UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
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 no. 1-9728
J NET ENTERPRISES, INC.
_______________________________________________________________________
(Exact name of registrant as specified in its charter)
Nevada 88-0169922
_______________________________ ____________________________________
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4020 W. Lake Creek Drive, #100, Wilson, Wyoming 83014
_______________________________________________ __________
(Address of principal executive offices) (Zip Code)
307-739-8603
____________________________________________________
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes x No
_____ _____
There were 8,524,541 shares of the Registrant's common stock outstanding
as of November 12, 2002.
J NET ENTERPRISES, INC. AND SUBSIDIARIES
INDEX
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited) -
September 30, 2002 and June 30, 2002
Condensed Consolidated Statements of Operations (Unaudited) -
Three Months Ended September 30, 2002
Condensed Consolidated Statement of Stockholders'
Equity (Unaudited) - Three Months Ended September 30, 2002
Condensed Consolidated Statement of Stockholders'
Equity (Unaudited) - Three Months Ended September 30, 2001
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Three Months Ended September 30, 2002
Notes to Condensed Consolidated Financial Statements -
(Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
J NET ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
September 30, June 30,
ASSETS 2002 2002
______ _____________ _________
Current assets:
Cash and cash equivalents $ 1,320 $ 6,674
Short-term investments 6,598 29,590
Accounts receivable, net 50 213
Notes receivable - related parties - 288
Notes receivable - 132
Federal income taxes receivable 983 983
Assets held for sale 4,950 4,950
Prepaid expenses 231 351
Other current assets 364 293
_______ _______
Total current assets 14,496 43,474
Investments in technology-related businesses 2,425 2,425
Property and equipment, net of accumulated
depreciation 147 180
Deferred tax asset - -
Other non-current assets 755 764
_______ _______
Total assets $17,823 $46,843
======= =======
See Notes to Condensed Consolidated Financial Statements.
J NET ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
(Concluded)
September 30, June 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 2002 2002
____________________________________ _____________ _________
Current liabilities:
Accounts payable and other current
liabilities $ 3,537 $ 4,095
Current portion of convertible
subordinated notes - 27,750
Deferred revenue and customer deposits 942 1,306
________ ________
Total current liabilities 4,479 33,151
Deferred rent 208 213
Other non-current liabilities 212 212
Commitments and contingencies
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 75,250
Accumulated deficit (46,374) (46,031)
Less 1,708,929 shares of common stock in
treasury, at cost (16,054) (16,054)
________ ________
Total stockholders' equity 12,924 13,267
________ ________
Total liabilities and stockholders'
equity $ 17,823 $ 46,843
======== ========
See Notes to Condensed Consolidated Financial Statements.
J NET ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(Dollars in thousands, except per share data)
(Unaudited)
2002 2001
________ ________
Revenues, net
Product licenses $ - $ 883
Maintenance 504 1,262
Services 152 680
________ ________
Total revenues, net 656 2,825
________ ________
Cost of revenues:
Product licenses - 146
Maintenance 26 195
Services 122 1,075
________ ________
Total cost of revenues 148 1,416
________ ________
Gross profit 508 1,409
Operating expenses:
Research and development 441 3,012
Sales - 3,400
Marketing alliances - 1,351
General and administrative 1,161 3,449
Bad debt expense 20 -
Restructuring and unusual charges - 4,548
Gains from settlements with unsecured
creditors (46) -
________ ________
Total operating expenses 1,576 15,760
________ ________
Operating loss (1,068) (14,351)
Other income (expense):
Interest and other income 172 718
Interest expense - (567)
Gain from repurchase of convertible
subordinated notes 553 -
Total other income (expense) 725 151
________ ________
Loss from operations before income tax (343) (14,200)
________ ________
Provision (benefit) for Federal income tax - -
________ ________
Net loss $ (343) $(14,200)
======== ========
Basic loss per share $ (.04) $ (1.67)
======== ========
Dilutive loss per share $ (.04) $ (1.67)
======== ========
See Notes to Condensed Consolidated Financial Statements
J NET ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED SEPTEMBER 30, 2002
(Dollars and shares in thousands)
(Unaudited)
Common Stock Additional Retained Treasury Stock
______________ Paid-In Earnings _________________
Shares Amount Capital (Deficit) Shares Amount Totals
______ _______ _________ ________ ______ _________ _______
Balance June 30, 2002 10,233 $102 $75,250 $(46,031) (1,709) $(16,054) $13,267
Net loss (343) (343)
______ ____ _______ ________ ______ ________ _______
Balance September 30, 2002 10,233 $102 $75,250 $(46,374) (1,709) $(16,054) $12,924
====== ==== ======= ======== ====== ======== =======
See Notes to Condensed Consolidated Financial Statements.
J NET ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED SEPTEMBER 30, 2001
(Dollars and shares in thousands)
(Unaudited)
Accumulated
Common Stock Additional Retained Treasury Stock Other
_____________ Paid-In Earnings ______________ Comprehensive
Shares Amount Capital (Deficit) Shares Amount Income (loss) Totals
______ ______ _________ ________ ______ ______ ______________ ______
Balance June 30, 2001 10,233 $102 $75,250 $(20,795) (1,709) $(16,054) (17) $ 38,486
Comprehensive loss:
Net loss (14,200) (14,200)
Cumulative translation
adjustment 99 99
________
Total comprehensive loss (14,101)
Amortization of employee
stock options 240 240
______ ____ _______ ________ ______ ________ ____ ________
Balance September 30, 2001 10,233 $102 $75,250 $(34,755) (1,709) $(16,054) $ 82 $ 24,625
====== ==== ======= ======== ====== ======== ==== ========
See Notes to Condensed Consolidated Financial Statements.
