1999 Plan"), as adopted by the Company's shareholders at its annual meeting on January 13, 2000. All stock options granted under prior stock option plans were converted to stock option grants under the 1999 Plan. A summary of stock options outstanding is as follows:
Option Weighted Number of Exercise Average Options Price Range Exercise Price ------- ----------- -------------- Balance, July 31, 1998 249,167 $ 1.68 - $ 4.43 $ 3.03 Options granted 42,000 $ 1.53 - $ 2.08 $ 2.02 Options canceled (92,000) $ 1.69 - $ 3.57 $ 3.04 Options exercised (17,000) $ 1.69 - $ 3.56 $ 2.91 --------- --------------- -------- Balance, July 31, 1999 182,167 $ 1.53 - $ 4.43 $ 2.82 Options granted 145,832 $ 7.50 - $17.50 $13.10 Options canceled (27,000) $ 8.00 - $16.13 $14.07 Options exercised (103,334) $ 1.53 - $11.63 $ 2.62 --------- --------------- -------- Balance, July 31, 2000 197,665 $ 1.53 - $17.50 $ 9.09 Options granted 128,000 $ 9.63 - $14.00 $11.29 Options canceled (16,667) $ 4.43 - $ 4.43 $ 4.43 Options exercised (12,022) $ 1.69 - $ 8.25 $ 2.94 --------- --------------- -------- Balance, July 31, 2001 296,996 $ 1.69 - $14.00 $10.55 ========= =============== ========
Of the options outstanding at July 31, 2001, 2000 and 1999, 128,000, 107,333 and 149,833, respectively, were exercisable with weighted average exercise prices of $11.29, $4.53 and $2.99. The weighted average remaining life of the options outstanding at July 31, 2001 was 5.18 years. F-16 J2 COMMUNICATIONS AND SUBSIDIARIES NOTES TO CONSOLIDATE FINANCIAL STATEMENTS NOTE F - STOCK OPTIONS AND STOCK APPRECIATION RIGHTS (CONTINUED) The Company has adopted SFAS No. 123, "Accounting for Stock Based Compensation," issued in October 1995. In accordance with SFAS No. 123, the Company has elected to follow Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its employee stock options. Under APB Opinion No. 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. If the Company had elected to recognize compensation expense based on the fair value of the options granted on their grant date as prescribed by SFAS No. 123, the Company's net income/(loss) and earnings/(loss) per share would have been reduced to the pro forma amounts as follows:
For the Fiscal Year Ended July 31, 2001 July 31, 2000 July 31, 1999 ------------- ------------ ------------- Net income/(loss) - as reported ($3,076,516) $ 826,416 ($1,298,888) Net income/(loss) - pro forma ($3,426,802) $ 341,421 ($1,333,059) Basic earnings/(loss) per share - as reported ($ 2.26) $ 0.64 ($ 1.07) Basic earnings/(loss) per share - pro forma ($ 2.52) $ 0.27 ($ 1.10) Diluted Earnings/(Loss) Per Share - as reported ($ 2.26) $ 0.62 ($ 1.07) Diluted Earnings/(Loss) Per Share - pro forma ($ 2.52) $ 0.25 ($ 1.10)
The fair value of each option grant on its date of grant was estimated using the Black-Scholes option pricing model using the following assumptions:
For the Fiscal Year Ended July 31, 2001 July 31, 2000 July 31, 1999 ------------- ------------- ------------- Expected dividend yield 00% 0.00% 0.00% Expected stock price volatility 89.48% 89.14% 85.77% Risk free interest rate 5.5% 6.27% 4.95% Expected life of option (in years) 4.00 4.00 3.34
The weighted average fair value of the options granted during the fiscal years ended July 31, 2001, 2000 and 1999 was $11.29, $8.75 and $1.53, respectively. The Company's Chairman, President and Chief Executive Officer has stock appreciation rights that entitle him to receive, upon demand, a cash payment equal to the difference between the fair market value and the appreciation base of the rights when they are exercised. As of July 31, 2001, 2000, and 1999, the appreciation in these rights was approximately $843,000, $569,000, and $1,717,000, respectively, and is reflected under stock appreciation rights payable in the accompanying consolidated balance sheets. F-17 J2 COMMUNICATIONS AND SUBSIDIARIES NOTES TO CONSOLIDATE FINANCIAL STATEMENTS NOTE G - INCOME TAXES The Company's provision for income taxes is as follows:
For the Fiscal Year Ended July 31, 2001 July 31, 2000 July 31, 1999 ------------- ------------- ------------- Federal income taxes $ 0 $ 0 $ 0 State income taxes 1,600 1,500 0 ------ ------ ------ Provision for income taxes $1,600 $1,500 0 ====== ====== ======
A reconciliation between the statutory federal tax rate and the Company's effective tax rate is as follows:
For the Fiscal Year Ended July 31, 2001 July 31, 2000 July 31, 1999 ------------- ------------- ------------- Statutory federal income tax rate (34%) 34% (34%) State income taxes -- -- -- Amortization of intangible assets 7% 10% 6% Other, primarily utilization of valuation allowances 27% (44%) 28% --- --- --- Effective tax rate 0% 0% 0% === === ===
The Company's effective tax rate is lower than the statutory rate due to the utilization of prior years operating losses not previously benefited. For federal and state income tax purposes, as of 7/31/01 the Company has available net operating loss carryforwards of approximately $4,225,000 and $1,695,000 respectively (expiring between 2008 and 2016) to potentially offset future income tax liabilities. Deferred tax assets result from temporary differences between financial and tax accounting in the recognition of revenue and expenses. Temporary differences and carryforwards which give rise to deferred tax assets are as follows:
As of As of July 31, 2001 July 31, 2000 ------------- ------------- Net operating loss carryforwards 1,925,000 581,000 Accrued liabilities 413,000 258,000 Royalty reserves 87,000 17,000 ----------- ----------- 2,425,000 856,000 Valuation allowance (2,425,000) (856,000) ----------- ----------- Net deferred tax assets $ 0 $ 0 =========== ===========
F-18 Valuation allowances of $2,425,000 and $856,000 were recorded at July 31, 2001 and 2000, respectively, to offset the net deferred tax assets due to the uncertainty of realizing the benefits of the tax assets in the future. J2 COMMUNICATIONS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE H - SEGMENT INFORMATION The Company has adopted SFAS No. 131, "Disclosure About Segments of an Enterprise and Related Information," during the fiscal year ended July 31, 1999 which changed the way the Company reports information about its operating segments. The Company operates in three business segments: licensing and exploitation of the "National Lampoon" trademark and related properties, operation of the "nationallampoon.com" website and video distribution. Segment operating income/(loss) excludes the amortization of intangible assets, stock appreciation rights costs, interest income and income taxes. Selling, general and administrative expenses not specifically attributable to any segment have been allocated equally between the trademark and Internet segments. Summarized financial information for the fiscal years ended July 31, 2001, 2000 and 1999 concerning the Company's segments is as follows:
Trademark Internet Video Total --------- -------- ----- ----- Year Ended July 31, 2001 Segment revenue $ 270,000 $ 14,000 $ 22,000 $ 306,000 Segment operating income/(loss) (210,000) (787,000) 18,000 (979,000) Identifiable assets 0 20,000 0 20,000 Capital expenditures 0 0 0 0 Depreciation expense 0 7,000 0 7,000 Year Ended July 31, 2000 Segment revenue $ 1,454,000 $ 10,000 $ 16,000 $ 1,480,000 Segment operating income/(loss) 776,000 (955,000) 12,000 (167,000) Identifiable assets 0 20,000 0 20,000 Capital expenditures 0 12,000 0 12,000 Depreciation expense 0 11,000 0 11,000 Year Ended July 31, 1999 Segment revenue $ 1,228,000 $ 0 $ 18,000 $ 1,246,000 Segment operating income/(loss) 425,000 (324,000) 5,000 106,000 Identifiable assets 0 19,000 10,000 29,000 Capital expenditures 0 27,000 0 27,000 Depreciation expense 0 8,000 0 8,000
A reconciliation of segment operating income/(loss) to net income/(loss) before income taxes for the fiscal years ended July 31, 2001, 2000 and 1999 is as follows:
For the Fiscal Year Ended July 31, 2001 July 31, 2000 July 31, 1999 ------------- ------------- ------------- Segment operating (loss)/income (979,000) (167,000) $ 106,000 Amortization of intangible assets (240,000) (240,000) (240,000) Stock appreciation rights benefit/(expense) (380,000) 1,148,000 (1,700,000) Other income 436,000 0 Interest income 56,000 99,000 87,000 Corporate expenses incurred related to the change in control of the Company (1,533,000) ----------- ----------- ----------- Net income/(loss) before income taxes ($3,076,000) $ 828,000 ($1,299,000) =========== =========== ===========
F-19 J2 COMMUNICATIONS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE H - SEGMENT INFORMATION (CONTINUED) A reconciliation of reportable segment assets to consolidated total assets as of July 31, 2001, 2000 and 1999 is as follows:
For the Fiscal Year Ended July 31, 2001 July 31, 2000 July 31, 1999 ------------- ------------- ------------- Total assets for reportable segments $ 20,000 $ 20,000 $ 29,000 Goodwill not allocated to segments 2,936,000 3,176,000 3,416,000 Cash and cash equivalents 324,000 1,884,000 1,858,000 Short-term investments 0 0 0 Other unallocated amounts 22,000 39,000 47,000 ---------- ---------- ---------- Total assets $3,302,000 $5,119,000 $5,350,000 ========== ========== ==========
NOTE I - JOINT VENTURE The Company is the successor to a 75% interest in a joint venture ("Joint Venture") established in 1975 for the development and production of the film "National Lampoon's Animal House" ("Film"). The current operations of the Joint Venture consist solely of collecting certain proceeds from the distribution and exploitation of the Film by the copyright owner. For financial statement purposes, the Joint Venture has been consolidated and an expense recorded corresponding to the minority partner's interest in the proceeds from the Joint Venture. The revenue received by the joint venture relating to the Film was approximately $71,000, $322,000 and $251,000 for the fiscal years ended July 31, 2001, 2000 and 1999, respectively. NOTE J - RELATED PARTY TRANSACTIONS Bruce Vann, one of the Company's directors, is a partner of the law firm Kelly, Lytton, Mintz and Vann retained by the Company for various legal matters. Legal expenses of approximately $46,000, $25,000 and $13,000 were incurred with respect to work performed by Mr. Vann's firm for the Company during the fiscal years ended July 31, 2001, 2000 and 1999. See Notes C, D and F to these consolidated financial statements for information concerning certain transactions between the Company and the Company's Chairman, President and Chief Executive Officer. F-20 J2 COMMUNICATIONS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE K - PENDING TRANSACTIONS On March 5, 2001, the Company, James P. Jimirro, the Company's Chairman and Chief Executive Officer, Daniel Laikin and Paul Skjodt, another shareholder of the Company acting in concert with Mr. Laikin, entered into an agreement (the "Laikin-Skjodt Agreement"; the transactions contemplated by the Laikin-Skjodt Agreement are referred to herein as the "Laikin-Skjodt Transactions") pursuant to which the parties agreed, among other things and subject to various conditions, that Mr. Laikin and Mr. Skjodt and/or their associates and affiliates (collectively referred to herein as the "Laikin-Skjodt Group") would purchase all of the interests of Mr. Jimirro in the Company (including common stock, vested stock options and common stock issuable upon exercise of Mr. Jimirro's stock appreciation rights) for aggregate consideration of approximately $4.6 million and, in accordance with Mr. Jimirro's employment agreement, the Company would pay Mr. Jimirro $2.5 million of deferred compensation due upon a change in control of the Company ("Deferred Compensation"). The Laikin-Skjodt Agreement further provided, subject to various conditions, that the Laikin-Skjodt Group would purchase 227,273 shares of the Company's common stock from the Company for a purchase price of between approximately $5.21 and $9.90 per share, based on a formula, to partially fund the Company's Deferred Compensation obligation to Mr. Jimirro and may also acquire, at the Laikin-Skjodt Group's option, up to an additional 300,000 shares of the Company's common stock directly from the Company at a purchase price of $11.00 per share. The Laikin-Skjodt Group's obligations set forth above are subject to the satisfaction of certain conditions including due diligence and financing. The Laikin-Skjodt Agreement further provided that at the closing of the Laikin-Skjodt Transactions, Mr. Jimirro would resign as an officer and Director of the Company and enter into a long-term consulting and non-compete agreement with the Company providing for aggregate payments to Mr. Jimirro over time of approximately $3.8 million plus fringe benefits expected to cost the Company approximately $360,000 and would receive options, vesting over four years, to purchase up to 250,000 shares of the Company's common stock at a price equal to the average market price of such common stock during the five days immediately preceding the closing date of Laikin-Skjodt Transactions. The Company's obligations under the consulting and non-compete agreement would be secured by a lien on the Company's assets. If the transactions