-----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, HElvVv/JuHG6TJE3beWOTD/Yp66+FGBXnRICK8kO6GRPzdbxPQMqc+7nP8t3h9OG pbkPGMGbn6rjT23wtBwspw== 0001144204-04-017260.txt : 20041029 0001144204-04-017260.hdr.sgml : 20041029 20041029173042 ACCESSION NUMBER: 0001144204-04-017260 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20040731 FILED AS OF DATE: 20041029 DATE AS OF CHANGE: 20041029 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL LAMPOON INC 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: 041107595 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 /CA/ DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: J2 TELECOMMUNICATIONS DATE OF NAME CHANGE: 19890731 FORMER COMPANY: FORMER CONFORMED NAME: J2 COMMUNICATIONS DATE OF NAME CHANGE: 19880308 10-K 1 v07916.txt U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE FISCAL YEAR ENDED JULY 31, 2004 COMMISSION FILE NO. 0-15284 NATIONAL LAMPOON, INC. (Exact name of registrant as specified in its charter) Delaware 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. |_| Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). YES |_| NO |X| As of October 18, 2004, the aggregate market value of the voting and non-voting common stock held by non-affiliates of the Registrant (based on the closing sales price as reported by the OTC Bulletin Board) was $6,929,794 assuming all officers and directors are deemed affiliates for this purpose). As of October 18, 2004 the Registrant had 3,091,183 shares of its common stock, par value $.0001, outstanding. Documents Incorporated by Reference Portions of the Registrant's Proxy Statement for its 2004 Annual Meeting of Stockholders (the "Proxy Statement"), to be filed with the Securities and Exchange Commission, are incorporated by reference into Part III of this Form 10-K. TABLE OF CONTENTS
Page ---- PART I ITEM 1. DESCRIPTION OF BUSINESS................................................................1 ITEM 2. PROPERTIES.............................................................................9 ITEM 3. LEGAL PROCEEDINGS......................................................................9 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................................10 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS..................10 ITEM 6. SELECTED FINANCIAL DATA...............................................................11 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS..12 PART II ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............................18 ITEM 8. FINANCIAL STATEMENTS..................................................................18 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE..18 ITEM 9A. CONTROLS AND PROCEDURES...............................................................18 ITEM 9B. OTHER INFORMATION.....................................................................18 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT....................................19 ITEM 11. EXECUTIVE COMPENSATION................................................................19 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..............................................19 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS..................................19 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES................................................19 PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES ...........................................19
i PART I ITEM 1. DESCRIPTION OF BUSINESS GENERAL This Annual Report on Form 10-K (Annual Report) contains forward-looking statements. These forward-looking statements are based on our current expectations, assumptions, estimates and projections about our business and our industry. You can identify these and other forward-looking statements by the use of words such as "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "intends," "potential," "continue," or the negative of such terms, or other comparable terminology. Forward-looking statements also include the assumptions underlying or relating to any of the foregoing statements. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed in this Annual Report as well as the following: o our inability to generate revenues sufficient to sustain our operations or to raise capital as and when we need it; o our failure to accurately forecast our capital needs; o unanticipated increases in development, production or marketing expenses related to our various business activities; o our inability to effectively compete with other providers of comedic entertainment in the marketplace; o our inability to protect our intellectual property from infringement by others; o our inability to fully implement our business plan for any reason; and other factors, some of which will be outside our control. All forward-looking statements included in this document are based on information available to us on the date hereof. We assume no obligation to update any forward-looking statements. National Lampoon, Inc., together with its subsidiaries (the Company, we, us or Registrant, unless the context requires otherwise), is a media and entertainment company that creates and provides comedic content to our audiences, which are primarily young adults between the ages of 18 and 24. The National Lampoon brand was initially developed through years of publication of the National Lampoon magazine and the production of motion pictures including National Lampoon's Animal House and National Lampoon's Vacation. We believe that the National Lampoon brand is one of the strongest brands in media. Our current business objective is to expand the use of the National Lampoon brand through motion picture and television development, production and distribution of entertainment through our subsidiary National Lampoon Networks, Inc., a network of affiliated college television stations, expansion into the home entertainment markets, and licensing our name. We have incurred significant losses since inception and as of July 31, 2004, we had an accumulated deficit of $20,943,951. We are not currently profitable. We expect to continue to incur losses over the near to medium term as we seek to expand the use of the National Lampoon brand and expand into wider markets. In addition, our revenues have been and will continue to be derived from a limited number of products and from a limited number of customers in the foreseeable future. Our financial statements for the fiscal year ended July 31, 2004 contain an explanatory paragraph as to our ability to continue as a going concern. This explanatory paragraph may impact our ability to obtain future financing. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Our corporate offices are located at 10850 Wilshire Boulevard, Suite 1000, Los Angeles, California, and we maintain an office in New York, New York. Our website is at www.nationallampoon.com. Our website and information contained in our website are not a part of this prospectus. 1 HISTORY We were incorporated in California in 1986 under the name J2 Communications, and reincorporated in Delaware under the name National Lampoon, Inc. in November 2002. We acquired National Lampoon, Inc. in late 1990, which was incorporated in 1967 (NLI), and was primarily engaged in publishing the National Lampoon Magazine. Its other activities included radio, stage shows and the development and production of motion pictures. Prior to our acquisition of National Lampoon, Inc., we had been engaged in the acquisition, production and distribution of videocassette programs for retail sale. With the acquisition of National Lampoon, Inc., we shifted our focus from the videocassette business to the exploitation of the National Lampoon trademark. In May 2002, a group led by our chief operating officer, Daniel S. Laikin, acquired control of the Company, and our business focus expanded from passive income through trademark licenses to the creation, management and distribution of various comedy properties. In August 2002, we acquired substantially all of the assets of Burly Bear Network, a business engaged in producing and distributing entertainment through a network of affiliated colleges and other educational television stations. We procured the assets of Burly Bear on a liquidation basis initially with a view towards keeping as much of the network intact as possible, and reusing previously produced programming. We renamed it National Lampoon Network, Inc. and expanded the affiliate network. As of July 31, 2004, the National Lampoon Network was available to 4.8 million students at 603 college campuses. BUSINESS The following discussion of our business activities should be read in conjunction with Note I Segment Information contained in our consolidated financial statements and related notes, which summarizes the amounts of revenue, operating profit or loss and identifiable assets attributable to each of our operating segments. Our trademarks and other intellectual property are licensed or assigned from third parties or created internally. Our licensed brands include the National Lampoon and domain names related to our online business. Network In 2003 we commenced production of original television programs solely for distribution on National Lampoon Network, Inc. We believe our network is a distribution source for National Lampoon content, as well as a platform for all of our entertainment initiatives. Advertising and sponsorships are largely dependent upon our ability to generate viewers for our programming on our network, and the ratings that may be generated when, and if, we initiate ratings tests, along with our ability to generate integrated marketing revenue through our other marketing initiatives. See Note (B) Acquisitions of Notes to Consolidated Financial Statements. In the fiscal year ended July 31, 2004, we delivered eight half-hour original television programs for distribution solely on the National Lampoon Network. Each show was created with a view towards the 18-24 year-old demographic and included new episodes. Our shows include the following: o COLLEGETOWN USA; o TOONED UP; o BRIDGET THE MIDGET; o THE GLEIB SHOW; o GAMERS; o AV SQUAD; and o HALF BAKED series. 2 We generally produced 10 episodes per show from July through October for the fall season. National Lampoon Network derives substantially all of its revenues from the sale of commercial airtime, sponsorship, and integrated and field marketing to national advertisers by our in house sales staff. Advertisers include Frank's Red Hot Sauce, JBL, Liz Claiborne, NBC Universal, Red Bull and TalentMatch.com. It obtains the commercial airtime it sells to advertisers from television affiliates in exchange for the programming it provides to them and in some cases purchases time slots in certain geographic areas to air programming and provide greater appeal to national advertisers who are able to have their commercial messages broadcast on television stations throughout the United States, reaching demographically defined audiences. We have generated limited advertising and promotional revenues from the National Lampoon Network in fiscal year 2004. Based on existing advertising arrangements for the network, we anticipate continuing to generate limited advertising and promotional revenues in the near term. In addition to our televised network, we also work with students across the country to provide on-campus marketing and events for our advertisers and sponsors that support our network, as well as to promote our brand and branded products. Entertainment Our entertainment division develops, produces and delivers National Lampoon branded comedic content through a broad range of platforms and distribution media. Through our entertainment division, we develop and produce motion picture and television programming; develop, produce and distribute programming for home entertainment in DVD, VHS and other formats; develop, produce and distribute material for radio, CDs and other audio markets; and coordinate National Lampoon branded sponsored live events. We are also pursuing initiatives in records and radio entertainment. Our entertainment division relies substantially upon its team and their expertise in entertainment and production to produce and deliver National Lampoon content. Motion Picture and Feature Film In recent years, we have derived the bulk of our revenues from license fees relating to the production of new motion pictures and from contingent compensation for motion pictures previously produced by NLI. We generally licensed our National Lampoon trademark for use in the titles of the films. We generally received a fee at the time of production of the motion picture plus contingent compensation that is dependent on the motion picture's financial performance for producing services and providing the National Lampoon trademark. To date, we have not financed the production or distribution of any National Lampoon motion pictures. Instead, we have relied upon third parties, primarily major motion picture studios, to provide a picture's financing and distribution. We currently are in discussions with several studios and other film financing entities regarding the development of new National Lampoon feature film projects. As of October 2004, two new branded feature films were released and two additional motion pictures completed principal production. National Lampoon Presents Dorm Daze was independently produced and distributed, and National Lampoon's Gold Diggers was independently distributed on under 1,000 screens. The two other films are anticipated to be released in 2005. They include National Lampoon's Pledge This! starring Paris Hilton; and National Lampoon's The Trouble with Frank, starring Jon Bon Jovi and directed by Academy Award winner Arthur Hiller. As of July 31, 2004, we have been involved in the production of nineteen motion pictures, as follows: Title Year of Release Financier/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 52 Women 1994 Showtime National Lampoon's Senior Trip 1995 New Line National Lampoon's Favorite Deadly Sins 1995 Showtime National Lampoon's Dad's Week Off 1997 Paramount National Lampoon's The Dons Analyst 1997 Paramount National Lampoon's Men in White 1998 Fox National Lampoon's Golf Punks 1998 Fox National Lampoon's Van Wilder 2001 Artisan National Lampoon Presents Dorm Daze 2003 Independent National Lampoon's Gold Diggers 2004 Lady P&A LLC ==================================== =============== ===================== 3 Television Production In late 2004 we entered into a "first-look" agreement with Viacom Productions. Viacom Productions was subsequently reorganized and our agreement was transferred to its parent's television development and production arm, Paramount Network Television. We currently have projects in development pursuant to this agreement. Additionally, we are actively engaged in developing a range of other television properties for cable, network and syndication, serving as production company, executive producer or some combination of the two. In October of this year, we concluded an agreement to enter the first-run syndication business, partnering with Atlas Worldwide, an independent distributor of television programming, to rebrand their franchise television series beginning in 2005. That series, to be called National Lampoon's An Eye for An Eye, will move from a weekly to a daily or strip series beginning in the fall of 2005. 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 television program produced by NLI or any licensee (subject to certain minimum royalties for each program produced). As of July 31, 2004, the full $500,000 has been recognized as an expense, with approximately $396,000 remaining on the books as a liability. Home Entertainment DVD and VHS With respect to home entertainment activities, we have focused significant efforts and resources into this market, including repackaging existing material and developing and producing original materials for DVD and VHS distribution. These efforts include projects with Ventura Distribution and its StudioWorks division under the Lost Reality franchise; Image Entertainment for a series of four titles, all of which are stand-up comedy programs, under the National Lampoon Live banner; and, in September 2004 we announced a multi-year agreement with Genius Products. The agreement with Genius, however, is non-exclusive, and we plan to work with various retail and direct channel distributors for additional titles in the home entertainment market. Live Events We have pursued live event activities primarily for the purpose of reinforcing and increasing awareness of the National Lampoon brand among college students. We have held live events during spring break that generally are sponsored by a national advertiser. Although in recent years these activities have not generated significant amounts of revenue, we believe that such activities promote and reinforce the National Lampoon trademark for our National Lampoon Network, other television operations, motion picture and Internet operations. We also anticipate that these activities might be enhanced by the new creative content created by us. Records and Radio We have entered into an agreement with Network One, a New York based radio production company, to produce both long and short form audio content currently being broadcast in the United States. We have an archive of 74 episodes of 30 minute syndicated radio shows. We believe that bringing back the National Lampoon radio content, including rebroadcasts of existing shows and our own original content, will reinforce the National Lampoon brand among the college demographic. We also are currently in discussion with certain companies in the recording industry regarding the production of National Lampoon records. In September of this year, we released "It's About Time," a greatest-hits collection from the new National Lampoon Radio Hour, through a distribution agreement with Uproar Entertainment, a company that also has licensed rights to distribute parts of the original Radio Hour archive materials. 4 Internet/Online Although as of the date hereof, our Internet operations have not yet generated significant revenue, we anticipate that our Internet operations will be the incubator for the development of stories, characters and animation that will be spun off into other media. In the future, we may earn revenue from our website and other Internet activities from either banner and sponsorship advertising, E-Commerce and the syndication of content originally developed and exploited on the website. We also operate a webstore in which consumers can purchase items directly from us on our nationallampoon.com or one of our partners' websites. Publishing In 2003 we entered into an agreement with Rugged Land LLC to publish 6 National Lampoon books based on new and established National Lampoon comedic content. We have released three books under this agreement, including 1964 High School Reunion Year Book, National Lampoon's Book of Love, and National Lampoon's Big Book of True Facts. Licensing Through our licensing division, we license the National Lampoon name to generate revenues through strategic partnerships both inside and outside of our normal course of business. Our current licensing initiatives include the development of National Lampoon branded video lottery terminal machines through a strategic partnership with Multimedia Games, Inc., the development of video games with Activision, and selected merchandising arrangements for various consumer products. Games Our gaming division has entered into an arrangement with Multi Media Games (Nasdaq: MGAM, a publicly held company that designs and develops Class II Bingo and Class III video games), to develop and manufacture up to three casino type slot machine games. It is currently anticipated that these games will be located in Class II type casinos (public casinos, such as Indian gaming casinos). MGAM also has the right to place the games in Class III casinos (i.e., private gaming casinos) under certain circumstances. Under the terms of the agreement, National Lampoon is entitled to 10% of MGAM's 30% of revenues generated by each slot machine per month. MGAM is entitled to a 90% commission of 30% of each slot machine revenues based on its commitment to develop, manufacture, and service all of the machines. No assurances can be given that we will receive significant revenues from this agreement with MGAM. COMPETITION The entertainment industry in general, and the motion picture and television industry specifically, are highly competitive. We face intense competition from motion picture studios and numerous independent production companies, most of whom have significantly greater financial resources than we do. 