J NET ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(Dollars in thousands)
(Unaudited)
2002 2001
________ ________
Operating activities:
Net loss $ (343) $(14,200)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Allowance for uncollectible receivables 20 -
Amortization of stock-based compensation - 240
Depreciation and amortization 39 200
Write off of impaired leasehold improvements - 1,700
Changes in assets and liabilities:
Federal income taxes receivable - 2,723
Accounts receivable 143 230
Marketable securities (8) (469)
Prepaid expenses and other current assets 181 506
Notes receivable - related parties 288 1,016
Other non-current assets 9 (164)
Accounts payable and other current liabilities (558) (808)
Deferred revenue and customer deposits (364) (929)
Deferred rent (5) 203
Other, net - 99
________ _______
Net cash used in operations (598) (9,653)
Investing activities:
Investments in technology-related businesses - (1,333)
Redemption of marketable securities 23,000 -
Purchases of property and equipment (6) (30)
________ ________
Net cash provided by (used in)
investing activities 22,994 (1,363)
________ ________
Financing activities:
Repayment of debt (27,750) -
________ ________
Net cash used in financing activities (27,750) -
Net decrease in cash and cash equivalents (5,354) (11,016)
Cash and cash equivalents at beginning of period 6,674 24,272
________ ________
Cash and cash equivalents at end of period $ 1,320 $ 13,256
======== ========
Supplemental disclosures of cash flow data:
Cash paid during the period for:
Interest paid $ - $ 555
Non-cash investing and financial activities:
Value of notes receivable discharged in
exchange for common stock $ - $ 1,024
See Notes to Condensed Consolidated Financial Statements.
J NET ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Significant accounting policies and business
Business:
J Net Enterprises, Inc. ("J Net" or the "Company") is a holding company
with concentrated investments in enterprise software (the "E-Commerce
Operations") and technology infrastructure companies (the "Technology-
Related Businesses").
E-Commerce Operations are conducted through IW Holdings, Inc. ("IWH"), a
wholly owned subsidiary of the Company and the successor to the business
formerly conducted by InterWorld Corporation ("InterWorld"), a 95% owned
subsidiary of the Company. IWH became the owner of the intellectual
property and assets of InterWorld in May 2002 when InterWorld defaulted
on a secured promissory note with J Net. Upon completion of foreclosure
proceedings by J Net against InterWorld, the assets and intellectual
property of InterWorld were transferred to J Net in full satisfaction of
the debt. J Net contributed those assets to IWH to conduct the
E-Commerce Operations.
The Technology-Related Businesses segment includes minority investments
in other technology companies including, but not limited to, systems
development and software companies. The E-Commerce Operations have
required a substantial amount of Management's time and the Company's
financial resources during the preceding year. As a result, the
Technology-Related Businesses investments have been curtailed.
The Company continues to actively seek potential acquisitions and
expansion opportunities. Management expects to devote resources to
these efforts and may incur expenses in connection with these
activities. The Company anticipates that, as it engages in such
activities, it will periodically incur expenses that may have a material
effect on the Company's operating income.
Although the Company is exploring such expansion and acquisition
opportunities, there can be no assurance that such opportunities will be
available on terms acceptable to J Net, or that, if undertaken, they
will be successful.
Recent events:
In May 2002, the Company announced that it would extend a voluntary
repurchase offer to the holders of its $27.75 million of convertible
subordinated notes ("Notes"). In June 2002, the offers were accepted by
all such holders and the Notes were paid off in July 2002.
Business segments:
The Company has two reportable business segments; E-Commerce Operations
and Technology-Related Businesses. Prior to May 2001, the Company
operated in only one segment, the Technology-Related Businesses. All
intersegment activity has been eliminated. Accordingly, segment results
reported exclude the effect of transactions between the Company and its
subsidiaries. Assets are the owned assets used by each operating segment.
Basis of presentation:
The accompanying unaudited condensed consolidated financial statements
included herein have been prepared by the Company pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted
pursuant to such rules and regulations, although Management believes
that the disclosures are adequate to make the information presented not
misleading.
In the opinion of Management, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments, consisting of
normal recurring accruals, necessary to present fairly the Company's
financial position as of September 30, 2002, the results of its
operations for the three months ended September 30, 2002 and 2001 and
its cash flows for the three months ended September 30, 2002 and 2001.
The results for the three months ended September 30, 2002 and 2001 are
not necessarily indicative of results for a full year. Information
included in the condensed consolidated balance sheet as of June 30, 2002
has been derived from the Company's Annual Report to the Securities and
Exchange Commission on Form 10-K for the fiscal year ended June 30, 2002
(the "2002 Form 10-K"). These unaudited condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and disclosures included in the 2002 Form 10-K.
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.
