UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to____________
Commission File Number 1-9728
J NET ENTERPRISES, INC.
___________________________________________________________________________
Exact name of registrant as specified in its charter
Nevada 88-0169922
_______________________________________________ _________________
State or other jurisdiction of incorporation or I.R.S. Employer
organization Identification No.
4020 Lake Creek Drive, #100, Wilson, Wyoming 83014
____________________________________________ ________
Address of principal executive offices Zip Code
Registrant's telephone number, including area code: (307) 739-8603
_____________
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
______________________________________________ _______________________
Common Stock - Par value $.01 per share, which New York Stock Exchange
includes certain preferred stock purchase rights
Securities registered pursuant to Section 12(g) of the Act: None
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 No x
____ ____
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: x
___
As of September 28, 2001, the aggregate market value of the voting stock held
by non-affiliates of the Registrant was $30,871,800.
As of September 28, 2001, there were 8,524,552 shares of the Registrant's
common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement relating to the 2001 Annual Meeting of
Stockholders are incorporated by reference into Part III of this report.
PART I
Item 1. Business
________
J Net Enterprises, Inc. ("J Net" or the "Company") is a technology holding
company with concentrated investments in enterprise software and technology
infrastructure companies (the "Technology-Related Businesses"). The
Company's assets consist primarily of cash and investments.
On May 22, 2001, J Net completed the acquisition of InterWorld Corporation
("InterWorld"). This acquisition was the result of several actions beginning
with a $20,000,000 purchase of mandatorily redeemable Series A Preferred
Stock (the "Preferred Stock") from InterWorld in November 2000. In April
2001, when the redemption of the Preferred Stock became due, J Net agreed to
accept common stock of InterWorld equal to 94.6% of the total issued and
outstanding shares in satisfaction of the Preferred Stock redemption
obligation. On June 29, 2001, in a transaction related to foreclosure of a
loan, J Net received additional shares of InterWorld's common stock which
increased total ownership to 95.3% of InterWorld's issued and outstanding
common stock which was their only equity security outstanding. As a result
of the acquisition, InterWorld represents the most significant investment of
the Company.
J Net also holds minority investments in other technology companies
including, but not limited to, systems development and software companies.
The investments are held directly by the Company, or by J Net Ventures I, LLC
(the "Fund" or "Ventures I"), a fund owned and managed by the Company. The
Fund was created in March 2000 and the Company anticipated contributions of
$55,000,000 to the Fund at formation. As of June 30, 2001, investments
totaling approximately $34,000,000 had been made on behalf of the Fund. As a
result of the changes in market conditions with respect to Technology-Related
Businesses and the significance of the InterWorld transaction described
above, J Net has suspended its minority investment strategy and concentrated
its efforts and financial resources on InterWorld.
Prior to March 2000, when the Company began emphasizing technology-related
activities, J Net was named Jackpot Enterprises, Inc. ("Jackpot") and was
engaged, through various subsidiaries, in the gaming industry for over 30
years. At the time the strategic decisions were made to become a technology
focused investment company, Jackpot was one of the largest gaming machine
route operations (the "Route Operations") in the state of Nevada. In July
2000, the Company executed a definitive agreement to sell the Route
Operations. The sale, which was subject to regulatory approvals and other
customary closing conditions, was completed on November 22, 2000. Because of
the sale, the results of the Route Operations in this Annual Report on Form
10-K for the fiscal year ended June 30, 2001 (this "Form 10-K") are presented
as discontinued operations.
Company Investments
___________________
Since its transition strategy to a technology-related business holding
company, the Company has completed several transactions. As a result of
these transactions, the focus of the Company, while still technology based,
has been refined to accommodate the accumulated portfolio and adjust to
adverse market conditions which have impacted technology businesses
significantly.
During the period of March 2000 through November 2000, the Company and its
affiliates invested approximately $54,000,000 in securities and other
financial instruments of eleven companies in various technology-related
businesses. Additional investments since that time have been limited to
working capital funding to InterWorld Corporation and, to a far lesser
extent, other investments where either a remaining funding obligation existed
or further investment was warranted.
The Company, along with other peers involved in technology related
investments, has been exposed to significant changes in market valuations.
The Nasdaq Composite Index, a measure used by The Nasdaq Stock Market, a
United States stock exchange which trades securities of many publicly traded
technology companies, declined more than 45% between June 2000 and June 2001
and more than 62% between June 2000 and September 2001. More specific
technology-related indexes, such as the Philadelphia Semiconductor Index and
the Amex Internet Index have declined by 62% and 79%, respectively, between
the June 2000 and September 2001 time period.
The aforementioned indexes are based on publicly traded companies. With the
exception of InterWorld, the Company's investments in technology-related
businesses are in non public companies. While valuations of non public
companies may be measured against the performance of public companies, non
public companies generally become less liquid in the marketplace and may
endure more difficulty accessing additional capital when the public markets
perform poorly.
As a result of recent market performance and related reductions in
valuations, the Company's investments in technology-related businesses during
2001 decreased substantially. In some cases, the businesses were not
successful and the entire investment was lost. Many of the investments that
survived experienced significant decreases in their value. The Company
regularly analyzes the value of such investments. As of June 30, 2001,
management's analysis of it's portfolio indicated that value remained in
three investments: its InterWorld subsidiary and minority interest
investments in eStara, Inc. and Tellme Networks, Inc. The remaining
investments were sold, abandoned, or impaired. While the data of many
research firms indicates a substantial market exists for products and
services of technology focused companies, the timing for consumer adoption
and the performance of the public markets make it difficult to predict the
outcome of these remaining investments. Although these investments remain
active, there can be no assurance that market valuations will increase, or
that the Company will provide additional capital, if available.
The Company, like many other businesses, is in the process of evaluating the
impact that the tragic events of September 11, 2001 will have on its
business. At this point in time it is too early to predict what the economic
and business consequences will be. At InterWorld, management has indicated
initial hesitancy on the part of some clients and prospective clients to move
forward with new e-commerce initiatives. This could result in a delay
or reduction in revenue.
A summary and status of each investment made by the Company as of June 30,
2001 follows:
InterWorld Corporation. InterWorld is a provider of integrated enterprise
commerce software solutions. Its products include software that addresses
customer relationship management, supplier relationship management, sales
channel management and business intelligence for companies in the retail,
manufacturing, distribution, telecommunications and transportation
industries.
As of June 30, 2001, J Net owned 95.3% of the common stock of InterWorld.
Two directors and an officer of J Net are members of InterWorld's Board of
Directors. The Company provides working capital to InterWorld under a
$20,000,000 secured credit facility which allows InterWorld to request
periodic advances. Advances, which are made solely at J Net's discretion,
are secured by all of the assets, including intellectual property, of
InterWorld. Total advances were $3,000,000 as of June 30, 2001 and
$12,350,000 as of September 30, 2001. InterWorld relies on advances from
this facility to fund its operations.
J Net is evaluating its current ownership interest in InterWorld and is
exploring a number of strategic alternatives including, but not limited to,
seeking a strategic partner to provide additional funding, pursuing a
possible sale, or terminating the businesses operations.
InterWorld's applications, components and tools are based on its Process-
Centric architecture, which enables medium and large-sized companies to
maximize returns on investments ("ROI") in information technology.
InterWorld's open software solutions are designed to assist its clients to
increase customer profitability, efficiency and satisfaction by allowing a
business to enhance selling opportunities, manage complex sales channels,
orchestrate sophisticated marketing campaigns, leverage and integrate
disparate technology systems, capture and rapidly respond to critical
business intelligence and facilitate complex business process interactions
among its customers, vendors and partners.
Additionally, the software solutions are designed to help companies:
. Get to market quickly with e-business initiatives by offering over
600 ready-to-deploy e-business processes, which can save companies
thousands of hours of costly development work.
. Automate customer relationship management and sales and support
processes, which enable companies to continuously update and
improve these processes across multiple channels, including the
World Wide Web, point-of-sale, call center, and wireless
marketplaces.
. Achieve lower total-cost-of-ownership with InterWorld's Process
Centric approach, which is easily adaptable and designed to
facilitate dynamic business and technology changes. These
solutions also reduce the need for proprietary development through
support of industry standards such as XML, CIF, BizTalk and
Rosetta Net.
. Improve profitability and deepen understanding of their business
by utilizing their sophisticated business intelligence
application. The software facilitates enterprise-wide
collaboration enabling companies to quickly and simply gather and
act on business intelligence, without the need for technical
support.
. Facilitate enterprise integration through pre-built software
adaptors that easily connect multiple back-office systems, sales
channels, digital marketplaces and business trading partners. In
addition, InterWorld's enterprise integration capabilities enable
a company to continue to use existing legacy systems, rather than
forcing a company to buy or build new systems from scratch.
The focus on ROI is particularly important in today's economic climate as
capital, once readily available to build an entirely new application, is now
limited. Increasingly, companies are demanding that their suppliers and
vendors offer them the option to do business online. Given the high costs
associated with information technology, companies need to ensure that their
investments will lead to enhanced profitability. To drive profitability,
companies must not only understand buying trends of their customers, they
must also be in a position to act on these trends. Further, companies must
be able to collaborate on an enterprise-wide basis as well as with their
customers and suppliers to sustain growth and remain competitive.
In September 2001, InterWorld announced the completion of its new Commerce
Exchange 5.0 version ("Version 5.0") of its software product. The new
version runs on the industry standard J2EE server and is backward compatible
with prior releases. In addition to Version 5.0, InterWorld introduced a new
marketing strategy to promote purchases of the new product.
To complement and extend its solutions, InterWorld has partnered with some of
the world's leading consulting and technology companies such as Ariba,
Andersen, Deloitte & Touche, NCR Corp., PricewaterhouseCoopers, Sun and
webMethods. Interworld customers include, among others, Ann Taylor, Brooks
Brothers, Crane Co., IKON Office Solutions, MSC Industrial Direct, Oki Data
Americas, Verizon and Walt Disney Internet Group.
Meister Brothers Investments, LLC ("MBI"). The Company acquired a 1%
controlling interest in a transaction involving a combination of put and call
agreements on March 1, 2000. MBI held a portfolio of technology-focused
investments in the form of preferred stock and equivalents in nine technology
companies. The Fund also made further investments in two of the companies,
Carta, Inc. and CyberBills, Inc., which are discussed more fully below.
On September 28, 2001, the Company terminated its remaining obligation under
the Put Agreement resulting in the acquisition of the remaining 99% of the
MBI portfolio. This transaction was done in connection with the termination
by the Company of the employment of the Co-Presidents of the Manager of the
fund.
As part of the regular periodic analysis performed by management during
fiscal 2001, it was determined that due to the declines in markets, the
companies within the MBI portfolio had no value and impairments of $2,500,000
($25,000 net to the Company) were recorded.
Digital Boardwalk, LLC ("Digital"). The Company's investment in Digital, an
e-services company, was sold in April 2001. Losses from the operations and
sale during the time the Company held the investment were approximately
$5,000,000, which included the Company's initial investment of $3,000,000 in
cash and $1,767,000 in J Net common stock in March 2000, and a $250,000
working capital loan made during 2001.
TechTrader, Inc. ("TechTrader"). The Company held an investment in
TechTrader until June 2001, when it declared the investment worthless. The
initial investment consisted of $6,000,000 in cash and $2,488,000 in J
Net common stock occurred in March 2000 and was written off in June 2001.
Ventures I. The Company anticipated a $55,000,000 contribution to Ventures I
in March 2000. As previously discussed, such contribution is presently being
evaluated as part of management's analysis of continued funding to
InterWorld. As of September 30, 2001, approximately $34,000,000 had been
invested by the Company on behalf of Ventures I. The following is a
description of the major investments made by Ventures I.
. Jasmine Networks, Inc. ("Jasmine") develops high-speed, multi-service
optical switches for next generation networks. Jasmine's vision is
to effectively utilize the existing fiber-optic infrastructure to
deliver more bandwidth and multiple services at light speed.
In August 2000, Ventures I invested $5,000,000 in Series C Preferred
Stock in a financing of over $80,000,000. The Series C financing also
included investments by Baker Capital Group, as lead investor,
Gilbert Global Equity, the Optical Capital Group and other investors.
A representative of the Company serves on Jasmine's board of
directors.
As of June 30, 2001, Jasmine was actively engaged in negotiations to
sell a division of its company to a third party at a value which
would represent a discount to the original investment. In addition,
other events which transpired in August and September, including the
loss of a significant customer, resulted in J Net recording an
impairment for its entire $5,000,000 investment as of June 30, 2001.
. Strategic Data Corp. ("SDC") provides clients real time ad
optimization technology which allows SDC's clients to identify who
their most valuable customers are and immediately deliver to them
targeted content, product recommendations, and marketing messages.
Ventures I invested $850,000 of the $5,000,000 Series B Preferred
Stock financing completed in May 2000. Also participating in the
financing were Bear Stearns Constellation Ventures Fund and Smart
Technology Ventures Fund.
In May 2001, an additional $250,000 was invested in SDC.
Management's analysis of SDC's business model, which relies on
Internet advertising, resulted in an impairment of its $1,100,000
investment as of June 30, 2001.
. Tellme Networks, Inc. ("Tellme") provides voice driven interactive
services to consumers and businesses. Tellme enables users, through
voice-recognition and speech-synthesis, to utilize any telephone to
access the Internet and listen to online information.
Investors in Tellme include The Barksdale Group, Benchmark Capital,
Kleiner Perkins Caufield & Byers and AT&T. In September 2000,
Ventures I invested $2,000,000 in Tellme, representing less than 2%
of the total capital raised. Based on Tellme's positive financial
condition (approximately $90,000,000 in cash as of June 30, 2001) and
its current and projected cash utilization, Management believes the
original $2,000,000 investment represents the lower of cost or market
at June 30, 2001.
. eStara, Inc. ("eStara") eStara provides voice communications
technology that enables on-line customers to talk with e-business
providers over the Internet. The Company funded $2,665,000 of a
$4,000,000 commitment to eStara's $15,000,000 Series B round of
financing in September 2000. The remaining commitment was funded in
July 2001 under revised terms, which included a new series of stock
at substantially lower valuations than the original contribution.
As a result of the lower valuations, a $1,375,000 partial impairment
to the original investment was recorded as of June 30, 2001 to
reflect the overall value of the Company's investment on a
consistent basis. eStara is a non public development stage company.
The Company uses the cost method to account for this investment.
. CyberBills, Inc. ("CyberBills") provides electronic bill presentment
and payment and enables customers to view, manage and pay their
bills online, whether the bills are in paper or electronic format.
The Series A Preferred Stock financing of CyberBills, in which
neither MBI or Ventures I participated, occurred in 1998 and was led
by Dotcom Ventures and Online Ventures. The Series B Preferred Stock
financing occurred in 1999 and such financing raised $12,500,000.
Intuit and Vertex Management were the lead participants in the Series
B Preferred Stock financing. MBI also participated in the Series B
financing. In March 2000, Ventures I invested $3,000,000 in the
$28,000,000 Series C Preferred Stock financing led by GE Capital.
Other participants in the Series C round included Texaco, Inc. and J
Seligman.
In June 2001, the assets of CyberBills were sold. It is expected
that the Series C shareholders will receive approximately 10% of
their original investment in connection with such sale.
. Alistia, Inc. ("Alistia") is a web based direct marketing integration
company that focuses on business-to-business information, analysis
and communication.
In May 2000, Ventures I invested $2,000,000 in the Series A Preferred
Stock financing of $5,000,000. The other participant in the Series A
financing was Arch Ventures. A representative of the Company served
on Alistia's board of directors.
On May 8, 2001, the Fund participated in a second round financing in
Alistia, Inc., of Redeemable Preferred Stock (the "Series B Stock")
with a separate group of investors. The Series B stock is senior in
liquidation to the Series A Preferred Stock. The funding of the
Series B Stock included two separate closings. The Company's share,
assuming completion of both closings, was 13.6% of a $5,000,000
placement in the Series B Stock. The first closing, representing the
issuance of 5,615,440 shares, occurred on May 8, 2001. The Company
funded $480,000, or 60% of the $800,000 committed at the first
closing. The second closing, consisting of an additional 4,362,285
shares, was contingent on Alistia meeting certain operating and
financial targets. In June 2001, Alistia notified its Board of
Directors and investors that the performance targets specified in the
Series B Stock would not be attained thereby nullifying any further
funding obligation. Alistia is presently in the process of
liquidation and the Company has recognized equity accounting losses
and impairment provisions for the full $2,480,000 invested in
Alistia.
. Carta, Inc. ("Carta") provided systems integration, application
development services and products and strategy consulting for state,
county, municipal and local governments in the United States.
In May 2000, Ventures I, along with Millenium Technology Ventures, an
affiliate of the Blackstone Group ("Millenium"), co-led an $8,000,000
convertible bridge note financing. The Company's share of the
financing was $4,000,000. A representative of the Company served on
Carta's board of directors.
The management of Carta elected to terminate operations and liquidate
in favor of its creditors in February 2001 and the entire $4,000,000
investment was expensed.
Discontinued Operations
_______________________
Prior to the Company's change in business strategy to a technology-related
holding company, the Company had been actively engaged, through its
subsidiaries, in the gaming industry for over 30 years.
In connection with this change in strategy, the Company retained the
investment banking firm of Koffler & Company to advise the Company on the
disposition of its gaming business segment. During the quarter ended June
30, 2000, management formalized its plan to sell the Route Operations and
commenced activities to dispose of the subsidiaries identified with that
segment. On July 8, 2000, the Company entered into a definitive agreement to
sell its Route Operations. The sale (which was for $38,000,000 in cash)
closed on November 22, 2000. All of the operations and related gain from the
sales transaction have been reported as discontinued operations in this Form
10-K. Readers are also encouraged to refer to prior Form 10-K's for more
detailed discussions associated with these operations.
Industry Background
___________________
Advances in technology and the increasing use of the Internet as a tool for
communications, information sharing and the conduct of commerce is the basis
for the investment strategy used by J Net. Despite the recent reductions in
capital and information technology spending, projections by many research
firms indicate growth in technology products and services.
The Company's subsidiary, InterWorld, is active in a market segment described
by AMR Research as Enterprise Commerce Management ("ECM"). The range of
capabilities from InterWorld's flagship product, Commerce Exchange 5.0, is
extensive, from automated transaction processing and customer service to
sophisticated private trading exchanges and portals.
AMR predicts the market for ECM applications including commerce solutions,
application servers and tools, middleware and other products will exceed $27
billion by the end of 2001.
The Company, along with other peers involved in technology-related
investments, has been exposed to significant changes in market valuations.
The Nasdaq Composite Index, a measure used by The Nasdaq Stock Market, a
United States stock exchange which trades securities of many publicly traded
technology companies, declined more than 45% between June 2000 and June 2001
and more than 62% between June 2000 and September 2001. More specific
technology-related indexes, such as the Philadelphia Semiconductor Index and
the Amex Internet Index have declined by 62% and 79%, respectively, between
the June 2000 and September 2001 time period.
Intellectual Property Rights
____________________________
J Net relies on a combination of trade secret, nondisclosure and other
contractual arrangements, and copyright and trademark laws, to protect
proprietary rights. Where possible we will enter into confidentiality
agreements with our employees, and will generally require that consultants
and clients enter into such agreements and limit access to and distribution
of proprietary information. It cannot be assured that the steps taken by the
Company in this regard will be adequate to deter misappropriation of
proprietary information or that unauthorized use will be detected and the
appropriate steps will be taken to enforce intellectual property rights.
InterWorld currently owns one U.S. patent relating to its product
architecture and technology. While the patent is believed to be valid, it
may be challenged, invalidated or circumvented. Moreover, the rights granted
under any patent issued to the Company, its subsidiaries or investees under
licensing agreements may not provide competitive advantages. Due to the
rapid pace of technological innovation for e-business solutions, the ability
to establish and maintain a position of technology leadership in the industry
is dependent more on the skills of development personnel than upon the legal
protections for existing technologies.
Agreements with employees, consultants and others who participate in the
development of InterWorld software or products developed by the companies in
which J Net holds an investment, may be breached and there may not be
adequate remedies for any breach. In addition, trade secrets may otherwise
become known to or independently developed by competitors. Furthermore,
efforts to protect proprietary technology may fail to prevent the development
and design by others of products or technology similar to or competitive with
those developed by J Net's Technology-Related Businesses.
Employees
_________
As of June 30, 2001, J Net employed 14 persons, a substantial number of whom
are management personnel. InterWorld employed approximately 260 persons as
of June 30, 2001. None of J Net's or InterWorld's employees are covered by a
collective bargaining agreement and both companies believe that they have
satisfactory employee relations.
In February 2001, Steven L. Korby, J Net's Executive Vice President and Chief
Financial Officer ("CFO") was appointed to a similar role at InterWorld.
Since that time, Mr. Korby has served as CFO for both the Company and
InterWorld. Mr. Korby's compensation and other employment costs are shared,
on a time-spent basis, between J Net and InterWorld.
On September 28, 2001, the Co-Presidents of the Manager of Ventures I entered
into termination agreements with the Company. The agreements, structured as
contract settlements, contained severance provisions, which were paid on
September 28, 2001.
Regulation and Licensing Requirements of Discontinued Operations
________________________________________________________________
As a condition of the sale of the assets associated with the discontinued
operations, the Company was required to maintain licenses in the state of
Nevada in order to conduct gaming operations and obtain approvals from
various state of Nevada agencies in order to sell the stock of the
subsidiaries conducting the gaming operations.
All such approvals were obtained prior to November 22, 2000, the effective
date of the sale of the Route Operations.
Specific information regarding these regulations can be obtained by referring
to the Company's Form 10-K's for prior fiscal years.
Item 2. Properties
__________
J Net's corporate headquarters are currently located in Wilson, Wyoming under
a month-to-month lease. J Net also conducts Ventures I and certain corporate
affairs in offices in New York, New York with approximately 8,500 square feet
under a lease which expires in 2010, and in Plano, Texas with approximately
3,000 square feet under a lease which expires in 2003.
The Company's subsidiary, InterWorld, has its principal offices in New York,
New York in approximately 112,000 square feet of leased office space. The
lease at this facility expires in 2015. Approximately 37% of the space is
subleased to an unrelated party. InterWorld also rents office space in other
cities in the United States and in other countries for sales and customer
support.
J Net owns land and improvements in Wellington, Florida, which is held for
sale. The property was acquired as a result of foreclosure actions taken on
a loan, which was held by the Ventures I subsidiary.
Item 3. Legal Proceedings
_________________
As of June 30, 2001, J Net did not have any litigation pending or
threatening, or other claims filed against the Company or its subsidiaries,
including InterWorld.
On March 8, 2001, as amended on May 29, 2001, InterWorld received notice that
the Securities and Exchange Commission (the "Commission") commenced a formal
order directing a private investigation by the Commission with respect to
whether InterWorld engaged in violations of Federal Securities Laws as it
relates to InterWorld's financial statements, as well as its accounting
practices and policies. Also under review by the Commission is certain
trading in InterWorld stock. All the above events are related to periods
prior to the Company's common stock ownership in InterWorld.
