-----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, FKNdFx5lWsRzrxBM9G9qofyvsGb4n7svtB0l6MRlujT3uFuu35nmUdzCJOjRbEr2 6kH0+vXnU9P9g1uBg4hlfw== 0000950148-99-002432.txt : 19991115 0000950148-99-002432.hdr.sgml : 19991115 ACCESSION NUMBER: 0000950148-99-002432 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990731 FILED AS OF DATE: 19991112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: J2 COMMUNICATIONS /CA/ CENTRAL INDEX KEY: 0000798078 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MOTION PICTURE & VIDEO TAPE PRODUCTION [7812] IRS NUMBER: 954053296 STATE OF INCORPORATION: CA FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-15284 FILM NUMBER: 99750018 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 TELECOMMUNICATIONS DATE OF NAME CHANGE: 19890731 FORMER COMPANY: FORMER CONFORMED NAME: J2 COMMUNICATIONS DATE OF NAME CHANGE: 19880308 10-K 1 FORM 10-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended July 31, 1999 Commission File Number 0-15284 J2 COMMUNICATIONS (Exact name of registrant as specified in charter) California 95-4053296 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 10850 Wilshire Boulevard, Suite 1000 Los Angeles, California (Address of principal executive office) Registrant's telephone number, including area code (310) 474-5252 Securities registered pursuant to Section 12(g) of the Act: (Name of each exchange (Title of each class) on which registered) -------------------------- ---------------------- Common Stock, no par value NASDAQ Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of October 27, 1999, the aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $13,178,034. As of October 27, 1999, the Registrant had 1,233,712 of its common stock ("Common Stock"), no par value, issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE No documents are incorporated by reference into Parts I, II or III 2 PART I Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 Certain statements in the Annual Report on Form 10-K, particularly under Items 1 through 8, constitute "forward-looking statements" within the meaning of Private Securities Litigation Reform Act of 1995 (the "Reform Act"). Such forward-looking statements involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements, expressed or implied by such forward-looking statements. ITEM 1: THE BUSINESS The Company was founded in March, 1986 by its Chairman of the Board and President, James P. Jimirro, the first President of both The Disney Channel and Walt Disney Home Video. The Company was originally formed primarily to engage in the acquisition, development and production of entertainment feature film and special-interest videocassette programs, and the marketing of these programs in the home video rental and sell-through markets. Due to increasing competition in the videocassette market, resulting in declining profitability, the Company de-emphasized this segment of its business and presently it is an insignificant part of the Company's overall business. In late 1990, the Company acquired National Lampoon, Inc. ("NL"), publisher of a national satire and humor magazine and licensor of its name for feature films. In an effort to preserve capital the Company at that time significantly scaled back its operations, and retained a modest staff to administer the licensing of the National Lampoon name. The Company did not actually engage in any production or development activity and instead contracted with various licensees to exploit this trademark. Altering its strategy to reflect current opportunities, in April, 1999 the Company announced its intent to develop nationallampoon.com, a humor network (the "Site") featuring a wide array of new comedic content including animation and live action, as well as classic articles and features from the magazine. Management expects to earn revenue on the Site through the sales of advertising and National Lampoon-themed merchandise from a virtual store which is a part of the Site. A further part of this Internet strategy is to spin off characters, animation, and stories from the website into feature films, television, video, audio and merchandise. The Site, which launched on October 25, 1999, is a content provider, and will deliver original programming, both developed by the Company and produced and acquired from third parties, for exhibition and exploitation over the Internet. The Site features a wide variety of original programming delivered via audio, video and text as well as classic National Lampoon audio from "The National Lampoon Radio Hour" and reprints of classic National Lampoon magazine articles and features. During the first week of the site's launch, there had been over 1,100,000 hits on nationallampoon.com, providing an early indication that the Site may be attractive to advertisers and that the quantity of visitors may attain the level necessary to sell significant quantities of merchandise. The Company believes that, despite the plethora of existing Internet sites, its strong consumer positioning will allow it to establish its Site as a leader in the delivery of comedic entertainment. The Company believes that the Site will derive a substantial portion of its revenue from "banner" and "sponsorship" advertising. The advertising model emerging on the Internet is similar to that which has developed in more mature media, in which revenue will depend upon the quantity and quality of impressions delivered to advertisers. The Company anticipates that the Site will appeal to the same demographic segments as did the magazine: males age 18-34, with a strong overlay of college-age males and a contingent of under-18 year olds. In addition, the Company believes that there is a significant segment of post-34 year olds who grew up with National Lampoon and, it is anticipated, will regularly visit the Site. 1 3 Nationallampoon.com demographics, especially 18-34 year old males, are extremely attractive to advertisers. Thus, should the Site succeed in delivering large quantities of this demographic segment, we believe that advertisers will be attracted to the Site. In addition, Management believes that the highly interactive nature of the Site and the frequent addition of new material will encourage visitors to remain at the Site longer than they would otherwise stay and to revisit it often, thus adding to its attractiveness to advertisers. The site also log on E-commerce component. The Site's retail store, "Smash & Grab," features a broad array of NL videos, books and CD's, as well as new National Lampoon apparel and other themed merchandise. Management anticipates that this selection of merchandise, as well as a schedule of promotions in the store, may result in retail revenue. Management anticipates that the Site will become the principal business of the Company over the near term. WEB RELATED BUSINESS ARRANGEMENTS In the process of creating and launching nationallampoon.com, the Company has been fortunate in attracting high caliber, experienced personnel, and in forming alliances, on a cost effective basis, which afford the Site the opportunity of achieving success. During 1999 the Company hired an Editor-in-Chief of the site who has extensive experience in comedy writing, editing and performing. In addition, the Company added a nationallampoon.com Marketing Manager who brought with her experience in creating, launching, and conducting online marketing for a website. Management believes that a primary source of revenue from the Site will be from advertising. The Company has entered into an agreement with Phase2Media to sell banner ads, interstitial ads (i.e., ads which use video as opposed to static images) and sponsorships (wherein an advertiser sponsors an entire section of the Site). Phase2Media represents a number of other prestigious, "branded" sites. As of November 1, 1999, no significant advertising space had been sold. To maximize the revenue potential of the Site, the Company has contracted with The eMarket Group to design and maintain a virtual retail outlet, "Smash & Grab." Under the terms of this agreement, the Company has completely eliminated inventory risk. Since all order fulfillment and customer service has, per the contract, been outsourced, the Company has avoided the fixed costs normally associated with managing a retail site. In a further effort to minimize fixed costs, the Company has chosen to outsource the hosting and maintaining of the Site to Concentric Network, which was chosen because of its reputation for reliability and high technical quality. The Company has a one year contract with Concentric, under what it considers to be favorable terms. The Company also has agreements with Reel Networks and inet regarding the republishing (re broadcast) of "Classic" National Lampoon ceudro metered, and the link of such sites to the National Lampoon site. Management believes that these personnel decisions, as well as the alliances described above, allow the Company to concentrate its resources, both human and financial, on the tasks of creating high quality, new comedic material for the Site and marketing it effectively. INDUSTRY BACKGROUND Due to its strong consumer appeal, the Internet is emerging as a medium that is complimentary and, in several respects, superior to traditional electronic and print media. Specifically, the Internet offers content providers and advertisers the ability to quickly and efficiently reach highly-targeted audiences without having to surmount the barriers to entry presented by traditional media. The Company believes that the Internet offers it a significant opportunity to reach its own target audience and deliver it to advertisers. 2 4 PROPRIETARY RIGHTS The Company regards its copyrights, trademarks, trade secrets and similar intellectual property as critical to its success. The Company has obtained copyrights and registration for its major properties and is in the process of obtaining them for its new properties. Due to worldwide availability of the Internet, copyright and trademark protection may not be available in every country where nationallampoon.com is available. MARKETING The Company will pursue both online and offline marketing in an effort to leverage National Lampoon's strong consumer positioning against nationallampoon.com Offline consumer marketing will, over the coming period, comprise a number of activities, beginning with a publicity campaign directed to print and electronic media. This will be supplemented by consumer promotions and paid advertising. Marketing will be directed toward the site's core audience of men 18-34, with specific emphasis on college age males and supplemented by targeting "baby boomer" males who grew up with the National Lampoon. In addition to consumer advertising and promotion, there will be an additional emphasis on online marketing, including syndication of nationallampoon.com material to other portals and websites. This "sampling" of National Lampoon material with accompanying links to nationallampoon.com is designed to generate interest among potential viewers and entice them to visit our site. COMPETITION The market for Internet access is relatively new, intensely competitive and rapidly changing. Because there are no substantial barriers to entry, the number of web sites competing for consumers' attention has proliferated and it is expected that competition will continue to intensify. Many proprietors of traditional offline media such as television, radio and print have already established, or may establish Web sites, and may compete directly with the Company. Many of these competitors are larger, more established and have access to more capital than the Company. The Company may need to raise additional capital to be able to be competitive in this market. It is anticipated that the amount of competition will increase in the future. This could result in price reductions for advertising revenue, reduced margins, loss of market share and greater operating losses, any of which would materially and adversely effect the business of the company, the results of its operations and financial condition. 3 5 CERTAIN CONSIDERATIONS Dependence on the Internet Since the Internet and other wide area networks are new and evolving, it is difficult to predict with any certainty whether the Internet will prove to be a viable commercial marketplace. The Internet has experienced and is expected to continue to experience significant growth in users and traffic. There can be no assurance that the Internet infrastructure will continue to be able to support the demands on it by this continued growth. In addition, the Internet could lose its viability due to delays in the development or adoption of new standards and protocols to handle an increased level of activity. Further, if the necessary infrastructure or complimentary services or facilities are not developed, results of the Company's operations and financial conditions will be materially affected. The Company expects to derive a substantial amount of its revenues from sponsorships and advertising for the foreseeable future, and demand and market acceptance for Internet advertising is uncertain. There are currently no standards for the measurement of the effectiveness of Internet advertising, and the industry may need to develop standard measurements to support and promote Internet advertising as a significant advertising medium. If such standards do not develop, existing advertisers may not continue their levels of Internet advertising. Furthermore, advertisers that have traditionally relied upon other advertising media may be reluctant to advertise on the Internet. The Company's business would be adversely affected if the market for Internet advertising fails to develop or develops more slowly than expected. The Company expects to be dependent on third parties for (i) establishment of agreements to acquire or license products, and (ii) operation of the Site. In particular, during its startup phase, the Company will be dependent on various third parties for software, systems and related services. Many of these third parties have a limited operating history, have relatively immature technology and are themselves dependent on reliable delivery of services from others. As a result, the Company's ability to deliver various services to its potential users may be adversely affected by the failure of these third parties to provide reliable software, systems and related services to us. In addition, there can be no assurance that the Company will be successful in establishing and maintaining such relationships with distributors and licensed entities on terms favorable to the Company. Risks Associated With Internet-Based Business Although the Company has just commenced active operations of its Internet site, shareholders should note the following: (i) The Company may be sued for information disseminated on the Internet, including claims for defamation, negligence, copyright or trademark infringement, personal injury or other legal theories relating to the information it publishes on the Site. These types of claims have been brought, sometimes successfully, against online services as well as print publications in the past. The Company could also be subjected to claims based upon the content that is accessible from the Site or through content and materials that may be posted by members in chat rooms or bulletin boards. The Company may also offer e-mail services, which may subject the Company to potential risks, such as liabilities or claims resulting from unsolicited e-mail, lost or misdirected messages, illegal or fraudulent use of e-mail or interruptions or delays in e-mail service. The Company, which intends to maintain general liability, may not adequately protect itself against these types of claims. 4 6 (ii) The Company may incur potential liability for products sold over the Internet. Consumers may sue it if any of the products that it sells (either online or otherwise) are defective, fail to perform properly or injure the user. The Company may foster relationships with manufacturers or companies to offer such products directly on other websites. Such a strategy involves numerous risks and uncertainties. Although the Company's agreements with manufacturers typically contain provisions intended to limit its exposure to liability claims, these limitations may not prevent all potential claims. Liability claims could require the Company to spend significant time and money in litigation or to pay significant damages. As a result, any such claims, whether or not successful, could seriously damage the Company's reputation and business. (iii) To the extent that the Company's growth is based on the Internet, the Company will be dependent on its continued growth and integration into daily commerce. The Company's intended business would be adversely affected if Internet usage does not continue to grow. A number of factors may inhibit Internet usage, including: inadequate network infrastructure; security concerns; inconsistent quality of service; and lack of availability of cost-effective, high speed service. If Internet usage grows, the Internet infrastructure may not be able to support the demands placed on it by this growth and its performance and reliability may decline. In addition, websites have experienced interruptions in their service as a result of outages and other delays occurring throughout the Internet network infrastructure. If these outages or delays frequently occur in the future, Internet usage, as well as the usage of the Company's website, could grow more slowly or decline. (iv) Internet security concerns could hinder e-commerce. The need to securely transmit confidential information over the Internet has been a significant barrier to electronic commerce and communications over the Internet. Any well-publicized compromise of security could deter people from using the Internet or using it to conduct transactions that involve transmitting confidential information. The Company may incur significant costs to protect against the threat of security breaches or to alleviate problems caused by such breaches. (v) Third parties may misappropriate personal information about the Company's potential users. If third parties were able to penetrate the Company's network security or otherwise misappropriate our users' personal information or credit card information, the Company could be subject to liability. This could include claims for unauthorized purchases with credit card information, impersonation or other similar fraud claims. They could also include claims for other misuses of personal information, such as for unauthorized marketing purposes. These claims could result in litigation. In addition, the Federal Trade Commission and state agencies have been investigating certain Internet companies regarding their use of personal information. The Company would incur additional expenses if new regulations regarding the use of personal information are introduced or if the Company's privacy practices are investigated. The Company Will Need To Expend Significant Resources On Internet Resources The Site will need to accommodate a high volume of traffic and deliver frequently updated information. If the Site has slow response times or decreased traffic, for a variety of reasons these types of occurrences could cause users to perceive the Site as not functioning properly and therefore cause them to use another website or other methods to obtain information. 5 7 In addition, the Company's potential users will depend on Internet service providers, online service providers and other website operators for access to the Site. Many of them have experienced significant outages in the past, and could experience outages, delays and other difficulties due to system failures unrelated to our systems. Fire, floods, earthquakes, power loss, telecommunications failures, break-ins and similar events could damage these systems. Computer viruses, electronic break-ins or other similar disruptive problems could also adversely affect the Site. The Company's business could be adversely affected if its systems were impacted by any of these occurrences. The Company's insurance policies may not adequately compensate it for any losses that may occur due to any failures or interruptions in our systems. The Company does not presently have any secondary "off-site" systems or a formal disaster recovery plan. nationallampoon.com is a new venture The Site is a new venture and its prospects are subject to risks, expenses and uncertainties frequently encountered by young companies that operate exclusively in the new and rapidly evolving markets for Internet products and services. Successfully achieving its growth plan depends on, among other things: the Company's ability to continue to develop new and original comedic material which is equal or superior to that of its competitors; its ability to attract, increase and maintain traffic on the Site; its ability to effectively integrate the technology and operations of business; its ability to continually identify, attract, retain and motivate qualified personnel and its ability to successfully attract Internet based advertising. J2 Common Stock Volatility The trading price of the Company's stock has been and continues to be subject to fluctuations. Since the Company began the full-scale development of the Site the stock price of the Company has risen substantially. The closing price of the Company's stock on March 25, 1999 was $1.875. The closing price of the Company's stock on October 22, 1999 was $24.50. The stock price may fluctuate in response to a number of events and factors, such as quarterly variations in operating results, changes in financial estimates and recommendations by security analysts, the operating and stock performance of other companies that investors may deem as comparable, and news reports relating to trends in the marketplace. In addition, the stock market in general and the market prices for Internet related companies in particular have experienced extreme volatility that often has been unrelated to the operating performance of such companies. These broad market and industry fluctuations may adversely affect the price of the company's common stock, regardless of the company's operating performance. NASDAQ Listing Requirement The NASDAQ listing requirements specify that a corporation meet certain minimum requirements for continued listing. One of the requirements is that a company maintain either 1) $2 million in net assets, or 2) $35 million in market capitalization, or 3) $500,000 in net income in the latest fiscal year or 2 of the last 3 fiscal years. The Company has an ongoing need to produce income or capital or an increase in its stock price to continue to meet these requirements. Management believes that it will be able to maintain compliance with these requirements. However, it cannot offer any guarantee that it can do so. The Company's inability to maintain compliance may affect its stock price. Dependence on National Lampoon name The Company's revenue is based primarily on the proceeds realized from exploitation of the National Lampoon name. Lack of any continued demand for the tradename could have an adverse effect on its business, the results of operations, and its financial condition. 6 8 Dependence on Key Personnel The Company is substantially dependent on the services of James P. Jimirro, who serves as the Company's Chairman of the Board and President. Although Mr. Jimirro is party to an employment agreement with the Company, the loss of his services could have a material adverse effect on the Company. RESTATED AGREEMENT WITH HARVARD LAMPOON On October 1, 1998, the Company entered into two agreements with Harvard Lampoon, Inc. ("HLI") to settle all outstanding past disputes and to confirm the Company's exclusive ownership of the National Lampoon trademark in a wide variety of areas, including all media currently being used as well as restaurant services and new electronic media not contemplated in earlier agreements. Under the agreement the Company will give up the right and obligation to publish new issues in print of National Lampoon magazine, which in recent years detracted from the Company's financial results. The Company has retained full rights to its extensive library of past issues of the magazine. The Company agreed to deliver 16,667 shares (as adjusted per the reverse split) of common stock to HLI (which were delivered in December, 1998) and increase the royalty level for certain expanded rights of exploitation, but the financial terms between the Company and HLI for the Company's ongoing and existing operations remain the same. The Company believes the new agreement represents a significant improvement for the Company, as the agreement clarifies the relationship with HLI, expands opportunities for business activities, and reduces the possibility of future disputes with HLI (which have occurred periodically over three decades). Moreover, the Company is now relieved of the financial obligation of publishing the magazine. The impact of the settlement resulted in no material impact on the financial results or operations of the Company. STOCKHOLDER RIGHTS AGREEMENT In July 1999, the Board of Directors of the Company adopted a Stockholder Rights Plan, and in connection therewith declared a dividend of one preferred share purchase right (the "Rights") for each outstanding share of common stock, no par value per share, of the Company (the "Common Shares") outstanding at the close of business on August 5, 1999. Since such time the Company has issued the Rights with each Common Share that has been subsequently issued. When exercisable, each new Right will entitle its holder to buy one one-hundredth of a share of Series A Junior Participating Preferred Stock (the "Preferred Shares") at a price of $65.00 per one-one-hundredth of a share (the "Purchase Price") until July 15, 2009. The Rights will become exercisable upon the earlier of (i) ten (10) business days following public announcement that a person or a group of affiliated or associated persons has acquired, or obtained the right to acquire, beneficial ownership of 15% or, in the case of Messrs. Daniel Laikin and Paul Skjodt (or any of their related persons, if any) as a group, 25%, or, in the case of Mr. James Jimirro (or any of his related persons, if any) 39% or more of the outstanding Common Shares (an "Acquiring Person"), or (ii) ten (10) business days following the commencement or announcement of an intention to make a tender offer or exchange offer the consummation of which would result in the beneficial ownership by a person or group of 15% or more of the outstanding Common Shares. 7 9 In the event of any merger, consolidation or other transaction in which Common Shares are exchanged, each Preferred Shareholder will be entitled to receive 100 times the amount received per Common Share. In the event that a person becomes an Acquiring Person or if the Company were the surviving corporation in a merger with an Acquiring Person or any affiliate or associate of an Acquiring Person and the Common Shares were not changed or exchanged, each holder of a Right, other than the Rights that are or were acquired or beneficially owned by the Acquiring Person (which Rights will thereafter be void), will thereafter have the right to receive upon exercise that number of Common Shares having a market value of two times the then current Purchase Price of one Right. In the event that, after a person has become an Acquiring Person, the Company were acquired in a merger or other business combination transaction or more than 50% of its assets or earning power were sold, proper provision shall be made so that each holder of a Right shall thereafter have the right to receive, upon the exercise thereof at the then current Purchase Price of the Right, that number of shares of common stock of the acquiring company which at the time of such transaction would have a market value of two times the then current Purchase Price of one Right. The Rights may be redeemed in whole, but not in part, by the Board of Directors of the Company at a price of $.001 per Right at any time prior to the time that an Acquiring Person has become such. The redemption of the Rights may be made effective at such time, on such basis and with such conditions as the Board of Directors of the Company in its sole discretion may establish. OTHER ACTIVITIES The Company will continue its focus on using the National Lampoon name in virtually every segment of the entertainment business. In the past, The first significant result of this effort was realized with the release in February, 1993 of the feature film "National Lampoon's Loaded Weapon I". This film achieved in excess of $28 million of theatrical revenue in its United States theatrical release. The Company is participating in the film's revenue as provided by the Company's licensing agreement with New Line Cinema, the producer and distributor of the film. The second picture under this licensed agreement, "National Lampoon's Senior Trip," was released in September of 1995. The theatrical revenue from this film was disappointing. However, as the Company only licensed the National Lampoon name with respect to the project, it had no risk of loss if theatrical boxoffice and ancillary revenues were disappointing. The Company intends to continue its efforts to license the National Lampoon name to other producers of full-length motion pictures. In fiscal 1994, a licensing agreement was entered into with Showtime Networks, Inc. which provided for the production of seven (7) movies made for initial viewing on the Showtime television channel over three (3) years. The Showtime Agreement expired during the fiscal year ending July 31, 1997 with only four made-for-cable pictures being produced and as such, the fifth through seventh movies were not produced. In accordance with the contract, Showtime has paid the producer fees due for the fifth (5) through seventh (7) movies as of July 31, 1998. On April 15, 1998 the Company entered into an agreement with International Family Entertainment, Inc. ("IFE"), a wholly-owned subsidiary of Fox Kids Worldwide, Inc., whereby IFE acquired an exclusive option to acquire certain exclusive rights in and to the National Lampoon brand (including name, logos, and related elements). On June 10, 1998 IFE elected to exercise that option. The rights acquired by IFE consisted of the right to use the National Lampoon name in connection with a Monday through Friday half-hour comedy strip, a once-weekly movie and/or comedy night as well as original made-for-television movies and series. The first two projects resulting from this alliance are two made-for-television motion pictures entitled "National Lampoon's Men in White" and "National Lampoon's Golf Punks". These two movies were broadcast on Fox Family Channel during the months of August and September of 1998 to favorable ratings. In addition, IFE's exercise of the option entitled them to four (4) additional, consecutive, conditional annual options to renew and extend this agreement through August, 2003. IFE has let this agreement lapse by not exercising its option during the second consecutive year's option period. 