Short-term investments:
At June 30, 2002, the Company held short-term investments in Mariner
Partners, L.P. ("Mariner"), a private investment fund which had a value of
$29.6 million. As a result of the voluntary offer to repurchase the
Company's Subordinated Notes (See Note 7), the balance of the Mariner
account was reduced from $29.6 million to $6.6 million at September 30,
2002. 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. 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 and other income in the consolidated statement of
operations.
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.
As of September 30, 2002, the unaudited condensed consolidated balance
sheet contains approximately $2.1 million of unsecured creditor
liabilities of InterWorld which, although consolidated, are separate and
distinct from J Net. As a result of J Net's foreclosure on its secured
promissory note with InterWorld and the subsequent transfer of assets to
IWH in settlement of the secured promissory note, InterWorld does not have
the financial resources to pay the face value of the obligations. The
Management of J Net has actively negotiated and settled with the
significant creditors of InterWorld since it completed the foreclosure
actions. Management expects, but cannot provide assurance, that the
remaining unsecured creditor liabilities of InterWorld will be settled at
substantially less than their face 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 Businesses.
Impairments:
The Company adopted Statement of Financial Accounting Standards No. 144 on
July 1, 2002 ("SFAS 144"). The Financial Accounting Standards Board's
("FASB") new rules on asset impairment supercede FASB Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of", and provide a single accounting model for
long-lived assets to be disposed of.
Although retaining many of the fundamental recognition and measurement
provisions of Statement 121, the new rules significantly change the
criteria that would have to be met to classify an asset as held-for-sale.
This distinction is important because assets held-for-sale are stated at
the lower of their fair values or carrying amounts and depreciation is no
longer recognized.
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 life of the asset or lease terms, as applicable, as
follows: 2 to 7 years for equipment and 3 to 10 years for leasehold
improvements. Property sold or retired is eliminated from the accounts in
the period 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. As of September 30, 2002, the
Company holds 40 acres of land with building improvements in the village
of Wellington, Florida. The property was obtained as a result of a
foreclosure on a loan to Michael Donahue, the former Vice Chairman and
Chief Executive Officer of InterWorld. The property has been listed for
sale. The carrying value of $4.95 million is net of estimated carrying
and sales costs.
Income taxes:
The Company accounts for income taxes in accordance with SFAS 109,
"Accounting for Income Taxes" ("SFAS 109"). SFAS 109 requires that
deferred tax assets and liabilities arising from temporary differences
between book and tax bases will be recognized using enacted tax rates at
the time such temporary differences reverse. In the case of deferred tax
assets, SFAS 109 requires a reduction to deferred tax assets if it is more
likely than not that some portion or all of the deferred tax asset will
not be realized.
As of September 30, 2002, the Company is carrying a $1.0 million
receivable, which represents an estimate of tax refunds resulting from the
carry-back of operating losses incurred during 2002. There are
accumulated deferred tax assets of $17.9 million, which are fully offset
by a valuation allowance pursuant to SFAS 109. Such losses are limited by
certain IRS regulations. While Management continues to take actions
required to turn the Company profitable, the ability to generate income at
levels sufficient to realize the accumulated deferred benefits is not
determinable at this time.
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.
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 arrangement fee is recognized
as follows: (a) the total fair value of the undelivered elements, as
indicated by vendor-specific objective evidence, is deferred and (b) the
difference between the total arrangement fee and the amount deferred for
the undelivered elements is recognized as revenue related to the delivered
elements. Software license agreements generally include two elements: the
software license and post-contract customer support. The Company has
established sufficient vendor-specific objective evidence 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 and
installation and integration support is recognized as the services are
rendered.
Maintenance revenue:
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. Recognition of revenue is deferred until advance
payments from customers are received for maintenance and support.
Deferred revenue consists principally of billings in advance for services
and support not yet provided and uncollected billings to customers for
maintenance and post contract support.
Recently issued accounting standards:
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 141, "Business Combinations" ("SFAS 141") and Statement of 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 adopted SFAS
141 and SFAS 142 beginning July 1, 2002. As of September 30, 2002, the
Company had no goodwill or other intangible assets due to previous
impairments or losses incurred on investments where goodwill had been
recorded. The Company expects that the adoption will not have a material
impact on future financial statements.
The FASB issued a Statement on Asset Impairment ("SFAS 144") that is
applicable to financial statements issued for fiscal years beginning after
December 15, 2001. The FASB's new rules on asset impairment supercede
FASB Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of", and provide a single
accounting model for long-lived assets to be disposed of.
Although retaining many of the fundamental recognition and measurement
provisions of Statement 121, the new rules significantly change the
criteria that would have to be met to classify an asset as held-for-sale.
This distinction is important because assets held-for-sale are stated at
the lower of their fair values or carrying amounts and depreciation is no
longer recognized.
The Company adopted SFAS 144 on July 1, 2002 and does not anticipate its
application to have a significant impact on the results of operations as
compared with practices in place today.
In April 2002, the FASB issued Statement of Financial Accounting Standards
o. 145, "Rescission of FASB Statements No. 4, 44 and 62, Amendment of FASB
Statement 13, and Technical Corrections ("SFAS 145"). For most companies,
SFAS 145 requires gains and losses from the extinguishment of debt to be
classified as a component of income or loss from continuing operations.