The investigation is confidential and the Commission has advised that the
investigation should not be construed as an indication by the Commission or
its staff that any violation of law has occurred nor should the investigation
be construed as an adverse reflection on any person, entity or security.
The investigation is ongoing and InterWorld is fully cooperating with the
Commission.
Item 4. Submission of Matters to a Vote of Security Holders
___________________________________________________
Not applicable.
Item 4A. Executive Officers of the Registrant
____________________________________
Year Became an
Name Age Position Executive Officer
_________________ ___ ___________________________ _________________
Allan R. Tessler 65 Chief Executive Officer 2000
and Chairman of the Board
Mark W. Hobbs 45 President and Chief
Operating Officer 2000
Steven L. Korby 55 Executive Vice President
and Chief Financial Officer 2000
Allan R. Tessler has served as Chief Executive Officer and Chairman of the
Board since March 2000 and May 1994, respectively, and has been a director of
J Net since 1980. Mr. Tessler also served as Secretary of J Net from 1980
through August 1993. He has been Chairman and Chief Executive Officer of
International Financial Group, Inc., an international merchant banking firm,
since 1987. He was Co-Chairman and Co-Chief Executive Officer of Interactive
Data Corporation (formerly Data Broadcasting Corporation), a securities
market data supplier, from June 1992 through February 2000. Mr. Tessler was
Chairman of the Board of Enhance Financial Services, Inc., an insurance
holding company, since 1986, and was Chairman of the Board of Great Dane
Holdings Inc., a diversified holding company, from 1987 through December
1996. He is also a director of The Limited, Inc., Interactive Data
Corporation and Allis-Chalmers Corporation. Mr. Tessler has been a director
of InterWorld Corporation since November 2000 and Chairman of the Board of
InterWorld since February 2001.
Mark W. Hobbs joined J Net as President and Chief Operating Officer in June
2000. From 1995 through his appointment to J Net, Mr. Hobbs was a partner in
Mariner Investment Group, a private money management and hedge fund operation
that had approximately $500,000,000 under management. Prior to Mariner, Mr.
Hobbs was involved in private investing and financial consulting from 1991 to
1995. From 1982 to 1991, Mr. Hobbs was President of Rosewood Financial,
Inc., a private investment management company. Mr. Hobbs has been a director
of InterWorld since February 2001.
Steven L. Korby was appointed Executive Vice President and Chief Financial
Officer in June 2000. From April 1999 through his appointment with J Net,
Mr. Korby was engaged in a private investment and consulting business. From
February 1998 through March 1999, Mr. Korby was Executive Vice President and
Chief Financial Officer of The Cerplex Group, Inc., a provider of repair and
logistics services, and spare parts sourcing and service management for
manufacturers of computer, communications and electronic office equipment.
From 1995 through 1997, Mr. Korby was Executive Vice President and Chief
Financial Officer of Greyhound Lines, Inc., a nationwide intercity bus
company. Prior to that and from 1983, Mr. Korby was Executive Vice President
and Chief Financial Officer of Neodata Services, Inc. and its predecessors, a
direct marketing services company. In addition to his role at J Net, Mr.
Korby was appointed Executive Vice President, Chief Financial Officer and
Treasurer of InterWorld in February 2001.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
_____________________________________________________________
Matters
_______
J Net's common stock, par value $.01 per share (the "Common Stock"), is
listed on the New York Stock Exchange (NYSE) under the trading symbol "J".
The following table sets forth the range of high and low prices for shares of
the Common Stock for the fiscal quarters indicated, as furnished by the NYSE.
No cash dividends were paid during those fiscal quarters. Future payment of
quarterly cash dividends, if any, is subject to periodic review and
reconsideration by J Net's Board of Directors (the "Board").
J NET COMMON STOCK
____________________________________________________________________
High Low
____________________________________________________________________
Fiscal 2000
First Quarter $10.00 $ 7.63
Second Quarter 10.25 7.75
Third Quarter 21.50 7.88
Fourth Quarter 16.50 10.19
____________________________________________________________________
Fiscal 2001
First Quarter $12.88 $ 8.94
Second Quarter 9.50 4.81
Third Quarter 6.98 4.56
Fourth Quarter 5.10 3.20
____________________________________________________________________
Fiscal 2002
First quarter $ 4.60 $ 2.75
____________________________________________________________________
As of September 28, 2001 there were 1,286 holders of record of J Net's Common
Stock. The number of holders of record of J Net's Common Stock on September
28, 2001 was computed by a count of record holders.
On October 10, 2001, the last reported sale price of J Net's common stock on
the NYSE was $3.99.
Item 6. Selected Financial Data
_______________________
The following consolidated financial data includes InterWorld's operating
results for the period beginning May 2001 and ending June 30, 2001 as well as
InterWorld's Balance Sheet as of June 30, 2001. On July 8, 2000, the Company
entered into a definitive agreement to sell its Route Operations. As a
result of the sale, the financial position and results of operations of the
Route Operations have been reported as discontinued operations. The
following information has been derived from J Net's consolidated financial
statements. In accordance with accounting principles generally accepted in
the United States applicable to discontinued operations, certain data in the
table below has been reclassified to reflect the Route Operations as
discontinued.
Years Ended June 30,
_________________________________________________________
2001 2000 1999 1998 1997
_________ ________ _________ ______ ______
(Dollars and shares in thousands, except per share data)
OPERATING DATA:
Income (loss)from
continuing
operations (a) $(61,449) $ 6,295(b) $ (978) $ (194) $ (764)
____________________________________________________________________________
Income from
discontinued
operations $ 12,754 (c)$ 346 $ 5,581 $ 7,407 $ 8,608
____________________________________________________________________________
Net income
(loss) (a) $(48,695) $ 6,641 $ 4,603 $ 7,213 $ 7,844
____________________________________________________________________________
Basic earnings
(loss)per
share from
continuing
operations $ (6.95) $ .73 $ (.11) $ (.02) $ (.08)
____________________________________________________________________________
Diluted earnings
(loss)per share
from continuing
operations $ (6.95) $ .71 $ (.11) $ (.02) $ (.08)
____________________________________________________________________________
Dividends declared
per share $ - $ - $ - $ - $ .16
____________________________________________________________________________
Average common
shares
outstanding 8,839 8,674 8,641 8,991 9,237
____________________________________________________________________________
Average common
shares and
common share
equivalents
outstanding 8,839 8,987 8,641 8,991 9,237
____________________________________________________________________________
BALANCE SHEET DATA
(at end of period):
Cash and cash
equivalents $ 24,272 $ 60,090 $44,137 $46,775 $44,445
____________________________________________________________________________
Short-term
investments $ 27,381 $ - $ - $ - $ -
____________________________________________________________________________
Total assets $ 77,413 $104,735 $77,721 $72,506 $70,116
____________________________________________________________________________
Long-term debt $ 27,750 $ 12,750 $ - $ - $ -
____________________________________________________________________________
Stockholders'
equity $ 38,486 $ 87,910 $74,614 $70,871 $67,281
____________________________________________________________________________
(a) For the periods presented above, Route Operations, which was J Net's
only business segment through February 2000, generated 100% of the
Company's revenues. The Company's Technology-Related Businesses
segment, which the Company began operating in March 2000, did not
generate any operating revenues in fiscal 2000. Revenues from the
Technology-Related Businesses in fiscal 2001 are derived solely through
the Company's InterWorld subsidiary.
The losses from continuing operations and net loss in 2001 are due
primarily to impairments of investments and losses on sales of certain
investments of $24,281,000, equity method losses of $26,121,000, and
$5,814,000 of consolidated losses attributable to the operations of
InterWorld for May and June 2001.
(b) Includes a net fee earned of $11,116,000 from a terminated merger.
(c) Represents an after tax gain from sale of $13,004,000 less a $250,000
after tax loss from operations.
Item 7. Management's Discussion and Analysis of Financial Condition and
_______________________________________________________________
Results of Operations
_____________________
Forward-looking Statements; Risks and Uncertainties
___________________________________________________
Certain information included in this Form 10-K and other materials filed or
to be filed by the Company with the Securities and Exchange Commission
contains statements that may be considered forward-looking. All statements
other than statements of historical information provided herein may be deemed
to be forward-looking statements. Without limiting the foregoing, the words
"believes", "anticipates", "plans", "expects", "should" and similar
expressions are intended to identify forward-looking statements. In
addition, from time to time, the Company may release or publish forward-
looking statements relating to such matters as anticipated financial
performance, business prospects, technological developments and similar
matters. The Private Securities Litigation Reform Act of 1995 provides a safe
harbor for forward-looking statements. In order to comply with the terms of
the safe harbor, the Company notes that a variety of factors could cause the
Company's actual results and experience to differ materially from the
anticipated results or other expectations expressed in the Company's forward-
looking statements.
The risks and uncertainties that may affect the operations, performance,
development and results of the Company's Technology-Related Businesses
include, but are not limited to, the ability of the Company to identify and
negotiate on terms acceptable to the Company an acquisition of a systems
development or other internet infrastructure company and the ability to
successfully integrate and grow such business if acquired and the success of
those entities in which the Company has invested, the ability of those
entities, in which the Company has existing minority investments, to raise
additional capital on terms that such entities find attractive to themselves
and to the Company or to otherwise monetize their securities.
The Company, like many other businesses, is in the process of evaluating the
impact that the tragic events of September 11, 2001 will have on its
business. At this point in time it is too early to predict what the economic
and business consequences will be. At InterWorld, management has indicated
initial hesitancy on the part of some clients and prospective clients to move
forward with new e-commerce initiatives. This could result in a delay or
reduction in revenue.
Overview
________
J Net is a technology holding company with concentrated investments in
enterprise software and technology infrastructure companies. The Company's
assets consist primarily of cash and investments.
On May 22, 2001, J Net completed the acquisition of InterWorld. This
acquisition was the result of several actions beginning with a $20,000,000
purchase of Preferred Stock from InterWorld in November 2000. In April 2001,
when the redemption of the Preferred Stock became due, J Net agreed to accept
common stock of InterWorld equal to 94.6% of the total issued and outstanding
shares in satisfaction of the Preferred Stock redemption obligation. On June
29, 2001, in a transaction related to foreclosure of a loan, J Net received
additional shares of InterWorld's common stock which increased total
ownership to 95.3% of InterWorld's issued and outstanding common stock which
was their only equity security outstanding. As a result of the acquisition,
InterWorld represents the most significant investment of the Company.
In addition to its $20,000,000 investment in Preferred Stock, the Company and
InterWorld have entered into a $20,000,00 secured credit facility in the form
of a promissory note. Under terms of that agreement, J Net, at its sole
discretion, advances InterWorld funds to meet working capital requirements.
Such advances totaled $3,000,000 at June 30, 2001 and $12,350,000 as of
September 30, 2001. The advances are secured by all of the assets of
InterWorld, including its intellectual property.
InterWorld requires advances under the promissory note to continue business
operations. InterWorld historically operated at a loss and received a going
concern opinion from its independent auditors during its previous fiscal year
ending December 31, 2000. J Net has continued to fund InterWorld's
operations and is currently evaluating its ownership interest in InterWorld.
J Net is exploring a number of strategic alternatives including, but not
limited to, seeking a strategic partner to provide additional funding for
InterWorld, pursuing a possible sale, or terminating its business operations.
J Net also holds minority investments in other technology companies
including, but not limited to, systems development and software companies.
The investments are held directly by the Company, or by the Fund or Ventures
I, a fund owned and managed by the Company. The Fund was created in March
2000 and the Company anticipated contributions of $55,000,000 to the Fund at
formation. As of June 30, 2001, investments totaling approximately
$34,000,000 had been made on behalf of the Fund. As a result of the changes
in market conditions with respect to Technology-Related Businesses and the
significance of the InterWorld transaction described above, J Net has
suspended its minority investment strategy and concentrated its efforts and
financial resources on InterWorld.
Prior to March 2000, when the Company began emphasizing technology-related
activities, J Net was named Jackpot and was engaged, through various
subsidiaries, in the gaming industry for over 30 years. At the time the
strategic decisions were made to become a technology focused company, Jackpot
was one of the largest Route Operations in the state of Nevada. In July
2000, the Company executed a definitive agreement to sell the Route
Operations. The sale, which was subject to regulatory approvals and other
customary closing conditions, was completed on November 22, 2000. Because of
the sale, the results of the Route Operations in this Form 10-K for the
fiscal year ended June 30, 2001 are presented as discontinued operations.
At various times during the past several years, the Company engaged in the
active consideration of potential acquisitions and expansion opportunities in
both the gaming and nongaming markets, including a potential acquisition of
Players International, Inc. ("Players") and CRC Holdings, Inc. d/b/a Carnival
Resorts & Casinos ("CRC"), a privately owned company, in 1999. The Company
devoted significant management and other resources to these efforts and
incurred substantial expenses in connection with such activities. The
discussion that follows is based on giving retroactive effect to the
discontinued operations. Since the Route Operations were sold in November
2000, the following discussion focuses on J Net's continuing operations,
which consist primarily of the operations of InterWorld and activities of the
parent company, its Fund Manager affiliate and fund investments for the
periods discussed in this report.
Results of Operations
_____________________
The results of operations for the 2001, 2000 and 1999 fiscal years will vary
significantly due to the changes in business operations and business strategy
within the Company during those years. In May and June 2001, the Company
completed transactions which resulted in the ownership of over 95% of the
equity securities of InterWorld. In fiscal year 2000, J Net transformed its
business model to a technology holding company and fund manager from its
gaming machine route operations. All operations associated with the Route
Operations, which were sold in November 2000, are reported as discontinued
operations.
The acquisition of InterWorld has been accounted for as a step acquisition
due to a series of transactions beginning in November 2000. The Company used
the equity method of accounting from November 2000 until May 2001, when the
consolidation method was adopted due to the acquisition of a controlling
interest in InterWorld. As of June 30, 2001, the Company owned 95.3% of the
Common Stock of InterWorld.
2001 Compared to 2000
_____________________
Revenues, net:
Revenues for fiscal year 2001 totaled $2,156,000 and were entirely due to
InterWorld's sales of licenses, product maintenance fees and professional
services for the May 5, 2001 through June 30, 2001 period. There were no
revenues from continuing operations for fiscal year 2000.
Costs of revenues:
Costs of revenues, all of which were entirely attributable to InterWorld's
operations through June 30, 2001, consist of royalty payments to third
parties for embedded software contained in InterWorld's products, costs of
product media, documentation and manufacturing These costs totaled $877,000.
As with revenues, there were no costs of revenues for the fiscal year ending
June 30, 2000.
Operating expense:
Total operating expenses for the twelve months ended June 30, 2001 were
$47,800,000 compared with $6,770,000 for fiscal year 2000, an increase of
$41,030,000. Significant components of the increase were due to impairments
and losses from investments in Technology-Related Businesses of $24,281,000,
bad debt expenses of $8,582,000 and operating and administrative costs of
InterWorld of $7,086,000. The following table sets forth the components of
the losses and impairments in fiscal year 2001 (dollars in thousands):
Equity
income Equity
(loss) (loss)
for for
year year Carrying
ended ended Impairments value
Original June June and losses as of
Acquisition 30, 30, Goodwill on sale in of June
Cost 2000 2001 Amortization 2001 Other 30, 2001
___________ ______ ______ _____________ ___________ _______ ________
Jasmine
Networks,
Inc. $ 5,000 $ - $ - $ - $ (5,000) $ - $ -
TechTrader,
Inc. 8,563 (99) (3,247) (407) (4,810) - -
Digital
Boardwalk,
LLC 5,017 130 (627) (19) (4,501) - -
Carta, Inc. 4,000 - - - (4,000) - -
CyberBills,
Inc. 3,186 - - - (2,986) (200)(a) -
eStara, Inc. 2,665 - - - (1,375) 1,290
Strategic
Data
Corporation 1,100 - - - (1,100) - -
Alistia,
Inc. 2,480 (93) (1,907) (11) (469) - -
Meister
Brothers
Investments,
LLC 40 - - - (40) - -
InterWorld
Corporation
(b) 20,340 - (20,340) - - - -
Tellme
Networks,
Inc. 2,000 - - - - - 2,000
_______ ____ ________ _____ ________ _____ ______
Total $54,391 $(62) $(26,121) $(437) $(24,281) $(200) $3,290
======= ==== ======== ===== ======== ===== ======
(a) Uncollected proceeds from sale of investment, included in other current
assets as of June 30, 2001.
(b) InterWorld became a consolidated subsidiary of the Company in May 2001.
Bad debt expenses of $8,582,000 for fiscal 2001 are the result of foreclosure
actions taken by the Company on a loan to Michael J. Donahue, the Chief
Executive Officer and Vice Chairman of InterWorld. The Company acquired the
loan from Salomon Smith Barney in October 2000 for face value of $12,445,500
in cash. Interest on the loan accrued at 8% per annum and 4,270,406 shares
(prior to a 1:50 reverse stock split effective on May 4, 2001) of InterWorld
common stock owned by Mr. Donahue, and a negative pledge of other assets,
secured the loan. Interest payments were due quarterly beginning in December
2000. On the date the loan was purchased by the Company, the value of the
InterWorld stock collateralizing the loan was approximately $13,600,000. The
Company also entered into a separate agreement with Mr. Donahue which allowed
J Net to participate in profits from the sale of the stock with Mr. Donahue.
InterWorld's stock price, along with other stock prices in the technology
space, continued to decline throughout 2000 and 2001. Such declines in the
InterWorld stock price necessitated the Company to take more definitive
actions on the negative pledge on the other assets.
In April 2001, amendments to the loan were executed whereby the Company
modified the existing negative pledge and secured additional collateral in
the form of real property owned by Mr. Donahue. As of June 29, 2001, the
loan, together with accrued interest totaled $13,232,000. Due to the
financial condition of Mr. Donahue, the Company executed a series of
agreements on June 29, 2001 which foreclosed on the real property assets
securing the loan. In addition, the 85,408 post-split shares of InterWorld
common stock securing the loan were transferred to the Company. The net
realizable value of the real property, net of selling costs and other
obligations, is estimated to be $5,450,000.
The agreements entered into on June 29, 2001 also provided for the Company to
loan Mr. Donahue up to $800,000.
The operating and general and administrative costs totaled $14,937,000 in
2001 compared with $6,770,000 in 2000, an increase of $8,167,000. The
primary causes of the increase are due to $7,086,000 of costs attributable to
the acquisition of InterWorld and higher costs from J Net activities, which
are the result of higher personnel costs, facilities expenses, and legal fees
incurred in connection with a terminated rights offering for InterWorld.
Administrative costs included severance payments of $1,140,000 in 2001 to
former executive officers of the Company. The 2000 general and
administrative costs also included $2,835,000 of severance paid to a former
Chief Executive Officer of the Company.
Other income (expense):
For the twelve months ended June 30, 2001, other expenses were $(26,486,000)
compared with other income of $15,483,000 for the twelve months ended June
30, 2000. The following table compares the significant components for each
year and the related change (dollars in thousands):
June 30,
________________
2001 2000 Change from prior year
________ ________ _______________________
Other income (expense)
Interest and other income $ 5,524 $ 2,068 $ 3,456
Equity losses in technology-
related businesses (26,121) (62) (26,059)
Interest expense (5,889) - (5,889)
Net fee from terminated merger - 11,116 (11,116)
Gain on sale of short-term
investments - 2,361 (2,361)
________ _______ ________
$(26,486) $15,483 $(41,969)
======== ======= ========
The increased interest income is due primarily to higher returns generated
from the Company's investment in marketable securities in Mariner, L.P.
Interest income in 2001 also includes $782,000 of interest accrued under the
loan to Michael J. Donahue. The interest attributable to the loan to Mr.
Donahue was included as bad debt expense discussed previously.
Equity losses for fiscal year 2001 include InterWorld losses for the November
2000 to May 2001 period of $20,340,000, Tech Trader, Inc. losses of
$3,247,000 and Alistia and Digital Boardwalk, LLC losses totaling $1,907,000
and $627,000, respectively. The 2001 equity losses do not include an
additional $5,814,000 loss from InterWorld for May and June 2001, which is
included in the consolidated operating results of the Company. Equity losses
for fiscal year 2000 were not material since the majority of the investments
occurred late in the fourth quarter of fiscal year 2000. All investments
accounted for using the equity method of accounting were either sold or
abandoned as of June 30, 2001, except for InterWorld which has been accounted
for as a consolidated subsidiary of the Company beginning in May 2001.
Interest expenses in 2001 are attributable to the convertible subordinated
notes (the "Notes"). Interest on the Notes, which were issued between June
28, 2000 and October 2, 2000, includes non-cash discount amortization of
$3,875,000. The cash interest cost for fiscal year 2001 was $2,069,000. As
of June 30, 2001, there was no unamortized discount remaining on the Notes.
The net fee from terminated merger and gain from sale of short-term
investments in fiscal year 2000 were due to a notice dated August 16, 1999
from Players, an unaffiliated entity, containing terms of a merger offer from
another entity. As a result of such notice, the Company received a break-up
fee of $13,500,000. Previously capitalized costs of $2,400,000 associated
with the Company's merger activities were expensed resulting in a net gain of
$11,116,000. The Players securities held by the Company were also sold for a
gain of $2,361,000.
Federal income tax:
The effective tax rate on loss from continuing operations for fiscal year
2001 was 15.8% compared to a 28% tax rate for fiscal year 2000. The
differences between the statutory rate and effective rate for fiscal year
2001 is due primarily to a valuation allowance for deferred tax assets and
non-deductible debt discount amortization. The difference in rates for
fiscal year 2000 is due to tax benefits from tax exempt interest income.
The Company expects to receive tax refunds of approximately $6,500,000 as a
result of payments in 2001, and operating loss carrybacks from 2000 and 1999.
In August 2001, $2,700,000 was received via a quick refund filing for
deposits made during 2001. The remaining refunds will be received after
filing of the 2001 Federal Tax Return.
Net income (loss) from continuing operations:
The net loss from continuing operations in fiscal year 2001 was $61,449,000
while the fiscal year 2000 had net income of $6,295,000. The primary causes
of the $67,744,000 variance are due to the equity losses, interest expenses,
consolidated InterWorld losses, and operating cost increases in fiscal year
2001 combined with the reduced other income items created by the non-
recurring merger termination fees and gains from the sale of investments in
fiscal year 2000.
Income (loss) from discontinued operations, net of tax:
On November 22, 2000, the Route Operations were sold for a pre-tax gain of
$19,715,000. Losses before income tax benefit from the discontinued
operations for the July 1, 2000 to November 22, 2000 period were $349,000.
Income taxes associated with the sale and related operations were $6,612,000.
For fiscal year 2000, the Route Operations had income after taxes of
$346,000.
Net income (loss):
The net loss for fiscal year 2001 was $48,695,000 compared with net income
for fiscal year 2000 of $6,641,000. The variance is attributable to the
items discussed above in continuing operations, with such losses being
partially offset by the gain realized from the sale of route operations in
fiscal 2001.