are consummated, the Company will be required to record an expense related to the transfer of options from Mr. Jimirro to the Laikin Skjodt Group and the difference between the purchase price and the fair market value of the common stock and stock options sold by Mr. Jimirro. The exact amount of this charge cannot be determined until consummation of the transactions and is dependent upon the market price of the Company's common stock on the closing date. If the market price for the Company's common stock on the closing date of the transactions is between $10.00 and $15.00, this charge is estimated to be between $2.0 million and $2.5 million, respectively. The Company also estimates that it will record expenses on closing of the transactions related to Mr. Jimirro's Deferred Compensation and the consulting and non-compete agreement in the aggregate amount of approximately $6.2 million. Pursuant to the Laikin-Skjodt Agreement, Messrs. Laikin and Skjodt agreed to a standstill agreement effective during the period prior to the closing of the Laikin-Skjodt Transactions, which standstill agreement generally precludes Messrs. Laikin and Skjodt from purchasing or selling the Company's securities or exerting influence over the Company's governance, by solicitation of proxies or otherwise, and agreed to the same standstill agreement F-21 in the event that the closing of the Laikin-Skjodt Transactions does not occur prior to the termination date of the Laikin-Skjodt Agreement. The Company subsequently consented to a waiver of the initial standstill commitment in order to allow Messrs. Laikin and Skjodt to purchase up to 67,700 shares of the Company's common stock on the open market. The Laikin-Skjodt Agreement also provides for a tender offer by Messrs. Laikin and Skjodt for all the remaining outstanding shares of the Company's common stock at a price of $15.00 per share no later than the first anniversary of the closing of the Laikin-Skjodt Transactions if the Company's common stock does not trade at or above $15.00 per share for any twenty (20) days during any period of thirty (30) consecutive trading days during the 365 days following the consummation of the Laikin-Skjodt Transactions. Completion of the Laikin-Skjodt Transactions, which have been approved by the Company's board of directors, are subject to due diligence and financing contingencies, shareholder approval (if reasonably deemed necessary by the Company based upon the advice of counsel) and customary closing conditions and regulatory approvals. Messrs. Jimirro, Laikin and Skjodt, collectively holders of over 39% of the Company's outstanding common stock, have agreed to vote in favor of the Laikin-Skjodt Transactions if they are submitted to the Company's shareholders. The transactions were scheduled to close on or before June 30, 2001, however, the transactions have not been consummated as of that date. From June 30, 2001 the Company agreed to extend the closing date of the transaction for a non-refundable extension fee of $25,000 per week or $100,000 per month to be applied against stock purchase if the transaction is consummated. As of July 31, 2001, the Company received $200,000 from the Laikin group to extend the closing date to August 31, 2001, classified as Extension payments in the financial statements. The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed herein, as of November 4, 2001, the Company is still waiting for the completion of the transactions. Management at this time cannot predict the outcome of as to whether the transactions will be completed. However, if a change of control results from these transactions, the significant contingent amounts due an officer discussed in NOTE C - COMMITMENTS AND CONTINGENCIES could be triggered which would result in a net capital deficiency that raises substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. NOTE L -- SUBSEQUENT EVENTS On October 26, 2001 the Company signed an extension to the Letter of Agreement until November 15, 2001. Through November 15, 2001 the Company will have received $450,000 from the Laikin group for extending the closing date of the letter agreement from June 30, 2001 to November 15, 2001. F-22 EX-4.2 3 v76607ex4-2.txt EXHIBIT 4.2 EXHIBIT 4.2 RIGHTS AGREEMENT AMENDMENT This Amendment, dated as of March 5, 2001, to the Rights Agreement, dated as of July 15, 1999 (the "Rights Agreement"), is between J2 