8 10 Motion Pictures, Television and Other Entertainment Activities MOTION PICTURES: NL's motion picture activities have consisted principally of developing ideas for feature films, suggesting script writers, providing supervision of the scripting, and providing producer services in connection with the production of such films. NL has not financed the development, production or distribution of movies, and does not maintain a development department. Instead, NL is typically presented with film ideas by major movie studios for consideration with regard to financing of development, production, and distribution by such studios and obtaining the right to use the National Lampoon name. For these services, NL receives production and other fees and a participation in the profits, if any, of the movie which bears its name. After NL's first movie, "Animal House," NL's compensation arrangements for its comedy film projects financed and distributed by studios traditionally fell into a general pattern of cash fees for NL's producer services and for the use of the name National Lampoon in the film title, and a small percentage of the studio's "net profits" (after a certain level of revenues has been achieved) from the film. To date, NL has been involved in the production of eight feature films, including the highly profitable 1978 film "Animal House," co-produced by NL and Ivan Reitman. This movie starred John Belushi and was financed and distributed by Universal Studios. For the last five years, revenues from this picture have consisted mainly of NL's share of fees derived from the licensing of the picture by Universal for showing by various independent television stations, and from the sale of videocassettes. NL's other films have included "National Lampoon's Vacation" (released in 1983) and its sequels, "National Lampoon's European Vacation" (released in 1985), and "National Lampoon's Christmas Vacation" (released in 1989), all starring Chevy Chase and Beverly D'Angelo. NL and New Line Cinema Corporation ("New Line") entered into an agreement, dated September 11, 1991, regarding the development and production, financing, and distribution of up to three (3) National Lampoon motion pictures, each at budgets not greater than $10 million, within four and one-half years of execution of the agreement (the "New Line Agreement"). The New Line Agreement provided NL with an advance fee for the use of the National Lampoon name in connection with each of the theatrical motion pictures to be produced and additional contingent compensation based on the gross revenues produced by the picture. New Line released the first film under this agreement, "National Lampoon's Loaded Weapon I," in February, 1993. The film grossed in excess of $28 million at the domestic boxoffice. The second film, "National Lampoon's Senior Trip," was released in September, 1995 and was not a boxoffice success. The New Line agreement expired on May 10, 1996, and as such, the third motion picture was never produced. In March, 1994, the Company signed an agreement with Showtime Networks, Inc. ("Showtime") to produce seven (7) movies over a three (3) year period to be aired initially on the Showtime Network or The Movie Channel. The agreement provided for the payment of a license fee to National Lampoon upon the commencement of principal photography of each film and contingent compensation based on revenues the films may generate from all sources. The Showtime agreement has now expired, with only four (4) made-for-cable movies produced, and as such, the fifth through seventh movies will not be produced. In accordance with the contract, Showtime has paid the producer fees due for the fifth (5th) through seventh (7th) movies as of July 31, 1998. Unless the Company licenses the rights and obtains a significant advance, revenue from theatrical feature film rights for fiscal year ended July 31, 2000 will be dependent on contingent compensation from previously licensed rights. The results will be lower feature film rights revenue for the fiscal year ended July 31, 2000, than in prior years. 9 11 TELEVISION: In July, 1987 NL entered into an exclusive television agreement with Barris Industries, Inc. ("Barris"), a Los Angeles-based television production company. Barris is a predecessor of Guber-Peter Entertainment Company ("GPEC"), which was acquired by Sony Pictures (formerly Columbia Studios). Pursuant to the Barris Agreement, NL granted Barris the exclusive right to produce television programming of any kind utilizing the name National Lampoon for a term of five years. NL had not previously been significantly active in creating television programming, and this agreement did not produce any significant television activity. Concurrent with the acquisition of NL by J2 Communications, the exclusive right to produce television programming under the name National Lampoon was re-acquired by NL on October 1, 1990 from GPEC ("GPEC Agreement"). The purpose of this acquisition of rights was to ensure that NL had the ability to control the use of its name in the valuable medium of television and to develop comedy motion pictures and other programs for broadcast in all areas of television distribution, including network, syndication and cable. The GPEC Agreement required the re-payment of $1,000,000 to GPEC, which was the consideration paid by GPEC to NL for the rights in 1987. This sum was payable by NL, fifty-percent ($500,000) on execution of the contract (and so paid), and fifty-percent ($500,000) payable out of seventeen and one-half percent (17 1/2%) of the gross receipts received by NL as a result of the exploitation of any new television programs bearing the National Lampoon name, with certain minimums due on commencement of principal photography or taping of the applicable programs. After this amount has been repaid, NL shall have no further obligations to GPEC. To date, $182,500 has been paid under the gross receipt provision of the agreement. MADE-FOR-VIDEO MOVIES: "National Lampoon's Last Resort", a made-for-video movie produced by Rose & Ruby Productions, completed filming in July, 1993. The picture starred Corey Feldman & Corey Haim, and was distributed internationally by Moonstone Entertainment and in the U. S. by Vidmark in early 1994. MOTION PICTURE AND TELEVISION COMPETITION: Motion pictures and television development activities are highly competitive. NL is in competition with the major film studios as well as numerous independent motion picture and television production companies for the acquisition of literary properties, the services of creative and technical personnel, and available production financing. NL believes it has been, and will continue to be, aided in these endeavors by the recognition achieved by the National Lampoon name and by the success achieved by its films, "National Lampoon's Animal House," "National Lampoon's Vacation," and "National Lampoon Loaded Weapon I;" however, NL cannot guarantee that any project will actually be produced or, if produced, will yield the success of past projects. BOOKS: NL has published various books, including "National Lampoon's Treasury of Humor" with Simon and Schuster, and four "True Facts" books with Contemporary Books. Other NL published books include the third edition of "National Lampoon's Cartoon Book," and "National Lampoon's White Bread Snaps". MERCHANDISE: NL has a number of merchandising arrangements, including a line of trading and post cards based upon National Lampoon magazine art. In addition, At A Glance Landmark, which published the Company's previous calendars is distributing the 1999 NL Life Sucks! PAGE-A-DAY CALENDAR AND HORRORSCOPE. RECORDINGS: Rhino Records continues to distribute a commemorative boxed set titled "The Best of The National Lampoon Radio Hour," a compilation of classic comedy from the early 1970's radio series. 10 12 Publishing Operations NATIONAL LAMPOON MAGAZINE: First published in March, 1970, National Lampoon was distributed at newsstands, bookstores, and other retail outlets. Its audience was largely young, college educated, and affluent. Each issue of the magazine contained original articles, artwork, and photographs treating various matters in a satirical manner. National Lampoon became a bi-monthly magazine in late 1986 with a $3.95 cover price and approximately 112 pages per issue. Commencing with the March, 1991 issue, National Lampoon increased to a ten (10) times per year frequency and reduced its cover price to $2.95 and lowered the page count to 84 pages. However, the continued economic recession and the advent of the Gulf War depressed all magazine circulation and related advertising revenues. Consequently, beginning with the December, 1991 issue, the Company reverted to bi-monthly issues. In an effort to reverse the trend of NL losses over many years, in March, 1992, the Company relocated the principal offices of National Lampoon, Inc. to Los Angeles, California, and closed the New York offices. After the April, 1992 issue, NL suspended publication of National Lampoon for several months. NL recommenced publication of National Lampoon with the spring, 1993 issue. In August, 1993 the Company entered into an agreement with CR Cooper Publications, Inc., a magazine publisher, to print and distribute the magazine. Editorial control of the magazine content remained with the Company. The agreement called for the publication of a minimum of 4 issues during the first year of the agreement, 6 issues the second year and 10 issues for the third and subsequent years. The agreement was for a period of 3 years; however, in February, 1996, the agreement was terminated by the Company because certain minimum performance targets were not met by the Publisher. Beginning with the 25th anniversary issue published in May 1996, the Company again began publishing the magazine. The Company published 55,000 copies of the 25th Anniversary 1996 issue and 62,000 copies of the 1997 issue. The Company's agreement with Harvard Lampoon at the time obligated the Company to publish at least one issue of the magazine a year with a minimum of 50,000 copies. The Company complied with this obligation until the Company received a waiver from Harvard Lampoon from its obligation to publish the magazine during the 1999 fiscal year, yet published an issue of the magazine in October of 1998. The Company published 53,000 copies of the magazine with a cover price of $4.95. It became clear to the Company that continuing to publish the magazine was no longer profitable. Therefore, in connection with the new agreement signed with Harvard Lampoon, Inc. on October 1, 1998, the Company prevailed in its desire to discontinue publishing the magazine. Video Operations The Company, which through 1993 was engaged in significant operations in the sell-through video market, has drastically diminished its video operations. The Company does not expect that its video operations will generate any significant revenue in the near future. EMPLOYEES As of October 23, 1998, the Company employed six (6) employees of whom four (4) are full time and two (2) are part-time. 11 13 ITEM 2: PROPERTIES The Company leases office space of approximately 3,912 square feet at 10850 Wilshire Boulevard, Suite 1000, Los Angeles, California 90024 for a five (5) year period commencing on October 1, 1995. The Company's rental obligation is $7,237 per month. The space is utilized for office space, as well as storage of video masters, cassettes and back issues of the National Lampoon Magazine and other NL archival materials. In addition, it provides storage for legal, accounting and contract files related to past years for National Lampoon and J2 Communications. Management considers the Company's corporate offices generally suitable and adequate for their intended purposes. ITEM 3: LEGAL PROCEEDINGS On August 13,1999, Heathdale Productions, Inc., a 25% partner with J2 Communications in the Yearbook Movie company--the participant in the royalties from Universal Studios on the movie "Animal House"-- sued the Company for breach of contract and other alleged violations they claim the Company committed in distributing their share of "Animal House" revenue. The Company believes this suit is without merit and plans to defend it vigorously. Management believes that this suit will not result in any material impact on its financial condition or results of operations. ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None 12 14 PART II ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS a. Stock: The Company's Common Stock has been traded in the NASDAQ over-the-counter market since October 2, 1986 under the symbol JTWO. On October 21, 1998, the Company held a special shareholders meeting where a 3:1 reverse stock split was voted on and approved. In consideration of this subsequent event, all periods presented have been restated to retroactively reflect the decreased number of shares and share prices outstanding. The reverse split resulted in a decrease in the common shares from 3,600,000 to 1,200,000 for all periods presented. The following table sets forth, for the periods shown, the high and low sales prices of the common stock during each quarterly period within the three most recent fiscal years, as reported by NASDAQ. Common Stock
High Low ------ ------ Fiscal 2000: First Quarter (through October 31, 1999).... 26.31 14.50 Fiscal 1999: First Quarter............................... 1.875 1.7814 Second Quarter.............................. 2.25 1.7814 Third Quarter............................... 2.25 1.875 Fourth Quarter.............................. 18.25 1.6875 Fiscal 1998: First Quarter............................... 4.0314 2.8125 Second Quarter.............................. 3.2814 1.875 Third Quarter............................... 2.8125 1.50 Fourth Quarter.............................. 2.9064 2.3436 Fiscal 1997: First Quarter............................... 3.6564 3.1875 Second Quarter.............................. 3.375 2.625 Third Quarter............................... 2.9064 2.3436 Fourth Quarter.............................. 3.00 2.4375
13 15 On October 25, 1999 the closing sales price for the Common Stock was $20.50 per share. The approximate number of holders of record of Common Stock on that date was 1,300. The Company has never paid a dividend on its Common Stock and presently intends to retain all earnings for use in its business. ITEM 6: SELECTED FINANCIAL DATA The selected consolidated statements of operations data for each of the three years in the period ended July 31, 1999 and the consolidated balance sheet data at July 31, 1998 and 1997 are derived from the Company's consolidated financial statements included elsewhere in this Annual Report that have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report, which is also included elsewhere in this Annual Report. Such selected consolidated financial data should be read in conjunction with those consolidated financial statements and the notes thereto. The selected consolidated income statement data for the years ended July 31, 1996 and 1995 are derived from audited consolidated financial statements of the Company which are not included herein. 14 16 SELECTED CONSOLIDATED FINANCIAL DATA
Years-ended July 31, ------------------------------------------------------------------------------ 1999 1998 1997 1996 1995 ------------ ---------- ------------ ------------ ------------ STATEMENT OF OPERATIONS DATA: Total revenues $ 1,345,000 $ 868,000 $ 1,415,000 $ 1,041,000 $ 1,333,000 Costs and expenses: Costs of revenue 124,000 45,000 262,000 259,000 193,000 Selling, general and administrative 2,648,000 765,000 792,000 725,000 818,000 Amortization of intangible assets 240,000 240,000 240,000 240,000 240,000 ------------ ---------- ------------ ------------ ------------ (Loss) income from operations (1,667,000) (182,000) 121,000 (183,000) 82,000 Other income and expense: Settlement of royalty and other claims 436,000 343,000 -- -- -- Minority Interest in income of consolidated subsidiary (68,000) (34,000) (82,000) (46,000) (30,000) ------------ ---------- ------------ ------------ ------------ (Loss) income before provision (benefit) for income taxes (1,299,000) 127,000 39,000 (229,000) 52,000 Provision (benefit) for income taxes -- 6,000 9,000 7,000 (14,000) ------------ ---------- ------------ ------------ ------------ NET (LOSS) INCOME $ (1,299,000) $ 121,000 $ 30,000 $ (236,000) $ 66,000 ============ ========== ============ ============ ============ (LOSS) INCOME PER COMMON SHARE Basic $ (1.07) $ 0.10 $ 0.03 $ (0.20) $0,06 ============ ========== ============ ============ ============ Diluted $ (1.07) $ 0.10 $ 0.02 $ (0.20) $ 0.06 ============ ========== ============ ============ ============
15 17
Years-ended July 31, ------------------------------------------------------------------ 1999 1998 1997 1996 1995 ---------- ---------- ---------- ---------- ---------- BALANCE SHEET DATA: Intangible assets $3,416,000 $3,656,000 $3,896,000 $4,136,000 $4,376,000 Total assets $5,350,000 $5,962,000 $5,473,000 $5,367,000 $5,667,000 ========== ========== ========== ========== ========== Shareholders' equity $2,590,000 $3,803,000 $3,682,000 $3,652,000 $3,888,000 ========== ========== ========== ========== ==========
16 18 ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS YEAR ENDED JULY 31, 1999 VERSUS JULY 31, 1998 Total revenues for 1999 increased $477,000 to $1,345,000 compared to $868,000 for 1998. Movies, television and theatrical revenues increased $516,000 primarily due to the receipt of $800,000 from International Family Entertainment Inc. ("IFE") for the rights to exploit the National Lampoon brand in connection with certain U.S. television rights. These revenues were partially offset by reductions in amounts received from Showtime of approximately $306,000. Videocassette sales increased $17,000 to $18,000 from $1,000 in the prior year mainly due to increased sales of "Mother Goose" video titles. Royalty income decreased $82,000 from $160,000 to $78,000 from the prior year due to decreased video royalties. Publishing revenue increased $12,000 from last fiscal year to $12,000 compared to $0 in 1998 due to the current fiscal year sales of the 1998 edition. Interest income for the year increased $14,000 to $99,000 from $85,000 in the prior fiscal year primarily due to increased interest income recognized on short-term investment, as well as higher cash balances invested in interest bearing accounts during the current fiscal year. Cost of movies, television and video increased $27,000 to $58,000 from $31,000 in the prior fiscal year, primarily due to required payments on the "GPEC" rights agreement. Royalty expense increased $52,000 to $66,000, compared to $14,000 in 1998, primarily due to increases in royalty income, video income and movie income. Selling, general and administrative expenses increased $163,000 to $948,000 in the current year as compared to $785,000 in the prior year. The increase was primarily due to increase in personnel and support staff required in launching the Site. Compensation (benefit) related to SAR's increased by $1,719,000 to $1,700,000 from a benefit of $19,000, in 1998 due to a dramatic increase in the Company's stock price resulting in a corresponding increase in the value of the SAR's. This is described more fully under "Employment Agreement and Stock Options." Other income of $436,000 in 1999 and $343,000 in 1998 primarily represents the reversal of previous accruals related to royalty and other liabilities which were extinguished at reduced amounts. A Net Loss of $1,299,000 equal to $1.07 per diluted share was recorded in the current year compared to $121,000 of Net Income equal to $.10 in 1998. The dramatic decrease was due primarily to the increase in SAR expenses and expenses associated with the launch of nationallampoon.com. YEAR ENDED JULY 31, 1998 VERSUS JULY 31, 1997 Total revenues for 1998 decreased $547,000 to $868,000 compared to $1,415,000 for 1997. Movies, television and theatrical revenues decreased $348,000, primarily due to decreased movie licensing revenue of previously licensed movies. Videocassette sales decreased $218,000 to $1,000 from $219,000 from the prior year due to the Company's continuing de-emphasis of the video segment of its business because of declining profitability. Royalty income increased $49,000 from $111,000 to $160,000 from the prior year, primarily due to the recognition of income on the balance of advance license fees upon expiration of the license agreements. Publishing revenue decreased $56,000 from last fiscal year to zero this year due to the Company receiving a waiver from publishing the National Lampoon magazine during the current fiscal year. Interest income for the year increased $26,000 to $85,000 from $59,000 in the prior fiscal year primarily due to increased interest income recognized on short-term investment, as well as higher cash balances invested in interest bearing accounts during the current fiscal year. 17 19 Cost of movies and television decreased $27,000 to $26,000 from $53,000 in the prior fiscal year, primarily due to no payments being required on the "GPEC" rights agreement. There was no cost of magazine due to the company obtaining a waiver from publishing a magazine this fiscal year. Royalty expenses decreased $49,000 to $14,000 compared to $63,000 in 1997, primarily due to no royalty expense being due on the balance of advance license fees upon expiration of the license agreements as mentioned above. Selling, general and administrative expenses decreased $27,000 to $765,000 in the current year as compared to $792,000 in the prior year. The decrease was primarily due to a reduction in salary expense and insurance expense, partially offset by an increase in accounting and corporate expenses. Other income of $343,000 primarily represents the reversal of previous accruals related to potential royalties, which were extinguished at a reduced amount, the current year recognition of certain unearned revenues, and the settlement of certain accrued expenses at reduced levels. Net income for the current year was $121,000, equal to $.10 per diluted share compared to $30,000, equal to $.02 per diluted share in the prior fiscal year. The increase in net income was due primarily to an increase in royalty, interest and other income, lower general and administrative expenses and cost of movies and television. This was partially offset by lower movies, television and theatrical revenue and reduced videocassette sales. LIQUIDITY AND CAPITAL RESOURCES Cash and short term investments at July 31,1999 totaled $1,858,000, a decrease of $373,000 from the prior year-end. The Company incurred significant expenditures in fiscal 1999, with approximately $116,000 (without taking into consideration the share of the Company's overhead allocated to developing the Site) due to the cost of developing and launching the Site. There will be additional significant expenditures in the current line of business and management believes that its present level of cash, augmented by internally generated funds, will provide sufficient cash resources through fiscal 2000. The Company is exploring ways of raising additional capital. No assurance can be given that the Company will be successful in raising additional capital, or if successful, that it will be on terms which are acceptable to the Company. To the extent that the Web operations are not cash flow positive, or that additional capital is not available, the Company may be forced to curtail some of its new activities. The Company has made a significant investment in the National Lampoon name and other intangible assets through its acquisition of NLI. Realization of these acquired assets $(3,416,000 as of July 31, 1999) is dependent on the success and viability of nationallampoon.com as well as the continued licensing of the National Lampoon name for use in feature films, video, television and audio distribution and merchandising of other appropriate opportunities. The Company has received approximately $7,407,000 in licensing revenues since the acquisition of the National Lampoon name in 1990. The Company is in the process of negotiating other licensing agreements and the development of other concepts, programs, etc. that could generate additional licensing fees in the future. If these and other licensing agreements that the Company may enter into in the future do not result in sufficient revenues to recover these acquired intangible assets over a reasonable period of time or if nationallampoon.com does not meet with advertising and merchandising sales success, the Company's future results of operations may be adversely affected by a write-off of or an adjustment to these acquired intangible assets. In evaluating if there has been an impairment in the value of its long-lived assets, the Company follows the guidelines of SFAS No. 121. This statement establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used and for long-lived assets and certain identifiable intangibles to be disposed of. Management has determined that through the realization of future licensing agreements and revenues from nationallampoon.com, expected future cash flows relating to the intangible assets will result in the recovery of the carrying amount of such assets. 18 20 IMPACT OF YEAR 2000 ISSUE Introduction: The term "Year 2000 issue" is a general term used to describe the various problems that may result from the improper processing of dates and date-sensitive calculations by computers and other machinery as the Year 2000 is approached and reached. These problems generally arise from the fact that most of the world's computer hardware and software has historically used only two digits to identify the year in a date, often meaning that the computer will fail to distinguish dates in the "2000's" from dates in the "1900's." These problems may also arise from other sources as well, such as the use of special codes and conventions in software that make use of the date field. State of Readiness: To date, we have completed the Year 2000 conversion with respect to all of our computer systems and applications. We have completed remediation and testing of our computer systems and applications. While we have completed all required system remediation and testing for the Year 2000, we will continue our testing efforts and make appropriate remediations as necessary through January 1, 2000. Because of the substantial progress made by us towards our Year 2000 conversion, we do not anticipate that any additional significant changes will be required or that the Year 2000 issue will pose significant operational problems for us. However, if the Company, its customers and vendors are unable to make necessary changes in a timely fashion and if unanticipated problems arise, the Year 2000 issue may take longer for us to address and may have a material impact on our financial condition and results of operations. ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Index to Financial Statements of the Company is included in Item 14. ITEM 9: NONE 19 21 PART III ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information set forth below, as of the date of this filing, lists each director and executive officer of the Company, the year in which he first became a director or executive officer, and his principal occupation during the past five years. Each Director is expected to hold office until the next annual meeting of stockholders and until his successor has been elected and qualified.
First Name and Office to which Elected Age Elected - -------------------------------- --- ------- James P. Jimirro 62 1986 Chairman of the Board of Directors, President and Chief Executive Officer James Fellows 64 1986 Director Bruce P. Vann 43 1986 Director John De Simio 47 1998 Director Andrew Weeraratne 49 1999 Chief Financial Officer Duncan Murray 53 1986 Vice President-Marketing
JAMES P. JIMIRRO has been employed by the Company since its inception. From 1980 to 1985 he was the President of Walt Disney Telecommunications Company, which included serving as President of Walt Disney Home Video, a producer and distributor of family home video programming. While in this position, he also served as Corporate Executive Vice President of Walt Disney Productions. In addition, from 1983 until 1985, Mr. Jimirro served as the first President of The Disney Channel, a national pay cable television channel, which Mr. Jimirro conceived and implemented. Mr. Jimirro continued in a consulting capacity for the Walt Disney Company through July, 1986. From 1973 to 1980 he served as Director of International Sales and then as Executive Vice President of the Walt Disney Educational Media Company, a subsidiary of Walt Disney Productions. Before his move to Disney, Mr. Jimirro directed international sales for CBS, Inc. and later, for Viacom International. 20 22 JAMES FELLOWS has been a member of the Board of Directors and the President of the Central Education Network, Inc., a Chicago, Illinois association of public television and educational associations, since 1983. From 1962 through 1982, Mr. Fellows worked in a variety of positions for the National Association of Educational Broadcasters (NAEB) in Washington, D.C., and became its President and Chief Executive Officer in 1978. Mr. Fellows is a director of numerous non-profit corporations, including the Hartford Gunn Institute, a research and planning service for public telecommunications; the Maryland Public Broadcasting Foundation, a corporate fund-raiser for public television; and the American Center for Children and Media, a coalition of organizations committed to improving media services for children and youth. BRUCE P. VANN has been a partner in the law firm of Kelly Lytton Mintz & Vann, LLP since December, 1995, and from 1989 through December 1995 was a partner with the law firm of Keck, Mahin & Cate and Meyer & Vann. In all firms (located in Los Angeles, California), Mr. Vann has specialized in corporate and securities matters. From 1994 through 1998 Mr. Vann served, on a non-exclusive basis, as Senior Vice President of Largo Entertainment, a subsidiary of The Victor Company of Japan. JOHN DE SIMIO has been in the entertainment side of the public relations business since 1976. From 1988 to 1996, Mr. De Simio was a Senior Vice President, Publicity/Promotion for Castle Rock Entertainment, where he oversaw publicity and national promotional campaigns for their theatrical and television productions. Before moving to Castle Rock, Mr. De Simio was National Publicity Director of Twentieth Century Fox Film Corporation from 1985-1988. Mr. De Simio is presently on a disability leave due to a visual impairment. Mr. De Simio currently serves on the boards of Theatre LA and The Broadcast Film Critics Association. ANDREW WEERARATNE joined the company in February,1999 as Chief Financial Officer. He is a Certified Public Accountant, licensed in the State of Florida (presently inactive), and has worked as Chief Financial Officer and Controller for various companies over the last 10 years. Prior to that he owned and operated his own Certified Public Accounting firm in Washington, D.C. for 6 years. DUNCAN MURRAY has been with the Company since August, 1986. Before that, he worked with The Walt Disney Company for fourteen years in a variety of capacities including Vice President, Sales Administration for The Disney Channel and Director of Sales for Walt Disney Telecommunications Company. Mr. Murray also serves, on a non-exclusive basis, as Vice President and Treasurer of Transactional Media Incorporated. 21 23 ITEM 11: EXECUTIVE COMPENSATION The Summary Compensation Table below includes, for each of the fiscal years ended July 31, 1999, 1998 and 1996, individual compensation for services to the Company and its subsidiaries of the Chief Executive Officer (the "Named Officer"). SUMMARY COMPENSATION TABLE
Long Term Compensation --------------------------------------------------- Annual Compensation Awards Payouts --------------------------------------- ---------------------------- ------------------- (a) (b) (c) (d) (e) (f) (g) (h) (i) Other Name Annual Restricted All Other and Compen- Stock LTIP Compen- Principal sation Award(s) Options/ Payouts sation Position Year Salary($)(4) Bonus($)(4) ($)(1) ($) SARs(#) ($) ($) - -------- ---- ------------ ----------- ------- ----------- -------------- ------- -------- 1999 190,750 -- (2) (3) 16,667/16,667 -- 3 James P. 1998 190,750 -- (2) (3) 16,667/16,667 -- 3 Jimirro(2) 1997 190,750 -- (2) (3) 16,667/16,667 -- 3
- ------------ (1) Does not include amounts of $18,887 in 1999, $12,000 in 1998, and $12,500 in 1997 paid to Jim Jimirro, who is entitled to be reimbursed for expenses relating to entertainment, travel and living expenses when away from home. (2) Does not include $6000 in 1999, $6,000 in 1998, and $7,000 in 1997, which the Company paid for Mr. Jimirro's health plan. The Company also provides Mr. Jimirro with a Company-leased vehicle for his use. (3) Does not include SAR's granted to Mr. Jimirro pursuant to his employment agreement. See the description of Mr. Jimirro's employment agreement under "Employment Agreements and Stock Option Plans" below. (4) Effective June 1, 1992, Mr. Jimirro reduced the amount of salary he receives to $190,750. Mr. Jimirro does not expect to receive the unpaid portion unless there is a change in the control of the Company as defined by his employment agreement. The Company has not accrued any salary or bonus for Mr. Jimirro in regards to the above for the fiscal years ended July 31, 1999, 1998 and 1997. 22 24 Option Grants in Last Fiscal Year Shown below is information on grants of stock options pursuant to the 1994 Stock Option Plan during the fiscal year ended July 31, 1999 to the Named Officer which are reflected in the Summary Compensation Table on page 17.