2000 compared to 1999
_____________________
Revenues:
The Company had no revenues from continuing operations in 2000 and 1999.
Costs and expenses:
Costs and expenses of J Net's continuing operations, which consisted
principally of parent company general and administrative activities,
increased $3,367,000, from $3,403,000 in 1999 to $6,770,000 in 2000. The
increase of $3,367,000 was due primarily to $2,835,000 of severance costs
paid to the former Chief Executive Officer.
Other income (expense):
Other income, net increased $14,143,000, from $1,340,000 in 1999 to
$15,483,000 in 2000. The increase was due principally to the net fee from
the terminated merger of $11,116,000 and the gain on the sale of the Players
common stock of $2,361,000 previously discussed.
Federal income tax:
The effective tax rate for 2000 and 1999 was 28%. These rates were lower
than the Federal Statutory rate of 35% principally because of the tax
benefits realized from tax-exempt interest income.
Net income (loss) from continuing operations:
Net income from continuing operations increased $7,273,000, from a net loss
of $(978,000) in 1999 to net income of $6,295,000 in 2000. Diluted earnings
(loss) per share from continuing operations for 2000 was $.71 per share
versus ($.11) per share for 1999. Such increases were due principally to the
increase in other income relating to the net fee from the terminated merger
and the gain on the sale of the Players common stock.
Income from discontinued operations, net of tax:
Income from discontinued operations, net of tax, decreased $5,235,000, from
$5,581,000 in 1999 to $346,000 in 2000. Such decrease was due principally to
three factors: (1) a significant decline in income generated at 15 former
Albertson's locations in southern Nevada, which have been operated by Raley's
since late September and early October 1999. Such decline was due primarily
to (i) significantly lower revenues generated at these locations and (ii) the
loss of such locations on February 1, 2000, (2) an operating loss of
approximately $3,400,000 in 2000 incurred at the locations of Rite Aid, a
large customer, resulting from the failure of 12 new locations to achieve
expected revenues, as well as from a decrease in revenues at existing
locations of such customer, and (3) legal and settlement costs incurred in
connection with Jackpot's litigation against Albertson's and Raley's.
Net income:
Net income increased $2,038,000, from $4,603,000 in 1999 to $6,641,000 in
2000. Diluted earnings per share for 2000 was $.75 per share versus $.53 per
share in 1999. Such increases were due primarily to the combination of
significant items described above.
Capital Resources and Liquidity
_______________________________
Liquidity:
Cash and cash equivalents were $24,272,000 at June 30, 2001 and marketable
securities were $27,381,000 providing the Company with $51,653,000 of
liquidity as of June 30, 2001. Since March 2000, when the Company changed
its business focus and strategy, the sources of additional inflows of cash
have been solely from the discontinued operations, the proceeds from the sale
of the Route Operations and through the issuance of convertible subordinated
notes.
Presently, InterWorld requires approximately $3,000,000 per month to fund its
operations. Such funding since June 2001 has been advanced by J Net under a
$20,000,000 secured credit facility. J Net is under no obligation to
continue to provide such funding. If such funding were to cease, InterWorld
would not be able to continue its business operations.
In light of the ongoing cash requirements of InterWorld, J Net is currently
exploring a number of strategic alternatives including, but not limited to,
seeking a strategic partner to provide additional funding to InterWorld,
pursuing a possible sale, or terminating the business operations of
InterWorld. At June 30, 2001, InterWorld had a deficiency in net assets
of $5,814,000.
On January 4, 2001, the Board of Directors authorized the repurchase of up to
1,000,000 shares of Common Stock. Repurchases under this program through
June 30, 2001, were 370,294 shares for an aggregate cost of $1,872,000. In
addition, 80,000 shares with an aggregate cost of $405,000 were repurchased
in the current year under a separate, now terminated, program.
On October 12, 2000, J Net and InterWorld entered into a definitive
Securities Purchase Agreement (the "Purchase Agreement"). Pursuant to the
terms of the Purchase Agreement, J Net purchased $20,000,000 of Preferred
Stock of InterWorld on November 10, 2000. On April 19, 2001, J Net and
InterWorld announced that pursuant to certain provisions contained in the
Purchase Agreement, J Net would redeem the Series A Preferred Stock for
common stock of InterWorld. In May 2001, the Company received shares
pursuant to the redemption equal to 94.6% of the total issued and outstanding
common stock of InterWorld.
On October 12, 2000, J Net, on behalf of Ventures I, entered into a Loan
Assumption and Forbearance Agreement with Michael J. Donahue, Vice Chairman
and Chief Executive Officer of InterWorld. Such agreement was modified on
April 6, 2001. The loan, as amended, had a face value of $12,445,000 and
accrued interest at 8% per annum. The loan was secured by 4,270,406 shares
of InterWorld common stock (having a value of approximately $13,600,000
on the date of purchase by Ventures I) and a negative pledge of other assets,
of Mr. Donahue. On June 29, 2001, the Company and Mr. Donahue entered into
an agreement whereby the Company was assigned all rights, title and interest
in the assets securing the loan. Under the agreement, the Company accepted
the collateral securing the loan and agreed to loan Mr. Donahue up to
$800,000 in full satisfaction of the obligation. The net realizable value of
the real property assets received in the settlement is estimated to be
approximately $5,450,000. Management is in the process of selling these
assets as of June 30, 2001.
The Company raised $27,750,000 through the issuance of Notes between June
2000 and October 2000. As a result of this placement, management believes
its resources are sufficient to fund its commitments, principally InterWorld,
and other investees and operations.
Cash Flows:
J Net's principal source of cash flows for 2001 consisted of $12,250,000
received from the issuance of Notes and the cash and marketable securities,
which were $51,653,000 at June 30, 2001.
Net cash used in investing activities was $32,450,000. Investments in
Technology-Related Businesses, purchased notes receivable and investments in
marketable securities were $68,701,000. Inflows from investing activities
included $36,905,000 of net proceeds received from the sale of the Route
Operations.
A significant part of the investments in Technology-Related Businesses was in
InterWorld, and the Company's primary efforts and financial resources have
been directed at development of this investment. The Company and its
InterWorld subsidiary have entered into a credit facility to provide
InterWorld up to $20,000,000 in funding. Advances under the facility accrue
interest at 15% per annum, compounded quarterly. Advances are secured by the
assets of InterWorld and are senior to other obligations. J Net also has the
right to refuse funding at its discretion. Advances under the facility were
$3,000,000 at June 30, 2001 and $12,350,000 as of September 30, 2001.
J Net is evaluating its current ownership interest in InterWorld and is
exploring a number of strategic alternatives including, but not limited to,
seeking a strategic partner to provide additional funding for InterWorld,
pursuing the possible sale of InterWorld, or terminating the business
operations of InterWorld.
Recently Issued Accounting Standards:
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"), as amended by
Statements of Financial Accounting Standards No. 137 and No. 138 in June 1999
and June 2000, respectively. These statements, which were required to be
adopted for fiscal years beginning after June 15, 2000, established
additional accounting and reporting standards for derivative instruments and
hedging activities. The statements require that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position. This statement also defines and allows companies to apply hedge
accounting to its designated derivatives under certain instances. It also
requires that all derivatives be marked to market on an ongoing basis. This
applies whether the derivatives are stand-alone instruments, such as warrants
or interest rate swaps, or embedded derivatives, such as call options
contained in convertible debt investments. Along with the derivatives, in the
case of qualifying hedges, the underlying hedged items are also to be marked
to market. These market value adjustments are to be included either in the
income statement or other comprehensive income, depending on the nature of
the hedged transaction. The fair value of financial instruments is generally
determined by reference to market values resulting from trading on a national
securities exchange or in an over the counter market. In cases where
derivatives relate to financial instruments of nonpublic companies, or where
quoted market prices are otherwise not available, such as for derivative
financial instruments, fair value is based on estimates using present value
or other valuation techniques. As a result of the Company's abandonment of
its investment in Tech Trader, Inc., the previously ascribed value of the
warrant classified as derivative was expensed and reported as an impairment
in the amount of $1,500,000.
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141")
and Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"). SFAS 141 addresses the initial recognition and
measurement of goodwill and other intangible assets acquired in a business
combination. SFAS 142 addresses the initial measurement and recognition of
intangible assets acquired outside of a business combination, whether
acquired with a group of other assets or acquired individually, and the
accounting and reporting for goodwill and other intangibles subsequent to
their acquisition. These standards require all future business combinations
to be accounted for using the purchase method of accounting. Goodwill will no
longer be amortized but instead will be subject to impairment test on an
annual basis at a minimum. The Company is required to adopt SFAS 141 and SFAS
142 on a go forward basis beginning January 1, 2002; however, certain
provisions of these new standards may also apply to any acquisition made
after June 30, 2001. As of June 30, 2001, the Company had no goodwill or
other intangible assets due to impairments or losses incurred on investments
where goodwill had been recorded. The adoption of SFAS 141 and SFAS 142 will
be made as required for future transactions. No significant impact of such
adoption is expected by the Company.
Pending or threatened litigation:
As of June 30, 2001, J Net did not have any litigation pending or
threatening, or other claims filed against the Company or its subsidiaries,
including InterWorld.
On March 8, 2001, as amended on May 29, 2001, InterWorld received notice that
the Securities and Exchange Commission (the "Commission") commenced a formal
order directing a private investigation by the Commission with respect to
whether InterWorld engaged in violations of Federal Securities Laws as it
relates to InterWorld's financial statements, as well as its accounting
practices and policies. Also under review by the Commission is certain
trading in InterWorld stock. All the above events are related to periods
prior to the Company's common stock ownership in InterWorld.
The investigation is confidential and the Commission has advised that the
investigation should not be construed as an indication by the Commission or
its staff that any violation of law has occurred nor should the investigation
be construed as an adverse reflection on any person, entity or security.
The investigation is ongoing and InterWorld is fully cooperating with the
Commission.
Factors Which May Affect Future Results
_______________________________________
With its change in business strategy, the Company will be operating in a
significantly different environment that involves a number of risks and
uncertainties. The Company has experienced two significant changes in
business direction. First, the transition to a technology holding company
beginning in 2000. As a direct result of the holding company activities, the
completion of the acquisition of InterWorld in May 2001 resulted in the
Company having a large concentration of assets in the enterprise commerce
software business. If any of the events described below actually occur, the
Company's business, financial condition and operating results could be
materially adversely affected.
The Company, like many other businesses, is in the process of evaluating the
impact that the tragic events of September 11, 2001 will have on its
business. At this point in time it is too early to predict what the economic
and business consequences will be. At InterWorld, management has indicated
initial hesitancy on the part of some clients and prospective clients to move
forward with new e-commerce initiatives. This could result in a delay or
reduction in revenue.
Risks Particular to J Net Enterprises, Inc.:
____________________________________________
Because of our change in business strategy, we have no operating history with
respect to Technology-Related Businesses, which makes it more difficult to
predict whether or not we will ultimately have successful business
operations.
Our newly-adopted business strategy has a no operating history. Our
prospects must be considered in light of the risks and difficulties
frequently encountered by companies expanding into a new and rapidly evolving
area such as Internet services, including, but not limited to, an untested
business model and the management of growth. You should evaluate our
business operations in view of the risks, uncertainties, delays and
difficulties associated with starting a new business, many of which may be
beyond our control. We cannot assure you that we will be successful in
meeting the challenges and addressing the risks that we face in a new and
rapidly expanding market such as Internet services and other Internet related
products and services and making venture investments and developing
Technology-Related Businesses.
With our change in business strategy, we will be operating in a significantly
different environment that involves a different level of risk and reward.
Except for our investment in InterWorld, all of our investments in
Technology-Related Businesses are in non public companies. Substantially all
of these companies are development stage companies and are presently
incurring operating losses. There can be no assurance that any of our
investments will generate operating income in the future.
Competition for venture investments is intense which may affect our financial
condition, operating results and business.
We face competition from numerous other capital providers seeking to acquire
interests in Technology-Related Businesses, including:
. other Internet companies;
. venture capital firms;
. large corporations; and
. other capital providers who also offer support services to companies.
Traditionally, venture capital and private equity firms have dominated
investments in emerging technology companies, and many of these types of
competitors may have greater experience and financial resources than we have.
In addition to competition from venture capital and private equity firms,
several public companies such as CMGI, Internet Capital Group and Safeguard
Scientifics, as well as private companies such as Idealab!, devote
significant resources to providing capital and other resources to Internet
companies. Additionally, corporate strategic investors, including Fortune 500
and other significant companies, are developing Internet strategies and
capabilities. Many of these competitors have greater financial resources and
brand name recognition than we do, and the barriers to entry for companies
wishing to provide capital and other resources to entrepreneurs and their
emerging technology companies are minimal. We expect that competition from
both private and public companies with business models similar to our own
will intensify. Among other adverse consequences, this competition may
diminish the pool of potential investment opportunities and raise the cost of
making future investments. As a result, our financial condition, operating
results and business could be adversely affected and the trading value our
common stock could be reduced significantly.
We may need additional capital which may not be available to us. The raising
of any additional capital may dilute your ownership in our company.
We may need to raise additional funds through public or private debt or
equity financings in order to:
. take advantage of opportunities, including more rapid expansion or
acquisitions of, or investments in, businesses or technologies;
. develop new services; or
. respond to competitive pressures.
Any additional capital raised through the sale of equity would dilute your
ownership percentage in our company. Furthermore, we cannot assure you that
any additional financing we may need will be available on terms favorable to
us, or at all. In such case, our financial condition, operating results and
business may be materially and adversely affected.
Our recent investments have created financial and other challenges, which, if
not addressed or resolved, could have an adverse effect on our financial
condition, operating results and business.
We have made several investments since the adoption of our change in business
strategy. To the extent our management must devote significant time and
attention to the integration of technology, operations, businesses and
personnel as a result of our services and incubator acquisitions, our
business may suffer. In addition, our senior management faces the difficult
and potentially time consuming challenge of implementing uniform standards,
controls, procedures and policies throughout our current and future
acquisitions. We could also experience financial or other setbacks if any of
the acquired businesses experienced problems in the past of which our
management is not presently aware. For example, if an acquired business had
dissatisfied customers or had any performance problems, our reputation could
suffer as a result of our association with that business. In addition, we
may experience disputes with the sellers of acquired businesses and may fail
to retain key acquired personnel. To the extent any customer or other third
party asserts any material legal claims against any of the acquired
companies, our financial condition, operating results and business could be
materially and adversely affected.
Our acquisition strategy may result in increased expenses, difficulties in
integrating acquired companies and diversion of management's attention.
A key component of our growth strategy is to acquire Technology-Related
Businesses that complement or enhance our business, on acceptable terms. We
expect the competition for acquisition candidates to continue to increase.
We cannot assure you that we will be able to identify and successfully
compete for attractive acquisition candidates or complete acquisitions at
reasonable purchase prices, in a timely manner or at all. In addition, some
of our competitors have greater financial resources than we do and may be
able to more effectively complete acquisitions, which could result in
increased prices for acquisition targets and a diminished pool of companies
available for acquisition.
Some of the other risks that we may encounter in implementing our acquisition
growth strategy include:
. expenses and difficulties in identifying potential targets and the
costs associated with uncompleted acquisitions;
. expenses, delays and difficulties of integrating acquired companies
into our existing organization;
. diversion of management's attention.
If realized, any of these risks could have a material adverse effect on our
financial condition, operating results and business.
We may not have opportunities to acquire interests in additional companies,
which could affect our growth strategy.
We may be unable to identify companies that complement our strategy, and even
if we identify a company that complements our strategy, we may be unable to
acquire an interest in the company for many reasons, including:
. a failure to agree on the terms of the acquisition, such as the
amount or price of our acquired interest;
. incompatibility between us and management of the company;
. competition from other acquirors of Technology-Related Businesses;
. a lack of capital to acquire an interest in the company; and
. the unwillingness of the company to incubator with us.
If we cannot acquire interests in attractive companies, our strategy to build
a collaborative network of Technology-Related Businesses may not succeed.
We may be unable to obtain maximum value for our incubator company interests
should we decide to divest some of our interests.
We have significant positions in our Technology-Related Businesses. While we
generally do not anticipate selling our interests in our Technology-Related
Businesses, if we were to divest all or part of an interest in a incubator
company, we may not receive maximum value for this position. For Technology-
Related Businesses with publicly traded stock, we may be unable to sell our
interest at then-quoted market prices. Furthermore, for those Technology-
Related Businesses that do not have publicly traded stock, the realizable
value of our interests may ultimately prove to be lower than the carrying
value currently reflected in our consolidated financial statements.
Our venture investments are risky.
A key element of our strategy is to make equity investments in start-up
companies. Decreases in the value of these companies will have an adverse
effect on our business. Because we own less than a majority of the shares of
many of these companies, we are not involved in the day-to-day operations of
a number of these companies and may not be able to control the policies or
directions that these companies take.
All of the companies in which we have made venture investments are in the
early stages of development, and we cannot assure you that these companies
will be able to successfully achieve their business goals in a timely manner
or at all. Our strategy is to realize capital return on our investments in
these companies by liquidating these investments through sales of equity or
otherwise. We cannot assure you that we will realize any return on any of
these investments. Moreover, the trading price of our common stock may be
adversely affected if we do not realize any return on these investments, or
if that return is lower than the market expects. The failure of one or more
of these companies in which we have invested, and the timing of any
dispositions of our investments in these companies, could have a material
adverse effect on our financial condition, operating results and business and
on the trading value of our common stock.
Our business depends upon the performance of our Technology-Related
Businesses, which is uncertain.
Many of our Technology-Related Businesses are in the early stages of their
development, and we cannot assure you that these companies will be able to
successfully achieve their business goals in a timely manner or at all. Our
strategy is to realize capital return on our investment in these companies by
liquidating the investments through sales of equity or otherwise. We cannot
assure you that we will realize any return on any of these investments.
Moreover, the trading price of our common stock may be adversely affected if
we do not realize any return on these investments, or if that return is lower
than the market expects. The failure of one or more of our Technology-Related
Businesses could have a material adverse effect on our financial condition,
operating results and business and on the trading value of our common stock.
The price of our common stock has been volatile.
The market price of our common stock has been, and is likely to continue to
be, volatile, experiencing wide fluctuations. In recent years, the stock
market has experienced significant price and volume fluctuations which have
particularly affected the market prices of equity securities of many
companies providing Internet-related products and services. Some of these
fluctuations appear to be unrelated or disproportionate to the operating
performance of such companies. Future market movements may materially and
adversely affect the market price of our common stock.
We do not intend to pay dividends in the foreseeable future.
We currently expect to retain our future earnings, if any, for use in the
operation and expansion of our business. We do not anticipate paying any cash
dividends in the foreseeable future.
The issuance of preferred stock or additional common stock may adversely
affect our stockholders.
Our board has the authority to issue up to 1,000,000 shares of our preferred
stock and to determine the terms, including voting rights, of those shares
without any further vote or action by our stockholders. The voting and other
rights of the holders of our common stock will be subject to, and may be
adversely affected by, the rights of the holders of any preferred stock that
may be issued in the future. Similarly, the Board may issue additional
shares of common stock without any further vote or action by stockholders,
which would have the effect of diluting common stockholders. An issuance
could occur in the context of another public or private offering of shares of
common stock or preferred stock or in a situation where the common stock or
preferred stock is used to acquire the assets or stock of another company.
The issuance of common stock or preferred stock, while providing desirable
flexibility in connection with possible acquisitions, investments and other
corporate purposes, could have the effect of delaying, deferring or
preventing a change in control.
Governmental regulation of the Internet could impact our operations.
Currently, we are not subject to, nor are our Technology-Related Businesses
subject to, any direct governmental regulation other than the securities laws
and regulations applicable to all publicly owned companies and laws and
regulations applicable to businesses generally. Few laws or regulations are
directly applicable to access to, or commerce on, the Internet. Due to the
increasing popularity and use of the Internet, it is likely that a number of
laws and regulations may be adopted at the local, state, national or
international levels with respect to the Internet, including the possible
levying of tax on e-commerce transactions. Any new legislation could inhibit
the growth in use of the Internet and decrease the acceptance of the Internet
as a communications and commercial medium, which could in turn decrease the
demand for our services or otherwise have a material adverse effect on our
future operating performance and business.
Risks Particular to our Technology-Related Businesses, including InterWorld:
____________________________________________________________________________
Without additional funding, whether from J Net or other parties, InterWorld
may not be able to stay in business.
InterWorld expects to incur losses for the foreseeable future. If
InterWorld's operating results do not improve, continued investment may not
be warranted. While J Net has continued to provide funding, the Company
continues to actively monitor the operations and seek partners. No firm
commitment to continue such funding under the existing promissory note
exists.
Competition for Internet services is intense with low barriers to entry which
may affect the financial condition, operating results and business of our
Technology-Related Businesses.
The market for Internet services is relatively new, intensely competitive,
rapidly evolving and subject to rapid technological change. While relatively
new, the market is already highly competitive and characterized by an
increasing number of entrants who have introduced or developed products and
services similar to those offered by us. We expect competition not only to
persist but to increase. Increased competition may result in price
reductions, reduced margins and loss of market share.
Competitors of our Technology-Related Businesses can be divided into the
following groups:
. Internet services providers;
. large systems integrators;
. specialty systems integrators;
. strategy consulting firms; and
. interactive marketing firms.
Many of their current and potential competitors have longer operating
histories, larger installed customer bases, greater name recognition, longer
relationships with clients and significantly greater financial, technical,
marketing and public relations resources than our Technology-Related
Businesses do. At any time their current and potential competitors could
increase their resource commitments to our markets. Our Technology-Related
Businesses expect to face additional competition from new market entrants in
the future as the barriers to entry into our business are also relatively
low. Their current or future competitors may also be better positioned to
address technological and market developments or may react more favorably to
technological changes. We compete on the basis of a number of factors,
including the attractiveness of the Internet services offered, the breadth
and quality of these services, creative design and systems engineering
expertise, pricing, technological innovation and understanding clients'
strategies and needs. Many of these factors are beyond the control of our
Technology-Related Businesses. Existing or future competitors may develop or
offer strategic Internet services that provide significant technological,
creative, performance, price or other advantages over the services offered by
us. As a result, the financial condition, operating results and business
could be adversely affected and the value of our investments could be reduced
significantly.
InterWorld increasingly relies on systems integration companies to sell and
implement their products, and if they cannot establish or maintain
relationships with these companies, or if they are not successful in their
efforts, the growth of their business would suffer.
InterWorld increasingly depends on systems integration companies for sales
and implementation of their products. Their growth will depend, in part, on
maintaining and expanding relationships with systems integration companies.
They may not be able to develop or maintain relationships with systems
integration companies. Moreover, if the systems integration companies with
which they have a strategic relationship are not successful in selling and
implementing systems that include their products, or if they adopt or promote
more vigorously, a competing product or technology, the growth of
InterWorld's business would be materially adversely affected. Additionally,
their use and training of systems integration companies has increased and is
likely to continue to increase their cost of services revenues for the
foreseeable future.
If InterWorld does not respond to technological change, their enterprise
commerce software products may become obsolete, and long-term viability would
suffer.