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 us. Moreover, the growth of ever larger, vertically integrated media conglomerates such as AOL Time Warner (owning AOL), Viacom (owing both Paramount, Nickelodeon, and CBS), News Corporation (owning or controlling Twentieth Century Fox, Fox Searchlight and Fox 2000, Fox Sports, and the Fox network) and The Walt Disney Company (owning Disney, ABC, and ESPN) presents significantly more challenges. Seasonality Certain portions of our business are subject to seasonality. For example, the National Lampoon Network, Inc. has no programming during the summer season. INTELLECTUAL PROPERTY Our 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. We take all appropriate and reasonable measures to obtain agreements from licensees to secure, protect and maintain trademark and copyright protection for our properties under the laws of all applicable jurisdictions. EMPLOYEES As of October 18, 2004 we employed 30 full-time employees. We consider our employee relations to be satisfactory at the present time. EXECUTIVE OFFICERS The following table sets forth certain information regarding our executive officers as of July 31, 2004: 5 Name Age Position ================== ===== ===================================== James P. Jimirro 66 Chairman of the Board, President and Chief Executive Officer Daniel S. Laikin 42 Director and Chief Operating Officer Douglas Bennett 45 Executive Vice President James Toll 51 Chief Financial Officer JAMES P. JIMIRRO has been employed as our 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 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. DANIEL S. LAIKIN has been employed as our Chief Operating Officer since May 17, 2002. Mr. Laikin served as Co-Chairman of Biltmore Homes, Inc., an Indiana-based home building and real estate development company until 2000. He also served as a 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 also on the Board of Directors of Obsidian Enterprises, Inc. DOUGLAS BENNETT has over 22 years of experience in managing businesses in the publishing, software and Internet space. Prior to his joining the Company he was the President of iUniverse, Inc., the largest independent publisher in the United States. iUniverse produced over 5,000 titles a year through the Internet. Prior to that he was the Chairman & CEO of EoExchange, Inc., an Internet search engine business. From 1992 until 1999 Mr. Bennett worked for Macmillan Publishing, the largest computer book and reference publisher in the world. Mr. Bennett started in the software and Internet division of Macmillian's business and eventually became the President of the entire Macmillan Publishing business. Prior to his employment with Macmillian, Mr. Bennett worked for 11 years for CCH Computax, the largest tax software company in the United States. At CCH Computax, Mr. Bennett held numerous senior level positions. JAMES TOLL has been employed as our Chief Financial Officer since August 2001. Mr. Toll has worked in the financial area for 22 years, including CBS Television Network in Los Angeles and Warner/Electra/Atlantic International (WEA International) Records in Burbank as a Senior Financial Analyst. Mr. Toll spent three years as head of the accounting department for the non-profit company WQED-West, and was involved with the production of the Emmy award winning seven part series, "The Planet Earth", and the production of National Geographic Specials during his tenure. From 1996 to 1999, Mr. Toll was employed as the Chief Financial Officer of Keller Entertainment Group, an international television production and distribution company. Mr. Toll also worked for the Company from approximately May 1987 through March 1993 as its Chief Financial Officer. Mr. Toll received his Bachelor of Arts degree from the University of California, Berkeley with Distinction and Honors in his major and a Master of Business Administration (Finance and Accounting) from the University of Southern California in l979 where he graduated in the top 15% of his class. CERTAIN CONSIDERATIONS 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. 6 ADEQUACY OF CAPITAL RESOURCES In recent years, our operations have been characterized by ongoing capital shortages caused by expenditures in initiating several new business ventures. We currently are seeking private sources of financing, establishing bank lines and obtaining additional equity from third party sources. We are not certain if our existing capital resources are sufficient to fund our activities for the next six to twelve months. Unless our revenues from new business activities significantly increase during that period, we will need to raise additional capital to continue to fund our planned operations or, in the alternative, significantly reduce or even eliminate certain operations. There can be no assurance that we will be able to raise such capital on reasonable terms, or at all. As of October 18, 2004 we had cash on hand of $468,824, an amount that reflects the receipt of $214,000 through the Series C Preferred Stock financing that we received immediately prior to such date. This amount is not sufficient to fund current operations, which we estimate to be approximately $200,000 per month. We anticipate that any shortfall will be covered by additional equity through the sale of additional shares of Series C Convertible Preferred stock, additional public or private equity offerings, and the exercise of warrants held by the NLAG Group, a group that includes Mr. Daniel Laikin, our Chief Operating Officer and a director, and Mr. Timothy Durham and Mr. Paul Skojdt, who are also directors. If the NLAG Group declines to make additional investments, or should we be unable to secure additional financing including the Series C Convertible Preferred or other equity offerings, we could be forced to immediately curtail much, if not all, of our current plans. Our financial statements for the fiscal year ended July 31, 2004 contain an explanatory paragraph as to our ability to continue as a going concern. This qualification may impact our ability to obtain future financing. SPECULATIVE NATURE OF ACTIVITIES Historically, substantially all of our revenues were derived from the licensing of the name National Lampoon in connection with production and distribution of feature films, television series and made-for-television movies. The entertainment industry in general, and the development, production and distribution of feature films and television programs, in particular, is highly speculative and involves a substantial degree of risk. Since each project is an individual artistic work and its commercial success is primarily determined by audience reaction, which is volatile and unpredictable, there can be no assurance that any entertainment property will make money. Even if a production is a critical or artistic success, there is no assurance that it will be profitable. In particular, to the extent that our product caters to the tastes of television audiences in the United States, our results may be affected by the inability to attract audiences in our newly addressed markets, especially Europe. If we are unable to attract productions which compete effectively in the global marketplace, our financial condition and results of operations could be materially adversely affected COMPETITION: GENERAL ECONOMIC CONDITIONS We are also subject to certain factors affecting the entertainment industry generally, such as (a) sensitivity to general economic conditions; (b) critical acceptance of our products; and (c) intense competition. Virtually all of our competitors are substantially larger than we are, have been in business longer than we have and have more resources at their disposal. The television industry is currently evolving into an industry in which certain multi-national, multi-media entities, because of their control over key film, magazine, and/or television content, as well as key network and cable outlets, will be able to dominate certain communications industry activities in the United States and abroad. These competitors have numerous competitive advantages, including the ability to acquire financing for their projects and attract superior properties, personnel, actors and/or celebrity hosts. PRODUCTION ACTIVITIES To the extent that we produce new programming for the National Lampoon Networks, we will be required to be cognizant of the risk of production activities and the related costs. To the extent that we seek to recoup some of those costs from the exploitation of product outside the network, there can be no assurance that we can produce enough episodes so that we can syndicate the series in the United States. Typically, there needs to be at least 65 episodes of a series produced in order to strip or syndicate the series in the daily re-run market. Networks can generally cancel a series at stated intervals and, accordingly, do not commit in advance to exhibit a series for more than a limited period. If a series is cancelled before the minimum number of shows necessary to syndicate or strip have been produced, there is the risk that the production costs of the project will not be fully recovered. Similar risks apply for a series produced for a non-network medium. 7 VARIANCE IN REVENUE Our revenues and results of operations are significantly dependent upon the timing and success of implementing the business activities described above, and the timing and receipt of revenue from licensing and production activities, which cannot be predicted with certainty. Revenues for any particular program may not be recognized until the program is produced and available for delivery to the licensee. Production delays may impact the timing of when revenues may be recognized under generally accepted accounting principles. We may experience significant quarterly variations in our operations, and results in any particular quarter may not be indicative of results in subsequent periods. Such variations may lead to significant volatility of our share price. INTERNET ACTIVITIES 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 our Internet revenues will be dependent on the Internet's continued growth and integration into daily commerce, among other factors. However, the demand for Internet advertising in general has declined, we have not achieved any significant advertising revenue, 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. Our business would be adversely affected if the market for Internet advertising fails to develop or develops more slowly than expected. STOCK PRICE VOLATILITY The trading price of our common 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. Significant volatility in the market price of our common stock may arise due to factors such as: o our developing business; o a continued negative cash flow; o relatively low price per share; o relatively low public float; o variations in quarterly operating results; o general trends in the television industry; o the number of holders of our common stock; and o the interest of securities dealers in maintaining a market for our common stock. As long as there is only a limited public market for our common stock, the sale of a significant number of shares of our common stock at any particular time could be difficult to achieve at the market prices prevailing immediately before such shares are offered, and could cause a severe decline in the price of our common stock. Sale of substantial amounts of our common stock, the issuance of substantial amounts of warrants and options granting the right to receive shares of our common stock or the prospect of such sales or issuances, respectively, could materially adversely affect the market price of our common stock. We have the equivalent of approximately 15.3 million shares of common stock outstanding, consisting of approximately 3.1 million shares of common stock, approximately 7.4 million shares issuable upon conversion of outstanding shares of Series B Preferred and approximately 4.8 million shares of common stock issuable upon exercise of outstanding warrants and options (exclusive of options which would be issued upon issuance of the Series B Preferred). Of these shares, approximately 1,680,000 shares are restricted shares under the Securities Act of 1933, as Amended (the "Act"). We have approved approximately 2,500,000 shares of our common stock reserved for issuance under our Amended and Restated 1999 Stock Option, Deferred Stock and Restricted Stock Plan. In addition, approximately 2.2 million shares are issuable upon conversion of outstanding shares of Series C Preferred, increasing the equivalent number of common shares outstanding to approximately 17.5 million. We anticipate that such shares will be issued and outstanding by the first of November 2004. Shares of our common stock issued upon exercise of options are available for sale in the public market, subject in some cases to volume and other limitations. 8 DEPENDENCE ON NATIONAL LAMPOON TRADEMARK AND RELATED PROPERTIES Our revenues are primarily derived from exploitation of the National Lampoon trademark. Any erosion of brand recognition of that trademark and its related properties or our failure to adequately protect our intellectual property could have a materially adverse effect on our business, results of operations and financial position. Our business also depends upon the protection of the intellectual property rights that we have to our entertainment properties. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and exploit our products. Monitoring unauthorized use of our products is difficult, and we cannot be certain that the steps we have taken will prevent unauthorized use of our film properties, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States and Europe. In recent years, there has been significant litigation in the United States involving intellectual property rights. We may become party to litigation in the future to protect our intellectual property rights or as a result of the alleged infringement of someone else's intellectual property. These claims and any resulting lawsuits could subject us to significant liability and invalidation of our property rights. Such litigation could also force us to take measures harmful to our operations, such as to stop selling certain products or to obtain a license from the owner of infringed intellectual property. Any such infringement claims, with or without merit, could be time-consuming to defend, result in costly litigation, divert management's attention and materially adversely affect our financial condition and results of operations DEPENDENCE ON KEY PERSONNEL We are dependent upon the services of Daniel S. Laikin and Doug Bennett. The loss of their services could have a materially adverse effect on our business, results of operations and financial position. We are also subject to a number of consulting arrangements with individuals and entities are not exclusive to us, or who are working without cash compensation. No assurance can be given that we will receive the same level of service and attention than had these services been handled by full time employees receiving traditional cash compensation. DEPENDENCE ON LIMITED NUMBER OF CUSTOMERS We depend on a limited number of customers, and the loss of, or a significant reduction in, revenues generated from any of our arrangements with them could harm our operating results. If we are not successful in maintaining relationships with our customers and obtaining new customers, our business and results of operations will suffer. Revenues from our three largest customers, Warner Bros., The Trouble With Frank, and AMC, accounted for approximately $773,000 representing 16%, 14%, and 10% of total revenues for the fiscal year ended July 31, 2004. The remaining 60% of total revenues for the fiscal year ended July 31, 2004 was derived from a number of customers, none of which accounted for more than 10% of total revenues. For the fiscal year ended July 31, 2003, Warner Bros., Universal, and Gary Hoffman Productions collectively accounted for approximately $695,000 representing 44%, 13% and 12% of total revenues. We expect to continue to be dependent upon a relatively small number of customers for a majority of our revenue in the near term. ITEM 2. PROPERTIES We lease approximately 3,912 square feet of office space in Los Angeles, California under a lease expiring in September 2005. The rent under the lease is $139,296 for 2004 and $139,306 for 2005. The lease agreement provides for rent adjustments based upon the lessor's operating costs and increases in the Consumer Price Index. Management considers our office space generally suitable and adequate for its current needs. We also leased space in New York City for National Lampoon Networks' New York employees. The lease was entered into as of January 17, 2003, commenced on August 1, 2003 and continued through January 31, 2004. The rent under the lease is $4,500 per month. If we remain in the space after the term of the lease, the cost shall increase to $2,000 per week unless the parties are in negotiations to extend the lease, although the landlord is under no obligation to enter into such negotiations ITEM 3. LEGAL PROCEEDINGS From time to time, claims are made against us in the ordinary course of our business, which could result in litigation. Claims and associated litigation are subject to inherent uncertainties and unfavorable outcomes could occur, such as monetary damages, fines, penalties or injunctions prohibiting us from selling one or more products or engaging in other activities. The occurrence of an unfavorable outcome in any specific period could have a material adverse affect on our results of operations for that period or future periods. 9 On February 17, 2004, plaintiff Trustin Howard filed a lawsuit against defendants In-finn-ity Productions, Bud Friedman, National Lampoon Productions, Game Show Network LLC in the United States District Court for the Central District of Claifornia. The plaintiff alleges that we ,along with other defendants, stole his idea for the show Funney Money and also alleges, among other things, copyright infringement. He seeks damages and injuctive relief. We believe that we have valid defenses to this action and intend to vigorously contest this matter. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On June 28, 2004, August 31, 2004 and September 17, 2004, the holders of a majority of our common stock and our Series B Convertible Preferred Stock consented, in writing to, the following actions: o Approval of an increase in our authorized common stock from 15,000,000 shares to 60,000,000 shares; o Approval of an increase in the common stock reserved for issuance from the J2 Communications Amended and Restated 1999 Stock Option, Deferred Stock and Restricted Stock Plan; o Approval of the National Lampoon, Inc. 2004 Consultants Stock Plan; o Approval of an Amendment to our Certificate of Incorporation modifying our Series B Convertible Preferred Stock; o Approval of the creation of Series C Convertible Preferred Stock; and o Approval of a two-for-one common stock split. The consenting holders were collectively entitled to vote 1,759,133 shares of our common stock, representing 52.90% of the issued and outstanding shares of common stock and were the record and beneficial owners of 48,874 shares of Series B Preferred Stock, representing 76.84% of the issued and outstanding shares of Series B Preferred Stock. Pursuant to Section 228(a) of the Delaware General Corporation Law, the consenting stockholders voted in favor of the actions described above. ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Until March 24, 2002, our common stock traded on the Nasdaq Small Cap Market under the symbol JTWO. From March 25, 2002, until October 25, 2002, our common stock traded on the Over The Counter Bulletin Board under the symbol JTWO.OB. On October 25, 2002, our common stock symbol changed to NLPN.OB, and continues to trade under that symbol. The following table sets forth the high and low closing sales prices per share of our common stock for the periods indicated. FISCAL YEAR 2003 HIGH LOW ============================= ============= ================ First Quarter 7.25 3.50 Second Quarter 7.40 3.00 Third Quarter 6.00 3.00 Fourth Quarter 5.05 3.00 FISCAL YEAR 2004 HIGH LOW ============================= ============= =============== First Quarter 6.25 3.50 Second Quarter 5.00 3.00 Third Quarter 4.50 3.25 Fourth Quarter 7.00 2.50 10 As of October 18, 2004, we had approximately 167 stockholders of record. DIVIDEND POLICY We have not paid any dividends on our outstanding common stock since our inception and do not anticipate doing so in the foreseeable future. SALES OF UNREGISTERED SECURITIES 1. We have issued stock options under our Amended and Restated 1999 Stock Option, Deferred Stock and Restricted Stock Plan (Stock Plan) to our employees and members of our Corporate Advisory Board and Creative Advisory Board. See Note A, of the Notes to Consolidated Financial Statements for issuances of stock options under the Stock Plan. 2. On October 28, 2003, we issued an aggregate 7,000 shares of our common stock to the following individuals: Dan Sarnoff (3,000), Sara Rutenberg (3,000) and Sally Stewart (1,000). The consideration for these issuances was in the form of services rendered to us. These transactions were exempt from registration requirements in reliance on Section 4(2) of the Securities Act of 1933. 3. On May 13, 2003, we issued 1,335 shares of our common stock to Todd Stuart in exchange for services rendered to us. This transaction was exempt from the registation requirements in reliance on Section 4(2) of the Securities Act of 1933. EQUITY COMPENSATION PLAN INFORMATION The following table sets forth information about our common stock that may be issued upon exercise of options and rights under our Amended and Restated 1999 Stock Option Plan, Deferred Stock and Restricted Stock Plan. Our stockholders have approved this plan. These numbers reflect our two-for-one common stock split effective October 2004.
Number of securities remaining available for future issuance Number of Securities to under equity be issued compensation upon exercise of plans (excluding outstanding Weighted-average exercise securities options, warrants and price of outstanding reflected in column Plan category rights options (a)) ====================== ======================== ======================= ======================== Equity Compensation 16,757,690 6.67 1,291,294(2) plans approved by security holders ====================== ======================== ======================= ======================== Equity compensation 0 0 0 plans not approved by security holders ====================== ======================== ======================= ======================== Total: 16,757,690 6.67 1,291,294 (2) ====================== ======================== ======================= ========================
- ---------- 1) Includes 63,607 Series B and 163,000 Series C Preferred units authorized. The units include one share of Series B Preferred and one warrant and the Series C includes one share of Series C and 1/2 warrant for each Series C share. The Series B Preferred and the warrant can be converted into 28.169 shares of common stock, the Series C Preferred can be converted into 10 shares of common stock. 2) The Amended and Restated 1999 Stock Option Plan reserved and made available for issuance 5,000,000 shares of our common stock, 3,708,706 options have been granted as of July 31, 2004. 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 our consolidated financial statements and related footnotes contained herein for the fiscal year ended July 31, 2004 and for the other periods presented.
SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS ============================================================ 2004 2003 2002 2001 2000 ========== ========== ========== ========== ========= Revenues $ 1,922 $ 1,008 $ 943 $ 306 $ 1,480 Operating income (loss) $ (5,130) $ (6,061) $ (1,800) $ (3,130) $ 854 Net income (loss) $ (5,127) $ (5,925) $ (1,613) $ (3,076) $ 826 Net income (loss) per share basic $ (1.67) $ (2.01) $ (.59) $ (1.13) $ 0.32 Net income (loss) per share diluted $ (1.67) $ (2.01) $ (.59) $ (1.13) $ 0.31 Total assets $ 2,506 $ 2,705 $ 3,745 $ 3,302 $ 5,119 Long term obligations $ 0 $ 0 $ 0 $ 0 $ 0
11 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS GENERAL Management's Discussion and Analysis of Financial Condition and Results of Operations discusses National Lampoon's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the 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. On an on-going basis, management evaluates its estimates and judgments. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. CRITICAL ACCOUNTING POLICIES Management believes the following critical accounting policies, among others, affect its more significant judgments and estimates used in preparation of its consolidated financial statements. 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 and DVDs, 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. Revenues from advertising and promotion are recognized when earned under the terms of the associated agreement or when the advertisement has been broadcast and the collection of such revenues are reasonably assured. Production Costs. As provided by SOP 00-2, production costs are not capitalized unless there are advertising agreements in place from which the production will generate revenues. As a result, since there were limited advertising agreements in place for particular programs, the production costs incurred by our network operations are capitalized only to the extent of the revenues generated by those agreements. The balance of the production costs are expensed during the period. OVERVIEW To date, we have been unable to generate enough revenue to sustain our operations and we have been dependent on investments and loans provided to us by the NLAG Group, which includes Daniel S. Laikin, our Chief Operating Officer and a director, and Paul Skjodt and Timothy S. Durham, who are also directors. We are not certain when or if we will ever be profitable. If the NLAG Group ceases to provide loans to us and we are not able to raise funds through sales of our securities, we would have to significantly scale back our operations and, possibly curtail them altogether. We have been seeking additional funding on an on-going basis. During our second quarter, we disclosed that we were negotiating a series of agreements with Avalon Equity Partners, Golden International Group, Tim Durham and Daniel Laikin that would have resulted in additional investments of approximately $5.5 million. This financing transaction was not consummated, however. We are currently seeking financing through the placement of up to 250,000 shares of Series C Preferred Stock. If we were able to sell all the Series C Preferred Stock, we would raise gross proceeds of $8,875,000, which includes the conversion of a $4.5 million loan into shares of Series C Preferred Stock. There is no guarantee that we will be able to sell all of the Series C Preferred Stock. We are negotiating an underwritten secondary offering of up to 1.75 million shares of our common stock at a share price to be mutually agreed upon, subject to board approval. If we complete such secondary offering, we believe that we would raise gross proceeds of up to $8 million. This disclosure does not constitute an offer to sell or the solicitation of an offer to buy any of our securities, nor will there be any sale of these securities by us in any state or jurisdiction in which the offer, solicitation or sale would be unlawful. This disclosure is being issued by us pursuant to and in accordance with Rule 135 under the Securities Act of 1933. In addition, we are very active in increasing operations through acquisitions and forming new divisions in an effort to increase cash flow and profitability. If management is unable to raise additional capital and cannot increase cash flow through operations, we will not be able to meet our obligations and may have to cease operations. 12 Our limited revenues are earned from licensing our name, from producing and distributing entertainment through our subsidiary, National Lampoon Networks, Inc., to a network of affiliated college television stations, from developing, producing and delivering National Lampoon comedic content and from consumer products, such as videos. RESULTS OF OPERATIONS THE YEAR ENDED JULY 31, 2004 VS. THE YEAR ENDED JULY 31, 2003 For the year ended July 31, 2004, total revenues increased by approximately 91% to$1,921,564 from $1,007,884 for the year ended July 31, 2003. This increase resulted from an increase of royalties received of approximately $133,000 or 38%, from Animal House and the three National Lampoon Vacation feature films to $483,000 in fiscal 2004 versus $350,000 in fiscal 2003, and an increase of approximately $467,000 for advertising and promotional revenues from National Lampoon Networks, Inc. which were $558,640 in fiscal 2004 versus $92,063 for the prior year due to the fact that National Lampoon Networks, Inc. began operations during fiscal 2003. Royalties from made for television and video productions increased by $308,000 in fiscal 2004, due to projects with AMC, the revenues for which were $198,000 in fiscal 2004 versus $40,000 in fiscal 2003, and with Image Entertainment for which revenues were $150,000 in fiscal 2004. Consumer product revenue of $76,111 in fiscal 2004 increased by approximately $64,000 or 557% from $11,577 in fiscal 2003. In addition to merchandize sold via the internet in both years, in fiscal 2004 there was internet advertising of about $23,000 and video game royalties from Activision of $40,000. Revenues from our three largest customers, Warner Bros., The Trouble With Frank, and AMC, accounted for approximately $773,000 representing 16%, 14%, and 10% of total revenues for the fiscal year ended July 31, 2004. The remaining 60% of total revenues for the fiscal year ended July 31, 2004 was derived from a number of customers, none of which accounted for more than 10% of total revenues. For the fiscal year ended July 31, 2003, Warner Bros., Universal, and Gary Hoffman Productions collectively accounted for approximately $695,000 representing 44%, 13% and 12% of total revenues. Costs related to trademark revenue increased by approximately 46% to $417,071 in fiscal 2004 from $285,174 for the year ended July 31, 2003. The increase in costs resulted primarily from the costs associated with the AMC and Image Entertainment projects totaling approximately $303,000. Royalties accrued to Harvard Lampoon, William Morris, and Guber Peters totaled approximately $232,000 during fiscal 2003 versus approximately $67,000 during fiscal 2004. In the prior fiscal year the multiple episode sale of "Funny Money" triggered a cost of approximately $185,000 due to Guber Peters, capping the amount owed to them. Therefore no cost was accrued for Guber Peters in the current fiscal year. Lastly, in the current fiscal year, there was $33,000 in costs associated with Live Events, with no corresponding cost in the prior fiscal year. Costs related to consumer products revenues were $50,170 for the year ended July 31, 2004 versus $23,374 for fiscal 2003, which represents an increase of 115%. Internet costs make up the majority of the costs related to consumer product revenues, and are direct expenses we incurred to develop, maintain, and promote our website excluding salaries and other general and administrative expenses incurred in connection with our Internet operations. Production costs totaling $1,181,039 in fiscal 2004 represent an increase of 35% over fiscal 2003 production costs of $872,868. These costs were primarily associated with the production of programming for National Lampoon Networks, Inc.. National Lampoon Networks, Inc. began operations with our acquisition of the assets of Burly Bear in September 2002. New show productions did not begin until the end of calendar 2002. Therefore fiscal 2004 saw a large increase in revenues and production costs. Amortization of intangible assets, included the costs of our acquisition of the National Lampoon trademark was $240,000 in fiscal 2004 and 2003. In fiscal 2003 there was the write-off of the Burly Bear trademark. The Burly Bear trademark was fully written off by the end of fiscal 2003 based upon SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, because the Company recognized the impairment of the value of the Burly Bear trademark when virtually all aspects of the Networks operated more successfully utilizing the National Lampoon name rather than the Burly Bear name. Write off of the Burly Bear intangible asset totaled $541,000 during fiscal 2003, and was zero in fiscal 2004. 13 Selling, general and administrative expenses for the fiscal year ended July 31, 2004 increased to approximately $4,521,000 versus $4,159,000 for the fiscal year ended July 31, 2003. This increase of $362,000 or 9% resulted primarily from increases in personnel costs of approximately $512,000 to $2,813,000 from $2,301,000, an increase in interest expense of $144,000 from approximately $40,000 in fiscal 2003 to $184,000 in fiscal 2004, and an increase of approximately $58,000 in health insurance costs from $56,000 in fiscal 2003 to approximately $114,000 in fiscal 2004. These increases were offset somewhat by a decrease in legal and accounting fees of approximately $343,000 to $300,000 in fiscal 2004 from approximately $643,000 in fiscal 2003. Fiscal 2003 had increased legal and accounting fees due to costs associated with the Reorganization Transaction in May of 2002 and the acquisition of Burly Bear Networks in September of 2002. Stock, warrants, and options issued for services of $641,878 in fiscal 2004 represents a decrease of $305,162 or 32% from the $947,040 issued in fiscal 2003. Fewer stock, warrants, and options were issued in fiscal 2004 than were issued in the prior fiscal year. Interest income during the year ended July 31, 2004 decreased to $5,762 versus $7,040 for the same period last year. This decrease results from lower cash balances held during the year ended July 31, 2004 versus the year ended July 31, 2003. The Company benefited from it subsidiary's National Lampoon Networks' insurance reimbursement of $32,000 from stolen equipment, and from allocation of $99,000 of its losses to the minority interest holders of National Lampoon Networks, Inc. There were no comparable benefits in fiscal 2004. For the year ended July 31, 2004, we recorded a net loss of $5,127,107 versus a net loss of $5,924,836 for the year ended July 31, 2003. This represents a decrease in the net loss of approximately 798,000 or 13%. The increase revenues of approximately $914,000 in the 2004 fiscal year along with having fully written off the Burly Bear intangible of $541,000 in fiscal 2003 are the main factors accounting for this difference. THE YEAR ENDED JULY 31, 2003 VS. THE YEAR ENDED JULY 31, 2002 For the year ended July 31, 2003, total revenues increased by approximately 7% to $1,007,884 from $943,487 for the year ended July 31, 2002. This increase resulted from advertising and promotional revenues from National Lampoon Networks which were $92,063 in fiscal 2003 versus $0 for the prior year due to the fact that National Lampoon Networks began operations during fiscal 2003. Trademark revenues in fiscal 2003 of $904,244 represented a 1% decrease from 2002 trademark revenues of $913,491. Royalties received from Animal House and the three National Lampoon's Vacation features totaled approximately $350,000 in fiscal 2003 compared with $559,000 in fiscal 2002. Royalties from made for television productions totaled $496,000 in fiscal 2003, with $225,000 attributable to "Cousin Eddie's Christmas Vacation" and $125,000 attributable to TBS for a show tentatively entitled "National Lampoon's Thanksgiving Reunion". Television royalties in fiscal 2002 totaled approximately $202,000, all of which relate to previously released television product like "Men in White" and "Golf Punks". Consumer product revenue of $11,577 in fiscal 2003, which consisted mostly of sales of videocassettes and of product sold via the internet decreased 61% from the prior year's revenues of $29,996 due mostly to reduced video revenues. Costs related to trademark revenue, primarily royalties and commissions payable to third parties based on our trademark revenues, increased by approximately 224% to $285,174 for the year ended July 31, 2003 versus $88,155 during the same period last year. The increase in costs resulted primarily from royalties accrued to Guber Peters for the broadcast of the Company's "Funny Money" television series and other television revenues. Royalties accrued to Guber Peters totaled approximately $194,000 during fiscal 2003. In addition, approximately $18,000 was accrued to Harvard Lampoon, and William Morris earned $19,000 from National Lampoon Vacation revenues earned by the Company in fiscal 2003. Costs related to consumer products revenues were $23,374 for the year ended July 31, 2003 versus $33,432 for fiscal 2002, which represents a decline of 30%. Internet costs make up the majority of the costs related to consumer product revenues, and are direct expenses we incurred to develop, maintain, and promote our website excluding salaries and other general and administrative expenses incurred in connection with our Internet operations. Cost declines were related to the decline in Internet revenues in fiscal 2003 versus fiscal 2002. 14 Production costs totaling $872,868 in fiscal 2003 were costs primarily associated with the production of programming for National Lampoon Networks. National Lampoon Networks began operations in September 2002 with the Company's acquisition of the assets of Burly Bear. The Burly Bear assets included the tangible assets of some edit and office equipment and Burly Bear television programs. Among the assets acquired from Burly Bear was the distribution network comprised of 400 affiliated campuses that aired Burly Bear programming. The Company renamed the Burly Bear Network the National Lampoon Networks and began producing programs to air on the existing National Lampoon Networks, which over the following ten months was expanded to 603 affiliated campuses. National Lampoon Networks expended approximately $729,000 in production costs during fiscal 2003, but was unable to secure significant advertising commitments for its programming. In accordance with SOP 00-2, as the Company cannot yet establish estimates of secondary market revenues, and there are no unearned future contracted revenue amounts, therefore, the Company has expensed the production costs incurred during the fiscal year. Amortization of intangible assets, included the costs of our acquisition of the National Lampoon trademark and the Burly Bear trademark. Amortization of the National Lampoon trademark was $240,000 during each of the years ended July 31, 2003 and 2002. The Burly Bear trademark was fully amortized by the end of fiscal 2003 based upon SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, because the Company recognized the impairment of the value of the Burly Bear trademark when virtually all aspects of the Networks operated more successfully utilizing the National Lampoon name rather than the Burly Bear name. Amortization of the Burly Bear intangible asset totaled $541,000 during fiscal 2003, and was zero in fiscal 2002 because the Burly Bear acquisition was consummated during fiscal 2003. Selling, general and administrative expenses for the fiscal year ended July 31, 2003 increased to approximately $4,159,000 versus $2,538,000 for the fiscal year ended July 31, 2002. This increase of $1,621,000 or 64% resulted primarily from increases in personnel costs of approximately $528,000 to $2,455,000 from $1,927,000, increases in marketing and advertising costs from nearly zero in fiscal 2002 to $166,000 in fiscal 2003, travel and entertainment increased to $148,000 from $17,000 or by $131,000. In addition, legal and public company related costs increased to approximately $539,000 from $201,000, representing an increase of $338,000. Increased personnel and general activities including the addition of National Lampoon Networks, its separate offices and related overhead costs resulted in increased SG&A costs in most areas including, telephone costs approximately $16,000 in fiscal 2002 increased to $54,000 in fiscal 2003 representing an increase of $38,000, shipping and postage costs were $45,000 in 2003 versus $3,000 in fiscal 2002 increasing by $42,000, insurance by $51,000, increasing from $84,000 in fiscal 2002 to $135,000 in fiscal 2003, accounting costs increased by $62,000 increasing from approximately $79,000 in fiscal 2002 to $141,000 in fiscal 2003, rent to $182,000 in fiscal 2003 from approximately $133,000 in fiscal 2002 or by $49,000, and office expenses increased by $47,000 to $51,000 in fiscal 2003 from approximately $4,000 in fiscal 2002 . During the year ended July 31, 2002, we recorded a benefit to stock appreciation rights ("SARs") of $843,096. This credit resulted from a conversion of all SARs granted to the Chief Executive Officer to common stock options. This conversion eliminated the liability or the amount payable by us to the Chief Executive Officer upon exercising the outstanding SARs. The conversion of the SARs to common stock options resulted in an expense of $140,894 for the fiscal year ended July 31, 2002. This cost reflects the difference between the exercise price of the SARs when converted to a stock option and the market price of the stock on the date of conversion. Other income of $175,484 in fiscal 2002 represents the elimination of liability associated with deferred salaries owed to the Chief Executive Officer as part of the Preferred Stock and Warrant Purchase Agreement. Interest income during the year ended July 31, 2002 decreased to $7,040 versus $12,849 for the same period last year. This decrease results from lower cash balances held during the year ended July 31, 2003 versus the year ended July 31, 2002. The Company recorded a benefit of approximately $175,000, the amount of James Jimirro's deferred salary, pursuant to the Reorganization Transaction. We benefited from our subsidiary's National Lampoon Networks' insurance reimbursement of $32,000 from stolen equipment, and from allocation of $99,000 of its losses to the minority interest holders of National Lampoon Networks. For the year ended July 31, 2003, we recorded a net loss of $5,924,836 versus a net loss of $1,613,334 for the year ended July 31, 2002. The substantial increase in net loss of approximately $4,312,000 resulted in an increase in SG&A costs of $1.6 million, the write-off of the Burly Bear intangible asset of $541,000, stock, warrants, and options issued for services in fiscal 2003 of $947,000, the expensing of National Lampoon Networks and National Lampoon's production costs of $873,000, and not receiving in fiscal 2003 the benefits of SARs adjustment and elimination of deferred payroll liability, which reduced the loss in the prior year by $1,018,580. Overall, the increase in costs was accompanied by an increase in revenues of just $64,000 or 7% from the prior year. 15 LIQUIDITY AND CAPITAL RESOURCES Our principal sources of working capital during the fiscal year ended July 31, 2004 included limited trademark income, advertising and sponsorship revenues and other income of approximately $1.9 million, and loans received from NLAG in the aggregate amount of $4.4 million. The loans bear interest at the rate of 4.75% per annum and are due to be converted into shares of Series C Preferred Stock as part of the funding received through the sale of the Series C Preferred Stock. For the twelve months ended July 31, 2004, our net cash flows used in our operating activities was $4,003,356, versus $3,848,306 of net cash flow used in operating activities during the twelve months ended July 31, 2003. This increase in cash flows used in operating activities is primarily attributable to the fact that our net loss in fiscal year 2003 included over $1.84 million in amortization and warrants granted for service, non cash