Potential Realized Value at Individual Grants in 1999 Assigned Annual Rates of Stock -------------------------------------------------------- Price Appreciation Percentage for 7 year Option Term of Total ----------------------------------------- Options/SARs Exercise 5% 10% Options/ granted to or Base ------------------- ------------------- SARS Employees in Price Per Expiration Stock Dollar Stock Dollar Name Granted(#) Fiscal Year Share($) Date Price($) Gains($) Price($) Gains($) - ---- ---------- ------------ --------- ---------- -------- ------- -------- -------- James Jimirro 16,667(1) 40.0 $1.94(2) 12-28-2005 $2.73 $13,167 $3.78 $30,667 16,667 100.0 $1.94 12-28-2005 $2.73 $13,167 $3.78 $30,667
- ---------- (1) Options/SARS granted are immediately exercisable. (2) Options/SARS granted with an exercise price (or initial valuation in the case of SARs) equal to the average of the high and low bid and asked price for one share of Common Stock during the five (5) business days preceding the date of grant Stock as quoted on the National Association of Securities Dealers Automated Quotation System ("NASDAQ") on December 28, 1999, the date of grant for Mr. Jimirro. Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values Shown below is information with respect to (i) options exercised by the Named Officer pursuant to the 1994 Plan during fiscal 1999 (of which there were none); and (ii) unexercised options granted in fiscal 1999 and prior years under the 1994 Plan to the Named Officer and held by them at July 31, 1999.
Value of Unexercised Unexercised In-the-Money Options/SARs at Options/SARS at 7/31/99 7/31/99(1) Shares Acquired Value Exercisable/ Exercisable/ Name on Exercise(#) Realized($) Unexercisable(#) Unexercisable($) - ---- --------------- ----------- ---------------- ---------------- James Jimirro -0- -0- 233,338/0 $3,433,752/0
- ---------- (1) Based on the closing sale price as quoted on NASDAQ on that date. Director Compensation Directors, with the exception of Mr. Jimirro, receive 1,333 stock options per year exercisable at the then market price as compensation for their services as a director. 23 25 Compensation Committee Interlocks and Insider Participation The Company does not have a Compensation Committee or similar Board committee. The compensation of Mr. Jimirro as Chief Executive Officer ("CEO") is determined under the provisions of Mr. Jimirro's employment agreement with the Company, which was approved by the Board of Directors in 1994 and then in 1999. James Jimirro, James Fellows, Bruce Vann and John De Simio were each directors of the Company during fiscal 1999. EMPLOYMENT AGREEMENTS AND STOCK OPTIONS In 1999, the Company entered into a new employment agreement with James P. Jimirro, effective July 1, 1999 (the "1999 Agreement"). Under the 1999 Agreement, which has a term of seven years, Mr. Jimirro will receive a base salary plus an incentive bonus following the end of each fiscal year during which Mr. Jimirro is employed by the Company. Mr. Jimirro's base salary for the first year will be $475,000 and will be adjusted annually by the greater of (i) 9% or (ii) 5% plus the percentage increase in the CPI Index. Effective July 1, 1999, the President reduced the amount of salary he receives to $191,000. The President does not expect to receive the unpaid portion unless there is a change in the control of the Company as defined by the agreement. The decision by Mr. Jimirro to forego compensation is similar to the actions by Mr. Jimirro under the terms of his prior employment agreement. Accordingly, and as specifically provided by the terms of the 1999 Agreement, the company has entered into a contingent note (the "Contingent Note") in the amount of $2,150,625, which amount represents the principal of all amounts previously waived by Mr. Jimirro. The Contingent Note is due only upon a change of control by the Company (as discussed below), and is considered a contingent obligation of the Company. To the extent that amounts are waived by Mr. Jimirro in the future, the 1999 Agreement provides that the Company is obligated to issue additional Contingent Notes, due on the same basis, for the amounts so waived. Mr. Jimirro's bonus is to be an amount equal to 5% of the Company's earnings in excess of $500,000 and up to $1 million; plus 6% of the next $1 million of earnings; plus 7% of the next $1 million of earnings; plus 8% of the next $2 million of earnings; and plus 9% of the next $2 million of earnings. If earnings exceed $7 million, then Executive shall, in addition to foregoing compensation, be entitled to such additional incentive compensation as may be determined by the Board based upon Executive's services and performance on behalf of the Company and the profitability of the Company. The 1999 Agreement also provides that, on the date of each annual meeting of shareholders during its term, Mr. Jimirro will be granted stock options with respect to 25,000 shares of Common Stock and stock appreciation rights (SARs) with respect to 25,000 shares of Common Stock. The exercise price of each option and the initial valuation of each SAR will be equal to the average of the high and low bid and asked price for a share of common stock during the five (5) business days preceding the date of grant as reported by NASDAQ automated quotation system. The options and SARs will be immediately exercisable non-statutory stock options, will have a term of seven years, and will be subject to all other terms identical to those contained in the Company's 1999 Employee Stock Option Incentive Plan (the "1999 Plan"). The 1999 Plan specifically provides for the grant of stock options and SARs to Mr. Jimirro in accordance with his employment agreement. The 1999 Agreement provides that if Mr. Jimirro's employment is terminated without cause, or is terminated by Mr. Jimirro for cause or under certain other circumstances, including a change in control of the Company (as defined below), then Mr. Jimirro generally is entitled to receive all payments and other benefits which would be due under the 1999 Agreement during its entire term; provided, that such payments are to be "grossed up" to the extent that such payments would constitute an "excess parachute payment" under the Internal Revenue Code of 1986, or any successor law applicable to payments of severance compensation to Mr. Jimirro. A "change in control" would be deemed to occur if (a) any person or group becomes the direct or indirect owner of securities with 25% or more of the combined voting power of the Company's then outstanding securities, (b) if there is a significant change in the composition of the Board of 24 26 Directors of the Company, (c) upon the sale of all or substantially all of the assets of the Company, (d) upon the merger of the Company with any other corporations if the shareholders of the Company prior to the merger owned less than 75% of the voting stock of the corporation surviving the merger or (e) in certain other events. In addition to the foregoing benefits, Mr. Jimirro has the right, if he terminates his employment under certain circumstances (including following a change in control or a breach of the 1999 Agreement by the Company) to serve as a consultant to the Company for a period of five years (the "Consulting Period"). During the Consulting Period, Mr. Jimirro would be required to devote no more than 600 hours per year to the affairs of the Company, and would receive 50% of his salary as in effect on the date of termination of his employment. As a result of the foregoing, the Company would incur substantial expenses if Mr. Jimirro terminates his employment with the Company following a change in control of the Company, which may make the Company a less attractive acquisition candidate. The 1999 Agreement also provides Mr. Jimirro with certain registration rights pursuant to which, beginning in 2000, the Company will be required upon the request of Mr. Jimirro to register the sale of shares of the Company's Common Stock owned by Mr. Jimirro under the Securities Act of 1933. The 1999 Agreement is terminable by the Company only "for cause" as defined therein. Any employee may participate in any bonus plan, which may be established, as well as all Employee Stock Option Plans. STOCK OPTION PLANS In 1994 the Board of Directors approved an Employee Stock Option Plan and a Stock Option Plan for Non-Employee Directors. Both Plans were approved by Shareholders at the Shareholders' Meeting held March 2, 1995. The Employee Stock Option Plan is to be administered by a committee consisting of at least two members of the Board of Directors. All prior options granted under previous stock option plans are to be replaced by options granted under the 1994 Plan. The 1994 Plan provides for the maximum number of options to be granted to be the greater of 358,333 or 30% of the Company's outstanding shares less 41,667 shares reserved for issuance under the Non-Employee Director Plan. The term of the options granted shall not exceed 10 years and the exercise price shall be equal to 100% of the fair market value of the common stock on the date of grant. The Non-Employee Directors Stock Option Plan is to be administered by a committee consisting of at least two members of the Board of Directors. All prior options granted under previous stock option plans are to be replaced by options granted under the 1994 Plan. The 1994 Plan provided for a maximum number of 41,667 options to be granted and further provides for the granting of 1,333 option shares per year to each Non-Employee Director as compensation for his services. A maximum of 41,667 shares may be issued under the Plan at an exercise price equal to the fair market value of the stock on the date of grant. All options are to be immediately exercisable. The Board of Directors has approved, and the Company will be submitting to shareholders, a 1999 Stock Option Plan which will provide for the issuance of shares equal to 20% of the aggregate number of shares of the Company's Common Stock then outstanding. The options outstanding under the 1994 Plan will be transferred to the 1999 Plan. The provisions of the proposed 1999 Plan are substantially similar to the 1994 Non-Employee Director Plan and Employee Plan, on a combined basis. 25 27 ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth the expected beneficial ownership of Common Stock as of October 27, 1999. The table shows the beneficial ownership to each person known to J2 who beneficially owns more than 5% of the shares of J2 Common Stock, each current director, and all directors and officers as a group. Except as otherwise indicated, J2 believes that the beneficial owners of the Common Stock listed below, based on information furnished by such owners, have sole investment and voting power with respect to such shares, subject to community property laws where applicable.
Shares Percent Beneficially of Owned Class ------------ -------- Number Percent James P. Jimirro(2)(3) 325,336 26.4% Daniel S. Laikin(7) 151,200 12.42% Paul Skjodt(7) 127,000 10.44% James Fellows(2)(4) 13,500 (1) Bruce P. Vann(2)(5) 1,665 (1) John De Simio(2)(6) 1,333 (1) All directors and executive officers as a group (4 persons) 620,034 50.26%
- ---------- (1) Less than 1 percent. (2) The address for each shareholder listed is 10850 Wilshire Boulevard, Suite 1000, Los Angeles, California 90024. (3) Includes 116,669 stock options granted under the Company's Stock Option Plan pursuant to Mr. Jimirro's Executive Employment Agreement. (4) Includes 13,500 shares of Common Stock purchasable under the Company's Stock Option Plan. (5) Includes 1,665 shares of Common Stock purchasable under the Company's Stock Option Plan. (6) Includes 1,333 shares of Common Stock purchasable under the Company's Stock Option Plan (7) The address for each shareholder listed is c/o Biltmore Homes, Inc., 25 West 9th Street, Indianapolis, IN 46204 ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Bruce P. Vann and the law firms of Kelly Lytton Mintz & Vann LLP, of which he is a partner, performed services as attorneys for the Company. For the fiscal year ended July 31, 1999, Kelly & Lytton Mintz & Vann LLP earned approximately $13,185. Mr. Vann is a director of the Company and, as such, he (or his law firm) may receive additional compensation for services rendered to the Company. 26 28 ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as a part of this annual report: 1. Financial Statements: The financial statements listed in the accompanying Index to Financial Statements are filed as part of this annual report. 2. Exhibits: The Exhibits listed below are filed as a part of this annual report. 3.1 Restated Articles of Incorporation.(1) 3.2 By-laws of the Company.(1) 3.3 Certificate of amendment to Articles of Incorporation.(10) 4.1 Right Agreement between J2 Communications and U.S. Stock Transfer Corporation, dated July 15, 1999.(3) 10.1 Restated Employment Agreement between the Company and James P. Jimirro, dated as of July 1, 1999.(9) 10.3 Lease between the Company and Pacific Properties.(4) 10.4 Amended lease between the Company and Pacific Properties.(5) 10.5 Second amended lease between the Company and Pacific Properties(6) 10.7 1994 Stock Option Plan for Employees.(7) 10.8 1994 Stock Option Plan for Non-Employee Directors.(7) 10.9 1998 Agreement between The Harvard Lampoon, Inc. and J2 Communications and settlement agreement and mutual general release agreement.(8) 10.10 Form of Contingent Note. 10.11 Form of Restated Indemnity Agreement.(9) 21.1 List of subsidiaries of Registrant.(8) - ---------- (1) Filed as an Exhibit to that certain Form S-1 Registration Statement of the Company as filed with the Securities and Exchange Commission on July 28, 1986, September 22, 1986 and October 2, 1986 (the "S-1 Registration Statement"). (2) Filed as Exhibit to the Company's Annual Report on Form 10-K for the Fiscal Year ended July 31, 1991. (3) Filed as an Exhibit to that certain current report on Form 8-K, dated July 16, 1999. 27 29 (4) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the Fiscal Year Ended July 31, 1988. (5) Filed as an Exhibit to the Company's Annual Report of Form 10-K for the Fiscal Year Ended as of July 31, 1989. (6) Filed as an Exhibit to that certain Registration Statement of the Company filed with the Securities and Exchange Commission on May 28, 1993. (7) Filed as an Exhibit to that certain Registration Statement of the Company on Form S-8 filed with the Securities and Exchange Commission on May 8, 1995. (8) Filed as an Exhibit to that certain quarterly report on Form 10-Q, dated December 15, 1998. (9) Filed herewith. (10) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the Fiscal Year Ended July 31, 1998. 28 30 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Los Angeles, State of California, on the 26th day of October, 1998. J2 COMMUNICATIONS NOVEMBER 4, 1999 BY: /s/ JAMES P. JIMIRRO ----------------------------------------- JAMES P. JIMIRRO CHAIRMAN OF THE BOARD, PRESIDENT, AND CHIEF EXECUTIVE OFFICER (PRINCIPAL EXECUTIVE OFFICER) Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Los Angeles, State of California, on the 26th day of October, 1998.
Signatures Title Date - ---------- ----- ---- /s/ James P. Jimirro Chairman of the Board, November 4, 1999 - ----------------------------- President, Chief Executive Officer JAMES P. JIMIRRO (Principal Executive Officer) and Director /s/ Andrew Weeraratne Chief Financial Officer November 4, 1999 - ----------------------------- (Principal Financial Officer) ANDREW WEERARATNE /s/ James Fellows Director November 4, 1999 - ----------------------------- JAMES FELLOWS /s/ Bruce P. Vann Director November 4, 1999 - ----------------------------- BRUCE P. VANN /s/ John De Simio Director November 4, 1999 - ----------------------------- JOHN DE SIMIO
29 31 J2 COMMUNICATIONS AND SUBSIDIARIES FINANCIAL STATEMENTS AS OF JULY 31, 1999 AND 1998 TOGETHER WITH AUDITOR'S REPORT 30 32 J2 COMMUNICATIONS AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS JULY 31, 1999 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS FINANCIAL STATEMENTS: Consolidated Balance Sheets as of July 31, 1999 and 1998 Consolidated Statements of Operations for each of the three years in the period ended July 31, 1999 Consolidated Statements of Shareholders' Equity for each of the three years in the period ended July 31, 1999 Consolidated Statements of Cash Flows for each of the three years in the period ended July 31, 1999 Notes to Consolidated Financial Statements 31 33 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To J2 Communications: We have audited the accompanying consolidated balance sheets of J2 Communications and subsidiaries (a California corporation) as of July 31, 1999 and 1998, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended July 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in Note 1 to the consolidated financial statements, a significant portion of the Company's assets is composed of certain intangible assets. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of J2 Communications and subsidiaries as of July 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended July 31, 1999 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Los Angeles, California October 19, 1999 32 34 J2 COMMUNICATIONS AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF JULY 31, 1999 AND 1998 ASSETS
1999 1998 ---------- ---------- CURRENT ASSETS: Cash and cash equivalents $1,858,000 $ 879,000 Short-term investments, at cost -- 1,352,000 Other current assets 41,000 55,000 ---------- ---------- Total current assets 1,899,000 2,286,000 ---------- ---------- NONCURRENT ASSETS: Equipment, less accumulated depreciation of $8,000 and $0 in 1999 and 1998, respectively 19,000 -- Intangible assets, less accumulated amortization of $2,549,000 and $2,309,000 in 1999 and 1998, respectively 3,416,000 3,656,000 Other 16,000 20,000 ---------- ---------- Total noncurrent assets 3,451,000 3,676,000 ---------- ---------- TOTAL ASSETS $5,350,000 $5,962,000 ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. 33 35 J2 COMMUNICATIONS AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF JULY 31, 1999 AND 1998 LIABILITIES AND SHAREHOLDERS' EQUITY
1999 1998 ---------- ---------- CURRENT LIABILITIES: Accounts payable $ 197,000 $ 154,000 Accrued expenses 432,000 829,000 Deferred revenues -- 800,000 Income taxes payable 25,000 38,000 Common stock payable 203,000 203,000 Minority interest 186,000 118,000 ---------- ---------- Total current liabilities 1,043,000 2,142,000 ---------- ---------- Deferred Compensation 1,717,000 17,000 ---------- ---------- Total liabilities 2,760,000 2,159,000 ---------- ----------
34 36 COMMITMENTS AND CONTINGENCIES (Note 5) SHAREHOLDERS' EQUITY: Preferred stock, no par value: Authorized -- 2,000,000 shares, issued and outstanding -- 0 shares in 1999 and 1998 -- -- Common stock, no par value: Authorized--15,000,000 shares, issued 1,233,712 and 1,200,000 shares in 1999 and 1998, respectively 8,754,600 8,662,600 Note receivable on common stock (134,000) (128,000) Deficit (6,029,000) (4,730,000) Less: treasury stock at cost, 1,166 shares (1,600) (1,600) ----------- ----------- Total shareholders' equity 2,590,000 3,803,000 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 5,350,000 $ 5,962,000 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 35 37 J2 COMMUNICATIONS AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JULY 31, 1999
1999 1998 1997 ------------ ------------ ------------ REVENUES: Movies, television and theatrical $ 1,138,000 $ 622,000 $ 970,000 Videocassette sales 18,000 1,000 219,000 Royalty income 78,000 160,000 111,000 Publishing 12,000 -- 56,000 Interest 99,000 85,000 59,000 ------------ ------------ ------------ Total revenues 1,345,000 868,000 1,415,000 ------------ ------------ ------------ EXPENSES: Costs of movies and television 45,000 26,000 53,000 Cost of videocassettes sold 13,000 5,000 105,000 Royalty expense 66,000 14,000 63,000 Magazine editorial, production and distribution -- -- 41,000 Selling, general and administrative 948,000 784,600 755,000 Compensation (benefit) related to SAR 1,700,000 (19,600) 37,000 Amortization of intangible assets 240,000 240,000 240,000 ------------ ------------ ------------ Total expenses 3,012,000 1,050,000 1,294,000 ------------ ------------ ------------
36 38 OTHER INCOME 436,000 343,000 -- ------------ ------------ ------------ (Loss) income from consolidated operations (1,231,000) 161,000 121,000 MINORITY INTEREST IN INCOME OF CONSOLIDATED SUBSIDIARY (68,000) (34,000) (82,000) ------------ ------------ ------------ (Loss) income before provision for income taxes (1,299,000) 127,000 39,000 PROVISION FOR INCOME TAXES -- 6,000 9,000 ------------ ------------ ------------ NET (LOSS) INCOME $ (1,299,000) $ 121,000 $ 30,000 ============ ============ ============ (LOSS) INCOME PER COMMON SHARE: Basic $ (1.07) $ 0.10 $ 0.03 ============ ============ ============ Diluted $ (1.07) $ 0.10 $ 0.02 ============ ============ ============ WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING Basic 1,211,728 1,200,000 1,200,000 ============ ============ ============ Diluted 1,211,728 1,212,347 1,214,937 ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 36 39 J2 COMMUNICATIONS AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JULY 31, 1999
Notes Common Stock Receivable Less: ------------------------ on Common Treasury Shares Amount Stock Deficit Stock Total --------- ---------- --------- ----------- --------- ---------- BALANCES, July 31, 1996 1,200,000 $8,649,600 $(115,000) $(4,881,000) $(1,600) $3,652,000 Accrued interest on notes receivable -- 6,000 (6,000) -- -- -- Net income -- -- -- 30,000 -- 30,000 --------- ---------- --------- ----------- ------- ---------- BALANCES, July 31, 1997 1,200,000 8,655,600 (121,000) (4,851,000) (1,600) 3,682,000 Accrued interest on notes receivable -- 7,000 (7,000) -- -- -- Net income -- -- -- 121,000 -- 121,000 --------- ---------- --------- ----------- ------- ---------- BALANCES, July 31, 1998 1,200,000 8,662,600 (128,000) (4,730,000) (1,600) 3,803,000 Accrued interest on notes receivable -- 6,000 (6,000) -- -- -- Stock options exercised 17,045 49,000 -- -- -- 49,000 Shares issued in settlement of liabilities 16,667 37,000 -- -- -- 37,000 Net loss -- -- -- 1,299,000 -- 1,299,000 --------- ---------- --------- ----------- ------- ---------- BALANCES, July 31, 1999 1,233,712 $8,754,600 $(134,000) $(6,029,000) $(1,600) $2,590,000 ========= ========== ========= =========== ======= ==========
The accompanying notes are integral part of these consolidated financial statements. 37 40 J2 COMMUNICATIONS AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JULY 31, 1999
1999 1998 1997 ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income $ (1,299,000) $ 121,000 $ 30,000 Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Amortization of intangible assets 240,000 240,000 240,000 Depreciation 8,000 -- -- Deferred compensation 1,700,000 (19,600) 37,000 Shares issued in settlement of liabilities 37,000 -- -- Minority interest in income of consolidated subsidiary 68,000 34,000 82,000 Changes in assets and liabilities: Accounts payable 43,000 24,000 18,000 Accrued expenses (397,000) (262,400) (56,000) Income taxes payable (13,000) -- -- Deferred revenues (800,000) 592,000 (5,000) Other 14,000 20,000 22,000 ------------ ------------ ------------ Net cash (used in) provided by operating activities (399,000) 749,000 368,000 ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of short-term investments -- (1,641,000) (1,053,000) Sale of short-term investments 1,352,000 1,150,000 1,206,000 Purchase of equipment (27,000) (20,000) -- Acquisition of other long-term assets 4,000 -- -- ------------ ------------ ------------ Net cash provided by (used in) investing activities 1,329,000 (511,000) 153,000 ------------ ------------ ------------
38 41 CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from exercise of stock options 49,000 -- -- ------------ ------------ ------------ Net cash provided by financing activities 49,000 -- -- ------------ ------------ ------------ NET INCREASE IN CASH AND CASH EQUIVALENTS 979,000 238,000 521,000 CASH AND CASH EQUIVALENTS, beginning of year 879,000 641,000 120,000 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS, end of year $ 1,858,000 $ 879,000 $ 641,000 ============ ============ ============ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION-- Cash paid during the year for income taxes $ 23,000 $ 6,000 $ 9,000 ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 39 42 J2 COMMUNICATIONS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JULY 31, 1999 1. Summary of Significant Accounting Policies Organization and Principles of Consolidation J2 Communications (the "Company"), a California Corporation, was formed in March 1986, and was primarily engaged in the acquisition, development and production of entertainment and special-interest videocassette programs and the marketing, distribution and licensing of these programs for retail sale in the home video market. In fiscal year 1991, the Company acquired all of the outstanding shares of National Lampoon, Inc. ("NLI"). NLI was incorporated in 1967 and was primarily engaged in various aspects of the publishing and entertainment industries. In December 1992, in consideration for the default of certain intercompany notes from NLI to the Company, NLI assigned the rights to the majority of its assets in full satisfaction of the notes. Included in these assets was NLI's 100 percent ownership interest in NL Communications, Inc. and Heavy Metal, Inc., which, upon this assignment, became subsidiaries of the Company. During April 1999, the Company refocused its business strategy by positioning itself as an internet based comedic content provider by developing "nationallampoon.com" ("the Website"). The Company believes that the world wide web is emerging as a form complimentary to, and in many respects superior to, traditional television and print media in terms of its ability to deliver content to its target audience. The Website was launched during October 1999. The Company's primary source of revenues currently are derived through exploitation of the "National Lampoon" trademark in a variety of areas including motion pictures, home video, television, publishing and other entertainment media. Although continued licensing revenues are expected from these forms of media, the Company anticipates that the new Website will become the primary source of income through advertising revenue, electronic commerce and the spinning off of original characters and stories introduced on the Website to feature films and television. Until the time where a normalized revenue stream can be generated from the Website, the Company's revenues and income will continue to fluctuate based on the size, nature and timing of transactions whereby its names and trademarks are licensed. 40 43 The consolidated financial statements include the accounts of the Company and its majority owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Cash Equivalents Cash equivalents include certificates of deposit with original maturity dates of three months or less. Short-Term Investments In accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities," the Company determines the appropriate classification of marketable securities at the time of purchase and reevaluates such designation at each balance sheet date. Marketable securities have been classified as held-to-maturity and are carried at cost. Revenue Recognition The Company recognizes licensing revenues based upon information provided by the licensee, with the exception of non-refundable advances from the licensing of the "National Lampoon" name, which are recognized when received. Revenues from the sale of videocassettes, net of estimated provisions for sales returns (which are not material for any period presented), are recognized when the units are shipped. Advances for future sales of videocassettes are deferred until the units are shipped. Publishing revenues include magazine sales and revenue from advertising included in the magazines. Single copy magazine sales are recognized as income in the month the issue becomes available for sale at the newsstand. Advertising revenue is recognized concurrently with the recognition of magazine sales. Intangible Assets Intangible assets consist primarily of the right to license the "National Lampoon" name and are being amortized straight-line over a twenty-five year period. Management continually evaluates whether events and circumstances have occurred that indicate the remaining estimated useful life of intangible assets may warrant revision or that the remaining balance of intangible assets may not be recoverable. Factors that would indicate the occurrence of such events or circumstances include current period operating or cash flow losses combined with a history of operating or cash flow losses, a projection or forecast that demonstrates continuing losses, or the inability of the Company to renew, 41 44 extend or replace existing contracts as they expire, including licensing of the "National Lampoon" name. When factors indicate that intangible assets should be evaluated for possible impairment, the Company uses an estimate of the related business's undiscounted net income over the remaining life of the intangible assets in measuring whether the intangible assets are recoverable. The Company has made a significant investment in the "National Lampoon" name and other intangible assets through its acquisition of NLI. Realization of these acquired assets is dependent on the continued exploitation of the "National Lampoon" name through licensing for use in feature films, video, television and audio distribution and merchandising or other appropriate opportunities, as well as the ability to generate revenue through other business ventures, such as the Website. The Company has received approximately $7,407,000 in licensing revenues since the acquisition of the "National Lampoon" name in 1990. The Company is in the process of identifying other licensing opportunities and developing concepts, programs and other opportunities that could generate future revenue. If these and other ventures that the Company may enter into in the future do not result in sufficient revenues to recover these acquired intangible assets over a reasonable period of time, the Company's future results of operations may be adversely affected by a write-off of or an adjustment to these acquired intangible assets. In evaluating if there has been an impairment in the value of its long-lived assets, the Company follows the guidelines of SFAS No. 121. This statement establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles and goodwill related to those assets to be held and used and for long-lived assets and certain identifiable intangibles to be disposed of. Management has determined that through the realization of future licensing agreements, expected future cash flows relating to the intangible asset will result in the recovery of the carrying amount of such asset. PER SHARE INFORMATION The Company has adopted SFAS No. 128, "Earnings Per Share" ("EPS"), effective for the quarter-ended January 31, 1998. All prior period EPS data presented has been restated to conform with the provisions of this statement. Under SFAS No. 128, primary EPS is replaced by "Basic" EPS, which excludes dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. "Diluted" EPS, which is computed similarly to fully diluted EPS, reflects the potential dilution that could occur if securities or options are included as share equivalents in computing diluted earnings per share using the treasury stock method. 42 45 On October 21, 1998, the Company held a special shareholders meeting where a 3:1 reverse stock split was voted on and approved. In consideration of this event, all periods presented have been restated to retroactively reflect the decreased number of shares outstanding. A summary of the shares used to compute earnings per share is as follows:
Year Ended Year Ended Year Ended July 31, July 31, July 31, 1999 1998 1997 ---------- ---------- ---------- Weighted average common shares used to compute basic EPS 1,211,728 1,200,000 1,200,000 Stock options -- 12,347 14,937 --------- --------- --------- Weighted average common shares used to compute diluted EPS 1,211,728 1,212,347 1,214,937 ========= ========= =========
Dilutive stock options of 182,167 are not included in the calculation of diluted EPS in the year ending July 31, 1999 because they are antidilutive. Income Taxes Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future. Such deferred income tax asset and liability computations are based on enacted tax laws and rates applicable to periods in which the differences are expected to effect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 43 46 Reclassifications Certain items in the 1998 and 1997 financial statements have been reclassified to conform with the 1999 presentation. 2. Short-Term Investments Short-term investments consist of United States Treasury bills and notes with original maturities of between three and twelve months. The following is an analysis of short-term investments:
1999 1998 ---- ---------- US Government obligations, cost $ -- $1,352,000 Gross unrealized holding gains -- 12,000 ---- ---------- US Government obligations, fair value $ -- $1,364,000 ==== ==========
No provision has been made for the change in market value for these investments, as the Company intends to hold them until maturity. In determining realized net gains, the cost of the securities sold is based on specific identification. 3. Deferred Revenues Deferred revenues consist of the following:
1999 1998 ---- -------- Deferred television revenues $ -- $800,000 ---- -------- $ -- $800,000 ==== ========
44 47 4. Accrued Expenses Accrued expenses consist of the following:
1999 1998 -------- -------- Accrued royalties $ 50,000 $312,000 Reserve for contract payment on sale of stock (Note 5) -- 158,000 Deferred salary 189,000 189,000 Legal expenses and other 193,000 170,000 -------- -------- $432,000 $829,000 ======== ========
Certain royalties and other expenses (including the contingent payment on sale of stock) accrued in previous years were settled in fiscal year 1999 and 1998 at reduced levels. The reduction in these accruals is reflected in other income in the accompanying consolidated statement of operations. 5. Commitments and Contingencies Made-For-Cable Agreement In March 1994, the Company signed an agreement with Showtime Networks, Inc. ("Showtime") to produce seven movies over a three year period to be aired initially on the Showtime Network or The Movie Channel. The agreement provides for the payment of a license fee to NLI upon the commencement of principal photography of each film and contingent compensation based on revenues the films may generate from all sources. The Showtime agreement has now expired, with only four made-for-cable movies produced, and as such, the fifth through seventh movies will not be produced. Showtime has paid the producer fees due for all movies as of July 31, 1999. Revenue recognized under this agreement totaled $0, $300,000 and $300,000 for the years ended July 31, 1999, 1998 and 1997, respectively. 45 48 In April 1998, the Company entered into an $800,000 agreement with International Family Entertainment, Inc. ("IFE"), whereby IFE had certain exclusive rights to the "National Lampoon" brand (including name, logos and related elements) in connection with US television series and made-for-TV movies during the 1998-99 telecast season. As the $800,000 annual fee was received by the Company in June 1998 for the television season beginning in August 1998, the Company deferred this income until fiscal year 1999. This income was reflected as movies, television and theatrical in the accompanying consolidated statements of operations. IFE did not exercise an option to extend this agreement through the 1999-2000 telecast season. Motion Picture Agreement NLI and New Line Cinema Corporation ("New Line") entered into an agreement, effective September 11, 1991, regarding the development, production, financing and distribution of up to three "National Lampoon" motion pictures. The agreement provided NLI with a non-refundable advance of $375,000 upon the execution of the agreement. The agreement was subsequently amended to extend its term through April 1, 1996. The compensation to be received by NLI as a result of the use of its name is $250,000 for each motion picture produced (payable on commencement of principal photography of the applicable film) plus 2-1/2 percent of distributors' gross receipts, as defined from all media in connection with the motion pictures. Revenues recognized under this agreement totaled $0, $84,000 and $118,000 for the years ended July 31, 1999, 1998 and 1997, respectively. Reserve for Contract Payment on Sale of Stock The Company has its videocassettes for the domestic market duplicated primarily by an independent duplication company, Technicolor Videocassette, Inc. ("Technicolor"), which warehouses the videocassettes and fulfills and ships orders for the Company. In April 1993, pursuant to a settlement agreement regarding an outstanding balance, the Company issued to Technicolor 52,333 shares of its common stock valued at $176,000, and a note in the amount of $87,000 to satisfy obligations owed to Technicolor. The Company paid the balance of the note in full during fiscal year 1995. The agreement provides for an additional cash payment in the event that such common stock is sold, 46 49 within a specified time period, for less than $6 per share. A reserve for this contingent payment of $158,000 was included in accrued expenses at July 31, 1998 and 1997. The current year appreciation of the Company's share price in excess of $6 per share allowed Technicolor to recoup its monies due without additional payment from the Company which eliminated the need for the liability previously recorded (see Note 4). Accordingly, reversal of the reserve has been reflected as other income in the accompanying consolidated statement of operations for the year ended July 31, 1999. Joint Venture As part of the acquisition of NLI, the Company acquired a 75 percent interest in a joint venture, which only operations consist of revenues received from the licensing of a certain "National Lampoon" motion picture. The minority interest's share in the joint venture's revenue is deducted from movies, television and theatrical revenue. Total revenues received by the joint venture related to this motion picture were $251,000, $124,000 and $328,000 for each of the three years in the period ended July 31, 1999. Of this revenue, the minority interest's share totaled $68,000, $34,000 and $82,000, respectively. Leases The Company is obligated under an operating lease expiring on September 30, 2000 for its office facility in Los Angeles, California. The facility lease includes certain provisions for rent adjustments based upon changes in the lessor's operating costs and increases in the Consumer Price Index. The Company is obligated under an operating lease expiring in September 2002 for equipment located at its office facility. The Company is also obligated under an operating lease expiring in November 1999 for an automobile leased on behalf of an employee of the Company. 47 50 The Company is committed to future minimum lease payments for the following years:
Building Equipment Total -------- --------- -------- 2000 89,000 6,000 95,000 2001 15,000 2,000 17,000 2002 -- 2,000 2,000 -------- ------- -------- Total $104,000 $10,000 $114,000 ======== ======= ========
Rent expense totaled $79,000, $89,000 and $79,000 for the years ended July 31, 1999, 1998 and 1997, respectively. Equipment lease expense totaled $2,000, $2,000 and $8,000 for the years ended July 31, 1999, 1998 and 1997, respectively. Royalty Agreements Pursuant to a royalty agreement between NLI and The Harvard Lampoon, Inc. ("HLI"), as amended on October 1, 1998, NLI is required to pay HLI a royalty equal to 2 percent on the aggregate "net sales price", as defined by the agreement, from sales of any permitted publication using the name "Lampoon" as part of its title and a royalty of up to 2 percent of "pretax profits", as defined in the agreement, on any movie, stage show, television show or radio show using the name. Royalties payable under this agreement totaled $5,000, $13,000 and $19,000 for the years ended July 31, 1999, 1998 and 1997, respectively. The Company has entered into various royalty agreements with the producers of videocassettes distributed by the Company. The Company is required to pay a royalty, according to each individual agreement, of a percentage of gross receipts, less certain expenses. Royalty expense under these agreements totaled $2,000, $2,000 and $45,000 for the years ended July 31, 1999, 1998 and 1997, respectively. 48 51 GPEC Agreement In 1987, NLI sold the exclusive rights to produce television programming utilizing the name "National Lampoon" to Guber-Peter Entertainment Company ("GPEC"). In 1991, under agreement with GPEC, NLI reacquired this right for $1,000,000, of which $500,000 was paid on execution of the agreement. The remaining $500,000 was payable out of the gross receipts of television programming, if any. To date, $182,500 has been paid under the gross receipts provision of the agreement. Employment Agreement The Company has entered into a restated employment agreement, dated July 1, 1999 ("1999 Agreement"), with its President and Chief Executive Officer. The agreement is for seven years and provides annual base compensation of $475,000, with annual increases of the greater of 9 percent or 5 percent, plus the percentage increase in the Consumer Price Index. Previously, the President had reduced the amount of salary he receives to $191,000. The President does not expect to receive the difference between the amount received and the amount provided for under the 1999 Agreement unless there is a change in control of the Company, as defined by the agreement. The decision by the President to forego compensation is similar to the actions by the President under the terms of his prior employment agreement. Accordingly, and as specifically provided by the terms of the 1999 Agreement, the Company has entered into ("the Contingent Note") in the amount of $2,150,625, which amount represents the principal and interest (computed at 10% per annum) of all amounts previously waived by the President. The Contingent Note is due only upon change of control by the Company (as defined in the 1999 Agreement), and is a contingent obligation of the Company. To the extent that amounts are waived by the President in the future, the 1999 Agreement provides that the Company is obligated to issue additional contingent notes, due on the same basis, for the amounts so waived. In addition, an annual bonus is payable to the President if the Company's pretax income exceeds specified levels. The amount is based on pretax earnings of the Company ranging from 5 percent to 9 percent over certain minimums. If earnings exceed $7,000,000, the President shall be entitled to such incentive compensation, as may be determined by the Board of Directors based upon the President's service and performance on behalf of the Company and the profitability of the Company. No bonus was earned in 1999, 1998 or 1997. Deferred bonuses for the President, included in accrued expenses, totaled $100,000 at July 31, 1999 and 1998. In addition, certain officers have deferred salary totaling $89,000 at July 31, 1999 and 1998, also included in accrued expenses. 49 52 The Company has also granted the President options to purchase 25,000 shares of its common stock and 25,000 stock appreciation rights (see Note 7) for each year of his employment contract. The price for each will be based on the average of the high and low bid and asked price for one share of common stock during the five (5) business days preceding the date of grant as reported by NASDAQ automated quotation system. The 1999 Agreement provides that if the President's employment is terminated without cause, or is terminated by the President for cause or under certain other circumstances, including a change in control of the Company (as defined in the 1999 Agreement), then the President generally is entitled to receive all payments and other benefits which would be due under the 1999 Agreement during its entire term; provided, that such payments are to be "grossed up" to the extent that such payments wold constitute an "excess parachute payment" under the Internal Revenue Code of 1986, or any successor law applicable to payments of severance compensation to the President. In addition to the foregoing benefits, the President has the right, if he terminates his employment under certain circumstances to serve as a consultant to the Company for a period of five years. During this consulting period the President would earn 50% of his salary as in effect on the date of termination of his employment. LITIGATION The Company, NLI and the officers and directors of NLI became the defendants in a lawsuit related to the acquisition of NLI by the Company. The shareholders of NLI (the "Plaintiffs") filed the claim in respect to the tax treatment of the transaction to the individual shareholders of NLI. The Company entered into a settlement agreement in August 1991, which must still be approved by the courts, under which the Company will pay in cash or stock the Plaintiffs for the payment of attorneys' fees. The value of the consideration to be paid of approximately $203,000 has been reflected as a liability at July 31, 1999, 1998 and 1997 as the shares have not been issued and the settlement has not been approved. On August 20, 1996, counsel for HLI filed a demand for arbitration with the American Arbitration Association, asserting that the Company underpaid royalties payable under the HLI royalty agreement by approximately $226,000, plus unspecified late charges, for the period July 1, 1992 through June 30, 1995, based upon HLI's interpretation of the agreement. After considerable arbitration, HLI and the Company entered into a new, perpetual license agreement which clarified certain new rights for the Company. As part of the arbitration, the Company agreed to issue HLI 16,667 shares of its common stock. The Company delivered the stock to HLI during the current year. 50 53 The Company is party to other legal matters arising in connection with its business. While the final resolution of any matter may have an impact on the Company's results of operations for a particular reporting period, management believes, based in part on discussions with legal counsel, that the final outcomes of these matters will not have a material adverse effect upon the Company's financial position or results of operations. 6. Notes Receivable on Common Stock In 1986, the Company issued 266,667 shares of common stock to certain of its officers and directors pursuant to its Restated Stock Purchase Plan. The shares were issued with 50 percent of the purchase price payable at the time of issuance and the remainder due in five years. The unpaid balance is due from the Company's President and Chief Executive Officer and bears interest at the rate of 10 percent, under promissory notes secured by the stock in favor of the Company. 7. Stock Options and Stock Appreciation Rights Stock Option Plans In March, 1995, shareholders approved the 1994 Employee Stock Option Plan and the 1994 Option Plan for Non-Employee Directors. These plans replaced the 1991 Stock Option Plan. All stock options subject to these plans are granted with an exercise price equivalent to the fair market value of the common stock at the time of the grant, except that in the case of the incentive stock options granted to a holder of 10 percent or more of the outstanding shares of common stock, such exercise price may not be less than 110 percent of the fair market value and may not be exercisable after the expiration of five years, versus ten years for regular stock options. 51 54 A summary of the stock options outstanding is below:
Number of Option Weighted Average Options Price Exercise Price Outstanding Range Per Share ----------- ------------- ---------------- Balance, July 31, 1996 198,000 $1.68 - $4.44 $3.30 Granted 38,000 $2.64 - $3.39 $3.00 Canceled (23,000) $3.18 - $3.57 $3.39 ------- ------------- ----- Balance, July 31, 1997 213,000 $1.68 - $4.44 $3.24 Granted 44,000 $1.68 - $3.00 $2.10 Canceled (8,000) $2.63 - $3.19 $3.09 ------- ------------- ----- Balance, July 31, 1998 249,000 $1.68 - $4.44 $3.03 Granted 42,000 $1.94 - $2.08 $2.02 Exercised (17,000) $1.69 - $3.56 $2.91 Canceled (92,000) $1.69 - $3.57 $3.04 ======= ============= ===== Balance, July 31, 1999 182,000 $1.68 - $4.44 $2.82
Of the options outstanding as of July 31, 1999, 1998 and 1997, 149,833, 214,000 and 192,000, respectively, were exercisable with a weighted average exercise price of $2.99, $3.18 and $3.27, respectively. The weighted average remaining contractual life of the options outstanding as of July 31, 1999 was 3.95 years. The Company has adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation", issued in October 1995. In accordance with provisions of SFAS No.123, the Company applies APB Opinion 25 and related interpretations in accounting for its stock option plans and, accordingly, does not recognize compensation cost for employee options granted at of above market value. If the Company had elected to recognize compensation cost based on the fair value of the options granted at grant date as prescribed by SFAS No. 123, net income (loss) and earnings (loss) per share would have been reduced to the pro forma amounts indicated in the table below: 52 55
Years Ended July 31, ------------------------------------------ 1999 1998 1997 ----------- -------- -------- Net (loss) income-as reported $(1,299,000) $121,000 $ 30,000 Net (loss) income-pro-forma $(1,343,000) $ 76,000 $(11,000) Basic (loss) earnings per share- as reported $ (1.07) $ 0.10 $ 0.03 Diluted (loss) earnings per share- as reported $ (1.07) $ 0.10 $ 0.02 Basic (loss) earnings per share-pro-forma $ (1.11) $ 0.06 $ 0.00 Diluted (loss) earnings per share-pro-forma $ (1.11) $ 0.06 $ 0.00
Because the SFAS No. 123 method of accounting has not been applied to options granted prior to August 1, 1995, the resulting pro-forma compensation cost may not be representative of the cost to be expected in future years. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: Expected dividend yield 0.00% Expected stock price volatility 85.77% Risk free interest rate 4.95% Expected life of options 3.34 years
The weighted average fair value of options granted during fiscal 1999 and 1998 was $1.53 and $1.50, respectively. 53 56 Stock Appreciation Rights The President and Chief Executive Officer of the Company has stock appreciation rights which entitle the officer to receive cash equal to the difference between the fair market value and the appreciation base of the rights when they are exercised. The rights are payable to the President on demand. However, the President has represented that unless there is a change in control in the Company's ownership, he does not intend to call in these rights during fiscal year 2000. As of July 31, 1999 and 1998, appreciation in these rights amounted to approximately $1,717,000 and $17,000, respectively. This amount has been classified as non-current and is reflected in deferred compensation in the accompanying consolidated balance sheets. At July 31, 1999, a total of 116,669 rights were outstanding with exercise prices of between $1.94 and $4.42 per share. 8. Related Party Transactions Legal fees of $13,200, $7,000 and $3,000, included in selling, general and administrative expenses, were incurred during fiscal 1999, 1998 and 1997, respectively, for services from legal firms, one of whose partners is a director of the Company. See Note 6 for discussion of a note receivable from the Company's President and Chief Executive Officer. 9. Income Taxes The provision for income taxes is comprised as follows:
1999 1998 1997 ---- ------ ------ Current: State $ -- $6,000 $9,000 Federal -- -- -- Adjustment to valuation allowance: State -- -- -- ---- ------ ------ $ -- $6,000 $9,000 ==== ====== ======
54 57 A reconciliation between the statutory federal rate and the Company's effective rate follows:
1999 1998 1997 ---- ---- ---- Statutory federal income tax rate (34)% 34% 34% State income taxes -- 7 19 Benefit of unrecognized prior year losses -- (190) (185) Amortization of intangible assets 6 64 173 Other 28 92 (22) ---- ---- ---- Effective rate --% 7% 19% ==== ==== ====
At July 31, 1999 and 1998, the tax effect of deductible timing differences and carryforwards is comprised of the following:
1999 1998 ------------ ------------ Net operating loss carryforwards $ 550,000 $ 507,000 Accrued liabilities and contingencies 705,000 136,000 Royalty reserves 108,000 131,000 Deferred income -- 320,000 ------------ ------------ 1,363,000 1,094,000 Valuation allowance (1,363,000) (1,094,000) ------------ ------------ Net deferred tax asset $ -- $ -- ============ ============
At July 31, 1998, the Company had available for federal income tax purposes net operating loss carryforwards of approximately $1,572,000, expiring at various dates through 2019. 55 58 10. Major Customers During the year ended July 31, 1999, the Company received $800,000 in revenues from one motion picture/television license agreement representing 59% of total revenues. During the year ended July 31, 1998, the Company received $300,000 in revenues from two motion picture licensees representing 25% of total revenues. During the year ended July 31, 1997, the Company received $300,000 in revenues from a motion picture licensee representing 24% of total revenues. 11. Stockholder Rights Plan In July of 1999, the Board of Directors of the Company adopted a Stockholder Rights Plan ("the Plan"). In connection therewith a dividend of one preferred share purchase right ("the Rights") for each outstanding share of common stock outstanding at the close of business on August 5, 1999. Since that time the Company has issued the Rights with each Common Share that has been subsequently issued. When exercisable, each new right will entitle its holder to buy one-hundredth of a share of Series A Junior Participating Preferred Stock ("the Preferred Shares") at a price of $65 per one-one-hundredth of a share until July 15, 1999. The Rights will become exercisable upon the earlier of (i) ten business days following public announcement that a person or a group of affiliated or associated persons has acquired, or obtained the right to acquire, beneficial ownership of 15% (with certain exceptions as defined in the Plan) or more of the outstanding Common Shares or (ii) ten business days following the commencement or announcement of an intention to make a tender offer or exchange offer the consummation of which would result in the beneficial ownership by a person or group of 15% or more of the outstanding Common Shares. In the event of any merger, consolidation or other transaction in which Common Shares are exchanged, each Preferred Shareholder will be entitled to receive 100 times the amount received per Common Share. In the event that a person becomes an Acquiring Person or if the Company were the surviving corporation on a merger with an Acquiring Person or any affiliate or associate of an Acquiring Person and the Common Shares were not changed or exchanged, each holder of a Right, other than the Rights that are or were acquired or beneficially owned by the Acquiring Person (which Rights will thereafter be 56 59 void), will thereafter have the right to receive upon exercise that number of Common Shares having a market value of two times the then current Purchase Price of one Right. In business combination transaction or more than 50% of its assets or earning power was sold, proper provision shall be made so that each holder of a Right shall thereafter have the right to receive, upon the exercise thereof at the then current Purchase Price of the Right, that number of shares of common stock of the acquiring company which at the time of such transaction would have a market value of two times the then current Purchase of one Right. The Rights may be redeemed in whole, but not in part, by the Board of Directors of the Company at a price of $0.001 per Right at any time prior to the time that an Acquiring Person has become such. The redemption of the Rights may be made effective at such time, on such basis and with such conditions as the Board of Directors of the Company in its sole discretion may establish. 12. Segment Information The Company adopted SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information", for its fiscal year ended July 31, 1999, which changed the way the Company reports information about its operating segments. The Company business units have been aggregated into three reportable operating segments: exploitation of the "National Lampoon" trademark, internet operations and video distribution. The factors for determining the reportable segments were based on the distinct nature of their operations. They are managed as separate business units because each requires and is responsible for executing a unique business strategy. Earnings of industry segments exclude interest income, goodwill amortization, compensation related to SAR's and other unallocated corporate expenses. With the development of internet operations beginning in January 1999, the Company began allocating unidentifiable selling, general and administrative expenses evenly between the trademark and internet segments. Identifiable assets are those assets used in the operations of the segments. Corporate assets consist of cash, certain corporate receivables and intangibles. Summarized financial information concerning the Company's reportable segments is shown in the following tables: 57 60
Trademark Internet Video Total ----------- --------- --------- ----------- Year Ended July 31, 1999: Revenues $ 1,228,000 $ -- $ 18,000 $ 1,246,000 Segment income (loss) 425,000 (324,000) 5,000 106,000 Identifiable assets -- 19,000 10,000 29,000 Capital expenditures -- 27,000 -- 27,000 Depreciation expense -- 8,000 -- 8,000 Year Ended July 31, 1998: Revenues $ 782,000 $ -- $ 1,000 $ 783,000 Segment income (loss) (76,600) -- (4,000) (80,600) Identifiable assets -- -- 14,000 14,000 Capital expenditures -- -- -- -- Depreciation expense -- -- -- -- Year Ended July 31, 1997: Revenues $ 1,137,000 $ -- $ 219,000 $ 1,356,000 Segment income (loss) 143,000 -- 114,000 257,000 Identifiable assets -- -- 12,000 12,000 Capital expenditures -- -- -- -- Depreciation expense -- -- -- --
58 61 The following is a reconciliation of reportable segment income to consolidated income (loss) before taxes:
Year Ended Year Ended Year Ended July 31, July 31, July 31, 1999 1998 1997 ----------- ---------- --------- Segment income (loss) $ 106,000 $ (80,600) $ 257,000 (Compensation) benefit related to SAR (1,700,000) 19,600 (37,000) Goodwill amortization (240,000) (240,000) (240,000) Other income 436,000 343,000 -- ----------- --------- --------- Operating (loss) income (1,398,000) 42,000 (20,000) Interest income 99,000 85,000 59,000 ----------- --------- --------- Consolidated (loss) income before taxes $(1,299,000) $ 127,000 $ 39,000 =========== ========= =========