The Internet commerce software industry is characterized by rapid
technological change, which can render products obsolete. InterWorld's
success depends, in part, on their ability to respond to technological change
in a timely and cost-effective manner. If they are not able to respond
successfully to technological change, their Commerce Exchange family of
products may become obsolete. This would threaten long-term viability.
Our Technology-Related Businesses may fail if their competitors provide
superior Internet-related offerings or continue to have greater resources
than our Technology-Related Businesses.
Competition for Internet products and services is intense. As the market for
B2B e-commerce grows, we expect that competition will intensify. Barriers to
entry are minimal, and competitors can offer products and services at a
relatively low cost. Our Technology-Related Businesses compete for a share of
a customer's:
. purchasing budget for services, materials and supplies with other
online providers and traditional distribution channels;
. dollars spent on consulting services with many established
information systems and management consulting firms; and
. advertising budget with online services and traditional off-line
media, such as print and trade associations.
In addition, some of our Technology-Related Businesses compete to attract and
retain a critical mass of buyers and sellers. Several companies offer
competitive solutions that compete with one or more of our Technology-Related
Businesses. We expect that additional companies will offer competing
solutions on a stand-alone or combined basis in the future. Furthermore, our
Technology-Related Businesses' competitors may develop Internet products or
services that are superior to, or have greater market acceptance than, the
solutions offered by our Technology-Related Businesses. If our Technology-
Related Businesses are unable to compete successfully against their
competitors, our Technology-Related Businesses may fail.
Many of our Technology-Related Businesses' competitors have greater brand
recognition and greater financial, marketing and other resources than our
Technology-Related Businesses. This may place our Technology-Related
Businesses at a disadvantage in responding to their competitors' pricing
strategies, technological advances, advertising campaigns, strategic
incubatorships and other initiatives.
If InterWorld products are not widely accepted in the Internet commerce
market, business, sales and profitability will suffer.
The demand for InterWorld's products in this market is uncertain, in part
because the marketplace itself is rapidly evolving and in part because of the
financial pressures confronting the e-commerce market. Business, financial
condition, results of operations and prospects for growth will be materially
adversely affected if InterWorld's products are not widely accepted in the
Internet commerce software market. The following factors highlight the
uncertainty of market acceptance of InterWorld's products:
. the market is characterized by rapid technological changes and
evolving industry standards;
. there is intense competition in the Internet commerce software
industry;
. products are relatively expensive and require a large capital
commitment by the client;
. The infrastructure necessary to support increased commerce on the
Internet may not develop;
. consumers and businesses may not adopt electronic commerce; and
. InterWorld's clients may not be successful in using products to
conduct their commercial operations online.
Future growth and success depends on broader acceptance of the Internet as a
medium for commerce. The Internet may not become a viable commercial
marketplace because of consumer concerns regarding reliability, cost, ease of
use and quality of service. In addition, consumer concerns regarding the
security and privacy of Internet transactions could inhibit the acceptance of
the Internet as a commercial medium.
All of InterWorld's existing revenues are derived from a single family of
products, and business, sales and profitability and prospects for growth will
suffer if InterWorld's product offerings are not commercially successful.
The Commerce Exchange family of products and related services have accounted
for substantially all of InterWorld's revenues to date, and it is expected
these products and related services will continue to account for most of
InterWorld's revenues for the foreseeable future. If current limited product
offerings are not commercially successful, InterWorld's business, financial
condition, results of operations and prospects for growth will be materially
adversely affected. InterWorld may not successfully develop or market any
enhanced new products. Moreover, competition or technological change could
aversely affect the pricing of or demand for InterWorld's products, which
would have a material adverse effect on InterWorld's business, financial
condition and results of operations. In addition, InterWorld's products are
currently being used by only a limited number of clients to conduct
electronic commerce. From time to time, some of InterWorld's clients
experience difficulty implementing InterWorld's software or the software does
not meet InterWorld's clients' expectations, and they may choose not to
continue to use the software. As a result of these problems, InterWorld's
reputation may be damaged, which could have a material adverse effect on
InterWorld's business.
Some of our Technology-Related Businesses may be unable to protect their
proprietary rights and may infringe on the proprietary rights of others.
Our Technology-Related Businesses are inventing new ways of doing business.
In support of this innovation, they will develop proprietary techniques,
trademarks, processes and software. Although reasonable efforts will be taken
to protect the rights to this intellectual property, the complexity of
international trade secret, copyright, trademark and patent law, coupled with
the limited resources of these young companies and the demands of quick
delivery of products and services to market, create risk that their
efforts will prove inadequate. Further, the nature of Internet business
demands that considerable detail about their innovative processes and
techniques be exposed to competitors, because it must be presented on the Web
sites in order to attract clients. Some of our Technology-Related Businesses
also license content from third parties and it is possible that they could
become subject to infringement actions based upon the content licensed from
those third parties. Our Technology-Related Businesses generally obtain
representations as to the origin and ownership of such licensed content;
however, this may not adequately protect them. Any claims against our
Technology-Related Businesses' proprietary rights, with or without merit,
could subject our Technology-Related Businesses to costly litigation and the
diversion of their technical and management personnel. If our Technology-
Related Businesses incur costly litigation and their personnel are not
effectively deployed, the expenses and losses incurred by our Technology-
Related Businesses will increase and their profits, if any, will decrease.
Proprietary rights may not be fully protected, and InterWorld may be subject
to intellectual property infringement claims by others.
InterWorld and Enterprise Broker are InterWorld's registered trademarks in
the United States and they have applied for other trademarks and service
marks in the United States as well as internationally. InterWorld has
recently been granted a U.S. patent relating to their product architecture
and technology. Their efforts to establish and protect their proprietary
rights, including federal copyright and trademark registrations, may be
inadequate to prevent imitation of their products by others. The laws of
foreign countries in which their products are sold may offer less protection
to proprietary rights than the laws of the United States. Moreover, others
may claim violation of their proprietary rights by InterWorld. BroadVision
and Open Market, two of InterWorld's competitors, have been issued U.S.
patents on some aspects of their electronic commerce software products.
InterWorld received a letter from counsel to Open Market concerning the
potential applicability of the Open Market patents to their products. The
letter stated that Open Market was prepared to meet with InterWorld to
resolve issues concerning the applicability of its patents and to discuss
terms of an appropriate license agreement. InterWorld responded to the Open
Market inquiry, informing Open Market that based on their review of the Open
Market patents and the analysis and advice of InterWorld's patent counsel,
they believe that their products do not infringe the patents awarded to Open
Market. InterWorld has not received any further inquiries or correspondence
from Open Market since their September 1998 response and has had no inquiries
or discussions with BroadVision with regard to patent matters. InterWorld
also received a letter from TechSearch LLC stating its belief that their Web
site induces the infringement by others of one or more claims of a U.S.
patent issued to TechSearch. InterWorld's patent counsel has advised them
that this patent is invalid in view of prior art. Although InterWorld does
not believe that they are infringing their patent rights, any of these
companies may claim that they are doing so. If a claim of patent
infringement by these or other companies was made against InterWorld, they
would likely incur significant expenses in defending against the claim, which
could adversely affect their financial condition and results of operations.
In addition, if a claim of infringement is made against InterWorld and they
are not successful in defending against the claim, they could be liable for
substantial damages and prevented from using any infringing technology.
InterWorld may also be required to make royalty payments, which could be
substantial, to the holder of the patent rights. These events could have a
material adverse effect on the business, financial condition, results of
operations and prospects for growth.
Rapid technological changes may prevent our Technology-Related Businesses
from remaining current with their technical resources and maintaining
competitive product and service offerings.
The markets in which our Technology-Related Businesses operate are
characterized by rapid technological change, frequent new product and service
introductions and evolving industry standards. Significant technological
changes could render their existing Web site technology or other products and
services obsolete. The e-commerce market's growth and intense competition
exacerbate these conditions. If our Technology-Related Businesses are unable
to successfully respond to these developments or do not respond in a cost-
effective way, our business, financial condition and operating results will
be adversely affected. To be successful, our Technology-Related Businesses
must adapt to their rapidly changing markets by continually improving the
responsiveness, services and features of their products and services and by
developing new features to meet the needs of their customers. Our success
will depend, in part, on our Technology-Related Businesses' ability to
license leading technologies useful in their businesses, enhance their
existing products and services and develop new offerings and technology that
address the needs of their customers. Our Technology-Related Businesses will
also need to respond to technological advances and emerging industry
standards in a cost- effective and timely manner.
The loss of executive management or other key personnel may harm our
Technology-Related Businesses' ability to obtain and retain client
engagements and compete effectively.
Our Technology-Related Businesses' operations depend largely on the skills of
their key management and technical personnel as well as key management and
technical personnel of companies they have acquired. Many of their executive
officers have recently joined them, and many of their key personnel have
worked together for a relatively short period. If one or more members of our
Technology-Related Businesses' executive management or other key personnel
were unable or unwilling to continue in their present positions, these
persons would be very difficult to replace. In addition, if any of these
persons joined a competitor or formed a competing company, some of our
clients might choose to use the services of that competitor or new company
instead of our investees' company. Furthermore, our Technology-Related
Businesses' clients or other companies seeking management talent may hire
away some members of the executive management or other key personnel. This
could result in the loss of their client relationships or new business
opportunities and impede their ability to implement the business strategy.
Our Technology-Related Businesses are dependent on their ability to recruit,
train and retain highly qualified Internet professionals who are in short
supply.
We believe continued hiring of new personnel will be required to support the
business of our Technology-Related Businesses. Their business operations
depend in large part on their ability to identify, hire, train and retain
highly qualified Internet professionals who can provide the technical,
strategic consulting, creative, marketing and audience development skills
required by clients. There may be a shortage of these highly qualified
personnel and our Technology-Related Businesses compete with other companies
for this limited pool of persons. We cannot assure you that our Technology-
Related Businesses will be able to attract, train, or retain qualified
personnel. Failure to do so could have a material adverse effect on the
financial condition, operating results and business of our Technology-Related
Businesses.
Fluctuations in the financial performance of our Technology-Related
Businesses could adversely affect the trading price of our common stock.
The operating results of our Technology-Related Businesses, including
InterWorld, may fluctuate as a result of a variety of factors, many of which
are outside of their control, including:
. the number, size and scope of their client engagements;
. reductions, cancellations or completions of major projects;
. the loss of significant clients or a change of scope in a significant
client engagement;
. the opening or closing of an office;
. their relative mix of business;
. changes in pricing by them or their competitors;
. the efficiency with which they utilize their billable professionals,
plan and manage their existing and new client engagements and manage
their future growth;
. variability in market demand for Internet services;
. their ability to retain and attract qualified professionals;
. their ability to complete fixed-fee engagements within the assigned
budget;
. costs related to expansion of their business;
. increased competition;
. marketing budget decisions by their clients; and
. general economic conditions.
As a result of these possible fluctuations, period-to-period comparisons of
their operating results may not be reliable indicators of future performance.
A high percentage of their expenses, including those related to employee
compensation and facilities, are fixed. If the number and size of our
projects decreases in any period, then their revenues and operating results
may also decrease. In some quarters, their operating results may fall below
the expectations of securities analysts and investors due to many factors,
including those described above. In such event, the trading price of our
common stock would likely decline and the decline could be significant.
The business of our Technology-Related Businesses depends on the growing
demand for Internet solutions.
If the usage and volume of commercial transactions on the Internet does not
continue to increase, demand for the services of our Technology-Related
Businesses may decrease and our financial condition, operating results and
business could be materially and adversely affected. Our future success
depends on the continued expansion of, and reliance of consumers and
businesses on the Internet and related technical solutions. The Internet may
not be able to support an increased number of users or an increase in the
volume of data transmitted over it. As a result, the performance or
reliability of the Internet may be adversely affected as use increases. The
improvement of the Internet in response to increased demands will require
timely improvement of the high speed modems and other communications
equipment that form the Internet infrastructure. The Internet has already
experienced outages and delays as a result of damage to portions of its
infrastructure. The effectiveness of the Internet may also decline due to
delays in the development or adoption of new technical standards and
protocols designed to support increased levels of activity. We cannot assure
you that the infrastructure, products or services necessary to maintain and
expand the Internet will be developed. Other factors that may adversely
affect Internet usage or e-commerce adoption include:
. actual or perceived lack of security of information;
. congestion of Internet traffic or other usage delays;
. inconsistent quality of service;
. increases in Internet access costs;
. increases in government regulation of the Internet;
. uncertainty regarding intellectual property ownership;
. reluctance to adopt new business methods;
. costs associated with the obsolescence of existing infrastructure;
and
. economic viability of e-commerce models.
The imposition of sales and other taxes of products sold over the Internet
could have a negative effect on electronic commerce generally and, as a
result, on demand.
Recent federal legislation limits the imposition of state and local taxes on
Internet-related sales. In 1998, Congress passed the Internet Tax Freedom
Act, which places a three-year moratorium on state and local taxes on:
. Internet access, unless such tax was already imposed prior to October
1, 1998; and
. discriminatory taxes on electronic commerce.
There is a possibility that Congress may not renew this legislation in 2001.
If Congress chooses not to renew this legislation, state and local
governments would be free to impose taxes on electronically purchased goods.
The imposition of new sales or other taxes could materially adversely affect
the growth of electronic commerce generally and, as a result, the demand for
InterWorld's products.
To InterWorld's knowledge, in accordance with current industry practice, most
companies that sell products over the Internet do not currently collect sales
or other taxes in respect to shipments of their products into states or
foreign countries in which they are not physically present. However, one or
more states or foreign countries may seek to impose sales or other tax
collection obligations on out-of-jurisdiction companies that engage in
electronic commerce. A successful assertion by one or more states or foreign
countries that companies engaged in electronic commerce should collect sales
or other taxes on the sale of their products over the Internet, even though
not physically present in the state or foreign country, could have an adverse
effect on electronic commerce generally, and, as a result, on demand for
products.
Products may contain defects, which could result in reduced sales, increased
service and warranty costs and liability to their clients.
Software and related products may contain errors that become apparent when
the products are introduced or when the volume of usage increases. Errors in
products, implementation errors or other performance difficulties could
result in decreased sales of products, increased service and warranty costs
and liability to clients, which could have a material adverse effect on our
businesses financial condition, results of operations and prospects for
growth.
A significant portion of InterWorld's revenues are derived from a limited
number of clients that will change from year to year, sales will decline if
they cannot attract significant new clients.
InterWorld expects that their largest clients will change from year to year
because revenues from any client are typically greatest when the client first
licenses their products. Moreover, because their products require a
meaningful capital commitment, a significant portion of their revenues in
any period is derived from a limited number of clients. Therefore, if
InterWorld is not able to generate revenues from significant new clients,
their business, financial condition, results of operations and prospects for
growth would be materially adversely affected.
The financial security of InterWorld's clients could have an adverse affect
on InterWorld's collection capabilities.
Many of InterWorld's clients have been impacted by the recent slowing of
economic conditions and uncollectible accounts have been increasing. In
addition, revenues from maintenance agreements and other professional
services are also placed at risk.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
_________________________________________________________
The Company is generally exposed to market risk from adverse changes in
interest rates. The Company's interest income is affected by changes in the
general level of U.S. interest rates. Changes in U.S. interest rates could
affect interest earned on the Company's cash equivalents, debt instruments
and money market funds. A majority of the interest earning instruments earn
a fixed rate of interest over short periods (7-35 days). Based upon the
invested cash balances at June 30, 2001, a 10% drop in interest rates would
reduce pretax interest income by approximately $100,000 per year. Therefore,
the Company does not anticipate that exposure to interest rate market risk
will have a material impact on the Company due to the nature of the Company's
investments.
The Company invested $25,444,000 of principal in Mariner, a private
investment fund. The Company classifies their investment in Mariner as a
trading security. Mariner employs a multi-strategy approach emphasizing a
market neutral and event-driven style to capitalize on investment
opportunities across the financial markets. Mariner's performance has
historically generated above-average returns relative to hedge fund industry
benchmarks. However, such returns cannot be assured in the future. Based on
the market value of the investment in Mariner as of June 30, 2001 and the
average return of such investment for the previous six months, a 10%
reduction in those returns would reduce pretax income by approximately
$250,000.
In June 2000 through October 2000, the Company raised $27,750,000 through the
issuance of the Notes. The principal amount of the Notes are payable on
March 31, 2007 and bear interest at 8% per annum, payable on a quarterly
basis. For financial statement purposes, the Notes were deemed to have been
beneficially converted as the conversion feature was in-the-money at the
commitment date. The Company has calculated the beneficial conversion feature
as the difference between the fair value of the common stock at the
commitment date and the initial conversion price, multiplied by the number of
shares into which the debt is convertible. Approximately $3,875,000 of the
proceeds from issuance of the Notes, equal to the intrinsic value, was
recorded as debt discount and allocated to additional paid-in capital.
Management believes that the carrying value of the Notes approximates fair
value.
Beginning July 1, 2000, when the Company adopted SFAS 133, the Company held
one derivative instrument in the form of a warrant in a non public company.
In the twelve months ended June 30, 2001, this investment was abandoned.
Therefore, no impact from changes in derivative instruments existed at June
30, 2001.
Item 8. Financial Statements and Supplementary Data
___________________________________________
The Financial Statements and Supplementary Data required by this Item 8 are
set forth as indicated in Item 14(a)(1)(2).
Item 9. Changes in and Disagreements with Accountants on Accounting and
_______________________________________________________________
Financial Disclosure
____________________
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
__________________________________________________
Item 11. Executive Compensation
______________________
Item 12. Security Ownership of Certain Beneficial Owners and Management
______________________________________________________________
Item 13. Certain Relationships and Related Transactions
______________________________________________
The information required by items 10, 11, 12 and 13 are incorporated by
reference from the 2001Proxy Statement to be filed with the Securities and
Exchange Commission within 120 days of the end of the fiscal year covered by
this report.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
________________________________________________________________
(a) (1) and (2) Consolidated Financial Statements and Schedules
For a list of the consolidated financial statements and
consolidated financial statement schedules filed as a part
of this annual report on Form 10-K, see "Index to Financial
Statements, Supplementary Data and Financial Statement
Schedules" on page F-1.
(a) (3) The exhibits filed and incorporated by reference are listed
in the index of Exhibits required by Item 601 of Regulation
S-K at Item (c) below.
(b) Reports on Form 8-K
J Net filed two reports on Form 8-K, dated June 8, 2001
and July 17, 2001, respectively:
The Form filed on June 8, 2001 reported on Item 4 - Changes
in Certifying Accountant - termination of Deloitte & Touche
LLP as certifying accountant.
The Form filed on July 17, 2001 reported on Item 4 - Changes
in Certifying Accountant - appointment of Ernst & Young LLP
as certifying accountant.
(c) Exhibits
3.1 Articles of Incorporation of the Registrant, as amended
(J)
3.2 By-laws of the Registrant, as amended (A)
4.1 Stockholder Rights Agreement dated as of July 11, 1994
between the Registrant and Continental Stock Transfer &
Trust Company, as Rights Agent (D)
10.1 Indemnification Agreement (Sample) (B)
10.2 1992 Incentive and Non-qualified Stock Option Plan
(C)(R)
10.3 Employment Agreement with Don R. Kornstein (E)(R)
10.4 License agreement with American Drug Stores, Inc. (F)
10.5 License agreement with American Drug Stores, Inc. (F)
10.6 License agreement with Lucky Stores, Inc. (F)
10.7 License agreement with Kmart Corporation (G)
10.8 License agreement with Albertson's, Inc. (G)
10.9 License agreement with Rite Aid Corporation (H)
10.10 License agreement with Rite Aid Corporation (H)
10.11 Settlement Agreement with Albertson's, Inc. (J)
10.12 First Amendment to Settlement Agreement with
Albertson's, Inc. (J)
10.13 First Amendment to License Agreement between Cardivan
Company and Rite Aid Corporation (K)
10.14 First Amendment to License Agreement between Corral
Coin, Inc. and Rite Aid Corporation (K)
10.15 Termination and Consulting Agreement between the
Registrant and Don R. Kornstein (K)(R)
10.16 Call Agreement, dated as of March 1, 2000, among Keith
A. Meister, Todd A. Meister and the Registrant (K)
10.17 Put Agreement, dated as of March 1, 2000, among Keith
A. Meister, Todd A. Meister and the Registrant (K)
10.18 Employment Agreement between the Registrant and George
Congdon (R)
10.19 Employment Agreement between the Registrant and Robert
Torkar (R)
10.20 Stock Purchase Agreement between E-T-T, Inc. and the
Registrant (L)
10.21 J Net Ventures I, LLC Operating Agreement (L)
10.22 Subscription Agreement and Investment Representation
(Sample) (L)
10.23 Convertible Subordinated Note (Sample) (L)
10.24 Registration Rights Agreement (Sample) (L)
10.25 Employment Agreement between Registrant and Mark W.
Hobbs (M)(R)
10.26 Employment Agreement between Registrant and Steven L.
Korby (M)(R)
10.27 Securities Purchase Agreement dated October 12, 2000
by and among Jackpot Enterprises, Inc. and Interworld
Corporation (N)
10.28 Loan Assumption and Forbearance Agreement dated
October 12, 2000 by and between Michael Donahue and
Jackpot Enterprises, Inc. (N)
10.29 Call/Profit Participation Agreement dated October 12,
2000 by and between Michael Donahue and Jackpot
Enterprises, Inc. (N)
10.30 Modification letter dated October 30, 2000 to Stock
Purchase Agreement between E-T-T, Inc. and the
Registrant (M)
10.31 Stock Purchase Agreement by and between Interworld
Corporation and J Net Enterprises, Inc. dated January
25, 2001 (O)
10.32 Stand-By Purchase Agreement dated January 25, 2001 (O)
10.33 Amended and Restated Loan Assumption and Forbearance
Agreement dated April 4, 2001 by and between Michael
Donahue and J Net Ventures I, LLC (P)
10.34 Termination of Amended and Restated Loan Assumption
and Forbearance Agreement dated June 29, 2001 by and
among Michael Donahue, Excalibur Polo Farm, LLC, Ginny
Bond Donahue and J Net Ventures I, LLC (Q)
10.35 Promissory Note by and between InterWorld Corporation
and J Net Enterprises, Inc. dated June 30, 2001 (Q)
10.36 Security Agreement by and between Interworld
Corporation and J Net Enterprises, Inc. dated June 30,
2001 (Q)
21.1 List of Registrant's subsidiaries (Q)
23.1 Consent of Ernst & Young LLP (Q)
23.2 Consent of Deloitte & Touche LLP (Q)
(A) Incorporated by reference to Registrant's Annual
Report on Form 10-K for the year ended June 30,
1989.
(B) Incorporated by reference to Registrant's Annual
Report on Form 10-K for the year ended June 30,
1991.
(C) Incorporated by reference to Registrant's 1992
Proxy Statement.
(D) Incorporated by reference to Registrant's Form 8-A
dated July 12, 1994.
(E) Incorporated by reference to Registrant's Form
10-Q for the quarter ended September 30, 1994.