costs, versus $879.000 for non cash costs in fiscal 2004. An increase in production costs of $59,000 in fiscal 2004 to $127,000 from $68,000 in fiscal 2003, and a decrease in deferred income of $41,000 in fiscal 2004 versus an increase of $161,000 in fiscal 2003, representing a reduction of cash of $202,000, accounts for this increase in cash used in operating activities in fiscal 2004. On May 17, 2003, certain notes payable totaling approximately $442,000 at April 30, 2002 were due to be paid in full. The notes represent money owed to legal firms relating to work done in connection with our reorganization in May 2002. As of July 31, 2004, approximately $390,000 in principal remained outstanding. We do not currently have the money to pay this obligation. In recent years, our operations have been characterized by ongoing capital shortages caused by expenditures in initiating several new business activities. We are also actively seeking private sources of financing through the placement of Series C Preferred Stock, establishing bank lines and obtaining additional equity from third party sources. There is no assurance that such financing will be available on commercially acceptable terms, if at all. Our existing capital resources are insufficient to fund our activities for the next six to twelve months. Unless our revenues from new business activities significantly increase during that period, we will need to raise additional capital to continue to fund our planned operations or, in the alternative, significantly reduce or even eliminate certain operations. There can be no assurance that we will be able to raise such capital on reasonable terms, or at all. As of October 18, 2004 we had cash on hand of $468,824, an amount that reflects the receipt of $214,000 through the Series C Preferred Stock financing that we received immediately prior to such date, and no significant receivables. This amount is not sufficient to fund current operations, which we estimate to be approximately $200,000 per month. We anticipate that any shortfall will be covered by additional equity through the sale of additional shares of Series C Convertible Preferred stock, additional public or private equity offerings, and the exercise of warrants held by the NLAG Group. If the NLAG Group declines to make additional investments, or should we be unable to secure additional financing including the Series C Convertible Preferred or other equity offerings, we could be forced to immediately curtail much, if not all, of our current plans. Our financial statements for the fiscal year ended July 31, 2004 contain an explanatory paragraph as to our ability to continue as a "going concern." This qualification may impact our ability to obtain future financing. FUTURE COMMITMENTS We are currently seeking financing through a private placement of up to 250,000 shares of Series C Preferred Shares for gross proceeds up to $8,875,000, which includes the conversion of a $4.5 million loan into shares of Series C Preferred Stock. There is no guarantee that we will be able to sell all of the shares of Series C Preferred Stock. The Company is negotiating an underwritten secondary offering of up to 1.75 million shares of its common stock at a share price to be mutually agreed upon, subject to board approval. If we complete such secondary offering, we would raise gross proceeds of up to $8 million. This disclosure does not constitute an offer to sell or the solicitation of an offer to buy any of the Company's securities, nor will there be any sale of these securities by the Company in any state or jurisdiction in which the offer, solicitation or sale would be unlawful. This disclosure is being issued by the Company pursuant to and in accordance with Rule 135 under the Securities Act of 1933. Off-Balance Sheet Arrangement 16 We do not have any off-balance sheet transactions. CONTRACTUAL OBLIGATIONS
Payments due by period ================================================================================ CONTRACTUAL OBLIGATIONS Total Less than 1 year 1-3 years 3-5 years More than 5 years ========================= =========== ================ =========== =========== ================= Long Term Debt -- Capital Lease Obligations -- Operating Leases 184,513 151,300 33,213 -- -- Purchasing Obligations -- Other Long-Term Liabilities -- 184,513 151,300 33,213 -- --
NEW ACCOUNTING PRONOUNCEMENTS: In December 2003, the FASB issued Summary of Statement No. 132 (revised 2003), "Employer's Disclosures about Pensions and Other Post Retirement Benefits - an amendment to FASB Statements No. 87, 88, and 106." This statement revises employers' disclosures about pension plans and other postretirement benefit plans. However, it does not change the measurement or recognition of those plans as required by FASB Statements No. 87, "Employers' Accounting for Pensions", No. 88, "Employers' Accounting for Settlements and Curtailments of defined Benefit Pension Plans and for Termination Benefits", and No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." This statement requires additional disclosures to those in the original Statement 132 about the assets, obligations, cash flows, and net periodic benefit cost. This statement also calls for certain information to be disclosed in financial statements for interim period. The disclosures required by this statement are effective for fiscal year ending after December 15, 2003. The Company does not expect the adoption of this pronouncement to have a material impact on its consolidated financial position or results of operations. In December 2003, the FASB issued Interpretation No. 46 (Revised 2003), "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51" ("FIN 46"). This interpretation explains how to identify variable interest entities and how an enterprise assesses its interest in a variable interest entity to decide whether to consolidate that entity. This interpretation requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among parties involved. Variable interest entities that effectively disperse risks will not be consolidated unless a single party holds an interest or combination of interest that effectively recombines risks that were previously dispersed. This interpretation is effective no later than the end of the first reporting period that ends after March 15, 2004. This interpretation did not have an impact on the Company's financial position or results of operations. In May 2003, the FASB issued Statement No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." ("SFAS 150") This statement establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. In accordance with the standard, financial instruments that embody obligations for the issuer are required to be classified as liabilities. SFAS 150 is effective for all financial instruments created or modified after May 31, 2003, and otherwise shall be effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS 150 did not have an impact on the Company's financial position or results of operations. In April 2003, the FASB issued statement No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities," "SFAS 149" which is generally effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. SFAS 149 clarifies under what circumstances a contract with an initial net investment meets the characteristics of a derivative as discussed in FASB Statement No. 133, clarifies when a derivative contains a financing component, amends the definition of an "underlying" to conform it to the language used in FASB Interpretation No. 45, "Guarantor Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" and amends certain other existing pronouncements. All provisions of SFAS 149 should be applied prospectively. The adoption of SFAS 149 did not have an impact on the Company's financial position or results of operations. 17 In May 2003, the Emerging Issues Task Force (EITF) released Issue No. 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables." EITF 00-21 addresses revenue recognition for arrangements involving more than one deliverable and the determination of whether an arrangement contains more than one unit of accounting. EITF 00-21 also addresses the measurement of the varying components of an arrangement and the manner in which the revenue should be allocated to the separate units of accounting. During December 2003, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) 104, "Revenue Recognition," which incorporated the requirements of EITF 00-21. The adoption of EITF 00-21 and SAB 104 did not have a material effect on the Company's results of operations or financial condition. In December 2003, the Securities and Exchange Commission (the "SEC") issued Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition." SAB 104 supersedes SAB 101, "Revenue Recognition in Financial Statements." SAB No. 104, which was effective upon issuance, rescinded certain guidance contained in SAB No. 101 related to multiple element revenue arrangements, and replaced such guidance with that contained in EITF 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables." Additionally, SAB No. 104 rescinded the SEC's Revenue Recognition in Financial Statements Frequently Asked Questions and Answers issued with SAB No. 101. The revenue recognition principles of SAB No. 101 remain largely unchanged by the issuance of SAB No. 104, and therefore the adoption of SAB No. 104 did not have a material effect on the Company's results of operations or financial condition. PART II ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK NONE. ITEM 8. FINANCIAL STATEMENTS The consolidated financial statements of National Lampoon, Inc. 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 NONE. ITEM 9A. CONTROLS AND PROCEDURES The Company maintains a system of disclosure controls and procedures that is designed to provide reasonable assurance that information, which is required to be disclosed by the Company in the reports that it files or submits under the Securities and Exchange Act of 1934, as amended, is accumulated and communicated to management in a timely manner. The Company's Chief Executive Officer and Chief Financial Officer have evaluated this system of disclosure controls and procedures as of the end of the period covered by this annual report, and believe that the system is operating effectively to ensure appropriate disclosure. There have been no changes in the Company's internal control over financial reporting during the most recent fiscal year that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. ITEM 9B. OTHER INFORMATION NONE. PART III Certain information required by Part III is incorporated by reference from the Company's definitive Proxy Statement to be filed with the Securities and Exchange Commission in connection with the solicitation of proxies for the Company's 2004 Annual Meeting of Stockholders to be held on December 14, 2004 (the "Proxy Statement"). 18 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this section is incorporated by reference from the information in the section entitled "Election of Directors" in the Proxy Statement. Item 405 of Regulation S-K calls for disclosure of any known late filing or failure by an insider to file a report required by Section 16 of the Exchange Act. This disclosure is incorporated by reference to the section entitled "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement. The information required by this Item with respect to the Company's executive officers is contained in Item 1 of Part I of this Annual Report under the heading "Executive Officers." ITEM 11. EXECUTIVE COMPENSATION The information required by this section is incorporated by reference from the information in the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this section is incorporated by reference from the information in the Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS The information required by this section is incorporated by reference from the information in the Proxy Statement. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES. The information required by this section is incorporated by reference from the information in the Proxy Statement. PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) The following documents are filed as part of this Form 10-K (1) Financial Statements: Reference is made to the Index to Consolidated Financial Statements of National Lampoon, Inc. and its subsidiaries on page F-1 of this Form 10-K. (2) Financial Statement Schedules: NONE. (b) Exhibits: Item 601 of Regulation S-K requires the exhibits listed below. 3.1 Company's Second Amended and Restated Certificate of Incorporation (1) 3.2 Company's Amended and Restated Bylaws (1) 3.3 First Amendment of the Company's Certificate of Incorporation (8) 3.4 Company's Certificate of Designations, Preferences, Rights and Limitations of Series C Convertible Preferred Stock (8) 4.1 NLAG Registration Rights Agreement, dated May 17, 2002, among the Company, the members of the NLAG Group, and GTH Capital, Inc. (1) 4.2 Jimirro Registration Rights Agreement, dated May 17, 2002, between the Company and James P. Jimirro (1) 4.3 Amended and Restated 1999 Stock Option, Deferred Stock and Restricted Stock Plan (2) 4.4 Piggyback Registration Rights Agreement, dated September 3, 2002 (5) 19 10.1 First Amendment to Preferred Stock and Warrant Purchase Agreement, dated as of May 17, 2002 (1) 10.2 2002 Employment Agreement Between J2 Communications and James P. Jimirro, dated May 17, 2002 (1) 10.3 Note Termination Agreement, dated May 17, 2002, between the Company and James P. Jimirro (1) 10.4 Security Agreement, dated May 17, 2002, between the Company and James P. Jimirro (1) 10.5 Absolute Assignment, dated May 17, 2002, between the Company and James P. Jimirro (1) 10.6 Termination of Stock Appreciation Rights Agreement, dated May 17, 2002, between the Company and James P. Jimirro (1) 10.7 Mutual Release, dated May 17, 2002, among the Company, James P. Jimirro and the members of the NLAG Group (1) 10.8 Restated Indemnification Agreement, dated May 17, 2002, between the Company and James P. Jimirro (1) 10.9 2002 Employment Agreement Between J2 Communications and Daniel S. Laikin, dated May 17, 2002 (1) 10.10 Non-Qualified Stock Option Agreement, dated May 17, 2002, between the Company and Daniel S. Laikin (1) 10.11 Indemnification Agreement, dated May 17, 2002, between the Company and Daniel S. Laikin. (2) 10.12 Letter, dated May 17, 2002, regarding Termination of Surviving Provisions of Letter Agreement, from the Company to Daniel S. Laikin and Paul Skjodt (1) 10.13 Warrant Agreement, dated May 17, 2002, between the Company and GTH Capital, Inc (1) 10.14 Voting Agreement, dated May 17, 2002, among each of the members of the NLAG Group and James P. Jimirro (1) 10.15 Promissory Notes issued May 17, 2002, by the Company to law firms (1) 10.16 Form of Common Stock Warrant (including Schedule identifying material terms (1) 10.17 Agreement between Registrant and Harvard Lampoon, Inc. dated October 1, 1998 (3) 10.18 First Amendment to Office Lease between Registrant and Avco Center Corporation dated April 21, 2000 (4) 10.19 Letter Agreement between Registrant and Batchelder Partners, Inc., dated August 16, 2000 (4) 10.20 Amendment to Letter Agreement between Registrant and Batchelder Partners, Inc. dated August 16, 2000 (4) 10.21 Warrant Issued by Registrant to George Vandemann dated August 18, 2000 (4) 10.22 Asset Purchase Agreement dated August 30, 2002 between National Lampoon Networks, Inc., Burly Bear Network, Inc., Constellation Venture Capital, L.P. and J2 Communications (5) 10.23 Consulting Agreement with Zelnick Media and related Warrant Agreements (6) 10.24 Advisory Agreement with SBI USA and related Warrant Agreement (6) 10.25 Lease for New York office space (7) 20 10.26 2003 Employment Agreement between the Company and Douglas Bennett (7) 21 Subsidiaries of Registrant (8) 31.1 Certification pursuant to Section 302 of Sarbanes-Oxley - James P. Jimirro 31.2 Certification pursuant to Section 302 of Sarbanes-Oxley - James Toll 32 Certification pursuant to Section 906 of Sarbanes-Oxley (1) Incorporated by reference to Form 8-K filed on May 31, 2002. (2) Incorporated by reference to Form S-8 filed on June 26, 2002. (3) Incorporated by reference to Form 10-Q for the period ended October 31, 1998 (4) Incorporated by reference to Form 10-K for the fiscal year ended July 31, 1999. (5) Incorporated by referenced to Form 8-K filed on September 9, 2002. (6) Incorporated by reference to Form 10-K for the fiscal year ended July 31, 2002. (7) Incorporated by reference to Form 10-K for the fiscal year ended July 31, 2003. (8) Filed herewith (c) Financial Statement Schedules: NONE. 21 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: October 29, 2004 By: /s/ James P. Jimirro ------------------------- James P. 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 P. Jimirro Director, Chairman of the Board of October 29, 2004 - ------------------------------------------- Directors and Chief Executive James P. Jimirro Officer (Principal Executive Officer) /s/ James Toll Chief Financial Officer October 29, 2004 - ------------------------------------------- James Toll /s/ Richard H. Irvine Director October 29, 2004 - ------------------------------------------- Richard H. Irvine Director October 29, 2004 - ------------------------------------------- Ron Berger /s/ Daniel S. Laikin Director, Chief Operating Officer October 29, 2004 - ------------------------------------------- Daniel S. Laikin /s/ Timothy S. Durham Director October 29, 2004 - ------------------------------------------- Timothy S. Durham /s/ Paul Skjodt Director October 29, 2004 - ------------------------------------------- Paul Skjodt /s/ Joshua A. Finkenberg Director October 29, 2004 - ------------------------------------------- Joshua A. Finkenberg
22 NATIONAL LAMPOON, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED JULY 31, 2004, JULY 31, 2003 AND JULY 31, 2002
Independent Auditors Report F-2 Consolidated Balance Sheets as of July 31, 2004 and 2003 F-3 Consolidated Statements of Operations for the Years Ended July 31, 2004, 2003 and 2002 F-4 Consolidated Statements of Shareholders Equity for the Years Ended July 31, 2004, 2003 and 2002 F-5 Consolidated Statements of Cash Flows for the Years Ended July 31, 2004, 2003 and 2002 F-6 Notes to Consolidated Financial Statements F-7
F-1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors National Lampoon, Inc., Los Angeles, California We have audited the accompanying consolidated balance sheets of National Lampoon, Inc. and Subsidiaries (the Company) as of July 31, 2004, and 2003, and the related consolidated statements of operations, shareholders (deficit) equity and cash flows for each of the three years in the period ended July 31, 2004. 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 the standards of the Public Company Accounting Oversight Board (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 National Lampoon, Inc. as of July 31, 2004 and the results of their consolidated operations and their consolidated cash flows for each of the three years in the period ended July 31, 2043 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 A to the consolidated financial statements, the Company's net losses of $5,127,107, $5,924,836, and $1,613,334 in the last three years, negative working capital of $6,938,541 and accumulated deficit of $20,943,951 at July 31, 2004 raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note A. 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. /s/ Stonefield Josephson, Inc. ------------------------------- CERTIFIED PUBLIC ACCOUNTANTS Santa Monica, California October 7, 2004 F-2 NATIONAL LAMPOON, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