Prior to the issuance of SFAS 145, early debt extinguishments were
required to be recognized as extraordinary items. SFAS 145 amended other
previously issued statements and made numerous technical corrections.
With the exception of the accounting treatment for extinguishments of
debts, those other modifications are not expected to impact the
consolidated financial statements of the Company. SFAS 145 is effective
for fiscal years beginning after May 15, 2002. Accordingly, the Company
has applied such provisions in the accompanying consolidated financial
statements for the quarter ended September 30, 2002.
The FASB recently issued Statement of Financial Accounting Standards No.
146, "Accounting for Costs Associated with Exit or Disposal Activities"
("SFAS 146"). SFAS 146 nullifies the Emerging Issues Task Force ("EITF")
Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity". SFAS 146 requires that a
liability associated with an exit or disposal activity be recognized when
the liability is incurred while EITF Issue No. 94-3 recognized such
liabilities at such time that an entity committed to an exit plan. The
provisions of SFAS 146 are effective for exit or disposal activities
initiated after December 31, 2002 with early application encouraged.
Note 2 - Investments in Technology-Related Businesses
On September 28, 2001, the Company completed the purchase of the remaining
99% of Meister Brothers Investments, LLC ("MBI") that the Company did not
already own. The purchase was executed pursuant to a settlement of a put
agreement (the "Put Agreement") entered into as part of the original
investment in March 2000 between the Company and Keith Meister and Todd
Meister, Co-Presidents (the "Co-Presidents") and managers of the Fund.
Under terms of the original Put Agreement, the Company was required to
issue 275,938 shares of the Company's common stock in exchange for each of
the member interests in MBI owned by the Co-Presidents. A corresponding
call agreement (the "Call Agreement") would have required the Company to
issue 312,500 shares of the Company's common stock. On September 28,
2001, the Company entered into a series of agreements relating to the
termination of the employment of the Co-Presidents, a cancellation of the
Put Agreement and corresponding Call Agreement and the repurchase of the
shares issuable under the Put Agreement and as a result paid an aggregate
of $1.6 million of consideration. A portion of such consideration equal
to $1.0 million was used to offset a loan from the Company to the
Co-Presidents. As a result, the entire $1.6 million of consideration was
expensed as restructuring and unusual charges for the three months ended
September 30, 2001, upon completion of the transaction.
eStara, Inc. ("eStara") is a non public development stage company that
provides voice communication technology that enables on-line customers to
talk and conduct e-business over the Internet. The Company uses the cost
method to account for this investment. The Company invested a total of
$4 million in two separate financing rounds of eStara between September
2000 and July 2001. As a result of Management's periodic assessments of
eStara's valuation, impairments totaling $3.6 million have been charged
against the carrying value of this investment.
Presently, eStara's operations are being funded under a $2 million bridge
loan pending completion of an additional financing round. J Net is not a
party to the group of investors providing the bridge financing and the
terms of the proposed financing are not available at this time.
Management believes the current carrying value of $.4 million approximates
fair market value of the investment as of September 30, 2002.
Tellme Networks, Inc. ("Tellme") provides voice driven interactive
services to consumers and businesses. Tellme enables users, through voice
recognition and speech synthesis, to utilize a telephone to access the
Internet and listen to on-line information. The Company uses the cost
method to account for its investment in Tellme. Based on Tellme's
existing financial condition, its current and projected cash utilization
and continued positive operating developments, Management believes the
original $2.0 million investment approximates the fair market value as of
September 30, 2002.
The following table sets forth the carrying values of the Company's
investments and the related activity of each active investment for the
three months ended September 30, 2002 (dollars in thousands):
Net
balance at Carrying value
6/30/02 Additions Impairments as of 9/30/02
__________ _________ ___________ ______________
eStara, Inc. $ 425 $ - $ - $ 425
Tellme Networks 2,000 - - 2,000
______ ______ ______ ______
Totals $2,425 $ - $ - $2,425
====== ====== ====== ======
Note 3 - Loss per share
Basic loss per share for the three months ended September 30, 2002 and for
the three months ended September 30, 2001 are computed by dividing net
loss from operations by the weighted average number of common shares
outstanding for the respective period. Since the three month periods
ended September 30, 2002 and 2001 had losses from continuing operations,
no potential common shares from the assumed exercise of options or
convertible subordinated notes have been included in the diluted loss per
share computations pursuant to accounting principles generally accepted in
the United States.
The following is the amount of loss and number of shares used in the basic
and diluted loss per share computations (dollars and shares in thousands,
except per share data):
Three Months Ended
September 30,
2002 2001
________ ________
Basic loss per share:
Loss available to common stockholders $ (343) $(14,200)
======= ========
Shares:
Weighted average number of common
shares outstanding 8,525 8,525
======= ========
Basic loss per share $ (.04) $ (1.67)
======= ========
Diluted loss per share:
Loss available to common shareholders $ (343) $(14,200)
======= ========
Shares:
Weighted average number of common
shares outstanding 8,525 8,525
======= ========
Weighted average number of common
shares and common share equivalents
outstanding 8,525 8,525
======= ========
Diluted loss per share $ (.04) $ (1.67)
Note 4 - Related party transactions
One director of J Net is a partner of a law firm that provides legal
services to the Company. Fees paid to that firm were not material for the
three months ended September 30, 2002. Management believes that fees
charged are competitive with fees charged by other law firms.