(F) Incorporated by reference to Registrant's Annual
Report on Form 10-K for the year ended June 30,
1997.
(G) Incorporated by reference to Registrant's Annual
Report on Form 10-K for the year ended June 30,
1998.
(H) Incorporated by reference to Registrant's Form
10-Q for the quarter ended March 31, 1999.
(I) Incorporated by reference to Registrant's Annual
Report on Form 10-K for the year ended June 30,
1999.
(J) Incorporated by reference to Registrant's Form
10-Q for the quarter ended December 31, 1999.
(K) Incorporated by reference to Registrant's Form
10-Q for the quarter ended March 31, 2000.
(L) Incorporated by reference to Registrant's Annual
Report on Form 10-K for the year ended June 30,
2000.
(M) Incorporated by reference to Registrant's Form
10-Q for the quarter ended September 30, 2000.
(N) Incorporated by reference to Registrant's Form 8-K
filed October 25, 2000.
(O) Incorporated by reference to Registrant's Form 8-K
filed February 2, 2001.
(P) Incorporated by reference to Registrant's Form 10-
Q for the quarter ended March 31, 2001.
(Q) Included herein.
(R) Management contract or compensatory plan or
arrangement which is separately identified in
accordance with Item 14(a)(3) of Form 10-K.
(d) Schedules
For a list of the financial statement schedules
filed as a part of this annual report on Form 10-
K, see "Index to Financial Statements,
Supplementary Data and Financial Statement
Schedules" on page F-1.
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.
Dated: October 16, 2001 J NET ENTERPRISES, INC.
(Registrant)
By: /s/ Allan R. Tessler
__________________________
Allan R. Tessler
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
_________ _____ _____
/s/ Allan R. Tessler Chief Executive Officer and
___________________________ Chairman of the Board October 16, 2001
Allan R. Tessler
/s/ Steven L. Korby Executive Vice President and October 16, 2001
___________________________ Chief Financial Officer
Steven L. Korby (Principal Financial Officer)
/s/ Eugene M. Freedman Director October 16, 2001
___________________________
Eugene M. Freedman
/s/ Alan J. Hirschfield Director October 16, 2001
___________________________
Alan J. Hirschfield
/s/ David R. Markin Director October 16, 2001
___________________________
David R. Markin
/s/ Robert L. McDonald, Sr. Director October 16, 2001
___________________________
Robert L. McDonald, Sr.
J NET ENTERPRISES, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS, SUPPLEMENTARY DATA
AND FINANCIAL STATEMENT SCHEDULES
[ITEMS 8 AND 14(a)]
(1) FINANCIAL STATEMENTS:
Reports of Independent Auditors
Consolidated Balance Sheets
June 30, 2001 and 2000
Consolidated Statements of Operations
Years Ended June 30, 2001, 2000 and 1999
Consolidated Statements of Stockholders' Equity
Years Ended June 30, 2001, 2000 and 1999
Consolidated Statements of Cash Flows
Years Ended June 30, 2001, 2000 and 1999
Notes to Consolidated Financial Statements
(2) SUPPLEMENTARY DATA:
Quarterly Financial Information (Unaudited)
Years Ended June 30, 2001 and 2000
(3) FINANCIAL STATEMENT SCHEDULES
Valuation and Qualifying Accounts
Certain financial statement schedules are omitted because the required
information is provided in the Consolidated Financial Statements or the
notes thereto.
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and therefore
have been omitted.
REPORT OF INDEPENDENT AUDITORS
We have audited the accompanying consolidated balance sheet of J Net
Enterprises, Inc. and subsidiaries as of June 30, 2001, and the related
consolidated statements of operations, stockholders' equity, and cash flows
for the year then ended. Our audit also included the financial
statement schedule listed in the index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
schedule based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the 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
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of J Net
Enterprises, Inc. and subsidiaries at June 30, 2001, and the consolidated
results of their operations and their cash flows for the year then ended in
conformity with accounting principles generally accepted in the United
States. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set
forth therein.
Ernst & Young LLP
New York, New York
October 4, 2001
INDEPENDENT AUDITORS' REPORT
The Stockholders of
Jackpot Enterprises, Inc.
We have audited the accompanying consolidated balance sheet of Jackpot
Enterprises, Inc. and subsidiaries (the "Company") as of June 30, 2000, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the two years in the period ended June 30, 2000. 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 auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
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.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at June 30, 2000,
and the results of their operations and their cash flows for each of the two
years in the period ended June 30, 2000, in conformity with accounting
principles generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
Las Vegas, Nevada
September 25, 2000
J NET ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - JUNE 30, 2001 AND 2000
(Dollars in thousands)
ASSETS 2001 2000
______ _______ ________
Current assets:
Cash and cash equivalents $24,272 $ 60,090
Short-term investments 27,381 -
Accounts receivable 1,532 -
Current portion of notes receivable -
related parties 1,288 -
Federal income taxes receivable 6,538 -
Assets held for sale 5,450 -
Other current assets 1,556 697
Net assets of discontinued operations - 16,645
_______ _______
Total current assets 68,017 77,432
_______ _______
Notes receivable - related parties - 1,000
Investments in technology-related
businesses 3,290 25,793
Property and equipment, net of
accumulated depreciation 4,010 -
Deferred income taxes 885 -
Other non-current assets 1,211 510
_______ ________
Total assets $77,413 $104,735
======= ========
See Notes to Consolidated Financial Statements.
J NET ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - JUNE 30, 2001 AND 2000
(Dollars in thousands)
(Concluded)
LIABILITIES AND STOCKHOLDERS' EQUITY 2001 2000
____________________________________ ________ ________
Current liabilities:
Accounts payable and accrued expenses $ 7,699 $ 799
Deferred revenue and customer deposits 3,122 -
________ ________
Total current liabilities 10,821 799
________ ________
Convertible subordinated notes, net of
unamortized discount of $- and $2,500 27,750 12,750
Deferred income taxes - 762
Deferred rent 356 -
Minority interest in subsidiary - 2,514
Commitments and contingencies (Note 12)
Stockholders' equity:
Preferred stock - authorized
1,000,000 shares of $1 par value;
none issued
Common stock - authorized
60,000,000 shares of $.01 par
value; 10,233,470 shares issued 102 102
Additional paid-in capital 75,250 73,875
Retained earnings (deficit) (20,795) 27,710
Less 1,708,918 and 1,258,624 shares of
common stock in treasury, at cost (16,054) (13,777)
Accumulated other comprehensive income (loss) (17) -
_______ ________
Total stockholders' equity 38,486 87,910
_______ ________
Total liabilities and
stockholders' equity $77,413 $104,735
======= ========
See Notes to Consolidated Financial Statements.
J NET ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 2001, 2000 AND 1999
(Dollars in thousands, except per share data)
2001 2000 1999
_________ ________ ______
Revenues, net:
Product licenses $ 7 $ - $ -
Maintenance 809 - -
Services 1,340 - -
_________ ________ ______
Total revenues, net 2,156 - -
_________ ________ ______
Cost of revenues:
Product licenses 430 - -
Maintenance 119 - -
Services 328 - -
_________ ________ ______
Total cost of revenues 877 - -
_________ ________ ______
Gross profit 1,279 - -
Operating expenses:
Research and development 2,264 - -
Sales 2,142 - -
Marketing alliances 1,085 - -
General and administrative
(including stock based compensation
of $190 for the year ended
June 30, 2001) 8,911 6,732 2,503
Depreciation and amortization 535 38 -
Loss on disposal and impairments of
technology-related businesses 24,281 - -
Bad debt expense 8,582 - -
Costs of terminated merger - - 900
_________ ________ ______
Total operating expenses 47,800 6,770 3,403
_________ ________ ______
Operating income (loss) from continuing
operations (46,521) 6,770 3,403
_________ ________ ______
Other income (expense):
Net fee from terminated merger - 11,116 -
Gain on sale of short-term investments - 2,361 -
Interest and other income 5,524 2,068 1,340
Interest expense (5,889) - -
Equity losses in technology-related
businesses (26,121) (62) -
_______ ______ ______
Total other income (expense) (26,486) 15,483 1,340
Income (loss) from continuing operations
before income tax (73,007) 8,713 (2,063)
_______ ______ ______
Provision (benefit) for Federal income tax (11,558) 2,418 (1,085)
_______ ______ ______
Income (loss) from continuing
operations net of tax (61,449) 6,295 (978)
_______ ______ ______
Income (loss) from discontinued
operations net of taxes of
$(99), $177 and $2,875 for the
years ended June 30, 2001,
2000 and 1999,respectively (250) 346 5,581
Gain on sale of discontinued
operations, net of taxes of
$6,711 13,004 - -
________ _______ _______
Discontinued operations, net of tax 12,574 346 5,581
________ _______ _______
Net income (loss) (48,695) 6,641 4,603
________ _______ _______
Other comprehensive loss :
Cumulative translation and
adjustment (17) - -
Comprehensive income (loss) $(48,712) $ 6,641 $ 4,603
======== ======= =======
Basic earnings (loss) per share:
Income (loss) from continuing
operations $ (6.95) $ .73 $ (.11)
Income from discontinued operations 1.44 .04 .64
________ _______ _______
Basic income (loss) per share $ (5.51) $ .77 $ .53
======== ======= =======
Dilutive earnings (loss) per share:
Income (loss) from continuing operations $ (6.95) $ .71 $ (.11)
Income from discontinued operations 1.44 .04 .64
________ _______ _______
Dilutive income (loss) per share $ (5.51) $ .75 $ .53
======== ======= =======
See Notes to Consolidated Financial Statements.
J NET ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 2001, 2000 AND 1999
(Dollars and shares in thousands, except per share data)
Accum-
ulated
Other
Compre
Common Stock Additional Treasury Stock hensive
________________ Paid-in Retained ________________ Income
Shares Amount Capital Earnings Shares Amount (loss) Totals
_______ ______ _________ ________ ______ _________ ______ _______
Balance
June 30,
1998 9,854 99 66,376 16,466 (1,080) (12,070) 70,871
Comprehensive
income:
Net loss
from
continuing
operations (978) (978)
Income
from
discontinued
operations,
net of
tax 5,581 5,581
Other comprehensive
income:
Unrealized gain on
available-for-sale
securities, net of tax
of $408 $757 757
_______
Total comprehensive
income 5,360
Tax benefit from
stock options 22 22
Issuance of
shares on
exercise
of stock
options 6 67 67
Repurchases of
common
stock (164) (1,706) (1,706)
______ ____ _______ _______ _______ ________ ____ _______
Balance
June 30,
1999 9,860 99 66,465 21,069 (1,244) (13,776) 757 74,614
Comprehensive income:
Income from
continuing
operations 6,295 6,295
Income from discontinued
operations, net of tax 346 346
Other comprehensive
income:
Unrealized gain on
available-for-sale
securities, net of tax
and reclassification
adjustment
(See Note 9 and
disclosure below) (757) (757)
_______
Total comprehensive
income 5,884
Tax benefit from stock
options 83 83
Issuance of shares on
exercise of
stock
options 28 295 295
Repurchases of common stock (15) (1) (1)
Issuance of shares for
investments in
internet-related
businesses 325 3 4,233 4,236
Issuance of shares for
cancellation of stock
options 20 299 299
Amount allocated to
additional paid-in capital
in connection with the
issuance of the 8%
convertible subordinated
notes (See Note 2) 2,500 2,500
______ ____ _______ _______ _______ ________ ____ _______
Balance
June 30,
2000 10,233 $102 $73,875 $27,710 (1,259) $(13,777) $ - $87,910
______ ____ _______ _______ _______ ________ ____ _______
Comprehensive income (loss):
Income (loss) from
continuing operations (61,449) (61,449)
Cumulative translation adjustment (17) (17)
Income from discontinued
operations, net of tax 12,754 12,754
_______
Total comprehensive loss (48,712)
Amortization of employee stock
options 190 190
Repurchases of
common stock (450) (2,277) (2,277)
Amount allocated to additional
paid-in capital in connection
with the issuance of the 8%
convertible subordinated
notes (See Note 2) 1,375 1,375
______ ____ _______ _______ _______ ________ ____ _______
Balance
June 30,
2001 10,233 $102 $75,250 $(20,795) (1,709) $(16,054) $(17) $38,486
====== ==== ======= ======== ====== ======== ==== =======
Disclosure of reclassification amount:
Unrealized gain for the year ended
June 30, 2000 $ 777
Less reclassification adjustment for
gain included in net income (1,534)
________
Unrealized gain on available-for-sale
securities, net of tax $ ( 757)
========
See Notes to Consolidated Financial Statements.
J NET ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2001, 2000 AND 1999
(Dollars in thousands)
2001 2000 1999
________ ________ _______
Operating activities:
Net income (loss) $(48,695) $ 6,641 $ 4,603
Adjustments to reconcile
net income (loss)to net
cash provided by (used in)
operating activities:
Equity in loss of technology-related
businesses 26,121 62 -
(Income) loss from discontinued
operations, net of ($99),
$177 and $2,875 of tax for
years ended June 30, 2001,
2000 and 1999, respectively 250 (346) (5,581)
Gain on sale of route operations,
net of $6,711 tax (13,004) - -
Net fee from terminated merger - (11,116) -
Loss on disposal and impairments of
technology-related businesses 24,281 - -
Bad debt provisions (recovery),
net of forgiven debt 8,582 - -
Amortization of original issue
debt discount 3,875 - -
Amortization of stock-based
compensation 190 - -
Depreciation and amortization 814 38 -
Deferred income taxes (1,263) (71) 103
Gain on sale of short-term
investments - (2,361) -
Increase (decrease) from
changes in:
Increase in federal income
taxes receivable (13,150) - -
Increase in marketable
securities (1,937) - -
Prepaid expenses, accounts
receivable and other
current assets 1,325 (15) 316
Notes receivable, related parties (288) - -
Other non-current assets (278) (474) 900
Accounts payable and other current
liabilities (981) 171 (260)
Deferred revenue and customer
deposits (610) - -
Other, net (8) - (61)
________ ________ ________
Net cash provided by (used in)
continuing operations (14,776) (7,471) 20
Net cash provided by
discontinued operations 1,435 8,389 10,987
________ ________ ________
Net cash provided by
(used in) operating
activities (13,341) 918 11,007
Investing activities:
Investments in technology-related
businesses (30,767) (19,099) -
Investment in notes receivable (12,490) - -
Investment in marketable securities (25,444) - -
Break-up fee from terminated merger - 13,500 -
Proceeds from sale of short-term investments - 8,488 -
Cash of InterWorld at acquisition 4,378 - -
Proceeds from sale of discontinued
operations 36,905 - -
Purchase of property and equipment (2,507) (11) -
Purchase of marketable securities - - (6,127)
Increase in lease acquisition costs
and noncurrent assets - (1,669) (1,622)
________ ________ ________
Net cash provided by
(used in) investing activities -
continuing operations (29,925) 1,209 (7,749)
Net cash used in discontinued
operations (2,525) (1,001) (4,257)
________ ________ ________
Net cash provided by (used in)
investing activities (32,450) 208 (12,006)
Financing activities:
Proceeds from convertible
subordinated notes 12,250 14,250 -
Proceeds from issuance of
common stock - 594 67
Repurchases of common stock (2,277) (1) (1,706)
Other - (16) -
________ ________ ________
Net cash provided by
(used in) financing activities 9,973 14,827 (1,639)
________ ________ ________
Net increase (decrease) in cash
and cash equivalents (35,818) 15,953 (2,638)
Cash and cash equivalents at
beginning of period 60,090 44,137 46,775
________ ________ ________
Cash and cash equivalents at
end of period $ 24,272 $ 60,090 $ 44,137
======== ======== ========
Supplemental disclosures of cash flow data:
Cash paid during the year for:
Federal income tax $ 2,300 $ 2,650 $ 2,400
Interest paid $ 1,976 - -
Non-cash investing and financing activities:
Tax benefit from exercise of stock options $ - $ 83 $ 22
Issuance of common stock for investments in
technology-related businesses $ - $ 4,236 $ -
Debt discount on convertible
subordinated notes $ 1,375 $ 2,500 $ -
Minority interest in subsidiary $ (2,514) $ 2,514 $ -
Note receivable - related parties $ 250 $ 1,000 $ -
Property received in foreclosure on loans $ 5,450 $ - $ -
See Notes to Consolidated Financial Statements.
J NET ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Significant Accounting Policies And Business
Business:
J Net Enterprises, Inc. ("J Net" or the "Company") is a technology holding
company with concentrated investments in enterprise software and technology
infrastructure companies (the "Technology-Related Businesses"). The
Company's assets consist primarily of cash and investments.
On May 22, 2001, J Net completed the acquisition of InterWorld. This
acquisition was the result of several actions beginning with a $20,000,000
purchase of Preferred Stock from InterWorld in November 2000. In April 2001,
when the redemption of the Preferred Stock became due, J Net agreed to accept
common stock of InterWorld equal to 94.6% of the total issued and outstanding
shares in satisfaction of the Preferred Stock redemption obligation. On June
29, 2001, in a transaction related to foreclosure of a loan, J Net received
additional shares of InterWorld's common stock which increased total
ownership to 95.3% of InterWorld's issued and outstanding common stock, which
was their only equity security outstanding. As a result of these
transactions, InterWorld represents the most significant investment of the
Company.
In addition to its $20,000,000 investment in Preferred Stock, the Company and
InterWorld have entered into a $20,000,000 secured credit facility in the
form of a promissory note. Under terms of that agreement, J Net, at its sole
discretion, advances InterWorld funds to meet working capital requirements.
Such advances totaled $3,000,000 at June 30, 2001 and $12,400,000 as of
September 30, 2001. At June 30, 2001, InterWorld had a deficiency in net
assets of $5,814,000.
InterWorld requires advances under the promissory note to continue business
operations. InterWorld historically operated at a loss and received a going
concern opinion from its independent auditors during its previous fiscal year
ended December 31, 2000. J Net has continued to fund InterWorld's operations
and is currently evaluating its ownership interest in InterWorld. J Net is
exploring a number of strategic alternatives including, but not limited to,
seeking a strategic partner to provide additional funding for InterWorld,
pursuing a possible sale, or terminating the business operations of
InterWorld altogether.
J Net also holds minority investments in other technology companies,
including but not limited to, systems development and software companies.
The investments are held directly by the Company, or by J Net Ventures I, LLC
(the "Fund" or "Ventures I"), a fund owned and managed by the Company. The
Fund was created in March 2000 and the Company anticipated contributions of
$55,000,000 to the Fund at formation. As of June 30, 2001, investments
totaling approximately $34,000,000 had been made on behalf of the Fund. The
Company also owned 100% of the Fund as of June 30, 2001. As a result of the
changes in market conditions with respect to Technology-Related Businesses
and the significance of the InterWorld transaction described above, J Net has
suspended its minority investment strategy and concentrated its efforts and
financial resources on InterWorld.
Prior to March 2000, when the Company began emphasizing technology-related
activities, J Net was named Jackpot Enterprises, Inc. ("Jackpot") and was
engaged, through various subsidiaries, in the gaming industry for over 30
years. In July 2000, the Company executed a definitive agreement to sell the
Route Operations. The sale, which was subject to regulatory approvals and
other customary closing conditions, was completed on November 22, 2000.
Because of the sale, the results of the Route Operations in this Annual
Report on Form 10-K for the fiscal year ended June 30, 2001
(this "Form 10-K") and prior periods are presented as discontinued
operations.
Principles of consolidation:
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries. All material intercompany accounts and
transactions are eliminated. Unless the context indicates otherwise,
references to "2001", "2000" and "1999" are for the fiscal years ended June
30, 2001, 2000 and 1999, respectively.
Reclassifications:
Certain reclassifications have been made to prior year financial statements
to conform to the current year presentation.
Use of estimates:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the amounts reported in the
accompanying consolidated financial statements and notes. Actual results
could differ from those estimates.
Cash equivalents:
Cash equivalents are liquid investments comprised primarily of debt
instruments and money market accounts with maturities of three months or less
when acquired and are considered cash equivalents for purposes of the
consolidated balance sheets and statements of cash flows. Cash equivalents
are stated at cost which approximates fair value due to their short maturity.
Cash and cash equivalents include cash equivalents of $24,190,000 and
$60,090,000 at June 30, 2001 and 2000.
Short-term investments:
In October and November 2000 and January 2001, the Company invested a total
of $25,000,000 in Mariner Partners, L.P. ("Mariner"), a private investment
fund. Mariner employs a multi-strategy approach, emphasizing market neutral
and event driven styles, to opportunistically seek, identify, and capitalize
on investment opportunities across the financial markets. This approach
mitigates the episodic returns generally experienced by single sector funds.
According to fund documents, Mariner has consistently generated above average
returns relative to hedge fund industry benchmarks while taking lower levels
of risk as indicated by comparative measures such as Sharpe Ratios, actual
volatility, cumulative loss, and % of months profitable. J Net can withdraw
all or a portion of its investment upon 45 days prior written notice. The
Company classifies those securities as short-term investments and records
changes in the value of the accounts in the item captioned interest income
and other income in the consolidated statement of operations. Interest and
other income representing the increase in the Company's investment in Mariner
for the fiscal year ended June 30, 2001 was $1,937,000.
Fair value of financial instruments:
The carrying value of certain of the Company's financial instruments,
including accounts receivable, accounts payable and accrued expenses
approximates fair value due to their short maturities. The unregistered
convertible subordinated notes are not traded in the open market and a market
price is not available. However, based on the Company's financial position,
management believes that the carrying value of such debt approximates fair
value.
Investments in Technology-Related Businesses:
The various interests that the Company acquires in Technology-Related
Businesses are accounted for under one of three methods: consolidation,
equity or cost. The applicable accounting method is generally determined
based on the Company's voting interest and its ability to influence or
control the Technology-Related Business. For investments accounted for under
the equity method, the excess of the cost of the investment over the
Company's equity in the underlying net assets of such investment is amortized
on a straight-line basis over 5 years. Such amortization is included in the
line captioned depreciation and amortization in the accompanying consolidated
statements of operations.
Investments in debt and equity securities:
The Company accounts for investments in debt and equity securities in
accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS
115"). This statement addresses the accounting and reporting for investments
in equity securities that have readily determinable fair values and for all
investments in debt securities, and requires such securities be classified as
either held to maturity, trading, or available-for-sale. Management
determines the appropriate classification of its investments in securities at
the time of purchase and reevaluates such classification at each balance
sheet date. SFAS 115 requires that available-for-sale securities be carried
at fair value with unrealized gains and losses, net of tax, reported as a
separate component of stockholders' equity. Unrealized gains and losses for
available-for-sale securities are recorded as comprehensive income (loss) and
are excluded from earnings. Realized gains from sales of available-for-sale
securities in 2000 were $2,361,000. There were no realized gains from sales
of investment securities in 2001 or 1999.
Stock-based compensation:
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB 25") for stock options while disclosing
pro forma net earnings (loss) and net earnings (loss) per share as if the
fair value method had been applied in accordance with Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123"). On July 1, 2000, the Company also adopted provisions contained
in the Financial Accounting Standard Board of the AICPA Interpretation 44
("FIN 44"), which provided clarification on the application of APB 25.