AS OF JULY 31, =================================== 2004 2003 ============ ============ CURRENT ASSETS Cash and cash equivalents $ 484 $ 140,255 Accounts receivable, net 52,339 18,390 Prepaid expenses and other current assets 24,461 15,636 ============ ============ Total current assets 77,284 174,281 ============ ============ NON-CURRENT ASSETS Fixed assets, net of accumulated depreciation 53,013 42,859 Film library, net of amortization 154,147 27,000 Intangible assets 5,964,732 5,964,732 Accumulated amortization of intangible assets (3,748,578) (3,508,578) Other assets 5,100 4,500 ============ ============ Total non-current assets 2,428,414 2,530,513 ============ ============ TOTAL ASSETS $ 2,505,698 $ 2,704,794 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 403,138 $ 183,485 Accrued expenses 990,281 781,023 Notes payable including $4,429,298 due to shareholders 5,347,837 1,443,856 Deferred income 120,000 161,000 ============ ============ Total current liabilities 6,861,256 2,569,364 ============ ============ TOTAL LIABILITIES 6,861,256 2,569,364 ============ ============ SHAREHOLDERS' (DEFICIT) EQUITY Preferred Stock, 2,000,000 shares authorized, no shares issued and -- -- outstanding (cancelled, see Note F) Series B Convertible Preferred Stock, par value $.0001, 68,406 shares 6 4,921,618 authorized, 63,067 and 63,067 shares issued and outstanding respectively Common Stock, par value $.0001, 30,000,000 shares authorized, 3,066,836 153 12,188,942 and 3,053,590 shares issued, respectively Additional paid in capital 17,265,985 -- Less: Note receivable on common stock (162,980) (157,220) Deferred compensation (514,771) (1,001,066) Accumulated Deficit (20,943,951) (15,816,844) ============ ============ TOTAL SHAREHOLDERS' (DEFICIT) EQUITY (4,355,558) 135,430 ============ ============ TOTAL LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY $ 2,505,698 $ 2,704,794 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. F-3 NATIONAL LAMPOON INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
AS OF JULY 31, ======================================================= 2004 2003 2002 =========== =========== =========== REVENUES Trademark $ 1,286,813 $ 904,244 $ 913,491 Consumer products 76,111 11,577 29,996 Advertising and promotion revenues 558,640 92,063 =========== =========== =========== Total revenue 1,921,564 1,007,884 943,487 COSTS AND EXPENSES Costs related to trademark revenue 417,071 285,174 88,155 Costs related to consumer products 50,170 23,374 33,432 Production costs 1,181,039 872,868 -- Amortization of intangible assets 240,000 240,000 240,000 Write- off of intangible asset -- 541,000 -- Proxy solicitation -- -- 545,887 Selling, general administrative expenses 4,521,418 4,159,094 2,538,282 Stock, warrants, and options issued for services 641,878 947,040 -- Stock appreciation rights (benefit)/expense -- (843,096) Conversion of stock appreciation rights to stock -- -- 140,894 options =========== =========== =========== Total costs and expenses 7,051,576 7,068,550 2,743,554 =========== =========== =========== OPERATING LOSS (5,130,012) (6,060,666) (1,800,067) OTHER INCOME/(EXPENSE) Interest 5,762 7,040 12,849 Reduction of deferred payroll -- -- 175,484 Other income -- 32,214 -- =========== =========== =========== Total other income 5,762 39,254 188,333 =========== =========== =========== MINORITY INTEREST IN INCOME OF CONSOLIDATED SUBSIDIARY -- 99,000 -- =========== =========== =========== LOSS BEFORE INCOME TAXES (5,124,250) (5,922,412) (1,611,734) Provision for income taxes 2,857 2,424 1,600 =========== =========== =========== NET LOSS $(5,127,107) $(5,924,836) $(1,613,334) =========== =========== =========== Loss per share basic and diluted $ (1.67) $ (2.01) $ (0.58) =========== =========== =========== Weighted-average number of common shares basic and diluted 3,063,674 2,950,312 2,761,194 =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-4 NATIONAL LAMPOON, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' (DEFICIT) EQUITY
Note Preferred Preferred Common Common Receivable Paid Stock Stock Stock Stock on in Shares Amount Shares Amount Common Stock capital ============ ============ ============ ============ ============= ============= Balance at July 31, 2001 2,742,232 $ 9,616,767 $ (145,700) Interest on note receivable (5,760) Preferred stock issued in NLAG transaction, net of costs 40,244 2,585,318 Exercise of stock options 28,734 83,101 Warrants issued for services 146,000 Conversion of SARs 140,894 Net loss ============ ============ ============ ============ ============= ============= Balance at July 31, 2002 40,244 2,585,318 2,770,966 9,986,762 (151,460) Interest on note receivable (5,760) Preferred stock issued for cash 21,150 2,115,000 Preferred stock issued for services 2,213 221,300 Exercise of stock options 106,822 75,374 Warrants/options issued for services 28,200 1,726,806 Common stock issued in connection with Burly Bear acquisition 147,602 400,000 Non vested portion of stock issued for services Net loss ============ ============ ============ ============ ============= ============= Balance at July 31, 2003 63,607 4,921,618 3,053,590 12,188,942 (157,220) Interest of note receivable (5,760) Common Stock Issued 13,246 33,115 Warrants/options issued for 122,468 services Non vested portion of stock issued for services Adjustment for change in par (4,921,612) (12,344,372) 17,265,984 value of common stock Net Loss ============ ============ ============ ============ ============= ============= Balance at July 31, 2004 63,607 6 3,066,836 $ 153 $ (162,980) $ 17,265,984 ============ ============ ============ ============ ============= ============= Total Deferred Shareholders' Compensation Accumulated (Deficit) Amount Deficit Equity ============= ============= ============ Balance at July 31, 2001 $ (8,278,674) $ 1,192,393 Interest on note receivable ( 5,760) Preferred stock issued in NLAG transaction, net of costs 2,585,318 Exercise of stock options 83,101 Warrants issued for services 146,000 Conversion of SARs 140,894 Net loss (1,613,334) (1,613,334) ============= ============= ============ Balance at July 31, 2002 (9,892,008) 2,528,612 Interest on note receivable (5,760) Preferred stock issued for cash 2,115,000 Preferred stock issued for services 221,300 Exercise of stock options 75,374 Warrants/options issued for services 1,726,806 Common stock issued in connection with Burly Bear acquisition 400,000 Non vested portion of stock issued for services (1,001,066) (1,001,066) Net loss (5,924,836) (5,924,836) ============= ============= ============ Balance at July 31, 2003 (1,001,066) (15,816,844) 135,430 Interest of note receivable (5,760) Common Stock Issued 33,115 Warrants/options issued for 122,468 services Non vested portion of stock issued for services 486,296 486,296 Adjustment for change in par -- value of common stock Net Loss (5,127,107) (5,127,107) ============= ============= ============ Balance at July 31, 2004 $ (514,770) $ (20,943,951) $ (4,355,558) ============= ============= ============
The accompanying notes are an integral part of these consolidated financial statements. F-5 NATIONAL LAMPOON, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JULY 31, ======================================================= 2004 2003 2002 =========== =========== =========== CASH FLOWS FROM OPERATING ACTIVITIES: Net Loss $(5,127,107) $(5,924,836) $(1,613,334) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 270,246 900,140 248,451 Stock appreciation rights (benefit)/expense -- -- (843,096) Conversion of stock appreciation rights to stock options 140,894 Other (5,760) (5,760) (5,760) Stock issued for services 33,115 -- Warrants/options granted for services 608,763 947,040 146,000 Changes in assets and liabilities: (Increase) in accounts receivable (33,950) -- -- (Increase)/decrease in prepaid expenses and other current assets (8,826) (16,704) 15,362 (Increase) in capitalized production costs (127,148) (68,000) (Increase) in other assets (600) (4,500) -- Increase/(decrease) in accounts payable 219,654 (127,467) 68,500 Increase/(decrease) in accrued expenses 209,258 290,781 (130,461) (Decrease)/increase in deferred revenues (41,000) 161,000 (Decrease) in settlement payable -- -- (203,117) (Decrease) in extension payments (200,000) =========== =========== =========== NET CASH AND CASH EQUIVALENTS USED IN (4,003,355) (3,848,306) (2,376,561) OPERATING ACTIVITIES =========== =========== =========== CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of Burly Bear Networks -- (200,000) Purchase of fixed assets (40,398) (54,876) (7,123) =========== =========== =========== NET CASH AND CASH EQUIVALENTS USED IN (40,398) (254,876) (7,123) INVESTING ACTIVITIES =========== =========== =========== CASH FLOWS FROM FINANCING ACTIVITIES: Exercise of stock options -- 75,374 83,101 Purchase of Series B preferred shares -- 2,115,000 2,585,318 Increase in notes payable 3,903,982 1,028,856 415,000 =========== =========== =========== NET CASH AND CASH EQUIVALENTS PROVIDED 3,903,982 3,219,230 3,083,419 BY FINANCING ACTIVITIES =========== =========== =========== NET DECREASE IN CASH AND CASH (139,771) (883,952) 699,735 EQUIVALENT CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 140,255 1,024,207 324,472 =========== =========== =========== CASH AND CASH EQUIVALENTS AT END OF YEAR $ 484 $ 140,255 $ 1,024,207 =========== =========== =========== Cash paid for Taxes $ 2,857 $ 2,424 $ 1,643 =========== =========== =========== Supplemental disclosure: shares/options/warrants issued for services $ 641,878 $ 947,040 $ 0 =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-6 NOTE A Organization and Principles of Consolidation. The consolidated financial statements include the accounts of National Lampoon, Inc. 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. The Company reincorporated into Delaware under the name National Lampoon, Inc. in November 2002. On May 17, 2002, the Company, James P. Jimirro, the Chairman of the Board, President and Chief Executive Officer, and a group of investors known collectively as the National Lampoon Acquisition Group (NLAG) completed a Preferred Stock and Warrant Purchase Agreement, (the Purchase Agreement). The Purchase Agreement called for, among other items, the purchase of 35,244 units, consisting of one share of Series B Preferred Stock and a warrant to purchase 28.169 shares of the Company common stock, at $100 a unit. The Series B Preferred Stock votes on an as converted basis as a class with the shares of Common Stock. As part of the transaction entered into related to the Purchase Agreement, one member of NLAG became Chief Operating Officer of the Company, and entered into an employment agreement with the Company, and a voting agreement was entered into providing for the election of three Jimirro nominees, three NLAG nominees, and one nominee acceptable to both parties The consummation of the Reorganization Transactions effectively concluded all of the litigation between the Company, the members of the NLAG Group and Mr. Jimirro. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company's net losses of $5,127,107 and $5,924,836 in the last two years, negative working capital of $6,938,541 and an accumulated deficit of $20,943,951 raise substantial doubt about its ability to continue as a going concern. 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. Management recognizes that the Company must generate additional resources to enable it to continue operations. The Company is issuing shares of Series C Preferred stock and may be issuing shares of common stock to investors as a means of raising capital. In addition, the Company is very active in increasing operations through acquisitions and forming new divisions in an effort to increase cash flow and profitability. If management is unable to raise additional capital and cannot increase cash flow through operations, the Company will not be able to meet its obligations and may have to cease operations. The Company has entered into agreements with, AFG Entertainment, Golden International Group, Tim Durham and Daniel Laikin, and others which are anticipated to close in November 2004, in connection with the Company's Series C Convertible Preferred Stock financing. If the Company were to sell all of the 250,000 shares of Series C Preferred Stock, it would raise gross proceeds of $8,875,000, which includes the conversion of a $4.5 million loan into shares of Series C Preffered Stock. The Company is negotiating an underwritten secondary offering of up to 1.75 million shares of its common stock at a share price to be mutually agreed upon, subject to board approval. If it completes such secondary offering, it would raise gross proceeds of up to $8 million. 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 and DVDs, 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. Revenues from advertising and promotion are recognized when earned under the terms of the associated agreement or when the advertisement has been broadcast and the collection of such revenues are 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. F-7 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 has not experienced any losses in such accounts. 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 is 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. The intangible asset acquired through the acquisition of Burly Bear, Inc. have been written off based upon the provisions of SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". Gross intangibles were $5,964,732 with accumulated amortization of $3,748,578 at July 31, 2004 and $5,964,732 with accumulated amortization of 3,508,578 at July 31, 2003, which includes $240,000 of amortization being expensed in both years. The estimated aggregate amortization expense for each of the five succeeding fiscal years is $240,000 per year, which represents the original acquired intangible relating to the National Lampoon trademark, amortized over twenty five years. As of July 31, 2004, 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 December 2003, the FASB issued Summary of Statement No. 132 (revised 2003), "Employer's Disclosures about Pensions and Other Post Retirement Benefits - an amendment to FASB Statements No. 87, 88, and 106." This statement revises employers' disclosures about pension plans and other postretirement benefit plans. However, it does not change the measurement or recognition of those plans as required by FASB Statements No. 87, "Employers' Accounting for Pensions", No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits", and No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." This statement requires additional disclosures to those in the original Statement 132 about the assets, obligations, cash flows, and net periodic benefit cost. This statement also calls for certain information to be disclosed in financial statements for interim period. The disclosures required by this statement are effective for fiscal year ending after December 15, 2003. The Company does not expect the adoption of this pronouncement to have a material impact on its consolidated financial position or results of operations. In December 2003, the FASB issued Interpretation No. 46 (Revised 2003), "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51" ("FIN 46"). This interpretation explains how to identify variable interest entities and how an enterprise assesses its interest in a variable interest entity to decide whether to consolidate that entity. This interpretation requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among parties involved. Variable interest entities that effectively disperse risks will not be consolidated unless a single party holds an interest or combination of interest that effectively recombines risks that were previously dispersed. This interpretation is effective no later than the end of the first reporting period that ends after March 15, 2004. This interpretation did not have an impact on the Company's financial position or results of operations. In May 2003, the FASB issued Statement No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." ("SFAS 150") This statement establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. In accordance with the standard, financial instruments that embody obligations for the issuer are required to be classified as liabilities. SFAS 150 is effective for all financial instruments created or modified after May 31, 2003, and otherwise shall be effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS 150 did not have an impact on the Company's financial position or results of operations. F-8 In April 2003, the FASB issued statement No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities," "SFAS 149" which is generally effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. SFAS 149 clarifies under what circumstances a contract with an initial net investment meets the characteristics of a derivative as discussed in FASB Statement No. 133, clarifies when a derivative contains a financing component, amends the definition of an "underlying" to conform it to the language used in FASB Interpretation No. 45, "Guarantor Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" and amends certain other existing pronouncements. All provisions of SFAS 149 should be applied prospectively. The adoption of SFAS 149 did not have an impact on the Company's financial position or results of operations. In May 2003, the Emerging Issues Task Force (EITF) released Issue No. 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables." EITF 00-21 addresses revenue recognition for arrangements involving more than one deliverable and the determination of whether an arrangement contains more than one unit of accounting. EITF 00-21 also addresses the measurement of the varying components of an arrangement and the manner in which the revenue should be allocated to the separate units of accounting. During December 2003, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) 104, "Revenue Recognition," which incorporated the requirements of EITF 00-21. The adoption of EITF 00-21 and SAB 104 did not have a material effect on the Company's results of operations or financial condition. In December 2003, the Securities and Exchange Commission (the "SEC") issued Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition." SAB 104 supersedes SAB 101, "Revenue Recognition in Financial Statements." SAB No. 104, which was effective upon issuance, rescinded certain guidance contained in SAB No. 101 related to multiple element revenue arrangements, and replaced such guidance with that contained in EITF 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables." Additionally, SAB No. 104 rescinded the SEC's Revenue Recognition in Financial Statements Frequently Asked Questions and Answers issued with SAB No. 101. The revenue recognition principles of SAB No. 101 remain largely unchanged by the issuance of SAB No. 104, and therefore the adoption of SAB No. 104 did not have a material effect on the Company's results of operations or financial condition. 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 reflect the potential dilution of securities that could share in the earnings of an entity that were outstanding for the period. Convertible Preferred Stock is included on an as converted basis if the effect is dilutive. Options to purchase 231,242, 1,148,131, and 296,996 shares of common shares, 12,448, 1,133,633, and 0 warrants, and 3,583,491, 3,583,491, and 2,267,266 common shares upon conversion of the Series B Convertible Preferred stock are not included in the calculation of diluted EPS in the fiscal year ended July 31, 2004, 2003, and 2002 respectively, because their inclusion would be anti-dilutive. 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 (the "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, 2001 296,996 $1.69-$14.00 $ 10.55 Options granted 893,670 $3.50-$8.00 $ 3.96 Options canceled (28,168) $3.19-$16.13 $ 7.70 Options exercised (14,367) $1.88-$8.00 $ 5.78 ============= ============= ============= Balance, July 31, 2002 1,148,131 $1.88-$16.13 $ 10.55 Options granted 390,500 $3.50-$6.00 $ 5.41 Options canceled (70,165) $3.50-$13.63 $ 7.07 Options exercised (94,333) $3.25-$4.11 $ 3.63 ============= ============= ============= Balance, July 31, 2003 1,374,133 $1.94-$16.13 $ 5.77 Options granted 622,520 $3.20-$7.00 3.68 Options canceled (152,300) $2.07-$16.125 5.75 Options exercised -- -- -- ============= ============= ============= Balance, July 31, 2004 1,844,353 $2.075-$16.13 5.03 ============= ============= =============
F-9 Of the exercisable options outstanding at July 31, 2004, 2003 and 2002, 1,844,353, 1,078,464, and 1,118,131, respectively, the weighted average exercise prices were $5.03, $5.82, $5.65, and $11.29. The weighted average remaining life of the options outstanding at July 31, 2004 was 6.80 years. 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, 2004 July 31, 2003 July 31, 2002 =============== ============== ============= Net loss as reported $(5,127,107) $(5,924,836) $(1,613,334) Compensation calculated under fair value method $(1,469,114) $(1,475,115) $(2,274,491) Net loss pro forma $(6,596,221) $(7,399,941) $(3,887,825) Basic and diluted loss per share as reported $ (1.67) $ (2.01) $ (.58) Basic and diluted loss per share pro forma $ (2.15) $ (2.51) $ (1.41)