Three directors, entities controlled by those directors or adult children
of those directors invested $7 million in the convertible subordinated
notes (the "Notes") issued by the Company. Officers and employees
invested either directly or indirectly $2.5 million in the notes as of
June 30, 2002. The Notes were repurchased in July 2002 on terms identical
to the voluntary repurchase offers made to unrelated parties.
Note 5 - Operating segments
The Company has two reportable segments: E-Commerce Operations and
Technology-Related Businesses. Prior to May 2001, the Company operated
only in one segment, Technology-Related Businesses. All significant
intersegment activity has been eliminated. Accordingly, segment results
reported exclude the effect of transactions between the Company and its
subsidiaries. Assets are the owned assets used by each operating segment.
Summary of Consolidated loss from Continuing Operations, net of tax
(dollars in thousands):
Three Months Ended Three Months Ended
September 30, 2002 September 30, 2001
__________________ __________________
Net loss:
E-Commerce Operations $(201) $ (9,546)
Technology-Related Businesses (142) (4,654)
_____ ________
Net loss $(343) $(14,200)
===== ========
E-Commerce Operations:
Revenues $ 656 $ 2,825
Cost of revenues 148 1,416
_____ ________
Gross profit 508 1,409
Operating expenses 709 10,675
Other income (expense) - (280)
_____ ________
Net loss from E-Commerce
Operations $(201) $ (9,546)
===== ========
Technology-Related Businesses:
Total operating expenses $ 867 $ 5,085
Interest and other income 725 431
_____ ________
Net loss from Technology-
Related Businesses $(142) $ (4,654)
===== ========
As of As of
September 30, 2002 June 30, 2002
__________________ _____________
Assets
E-Commerce Operations $ 363 $ 632
Technology-Related Businesses 17,460 46,211
_______ _______
Total $17,823 $46,843
======= =======
Note 6 - Commitments and contingencies
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.
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.
As of September 30, 2002, the unaudited condensed consolidated balance
sheet contains approximately $2.1 million of unsecured creditor
liabilities of InterWorld, which are separate and distinct from J Net. As
a result of J Net's foreclosure on its secured promissory note with
InterWorld and the subsequent transfer of assets to IWH in settlement of
the secured promissory note, InterWorld does not have the financial
resources to pay the face value of the obligations. The Management of J
Net has actively negotiated and settled with the significant creditors of
InterWorld since it completed the foreclosure actions. Management
expects, but cannot provide assurance, that the remaining unsecured
creditor liabilities of InterWorld will be settled at substantially less
than their face value.
The Company has employment contracts with its President and Chief
Financial Officer. Minimum remaining obligations under those contracts
totaled approximately $.4 million as of September 30, 2002.
As of September 30, 2002, J Net did not have any litigation, pending or
threatened, or other claims filed against the Company. However,
InterWorld is subject to two claims.
On March 8, 2001, as amended on May 29, 2001, InterWorld received notice
that the Securities and Exchange Commission (the "Commission") had
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 activity 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
as 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.
PBS Realty ("PBS"), a real estate broker conducting business in New York
City filed a $1.2 million claim against InterWorld in April 2002. The
claim alleges that PBS is owed commissions by InterWorld for services
related to PBS's attempts to sublease office space previously occupied by
InterWorld at 395 Hudson Street in New York City. InterWorld is
vigorously contesting the claim and InterWorld management does not believe
a liability exists at this time. J Net was not a party to the brokerage
agreement and no claim has been asserted against J Net by PBS.
Note 7 - Convertible subordinated notes
The Company completed its offering of $27.75 million of the Notes to a
small group of investors in October 2000.
In May 2002, the Company made a voluntary repurchase offer to the existing
holders of the unregistered Notes. Such offer was made at the face amount
of the Notes and did not include any accrued but unpaid interest since
March 31, 2002, the last interest payment date. Such action was approved
on May 8, 2002 by a special committee of the Board of Directors of the
Company, consisting of directors who had no financial interest in the
Notes, following a request made by the largest third party holder of such
Notes.
In June 2002, the offers were accepted by all of such holders and the
Notes were paid off in July 2002. Under terms of the voluntary repurchase
offer, the repayment excluded interest on the Notes which had accrued
since April 1, 2002. The amount of forgiven interest totaled $.6 million
and is reported as a gain on the repurchase of the Notes for the three
months ended September 30, 2002 in the condensed consolidated statement of
operations.
Item 2. Management's Discussion and Analysis of Financial Condition and
_______________________________________________________________
Results of Operations
_____________________
Critical Accounting Policies
____________________________
General:
The policies outlined below are critical to our operations and the
understanding of our results of operations. The impact of these policies
on our operations is discussed throughout Management's Discussion and
Analysis of Financial Condition and Results of Operations where such
policies affect our reported and expected financial results. For a
detailed discussion on the application of these and other accounting
policies, refer to Note 1 in the Notes to the Condensed Consolidated
Financial Statements for this Quarterly report. Note that our preparation
of this Quarterly Report on Form 10-Q requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities and the reported amounts
of revenue and expenses during the reporting period. There can be no
assurance that actual results will not differ from those estimates.