Accounting for equity method investments:
When the Company uses the equity method to account for its investments in
Technology-Related Businesses it uses the procedures outlined in the "Summary
of Proceedings of the FASB Emerging Issues Task Force" issue number 98-13
("EITF 98-13"), which covers accounting by equity method investors for
investee losses when the investor has loans to and investments in other
securities of the investee. EITF 98-13 generally defined other investments
in the investee to include preferred stock, debt securities and loans. The
conclusions of the task force also prescribes the order in which equity
method losses shall be recognized as the seniority of the other investments
(that is, priority in liquidation).
In 2001, the Company used the equity method to account for its investments in
InterWorld Corporation (up to May 2001, when the consolidation method was
adopted), Alistia Inc., Digital Boardwalk, LLC and Tech Trader, Inc.
All of the investments were in the form of preferred stock. When common
stockholders' equity is a deficit, equity losses are recognized in accordance
with the company's proportionate ownership percentages in preferred stock.
The applicable percentage of equity losses recognized in 2001 was 100% for
InterWorld Corporation, 39.8% for Alistia, Inc. and 42.1% for Tech Trader,
Inc. As a result of the business combination with InterWorld, the
consolidation method was adopted during May 2001.
Property and equipment:
Leasehold improvements and other property and equipment are recorded at cost
and are depreciated on a straight line basis over the shorter of estimated
useful live of the asset or lease terms, as applicable, as follows: 3 to 7
years for equipment and 3 to 10 years for leasehold improvements. Property
sold or retired is eliminated from the accounts in the year of disposition.
Assets held for sale:
Assets which will be sold rather than used are recorded at their estimated
fair value less estimated cost to sell.
Revenue recognition:
The Company follows AICPA Statement of Position 97-2, "Software Revenue
Recognition" ("SOP 97-2"), as amended by SOP 98-4, further amended by SOP 98-
9, and Staff Accounting Bulletin 101. These pronouncements provide guidance
on when revenue should be recognized and in what amounts as well as what
portion of licensing transactions should be deferred. The adoption of these
pronouncements did not have a material impact on results.
Revenue under multiple element arrangements is allocated to each element
using the "residual method", in accordance with Statement of Position No. 98-
9, "Modification of SOP 97-2 with Respect to Certain Transactions" ("SOP 98-
9"). Under the "residual method", the total fair value of the undelivered
elements is deferred and subsequently recognized in accordance with SOP 97-2.
Software license agreements generally include two elements: the software
license and post-contract customer support. InterWorld has established
sufficient vendor-specific objective evidence ("VSOE") for the value of
maintenance and post-contract customer support services based on the price
when these elements are sold separately and/or when stated renewal rates for
maintenance and post-contract customer support services are included in the
agreement, and the actual renewal rate achieved.
Product licenses:
Revenue from the licensing of software products is recognized upon shipment
to the customer, pursuant to an executed software licensing agreement when no
significant vendor obligations exist and collection is probable. If
acceptance by the customer is required, revenue is recognized upon customer
acceptance. Amounts received from customers in advance of product shipment
or customer acceptance are classified as deposits from customers. Other
licensing arrangements such as reseller agreements, typically provide for
license fees payable to the Company based on a percentage of the list price
for the software products. The license revenues are generally recognized
when shipment by the reseller occurs, or when collection is probable.
Contracts for product licenses where professional services require
significant production, modification or customization are recognized on a
percentage of completion basis.
Services revenue:
Revenue from professional services, such as custom development, installation
and integration support, is recognized as the services are rendered.
Revenue from maintenance and post-contract customer support services, such as
telephone support and product enhancements is recognized ratably over the
period of the agreement under which the services are provided, typically one
year.
Deferred revenue consists principally of billings in advance for services and
support not yet provided.
Recently issued accounting standards:
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"), as amended by
Statements of Financial Accounting Standards No. 137 and No. 138 in June 1999
and June 2000, respectively. These statements, which were required to be
adopted for fiscal years beginning after June 15, 2000, established
additional accounting and reporting standards for derivative instruments and
hedging activities. The statements require that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position. This statement also defines and allows companies to apply hedge
accounting to its designated derivatives under certain instances. It also
requires that all derivatives be marked to market on an ongoing basis. This
applies whether the derivatives are stand-alone instruments, such as warrants
or interest rate swaps, or embedded derivatives, such as call options
contained in convertible debt investments. Along with the derivatives, in the
case of qualifying hedges, the underlying hedged items are also to be marked
to market. These market value adjustments are to be included either in the
income statement or other comprehensive income, depending on the nature of
the hedged transaction. The fair value of financial instruments is
generally determined by reference to market values resulting from trading on
a national securities exchange or in an over the counter market. In cases
where derivatives relate to financial instruments of nonpublic companies, or
where quoted market prices are otherwise not available, such as for
derivative financial instruments, fair value is based on estimates using
present value or other valuation techniques.
As a result of the Company's abandonment of its investment in Tech Trader,
Inc., a previously ascribed value of the warrant classified as derivative was
expensed and reported as an impairment in the amount of $1,500,000 in fiscal
2001. The Company did not have any derivative instruments at June 30, 2001.
In March 2000, the Financial Accounting Standards Board of the AICPA issued
FASB Interpretation 44 Accounting for Certain Transactions involving Stock
Compensation ("FIN 44"), which provides clarification on the application of
Accounting Principals Board Opinion No. 25 Accounting for Stock Issued to
Employees. The Company adopted the provisions of FIN 44 beginning July 1,
2000. The application of FIN 44 did not have a significant impact on the
Company's results of operations.
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141")
and Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"). SFAS 141 addresses the initial recognition and
measurement of goodwill and other intangible assets acquired in a business
combination. SFAS 142 addresses the initial measurement and recognition of
intangible assets acquired outside of a business combination, whether
acquired with a group of other assets or acquired individually, and the
accounting and reporting for goodwill and other intangibles subsequent to
their acquisition. These standards require all future business combinations
to be accounted for using the purchase method of accounting. Goodwill will
no longer be amortized but instead will be subject to impairment test on an
annual basis at a minimum. The Company is required to adopt SFAS 141 and
SFAS 142 on a go forward basis beginning January 1, 2002; however, certain
provisions of these new standards may also apply to any acquisition made
after June 30, 2001. As of June 30, 2001, the Company wrote off its goodwill
due to impairments or losses incurred on investments where goodwill had been
recorded. The adoption of SFAS 141 and SFAS 142 will be made as required for
future transactions.
Note 2 - Convertible Subordinated Notes
The Company completed an offering of $27,750,000 of unregistered convertible
subordinated notes (the "Notes") to a group of private investors in October
2000. Investors include officers and directors of the Company or entities
controlled by such directors and certain employees (see Note 7). The
issuance of the Notes was approved by the Company's Board of Directors on
January 31, 2000 and approved by shareholders at the Company's annual meeting
on December 6, 2000. The conversion price of $10.75 was set by the Company
in connection with the limited circulation of a Confidential Memorandum prior
to the public announcement of the Company's intention to effect its business
transformation and was equal to an 18% premium over the then twenty day
trailing average market price.
The principal amount of the Notes is payable on March 31, 2007 and bears
interest at 8% per annum, payable on a quarterly basis and may not be prepaid
in whole or in part by the Company. The Notes are convertible automatically
if, at any time after April 1, 2004, the common stock of the Company has a
market price (as determined by the principal trading market for the Company's
common stock or as otherwise specified in the Note) of over 250% of the then
current conversion price for a period of ten trading days within any twenty
consecutive trading day period. At the option of the holder of a Note, a
Note shall be convertible into the Company's common stock at any time after
June 1, 2001. The number of shares of common stock to be received by a Note
holder upon conversion will be determined by dividing the principal amount of
the Note by the conversion price in effect at the time of the conversion,
which was initially $10.75. The conversion price is subject to adjustment
in the event of any subdivision, combination, or reclassification of
outstanding shares of the Company's common stock.
For financial statement purposes, a substantial portion of the Notes were
deemed to have been in-the-money at the commitment date. The Company
calculated the beneficial conversion feature as the difference between the
fair value of the common stock at the commitment date and the initial
conversion price, multiplied by the number of shares into which the debt is
convertible. For the fiscal year ending June 30, 2000 approximately
$2,500,000 of the proceeds from issuance of the Notes was recorded as debt
discount and allocated to additional paid-in capital. Additional Notes
issued during the fiscal year ended June 30, 2001 resulted in additional
discount of $1,375,000. Because the earliest date available for the holders
to covert the Notes to common stock was June 1, 2001, the entire debt
discount was amortized to interest expense during the fiscal year ended June
30, 2001.
Note 3 - Investments In Technology-Related Businesses
Active investments as of June 30, 2001:
InterWorld Corporation (a consolidated subsidiary beginning May 2001). The
acquisition of InterWorld has been accounted for as a step acquisition due to
a series of transactions beginning in November 2000. The Company used the
equity method of accounting from November 2000 until May 2001, when the
consolidation method was adopted due to the acquisition of a controlling
interest in InterWorld. As of June 30, 2001, the Company owned 95.3% of the
Common Stock of InterWorld.
J Net is presently funding InterWorld under a $20,000,000 secured credit
facility in the form of a promissory note. Advances are secured by all of
the assets of InterWorld, including intellectual property. J Net funds
InterWorld at its sole discretion and is under no obligation to continue
funding or to fund the full amount of the credit facility.
Presently, InterWorld requires approximately $3,000,000 per month to fund its
operations. As of June 30, 2001, the Company had funded $3,000,000 under the
aforementioned promissory note and had funded $12,400,000 by September 30,
2001. InterWorld has historically operated at a loss and received a going
concern opinion from its independent auditors for the twelve months ended
December 31, 2000. Through June 30, 2001, InterWorld continued to incur
operating losses and without continued funding, there remains substantial
doubt about InterWorld continuing as a going concern.
J Net is evaluating its current ownership interest in InterWorld and is
exploring a number of strategic alternatives including, but not limited to,
seeking a strategic partner to provide additional funding, pursuing a
possible sale, or terminating the business operations of InterWorld
altogether.
On October 12, 2000, J Net and InterWorld Corporation entered into a
definitive Securities Purchase Agreement (the "Securities Purchase
Agreement"). Pursuant to the terms of the Securities Purchase Agreement, J
Net purchased $20,000,000 in aggregate principal amount of Series A Preferred
Stock of InterWorld (the "Preferred Stock") on November 10, 2000. Each share
of the Preferred Stock was initially convertible into shares of Common Stock
of InterWorld (the "Common Stock") at a conversion price of $6.25 per share
(the "Conversion Price"), subject to adjustment on the six month anniversary
of the date of issue, to 90% of the average daily closing price of Common
Stock for such six-month period, but in no event less than $2.00 per share.
Furthermore, as of April 12, 2001, J Net, at its sole discretion, had the
option to require InterWorld to redeem the Preferred Stock for cash at 150%
of the purchase price plus accrued dividends, provided that such right would
expire if InterWorld consummated a change of control transaction with J Net
on or prior to such date.
In connection with the issuance of the Preferred Stock, InterWorld issued to
J Net warrants to purchase additional shares of Common Stock at an exercise
price of $7.25 per share, subject to adjustment, exercisable at any time
until October 12, 2005, equal to 19.999% of the current outstanding shares of
Common Stock less the amount of shares issuable upon the conversion of the
Preferred Stock. The Company determined these warrants were a derivative
security as defined by SFAS 133, as amended. Because there is no public
market for these warrants, the value of the warrants was determined using the
Black-Scholes methodology. As a result of subsequent transactions described
below, the warrants were canceled. Therefore, no accounting for these
warrants using SFAS 133 was required.
Pursuant to the Securities Purchase Agreement, J Net appointed two of its
board members to InterWorld's Board of Directors. Based on the Company's
representation on the Board of Directors and the Company's ability to
otherwise influence direction of InterWorld's activities, the Company adopted
the equity method to account for its initial investment in InterWorld.
On January 25, 2001, J Net and InterWorld entered into a Stock Purchase
Agreement and a Stand-By Purchase Agreement (collectively, the "Agreements").
Pursuant to the Agreements, J Net was to exchange all of its InterWorld
Preferred Stock and the related warrants for 46,153,846 newly-issued shares
of InterWorld Common Stock. In connection with such exchange, J Net had
agreed to suspend its option to require InterWorld to redeem its Preferred
Stock, provided such exchange was approved by InterWorld's shareholders. In
addition, pursuant to the Agreements, InterWorld had agreed to offer for sale
to all holders of InterWorld Common Stock up to $20,000,000 of newly-issued
InterWorld Common Stock at a price per share of $.65. If such holders did
not purchase all of the new issuance, the Company had agreed to purchase the
difference between $20,000,000 and the amount purchased by other InterWorld
shareholders (the "Stand-By Commitment"). The Agreements also provided J Net
with an option to purchase an additional $20,000,000 of InterWorld Common
Stock (the "Over Allotment Option"). A portion of the Over Allotment Option
would have been exercisable at a price per share of $.65 and a portion would
have been exercisable at a price per share equal to 90% of the volume-
weighted average trading price of InterWorld Common Stock for the 10 trading
day period prior to the time of exercise. The portions exercisable at each
price would have depended on the number of shares purchased pursuant to the
Stand-By Commitment, as described in the Agreements. The transactions
described in the Agreements were subject to numerous conditions, including
obtaining various InterWorld shareholder approvals and the making of various
regulatory filings, as described in the Agreements. On February 7, 2001,
Mark W. Hobbs, J Net's President and Chief Operating Officer, was appointed
to InterWorld's Board of Directors.
On April 19, 2001, the Company announced that there were several factors
which precluded the consummation of the transactions contemplated by the
Agreements. As a result, J Net and InterWorld announced that the agreements
had been terminated. In addition, it was disclosed that the Nasdaq, the
securities exchange where InterWorld was then traded, had notified InterWorld
that unless certain conditions were satisfied, that InterWorld's stock would
be delisted. Such delisting was effective May 4, 2001.
As a result of the cancellation of the Agreements, J Net announced it would
require InterWorld to redeem its Preferred Stock in accordance with its
terms. Those provisions entitled J Net to receive a cash payment or to
convert the Preferred Stock into Common Stock at a fixed discount of the then
market price. On May 4, 2001, InterWorld issued Common Stock equal to 67.5%
of its total issued and authorized Common Shares as partial settlement to its
mandatory redemption obligation.
At the close of business on May 21, 2001, InterWorld announced completion of
a one for fifty reverse stock split. In conjunction with this reverse stock
split, InterWorld completed the redemption of the Preferred Stock with the
terms of the mandatory redemption provision. Subsequent of the reverse stock
split, InterWorld had 10,779,033 of Common Stock of which J Net owned 10,
191,813 or 94.6% of the total outstanding shares.
On June 29, 2001, in a transaction related to a loan foreclosure with Michael
J. Donahue, the company received an additional 85,408 shares of InterWorld
common stock. At the close of this transaction, J Net owned 95.3% of the
issued and outstanding shares of InterWorld.
Pro Forma Information (Unaudited)
Set forth in the following table is certain unaudited pro forma financial
information for the years ended June 30, 2001 and 2000. This information has
been prepared assuming that J Net's acquisition of InterWorld was consummated
on July 1, 1999. Because J Net functioned primarily as a holding company and
InterWorld as an operating company at the assumed date of acquisition date,
no cost savings have been assumed in the pro forma tables.
The pro forma consolidated statement of operations for the years ended June
30, 2001 and June 30, 2000 are unaudited and were derived by adjusting the
historical consolidated financial statements of J Net and InterWorld for
those reporting periods. The historical consolidated financial statements of
InterWorld has been restated to accommodate the June 30 fiscal year used by J
Net. The pro forma statement of operations are for information purposes only
and they should not be interpreted to be indicative of the Company's
consolidated results of operations had the transaction actually occurred on
the assumed date and should not be used to project results for any future
date or period.
Twelve Months Ended June 30,
____________________________
2001 2000
________ _______
(dollars in thousands)
Revenues, net:
Product licenses $ 8,632 $ 33,392
Services 20,634 24,911
Maintenance 1,281 -
Training 14 -
Other - -
________ ________
Total revenues, net 30,561 58,303
________ ________
Cost of revenues:
Product licenses 2,633 3,428
Services 18,377 20,870
Maintenance 149 -
Training 169 -
________ ________
Total cost of revenues 21,238 24,208
________ ________
Gross profit 9,233 34,095
Operating expenses:
Research and development 20,845 23,027
Sales and marketing 30,378 31,083
General and administrative 23,124 21,465
Depreciation and amortization 535 38
Impairment on technology-related
investments 21,445 -
Loss on sale of investments 2,836 -
Bad debt expense 8,582 -
Charges for follow-on offering costs - 733
Amortization of stock-based
compensation 288 -
________ ________
Total operating expenses 107,778 76,346
________ ________
Income (loss) from operations (98,545) (42,251)
________ ________
Other income (expense):
Interest and other income 6,462 3,945
Interest expense (5,889) (411)
Net fee from terminated merger - 11,116
Write-off deferred financing (470) -
Gain on sale of short-term
investments - 2,361
Equity in income (loss) of
internet-related businesses (5,871) (62)
________ ________
Total other income (expense) (5,678) 16,949
________ ________
Income (loss) before income taxes (104,223) (25,302)
Provision (benefit) for Federal
income tax (11,558) 2,374
________ ________
Net income (loss) from continuing
operations (92,665) (26,676)
Income from discontinued
operations, net of tax 12,754 346
________ ________
Net income (loss) $(79,911) $(27,330)
======== ========
Basic and diluted loss per share:
Income (loss) from continuing
operations $ (10.48) $ (3.19)
Income from discontinued operations 1.44 .04
________ ________
$ (9.04) $ (3.15)
======== ========
Weighted average common shares
outstanding - basic 8,839 8,674
======== ========
Tellme Networks, Inc. ("Tellme") provides voice driven interactive services
to consumers and businesses. Tellme enables users through voice-recognition
and speech-synthesis to utilize any telephone to access the Internet and
listen to online information. The Company uses the cost method to account
for its investment in Tellme.
Investors in Tellme include The Barksdale Group, Benchmark Capital, Kleiner
Perkins Caufield & Byers and AT&T. In September 2000, Ventures I invested
$2,000,000 in Tellme, representing less than 2% of the total capital raised.
Based on Tellme's positive financial condition (approximately $90,000,000 in
cash as of June 30, 2001) and its current and projected cash utilization,
Management believes the original $2,000,000 investment represents the lower
of cost or market at June 30, 2001.
eStara, Inc. ("eStara") The Company funded $2,665,000 of a $4,000,000
commitment to eStara's $15,000,000 Series B round of financing in September
2000. The remaining commitment was funded in July 2001 under revised terms,
which included a new series of stock at substantially lower valuations than
the original contribution. As a result of the lower valuations, a partial
impairment of $1,375,000 against the original investment was recorded as of
June 30, 2001 to reflect the overall value of the Company's investment on a
consistent basis. eStara is a non public development stage company that
provides voice communications technology that enables on-line customers to
talk with e-businesses over the Internet. The Company uses the cost method
to account for this investment.
Investments sold, abandoned or impaired during fiscal 2001:
Jasmine Networks. The Company, on behalf of Ventures I, invested $5,000,000
as part of an $80,000,000 Series C financing in August 2000. As of June 30,
2001, Jasmine was actively engaged in negotiations to sell a division of its
company to a third party at a value which would represent a discount to the
original investment. In addition, other events which transpired in August
and September, including the loss of a significant customer, resulted in J
Net recording an impairment for its entire investment of $5,000,000 as of
June 30, 2001. The Company used the cost method to account for its
investment in Jasmine.
Strategic Data Corporation. The Fund invested $250,000 and $850,000 in
Strategic Data Corporation in May 2001 and May 2000, respectively. The
investment is accounted for under the cost method. Management's analysis of
Strategic Data's business model, which relies on Internet advertising,
resulted in an impairment of the full $1,100,000 investment as of June 30,
2001.
Meister Brothers Investments, LLC. On March 1, 2000, the Company acquired a
1% membership interest in and became the managing member of Meister Brothers
Investments, LLC ("MBI") for $40,000 pursuant to an agreement between MBI,
the Company, Keith Meister ("KM") and Todd Meister ("TM"). KM and TM each
own 49.5% of the membership interests in MBI and were Co-Presidents of the
Manager of the Fund as of June 30, 2001. As managing member, the Company has
complete authority and responsibility for the operations and management of
MBI and its ownership interests. Through its ownership interests, MBI owns a
portfolio of investments (the "Portfolio") in development stage Technology-
Related businesses. Such investments are accounted for under the cost
method.
Prior to the execution of the agreements described above, KM, TM and the
Company mutually agreed that the estimated Portfolio value was $2,500,000.
Based upon such value, the minimum number of shares to be received by KM and
TM was determined by using a $9.06 per share value of J Net's common stock,
which was the average closing price for the 30 days prior to the parties
mutual agreement of the estimated Portfolio value.
On March 1, 2000 in connection with the agreement described above, KM, TM and
the Company entered into a combination of Put and Call Agreements. Pursuant
to the terms of the Call Agreement, KM and TM granted an option to the
Company to purchase from KM and TM, and KM and TM are each obligated to sell
to the Company, upon proper exercise, under such option (the "Call Option")
all of their membership interests in MBI. Upon exercise of the Call Option
by the Company, KM and TM will receive no less than 312,500 and no more than
500,000 shares of the Company's common stock, as calculated by a
predetermined formula in the Call Agreement. The Call Option may be
exercised by the Company at any time after March 1, 2002 and expires on March
1, 2004. Pursuant to the terms of the Put Agreement, the Company granted an
option to each of KM and TM to sell to the Company and the Company shall be
obligated to purchase from each of KM and TM, upon proper exercise, under
such option (the "Put Option") any or all of the membership interests in MBI
held by each of them in exchange for a number of common shares of the
Company, as calculated by a predetermined formula in the Put Option. Upon
exercise of the Put Option by KM and TM, KM and TM will receive no less than
275,938 and no more than 441,501 shares of the Company's common stock, as
calculated by a predetermined formula in the Put Agreement. The Put Option
may be exercised at any time after the first to occur of (i) September 1,
2001 or (ii) the date the Portfolio Value, as defined in the Put Option, is
fixed at $4,000,000, but in no event shall the Put Option become exercisable
any earlier than March 1, 2001. The Put Option expires on March 1, 2004.
If neither the Put Option nor the Call Option is exercised, KM and TM have a
further option to purchase, or cause MBI to purchase, the Company's interest
in MBI at its fair market value as determined by appraisal. This option is
exercisable on or after April 1, 2004 and expires April 30, 2004.
Based upon the Company's control over MBI as described above, the Company has
consolidated MBI in its June 30, 2001 balance sheet and reflected the
minority interest of MBI owned by KM and TM. Upon the exercise of the Put or
the Call, the Company will record the purchase of MBI as a step acquisition
based upon the fair value of the J Net common stock issued.