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, 2004 July 31, 2003 July 31, 2002 ============ ============ =========== Expected dividend yield 00% 00% 00% Expected stock price volatility 123.7-170% 87.5-129.2% 77.2% Risk free interest rate 5.5 5.5% 4.0% Expected life of option (in years) 7.00-10.00 3.00-7.00 7.00
The weighted average fair value of the options granted during the fiscal years ended July 31, 2004, 2003 and 2002 was $3.61, $5.41, and $4.42 respectively. The Company's Chairman, President and Chief Executive Officer had 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. At December 28, 2001 the stock appreciation rights (SARs) were converted into common stock options having the same terms as the original SARs. An expense of $140,894 was recorded in relation to this conversion, as well as a benefit of $843,096 arising from the elimination of the liability relating to the SARs. As of July 31, 2001, appreciation in these rights was approximately $843,000, and is reflected under stock appreciation rights payable in the accompanying consolidated balance sheets. F-10 NOTE B ACCRUED EXPENSES Accrued expenses consist of: As of As of July 31, 2004 July 31, 2003 ======== ======== Accrued legal fees $ 91,810 $150,000 Accrued accounting fees 20,114 27,500 Accrued payroll and related items 368,638 115,254 Accrued video royalties 15,000 15,000 Accrued television and other royalties 426,524 412,574 Deferred payroll officers/shareholders 6,695 6,695 Other 61,500 54,000 ======== ======== $990,281 $781,023 ======== ======== NOTE C COMMITMENTS AND CONTINGENCIES Leases. The Company is obligated under an operating lease expiring on September 30, 2005 for approximately 3,912 square feet 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 in May of 2006 for an automobile provided by the Company to its chairman, President and Chief Executive Officer. The Company's minimum future lease payments for the fiscal years indicated are as follows: Year Office Auto/ Space Equipment Total ============ ============= ============= 2005 $ 139,306 $ 11,994 $ 151,300 2006 23,218 9,995 33,213 ============ ============= ============= $ 162,524 $ 21,989 $ 184,513 ============ ============= ============= NATIONAL LAMPOON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company's aggregate lease payments were approximately $206,292, $141,872, and $139,166, for the years ended July 31, 2004, 2003 and 2002, 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 $23,000, $11,000, and $16,000, for the years ended July 31, 2004, 2003 and 2002, respectively. 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 F-11 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 on 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, 2004, the Company has recorded royalty expense of approximately $500,000 relating to the Termination Agreement including approximately $0, $195,000, and $35,000 during the years ended July 31, 2004, 2003, and 2002, respectively. The increased royalty expense during fiscal 2003 was primarily due to the airing of 65 episodes of the Company's "Funny Money" on one of the cable networks. According to the Guber-Peters agreements, there is a minimum fee of $5,000 for every television episode that airs. The 65 episodes would result in a royalty of $325,000, except that the Company has a maximum due Guber-Peters of $396,250 of which the Company had already accrued $210,687. With this accrual, the Company has recognized the full potential balance due Guber-Peters and therefore will not make any further accruals to them. Employment Agreements. The Company has entered into a 2002 Employment Agreement dated May 17, 2002 with James P. Jimirro, its Chairman, President and Chief Executive Officer. The 2002 agreement terminated the 1999 Agreement and replaced all Contingent Notes totaling $3,224,482 in exchange for an immediate payment of $1,100,000, and future contingent amounts due upon raising of additional capital. The Agreement can be cancelled after December 31, 2002 without cause upon raising additional financing, at which time the Company must pay the new contingent amounts due to Mr. Jimirro of a cash severance payment in the amount of $1,400,000 and delivery of a promissory note providing for the Company's payment to Mr. Jimirro of $1,000,000 in twelve equal monthly installments. The employment contract calls for a base salary for the Initial Term beginning January 1, 2002 and ending December 31, 2007 of $500,000 per year, and a cancellation provision. If Mr. Jimirro remains employed by the Company on December 31, 2003, the Jimirro Employment Agreement will automatically be extended for an additional year. As of December 31, 2004 and December 31 of each year thereafter, so long as Mr. Jimirro remains employed by the Company on such date, the Jimirro Employment Agreement will again be automatically extended for an additional year so that at no time will the remaining term under the Jimirro Employment Agreement be less than five years. To secure future obligations to him, Mr. Jimirro was also granted a security interest in substantially all of the Company's assets, including a pledge of all the outstanding securities of all of their subsidiaries. In addition, Mr. Jimirro will receive 50 percent of the amount the Company receives from exploitation of the movie National Lampoons Van Wilder. The Agreement also provides for the Company to grant Mr. Jimirro 5,000 shares of the Company's common stock at that day's fair market value on the last day of each month of the Employment Term beginning January 31, 2003. The Company has entered into a 2002 Employment Agreement dated May 17, 2002 with Daniel Laikin, a Director and its Chief Operating Officer. The agreement grants to Mr. Laikin compensation of $200,000 per year, which for the Agreement year ended May 17, 2003 was paid in the form of Series B Preferred stock. According to the Agreement, the Chief Operating Officer shall have general operational control of the business and affairs of the Company and reports directly to the Board of Directors. Mr. Laikin was also granted 100,000 common stock options at fair market value at date of grant, as part of the Agreement. The employment agreement has an initial term of one year, but it automatically extends for successive one-year terms thereafter unless and until the Board of Directors elects not to renew the agreement. The Company has entered into an at-will employment agreement with Douglas Bennett, effective October 14, 2002. Mr. Bennett receives a base salary of $175,000 per year, effective December 1, 2002. Mr. Bennett is entitled to calendar quarterly bonuses of $31,250, which bonuses are payable in the month subsequent to the end of calendar quarter to which they were granted. Concurrent with the signing of the Bennett Employment Agreement, Mr. Bennett was granted options to purchase 135,0000 shares of common stock at the then current market price of $6.00 per share, which options vest ratably over a 3-year period. Mr. Bennett is also entitled to an option grant of 50,000 shares of common stock for the period January 3, 2003 through June 3, 2003 and an option grant of 50,000 shares of common stock for the period July 3, 2003 through December 3, 2003. These options shall also vest ratably over three year periods and are to be issued at then current market prices. Upon a change in control of the Company, all unvested options are to vest immediately. On August 18, 2003, a lawsuit was filed against us by Duncan Murray in Los Angeles Superior Court, case number BC300908. Mr. Murray claimed that he was unjustly terminated and was owed severance. The matter was sent to arbitration on February 17, 2004 and was settled on that date. According to the terms of the Settlement and General Release Agreement, the Company paid to Mr. Murray and his lawyer a total of approximately $42,500. F-12 The Purchase Rights became redeemable upon the Acquisition on May 17,2002. Subject to certain exceptions, the Purchase Rights were redeemable at a price of $0.001 per right. Since the amount owed most Rights holders was less than $1.00, a letter was sent to all Rights holders requesting they contact the Company in order for them to receive the amount they were owed. As of October 15, 2003 none of the Rights holders have requested payment. 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 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, 2004 and 2003 was approximately $162,980 and $157,000 respectively. NOTE E MAJOR CUSTOMERS During the year ended July 31, 2004, the Company earned revenue from three significant customers of approximately $773,000 representing 16%, 14%, and 10% of revenues. During the year ended July 31, 2003, the Company earned revenue from three significant customers of approximately $695,000 representing 44%, 13%, and 12% of revenues. During the year ended July 31, 2002, the Company earned revenue from three significant customers of approximately $694,000 representing 21%, 15%, and 38% of revenues. NOTE F STOCKHOLDER EQUITY On May 17, 2002 the Company and the National Lampoon Acquisition Group (the "NLAG Group") entered into a Preferred Stock and Warrant Purchase Agreement, pursuant to which we agreed to sell certain members of the NLAG Group 35,244 units, each such unit consisting of one share of Series B Preferred and a warrant to purchase 28,169 shares of the Company's common stock at a purchase price of $3.55 per share prior to the second anniversary of the date of issuance of the warrant and $5.00 per share thereafter. The 35,244 units sold were valued at $100 each, with the total amount due to the Company of $3,524,400, reduced by $450,000 that had been previously paid to the Company in the form of extensions of a prior letter agreement, and $574,000 which was in the form of an offset for expenses previously paid by the NLAG that the Company has agreed to pay pursuant to the Purchase Agreement. Further as part of the May 17, 2002 Purchase Agreement, the Company amended and restated the Restated Certificate of Incorporation, as amended, to effect among other things, the designation of 68,406 shares of the previously authorized 2,000,000 shares of Preferred Stock as Series B convertible Preferred Stock, and the elimination of Series A Preferred shares as an authorized series of preferred stock. Each share of Series B Preferred is convertible into 28.169 shares of common stock. The Series B Preferred Stock vote on an as converted basis as a class with the shares of Common Stock. The holders of Series B Preferred Stock shall have a right to participate in dividends and distributions (including, without limitation, share dividends or distributions) to the extent that the holders of Common Stock participate, and the holders of Series B Preferred Stock shall receive a like dividend or distribution, pro rata and pari passu with the holders of Common Stock, with all holders of Series B Preferred Stock being treated as if they were holders of the number of shares of Common Stock into which their shares of Series B Preferred Stock could be converted, further, that no dividend or distribution shall be paid unless such dividends or distributions are sufficient to pay in full all amounts due to the holders of the Series B Preferred Stock and the holders of the Common Stock Upon any liquidation, dissolution, or winding up of the Corporation, whether voluntary or involuntary, the assets of the Corporation legally available for distribution, if any, shall be distributed ratably to the holders of the Common Stock and the Series B Preferred Stock, with all holders of Series B Preferred Stock being treated as if they were holders of the number of shares of Common Stock into which their shares of Series B Preferred stock could be converted. During the year ended July 31, 2003, the Company sold an additional 21,500 units to the NLAG group, under the same terms of the Purchase Agreement, for total proceeds of $2,115,000. F-13 As discussed in Note C, Mr. Laikin's compensation of $200,000 per year was paid in the form of Series B Preferred stock in fiscal 2003 and has been accrued and is to be paid in the form of Series C Preferred stock for fiscal 2004 and 2005. NOTE H INCOME TAXES The Company's provision for income taxes is as follows:
For the Fiscal Year Ended ================================================== July 31, 2004 July 31, 2003 July 31, 2002 ========== ========== ========== Federal income taxes $ 0 $ 0 $ 0 State income taxes 2,857 2,424 1,600 ========== ========== ========== Provision for income taxes $ 2,857 $ 2,424 $ 1,600 ========== ========== ==========
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, 2004 July 31, 2003 July 31, 2002 ========== ========== ========== Statutory federal income tax rate (34%) (34%) (34%) State income taxes Amortization of intangible assets 5% 5% 5% Other, increase in valuation allowances 29% 29% 29% ========== ========== ========== Effective tax rate 0% 0% 0%
NATIONAL LAMPOON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For federal and state income tax purposes, as of July 31, 2004 & 2003 the Company has available net operating loss carry forwards of approximately $15,413,000 and $11,320,000 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 carry forwards which give rise to deferred tax assets are as follows: As of As of July 31, 2004 July 31, 2003 ========== ========== Net operating loss carry forwards 6,165,000 4,528,000 Accrued liabilities 390,000 110,000 Royalty reserves 6,000 19,000 ========== ========== 6,561,000 4,657,000 Valuation allowance (6,561,000) (4,657,000) ========== ========== -- -- ========== ========== Valuation allowances of $6,561,000 and $4,657,000 were recorded at July 31, 2004 and 2003, respectively, to offset the net deferred tax assets due to the uncertainty of realizing the benefits of the tax assets in the future. F-14 NOTE I 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, 2004, 2003, and 2002 concerning the Company's segments is as follows:
Trademark Consumer Prod Television Total =========== ============== ============ ============= Year Ended July 31, 2004 Segment revenue $ 1,299,000 $ 64,000 $ 559,000 $ 1,922,000 Segment operating loss (469,000) (1,584,000) (2,840,000) (4,893,000) Identifiable assets Capital expenditures 40,000 40,000 Depreciation expense 2,000 28,000 30,000 Year ended 31, 2003 Segment revenue $ 904,000 $ 12,000 $ 92,000 $ 1,008,000 Segment operating loss (1,239,000) (2,032,000) (1,912,000) (5,183,300) Identifiable assets 5,000 38,000 43,000 Capital expenditures 6,000 6,000 Depreciation expense 2,000 17,000 19,000 Year Ended July 31, 2002 Segment revenue $ 913,000 $ 30,000 $ 943,000 Segment operating loss (940,000) (776,000) (1,716,000) Identifiable assets 7,000 7,000 Capital expenditures Depreciation expense 8,000 8,000
A reconciliation of segment operating income/(loss) to net income/(loss) before income taxes for the fiscal years ended July 31, 2003, 2002 and 2001 is as follows:
For the Fiscal Year Ended ======================================================== July 31, 2004 July 31, 2003 July 31, 2002 =========== =========== =========== Segment operating loss $(4,893,000) $(5,183,000) $(1,717,000) Amortization of intangible assets (240,000) (781,000) (240,000) Stock appreciation rights benefit/(expense) -- -- 843,000 Conversion of SARs to stock options -- -- (140,000) Other income -- 32,000 175,000 Interest income 6,000 7,000 13,000 Corporate expenses incurred related to the change in -- (546,000) control of the Company =========== =========== =========== Net income/(loss) before income taxes $(5,127,000) $(5,925,000) $(1,612,000) =========== =========== ===========
A reconciliation of reportable segment assets to consolidated total assets as of July 31, 2004 and 2003 is as follows: F-15
For the Fiscal Year Ended ================================ July 31, 2004 July 31, 2003 ========== ========== Total assets for reportable segments 154,000 $ 30,000 Intangible asset not allocated to segments 2,216,000 2,456,000 Cash and cash equivalents -- 140,000 Short-term investments -- -- Other unallocated amounts 136,000 66,000 ========== ========== Total assets $2,506,000 $2,692,000
NOTE J 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 $0 for the fiscal years ended July 31, 2004, 2003 and 2002. NOTE K RELATED PARTY TRANSACTIONS Bruce P. Vann, one of the Company's directors until February of 2004, was a partner of the law firm Kelly Lytton &Vann LLP retained by the Company for various legal matters. Legal expenses of approximately $32,000, $108,000, and $119,000 were incurred with respect to work performed by Mr. Vann's firm for the Company during the fiscal years ended July 31, 2004, 2003 and 2002. See Notes C, D and G to these consolidated financial statements for information concerning certain transactions between the Company and the Company's Chairman, President and Chief Executive Officer. NOTE L SUBSEQUENT EVENTS The Company is in the midst of receiving funding from various parties as part of the Series C Preferred stock offering. As of the record date we have received funding totaling $1,159,900 from Golden International Group, Robert Levy, AFG Entertainment, and various others. These parties will invest approximately $8,000,000 (which includes approximately $4.5 million already loaned to us) in a new series of convertible preferred stock. Further, we have signed a Letter of Intent with a third party in an effort to sell up to an additional 1.75 million shares of common stock as part of a secondary common stock offering, at a price to be mutually agreed upon, subject to board approval. Upon receipt of funding, approximately $1.5 million will be paid to James P. Jimirro as part of the Reorganization Transaction of May 17, 2002. Upon Mr. Jimirro's receiving payment he will vacate his offices with the Company, and resign as president. Mr. Jimirro will retain his position as Chairman of the Board and the composition of the board will not change until he is paid another $1 million, to be paid out over the subsequent 12-month period. F-16 STATEMENT OF OPERATIONS BY QUARTER NATIONAL LAMPOON, INC. UNAUDITED
July 31 April 30, Jan. 31, Oct. 31, July 31 April 30, Jan. 31, Oct. 31, 2004 2004 2004 2004 2003 2003 2003 2003 =========== =========== =========== =========== =========== =========== =========== =========== Net Sales 433,735 500,768 714,132 272,929 460,453 344,914 128,329 74,189 Gross (Loss) (948,705) (1,385,426) (1,445,223) (1,350,658) (1,880,953) (1,159,966) (1,401,106) (1,618,640) =========== =========== =========== =========== =========== =========== =========== =========== Income (947,630 (1,383,986) (1,443,783) (1,351,618) (1,879,507) (1,158,520) (1,305,723) (1,580,280) (loss) =========== =========== =========== =========== =========== =========== =========== =========== Net income $ (947,630) $(1,383,986) $(1,443,783) $(1,351,618) $(1,879,507) $(1,159,320) $(1,305,723) $(1,580,280) (loss) =========== =========== =========== =========== =========== =========== =========== =========== (Loss)/ $ (0.31) $ (0.45) $ (0.47) $ (0.45) $ (0.62) $ (0.39) $ (0.45) $ (0.55) Earnings per share =========== =========== =========== =========== =========== =========== =========== ===========