Accounting methods for 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 Businesses.
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 arrangement fee is recognized
as follows: (a) the total fair value of the undelivered elements, as
indicated by vendor-specific objective evidence, is deferred and (b) the
difference between the total arrangement fee and the amount deferred for
the undelivered elements is recognized as revenue related tot he delivered
elements. Software license agreements generally include two elements:
the software license and post-contract customer support. The Company has
established sufficient vendor-specific objective evidence 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
or 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 and
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. Recognition of revenue is deferred until advance
payments from customers are received for maintenance and support.
Deferred revenue consists principally of billings in advance for services
and support not yet provided and uncollected billings to customers for
maintenance and post contract support.
Impairments
The Company adopted Statement of Financial Accounting Standards No. 144 on
July 1, 2002 ("SFAS 144"). The Financial Accounting Standards Board's
("FASB") new rules on asset impairment supercede FASB Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of", and provide a single accounting model for
long-lived assets to be disposed of.
Although retaining many of the fundamental recognition and measurement
provisions of Statement 121, the new rules significantly change the
criteria that would have to be met to classify an asset as held-for-sale.
This distinction is important because assets held-for-sale are stated at
he lower of their fair values or carrying amounts and depreciation is no
longer recognized.
Gain on repurchase of Notes
In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145, "Rescission of FASB Statements No. 4, 44 and 62, Amendment of
FASB Statement 13, and Technical Corrections ("SFAS 145"). For most
companies, SFAS 145 requires gains and losses from the extinguishment of
debt to be classified as a component of income or loss from continuing
operations. Prior to the issuance of SFAS 145, early debt extinguishments
were required to be recognized as extraordinary items. SFAS 145 amended
other previously issued statements and made numerous technical
corrections. With the exception of the accounting treatment for
extinguishments of debts, those other modifications are not expected to
impact the consolidated financial statements of the Company.
Forward-Looking Statements; Risks and Uncertainties
___________________________________________________
Certain information included in this Form 10-Q 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 operations, performance,
development and results of the Company include, but are not limited to,
the ability to increase sales of its e-commerce software products, attract
new clients, maintain existing clients in the face of new competition and
reduce costs. In other investment or partnering activities, the Company
must identify and successfully acquire interests in systems development or
other technology-based companies and grow such businesses. The ability of
entities in which the Company has invested to raise additional capital on
terms which are acceptable to the Company, or other investors, is critical
in the ongoing success of such companies and obtaining additional capital
in markets which are performing poorly may be difficult.
Overview
________
J Net Enterprises, Inc. (referred to hereinafter as "J Net" or the
"Company") is a technology holding company with concentrated investments
in enterprises software and technology infrastructure companies.
The Company operates in two business segments, E-Commerce Operations and
Technology-Related Businesses. E-Commerce Operations are conducted
through IW Holdings, Inc. ("IWH"), a wholly owned subsidiary of the
Company and the successor to the business formerly conducted by InterWorld
Corporation ("InterWorld"). The e-commerce software products include
functionality that addresses distributed order management, customer
relationship management, supplier relationship management, sales channel
management, and business intelligence for companies in the retail,
manufacturing, distribution, telecommunications and transportation
industries. The E-Commerce Operations applications, components and tools
are based on IWH's Process-Centric(tm) architecture which enables companies
to maximize returns on investments in information technology by allowing
them to quickly implement the software and adapt to changing market
conditions without the need for programmers.
Marketing
_________
From February 2002 through October 30, 2002, marketing of e-commerce
products in the Americas were conducted through a Strategic Partnership
Agreement (the "Agreement") with Titan Ventures, LP ("Titan"). Under this
Agreement, Titan was required to achieve certain milestones to earn a
percentage of E-Commerce Operations equity. Revenues generated from the
Agreement were to be shared between Titan and the Company at predetermined
percentages. Costs of marketing efforts were borne entirely by Titan.
Titan failed to meet the required milestones contained in the Agreement
and the Company notified Titan that it would terminate the Agreement
pursuant to its terms in favor of a multi-channel distribution strategy.
Subsequent to a transition period required by the Agreement, the Company
entered into a nonexclusive reselling alliance with Nextjet, Inc. in
November 2002 and is presently negotiating a similar alliance with other
parties. Titan has requested, and the Company is considering, entering
into an agreement whereby Titan could remain a nonexclusive reseller of
the Company's E-Commerce products. The Company also has existing reseller
and marketing agreements in Europe and Japan.
J Net also holds minority investments in other technology companies
including, but not limited to, systems development and software companies.
The investments are held and managed by the Technology-Related Business
segment. For the preceding 12 months, activities in the Technology-
Related Businesses segment have been curtailed. However, the Company is
exploring expansion and acquisition opportunities. Such activities may
require use of Management's resources and expenses. The Company expects
that as it engages in such activities, it may periodically incur expenses
that may have a material affect on the Company's operating income.
Although the Company is exploring these expansion opportunities, there can
be no assurance that the opportunities will be available on terms
acceptable to J Net or that if undertaken, will be successful.