Communications, a California corporation (the "Company"), and U.S. Stock Transfer Corporation, a Delaware corporation (the "Rights Agent"). The Company and the Rights Agent have heretofore executed and entered into the Rights Agreement. Pursuant to Section 26 of the Rights Agreement, the Company and the Rights Agent may from time to time supplement or amend the Rights Agreement in accordance with the provisions of Section 26 thereof and the Company desires and directs the Rights Agent to so amend the Rights Agreement. All acts and things necessary to make this Amendment a valid agreement according to its terms have been done and performed, and the execution and delivery of this Amendment by the Company and the Rights Agent have been in all respects authorized by the Company and the Rights Agent. In consideration of the foregoing premises and mutual agreements set forth in the Rights Agreement and this Amendment, the parties hereto agree as follows: 1. Section 1.1 of the Rights Agreement is hereby amended to read in its entirety as follows: "'Acquiring Person' shall mean any Person (as such term is hereinafter defined) who or which, together with all Affiliates and Associates (as such terms are hereinafter defined) of such Person, shall be the Beneficial Owner (as such term is hereinafter defined) of 15% or more of the Common Shares of the Company then outstanding but shall not include (i) an Exempt Person (as such term is hereinafter defined), (ii) Daniel Laikin ("Laikin") or Paul Skjodt ("Skjodt") or their respective Affiliates, Associates or group ("Group") within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") or (iii) James P. Jimirro ("Jimirro") or any of his Affiliates, Associates or Group unless and until such time as such Person shall become the Beneficial Owner of 39% or more of the Common Shares of the Company then outstanding. Notwithstanding the foregoing, no Person shall become an "Acquiring Person" as the result of an acquisition of Common Shares by the Company which, by reducing the number of shares outstanding, increases the proportionate number of shares beneficially owned by such Person to 15% (or, in the case of Jimirro (or any of his any of his Affiliates, Associates or Group, if any, 39%) or more of the Common Shares of the Company then outstanding; provided, however, that if a Person shall become the Beneficial Owner of 15% (or, in the case of Jimirro (or any of his any of his Affiliates, Associates or Group, if any), 39%) or more of the Common Shares of the Company then outstanding solely by reason of share purchases by the Company and shall, after such share purchases by the Company, become the Beneficial Owner of one or more additional Common Shares of the Company (other than pursuant to a dividend or distribution paid or made by the Company on the outstanding Common Shares in Common Shares or pursuant to a split or subdivision of the outstanding Common Shares), then such Person shall be deemed to be an "Acquiring Person." Notwithstanding the foregoing, if the Board of Directors of the Company determines in good faith that a Person who would otherwise be an "Acquiring Person," as defined pursuant to the foregoing provisions of this Section 1.1, has become such inadvertently (including, without limitation, because (A) such Person was unaware that it beneficially owned a percentage of Common Stock that would otherwise cause such Person to be an "Acquiring Person" or (B) such Person was aware of the extent of its Beneficial Ownership of Common Stock but had no actual knowledge of the consequences of such Beneficial Ownership under this Agreement), and without any intention of changing or influencing control of the Company, and such Person divests as promptly as practicable a sufficient number of Common Shares so that such Person would no longer be an Acquiring Person, as defined pursuant to the foregoing provisions of this Section 1.1, then such Person shall not be deemed to be or have become an "Acquiring Person" at any time for any purposes of this Agreement. For all purposes of this Agreement, any calculation of the number of Common Shares outstanding at any particular time, including for purposes of determining the particular percentage of such outstanding Common Shares of which any Person is the Beneficial Owner, shall be made in accordance with the last sentence of Rule 13d-3(d)(1)(i) of the General Rules and Regulations under the Exchange Act, as in effect on the date of this Agreement." 