On September 28, 2001, the Company completed the acquisition of the remaining
99% of the MBI portfolio. The acquisition was consummated pursuant to terms
contained in the Put Agreement entered into in March 2000.
As part of the regular periodic analysis performed by management during
fiscal 2001, it was determined that the companies within the MBI portfolio,
had no value and impairments were recorded.
CyberBills, Inc. In March 2000, the Company purchased 3,385,106 shares of
Series C Preferred Stock of CyberBills, Inc ("CyberBills"), a non public
development stage company at a cost of $3,186,000, of which $3,000,000 was
made on behalf of Venture I. The Company's share of the total investment was
approximately 11% of the total Series C placement. The cost method of
accounting was used to account for the investment in CyberBills.
In May 2001, the management of CyberBills entered into an asset purchase
agreement with an unrelated party to sell the assets for $15,000,000. The
closing of the sale occurred on June 20, 2001. After payment of creditors
and estimated reserves for transaction and other transition expenses, the
Series C shareholders are expected to receive a distribution of approximately
$2,000,000, or approximately $200,000 net to the Company. The proceeds will
be received in two parts. The first will occur at dissolution of CyberBills
which is expected in the fourth quarter of calendar year 2001. The second
distribution, expected in June 2002, will occur when final escrowed funds set
aside for undisclosed liabilities are released by the buyer. The loss on the
investment, net of the expected $200,000 of proceeds is reported as a
$2,986,000 loss on disposal and impairments in the Consolidated Statement of
Operations.
Digital Boardwalk, LLC ("Digital"). The Company's investment in Digital, an
e-services company was sold in April 2001. Losses from the operations and
sale during the time the Company held the investment were approximately
$5,000,000, which included the Company's initial investment of $3,000,000 in
cash and $1,767,000 in J Net common stock in March 2000, and a $250,000
working capital loan made during 2001. Prior to its disposal, the Company
used the equity method to account for the investment in Digital.
Alistia, Inc. On May 18, 2000, J Net Ventures I purchased a 39.8% ownership
interest in Series A Preferred Stock ("Series A Stock") of Alistia, Inc.
("Alistia"), a non public development stage company for $2,000,000 in cash.
The Series A Preferred Stockholders are entitled to vote along with the
common stockholders based on the number of common stock in which the Series A
Preferred shares could be converted. On an as-converted basis, the Company
had a 19.95% voting interest in the initial investment. In addition, a
member of J Net's board of directors is a member of Alistia's five member
board. As a result of the voting percentage and board representation, the
Company used the equity method of accounting.
On May 8, 2001, the Fund participated in a second round financing in Alistia,
Inc., of Redeemable Preferred Stock (the "Series B Stock") with a separate
group of investors. The Series B stock is senior in liquidation to the
Series A Preferred Stock. The funding of the Series B Stock included two
separate closings. The Company's share, assuming completion of both
closings, was 13.6% of a $5,000,000 placement in the Series B Stock. The
first closing, representing the issuance of 5,615,440 shares, occurred on May
8, 2001. The Company funded $480,000, or 60% of the $800,000 committed at
the first closing. The second closing, consisting of an additional 4,362,285
shares, was contingent on Alistia meeting certain operating and financial
targets. In June 2001, Alistia notified its Board of Directors and investors
that the performance targets specified in the Series B Stock would not be
attained thereby nullifying any further funding obligation. Alistia is
presently in the process of liquidation and the Company has recognized equity
accounting losses and impairment provisions for the entire $2,480,000
investment in Alistia.
TechTrader, Inc. In June 2000, the Company purchased 42.1% in Series B
Preferred Stock and a warrant to acquire 827,796 shares of common stock in
Tech Trader, Inc. ("Tech Trader"), a development stage non public company.
The aggregate purchase price totaled $8,488,000 consisting of $6,000,000 in
cash and $2,488,000 in the Company's common stock (178,571 shares). The
Company used the equity method to account for the investment in TechTrader.
In June 2001, the Company deemed the enterprise value of Tech Trader to be
worthless and wrote off the full value of its investment, goodwill, and value
previously ascribed to warrants included in the Series B Preferred Stock
purchase agreement.
Other transactions. The management of Carta, Inc. ceased operations in
February 2001 and the Company's investment of $4,000,000 was written off in
2001. The Company used the cost method of accounting for Carta.
Summary of investments in Technology-Related Businesses:
As a result of the Company's acquisition of a controlling interest in
InterWorld, the accounts of InterWorld are consolidated with J Net beginning
in May 2001. Because the net book value of InterWorld is a deficit, the
minority interest share of losses have been included in the consolidated
financial statements. The minority interests shares of operating losses
since the Company acquired the controlling interest in InterWorld would be
approximately $275,000. Until such time InterWorld becomes profitable, if at
all, the minority interests will continue to be included in the consolidated
results of the Company.
Due to impairments recorded in 2001, the Meister Brothers Portfolio, which
used the consolidation method, was carried at zero value.
There are no investments remaining for which the equity method is used as of
June 30, 2001. The sale of Digital Boardwalk, abandonment of TechTrader in
the fiscal year ended June 30, 2001 and the decisions to cease funding to
Alistia by the investors, resulted in all equity investees having a zero
basis.
The remaining investments accounted for using the cost method, net of
impairment, include Tellme Networks, Inc., and eStara, Inc., which have a
carrying value of $3,290,000 as of June 30, 2001.
The following table sets forth the acquisition cost for the Company's
investments and the related activity of each investment since inception
(dollars in thousands):
Equity
income Equity
(loss) (loss)
for for
year year Carrying
ended ended Impairments value
Original June June and losses as of
Acquisition 30, 30, Goodwill on sale in of June
Cost 2000 2001 Amortization 2001 Other 30, 2001
___________ ______ ______ _____________ ___________ _______ ________
Jasmine
Networks,
Inc. $ 5,000 $ - $ - $ - $ (5,000) $ - $ -
TechTrader,
Inc. 8,563 (99) (3,247) (407) (4,810) - -
Digital
Boardwalk,
LLC 5,017 130 (627) (19) (4,501) - -
Carta, Inc. 4,000 - - - (4,000) - -
CyberBills,
Inc. 3,186 - - - (2,986) (200)(a) -
eStara, Inc. 2,665 - - - (1,375) 1,290
Strategic
Data
Corporation 1,100 - - - (1,100) - -
Alistia,
Inc. 2,480 (93) (1,907) (11) (469) - -
Meister
Brothers
Investments,
LLC 40 - - - (40) - -
InterWorld
Corporation
(b) 20,340 - (20,340) - - - -
Tellme
Networks,
Inc. 2,000 - - - - - 2,000
_______ ____ ________ _____ ________ _____ ______
Total $54,391 $(62) $(26,121) $(437) $(24,281) $(200) $3,290
======= ==== ======== ===== ======== ===== ======
(a) Uncollected proceeds from sale of investment, included in other current
assets as of June 30, 2001.
(b) InterWorld became a consolidated subsidiary of the Company in May 2001.
Note 4 - Notes Receivable And Assets Held For Sale
On October 12, 2000 J Net, on behalf of Venture I, entered into a Loan
Assumption and Forbearance Agreement with Michael J. Donahue, Vice Chairman
and Chief Executive Officer of InterWorld, pursuant to which J Net purchased
from Salomon Smith Barney ("SSB") a loan from SSB to Mr. Donahue in the
amount of $12,445,500. The loan was secured by 4,270,406 shares (prior to a
May 4, 2001 1:50 reverse stock split) of InterWorld Common Stock and other
assets owned by Mr. Donahue. The loan was due in October 2003, subject to an
acceleration in October 2001 if InterWorld did not effect a merger
transaction with J Net, and accrued interest payable at 8% per annum. In
connection therewith, J Net entered into a Call/Participation Agreement with
Mr. Donahue whereby he agreed that J Net would share in the profit on a
portion of the stock securing the loan once certain conditions, including the
repayment of the loan, were met. Mr. Donahue had sole power to vote and
dispose of the shares, although he was required to vote the shares in favor
of a merger of InterWorld and J Net and consult with J Net on other matters
put before InterWorld's shareholders for a vote thereon. The loan agreement
contained certain events of default beyond non-payment, the most significant
of which included failure by Mr. Donahue to vote the stock in favor of a
merger between InterWorld and J Net and any time that the closing price of
the stock pledged as collateral fell below $2.00 per share for more than 10
days.
On the date the loan was purchased by the Company, the value of the
InterWorld stock collateralizing the loan was approximately $13,600,000. The
Company also entered into a separate agreement with Mr. Donahue which allowed
J Net to participate in profits from the sale of the stock with Mr. Donahue.
InterWorld's stock price, along with other stock prices in the technology
space, continued to decline throughout 2000 and 2001. Such declines in the
InterWorld stock price necessitated the Company to take more definitive
actions on the negative pledge on the other assets.
On April 4, 2001, the Company, on behalf of Venture I, entered into an
Amended and Restated Loan Assumption and Forbearance Agreement (the "Amended
Agreement") with Mr. Donahue. The Amended Agreement replaced the Loan and
Forbearance Agreement (the "Original Agreement") dated October 12, 2000. The
significant components in the Amended Agreement added Excalibur Polo Farm
("Excalibur") as a debtor, changed interest payment terms, revised certain
collateral provisions and changed events allowing acceleration. The amended
loan was secured by 4,270,406 (prior to a May 4, 2001 1:50 reverse stock
split) shares of InterWorld common stock and the assets of Excalibur.
The loan was due on October 11, 2003, subject to acceleration to October 11,
2001, if on or before July 31, 2001, InterWorld did not commence with the
rights offering contemplated by the Stock Purchase and Standby Purchase
Agreements dated January 25, 2001. J Net elected not to enforce its rights
relating to any other defaults at the time. The loan accrued interest at 8%
per annum and called for payment of accrued interest at the end of each
calendar quarter. Principal payments of $500,000 commencing December 31,
2001 were also due each quarter.
The Call/Participation Agreement contained in the original agreement whereby
J Net would share in the profit on a portion of the stock securing the loan
once certain conditions, including the repayment of the loan, remained intact
in the Amended Agreement. This agreement was not deemed to have any value.
As of June 29, 2001, the loan, together with accrued interest totaled
$13,232,000. Due to the financial condition of Mr. Donahue, the Company
executed a series of agreements on June 29, 2001 which foreclosed on the real
property assets securing the loan. In addition, the 85,408 post-split shares
of InterWorld common stock securing the loan were transferred to the Company.
The net realizable value of the real property, net of selling costs and other
obligations, is estimated to be $5,450,000.
The agreements entered into on June 29, 2001 also provided for the Company to
loan Mr. Donahue up to $800,000.
Note 5 - Accounts payable and accrued expenses
Accounts payable and accrued expenses consist of the following (dollars in
thousands):
June 30,
___________________
2001 2000
_______ ______
Trade accounts payable $ 3,410 -
Accrued professional fees 1,804 $203
Accrued employee benefits 1,183 -
Accrued interest payable - 95
Accrued obligation - Donahue loan 800 -
Accrued royalty payments 141 -
Other 361 501
______ ____
Totals $7,699 $799
====== ====
Note 6 - Earnings (Loss) Per Share
Basic earnings (loss) per share from continuing operations for 2001, 2000 and
1999 and diluted loss per share from continuing operations for 2001 and 2000
are computed by dividing net income (loss) from continuing operations by the
weighted average number of common shares outstanding for the respective
period. Diluted earnings per share from continuing operations for 2000 is
computed by dividing net income by the weighted average number of common and
common equivalent shares outstanding. Options and warrants to purchase
common stock, whose exercise price was greater than the average market price
for the respective period, have been excluded from the computation of diluted
earnings per share from continuing operations for 2000. Such antidilutive
options and warrants outstanding for 2000 were 364,000. Since both 2001 and
2000 had a loss from continuing operations, no potential common shares from
the assumed exercise of options and warrants have been included in the
diluted loss per share from continuing operations computations pursuant to
accounting principles generally accepted in the United States.
The following is the amount of income (loss) and number of shares used in the
basic and diluted earnings (loss) per share computations for continuing
operations (dollars and shares in thousands, except per share data):
2001 2000 1999
________ ______ ______
Basic earnings (loss) per share
from continuing operations:
Earnings (loss):
Income (loss) available to
common stockholders $(61,449) $6,295 $ (978)
======== ====== ======
Shares:
Weighted average number of
common shares outstanding 8,839 8,674 8,641
======== ====== ======
Basic earnings (loss) per share
from continuing operations $ (6.95) $ .73 $ (.11)
======== ====== ======
Diluted earnings (loss) per share:
Earnings (loss):
Income (loss) available to common
stockholders $(61,449) $6,295 $ (978)
Effect of dilutive securities - 63 -
________ ______ ______
Income (loss), as adjusted $(61,449) $6,358 $ (978)
======== ====== ======
Shares:
Weighted average number of
common shares outstanding 8,839 8,674 8,641
Common shares issuable upon
assumed exercise of dilutive
stock options - 1,516 -
Less common shares assumed to
be repurchased by application
of the treasury stock method
to the proceeds using the average
market price for the period - (1,404) -
Common shares issuable upon assumed
conversion of 8% convertible
subordinated notes - 109 -
Common shares issuable upon assumed
exercise of put option - 92 -
________ ______ ______
Weighted average number of common
shares and common share
equivalents outstanding 8,839 8,987 8,641
======== ====== ======
Diluted earnings (loss) per share
from continuing operations $ (6.95) $ .71 $ (.11)
======== ====== ======
Note 7 - Stockholders' Equity
Authorized common stock:
On September 14, 1999, J Net's stockholders approved an increase in the
number of authorized shares of common stock from 30,000,000 to 60,000,000.
Rights plan:
In June 1994, the Board approved a Stockholder Rights Plan. On July 11,
1994, J Net declared a dividend distribution of one Preferred Stock purchase
right (the "Rights") payable on each outstanding share of common stock, as of
July 15, 1994. The Rights become exercisable only in the event, with certain
exceptions, an acquiring party accumulates 15% or more of J Net's voting
stock, or if a party announces an offer to acquire 30% or more of J Net's
voting stock. Each Right will entitle the holder to purchase one-hundredth
of a share of a Series A Junior Preferred Stock at a price of $30. In
addition, upon the occurrence of certain events, holders of the Rights will
be entitled to purchase either J Net's Preferred Stock or shares in an
"acquiring entity" at half of market value. The Rights, which expire on July
15, 2004, may be redeemed by J Net at $.01 per Right prior to the close of
business on the tenth day after a public announcement that beneficial
ownership of 15% or more of J Net's shares of voting stock has been
accumulated by a single acquiror or a group (with certain exceptions), under
circumstances set forth in the Rights Agreement. As of June 30, 2001 and
2000, 150,000 shares of unissued Series A Junior Preferred Stock were
authorized and reserved for issuance upon exercise of the Rights. The
issuance of the Rights had no effect on dilutive earnings per share in 2001,
2000 and 1999.
On May 21, 2001, the Gabelli Group filed with the Securities and Exchange
Commission an Amendment to Schedule 13D indicating that the Gabelli Group had
purchased additional shares of issued and outstanding capital stock of the
Company and, therefore, beneficially owned an aggregate of 16.2% of the
issued and outstanding capital stock of the Company.
On May 30, 2001, Section 3 of the Rights Plan Agreement dated as of July 11,
1994 between J Net Enterprises, Inc. and Continental Stock Transfer & Trust
Company was amended to provide that the Amendment to the Schedule 13D would
not constitute a public announcement that would trigger the Rights Plan.
The Board of Directors of J Net also resolved that the Gabelli Group would be
permitted to purchase up to 19.9% of the issued and outstanding capital stock
of the Company and the public announcement, which may include the filing of
one or more amendments to the Schedule 13D, would not trigger the Rights
under Section 3 of the Rights Plan Agreement.
Stock option plans:
On December 7, 1990, J Net's stockholders approved the 1990 Incentive and
Nonqualified Stock Option Plan (the "1990 Plan"). The 1990 Plan terminated
on June 26, 2000. As of such date, no options granted under the 1990 Plan
were outstanding. On January 12, 1993, J Net's stockholders approved the
1992 Incentive and Non-qualified Stock Option Plan (the "1992 Plan"). On
August 17, 1994, the Board adopted certain amendments (the "Amendments") to
the 1992 Plan which were approved by J Net's stockholders on January 10,
1995. The Amendments increased the number of shares of J Net's common stock
(the "Common Stock") authorized for issuance pursuant to the 1992 Plan from
1,045,000 to 2,545,000. The 1992 Plan provides that each individual who is a
member of the Board on June 30 of any year, including any future director on
any such date, will automatically be granted nonqualified stock options to
purchase 27,500 shares of Common Stock on each such June 30. The option
price for each June 30 grant will be 100% of the fair market value of the
Common Stock on the following September 30. Each option granted to a
director will become exercisable after September 30 of each year, and expire
five years from the date of grant. Under the 1992 Plan, options granted to J
Net's directors to purchase an aggregate of 440,000 shares of Common Stock
were outstanding, of which 330,000 were exercisable at June 30, 2000. The
1992 Plan terminates on the earlier of (i) the date all shares subject to the
1992 Plan have been issued upon the exercise of options granted under such
plans, or (ii) September 30, 2002, or on such earlier date as the Board may
determine. Any option outstanding at the termination date remains outstanding
until it has either expired or has been exercised. On January 31, 2000, a new
director was added to the Company's Board of Directors. In connection with
the appointment, such director was granted a nonqualified stock option to
purchase 27,500 shares of common stock. On May 1, 2000, pursuant to the
terms of the grant, the exercise price was vested at $10.63 per share, the
fair market value of the stock on that date. The option expires five years
from the date of grant. Also, on January 31, 2000, nonqualified stock
options to purchase an aggregate of 450,000 shares of common stock were
granted to three directors (150,000 each) at an exercise price of $10.13 per
share, the fair market value on the date of grant. The option granted to
each director will vest in thirds on each of the first, second and third
anniversaries of the date of grant. Such options expire ten years from date
of grant.
Changes in options outstanding under the 1992 stock option plan are
summarized below (shares in thousands):
2001 2000 1999
_________________ ______________ _______________
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
______ _________ ______ ________ ______ ________
Fixed options:
Outstanding at
beginning of year 2,132 $ 9.47 1,422 $ 9.79 1,486 $10.23
Granted 94 9.42 757 10.25 55 12.25
Exercised - - (48) 12.31 (6) 8.56
Cancelled (110) 10.00 (109) 9.88 (223) 12.80
Automatic grant
to directors 137 4.00 110 9.50 110 8.75
_____ ______ _____ _____ _____ ______
Outstanding at
end of year 2,253 9.33 2,132 9.47 1,422 9.79
===== ====== ===== ===== ===== ======
Options exercisable
at year-end 1,636 9.79 1,292 9.76 1,290 9.83
Weighted average
fair value of
options granted
during the year $ 4.17 $ 4.12 $ 2.47
The following table summarizes information about stock options outstanding at
June 30, 2001:
Options Outstanding Options Exercisable
__________________________________________________ _____________________
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 6/30/01 Life Price at 6/30/01 Price
_______________ ___________ ____________ _________ ___________ _________
$ 3.00 - $10.00 1,261 3.36 years $ 8.31 1,113 $ 9.20
$10.01 - $12.63 992 4.85 years $10.66 522 $11.04
Other nonqualified stock options:
On September 14, 1999, nonqualified stock options to purchase an aggregate
of 120,000 shares of common stock were granted to the Company's Board of
Directors (30,000 each to four directors) at an exercise price of $9.00 per
share, the fair market value on the date of grant. The option granted to
each director will vest 50% on each of the first and second anniversaries
of the date of grant and shall be subject to accelerated vesting under
certain circumstances. Such options expire ten years from date of grant.
On January 31, 2000, nonqualified stock options to purchase an aggregate of
150,000 shares of common stock were granted to the Co-Presidents of the
Manager (75,000 each) at an exercise price of $10.13 per share, the fair
market value on the date of grant. Such options will vest in thirds on each
of the first, second and third anniversaries of the date of grant and
expire ten years from date of grant.
On June 21, 2000, nonqualified stock options to purchase an aggregate of
500,000 shares of common stock were granted to the President and Chief
Operating Officer and the Executive Vice President and Chief Financial
Officer at an exercise price of $13.13 per share, the fair market value on
the date of the grant. The options will vest in thirds on each of the first,
second and third anniversaries of the date of grant and expire ten years from
the date of the grant.
There were no other nonqualified options granted during fiscal 2001.
Changes in options outstanding under the nonqualified stock option plan is
summarized below (shares in thousands):
2001 2000 1999
_________________ ______________ _______________
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
______ _________ ______ ________ ______ ________
Fixed options:
Outstanding at
beginning of
year 640 $12.22 221 $ 9.19 352 $ 9.72
Granted - - 640 12.22 - -
Exercised - - - - - -
Cancelled ( -) - (221) 9.19 (131 10.63
Outstanding at
end of year 640 $12.22 640 12.22 221 9.19
Options exercisable
at year-end 237 $11.90 - - 221 9.19
Weighted average
fair value of options
granted during
the year $ - - $ 4.89 - $ -
The following table summarizes information about nonqualified stock options
outstanding at June 30, 2001 (shares in thousands):
Options Outstanding Options Exercisable
__________________________________________________ _____________________
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 6/30/01 Life Price at 6/30/01 Price
_______________ ___________ ____________ _________ ___________ _________
Less than
$10 per share 140 8.75 years $ 9.00 70 $ 9.00
Greater than
$10.00 per share 500 9.00 years $13.13 167 $13.13
Shares reserved for issuance:
Shares of Common Stock were reserved for the exercise of the following (in
thousands):
June 30,
2001 2000
_____ _____
Stock option plans:
Outstanding 2,253 2,132
Available for grant 198 340
Other nonqualified stock options 640 640
_____ _____
Totals 3,091 3,112
===== =====
Accounting for stock-based compensation:
The following table discloses pro forma amounts for net income (loss) and
basic and dilutive earnings per share for 2001, 2000 and 1999 assuming
compensation cost for employee stock options had been determined using the
fair value-based method prescribed by SFAS 123. On July 1, 2000, the
Company adopted the revised provisions outlined in Financial Accounting
Standards Board Interpretation No. 44 ("FIN 44"). There was no impact from
adoption of these revised practices. The table also discloses the weighted
average assumptions used in estimating the fair value of each option grant
on the date of grant using the Black-Scholes option pricing model, and the
estimated weighted average fair value of the options granted. The model
assumes no expected future dividend payments on the Company's Common Stock
for the options granted in 2001, 2000 and 1999 (dollars in thousands, except
per share data):
2001 2000 1999
________ ______ ______
Net income (loss):
As reported $(48,695) $6,641 $4,603
Pro forma $(49,342) $5,507 $4,167
Basic earnings (loss) per share:
As reported $ (5.51) $ .77 $ .53
Pro forma $ (5.58) $ .63 $ .48
Diluted earnings (loss) per share:
As reported $ (5.51) $ .75 $ .53
Pro forma $ (5.58) $ .62 $ .48
Weighted average assumptions:
Expected stock price volatility 60.0% 50.0% 30.0%
Risk-free interest rate 5.8% 6.4% 5.6%
Expected option lives (in years) 3.0% 3.0 3.0
Estimated fair value of options
granted $ 4.19 $ 4.35 $ 3.02
Note 8 - Related Party Transactions
One director of J Net is a partner of a law firm that provided legal services
to the Company totaling approximately $85,000, $190,000 and $170,000 for the
fiscal years ended June 30, 2001, 2000 and 1999, respectively.