The following is a reconciliation of reportable segment assets to consolidated total assets:
Year Ended Year Ended Year Ended July 31, July 31, July 31, 1999 1998 1997 ---------- ---------- ---------- Total assets for reportable segments $ 29,000 $ 14,000 $ 12,000 Goodwill not allocated to segments 3,416,000 3,656,000 3,896,000 Cash and cash equivalents 1,858,000 879,000 641,000 Short-term investments -- 1,352,000 861,000 Other unallocated amounts 47,000 61,000 63,000 ---------- ---------- ---------- Consolidated total assets $5,350,000 $5,962,000 $5,473,000 ========== ========== ==========
59 EX-10.1 2 EXHIBIT 10.1 1 EXHIBIT 10.1 RESTATED EMPLOYMENT AGREEMENT BETWEEN J2 COMMUNICATIONS AND JAMES P. JIMIRRO This RESTATED EMPLOYMENT AGREEMENT dated as of July 1, 1999 (the "Agreement"), is by and between J2 COMMUNICATIONS, a California corporation (the "Company"), and JAMES P. JIMIRRO ("Executive"). RECITALS WHEREAS, Executive has served since 1986 and continues to serve as Chairman of the Board of Directors, President and Chief Executive Officer of the Company; WHEREAS, Executive and the Company are parties to a Restated Employment Agreement dated as of July 1, 1994 (the "1994 Employment Agreement"); WHEREAS, the Board of Directors of the Company (the "Board") recognizes the possibility that a "change in control" (as defined in Section 4(e) (iv) may occur and that this possibility, and the uncertainty which it raises to Executive, may result in the distraction of Executive to the detriment of the Company and its shareholders; WHEREAS, the Board has determined that it is in the best interests of the Company to foster and encourage the continued attention and dedication of Executive without distraction arising from the possibility of a change in control of the Company; and WHEREAS, the Company and Executive have mutually agreed to extend Executive's terms of employment to secure to the Company the continued valuable services of Executive, and have agreed to restate the 1994 Agreement as provided herein: AGREEMENT NOW, THEREFORE, in consideration of the foregoing and the mutual covenants herein contained, the parties hereto agree to amend and restate the 1994 Employment Agreement in its entirety as follows: 1. EMPLOYMENT (a) Executive Employment. The Company hereby employs Executive, and Executive hereby agrees to perform services for the Company for an during the term hereof, and to serve as President and Chief Executive Officer of the Company and, for so long as Executive is a director of the Company, as Chairman of the Board. Executive shall perform such duties and have such 2 responsibilities as are customarily performed by the president, chief executive officer and chief managing officer of a corporation engaging in the business of the Company, including, without limitation, such executive duties and responsibilities as may from time to time be assigned to Executive by the Board. The Executive shall report solely to the Board and shall be subject to direction solely from the Board in the performance of his duties hereunder. Unless Executive otherwise consents in writing, Executive shall also serve in the same positions, and shall have similar responsibilities with respect to, each of the Company's direct and indirect subsidiaries (the "Subsidiaries"). For purposes of this Agreement, unless the context otherwise requires, references to the business of "the Company" shall include all Subsidiaries of the Company and any successor corporation or corporations which may be the eventual successor to the present future business and/or assets of the Company. (b) Duties. Throughout the period that the Executive is employed by the Company hereunder (the "Employment Term"), Executive shall devote substantially all of his time, energy and skill during normal business hours to the business and affairs of the Company, except for vacation periods and periods of illness or incapacity, but nothing in this Agreement shall preclude Executive from devoting reasonable amounts of time to serve as a director or member of a committee of any organization involving no material and substantial conflict of interest with the Company or from pursuing personal investments provided that Employee shall not, directly or indirectly, as employee, consultant, agent, investor, principal, partner, stockholder (except as a holder of less that 1% of the issued and outstanding stock or debt of a publicly held corporation), officer, director or otherwise, engage or participate in any business similar to or in competition in any manner whatsoever with the business as now or hereafter conducted. (c) Election of Directors. It is the intent of the parties that during the Employment Term the Executive shall serve as a director of the Company, and at each meeting of shareholders of the Company at which Executive's term as a director ends, the Company shall include Executive in its slate of nominees to be elected as directors at such meeting, and shall take all action within its power to cause the Executive to be elected and maintained as a member of the Board in preference to all other nominees of the Board, including soliciting and voting proxies from shareholders in support of such election, and invoking cumulative voting, if available. Unless Executive otherwise consents in writing, the Company shall also take all actions within its power to cause Executive to be elected and maintained as a member of the Board of Directors of each of the Subsidiaries. (d) Place of Employment. The Company shall not change the location of the principal office of the Company or Executive's principal place of employment during the Employment Term of this Agreement without the prior written approval of Executive. The Executive shall not be required to travel from Los Angeles on business for unreasonable periods of time or on an unreasonable number of business trips. 2. COMPENSATION. The Company shall provide to Executive and pay the following forms of compensation: (a) Base Salary. 2 3 (i) During the Employment Term, the Company shall pay to Executive an annual salary (the "Base Salary") for the services to be rendered by him hereunder, including all services to be rendered as an officer and director of the Company, which shall initially be Four Hundred Seventy-five Thousand Dollars ($475,000) per year. Such salary shall be payable in accordance with the Company's executive payroll policies as in effect from time to time. The Executive's Base Salary as in effect from time to time shall not be subject to reduction without the Executive's prior written consent. (ii) Company and Employee acknowledge that prior to the date hereof, Employee has waived $2,150,625 principal amount of compensation, as more fully set forth on Schedule 1 attached hereto. Company agrees that such amounts shall be evidenced by a note (the "Contingent Note"), which note shall be due and payable upon a "Change of Control", as defined therein to the extent that Employee elects to waive any additional compensation the Company shall issue one or more additional Contingent notes to reflect such waived amount. (b) Adjustments to Base Salary. On July 1, 2000, and on each anniversary of that date (each, an "Anniversary Date"), the Base Salary shall be increased by the greater of (i) 9%, or (ii) 5% plus the Percentage Increase in the CPI Index. The "Percentage Increase in the CPI Index" shall mean a percentage equal to a fraction, the numerator of which shall be the Index in effect on the Anniversary Date less the Index in effect on the date one year prior to the Anniversary Date (the "Prior Index") and the denominator of which shall be the Prior Index. "Index" shall mean, on any date on which the Index is determined, the most recent Consumer Price Index - All Urban Consumers Los Angeles - Long Beach - Anaheim - All Items (the "Index"), published by the United States Department of Labor's Bureau of Labor Statistics (the "Bureau"). Should the Bureau discontinue the publication of the Index, or publish the Index less frequently than quarterly, or alter the Index in some other manner, the Company shall adopt a substitute index or substitute procedure which reasonably reflects variations in consumer prices. (c) Bonus Compensation. During the Employment Term, the Company shall pay a bonus (the "Bonus") to Executive, which may be part of a general bonus plan established by the Company. The bonus paid to Executive with respect to each fiscal year of the Company during the Employment Term shall be at least equal to the Bonus described below. The bonus shall be payable on the earlier of one hundred twenty (120) days following the end of each fiscal year of the Company, or within thirty (30) days following the date on which the Company files with the Securities Exchange Commission its Annual Report or Form 10-K. The Company agrees that it shall not change its fiscal year or materially modify its corporate structure unless the Company and Executive reach an agreement on an equitable adjustment of the bonus formula set forth in this Section 2(c), which agreement shall not be unreasonably withheld by either party. The Bonus shall be based on the consolidated earnings, before taxes of J2 Communications ("Consolidated EBIT") computed using generally accepted accounting principles, applied consistently with past periods. The Bonus shall be in an amount equal to 5% of Company's Consolidated EBIT in excess of $500,000 and up to $1 million; plus 6% of the next $1 million of Consolidated EBIT; plus 7% of the next $1 million of Consolidated EBIT; plus 8% of the next $2 million of Consolidated 3 4 EBIT; and, plus 9% of the next $2 million of Consolidated EBIT. If Consolidated EBIT for any fiscal year of the Company exceed $7 million, then Executive shall, in addition to foregoing compensation, be entitled to such additional incentive compensation as may be determined by the Board based upon Executive's services and performance on behalf of the Company and the profitability of the Company. In determining Consolidated EBIT, the Company shall exclude the effects of extraordinary gains and losses, non recurring expense amortization of intangible assets arising out of transactions included without the approval of Executive, any expenses accrued by the Company in respect to any Stock Option or SAR grant to Executive under this Agreement or any predecessor agreement. (d) Stock Options. During the Employment Term, the Board shall grant to Executive during each one-year period on the earlier of the date of the Annual Meeting of Stockholders or one hundred fifty (150) days following the end of the Company's fiscal year, options to purchase 25,000 shares of the Company's Common Stock, no par value (the "Common Stock") and stock appreciation rights ("SARS") relating to an additional 25,000 shares of the Company's Common Stock, each on the following terms and conditions: (i) The exercise price of each option and the initial valuation of each SAR shall be equal to (A) if the Common Stock is traded on the NASDAQ Automated Quotation System, the average of the high and low bid and asked price for one share of Common Stock during the five (5) business days preceding the date of grant as reported by such system or exchange, as reported on the NASDAQ Automated Quotation System; (B) if transactions in the Common Stock are reported on the NASDAQ National Market System or the Common Stock is listed on any national stock exchange, the average closing price for one share of Common Stock during the five (5) business days preceding the date of grant, as reported on such system or by such exchange; or (C) if neither (A) nor (B) is applicable, then the fair market value of one share of the Common Stock, as determined by the Board. (ii) All stock options and SARS granted to Executive pursuant to this Section 4(d): (A) shall be immediately exercisable; (B) shall expire to the extent not exercised prior to the close of business on the day ten (10) years from the date of grant; (C) may be exercised as to the whole or any part, by written notice to the Company, stating the number of shares with respect to which the option is being exercised and specifying a date, not less than ten (10) nor more than twenty (20) days after the date of such notice, as the date on which the stock will be taken up and payment, if any, made therefor at the principal office of the Company; (D) in the case of options, shall, to the maximum extent permitted under the Internal Revenue Code, be options intended to qualify as "Incentive Stock Options" pursuant to Section 422 of the Internal Revenue Code; (E) shall be governed by agreements substantially in the form of the agreements which are Exhibits to the Company's 1991 Employee Stock Incentive Plan approved by the Board of Directors of the Company on December 13, 1990, or as otherwise agreed upon by the parties; and (F) shall be subject to all other terms identical to those contained in the Company's 1991 Employee Stock Incentive Plan. The Company shall use its best efforts to assure that all options and SARS are granted to Executive under the Company's 1991 Employee Incentive Stock Option Plan, or a similar plan later adopted by the Company which satisfies the conditions of Rule 16b-3 of the Securities and Exchange Commission or any successor thereto. 4 5 (iii) In the event of a change in the number of the Company's shares of Common Stock outstanding caused by an event listed in Section 10 of the Company's 1991 Employee Stock Incentive Plan, the number of shares subject to options granted after the date of such event shall be adjusted in accordance with the procedures contained in such Section and the number of options and SARS to be granted to Executive pursuant to this Section 4(d) shall be correspondingly adjusted. (iv) Notwithstanding the foregoing, if and to the extent that, in the opinion of counsel, the Company is unable to grant the Executive any stock options or SARS due Executive pursuant to this Section 2(d), because such grant would violate any state or federal securities law, regulation, permit or approval obtained by the Company, then the Company shall to the extent it is able to do so without violation of the foregoing, at the time such stock options or SARS would otherwise be granted to Executive hereunder: agree with the Executive on a reasonably equivalent, alternative form of compensation, with the agreement of neither party to be unreasonably withheld. (v) To the extent such Options or SARS are unavailable under any Stock Option Plan, the Company shall nevertheless be required to issue such options and register such options as soon as productable as herein provided. (e) Insurance. During the Employment Term, the Company shall pay the premiums on term life insurance on Executive's life in the face amount of $700,000. Executive shall have the right to designate the beneficiary or beneficiaries of said insurance policies, to change such designations at any time by written notice to the Company and, if available, at his own expense, to maintain the policy in force following the termination of the Company's obligation to pay premiums on the policy. (f) Vacation. During the Employment Term, Executive shall be entitled to four (4) weeks paid vacation to be taken at such times as are mutually satisfactory to Executive and to the Company. (g) Other Benefits. During the Employment Term, the Company shall continue to provide Executive with benefits substantially similar to those enjoyed by him under any of the Company's vacation, pension, retirement, life insurance, medical, health and accident, or disability plans or policies in which he is presently participating and the Company shall not take any action which would directly or indirectly materially reduce any of such benefits or deprive Executive of any material fringe benefit presently enjoyed by him immediately prior to the date of this Agreement. During the Employment Term, Executive shall also be entitled to participate or continue to participate in or receive benefits under all of the Company's employee benefit plans, policies, practices and arrangements made available by the Company in the future to its executive employees subject to and on a basis consistent with the terms, conditions and overall administration of such benefit plans and the terms of this Agreement. At its discretion, the Board may grant to Executive benefits under the Company's existing employee benefit plans in addition to those presently enjoyed by Executive or specified herein, based upon Executive's contributions to the success of the Company. 5 6 (h) Excise Tax Gross-Up Payment. In the event that any payment and/or the value of any benefit, or any portion thereof, received or to be received by Executive (other than any amount paid to Executive pursuant to this Section 2(h)) (collectively, "Payments") will make Executive liable for payment of the excise tax (the "Excise Tax") provided for under Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), then the Company or the acquiring or successor entity of the Company shall pay to Executive within ninety (90) days of the date Executive becomes subject to the Excise Tax, an additional amount (the "Excise Tax Gross-Up Payment") such that the net after-tax amount retained by the Executive, after deduction of (i) any Excise Tax on the Payments, and (ii) any federal, state, local or foreign income, employment or other tax and Excise Tax upon any payment provided for by this Section 2(h), shall be equal to the Payments, reduced by the amount of any United States federal, state and local income or employment tax liability of the Executive calculated as if the Payments were not subject to the Excise Tax. Under no circumstances shall the terms of this Section 2(h) be construed to alter the timing, form, or any other provisions of the Payments. For the purposes of determining whether any of the Payments will be subject to the Excise Tax and the amount of such Excise Tax: (1) Any other payments or benefits received or to be received by Executive in connection with the transactions contemplated by a Change in Control or Executive's termination of employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company), shall be treated as "parachute payments" within the meaning of Section 280G of the Code, and all "excess parachute payments" within the meaning of Section 280G shall be treated as subject to the Excise Tax, unless in the opinion of tax counsel selected by the Company and acceptable to Executive, such other payments or benefits (in whole or in part) do not constitute parachute payments, or such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered within the meaning of Section 280G in excess of the "base amount" within the meaning of Section 280G, or are otherwise not subject to the Excise Tax. (2) The amount of the Payments which shall be treated as subject to the Excise Tax shall be equal to the lesser of (1) the total amount of the Payments, or (2) the amount of the excess parachute payments within the meaning of Section 280G (after applying the above provisions). (3) The value of the non-cash benefits, or any deferred payment or benefit, shall be determined by an independent public accounting firm mutually agreeable to the Company and Executive (the "Accountants") in accordance with the principles of Section 280G of the Code. For purposes of determining the amount of the Excise Tax Gross-Up Payment, Executive shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation for the calendar year with respect to which the Excise Tax Gross-Up Payment is to be made, and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive's residence on the date of the Excise Tax Gross-Up Payment is to be 6 7 made, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. In the event that the Excise Tax is subsequently determined to be less than the amount taken into account under this Section 2(h), Executive shall repay to the Company at the time that the amount of such reduction of Excise Tax is finally determined, an amount equal to the sum of the following: (i) the amount of the reduction of the Excise Tax, (ii) the amount of the reduction in all other taxes generated by the reduction in the Excise Tax, and (iii) interest on the amount of the sum of (i) and (ii) at the rate provided in Section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount previously taken into account under the Section 2(h) (including by reason of any payment the existence or amount of which cannot be determined at the time of the Excise Tax Gross-Up Payment), the Company shall make an additional Excise Tax Gross-Up Payment in respect to such excess (plus any interest payable with respect to such excess) at the time that the amount of such excess is finally determined in accordance with the principles set forth above. Unless the Company and Executive otherwise agree in writing, any determination required under this Section 2(h) shall be made in writing by the Accountants, whose determination shall be conclusive and binding upon Executive and the Company for all purposes. For purposes of making the calculations required by this Section 2(h), the Accountants may make reasonable assumptions and approximations concerning applicable taxes and may rely on reasonable, good faith interpretations concerning the application of Sections 280G and 4999 of the Code. The Company and Executive shall furnish to the Accountants such information and documents as the Accountants may reasonably request in order to make a determination under this Section 2(h). The Company shall bear all costs the Accountants may reasonably incur in connection with any calculations contemplated by this Section 2(h). References to Sections 280G and 4999 of the Code shall include any provisions which are similar to or are a successor to such Code section. 3. EXPENSES. Executive shall be reimbursed for expenses incurred for business purposes by the Company upon presenting satisfactory vouchers evidencing such expenses. Executive shall be provided with and the Company shall pay all insurance, maintenance, license, registration and operational expenses for an automobile of his choice (luxury class). 4. TERMINATION. (a) Term. This Agreement shall be in effect from the date hereof through a period of seven (7) years following the date hereof, unless extended or earlier terminated in accordance with this Section 4. Any early termination of this Agreement shall be subject to delay if a Notice of Dispute is delivered in accordance with Section 4(g). (b) Death. This Agreement shall be terminated automatically upon the death of Executive. 7 8 (c) Disability. This Agreement shall be terminated automatically upon the permanent disability of Executive. For purposes of this Agreement, a permanent disability shall be deemed to have occurred if (i) Executive is unable to perform his material duties hereunder for a period of ninety (90) consecutive days, or one hundred eighty (180) days in any one (1) year, on account of any physical or mental disability; or (ii) a licensed physician selected by the Company and approved by Executive (or his closest relative if Executive is unable to act), which approval shall not be unreasonably withheld, makes a medical determination of physical or medical disability or incapacity of Executive. (d) Cause. This Agreement may be terminated voluntarily by the Company immediately at any time during its term for "Cause" which shall mean (i) the willful and continued failure by Executive to substantially perform his duties with the Company in good faith (other than any such failure resulting from his incapacity due to physical or mental illness or any such actual or anticipated failure resulting from his termination pursuant to Section 4(e)), after a demand for substantial performance is delivered to him by the Board which specifically identifies the manner in which the Board believes that Executive has not substantially performed his duties in good faith; or (ii) the willful engaging by Executive in conduct which is demonstrably and materially injurious to the Company, monetarily or otherwise. For purposes of this Section 4(d), no act, or failure to act, on the Company's part shall be considered "willful" unless done, or omitted to be done, by him in bad faith and without reasonable belief that his action or omission was in the best interest of the Company. Notwithstanding the foregoing, Executive shall not be deemed to have been terminated for cause unless and until there shall have been delivered to him a Notice of Termination (as defined in Section 4(f) below) and a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice to him and an opportunity for him, together with his counsel, to be heard before such meeting), finding that in the good faith opinion of the Board, Executive was guilty of conduct set forth above in clause (i) or (ii) of the first sentence of this Section 4(d) and specifying the particulars thereof in detail. (e) Termination by Executive. Executive shall be entitled to terminate his employment upon any of the "Executive Termination Events" listed below by delivery to the Company of a Notice of Termination. The right of Executive to terminate his employment shall be in addition to all rights to damages or other remedies to which Executive may be entitled by law. The term "Executive Termination Events" shall mean the occurrence of any one or more of the following: (i) the material breach of this Agreement by the Company; (ii) the failure of the Company to cause the election of Executive to the Board upon the end of any term of office of Executive as a member of the Board, or the failure to maintain Executive in office as a director at any other time; (iii) any purported termination of Executive's employment upon which a Notice of Dispute is properly given if pursuant to Section 4(g) it is determined, either by a 8 9 binding arbitration award or by a final judgment, order or decree of a court of competent jurisdiction (the time for appeal therefrom having expired and no appeal having been perfected), that such purported termination was invalid; provided, however, that in the event Executive terminates his employment pursuant to this clause (iii), the compensation payable under Section 5 as a result of such termination shall be reduced by any damages awarded by such court or arbitration panel and paid to Executive; (iv) the occurrence of a "Change in Control of the Company" which shall be deemed to occur: (A) upon a change in control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended ("Exchange Act"), whether or not the Company is then subject to such reporting requirement; (B) any "person" (as such term is defined in Section 3(a) (9) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding securities; (C) during any period of two (2) consecutive years (the "Period"), individuals who at the beginning of the Period constitute the Board, including for this purpose any new director whose election or nomination for election by the Company's shareholders was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the Period (or whose election or nomination was similarly approved by the Board), cease for any reason to constitute a majority thereof; (D) the sale of all or substantially all of the assets of the Company; or, (E) the merger of the Company with any other corporation if shareholders of the Company prior to the effective date of the merger own, immediately following the merger, less than seventy-five percent of the combined voting power of the surviving corporation excluding from such ownership any voting securities not received in exchange for or in respect of voting securities of the Company; and (v) the failure of the Company to obtain an assumption agreement as required by Section 6 hereof prior to the effectiveness of any such succession as defined therein. Any purported termination of employment by Executive pursuant to this Section 4(e) shall be made by giving a Notice of Termination within one (1) year in the case of clause (iv) and six (6) months in the case of clauses (i), (ii), (iii) and (v) hereof of the event giving rise to the right to terminate. The failure of Executive to give a Notice of Termination within such period shall not be construed to prevent the giving of Notice of Termination upon the next occurrence of any event set forth in clauses (i) through (v) of this Section 4(e). Executive's right to terminate his employment pursuant to this Section 4(e) shall not be affected by his incapacity due to physical or mental illness. (f) Notice of Termination. "Notice of Termination" shall be a written notice terminating Executive's employment hereunder which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of employment under the provision so indicated. 