F-17 EX-3.3 2 v07916_ex3-3.txt STATE OF DELAWARE FIRST AMENDMENT OF CERTIFICATE OF INCORPORATION OF NATIONAL LAMPOON, INC. FIRST: The Board of Directors of National Lampoon, Inc., a Delaware corporation (the "Corporation"), duly adopted resolutions setting forth the proposed amendment to the Certificate of Incorporation (the "Certificate") of said Corporation, declaring said amendment to be in the best interests of the Corporation and its stockholders. The resolutions setting forth the proposed amendment are substantially as follows: NOW, THEREFORE, BE IT RESOLVED, that Article 4 of the Certificate of Incorporation of the Corporation be amended and restated in its entirety to read as follows: ARTICLE 4. STOCK. The aggregate number of shares of capital stock that the Corporation shall have authority to issue is Sixty-Two Million (62,000,000) shares, consisting of Sixty Million (60,000,000) shares of common stock with a par value of $0.0001 per share ("Common Stock") and Two Million (2,000,000) shares of preferred stock with a par value of $0.0001 per share ("Preferred Stock"). NOW, THEREFORE, BE IT RESOLVED, that the Certificate of Incorporation of the Corporation is hereby amended by striking out Sections 5.2.1, 5.2.3 and 5.2.4(d) thereof and by substituting in lieu of said sections the following new Sections 5.2.1, 5.2.3 and 5.2.4(d), and by adding a new Section 5.2.7 to Article 5 of the Certificate of Incorporation, as follows: SECTION 5.2.1 DIVIDEND RIGHTS. The Corporation shall have the right to issue dividends and make distributions, whether cash, securities or otherwise, whether or not any shares of the Series B Preferred Stock are outstanding; provided, however, that the Corporation shall not issue any dividends (other than dividends payable solely in Common Stock) or make any distributions of cash or other assets until after the Payment Satisfaction Date. To the extent dividends are declared and issued by the Corporation prior to the earlier of (i) the date of a Liquidation Event or (ii) the date on which the Series B Preferred Stock is converted hereunder, the Corporation shall pay preferential dividends to the holders of the Series B Preferred Stock as provided in this Section 5.2.1. Dividends may be paid in cash or with shares of Common Stock. Dividends on each share of the Series B Preferred Stock shall accrue on a daily basis, whether or not declared, beginning July 19, 2004 and continuing to accrue until the earlier of (i) the date of a Liquidation Event, or (ii) the date on which such share of Series B Preferred Stock is converted hereunder, at the rate of 9.0% per annum on the sum of (i) the Original Purchase Price (as equitably adjusted for any stock splits, stock dividends, recapitalizations, reverse stock splits or otherwise to prevent an enlargement or diminution of rights), plus (ii) all accumulated and unpaid dividends thereon (compounding annually). All accrued and unpaid dividends on each share of Series B Preferred Stock shall be fully paid (pro rata and pari passu with any class or series of preferred securities of the 1 Corporation entitled to participate pro rata and pari passu as to dividends with the Series B Preferred Stock) before any dividends or distributions may be issued with respect to any Junior Securities. If a share of Series B Preferred Stock is converted, then upon such conversion any accumulated and unpaid dividends on such share of Series B Preferred Stock shall be paid in the form of Common Stock at a price per share equal to the price at which shares of Series C Convertible Preferred Stock of the Corporation would be converted at the time assuming there were shares of such stock actually being converted at that time. Except as otherwise provided herein, if at any time the Corporation pays less than the total amount of dividends then accrued with respect to the Series B Preferred Stock and any class or series of preferred securities of the Corporation entitled to participate pro rata and pari passu as to dividends or distributions with the Series B Preferred Stock, such payment shall be distributed ratably among the holders thereof based upon the aggregate accrued but unpaid dividends on the Series B Preferred Stock and any class or series of preferred securities of the Corporation entitled to participate pro rata and pari passu as to dividends or distributions with the Series B Preferred Stock. SECTION 5.2.3 LIQUIDATION RIGHTS. Not less than thirty (30) days prior to the payment date stated therein, the Corporation shall mail written notice of any Liquidation Event to each record holder of Series B Preferred Stock setting forth in reasonable detail the amount of proceeds to be paid with respect to each share of (a) Series B Preferred Stock, (b) Common Stock and (c) any class or series of preferred securities of the Corporation entitled to priority over or to participate pro rata and pari passu as to dividends or distributions with the Series B Preferred Stock, in connection with such Liquidation Event. Upon any liquidation, dissolution, or winding up of the Corporation, whether voluntary or involuntary, the holders of Series B Preferred Stock shall be entitled to receive payment of all accrued and unpaid dividends with respect thereto prior to the making of any distributions to the holders of Common Stock, and after the payment of such dividends (and any other dividends or amounts payable to the holders of the Corporation's preferred securities entitled to priority with respect thereto) the assets of the Corporation legally available for distribution, if any, shall be distributed ratably to the holders of the Common Stock and the Series B Preferred Stock, along with the holders of all other securities of the Corporation entitled to participate therein, with all holders of Series B Preferred Stock being treated as if they were holders of the number of shares of Common Stock into which their shares of Series B Preferred Stock could be converted in accordance with Section 5.2.4. 2 SECTION 5.2.4 CONVERSION RIGHTS. (D) FRACTIONAL SHARES. No fractional shares of Common Stock shall be issued upon conversion of Series B Preferred Stock. All shares of Common Stock (including fractions thereof) issuable upon conversion of more than one share of Series B Preferred Stock by a holder thereof shall be aggregated for purposes of determining whether the conversion would result in the issuance of any fractional share. If, after the aforementioned aggregation, the conversion would result in the issuance of any fractional share, the Corporation shall, in lieu of issuing any fractional share, pay cash equal to the product of such fraction multiplied by the Market Price of the Common Stock on the date of conversion. SECTION 5.2.7 DEFINITIONS. As used in this Article 5, the following defined terms have the meanings set forth below: "COMMON STOCK" means the Corporation's Common Stock, par value of $0.0001 per share. "JUNIOR SECURITIES" means the Common Stock and any other capital stock or other equity securities of the Corporation (including, without limitation, warrants, options and other rights to acquire such capital stock or other equity securities), except for the Series B Preferred Stock and such other series or classes of securities having priority over the Series B Preferred Stock, or having the right to participate pro rata and pari passu with the Series B Preferred Stock, as to current or liquidating dividends or other distributions and as to which the holders of a majority of the Series B Preferred Stock have affirmatively approved the issuance thereof. "LIQUIDATION EVENT" means any of the following: (i) the liquidation, dissolution or winding up of the Corporation (whether voluntary or involuntary), (ii) the sale, lease, transfer or other disposition of all or substantially all of the property or assets of the Corporation, (iii) any merger, consolidation or reorganization to which the Corporation is a party, except for a merger, consolidation or reorganization as to which, after giving effect to such merger, consolidation or reorganization, the holders of the Corporation's outstanding capital stock (on a fully-diluted basis) immediately prior to the merger, consolidation or reorganization, own capital stock holding a majority of the voting power (under ordinary circumstances), and (iv) any sale or related series of sales of shares of the Corporation's capital stock by the Corporation which results in any Person or group of affiliated Persons (other than the owners of the Company's capital stock immediately prior to such sale or related series of sales) owning capital stock holding a majority of the voting power of the Company. "MARKET PRICE" of the Common Stock means the average of the closing prices of the Common Stock's sales on all securities exchanges on which the Common Stock may at the time be listed, or, if there have been no sales on any such exchange on any day, the average of the highest bid and lowest asked prices on all such exchanges at the end of such day, or, if on any day the Common Stock is not so listed, the average of the representative bid and asked prices quoted in the NASDAQ System as of 4:00 P.M., New York time, or, if on any day the Common Stock is not quoted in the NASDAQ System, the average of the closing or last prices of such stock's sales each day (whether sales occurred each day or not) in the domestic over the counter market as reported by the National Quotation Bureau, Incorporated, or any similar successor organization, in each such case averaged over a period of twenty-one (21) business days consisting of the day as of which "Market Price" is being determined and the twenty (20) consecutive business days immediately prior to such day. If at any time the Common Stock is not listed on any securities exchange or quoted in the NASDAQ System or the over the counter market, the "Market Price" shall be the fair value thereof determined in the reasonable good faith judgment of the Corporation's Board of Directors. 3 "ORIGINAL PURCHASE PRICE" shall mean with respect to each share of Series B Preferred Stock the amount paid to the Corporation for the issuance thereof (with accompanying warrants or options if applicable). "PAYMENT SATISFACTION DATE" means the date following the termination of the employment of James P. Jimirro ("JIMIRRO") with the Corporation as of which the following condition (whichever is applicable) has been satisfied: (i) if Jimirro's employment with the Corporation has been terminated by the Corporation for "Cause" pursuant to Section 4(e) of the Employment Agreement between Jimirro and the Corporation dated May 17, 2002 (the "EMPLOYMENT AGREEMENT") or by Jimirro otherwise than for an Executive Good Reason Termination Event pursuant to Section 4(g) of the Employment Agreement, then upon full payment of all compensation (excluding payments with respect to the movie "National Lampoon's Van Wilder") owed to Jimirro under the Employment Agreement; or (ii) if Jimirro's employment with the Corporation has been terminated by reason of Jimirro's death or disability, by the Corporation for "Convenience" pursuant to Section 4(f) of the Employment Agreement, or by Jimirro for an Executive Good Reason Termination Event pursuant to Section 4(g) of the Employment Agreement, then upon the later of (A) full payment to Jimirro of all compensation (including payments under the Severance Note (as defined in the Employment Agreement) but excluding payments with respect to the movie "National Lampoon's Van Wilder") owed to Jimirro under the Employment Agreement, and (B) thirteen (13) months after the payment to Jimirro of the "Cash Severance Payment" pursuant to, and as defined in, Section 5(d)(i) of the Employment Agreement. SECOND: That acting by written consent, the holders of at least a majority of the issued and outstanding shares of the Corporation's capital stock, including the Series B Preferred Stock, consented to the foregoing resolutions and this First Amendment of Certificate of Incorporation in accordance with Section 228(a) of the Delaware General Corporation Law. 4 THIRD: That the resolutions and this First Amendment of Certificate of Incorporation was duly adopted in accordance with the provisions of Section 242(b)(1) of the Delaware General Corporation Law. FOURTH: That the capital of said Corporation shall not be reduced under or by reason of said amendment. IN WITNESS WHEREOF, the undersigned Corporation has caused this First Amendment to Certificate of Incorporation to be signed by a duly authorized officer as of October 15, 2004. By: /s/ Douglas Bennett ------------------------------------- Douglas Bennett, Executive Vice President 5 EX-3.4 3 v07916_ex3-4.txt CERTIFICATE OF DESIGNATIONS, PREFERENCES, RIGHTS AND LIMITATIONS OF SERIES C CONVERTIBLE PREFERRED STOCK OF NATIONAL LAMPOON, INC. Pursuant to Section 151 of the General Corporation Law of the State of Delaware NATIONAL LAMPOON, INC., a corporation organized and existing under the General Corporation Law of the state of Delaware (the "Corporation"), DOES HEREBY CERTIFY: That, pursuant to the authority expressly vested in the Board of Directors by Article 5 of the Certificate of Incorporation of the Corporation (as amended from time to time, the "CERTIFICATE OF Incorporation"), and pursuant to the provisions of Section 151 of the General Corporation Law of the State of Delaware, the Board of Directors duly adopted a resolution providing for the issuance of up to Two Hundred Fifty Thousand (250,000) shares of Series C Convertible Preferred Stock, which resolution is as follows: RESOLVED by the Board of Directors of National Lampoon, Inc., a Delaware corporation (the "CORPORATION"), that one (1) series of the class of authorized Preferred Stock, $0.0001 par value per share, of the Corporation (the "PREFERRED STOCK") to be designated the Series C Convertible Preferred Stock (the "SERIES C PREFERRED") is hereby created, and that the designations and amounts thereof and the voting powers, preferences and relative, participating optional and other special rights of the shares of such series, and the qualifications, limitations and restrictions thereof are as follows: NUMBER OF SERIES AUTHORIZED SHARES: Series C Convertible Preferred Stock 250,000 Section 1. NUMBER OF SHARES. The number of shares constituting the Series C Preferred shall be as set forth above. Such number of shares may be increased or decreased by resolution of the Board of Directors; provided, that no decrease shall reduce the number of shares of Series C Preferred to a number less than the number of shares then outstanding plus the number of shares reserved for issuance upon the exercise of any outstanding options, rights or warrants, or upon the conversion of any outstanding securities or rights issued by the Corporation convertible into the Series C Preferred; provided further that no increase shall be effective unless the Corporation obtains the prior written consent of the holders of at least seventy-five percent (75%) of the outstanding Series C Preferred. Section 2. RANKING. As to the payment of dividends and distributions on liquidation and as to redemptions, the Series C Preferred ranks senior to all other Junior Securities of the Corporation. Section 3. VOTING Section 3.01. VOTING GENERALLY. Except as may be otherwise provided in this Certificate of Designations or as otherwise required by applicable law, the Series C Preferred shall vote together with the Common Stock (and such other series of Preferred Stock which by their terms likewise vote together with the Common Stock) as a single class on all actions to be taken by the stockholders of the Corporation. The holders of Series C Preferred shall be entitled to notice of all stockholders meetings in accordance with the Corporation's Bylaws. Each share of Series C Preferred shall entitle the holder thereof to one vote per share on each such action for each whole share of Common Stock into which such share of Series C Preferred is then convertible as of the record date for such vote or, if no record date is specified, as of the date of such vote. 1 Section 3.02. ELECTION OF DIRECTORS. For so long as at least 100,000 shares of Series C Preferred are issued and outstanding (as equitably adjusted for any stock splits, stock dividends, recapitalizations, reverse stock splits or otherwise to prevent an enlargement or diminution of rights), in the election of directors of the Corporation, the holders of the Series C Preferred, voting separately as a single class to the exclusion of all other classes of the Corporation's capital stock and with each share of Series C Preferred entitled to one vote, shall be entitled to elect one (1) director to serve on the Corporation's Board of Directors until his/her successor is duly elected by the holders of the Series C Preferred or he/she is removed from office by the holders of the Series C Preferred. If the holders of the Series C Preferred for any reason fail to elect anyone to fill any such directorship, such position shall remain vacant until such time as the holders of the Series C Preferred elect a director to fill such position and shall not be filled by resolution or vote of the Corporation's Board of Directors or the Corporation's other stockholders. Section 3.03. OTHER VOTING RIGHTS. Notwithstanding the foregoing, so long as any Series C Preferred remains outstanding, without the affirmative vote or prior written consent of the holders of at least a majority of the outstanding Series C Preferred, the Corporation shall not: (a) directly or indirectly declare or pay any dividends or make any distributions upon any of its Common Stock; and (b) directly or indirectly redeem, purchase or otherwise acquire any of the Corporation's Junior Securities or directly or indirectly redeem, purchase or make any payments with respect to any stock appreciation rights, phantom stock plans or similar rights or plans; except for repurchases of Common Stock from employees and other service providers of the Corporation upon termination of employment or other services pursuant to equity incentive agreements or other agreements providing for a right of repurchase by the Corporation as approved by the unanimous consent of the Board. Section 4. DIVIDENDS. The Corporation shall have the right to issue dividends and make distributions, whether cash, securities or otherwise, whether or not any shares of the Series C Preferred Stock are outstanding; provided, however, that the Corporation shall not issue any dividends (other than dividends payable solely in Common Stock) or make any distributions of cash or other assets until after the Payment Satisfaction Date. To the extent dividends are declared and issued by the Corporation prior to the earlier of (i) the Redemption Date, (ii) the date of a Liquidation Event or (iii) the date on which the Series C Preferred Stock is converted hereunder, the Corporation shall pay preferential dividends, payable in the Corporation's Common Stock, to the holders of the Series C Preferred Stock as provided in this Section 4. Dividends on each share of the Series C Preferred Stock shall accrue on a daily basis, whether or not declared, beginning with the date of issuance of such share of Series C Preferred and continuing until the earlier of (i) the Redemption Date, (ii) the date of a Liquidation Event, or (iii) the date on which such share of Series C Preferred Stock is converted hereunder, at the rate of 9.0% per annum on the sum of (i) the Original Purchase Price (as equitably adjusted for any stock splits, stock dividends, recapitalizations, reverse stock splits or otherwise to prevent an enlargement or diminution of rights), plus (ii) all accumulated and unpaid dividends thereon (compounding annually). All accrued and unpaid dividends on each share of Series C Preferred Stock shall be fully paid (pro rata and pari passu with any class or series of preferred securities of the Corporation entitled to participate pro rata and pari passu as to dividends with the Series C Preferred Stock) before any dividends or distributions may be issued with respect to any Junior Securities. If a share of Series C Preferred Stock is converted, then upon such conversion any accumulated and unpaid dividends on such share of Series C Preferred Stock shall be paid in the form of Common Stock at a price per share equal to the Conversion Price. Except as otherwise provided herein, if at any time the Corporation pays less than the total amount of dividends then accrued with respect to the Series C Preferred Stock and each Parity Series, such payment shall be distributed ratably among the holders thereof based upon the aggregate accrued but unpaid dividends on the Series C Preferred Stock and all Parity Series. 2 Section 5. LIQUIDATION. Section 5.01. LIQUIDATION PREFERENCE. Upon the occurrence of any Liquidation Event, each holder of Series C Preferred shall be entitled to be paid, before any distribution or payment is made upon any Junior Securities (including, without limitation, the Series B Convertible Preferred Stock), an amount in cash equal to the aggregate Liquidation Value of all shares of Series C Preferred held by such holder (plus all unpaid dividends thereon, if any). In addition to and after payment in full of all other amounts payable to the holders of the Series C Preferred under this Section 5 and the subsequent payment of all priority amounts due to the holders of any other class of preferred stock of the Corporation outstanding, upon the occurrence of any Liquidation Event, the assets of the Corporation legally available for distribution, if any, shall be distributed ratably to the holders of the Common Stock, the holders of Series C Preferred and the holders of such other series of Preferred Stock as are constituted as similarly participating (including the Series B Convertible Preferred Stock), with all holders of Series C Preferred treated (for purposes of this determination) as if they had converted all of their shares of Series C Preferred into Common Stock in accordance with Section 7. Section 5.02. INSUFFICIENCY OF ASSETS. If upon the occurrence of any such Liquidation Event, the Corporation's assets to be distributed among the holders of the Series C Preferred are insufficient to permit payment to such holders of the aggregate amount which they are entitled to be paid under this Section 5, then the entire assets available to be distributed to the Corporation's stockholders shall be distributed pro rata among such holders based upon the aggregate Liquidation Value (plus all unpaid dividends thereon, if any) of the Series C Preferred held by each such holder. 