Three directors' entities controlled by those directors or adult children of
those directors have invested $7,000,000 in the convertible subordinated
notes described in Note 2. In addition, officers and employees have
invested, either directly or indirectly, $5,750,000 in the Notes as of June
30, 2000.
In connection with the subordinated notes held by officers or employees
having a face value of $3,250,000, the Company has loaned $1,250,000 to
facilitate the purchase of the notes. The loans bear interest of 8% per
annum and are secured by the right, title and interest to those notes. The
loans and any accrued interest are due on June 30, 2002. As of June 30,
2001, the total principal and accrued interest due on the loans was
approximately $1,300,000. On September 28, 2001, pursuant to the exercise of
the Put Option by KM and TM described in Note 3, the Company discharged the
value of the note with KM and TM in exchange for the shares that were to be
issued under the Put Option.
The Executive Vice President and Chief Financial Officer of the Company also
serves in a similar capacity at InterWorld, a subsidiary of J Net, since
February 2001. The costs of the executive's employment are shared between J
Net and InterWorld on a time spent basis. Such shared costs billed to
InterWorld for fiscal 2001 totaled $162,000.
The Company and InterWorld have entered into a secured
credit agreement which allows InterWorld to draw up to a total of $20,000,000
in cash from J Net, at the Company's discretion. The advances are secured by
the assets of InterWorld including intellectual property. Advances totaled
$3,000,000 at June 30, 2001 and $12,350,000 as of September 28, 2001.
The Company foreclosed on assets securing a loan to Michael J. Donahue, Vice
Chairman and Chief Executive Officer of InterWorld on June 29, 2001 as
described in Note 4. The assets received in the foreclosure are presently
for sale and have an estimated net realizable value of $5,450,000.
The agreements entered into on June 29, 2001 also provided for the Company to
loan Mr. Donahue up to $800,000.
Note 9 - Federal Income Tax
The components of Federal income tax expense (benefit) are as follows
(dollars in thousands):
2001 2000 1999
________ ______ ______
Federal:
Current expense (benefit) $(10,295) $1,641 $ (744)
Deferred expense (benefit) (10,579) 777 (341)
Deferred valuation allowance 9,316 - -
________ ______ ______
Federal income tax expense (benefit)
on income (loss) from continuing
operations (11,558) 2,418 (1,085)
Federal income tax expense of
discontinued operations 6,612 177 2,875
________ ______ ______
Total Federal income tax expense
(benefit) $ (4,946) $2,595 $ 1,790
======== ====== =======
A reconciliation of the Federal statutory income tax rate to the effective
income tax rate based on income (loss) from continuing operations before
income tax follows:
2001 2000 1999
________ ______ ______
Statutory rate (35.0)% 35.0% (35.0)%
Increase (decrease) in
tax resulting from:
Surtax exemption 1.0 (1.0) 1.0
Amortization of debt discount 5.3 - -
Increase in valuation allowance 12.8 - -
Tax-exempt interest - (7.6) (22.5)
Other .1 1.4 3.9
_____ ____ _____
Effective rate (15.8)% 27.8% (52.6)%
===== ==== =====
The tax items comprising J Net's net deferred tax asset (liability) as of
June 30, 2001 and 2000 are as follows (dollars in thousands):
2001 2000
_______ ____
Equity method losses and impairments $10,238 $ -
Less valuation allowance (9,316) -
Other (37) (762)
_______ _____
Net deferred tax asset (liability) $ 885 $(762)
======= =====
Note 10 - Operating Segments
The Company has two reportable segments; InterWorld and J Net Technology-
Related Businesses. Prior to May 2001, the Company operated only in one
segment, J Net Technology-Related Businesses. J Net Technology-Related
Businesses include the effect of transactions and operations of the
Company's non consolidated investments, including InterWorld prior to the
acquisition of a majority of its outstanding common stock in May 2001, from
the date of acquisition. InterWorld includes the results of the Company's
majority owned investment. All significant intersegment activity
has been eliminated. Accordingly, segment results reported exclude the
effect of transactions between the Company and its subsidiary. Assets are
the owned assets used by each operating segment.
Summary of Consolidated loss from Continuing Operations, net of tax (dollars
in thousands):
Year Ended June 30, 2001
________________________
InterWorld $ (5,814)
J Net Technology-Related Businesses (55,635)
________
$(61,449)
InterWorld Operations
Revenue 2,156
Cost of sales 877
Operating Expenses
Research and development 2,264
Sales 2,142
Marketing alliances 1,085
General and administrative 1,595
________
Total operating expenses 7,086
Other expense, net (7)
________
Loss from InterWorld continuing operations (5,814)
J Net Technology-Related Businesses
Operating Expenses 7,316
General and administrative 535
Depreciation and amortization
Loss on disposal and impairment
of technology-related businesses 24,281
Bad debt expense 8,582
________
Total operating expenses 40,714
________
Interest income 5,512
Interest expense (5,870)
Equity losses in technology-related
businesses (26,121)
________
Loss from continuing operations
before income tax (67,193)
Income tax benefit (11,558)
________
Loss from J Net Technology-Related
Businesses $(55,635)
========
June 30, 2001
_____________
Assets
InterWorld Corporation $ 2,879
J Net Technology-Related Businesses 74,534
________
Total $ 77,413
========
Note 11 - Other Events
Terminated mergers:
On February 17, 1999, J Net and CRC Holdings, Inc. d/b/a Carnival Resorts &
Casinos ("CRC"), a privately owned company, entered into a definitive
agreement providing for the acquisition of CRC by J Net. On April 15, 1999,
J Net and CRC mutually agreed to terminate the agreement. As a result of
the termination of the agreement, capitalized costs incurred in connection
with the proposed acquisition of CRC of $900,000 were expensed in 1999.
On August 16, 1999, J Net received a notice from Players International, Inc.
("Players") terminating an Agreement and Plan of Merger dated February 8,
1999 (the "Players Agreement") between the Company and Players. Such notice
contained the terms of a merger offer for Players from Harrah's
Entertainment, Inc. On August 19, 1999, pursuant to the terms of the Players
Agreement, J Net received a break-up fee of $13,500,000. As a result of the
termination of the Players Agreement, capitalized costs of $2,384,000
incurred in connection with the proposed acquisition of Players were expensed
resulting in a net break- up fee of $11,116,000. During 2000, J Net sold
1,014,400 shares of Players common stock for $8,488,000 ($8.37 per share).
As a result of the sale of such shares, which were purchased on March 10,
1999 at a cost of $6,127,000 ($6.04 per share), J Net realized a gain of
$2,361,000.
Termination and Consulting Agreement:
On February 29, 2000, the Company and Don R. Kornstein, President, Chief
Executive Officer and Director, entered into a Termination and Consulting
Agreement (the "Termination Agreement"). Pursuant to the terms of the
Termination Agreement, Mr. Kornstein and the Company mutually agreed that his
employment and position on the Board of Directors terminated on February 29,
2000. On March 10, 2000, pursuant to the terms of Mr. Kornstein's employment
agreement and the Termination Agreement, the Company paid $2,906,000 to Mr.
Kornstein for severance and accrued vacation costs. Of such amount,
$2,835,000 was expensed in 2000, and is included in the line captioned
general and administrative in the accompanying consolidated statements of
operations.
In November 2000, upon completion of the sale of the Route Operations,
severance payments totaling $1,140,000 and accrued bonuses were paid to two
former officers of the Company pursuant to employment agreements. The costs
of the severances are included in the line captioned general and
administrative in the accompanying consolidated statements of operations.
Note 12 - Commitments And Contingencies
Employment agreements:
J Net entered into employment agreements with Mark W. Hobbs, President and
Chief Operating Officer, and Steven L. Korby, Executive Vice President and
Chief Financial Officer on October 1, 2000. Such agreements expire on June
21, 2003. The aggregate commitment for future salaries at June 30, 2001,
excluding bonuses, under the employment agreements is approximately
$1,000,000.
Financial instruments with concentration of credit risk:
The financial instruments that potentially subject J Net to concentrations of
credit risk consist principally of cash and cash equivalents. J Net
maintains cash and certain cash equivalents with financial institutions in
amounts which, at times, may be in excess of the FDIC insurance limits. J
Net's cash equivalents are invested in several high-grade securities which
limits J Net's exposure to concentrations of credit risk.
The Company owns short-term investments which are managed by Mariner as
described in Note 1. Mariner employs a multi-strategy approach which
emphasizes market-neutral and event driven styles. Such approach is designed
to mitigate risk inherent with market based investments. While Mariner has
consistently generated above average returns relative to hedge fund industry
benchmarks, such returns are subject to fluctuation in the future.
Legal matters:
The Company, including its InterWorld subsidiary, is not party to any legal
matters that could have a material impact on its operations as of June 30,
2001.
On March 8, 2001, as amended on May 29, 2001, InterWorld received notice that
the Securities and Exchange Commission (the "Commission") commenced a formal
order directing a private investigation by the Commission with respect to
whether InterWorld engaged in violations of Federal Securities Laws as it
relates to InterWorld's financial statements, as well as its accounting
practices and policies. Also under review by the Commission is certain
trading in InterWorld stock. All the above events are related to periods
prior to the Company's common stock ownership in InterWorld.
The investigation is confidential and the Commission has advised that the
investigation should not be construed as an indication by the Commission or
its staff that any violation of law has occurred nor should the investigation
be construed as an adverse reflection on any person, entity or security.
The investigation is ongoing and InterWorld is fully cooperating with the
Commission.
Leases:
J Net has a noncancellable office lease in New York, New York. Future
minimum payments under such lease total $4,345,000 at June 30, 2001, payable
as follows: $438,000 in 2002; $438,000 in 2003; $438,000 in 2004; $438,000 in
2005; 1,472,000 in 2006 and $2,122,000 thereafter. J Net also has a
noncancellable office lease in Plano, Texas. Future minimum payments under
such lease is $134,000 at June 30, 2001, payable as follows: $80,000 in 2002
and $54,000 in 2003. Total rent expenses for 2001 were $705,000
InterWorld has entered into noncancelable operating leases primarily for
office space, furniture and office equipment with initial or remaining terms
of six months or more. Total rent expense for May and June 2001 totaled
$465,000.
Commencing October 1999, Interworld extended its lease and leased additional
office space at its current headquarters location. Interworld has subleased
a portion of the space to UGO, a related party. The lease and sublease will
expire in December 2015 and the sublease allows InterWorld to terminate all
or a portion of the subleased space under specific circumstances.
Future minimum lease payments by year under gross and net operating leases,
UGO's sublease obligation and capital leases with initial or remaining terms
of one year or more consisted of the following at December 31, 2000:
Gross UGO Net
Year Operating Sublease Operating
_______________________________ _________ ________ _________
2002 $ 2,872 $ 1,343 $ 1,529
2003 2,408 1,381 1,027
2004 2,320 1,420 901
2005 2,445 1,520 924
2006 and thereafter 39,484 17,944 21,540
_______ _______ _______
Total minimum lease payments $49,529 $23,608 $25,921
======= ======= =======
Note 13 - Discontinued Operations
Definitive agreement:
On July 8, 2000, the Company entered into a definitive agreement to sell its
Route Operations for $45,000,000 in cash. In October 2000, the sales price
was reduced to $38,000,000. The sale, which was subject to closing
conditions and regulatory and other approvals, was completed in November 2000
is reported as discontinued operations. In accordance with accounting
principles applicable to discontinued operations, previously reported
financial statements have been reclassified to reflect the Route Operations
as discontinued.
Litigation settlement:
In August 1998, Albertson's, Inc. ("Albertson's," a retail chain in which J
Net conducts gaming operations) and American Stores Company ("American
Stores") entered into a merger agreement that provided for the acquisition of
American Stores by Albertson's. Approximately 51%, 57% and 55% of revenues
generated by discontinued operations for 2000, 1999 and 1998, respectively,
were generated at the locations of those two entities. The merger of
Albertson's and American Stores was completed on June 23, 1999. As a
condition to avoiding and/or settling legal proceedings against the merger by
the Federal Trade Commission and the Attorneys General of California, Nevada
and New Mexico, Albertson's agreed to divest certain of its stores, including
19 stores in southern Nevada, fifteen of which were J Net locations. In late
September and early October 1999, Albertson's sold those locations to
Raley's, Inc. ("Raley's"), and Raley's has operated them since.
On August 30, 1999, J Net commenced litigation in United States District
Court for the District of Nevada against Albertson's and Raley's to enforce
its rights to remain in the fifteen locations under its agreement with
Albertson's. On September 14, 1999, J Net obtained a preliminary injunction
to prevent Albertson's and Raley's from interfering with its right to occupy
the subject premises and conduct gaming operations. Albertson's and Raley's
appealed the injunction and made motions for summary judgment.
In connection with Raley's acquisition of the locations, United Coin Machine
Company ("United Coin"), the slot route operator for Raley's northern Nevada
stores, filed applications with the Nevada Gaming Control Board to operate
the gaming machines at the fifteen stores. On September 23, 1999, United
Coin commenced an action in Nevada state court against J Net, Albertson's,
Raley's and Anchor Coin ("Anchor"), the slot route operator at the four other
Albertson's southern Nevada locations seeking declaratory and injunctive
relief and money damages.
On January 26, 2000, J Net entered into a Settlement Agreement and Release
(the "Settlement Agreement") with Albertson's, Raley's, Anchor and United
Coin. Pursuant to the terms of the Settlement Agreement, the parties agreed
to dismiss with prejudice all litigation pending among them and to the
takeover of gaming operations by United Coin of the 19 stores in southern
Nevada, effective February 1, 2000. Of the 19 stores in southern Nevada
operated by Raley's, J Net had operated 246 gaming machines at 15 locations
pursuant to its long-term agreement with Albertson's. J Net believed it was
in its best interest to settle the case and thereby preserve and solidify its
long-term relationship with Albertson's, its largest customer, pursuant to
the terms of an amendment to its agreement with Albertson's, which it had
theretofore arranged and which is described below in this note. It was also
important to J Net to avoid further litigation and fully resolve all claims
among and between the parties. All costs incurred in connection with the
litigation and settlement, including legal and settlement costs aggregating
approximately $950,000, were recorded in fiscal 2000, and are included in the
line captioned income from discontinued operations in the accompanying
consolidated statements of income.
Settlement agreement with Albertson's:
Prior to the settlement described above, on November 18, 1999, J Net and
Albertson's had entered into a settlement agreement (the "Agreement"). The
Agreement amended the license agreement entered in September 1998 between J
Net and Albertson's (the "Albertson's Agreement"). The Agreement also
terminated J Net's separate license agreements with Lucky Stores, Inc. and
American Drug Stores, Inc. and incorporates J Net's exclusive rights in
Nevada to operate gaming devices at the locations (including any future
locations) of those entities into the Albertson's Agreement, as amended by
the Agreement. Under the Agreement, J Net has the exclusive option to extend
the agreements beyond their initial terms and will continue to have exclusive
gaming rights for new Albertson's locations. In addition, Albertson's
granted J Net exclusive gaming rights in all drug stores opened by
Albertson's or any of its affiliates in Nevada, and in future fuel center
locations, a new retailing concept that Albertson's will open, in which
gaming may be offered to customers. Further, pursuant to the terms of the
Agreement, J Net received certain immediate credits toward license fees and
will receive substantial reductions in certain license fees, which are
effective from February 1, 2000 through the initial term of the Agreement.
The Rite Aid dispute:
On December 8, 1999, certain Gaming Machine Route Operations subsidiaries of
J Net commenced litigation in the United States District Court for the
District of Nevada against Rite Aid Corporation ("Rite Aid"). The lawsuit is
an action for rescission of two license agreements between those subsidiaries
and Rite Aid and for damages based upon Rite Aid's alleged fraud. Operations
of said subsidiaries under said agreements resulted in an operating loss of
approximately $3,40,000 in 2000.
On March 27, 2000, J Net entered into amendments to the two license
agreements with Rite Aid. Based on the number of existing locations at which
J Net currently operates gaming machines, license fees payable to Rite Aid
have been reduced by approximately $2,500,000 annually over the remaining
term of the amended agreements. The amendments were subject to approvals
from the Nevada State Gaming Control Board (the "Nevada Board") were received
in October 2000.
The following are the summary operating results of the discontinued
operations. The results for fiscal 2001 represent the period of July 1, 2000
to November 22, 20000, the effective time of the sale (dollars in thousands):
2001 2000 1999
________ _______ _______
Revenues $ 28,120 $86,949 $95,669
Costs and expenses (28,484) 86,563 87,264
________ _______ _______
Operating income (364) 386 8,405
Other income 15 137 51
________ _______ _______
Income (loss) before income tax (349) 523 8,456
Provision (benefit) for income tax (99) 177 2,875
________ _______ _______
Income (loss) from discontinued
operations, net of tax $ (250) $ 346 $ 5,581
======== ======= =======
The following are the net assets of the discontinued operations sold on
November 22, 2000 (dollars in thousands):
November 22, June 30,
2000 2000
____________ ________
Assets:
Cash $ 3,500 $ 3,500
Prepaid expenses 819 1,209
Other current assets 2,223 1,020
Deferred income tax - 384
Property and equipment at
cost, net 10,803 11,907
Lease acquisition costs and
other intangible assets, net 5,279 5,190
_______ _______
Total assets $22,624 $23,210
======= =======
Liabilities:
Accounts payable and other
current liabilities 1,490 2,516
Deferred rent 3,945 4,049
_______ _______
Total liabilities $ 5,435 $ 6,565
_______ _______
Net assets of discontinued
operations $17,189 $16,645
======= =======
Note 14 - Subsequent Events
On May 8, 2001, the Fund participated in a second round financing in Alistia,
Inc., of Redeemable Preferred Stock (the "Series B Stock") with a separate
group of investors. The Series B stock is senior in liquidation to the
Series A Preferred Stock. The funding of the Series B Stock included two
separate closings. The Company's share, assuming completion of both
closings, was 13.6% of a $5,000,000 placement in the Series B Stock. The
first closing, representing the issuance of 5,615,440 shares, occurred on May
8, 2001. The Company funded $480,000, or 60% of the $800,000 committed at
the first closing. The second closing, consisting of an additional 4,362,285
shares, was contingent on Alistia meeting certain operating and financial
targets. In June 2001, Alistia notified its Board of Directors and investors
that the performance targets specified in the Series B Stock would not be
attained thereby nullifying any further funding obligation. Alistia is
presently in the process of liquidation and the entire investment was written
off as of June 30, 2001.
eStara, Inc. In July 2001, the Company funded its remaining commitment of
$1,333,333 (see Note 3).
The Company, like many other businesses, is in the process of evaluating the
impact that the tragic events of September 11, 2001 will have on its
business. At this point in time it is too early to predict what the economic
and business consequences will be. At InterWorld, management has indicated
initial hesitancy on the part of some clients and prospective clients to move
forward with new e-commerce initiatives. This could result in a delay
or reductions in revenue.
MBI, Inc. On September 28, 2001, KM and TM exercised the Put Option
described in Note 3 requiring the Company to issue 275,938 shares to complete
the step acquisition of the MBI portfolio. The Company also paid $500,000 in
cash consideration as part of the settlement. The value of shares required
to be issued were exchanged by KM and TM to discharge the face value and
accrued interest on a loan from the Company to KM and TM to purchase a
portion of the Notes (see Note 2).
On September 28, 2001, the Company entered into contract buyout and
termination agreements with TM and KM. Under the terms of the agreements,
each person received $300,000 and resigned as officers of Ventures I Fund.
InterWorld. The Company is currently funding the operations of InterWorld
under a secured credit facility providing for funding of up to $20,000,000.
Such funding totaled $3,000,000 and $12,350,000 at June 30, 2001 and
September 28, 2001, respectively. The Company is under no obligation to
complete the funding up to the $20,000,000 and continues advances at its own
discretion.
J NET ENTERPRISES, INC. AND SUBSIDIARIES
QUARTERLY FINANCIAL INFORMATION
YEARS ENDED JUNE 30, 2001 AND 2000
(Dollars in thousands, except per share data)
(Unaudited)
Summarized quarterly financial information for 2001 and 2000 follows:
Quarter
__________________________________________
First Second Third Fourth
_______ ________ ______ _______
2001
____
Revenues $ - $ - $ - $ 2,156
Gross profit from continuing
operations - - - 1,279
Operating loss from continuing
operations (1,270) (11,232) (11,337) (22,682)
Income (loss) from continuing
operations (2,567) (10,078) (22,771) (26,033)
Income (loss) from discontinued
operations 132 12,507 137 (22)
Net income (loss) (2,435) 2,429 (22,634) (26,055)
Basic earnings (loss) per
share:
Income (loss) from continuing
operations (.29) (1.12) (2.57) (3.05)
Income from discontinued
operations .02 1.39 .02 -
Net income (loss) (.27) .27 (2.55) (3.05)
Dilutive earnings (loss)
per share:
Income (loss) from continuing
operations (.29) (1.12) (2.57) (3.05)
Income from discontinued
operations .02 1.39 .02 -
Net income (.27) .27 (2.55) (3.05)
2000
____
Revenues $ - $ - $ - $ -
Operating loss from continuing
operations (679) (908) (3,322) (1,823)
Income (loss) from continuing
operations 7,437 1,383 (1,670) (855)
Income (loss) from discontinued
operations (144) (506) 281 715
Net income (loss) 7,293 877 (1,389) (140)
Basic earnings (loss) per
share:
Income (loss) from continuing
operations .86 .16 (.19) (.10)
Income (loss) from discontinued
operations (.01) (.06) .03 .08
Net income (loss) .85 .10 (.16) (.02)
Dilutive earnings (loss) per
share:
Income (loss) from continuing
operations .86 .16 (.19) (.12)
Income (loss) from discontinued
operations (.01) (.06) .03 .08
Net income (loss) .85 .10 (.16) (.04)
J NET ENTERPRISES, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(dollars in thousands)
Twelve Twelve Twelve
Months Months Months
Ended Ended Ended
June 30, June 30, June 30,
2001 2000 1999
_________ ________ ________
Impairment reserve in
technology-related businesses:
Balance at Beginning of Period $ - $ - $ -
Impairments charged to expenses (24,281) - -
________ _______ _______
Balance at Beginning of Period $(24,281) $ - $ -
======== ======= =======
SUBSIDIARIES OF J NET ENTERPRISES, INC.
STATE OF
COMPANY %OWNED INCORPORATION
1. J Net Ventures I, LLC 100% Delaware
2. J Net Holdings, LLC 100% Nevada
3. J Net GP, LLC 100% Nevada
4. InterWorld Corporation 95.3% Delaware