9 10 (g) Notice of Dispute. Within fifteen (15) days after Notice of Termination is given, the party receiving such Notice of Termination may notify the other party that a dispute exists concerning the termination ("Notice of Dispute"), and the Date of Termination shall be the date on which the dispute is finally resolved, either by mutual written agreement of the parties, by a binding arbitration award, or by a final judgment, order or decree of a court of competent jurisdiction (the time for appeal therefrom having expired and no appeal having been perfected); and provided, however, that the Date of Termination shall be extended by a Notice of Dispute only if the party delivering such notice pursues the resolution of such dispute with reasonable diligence. Notwithstanding the pendency of a Notice of Dispute, the Company will continue to pay Executive his full compensation in effect when the notice giving rise to the dispute was given and continue him as a participant in all compensation, bonus, benefit and insurance plans in which he was participating when the notice giving rise to the dispute was given, until the dispute is finally resolved. (h) Extension. By written agreement executed by the Company and Executive, the Employment Term may be extended for such additional periods as the Executive and the Company may from time to time agree in writing. (i) Date of Termination. Subject to Section 4(g), "Date of Termination" means (i) if employment is terminated upon the death of Executive, the date of such death; (ii) if employment is terminated upon the permanent disability of Executive as provided for in Section 4(c), on the date permanent disability is first established pursuant to that Section; (iii) if employment is terminated pursuant to Section 4(d), the date specified in the last sentence of Section 4(d); (iv) if employment is terminated pursuant to Section 4(e) (other than Section 4(e)(v)), the date specified in the Notice of Termination, which shall be not less than thirty (30) nor more than sixty (60) days following the date the Notice of Termination is delivered to the Company; or (v) if employment is terminated pursuant to clause (v) of Section 4(e), the date on which any such succession becomes effective. 5. COMPENSATION AND BENEFITS UPON TERMINATION. In addition to any benefits mandated by law, upon termination of employment, Executive shall be entitled to the compensation and benefits described below, plus such amounts as may be due and owing from time to time pursuant to Section 4(h) hereof. Upon payment of such amounts, the Company shall have no further liability or obligation hereunder to Executive to pay the compensation or provide the benefits specified in Sections 2 hereof, or to his executors or administrators, his heirs or assigns or any other person claiming under or through him therefor; provided, however, that the foregoing shall not relieve the Company from its obligations under Section 4(h). (a) Death. Upon the death of Executive, the Company shall pay to the estate of Executive: (i) (A) to the extent not previously paid, any Bonus due to Executive pursuant to Section 2(c) for the fiscal year preceding that in which the Date of Termination occurs, and (B) a pro rata portion of the Bonus which would be due for Executive pursuant to Section 2(c) with respect to the fiscal year in which the Date of Termination occurs, based on the number of 10 11 days of such fiscal year elapsed through the Date of Termination; such Bonus amounts shall be due and payable to Executive's estate not later than five (5) days after Executive's Date of Termination, provided, that if the amount of any such Bonus due Executive's estate shall not be determinable within five (5) days following the Date of Termination, the Company shall use its best efforts to determine and pay such amounts to the estate of Executive at the earliest possible date, which under no circumstances shall be later than the date for the determination and payment of such amounts pursuant to the terms of this Agreement under Section 2(c) if Executive had not died; (ii) the compensation which would otherwise be payable to Executive pursuant to Section 2(a) and 2(b) up to end of the month in which the Date of Termination occurs, which amounts shall be paid as soon as practicable but in any event no later than two (2) weeks after the Date of Termination; (b) Disability. Upon the termination of Executive's employment as a result of his disability pursuant to Section 4(c), the Company shall pay to the Executive: (i) (A) to the extent not previously paid, any Bonus due to Executive pursuant to Section 2(c) for the fiscal year preceding that in which the Date of Termination occurs, and a (B) pro rata portion of the Bonus which would be due for Executive pursuant to Section 2(c) with respect to the fiscal year in which the Date of Termination occurs, based on the number of days of such fiscal year elapsed through the Date of Termination; such Bonus amounts shall be due and payable to Executive not later than five (5) days after Executive's Date of Termination, provided, that if the amount of any such Bonus due Executive shall not be determinable within five (5) days following the Date of Termination, the Company shall use its best efforts to determine and pay such amounts to Executive at the earliest possible date, which under no circumstances shall be later than the date for the determination and payment of such amounts pursuant to the terms of this Agreement under Section 2(c) if Executive's employment hereunder had not terminated; (ii) the compensation which would otherwise be payable to Executive pursuant to Section 2(a) and 2(b) up to the Date of Termination, which amounts shall be paid as soon as practicable but in any event no later than two (2) weeks after the Date of Termination; (iii) a sum equal to two and one-half (2-1/2) times his Base Salary in effect at the Date of Termination, which shall be paid as soon as practicable but in any event no later than six (6) months after the Date of Termination. (c) Cause. If Executive's employment shall be terminated for Cause, the Company shall pay Executive his full Base Salary in effect at the Date of Termination and other benefits to which he is entitled through the Date of Termination at the rate in effect at the time Notice of Termination is given. 11 12 (d) Termination by Executive. If Executive's employment by the Company shall be terminated by the Company other than for Cause, death or disability, or by Executive pursuant to Section 4(e), then Executive shall be entitled to the compensation provided below: (i) the Company shall pay Executive, not later than the fifth (5th) day following the Date of Termination, a lump sum equal to the aggregate total of all Base Salary payments due pursuant to Sections 2(a) and 2(b) during the remaining Employment Term based upon the Base Salary in effect on the Date of Termination, provided that, in calculating such amount, notwithstanding Section 2(b), the Base Salary shall not be increased above the Base Salary in effect on the Date of Termination, and the amount shall not be discounted to "present value," (ii) the Company shall pay to Executive any Bonus due to Executive pursuant to Section 2(c) for the remaining Employment Term notwithstanding the fact that Executive is no longer providing services under this Agreement, which payments of Bonuses shall be paid from time to time not later than the dates specified in Section 2(c) hereof; (iii) for the remaining period of the Employment Term, the Company shall provide and pay to Executive (A) stock options as required pursuant to Section 2(d) hereof, (B) insurance pursuant to Section 2(e) hereof, (C) an automobile as required pursuant to Section 3 hereof, (D) disability, accident and health insurance and all other benefits substantially similar to those which Executive is receiving immediately prior to the Date of Termination, and (E) all other benefits pursuant to Section 2(g) to which Executive would be entitled if he remained in the employment of the Company. (e) No Mitigation of Damages. Executive shall not be required to mitigate the amount of any payment provided for in Sections 2 or 3 or in this Section 5 by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in Sections 2 or 3 or in this Section 5 be reduced by any compensation earned by him as the result of employment by another employer or by retirement benefits after the Date of Termination. The Company shall not be entitled to any rights to offset, mitigate or otherwise reduce the amounts owing to Executive by virtue of Sections 2 or 3 or this Section 5 with respect to any rights, claims or damages which the Company may have against Executive. (f) Services as Consultant In addition to the other benefits payable hereunder, if Executive's employment shall be terminated pursuant to Section 4(e) hereof, then, at the written request of Executive given to the Company not later than 30 days after the relevant Date of Termination, the Company shall retain Executive as a Consultant for a period of five (5) years commencing on the Date of Termination (the "Consulting Period"). During the Consulting Period, Executive shall furnish consulting and advisory services to the Company with respect to the operation of the Company's business. Without limiting the generality of the foregoing, Executive shall cooperate fully with the senior executive officers of the Company, provide such assistance and information as may be reasonably requested by the Board and officers of the Company and be available by telephone or in person at the Company's offices in Los Angeles, California, at such times and places as may reasonably be requested by the Company and as may 12 13 be mutually convenient to Executive and the Company. During the Consulting Period (a) Executive shall not be required to devote more than 600 hours per calendar year to such consulting and advisory services; and (b) Executive's consulting and advisory services shall be subject to Executive's reasonable business and professional commitments and vacations. During the Consulting Period, the Company shall pay Executive consulting fees, payable in monthly installments or in such other manner that parties hereto mutually agree upon, at a rate per annum equal to 50% of the Base Salary in effect on the Date of Termination of employment of Executive. Executive shall be entitled to terminate his engagement as a Consultant hereunder on not less than 10 business days prior written notice. Any such termination shall be without liability to the Executive and shall not diminish or adversely affect the benefits payable to Executive under Sections 2 and 5 hereof, except that effective with such termination Executive shall no longer be entitled to receive the consulting fees provided in this Section 5(f). 6. SUCCESSORS. The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. 7. REGISTRATION SHARES OF COMMON STOCK (a) Demand Registration. At any time on or after January 1, 2000, Executive shall have the right to request that the Company effect the registration under the Securities Act, of any or all of the Common Stock now or hereafter owned by Executive and whether or not such Common Stock was acquired pursuant hereto(the Common Stock requested to be registered is hereinafter referred to as the "Requested Registration Shares"); provided, however, that each such Requested Registration shall cover at least fifty (50) shares of the Common Stock (as presently constituted). In such event, the Company shall use its best efforts to cause the Requested Registration Shares to be registered under the Securities Act and to effect and to comply with all such qualifications, compliances and requirements as may be necessary to permit the sale or other transfer of such Requested Registration Shares in the manner described in such request, including, without limitation, qualifications under applicable Blue Sky or other state securities laws (provided that the Company shall not be required in connection therewith to qualify as a foreign corporation or to execute a general consent to service of process in any state); provided, however that (i) the Company shall not be obligated to file and cause to become effective more than three (3) registration statements in which Requested Registration Shares are sold pursuant to this Section 7(a), (ii) in the event that, for any reason, less than one-half of the number of Requested Registration Shares shall be registered under the Securities Act in accordance with a request made pursuant to this Section 7(a), then such registration shall not constitute one of the three registration statements referred to in clause (i) above, and (iii) the Company shall not be obligated to effect such registration for a period of ninety (90) days following the request by Executive to do so if the Board determines in good faith (and so certifies to the Executive in writing) that the Company is preparing a public offering of securities and that the registration of the Requested Registration Shares would adversely affect the Company's ability to offer its securities to the public, provided, however, the Company shall be 13 14 entitled to only one such ninety (90) day period delay during any twelve (12) month period. In connection with any registration of Common Stock hereunder, the Company may allow any other stockholder of the Company to register shares of Common Stock in the same registration statement; provided that if not all Requested Registration Shares may be included as determined by any managing underwriter, Executive shall be entitled to priority over other stockholders. The Executive's rights under this Section 7 shall survive Executive's employment hereunder and Executive's engagement as a Consultant hereunder, but shall terminate at such time as Executive may, within a three (3) month period, offer and sell all of his Common Stock pursuant to Rule 144 of the Securities Act, or any successor law or regulation thereto, without any adverse effect on the price at which such shares of Common Stock may be sold. (b) Piggyback Registration. In the event that, at any time or from time to time, the Company proposes to register any securities of any type (the "Registration Shares") under the Securities Act other than pursuant to a registration statement on Form S-8 or any successor to such Form for the purpose of the sale or other transfer of the Registration Shares by the Company or by any present or future holder of shares of Common Stock, the Company shall mail or deliver to Executive, at least forty-five (45) days prior to the effectiveness of the registration statement covering such Registration Shares, a written notice (a "Registration Notice") of its intention so to register the Registration Shares. In the event that a Registration Notice shall have been so mailed or delivered, Executive at its election, may mail or deliver to the Company a written notice (a "Supplemental Notice") (i) specifying the number of shares of Common Stock ("Supplemental Registration Shares") proposed to be sold or otherwise transferred by Executive, (ii) describing the proposed manner of sale or other transfer thereof and (iii) requesting the registration thereof under the Securities Act; provided, however, that such Supplemental Notice shall be so mailed or delivered by Executive not more than twenty (20) days after the date of delivery to Executive of a Registration Notice. From and after receipt of a Supplemental Notice, the Company shall use its best efforts to cause the Supplemental Registration Shares specified in such Supplemental Notice to be registered under the Securities Act and to effect and to comply with all such qualifications, compliances and requirements as may be necessary to permit the sale or other transfer of such Supplemental Registration Shares in the manner described in such Supplemental Notice, including, without limitation, qualifications under applicable Blue Sky or other state securities laws (provided that the Company shall not be required in connection therewith to qualify as a foreign corporation or to execute a general consent to service of process in any state); provided, however, that in the case of an underwritten public offering of securities proposed to be made by the Company, the managing underwriter shall advise the Company in writing that inclusion of some or all of such Supplemental Registration Shares would, in such managing underwriter's opinion, interfere with the proposed distribution of the securities to be issued by the Company in respect of which registration was originally to be effected, then the Company may upon notice to Executive and, if such notice is given by the Company, the Company shall by written notice to any and all other holders of securities which otherwise were to be included in such registration (the "Includable Shares") (other than the Company which shall have first priority as to any securities to be registered for sales by it), allocate the Supplemental Registration Shares and other Includable Shares such that the Company shall include the Supplemental Registration Shares and other Includable Shares in the registration statement contemplated by the applicable Registration Notice on a pro rata basis among holders of shares 14 15 of Common Stock included in the Supplemental Registration Shares, based on the number of Supplemental Registration Shares or other Includable Shares held by each. If any firm of counsel representing the Company in connection with such registration which is reasonably acceptable to Executive shall advise the Company in writing that in their opinion one or more of the steps contemplated hereby is not necessary to permit the sale of the Supplemental Registration Shares in a transaction constituting a public offering within the meaning of the Securities Act, then the Company shall not be required to take any action with respect to such step or steps. (c) Holdback. During Executive's Employment Term, Executive agrees not to effect any public sale or distribution of any shares of Common Stock, including a sale pursuant to Rule 144, during the fourteen (14) day period preceding or the ninety (90) day period following, effective date of any registration statement covering similar securities of the Company (except pursuant to such registration statement), if and to the extent the Company (in the case of a non- underwritten offering) or the managing underwriter (in the case of any underwritten offering) so requests. (d) Registration Requirements. If and wherever the Company is required by the provisions of this Section 7 to use its best efforts to effect the registration under the Securities Act of any shares of Common Stock requested to be so registered by Executive, the Company will, as promptly as reasonably practicable: (i) prepare and file with the Securities and Exchange Commission a registration statement with respect to such shares of Common Stock and use its best efforts to cause such registration statement to become and remain effective for a period of not less than two hundred seventy (270) days or such shorter period which will terminate when all shares of Common Stock included in such registration statement have been sold; (ii) prepare and file with the Securities and Exchange Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective for the period set forth in clause (i) above and to comply with the provisions of the Securities Act with respect to the sale or other disposition of all shares of Common Stock covered by such registration statement whenever the purchaser shall desire to sell or otherwise dispose of the same within the period set forth in clause (i) above; (iii) furnish to Executive such number of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as may reasonably be requested thereby in order to facilitate the public sale or other disposition of such shares of Common Stock owned thereby; (iv) promptly notify Executive, during any time when a prospectus relating to such shares of Common Stock is required to be delivered under the Securities Act within the appropriate period mentioned in clause (i) of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement 15 16 of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of circumstances then existing, and at Executive's request, promptly prepare and furnish to it a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such shares of Common Stock, such prospectus shall not Include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing, and Executive agrees that, upon receipt of any written notice from the Company of the happening of any event of the kind described in this clause (iv), it will forthwith discontinue disposition of shares of Common Stock pursuant to the registration statement until receipt of the copies of the supplemented or amended prospectus contemplated by this clause (iv) (which the Company agrees to prepare, file and deliver promptly after the written notice referred to above), and, if so directed by the Company within five (5) days after the written notice referred to above, Executive will deliver to the Company all copies, other than permanent file copies, then in its possession of the most recent prospectus covering shares of Common Stock at the time or receipt of such notice. In the event the Company shall give any written notice under this subsection, the Company shall extend the period during which such registration statement shall be maintained effective by the number of days during the period from and including the date of the giving of notice under this subsection to the date when the Company shall make available to Executive a prospectus supplemented or amended to conform with the requirements hereunder; (v) make available such officers of the Company as Executive may reasonably request for purposes of making analysis and presentations to securities analysts, underwriters, selling and placement agents, prospective purchasers and other persons involved in any public offering of Common Stock. (e) Registration Expenses. The Company will pay all expenses necessary to effect under the Securities Act any registration statements, amendments or supplements filed pursuant to this Section 7 (other than underwriters, discounts and commissions and brokerage commission and fees, if any, payable with respect to shares of Common Stock sold by Executive and other than legal fees incurred by Executive), including without limitation, printing expenses, fees of the Securities and Exchange Commission and the National Association of Securities Dealers, Inc., expenses of compliance with Blue Sky and other state securities laws, and accounting and legal fees and expenses incurred by the Company. (f) Exchange Act Reports. The Company covenants that it will, so long as any shares of Common Stock remain outstanding, file all reports required to be filed by it under the Securities Act or the Securities Exchange Act and the rules and regulations promulgated by the Securities and Exchange Commission thereunder (or, if it is not required to file such reports, it will make publicly available such information as will enable the Executive to sell any restricted shares of Common Stock held by him without registration as described below in this Section 7(f)), and will take such further action as Executive may reasonably request, all to the extent required from time to time to enable Executive to sell such restricted shares held by him without registration within the limitations of the exemptions provided by (i) Rule 144 promulgated under 16 17 the Securities Act, as such rule may be amended from time to time, or (ii) any similar rule or regulation hereafter promulgated by the Securities and Exchange Commission. (g) Indemnification by Company. In the event of any registration pursuant to this Section 7 covering shares of Common Stock beneficially owned by Executive, the Company will indemnify and hold harmless Executive, against any losses, claims, damages, costs, expenses (including reasonable attorneys' fees), or liabilities (or actions in respect thereof) under the Securities Act or otherwise, which arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any such registration statement, any preliminary prospectus or final prospectus or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim damage or liability arises out of or is based upon an alleged omission made in said registration statement, said preliminary prospectus, said prospectus, or any said amendment or supplement, in reliance upon and in conformity with written information furnished by Executive specifically for use in the preparation thereof. The Company also agrees to reimburse Executive for any legal or other expenses reasonably incurred by Executive in connection with investigating or defending any such loss, claim, liability or action. (h) Indemnification by Executive. In the event of any registration pursuant to this Section 7 covering shares of Common Stock beneficially owned by Executive, Executive shall indemnify and hold harmless the Company, each of its directors, each of its officers who have signed any registration statement, and each person, if any, who controls the Company within the meaning of the Securities Act, and each other stockholder whose shares of Common Stock are covered by such registration and each person, if any, who controls any such stockholder, against any losses, claims, damages, costs, expenses (including reasonable attorneys' fees), or liabilities (or actions in respect thereof) to which the Company or any such director, officer, stockholder, or controlling person may become subject, under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue or alleged untrue statement of any material fact contained in such registration statement, any preliminary prospectus or final prospectus or final amendment or supplement thereto, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in said registration statement, said preliminary prospectus, said final prospectus, or said amendment or supplement, in reliance upon and in conformity with written information furnished by Executive specifically for use in the preparation thereof. Executive will reimburse any legal or other expenses reasonably incurred by the Company or any such director, officer, stockholder, or controlling person in connection with investigating or defending any such loss, claim, damage, liability or action, but only in the circumstances and to the extent as aforesaid. (i) Notice of Indemnity Claim. Promptly after receipt by an indemnified party under this Section 7 of notice of the commencement of any action, such indemnified party shall, if a 17 18 claim in respect thereof is to be made against any indemnifying party under this Section 7, notify the indemnifying party of the commencement thereof; provided, however, that failure so to notify the indemnifying party shall not affect any indemnifying party's obligations hereunder unless and then only to the extent that such failure over an extended period of time shall have materially prejudiced the indemnifying party. In case any such action is brought against any indemnified party, and it notifies any indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate in the defense thereof, with counsel reasonably satisfactory to such indemnified party. Notwithstanding the foregoing, the indemnified party may retain its own counsel, who shall be reasonably satisfactory to the indemnifying party. The reasonable fees and expenses of such counsel shall be borne by the indemnifying party. An indemnified party shall not enter into a compromise or settlement of any claim or agree to a judgment without the consent of the indemnifying party. (j) Indemnification of Underwriters. With respect to any underwritten offering, the Executive and the Company shall, in addition to the foregoing, provide the underwriter of such offering with customary representations and warranties, and customary indemnification, in each instance as shall be reasonably requested by the underwriter; provided, however, that any such agreement to indemnify an underwriter with respect to any preliminary prospectus shall not inure to the benefit of any such underwriter to the extent that any loss, claim, damage or liability of any such underwriter results solely from an untrue statement of material fact contained in, or the omission of a material fact from, such preliminary prospectus which untrue statement or omission was corrected in the final prospectus, if such underwriter failed to send or give a copy of the final prospectus to the person asserting such loss, claim, damage or liability at or prior to the written confirmation of the sale of such shares of Common Stock to such person, and provided that any such agreement by the Executive to indemnify an underwriter shall be on a several (and not joint) basis in proportion to the number of shares of Common Stock sold by the Executive in such underwritten offering and shall be limited in amount to the net proceeds received by Executive in such underwritten offering. 8. INDEMNITY. Concurrently with the execution of this Agreement, the Company and the Executive shall execute and deliver to each other an Indemnity Agreement in the form attached as Exhibit "B" hereto. The delivery of such agreement by the Company is in consideration for the performance by Executive of his obligations under this Agreement. 