3 Section 5.03. NOTICE OF LIQUIDATION. Not less than thirty (30) days prior to the payment date stated therein, the Corporation shall mail written notice of any such Liquidation Event to each record holder of Series C Preferred, setting forth in reasonable detail the amount of proceeds to be paid with respect to each share of Series C Preferred and each share of Common Stock in connection with such Liquidation Event. Section 6. CONVERSION. Section 6.01. CONVERSION PROCEDURE. (a) At any time and from time to time, any holder of Series C Preferred may convert all or any portion of the Series C Preferred held by such holder into a number of shares of Conversion Stock computed by multiplying the number of shares of Series C Preferred to be converted times ten, with such conversion ratio to be adjusted as provided herein. (b) Except as otherwise provided herein, each conversion of Series C Preferred shall be deemed to have been effected as of the close of business on the date on which the certificate or certificates representing the Series C Preferred to be converted have been surrendered for conversion at the principal office of the Corporation. At the time any such conversion has been effected, the rights of the holder of the shares of Series C Preferred converted as a holder of Series C Preferred shall cease and the Person or Persons in whose name or names any certificate or certificates for shares of Conversion Stock are to be issued upon such conversion shall be deemed to have become the holder or holders of record of the shares of Conversion Stock represented thereby. (c).Notwithstanding any other provision hereof, if a conversion of Series C Preferred is to be made in connection with a Change in Ownership, a Fundamental Change or other transaction affecting the Corporation, the conversion of any shares of Series C Preferred may, at the election of the holder thereof, be conditioned upon the consummation of such transaction, in which case such conversion shall not be deemed to be effective until such transaction has been consummated. (d) As soon as possible after a conversion has been effected, the Corporation shall deliver to the converting holder: (i) a certificate or certificates representing the number of shares of Conversion Stock issuable by reason of such conversion in such name or names and such denomination or denominations as the converting holder has specified; and 4 (ii) a certificate representing any shares of Series C Preferred which were represented by the certificate or certificates delivered to the Corporation in connection with such conversion but which were not converted. (e) The issuance of certificates for shares of Conversion Stock upon conversion of Series C Preferred shall be made without charge to the holders of such Series C Preferred for any issuance tax in respect thereof or other cost incurred by the Corporation in connection with such conversion and the related issuance of shares of Conversion Stock. (f) The Corporation shall not close its books against the transfer of Series C Preferred or of Conversion Stock issued or issuable upon conversion of Series C Preferred in any manner which interferes with the timely conversion of Series C Preferred. The Corporation shall assist and cooperate with any holder of shares of Series C Preferred required to make any governmental filings or obtain any governmental approval prior to or in connection with any conversion of shares of Series C Preferred hereunder (including, without limitation, making any filings required to be made by the Corporation). (g) The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Conversion Stock, solely for the purpose of issuance upon the conversion of the Series C Preferred, such number of shares of Conversion Stock issuable upon the conversion of all outstanding Series C Preferred. All shares of Conversion Stock which are so issuable shall, when issued, be duly and validly issued, fully paid and nonassessable and free from all taxes, liens and charges. (h) If any fractional interest in a share of Conversion Stock would, except for the provisions of this subparagraph, be delivered upon any conversion of the Series C Preferred, the Corporation, in lieu of delivering the fractional share therefore, shall pay an amount to the holder thereof equal to the Market Price of such fractional interest as of the date of conversion. Section 6.02. Subdivision or Combination of Common Stock. If the Corporation at any time subdivides (by any stock split, stock dividend, recapitalization or otherwise) one or more classes of its outstanding shares of Common Stock into a greater number of shares, the number of shares of Conversion Stock into which each Series C Preferred Share can be converted shall be increased ratably, and if the Corporation at any time combines (by reverse stock split or otherwise) one or more classes of its outstanding shares of Common Stock into a smaller number of shares, the number of shares of Conversion Stock into which each Series C Preferred Share can be converted shall be decreased ratably. Section 7. REGISTRATION OF TRANSFER. The Corporation shall keep at its principal office a register for the registration of Series C Preferred. Upon the surrender of any certificate representing Series C Preferred at such place, the Corporation shall, at the request of the record holder of such certificate, execute and deliver (at the Corporation's expense) a new certificate or certificates in exchange therefore representing in the aggregate the number of shares of Series C Preferred represented by the surrendered certificate. Each such new certificate shall be registered in such name and shall represent such number of shares of Series C Preferred as is requested by the holder of the surrendered certificate and shall be substantially identical in form to the surrendered certificate. 5 Section 8. REPLACEMENT. Upon receipt of evidence reasonably satisfactory to the Corporation (an affidavit of the registered holder shall be satisfactory) of the ownership and the loss, theft, destruction or mutilation of any certificate evidencing shares of Series C Preferred, and in the case of any such loss, theft or destruction, upon receipt of indemnity reasonably satisfactory to the Corporation (provided that if the holder is a financial institution or other institutional investor its own agreement shall be satisfactory), or, in the case of any such mutilation upon surrender of such certificate, the Corporation shall (at its expense) execute and deliver in lieu of such certificate a new certificate of like kind representing the number of shares of Series C Preferred of such class represented by such lost, stolen, destroyed or mutilated certificate and dated the date of such lost, stolen, destroyed or mutilated certificate, and declared dividends shall accrue on the Series C Preferred represented by such new certificate from the date to which dividends have been fully paid on such lost, stolen, destroyed or mutilated certificate. Section 9. DEFINITIONS. "CHANGE IN OWNERSHIP" means any sale, transfer or issuance or series of sales, transfers or issuances of shares of the Corporation's capital stock by the Corporation or any holders thereof which results in any Person or group of Persons (as the term "GROUP" is used under the Securities Exchange Act of 1934), other than the holders of Common Stock, the Series B Convertible Preferred Stock and the Series C Preferred as of the Series C Closing Date, owning more than 50% of the Common Stock outstanding at the time of such sale, transfer or issuance or series of sales, transfers or issuances. "COMMON STOCK" means, collectively, the Corporation's Common Stock, par value of $0.0001 per share. "CONVERSION STOCK" means shares of the Corporation's Common Stock; provided that if there is a change such that the securities issuable upon conversion of the Series C Preferred are issued by an entity other than the Corporation or there is a change in the type or class of securities so issuable, then the term "CONVERSION STOCK" shall mean one share of the security issuable upon conversion of the Series C Preferred if such security is issuable in shares, or shall mean the smallest unit in which such security is issuable if such security is not issuable in shares. "CONVERTIBLE SECURITIES" means any stock or securities directly or indirectly convertible into or exchangeable for Common Stock. "FUNDAMENTAL CHANGE" means (a) any sale or transfer of more than 50% of the assets of the Corporation and its Subsidiaries on a consolidated basis (measured either by book value in accordance with generally accepted accounting principles consistently applied or by fair market value determined in the reasonable good faith judgment of the Corporation's Board of Directors) in any transaction or series of transactions (other than sales in the ordinary course of business) and (b) any merger or consolidation to which the Corporation is a party, except for a merger in which the Corporation is the surviving corporation, the terms of the Series C Preferred are not changed and the Series C Preferred is not exchanged for cash, securities or other property, and after giving effect to such merger, the holders of the Corporation's outstanding capital stock possessing a majority of the voting power (under ordinary circumstances) to elect a majority of the Corporation's Board of Directors immediately prior to the merger shall continue to own the Corporation's outstanding capital stock possessing the voting power (under ordinary circumstances) to elect a majority of the Corporation's Board of Directors. 6 "JUNIOR SECURITIES" means any capital stock or other equity securities of the Corporation (including, without limitation, warrants, options and other rights to acquire such capital stock or other equity securities), except for the Series C Preferred and such other series or classes of securities which the holders of a majority of the Series C Preferred affirmatively approve to not be Junior Securities under this Certificate of Designations. "LIQUIDATION EVENT" means any of the following (i) the liquidation, dissolution or winding up of the Corporation (whether voluntary or involuntary), (ii) the sale, lease, transfer or other disposition of all or substantially all of the property or assets of the Corporation, (iii) any merger, consolidation or reorganization to which the Corporation is a party, except for a merger, consolidation or reorganization, which, after giving effect to such merger, consolidation or reorganization, the holders of the Corporation's outstanding capital stock (on a fully-diluted basis) immediately prior to the merger, consolidation or reorganization, own capital stock holding a majority of the voting power (under ordinary circumstances), and (iv) any sale or related series of sales of shares of the Corporation's capital stock by the Corporation which results in any Person or group of affiliated Persons (other than the owners of the Company's capital stock as of the Series C Closing Date) owning capital stock holding a majority of the voting power of the Company. "LIQUIDATION VALUE" of any share of Series C Preferred as of any particular date shall be equal to 1.5 times the Original Purchase Price (as equitably adjusted for any stock splits, stock dividends, recapitalizations, reverse stock splits, or otherwise to prevent an enlargement or diminution of rights). "MARKET PRICE" of any security means the average of the closing prices of such security's sales on all securities exchanges on which such security may at the time be listed, or, if there have been no sales on any such exchange on any day, the average of the highest bid and lowest asked prices on all such exchanges at the end of such day, or, if on any day such security is not so listed, the average of the representative bid and asked prices quoted in the NASDAQ System as of 4:00 P.M., New York time, or, if on any day such security is not quoted in the NASDAQ System, the average of the closing or last prices of such stock's sales each day (whether sales occurred each day or not) in the domestic over-the-counter market as reported by the National Quotation Bureau, Incorporated, or any similar successor organization, in each such case averaged over a period of 21 days consisting of the day as of which "Market Price" is being determined and the 20 consecutive business days prior to such day. If at any time such security is not listed on any securities exchange or quoted in the NASDAQ System or the over-the-counter market, the "Market Price" shall be the fair value thereof determined in the reasonable good faith judgment of the Corporation's Board of Directors. 7 "OPTIONS" means any rights, warrants or options to subscribe for or purchase Common Stock or Convertible Securities. "ORIGINAL PURCHASE PRICE" shall mean with respect to each share of Series C Preferred, the amount of cash consideration paid to the Company for such share and for any accompanying warrants or options issued with such share and not separately priced. "PAYMENT SATISFACTION DATE" means the date following the termination of the employment of James P. Jimirro ("JIMIRRO") with the Corporation as of which the following condition (whichever is applicable) has been satisfied: (i) if Jimirro's employment with the Corporation has been terminated by the Corporation for "Cause" pursuant to Section 4(e) of the Employment Agreement between Jimirro and the Corporation dated May 17, 2002 (the "EMPLOYMENT AGREEMENT") or by Jimirro otherwise than for an Executive Good Reason Termination Event pursuant to Section 4(g) of the Employment Agreement, then upon full payment of all compensation (excluding payments with respect to the movie "National Lampoon's Van Wilder") owed to Jimirro under the Employment Agreement; or (ii) if Jimirro's employment with the Corporation has been terminated by reason of Jimirro's death or disability, by the Corporation for "Convenience" pursuant to Section 4(f) of the Employment Agreement, or by Jimirro for an Executive Good Reason Termination Event pursuant to Section 4(g) of the Employment Agreement, then upon the later of (A) full payment to Jimirro of all compensation (including payments under the Severance Note (as defined in the Employment Agreement) but excluding payments with respect to the movie "National Lampoon's Van Wilder") owed to Jimirro under the Employment Agreement, and (B) thirteen (13) months after the payment to Jimirro of the "Cash Severance Payment" pursuant to, and as defined in, Section 5(d)(i) of the Employment Agreement. "PERSON" means an individual, a partnership, a corporation, a limited liability Corporation, a limited liability, an association, a joint stock Corporation, a trust, a joint venture, an unincorporated organization and a governmental entity or any department, agency or political subdivision thereof. 8 "SERIES C CLOSING DATE" means the date upon which the first sale and purchase of Series C Preferred is consummated, which is currently anticipated to be in July 2004. "SUBSIDIARY" means any corporation of which the shares of outstanding capital stock possessing the voting power (under ordinary circumstances) in electing the board of directors are, at the time as of which any determination is being made, owned by the Corporation either directly or indirectly through Subsidiaries. Section 10. AMENDMENT AND WAIVER. No amendment, modification or waiver shall be binding or effective with respect to any provision hereof without the affirmative vote or prior written consent of the holders of a majority of the Series C Preferred outstanding at the time such action is taken; and provided further that no change in the terms hereof may be accomplished by merger or consolidation of the Corporation with another corporation or entity unless the Corporation has obtained the affirmative vote or prior written consent of the holders of a majority of the Series C Preferred then outstanding. Section 11. NOTICES. Except as otherwise expressly provided hereunder, all notices referred to herein shall be in writing and shall be delivered by registered or certified mail, return receipt requested and postage prepaid, or by reputable overnight courier service, charges prepaid, and shall be deemed to have been given when so mailed or sent (i) to the Corporation, at its principal executive offices and (ii) to any stockholder, at such holder's address as it appears in the stock records of the Corporation (unless otherwise indicated by any such holder). RESOLVED FURTHER, that the Executive Vice President of the Corporation is authorized to do or cause to be done all such acts or things and to make, execute and deliver or cause to be made, executed and delivered all such agreements, documents, instruments and certificates in the name and on behalf of the Corporation or otherwise as he deems necessary, desirable or appropriate to execute or carry out the purpose and intent of the foregoing resolutions. IN WITNESS WHEREOF, National Lampoon, Inc. has caused this Certificate of Designations, Preferences, Rights and Limitations of Series C Convertible Preferred Stock to be signed by its duly authorized officer as of this 15th day of October 2004. NATIONAL LAMPOON, INC. BY:/s/ Douglas S. Bennett --------------------------------- Douglas S. Bennett Executive Vice President 9 EX-21 4 v07916_ex21.txt EXHIBIT 21 Subsidiaries of the Registrant National Lampoon Networks, Inc. National Lampoon Tours, Inc. EX-31.1 5 v07916_ex31-1.txt EXHIBIT 31.1 Certification by CEO Pursuant to Section 302 of Sarbanes-Oxley Certifications I, James P. Jimirro, President and Chief Executive, certify that: 1. I have reviewed this annual report on Form 10-K of National Lampoon, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial conditions, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in the Exchange Act Rules 13a-15(e) and 15d-15(e), and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and d) Disclosed in this annual report any change in the registrant's internal control over financial reporting that occurred during the registrant's fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Dated: October 29, 2004 /s/James P. Jimirro ------------------- James P. Jimirro EX-31.2 6 v07916_ex31-2.txt EXHIBIT 31.2 Certification by CFO Pursuant to Section 302 of Sarbanes-Oxley Certifications I, James Toll, Chief Financial Officer, certify that: 1. I have reviewed this annual report on Form 10-K of National Lampoon, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial conditions, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in the Exchange Act Rules 13a-15(e) and 15d-15(e), and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and d) Disclosed in this annual report any change in the registrant's internal control over financial reporting that occurred during the registrant's fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Dated: October 29, 2004 /s/ James Toll ------------------- James Toll EX-32 7 v07916_ex32.txt EXHIBIT 32 SECTION 906 CERTIFICATIONS In connection with the Annual Report of National Lampoon, Inc and Subsidiaries (the "Company") on Form 10-K for the fiscal year ended July 31, 2004 as filed with the Securities and Exchange Commission and to which this Certification is an exhibit (the "Report"), the undersigned hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company for the periods reflected therein. Date: October 29, 2004 /s/ James P. Jimirro ------------------------------- James P. Jimirro, Chief Executive Officer /s/ James Toll ------------------------------- James Toll, Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----