Three Months Ended September 30, 2002 and 2001:
Results of Operations
_____________________
Total revenues:
Consolidated revenues, all of which are related to E-Commerce Operations,
were $.7 million for the three months ended September 30, 2002 versus $2.8
million for the three months ended September 30, 2001, reflecting a
decrease of $2.1 million or 75%. The decrease reflects ongoing declines
in markets for e-commerce products, which began in 2000. All components
of revenue (licenses, services and maintenance) were down from the
previous year. There were no license sales in 2002 compared with 4 such
sales in the comparable three month period in 2001. Professional service
revenue, which tends to follow license sales also declined to $.2 million
in 2002 from $.7 million in 2001. Post contract maintenance revenue also
declined due primarily to reductions in renewals from "dot-com" customers.
Total cost of revenues:
Cost of revenues, all of which are related to E-Commerce Operations, were
$.2 million for the three months ended September 30, 2002. The total
cost of revenues was $1.4 million for the three months ended September 30,
2001. The primary causes of the $1.2 million decrease compared to the
three months ended September 30, 2001 are the substantial reductions in
workforce and the variable cost impacts from reduced license sales
revenues.
Operating expenses:
Total operating expenses were $1.6 million for the three months ended
September 30, 2002 compared to $15.8 million for the three months ended
September 30, 2001. The decrease of $14.2 million reflects the impact of
workforce and other cost reductions which lowered monthly operating costs
for E-Commerce Operations from $3 million per month in 2001 to
approximately $.4 million per month in 2002. The quarter ended September
30, 2001 also included restructuring charges which totaled $4.6 million.
There were no restructuring and unusual charges for the three months ended
September 30, 2002.
Other income (expense):
For the three months ended September 30, 2002, the Company had other
income of $.7 million compared with net other income of $.2 million for
the three months ended September 30, 2001. Interest income decreased to
$.2 million for the three months ended September 30, 2002 from $.7 million
in the prior year quarter because of reductions in the average amount
invested at Mariner which was redeemed to repurchase the subordinated
convertible notes (the "Notes"). Interest expense decreased from $.6
million for the three months ended September 30, 2001 to $0 in the
comparable quarter ended September 30, 2002. In addition, a $.6 million
gain was recognized in the quarter ended September 30, 2002 from the
repurchase of the Notes. The gain reflects the interest which had accrued
since April 1, 2002, but was not paid pursuant to the terms of the
voluntary repurchase offers made to the holders of the Notes.
Federal income taxes:
There is no federal income tax provision or benefit for the three months
ended September 30, 2002 or 2001. All taxable transactions and temporary
differences for federal income taxes are fully offset by a reserve
allowance. Such allowances will continue to be provided until such time
as the Company begins to generate operating income.
The Company is analyzing the effect of recent revisions to the Internal
Revenue Code affecting the carryback of net operating losses incurred
during the Company's fiscal years ended June 30, 2001 and 2002. The
amount of any increased refund resulting from these rules, if any, is not
determinable at this time. Any such refund claim could be subject
to examination and review by the Internal Revenue Service and is subject
to approval by the Joint Committee of Taxation.
Net loss:
The net loss was $.3 million for the three months ended September 30, 2002
compared to a loss of $14.2 million in the comparable 2001 quarter. The
$13.9 million improvement is due primarily to reductions in operating
expenses and the nonrecurring restructuring charges from the September 30,
2001 quarter. The results for the three months ended September 2002 also
benefited from the $.6 million gain on the forgiveness of interest in
connection with the repurchase of the Notes.
Capital Resources and Liquidity
_______________________________
Liquidity
The Company's sources of funds for the quarter ended September 30, 2002
were generated from E-Commerce Operations revenues, interest from cash
deposits and Mariner Investments, L.P. ("Mariner") earnings.
As of June 30, 2002, the Company had $36.3 million in cash and marketable
securities. In July 2002, a total of $27.3 million was used to complete
payments to the holders of the Notes pursuant to the voluntary repurchase
offer made by the Company in May 2002. As a result of the repurchase, the
remaining cash and securities total $7.9 million as of September 30, 2002.
In 2003, the Company expects to receive proceeds from the sale of assets
of approximately $5 million and receive income tax refunds of
approximately $1 million. Therefore, available liquidity is expected to
reach approximately $14 million, which the Company believes should be
adequate to fund existing operations and allow additional time for the
multi-channel marketing efforts to increase cash flows from operations.
These funds also provide resources for the Company to explore new
expansion or acquisition opportunities.
As of September 30, 2002, the total accounts payable and accrued
liabilities include approximately $2.1 million attributable to unsecured
creditors of InterWorld. While these liabilities are included as part of
the consolidated group, these liabilities remain separate and distinct to
InterWorld and J Net is not liable to settle the debts. Management has
actively been negotiating with many of the significant unsecured creditors
to settle aged claims. Between January and September 2002, approximately
$1.1 million of liabilities were settled for approximately $.3 million.
Although there can be no assurances, Management believes the remaining
obligations will be settled at amounts substantially less then their
respective face values.
Cash Flows
In the quarter ended September 30, 2002, J Net used $.6 million in
operations. Approximately $.5 million was used in E-Commerce Operations.
As a result of the Company's restructuring efforts during the first half
of fiscal 2002, the monthly cash use has been reduced from approximately
$3 million per month in September 2001 to approximately $.2 million per
month in the quarter ended September 30, 2002. Revenue will have to be
increased through the Company's multi-channel marketing strategy for cash
flows from operations to become positive.