2. Section 1.10 of the Rights Agreement is hereby amended by adding as the final sentence thereto the following: "Notwithstanding anything in the Agreement to the contrary, no Shares Acquisition Date shall be deemed to have occurred solely as a result of (i) the approval, execution or delivery of the Letter Agreement, dated as of March 5, 2001, among the Company, Laikin, Skjodt and Jimirro (the "Letter Agreement") or the Documentation (as such term is defined in the Letter Agreement), (ii) acceptance for payment and purchase of Common Shares of the Company pursuant to the Letter Agreement or the Documentation, (iii) the consummation of the Transactions (as defined in the Letter Agreement) or (iv) any purchase of Common Shares of the Company by Laikin, Skjodt or their respective Affiliates, Associates or Group. 3. Section 3.1 of the Rights Agreement is hereby amended by adding as the final sentence thereto the following: "Notwithstanding anything in this Agreement to the contrary, no Distribution Date shall be deemed to have occurred solely as a result of (i) the approval, execution or delivery of the Letter Agreement or the Documentation (as such term is defined in the Letter Agreement), (ii) acceptance for payment and purchase of shares of the Common Shares of the Company pursuant to the Letter Agreement or the Documentation, (iii) the consummation of the Transactions (as defined in the Letter Agreement) or (iv) any purchase of Common Shares of the Company by Laikin, Skjodt or their respective Affiliates, Associates or Group." 4. Section 11.1.2 of the Rights Agreement is hereby amended by adding as the final sentence thereto the following: "Notwithstanding anything in this Agreement to the contrary, no Trigger Event shall be deemed to have occurred solely as a result of (i) the approval, execution or delivery of the Letter Agreement or the Documentation (as such term is defined in the Letter Agreement), (ii) acceptance for payment and purchase of shares of the Common Shares of the Company pursuant to the Letter Agreement or the Documentation, (iii) the consummation of the Transactions (as defined in the Letter Agreement) or (iv) any purchase of Common Shares of the Company by Laikin, Skjodt or their respective Affiliates, Associates or Group." 2 5. Section 13.1 of the Rights Agreement is hereby amended by adding as the final sentence thereto the following: "Notwithstanding anything in this Agreement to the contrary, none of the events described in clauses (A) through (C) of the first sentence of Section 13.1 shall be deemed to have occurred solely as a result of (i) the approval, execution or delivery of the Letter Agreement or the Documentation (as such term is defined in the Letter Agreement), (ii) acceptance for payment and purchase of shares of the Common Shares of the Company pursuant to the Letter Agreement or the Documentation, (iii) the consummation of the Transactions (as defined in the Letter Agreement) or (iv) any purchase of Common Shares of the Company by Laikin, Skjodt or their respective Affiliates, Associates or Group." 6. This Amendment to the Rights Agreement shall be governed by and construed in accordance with the laws of the State of California. 7. This Amendment to the Rights Agreement may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed an original, and all such counterparts shall together constitute but one and the same instrument. 8. Except as expressly set forth herein, this Amendment to the Rights Agreement shall not by implication or otherwise alter, modify, amend or in any way affect any of the terms, conditions, obligations, covenants or agreements contained in the Rights Agreement, all of which are ratified and affirmed in all respects and shall continue in full force and effect. 9. Capitalized terms used herein but not defined shall have the meanings given to them in the Rights Agreement. 3 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to the Rights Agreement to be duly executed as of the day and year first above written. J2 COMMUNICATIONS By: ------------------------------- Name: -------------------------- Title: -------------------------- U.S. STOCK TRANSFER CORPORATION as Rights Agent By: ------------------------------- Name: -------------------------- Title: -------------------------- 4 -----END PRIVACY-ENHANCED MESSAGE-----