9. MISCELLANEOUS. (a) Severability, The provisions of this Agreement shall be severable and if any provision hereof shall be judged to be invalid, such invalidity shall not affect any other portion of this Agreement which can be given effect. (b) Notices. All notices, requests, demands and other communications hereunder shall be in writing and shall be duly given if actually received or if duly mailed, registered or certified mail, return receipt requested, postage prepaid: If to the Company, to: 18 19 J2 Communications 10850 Wilshire Blvd. Suite 1000 Los Angeles, CA 90024 If to Executive, to: James P. Jimirro 10787 Wilshire Blvd. Suite 1702 Los Angeles, CA 90024 or to such other address as either party may furnish to the other in writing, making specific reference to this Section 9(b). (c) Arbitration. In the event that there shall be a dispute between the parties hereto concerning the meaning, application or interpretation of this Agreement or of the legal relations connected therewith, or concerning any alleged breach hereof, or to enforce the terms hereof or to seek damages in respect of a breach hereof or otherwise relating hereto, then such dispute shall be referred to the American Arbitration Association for arbitration before a single arbitration in Los Angeles, California, according to the rules of the arbitrator appointed by said Association; and the decision of such Association shall be final and binding on the parties hereto. (d) Rights to Work Product. Except as provided in Section 9(e) below, Executive grants to the Company all rights of every kind whatsoever, exclusively and perpetually, in and to all services performed by him for the Company hereunder, during the term hereof, and the results and proceeds thereof, including all of Executive's creative works including without limitation ideas, concepts, formats, themes, screenplays, and/or adaptations of the foregoing, whether or not reduced to writing, and whether or not otherwise protected by copyrights, or rights thereto, or at common law or otherwise during the term hereof. Executive agrees that all films, film rights, videotapes, distribution rights, literary material, photoplays, music rights, ideas for photoplays, scripts and similar rights, presentations, ideas, formats and all other material (collectively referred to as "Material") submitted to him by third parties during the term of his employment hereunder shall be deemed to be submitted to the Company and upon the termination of his employment hereunder Executive shall forthwith deliver all such Material in his possession, if any, to the Company. (e) Confidentiality. Without the express prior written consent of the Company, Executive shall not, except in the ordinary course of performing his duties for the Company, disclose or make available to anyone outside the Company, any confidential or proprietary information of the Company its subsidiaries, or affiliated corporations or entities including, without limitation, trade secrets, customer lists, financial data, programming plans or other information not generally known to any competitor of the Company, its subsidiaries or affiliated corporations or entities. Upon termination of his employment, Executive shall deliver to the Company all documents in his possession containing any such confidential or proprietary 19 20 information; provided, however, that Employee shall be entitled to retain a copy of his personal correspondence file. The agreements of Executive set forth in this Section 9(e) shall survive the end of the Employment Term and the termination of Executive's period of serving as a Consultant pursuant to Section ______ of this Agreement. (f) Name. The Company acknowledges that part of its name ("J2") relates and refers to Executive's initials and that such corporate name will be inevitably associated with Executive within the entertainment industry. Executive hereby grants the Company the right to use his initials as part of its name without additional compensation therefor; provided however, that should Executive's employment with the Company be terminated for any reason, the Company shall, upon written request of Executive, change its name from "J2" to a name that does not utilize J2 or Executive's initials within a reasonable time period (not to exceed one year) following such request. (g) Attorneys' Fees. In the event of any dispute hereunder, or in the event of any action to enforce the terms and provisions of this Agreement, the prevailing party shall be entitled to recover from the other his reasonable attorneys' fees and disbursements and other costs incurred in connection therewith. (h) Assignment. Neither this Agreement nor any right or interest under this Agreement shall be assignable by Executive. This Agreement shall not be assignable by the Company without the prior written consent of Executive. (i) Entire Agreement. This Agreement sets forth the entire understanding and agreement of the parties. Said Agreement is binding upon the heirs, administrators, successors and assigns of the parties hereto. There are no oral agreements, modifications, representations or understandings which are not specifically set forth herein. All negotiations are merged into this Agreement. (j) Governing Law. This Agreement and each of the provisions hereunder shall be interpreted according to and governed by the internal laws of the State of California regardless of the principles of choice of law of that or any other jurisdiction. The parties hereto submit to the jurisdiction of the state and federal courts of the State of California. Signature page follows 20 21 IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its officer thereunto duly authorized, and Executive has executed this Agreement as of the day and year first above written. "The Company" J2 COMMUNICATIONS By:_________________________ "Executive" JAMES P. JIMIRRO ____________________________ 21 EX-10.10 3 EXHIBIT 10.10 1 EXHIBIT 10.10 FORM OF CONTINGENT NOTE $2,150,625 July 1, 1999 FOR VALUE RECEIVED, the undersigned, J2 Communications ("Obligor") promises to pay to the order of James P. Jimirro or his lawful assignee ("Holder"), the principal sum of Two Million One Hundred Fifty Thousand Six Hundred Dollars ($2,150,625) in lawful money of the United States, or if less than such principal amount has been advanced hereunder, the aggregate unpaid principal balance of this Note, with interest thereon in like lawful money, at the rate provided below from the date such principal is advanced until payment in full thereof. This Note is referred to and is executed and delivered pursuant to that certain Restated Employment Agreement, dated as of September , 1999 (as it may be amended, supplemented or otherwise modified from time to time, the "Employment Agreement"), between the Obligor and the Holder. Capitalized terms not otherwise defined herein, shall have the meanings ascribed thereto in the Employment Agreement. Reference is hereby made to the terms and conditions of the Employment Agreement for a more complete statement of the terms and conditions of the under which the amounts due hereunder are to be paid. The Employment Agreement, among other things, provides (a) for the issuance of one or more Contingent Notes upon Holders election to waive all or a portion of his compensation, (b) the acceleration of the maturity hereof upon the happening of certain stated events, including but not limited to a Change of Control (as defined in the Employment Agreement) and also for prepayments of principal hereof prior to the maturity hereof upon the terms and conditions therein specified, and (c) for changes in the interest rate hereof upon the terms and conditions specified therein. The outstanding principal amount hereof (including, to the extent permitted by law, on interest thereon not paid when due) shall bear interest from the date made until paid in full in cash at a fluctuating rate equal 7% per annum (the "Base Rate"). The total amount owing hereunder is referred to herein as the "Obligation." All interest charges shall be computed on the basis of a year of 360 days and actual days elapsed. Interest not paid when due at the Maturity Date (as defined below) shall accrue at a rate equal to 5% per annum (the "Default Rate) over the Base Rate. The maturity date (the "Maturity Date") for the Obligations owing hereunder shall be 5 business days after the occurrence of a "Change of Control." Except as otherwise provided herein, all interest shall be payable in arrears upon a "Change of Control." "Change in Control" means either (i) a Change of Control as defined under the Employment Agreement of (ii) a change in control of the Company occurring after the date of this Note of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A (or in response to any similar item on any similar schedule or form) promulgated under the Securities Exchange Act of 1934 (the "Act"), whether or not the Company is then subject to such reporting requirement; provided, however, that, without limitation, such a 2 Change in Control shall be deemed to have occurred if after the date of this Agreement Each of the following specified events hereby constitutes and is herein referred to individually as an "Event of Default": (a) Obligor's failure to make (or cause to be made) any payments to the Holder under this Note when the same are due and not cured; or (b) Default in the due and timely observance or performance of the material terms, provisions, covenants, conditions, agreements or obligations of Obligor contained in this Note which would adversely and materially affect the validity, perfection or priority of the security interest of the Holder in the Collateral, or the value of the Collateral or the Note and failure to cure same within ten (10) business days of Holder's written notice concerning such failure; or (c) Suspension by Obligor of its business operations and failure to reinstate operations within twenty (20) business days of such suspension; or (d) Obligor transfers all or substantially all of its assets to a third party other than Holder who is approved by Holder, in Holder's sole and absolute discretion; or (e) The acquisition by a third party, other than Holder or an affiliate of Obligor, of all of the outstanding shares of common stock of Obligor. At the Holder's option, upon the occurrence of an Event of Default, and at any time thereafter if such Event of Default shall then be continuing: (a) Unless such Event of Default is cured within the time period provided for hereunder, the Indebtedness may, without presentment, demand, protest, or notice of any kind, all of which are hereby expressly waived by Obligor, be forthwith called due and payable, if not otherwise then due and payable (anything in this Note or other agreement, contract, indenture, document or instrument contained to the contrary notwithstanding) and the Maturity Date shall be accelerated accordingly; (b) The Holder may pursue the remedies afforded to it hereunder or under any of the documents executed in connection herewith, or any other remedy afforded to it by law or equity, and the Holder may, at its option, do and perform all other acts and things reasonably necessary for the proper preservation and protection of its rights hereunder, or pursuant to the Restated Security Agreement, all at the cost and expense of Obligor, which amount so expended shall constitute costs recoupable by the Holder; and 2 3 (c) The Holder may, at its option, engage others to exercise or discharge any of its rights or obligations hereunder. The amounts payable to such others by the Holder shall be recoupable by the Holder. No provision of this Note shall be deemed to establish or require the payment of interest of a rate in excess of the maximum rate permitted by applicable law (the "Maximum Legal Rate"). In the event that the interest required to be paid under this the Note exceeds the Maximum Legal Rate, the interest required to be paid hereunder or under the Note shall be automatically reduced to the Maximum Legal Rate. In the event any interest paid exceeds the then applicable interest rate, the excess of such interest over the maximum amount of interest permitted to be charged shall automatically be deemed to reduce the accrued and unpaid fees and expenses due to the Holder under this Note, if any; then to reduce the accrued and unpaid interest, if any; and then to reduce principal of the Loan; the balance of any excess interest remaining after the application of the foregoing, if any, shall be refunded to the Obligor. If any of the Obligations owed hereunder are not paid when due (whether by acceleration or otherwise), then all of the Obligations shall bear interest at the Default Rate applicable thereto until so paid; and if any other Default or Event of Default occurs, then at the election of the Holder, while any such Default or Event of Default is outstanding, all of the Obligations shall bear interest at the Default Rate applicable thereto. Interest calculated at the Default Rate shall be immediately due and owing and shall accrue and be payable from the date such payment was due to and including the date of payment. All payments in respect of this Note shall be made to Holder at 10787 Wilshire Blvd., Penthouse Two, Los Angeles, CA 90024, or at such other place as may be designated in writing by the Holder for such purpose in accordance with the terms of the Employment Agreement. The principal and all accrued and unpaid interest thereon shall be due and payable in full as provided herein. Such payment is subject to earlier acceleration and/or mandatory prepayments as provided in the Employment Agreement. Upon the occurrence of an Event of Default the whole sum of principal and interest then due and owing hereunder shall be immediately due and payable. If this Note is not paid in full on the Maturity Date, the Obligor promises to pay all reasonable costs and expenses of collection and reasonable attorneys' fees and expenses and court costs incurred by the holder hereof on account of such collection whether or not suit is filed thereon. The amounts and rates of all Loans made pursuant hereto and all amounts paid or repaid on this Note shall be indicated on the Holder's books with respect to this Note and shall constitute prima facie evidence of the amounts and dates of such Loans. The Obligor waives protest, diligence, presentment, demand for payment, notice of 3 4 default or nonpayment, notice of dishonor and all other demands and notices in connection with the delivery, acceptance, performance and enforcement of this Note, and to the fullest extent permitted by law, all rights to assert any statute of limitations to an action hereunder. Each controversy, dispute or claim between the parties arising out of or relating to this Note, which controversy, dispute or claim is not settled in writing within thirty (30) days after the "Claim Date" (defined as the date on which Holder or Obligor gives written notice to all other parties that a controversy, dispute or claim exists), will be settled by a reference proceeding in California in accordance with the provisions of Section 638 et seq. of the California Code of Civil Procedure, or their successor section ("CCP"), which shall constitute the exclusive remedy for the settlement of any controversy, dispute or claim concerning this Note, including whether such controversy, dispute or claim is subject to the reference proceeding and except as set forth above, the parties waive their rights to initiate any legal proceedings against each other in any court or jurisdiction other than the Superior Court in Los Angeles County (the "Court"). The referee shall be a retired Judge of the Court selected by mutual agreement of the parties, and if they cannot so agree within forty-five (45) days after the Claim Date, the referee shall be promptly selected by the Presiding Judge of the Court (or his representative). The referee shall be appointed to sit as a temporary judge, with all of the powers for a temporary judge, as authorized by law, and upon selection should take and subscribe to the oath of office as provided for in Rule 244 of the California Rules of Court (or any subsequently enacted Rule). Each party shall have one peremptory challenge pursuant to CCP Section 170.6. The referee shall (a) be requested to set the matter for hearing within sixty (60) days after the Claim Date and (b) try any and all issues of law or fact and report a statement of decision upon them, if possible, within ninety (90) days of the Claim Date. Any decision rendered by the referee will be final, binding and conclusive and judgment shall be entered pursuant to CCP Section 644 in any court in the state of California having jurisdiction. Any party may apply for a reference proceeding at any time after thirty (30) days following notice to any other party of the nature of the controversy, dispute or claim, by filing a petition for a hearing and/or trial. All discovery permitted by this paragraph shall be completed no later than fifteen (15) days before the first hearing date established by the referee. The referee may extend such period in the event of a party's refusal to provide requested discovery for any reason whatsoever, including, without limitation, legal objections raised to such discovery or unavailability of a witness due to absence or illness. No party shall be entitled to "priority" in conducting discovery. Depositions may be taken by either party upon seven (7) days written notice, and request for production or inspection of documents shall be responded to within ten (10) days after service. All disputes relating to discovery which cannot be resolved by the parties shall be submitted to the referee whose decision shall be final and binding upon the parties. Pending appointment of the referee as provided herein, the Superior Court is empowered to issue temporary and/or provisional remedies, as appropriate. 4 5 Except as expressly set forth in this paragraph, the referee shall determine the manner in which the reference proceeding is conducted including the time and place of all hearings, the order of presentation of evidence, and all other questions that arise with respect to the course of the reference proceeding. All proceedings and hearings conducted before the referee, except for trial, shall be conducted without a court reporter, except that when any party so requests, a court reporter will be used at any hearing conducted before the referee. The party making such a request shall have the obligation to arrange for and pay for the court reporter. The costs of the court reporter at the trial shall be borne equally by the parties. The referee shall be required to determine all issues in accordance with existing case law and the statutory laws of the state of California. The rules of evidence applicable to proceedings at law in the state of California will be applicable to the reference proceeding. The referee shall be empowered to enter equitable as well as legal relief, to provide all temporary and/or provisional remedies and to enter equitable orders that will be binding upon the parties. The referee shall issue a single judgment at the close of the reference proceeding that shall dispose of all of the claims of the parties that are the subject of the reference. The parties hereto expressly reserve the right to contest or appeal from the final judgment or any appealable order or appealable judgment entered by the referee. The parties hereto expressly reserve the right to findings of fact, conclusions of law, a written statement of decision, and the right to move for a new trial or a different judgment, which new trial, if granted, is also to be a reference proceeding under this provision. In the event that the enabling legislation which provides for appointment of a referee is repealed (and no successor statute is enacted), any dispute between the parties that would otherwise be determined by the reference procedure herein described will be resolved and determined by arbitration. The arbitration will be conducted by a retired judge of the Court, in accordance with the California Arbitration Act, Section 1280 through Section 1294.2 of the CCP as amended from time to time. The limitations with respect to discovery as set forth hereinabove shall apply to any such arbitration proceeding. This Note shall be governed by and construed in accordance with the laws of the state of California without reference to conflicts of law principles in the state of California. IN WITNESS WHEREOF, the Obligor has executed this Note as of the date first written above. "OBLIGOR" J2 Communications By_______________________________ Its______________________________ 5 EX-10.11 4 EXHIBIT 10.11 1 EXHIBIT 10.10 RESTATED INDEMNIFICATION AGREEMENT THIS AGREEMENT (the "Agreement") is made and entered into this ____day of _______________, 1999 between J2 Communications, a California corporation (the "Company") and ____________________ ("Indemnitee"). WITNESSETH THAT: WHEREAS, Indemnitee performs a valuable service for the Company; and WHEREAS, the Board of Directors of the Company having adopted an Amended and Restated Certificate of Incorporation (the "Certificate") permitting the Board of Directors to indemnify certain officers and employees designated by the Board of Directors or Chief Executive Officer (the "Officers") and directors (the "Directors") of the Company; and WHEREAS, the Certificate and Section 317 of the California General Corporation Law, as amended ("Law"), permits the Company to indemnify its Officers and Directors; and WHEREAS, as a result of recent developments affecting the terms, scope and availability of D & O Insurance there exists general uncertainty as to the extent of protection afforded the Company's Officers and Directors by such D&O INSURANCE and said uncertainty also exists under statutory and bylaw indemnification provisions; and WHEREAS, in recognition of past services and in order to induce Indemnitee to continue to serve as an officer and/or a director of the Company, the Company has determined and agreed to enter into this contract with Indemnitee; NOW, THEREFORE, in consideration of Indemnitee's continued service as an Officer and/or a Director after the date hereof, the parties hereto agree as follows: 1. INDEMNITY OF INDEMNITEE. The Company hereby agrees to hold harmless and indemnify Indemnitee to the full extent authorized or permitted by the provisions of the Law, as such may be amended from time to time, and Article V of the Certificate, as such may be amended. In furtherance of the foregoing indemnification, and without limiting the generality thereof: (a) Proceedings Other Than Proceedings by or in the Right of the Company. Indemnitee shall be entitled to the rights of indemnification provided in this Section 1(a) if, by reason of his Corporate Status (as hereinafter defined), he is, or is threatened to be made, a party to or participant in any Proceeding (as hereinafter defined) other than a Proceeding by or in the 2 right of the Company. Pursuant to this Section 1(a), Indemnitee shall be indemnified against all Expenses (as hereinafter defined), judgments, penalties, fines and amounts paid in settlement actually and reasonably incurred by him or on his behalf in connection with such Proceeding or any claim, issue or matter therein, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company and, with respect to any criminal Proceeding, had no reasonable cause to believe his conduct was unlawful. (b) Proceedings by or in the Right of the Company. Indemnitee shall be entitled to the rights of indemnification provided in this Section 1(b) if, by reason of his Corporate Status, he is, or is threatened to be made, a party to or participant in any Proceeding brought by or in the right of the Company to procure a judgment in its favor. Pursuant to this Section 1(b), Indemnitee shall be indemnified against all Expenses actually and reasonably incurred by him or on his behalf in connection with such Proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company; provided, however, that, if applicable law so provides, no indemnification against such Expenses shall be made in respect of any claim, issue or matter in such Proceeding as to which Indemnitee shall have been adjudged to be liable to the Company unless and to the extent that the Court of Chancery of the State of California, or the court in which such Proceeding shall have been brought or is pending, shall determine that such indemnification may be made. (c) Indemnification for Expenses of a Party Who is Wholly or Partly Successful . Notwithstanding any other provision of this Agreement, to the extent that Indemnitee is, by reason of his Corporate Status, a party to and is successful, on the merits or otherwise, in any Proceeding, he shall be indemnified to the maximum extent permitted by law against all Expenses actually and reasonably incurred by him or on his behalf in connection therewith. If Indemnitee is not wholly successful in such Proceeding but is successful, on the merits or otherwise, as to one or more but less than all claims, issues or matters in such Proceeding, the Company shall indemnify Indemnitee against all Expenses actually and reasonably incurred by him or on his behalf in connection with each successfully resolved claim, issue or matter. For purposes of this Section and without limitation, the termination of any claim, issue or matter in such a Proceeding by dismissal, with or without prejudice, shall be deemed to be a successful result as to such claim, issue or matter. 2. ADDITIONAL INDEMNITY. (a) Subject only to the exclusions set forth in Section 2(b)hereof, the Company hereby further agrees to hold harmless and indemnify Indemnitee against any and all Expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred by Indemnitee in connection with any Proceeding (including an action by or on behalf of the Company) to which Indemnitee is, was or at any time becomes a party, or is threatened to be made a party, by reason of his Corporate Status; provided, however, that with respect to actions by or on behalf of the Company, indemnification of Indemnitee against any judgments shall be made by the Company only as authorized in the specific case upon a determination that 2 3 Indemnitee acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company; and (b) No indemnity pursuant to this Section 2 shall be paid by the Company: (i) In respect to remuneration paid to Indemnitee if it shall be determined by a final judgment or other final adjudication that such remuneration was in violation of law; (ii) On account of any suit in which judgment is rendered against Indemnitee for an accounting of profits made from the purchase or sale by Indemnitee of securities of the Company pursuant to the provisions of Section 16(b) of the Securities Exchange Act of 1934 and amendments thereto or similar provisions of any federal, state or local statutory law; (iii) On account of Indemnitee's conduct which is finally adjudged to have been knowingly fraudulent or deliberately dishonest, or to constitute willful misconduct; or (iv) If a final decision by a court having jurisdiction in the matter shall determine that such indemnification is not lawful. 3. CONTRIBUTION. If the indemnification provided in Sections 1 and 2 is unavailable and may not be paid to Indemnitee for any reason other than those set forth in paragraphs (i), (ii) and (iii) of Section 2(b), then in respect to any Proceeding in which the Company is jointly liable with Indemnitee (or would be if joined in such Proceeding), the Company shall contribute to the amount of Expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred and paid or payable by Indemnitee in such proportion as is appropriate to reflect (i) the relative benefits received by the Company on the one hand and by the Indemnitee on the other hand from the transaction from which such Proceeding arose, and (ii) the relative fault of the Company on the one hand and of the Indemnitee on the other hand in connection with the events which resulted in such Expenses, judgments, fines or settlement amounts, as well as any other relevant equitable considerations. The relative fault of the Company on the one hand and of the Indemnitee on the other hand shall be determined by reference to, among other things, the parties' relative intent, knowledge, access to information and opportunity to correct or prevent the circumstances resulting in such Expenses, judgments, fines or settlement amounts. The Company agrees that it would not be just and equitable if contribution pursuant to this Section 3 were determined by pro rata allocation or any other method of allocation which does not take account of the foregoing equitable considerations. 4. INDEMNIFICATION FOR EXPENSES OF A WITNESS. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee is, by reason of his Corporate Status, a witness in any Proceeding to which Indemnitee is not a party, he shall be 3 4 indemnified against all Expenses actually and reasonably incurred by him or on his behalf in connection therewith. 5. ADVANCEMENT OF EXPENSES. Notwithstanding any other provision of this Agreement, the Company shall advance all reasonable Expenses incurred by or on behalf of Indemnitee in connection with any Proceeding by reason of Indemnitee's Corporate Status within ten days after the receipt by the Company of a statement or statements from Indemnitee requesting such advance or advances from time to time, whether prior to or after final disposition of such Proceeding. Such statement or statements shall reasonably evidence the Expenses incurred by Indemnitee and shall include or be preceded or accompanied by an undertaking by or on behalf of Indemnitee to repay any Expenses advanced if it shall ultimately be determined that Indemnitee is not entitled to be indemnified against such Expenses. Any advances and undertakings to repay pursuant to this Section 5 shall be unsecured and interest free. Notwithstanding the foregoing, the obligation of the Company to advance Expenses pursuant to this Section 5 shall be subject to the condition that, if, when and to the extent that the Company determines that Indemnitee would not be permitted to be indemnified under applicable law, the Company shall be entitled to be reimbursed, within thirty (30) days of such determination, by Indemnitee (who hereby agrees to reimburse the Company) for all such amounts theretofore paid; provided, however, that if Indemnitee has commenced or thereafter commences legal proceedings in a court of competent jurisdiction to secure a determination that Indemnitee should be indemnified under applicable law, any determination made by the Company that Indemnitee would not be permitted to be indemnified under applicable law shall not be binding and Indemnitee shall not be required to reimburse the Company for any advance of Expenses until a final judicial determination is made with respect thereto (as to which all rights of appeal therefrom have been exhausted or lapsed). 6. PROCEDURE FOR DETERMINATION OF ENTITLEMENT TO INDEMNIFICATION. (a) To obtain indemnification (including, but not limited to, the advancement of Expenses and contribution by the Company) under this Agreement, Indemnitee shall submit to the Chief Executive Officer or Chief Financial Officer a written request, including therein or therewith such documentation and information as is reasonably available to Indemnitee and is reasonably necessary to determine whether and to what extent Indemnitee is entitled to indemnification. The Secretary or any Assistant Secretary of the Company shall, promptly upon receipt of such a request for indemnification, advise the Board of Directors in writing that Indemnitee has requested indemnification. (b) Upon written request by Indemnitee for indemnification pursuant to the first sentence of Section 6(a) hereof, a determination, if required by applicable law, with respect to Indemnitee's entitlement thereto shall be made in the specific case: 4 5 (i) if a Change in Control (as hereinafter defined) shall have occurred, by Independent Counsel (as hereinafter defined) in a written opinion to the Board of Directors, a copy of which shall be delivered to Indemnitee (unless Indemnitee shall request that such determination be made by the Board of Directors or the stockholders, in which case the determination shall be made in the manner provided in Clause (ii) below), or (ii) if a Change in Control shall not have occurred, (A) by the Board of Directors by a majority vote of a quorum consisting of Disinterested Directors (as hereinafter defined),or (B) if a quorum of the Board of Directors consisting of Disinterested Directors is not obtainable or, even if obtainable, said Disinterested Directors so direct, by Independent Counsel in a written opinion to the Board of Directors, a copy of which shall be delivered to Indemnitee, or (C) if so directed by said Disinterested Directors, by the stockholders of the Company; and, if it is determined that Indemnitee is entitled to indemnification, payment to Indemnitee shall be made within ten (10) days after such determination. Indemnitee shall cooperate with the person, persons or entity making such determination with respect to Indemnitee's entitlement to indemnification, including providing to such person, persons or entity upon reasonable advance request any documentation or information which is not privileged or otherwise protected from disclosure and which is reasonably available to Indemnitee and reasonably necessary to such determination. Any Independent Counsel, member of the Board of Directors, or stockholder of the Company shall act reasonably and in good faith in making a determination under the Agreement of the Indemnitee's entitlement to indemnification. Any costs or expenses (including attorneys' fees and disbursements) incurred by Indemnitee in so cooperating with the person, persons or entity making such determination shall be borne by the Company (irrespective of the determination as to Indemnitee's entitlement to indemnification) and the Company hereby indemnifies and agrees to hold Indemnitee harmless therefrom. (c) If the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section 6(b) hereof, the Independent Counsel shall be selected as provided in this Section 6(c). If a Change in Control shall not have occurred, the Independent Counsel shall be selected by the Board of Directors, and the Company shall give written notice to Indemnitee advising him of the identity of the Independent Counsel so selected. If a Change in Control shall have occurred, the Independent Counsel shall be selected by Indemnitee (unless Indemnitee shall request that such selection be made by the Board of Directors, in which event the preceding sentence shall apply), and Indemnitee shall give written notice to the Company advising it of the identity of the Independent Counsel so selected. In either event, Indemnitee or the Company, as the case may be, may, within 10 days after such written notice of selection shall have been given, deliver to the Company or to Indemnitee, as the case may be, a written objection to such selection; provided, however, that such objection may be asserted only on the ground that the Independent Counsel so selected does not meet the requirements of "Independent Counsel" as defined in Section 14 of this Agreement, and the objection shall set forth with particularity the factual basis of such assertion. Absent a proper and timely objection, the person so selected shall act as Independent Counsel. If a written objection is made and substantiated, the Independent Counsel selected may not serve as Independent Counsel unless and until such 5 6 objection is withdrawn or a court has determined that such objection is without merit. If, within 20 days after submission by Indemnitee of a written request for indemnification pursuant to Section 6(a)hereof, no Independent Counsel shall have been selected and not objected to, either the Company or Indemnitee may petition the Court of Chancery of the State of California or other court of competent jurisdiction for resolution of any objection which shall have been made by the Company or Indemnitee to the other's selection of Independent Counsel and/or for the appointment as Independent Counsel of a person selected by the court or by such other person as the court shall designate, and the person with respect to whom all objections are so resolved or the person so appointed shall act as Independent Counsel under Section 6(b) hereof. The Company shall pay any and all reasonable fees and expenses of Independent Counsel incurred by such Independent Counsel in connection with acting pursuant to Section 6(b) hereof, and the Company shall pay all reasonable fees and expenses incident to the procedures of this Section 6(c), regardless of the manner in which such Independent Counsel was selected or appointed. Upon the due commencement of any judicial proceeding or arbitration pursuant to Section 8(a)(iii) of this Agreement, Independent Counsel shall be discharged and relieved of any further responsibility in such capacity (subject to the applicable standards of professional conduct then prevailing). (d) The Company shall not be required to obtain the consent of the Indemnitee to the settlement of any Proceeding which the Company has undertaken to defend if the Company assumes full and sole responsibility for such settlement and the settlement grants the Indemnitee a complete and unqualified release in respect of the potential liability. 7. PRESUMPTIONS AND EFFECT OF CERTAIN PROCEEDINGS. (a) In making a determination with respect to entitlement to indemnification hereunder, the person or persons or entity making such determination shall presume that Indemnitee is entitled to indemnification under this Agreement if Indemnitee has submitted a request for indemnification in accordance with Section 6(a) of this Agreement, and the Company shall have the burden of proof to overcome that presumption in connection with the making by any person, persons or entity of any determination contrary to that presumption. (b) If the person, persons or entity empowered or selected under Section 6 of this Agreement to determine whether Indemnitee is entitled to indemnification shall not have made a determination within thirty (30) days after receipt by the Company of the request therefor, the requisite determination of entitlement to indemnification shall be deemed to have been made and Indemnitee shall be entitled to such indemnification, absent (i) a misstatement by Indemnitee of a material fact, or an omission of a material fact necessary to make Indemnitee's statement not materially misleading, in connection with the request for indemnification, or 6 7 (ii) a prohibition of such indemnification under applicable law; provided, however, that such 30 day period may be extended for a reasonable time, not to exceed an additional fifteen (15) days, if the person, persons or entity making the determination with respect to entitlement to indemnification in good faith requires such additional time for the obtaining or evaluating documentation and/or information relating thereto; and provided, further, that the foregoing provisions of this Section 7(b) shall not apply if the determination of entitlement to indemnification is to be made by the stockholders pursuant to Section 6(b) of this Agreement and if (A) within fifteen (15) days after receipt by the Company of the request for such determination the Board of Directors or the Disinterested Directors, if appropriate, resolve to submit such determination to the stockholders for their consideration at an annual meeting thereof to be held within seventy five (75) days after such receipt and such determination is made thereat, or (B) a special meeting of stockholders is called within fifteen (15) days after such receipt for the purpose of making such determination, such meeting is held for such purpose within sixty (60) days after having been so called and such determination is made thereat, or (iii) if the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section 6(b) of this Agreement. (c) The termination of any Proceeding or of any claim, issue or matter therein, by judgment, order, settlement (with or without court approval),conviction, or upon a plea of nolo contendere or its equivalent, shall not (except as otherwise expressly provided in this Agreement) of itself adversely affect the right of Indemnitee to indemnification or create a presumption that Indemnitee did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Company or, with respect to any criminal Proceeding, that Indemnitee had reasonable cause to believe that his conduct was unlawful. (d) For purposes of any determination of good faith, Indemnitee shall be deemed to have acted in good faith if Indemnitee's action is based on the records or books of account of the Enterprise (as hereinafter defined), including financial statements, or on information supplied to Indemnitee by the Officers and Directors of the Enterprise in the course of their duties, or on the advice of legal counsel for the Enterprise or on information or records given or reports made to the Enterprise by an independent certified public accountant or by an appraiser or other expert selected with reasonable care by the Enterprise. In addition, the knowledge and/or actions, or failure to act, of any director, officer, agent or employee of the Enterprise shall not be imputed to Indemnitee for purposes of determining the right to indemnification under this Agreement. The provisions of this Section 7(d) shall not be deemed to be exclusive or to limit in any way the other circumstances in which the Indemnitee may be deemed to have met the applicable standard of conduct set forth in this Agreement. 7 8 8. REMEDIES OF INDEMNITEE. (a) In the event that: (i) a determination is made pursuant to Section 6 of this Agreement that Indemnitee is not entitled to indemnification under this Agreement, (ii) advancement of Expenses is not timely made pursuant to Section 5 of this Agreement, (iii) no determination of entitlement to indemnification shall have been made pursuant to Section 6(b) of this Agreement within ninety (90) days after receipt by the Company of the request for indemnification, (iv) payment of indemnification is not made pursuant to Section 3 or 4 of this Agreement within ten (10) days after receipt by the Company of a written request therefor, or (v) payment of indemnification is not made within ten (10) days after a determination has been made that Indemnitee is entitled to indemnification or such determination is deemed to have been made pursuant to Section 6 or 7 of this Agreement, Indemnitee shall be entitled to an adjudication in an appropriate court of the State of California, or in any other court of competent jurisdiction, of his entitlement to such indemnification. Alternatively, Indemnitee, at his option, may seek an award in arbitration to be conducted by a single arbitrator pursuant to the Commercial Arbitration Rules of the American Arbitration Association. Indemnitee shall commence such proceeding seeking an adjudication or an award in arbitration within one hundred eighty (180) days following the date on which Indemnitee first has the right to commence such proceeding pursuant to this Section 8(a). The Company shall not oppose Indemnitee's right to seek any such adjudication or award in arbitration. (b) In the event that a determination shall have been made pursuant to Section 6(b) of this Agreement that Indemnitee is not entitled to indemnification, any judicial proceeding or arbitration commenced pursuant to this Section 8 shall be conducted in all respects as a de novo trial, or arbitration, on the merits and Indemnitee shall not be prejudiced by reason of that adverse determination. (c) If a determination shall have been made pursuant to Section 6(b) of this Agreement that Indemnitee is entitled to indemnification, the Company shall be bound by such determination in any judicial proceeding or arbitration commenced pursuant to this Section 8, absent 8 9 (i) a misstatement by Indemnitee of a material fact, or an omission of a material fact necessary to make Indemnitee's statement not materially misleading, in connection with the request for indemnification, or (ii) a prohibition of such indemnification under applicable law. (d) In the event that Indemnitee, pursuant to this Section 8, seeks a judicial adjudication of or an award in arbitration to enforce his rights under, or to recover damages for breach of, this Agreement, Indemnitee shall be entitled to recover from the Company, and shall be indemnified by the Company against, any and all expenses (of the types described in the definition of Expenses in Section 16 of this Agreement) actually and reasonably incurred by him in such judicial adjudication or arbitration, but only if he prevails therein. If it shall be determined in said judicial adjudication or arbitration that Indemnitee is entitled to receive part but not all of the indemnification sought, the expenses incurred by Indemnitee in connection with such judicial adjudication or arbitration shall be appropriately prorated. The Company shall indemnify Indemnitee against any and all expenses and, if requested by Indemnitee, shall (within ten (10) days after receipt by the Company of a written request therefor) advance such expenses to Indemnitee, which are incurred by Indemnitee in connection with any action brought by Indemnitee to recover under any Directors' and Officers' liability insurance policies maintained by the Company, regardless of whether Indemnitee ultimately is determined to be entitled to such indemnification, advancement of expenses or insurance recovery, as the case may be. (e) The Company shall be precluded from asserting in any judicial proceeding or arbitration commenced pursuant to this Section 8 that the procedures and presumptions of this Agreement are not valid, binding and enforceable and shall stipulate in any such court or before any such arbitrator that the Company is bound by all the provisions of this Agreement. 9. NON-EXCLUSIVITY; SURVIVAL OF RIGHTS; INSURANCE; SUBROGATION. (a) The rights of indemnification as provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may at anytime be entitled under applicable law, the Certificate, any agreement, a vote of stockholders or a resolution of Directors, or otherwise. No amendment, alteration or repeal of this Agreement or of any provision hereof shall limit or restrict any right of Indemnitee under this Agreement in respect of any action taken or omitted by such Indemnitee in his Corporate Status prior to such amendment, alteration or repeal. To the extent that a change in the Law, whether by statute or judicial decision, permits greater indemnification than would be afforded currently under the Certificate and this Agreement, it is the intent oft he parties hereto that Indemnitee shall enjoy by this Agreement the greater benefits so afforded by such change. No right or remedy herein conferred is intended to be exclusive of any other right or remedy, and every other right and remedy shall be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or 9 10 otherwise, shall not prevent the concurrent assertion or employment of any other right or remedy. (b) To the extent that the Company maintains an insurance policy or policies providing liability insurance for Directors, Officers, employees, or agents or fiduciaries of the Company or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise which such person serves at the request of the Company, Indemnitee shall be covered by such policy or policies in accordance with its or their terms to the maximum extent of the coverage available for any such director, officer, employee or agent under such policy or policies. (c) In the event of any payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all papers required and take all action necessary to secure such rights, including execution of such documents as are necessary to enable the Company to bring suit to enforce such rights. (d) The Company shall not be liable under this Agreement to make any payment of amounts otherwise indemnifiable hereunder if and to the extent that Indemnitee has otherwise actually received such payment under any insurance policy, contract, agreement or otherwise. 10. EXCEPTION TO RIGHT OF INDEMNIFICATION. Notwithstanding any other provision of this Agreement, Indemnitee shall not be entitled to indemnification under this Agreement with respect to any Proceeding brought by Indemnitee, or any claim therein, unless (a) the bringing of such Proceeding or making of such claim shall have been approved by the Board of Directors or (b) such Proceeding is being brought by the Indemnitee to assert his rights under this Agreement. 11. DURATION OF AGREEMENT. All agreements and obligations of the Company contained herein shall continue during the period Indemnitee is an officer and/or a director of the Company (or is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise) and shall continue thereafter so long as Indemnitee shall be subject to any Proceeding (or any proceeding commenced under Section 8 hereof) by reason of his Corporate Status, whether or not he is acting or serving in any such capacity at the time any liability or expense is incurred for which indemnification can be provided under this Agreement. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors (including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business or assets of the Company), assigns, spouses, heirs, executors and personal and legal representatives. This Agreement shall continue in effect 10 11 regardless of whether Indemnitee continues to serve as an officer and/or a director of the Company or any other enterprise at the Company's request. 12. SECURITY. To the extent requested by the Indemnitee and approved by the Board of Directors, the Company may at any time and from time to time provide security to the Indemnitee for the Company's obligations hereunder through an irrevocable bank line of credit, funded trust or other collateral. Any such security, once provided to the Indemnitee, may not be revoked or released without the prior written consent of the Indemnitee. 13. ENFORCEMENT. (a) The Company expressly confirms and agrees that it has entered into this Agreement and assumed the obligations imposed on it hereby in order to induce Indemnitee to serve as an officer and/or a director of the Company, and the Company acknowledges that Indemnitee is relying upon this Agreement in serving as an officer and/or a director of the Company. (b) This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings, oral, written and implied, between the parties hereto with respect to the subject matter hereof. 14. DEFINITIONS. For purposes of this Agreement: (a) "Change in Control" means a change in control of the Company occurring after the date of this Agreement of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A (or in response to any similar item on any similar schedule or form) promulgated under the Securities Exchange Act of 1934 (the "Act"), whether or not the Company is then subject to such reporting requirement; provided, however, that, without limitation, such a Change in Control shall be deemed to have occurred if after the date of this Agreement (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Act, as amended) other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company or a corporation owned directly or indirectly by the stockholders of the Company insubstantially the same proportions as their ownership of stock of the Company, is or becomes the "beneficial owner" (as defined in Rule 13d3 under the Act), directly or indirectly, of securities of the Company representing (15%) or more of the combined voting power of the Company's then outstanding securities (other than any such person or any affiliate thereof that is such a 15% beneficial owner as of the date hereof) without the prior approval of at least two-thirds of the members of the Board of Directors in office immediately prior to such person attaining such percentage interest; 11 12 (ii) there occurs a proxy contest, or the Company is a party to a merger, consolidation, sale of assets, plan of liquidation or other reorganization, as a consequence of which members of the Board of Directors in office immediately prior to such transaction or event constitute less than a majority of the Board of Directors thereafter; or (iii) during any period of two (2) consecutive years, other than as a result of an event described in clause (a)(ii) of this Section 16, individuals who at the beginning of such period constituted the Board of Directors (including for this purpose any new director whose election or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the Directors then still in office who were Directors at the beginning of such period) cease for any reason to constitute at least a majority of the Board of Directors. A Change in Control shall not be deemed to have occurred under item (i) above if the"person" described under item (i) is entitled to report its ownership on Schedule 13G promulgated under the Act and such person is able to represent that it acquired such securities in the ordinary course of its business and not with the purpose nor with the effect of changing or influencing the control of the Company, nor in connection with or as a participant in any transaction having such purpose or effect. If the "person" referred to in the previous sentence would at any time not be entitled to continue to report such ownership on Schedule 13G pursuant to Rule 13d1(b)(3)(i)(B) of the Act, then a Change in Control shall be deemed to have occurred at such time. (b) "Corporate Status" describes the status of a person who is or was a director, officer, employee or agent or fiduciary of the Company or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise which such person is or was serving at the express written request of the Company. (c) "Disinterested Director" means a director of the Company who is not and was not a party to the Proceeding in respect of which indemnification is sought by Indemnitee. (d) "Enterprise" shall mean the Company and any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise of which Indemnitee is or was serving at the express written request of the Company as a director, officer, employee, agent or fiduciary. (e) "Expenses" shall include all reasonable attorneys' fees, retainers, court costs, transcript costs, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees, and all other disbursements or expenses of the types customarily incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating, participating, or being or preparing to be a witness in a Proceeding. 12 13 (f) "Independent Counsel" means a law firm, or a member of a law firm, that is experienced in matters of corporation law and neither presently is, nor in the past five years has been, retained to represent: (i) the Company or Indemnitee in any matter material to either such party (other than with respect to matters concerning the Indemnitee under this Agreement, or of other indemnitees under similar indemnification agreements), or (ii) any other party to the Proceeding giving rise to a claim for indemnification hereunder. Notwithstanding the foregoing, the term "Independent Counsel" shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or Indemnitee in an action to determine Indemnitee's rights under this Agreement. The Company agrees to pay the reasonable fees of the Independent Counsel referred to above and to fully indemnify such counsel against any and all Expenses, claims, liabilities and damages arising out of or relating to this Agreement or its engagement pursuant hereto. (g) "Proceeding" includes any threatened, pending or completed action, suit, arbitration, alternate dispute resolution mechanism, investigation, inquiry, administrative hearing or any other actual, threatened or completed proceeding, whether brought by or in the right of the Company or otherwise and whether civil, criminal, administrative or investigative, in which Indemnitee was, is or will be involved as a party or otherwise, by reason of the fact that Indemnitee is or was an officer and/or a director of the Company, by reason of any action taken by him or of any inaction on his part while acting as an officer and/or a director of the Company, or by reason of the fact that he is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise; in each case whether or not he is acting or serving in any such capacity at the time any liability or expense is incurred for which indemnification can be provided under this Agreement; including one pending on or before the date of this Agreement; and excluding one initiated by an Indemnitee pursuant to Section 8 of this Agreement to enforce his rights under this Agreement. 15. SEVERABILITY. If any provision or provisions of this Agreement shall be held by a court of competent jurisdiction to be invalid, void, illegal or otherwise unenforceable for any reason whatsoever: (a) the validity, legality and enforceability of the remaining provisions of this Agreement (including without limitation, each portion of any section of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby and shall remain enforceable to the fullest extent permitted by law; and (b) to the fullest extent possible, the provisions of this Agreement (including, without limitation, each portion of any section of this Agreement containing any such provision 13 14 held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested thereby. 16. MODIFICATION AND WAIVER. No supplement, modification, termination or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver. 17. NOTICE BY INDEMNITEE. Indemnitee agrees promptly to notify the Company in writing upon being served with any summons, citation, subpoena, complaint, indictment, information or other document relating to any Proceeding or matter which may be subject to indemnification covered hereunder. The failure to so notify the Company shall not relieve the Company of any obligation which it may have to the Indemnitee under this Agreement or otherwise. 18. NOTICES. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if (i) delivered by hand and receipted for by the party to whom said notice or other communication shall have been directed, or (ii) mailed by certified or registered mail with postage prepaid, on the third business day after the date on which it is so mailed: (a) If to Indemnitee, to: (b) If to the Company, to: J2 Communications 10850 Wilshire Blvd. #1000 Los Angeles, CA 90024 Attention: James P. Jimirro Facsimile: 310\ 474-1219 or to such other address as may have been furnished to Indemnitee by the Company or to the Company by Indemnitee, as the case may be. 19. IDENTICAL COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall for all purposes be deemed to be an original but all of which together shall constitute one and the same Agreement. Only one such counterpart signed by the party against whom enforceability is sought needs to be produced to evidence the existence of this Agreement. 14 15 20. HEADINGS. The headings of the paragraphs of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction thereof. 21. GOVERNING LAW. The parties agree that this Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of California without application of the conflict of laws principles thereof. 22. GENDER. Use of the masculine pronoun shall be deemed to include usage of the feminine pronoun where appropriate. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on and as of the day and year first above written. COMPANY: J2 Communications, a California corporation By _________________________________ James P. Jimirro INDEMNITEE: By _________________________________ 15 EX-27 5 FINANCIAL DATA SCHEDULE
5 12-MOS JUL-31-1999 AUG-01-1998 JUL-31-1999 1,858,000 0 0 0 0 41,000 5,992,000 2,557,000 5,350,000 1,043,000 0 0 0 8,754,600 (6,164,600) 5,350,000 1,246,000 1,345,000 124,000 3,012,000 0 (1,299,000) 3,143 0 0 0 0 0 0 (1,299,000) (1.07) (1.07)
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