Cash provided by investing activities in the quarter ended September 30,
2002 was a net $23 million, all of which was attributable to the
redemption of marketable securities used in the repurchase of the Notes.
In 2001, the Company reduced its focus on making minority-interest based
investments and concentrated its growth efforts on the E-Commerce
Operations. While the Company continues to evaluate potential
investments, the process remains selective.
Cash used in financing activities in the quarter ended September 30, 2002
was $27.75 million representing the face value of the repurchased Notes.
The actual cash used to repurchase the Notes, after recovery $.4 million
of loans due to the Company, was $27.3 million.
Recently Issued Accounting Standards
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 141, "Business Combinations" ("SFAS 141") and Statement of 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 adopted SFAS
141 and SFAS 142 beginning July 1, 2002. As of September 30, 2002, the
Company had no goodwill or other intangible assets due to previous
impairments or losses incurred on investments where goodwill had been
recorded. The Company expects that the adoption will not have a material
impact on future financial statements.
The FASB issued a Statement on Asset Impairment ("SFAS 144") that is
applicable to financial statements issued for fiscal years beginning after
December 15, 2001. The FASB's new rules on asset impairment supercede
FASB Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of", and provide a single
accounting model for long-lived assets to be disposed of.
Although retaining many of the fundamental recognition and measurement
provisions of Statement 121, the new rules significantly change the
criteria that would have to be met to classify an asset as held-for-sale.
This distinction is important because assets held-for-sale are stated at
the lower of their fair values or carrying amounts and depreciation is no
longer recognized.
In April 2002, the FASB issued Statement of Financial Accounting Standards
o. 145, "Rescission of FASB Statements No. 4, 44 and 62, Amendment of FASB
Statement 13, and Technical Corrections ("SFAS 145"). For most companies,
SFAS 145 will require gains and losses from the extinguishment of debt to
be classified as a component of income or loss from continuing operations.
Prior to the issuance of SFAS 145, early debt extinguishments were
required to be recognized as extraordinary items. SFAS 145 amended other
previously issued statements and made numerous technical corrections.
With the exception of the accounting treatment for extinguishments of
debts, those other modifications are not expected to impact the
consolidated financial statements of the Company.
The FASB recently issued Statement of Financial Accounting Standards No.
146, "Accounting for Costs Associated with Exit or Disposal Activities"
("SFAS 146"). SFAS 146 nullifies the Emerging Issues Task Force ("EITF")
Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity". SFAS 146 requires that a
liability associated with an exit or disposal activity be recognized when
the liability is incurred while EITF Issue No. 94-3 recognized such
liabilities at such time that an entity committed to an exit plan. The
provisions of SFAS 146 are effective for exit or disposal activities
initiated after December 31, 2002 with early application encouraged. The
Company does not anticipate that adoption of SFAS 146 will have a material
affect on its results of operations.
Factors Which May Affect Future Results
_______________________________________
The Company's financial and management resources have been concentrated on
its E-Commerce Operations. For the past two years, the technology-related
markets have experienced significant declines in sales, market value, and
available capital resources to develop new products. In addition, the
technology-related environment is extremely competitive. The combination
of the above factors involves a number of risks and uncertainties. Even
with the significant reductions to its cost structure, the Company's
operations will require an increase in sales of e-commerce products to
avoid further cost reductions. Increases in sales are dependent on
several factors including (1) successful closed deals from its channel
partners and resellers, (2) an increase in information technology spending
by businesses, (3) continued solvency of existing customers, (4)
availability of capital, (5) an increase in the use of the Internet by
businesses and individuals, (6) preservation of existing patents and
trademarks, and (7) the Company's ability to build and deliver products
ahead of its competitors. There is no assurance that any of the events
will occur, or be sustainable if they do occur.
Item 3. 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 earns a fixed rate of interest over short periods (7-35 days)
Based upon the invested money market balances at September 30, 2002, a 10%
change in interest rates would change pretax interest income by
approximately $2 thousand 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 holds short-term investments with a value of $6.6 million in
Mariner Partners, L.P., a private investment fund. 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
March 31, 2002 and the average return of such investment for the previous
six months, a 10% reduction in those rates would reduce pretax income by
approximately $11 thousand a 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 size and nature of the Company's
investments.
Item 4. Controls and Procedures
_______________________
Based on their evaluation of the Company's disclosure controls and
procedures as of a date within 90 days of the filing of this Report, the
Chief Executive Officer and Chief Financial Officer have concluded that
such controls and procedures are effective.
There were no significant changes in the Company's internal controls or in
other factors that could significantly affect such controls subsequent to
the date of such evaluation by the Chief Executive Officer and Chief
Financial Officer.
PART II. OTHER INFORMATION
___________________________
Item 1. Legal Proceedings
_________________
On March 8, 2001, as amended on May 29, 2001, InterWorld received notice
that the Securities and Exchange Commission (the "Commission") had
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.
PBS Realty ("PBS"), a real estate broker conducting business in New York
City filed a $1.2 million claim against InterWorld Corporation, a
subsidiary of the Company, in April 2002. The claim alleges that PBS is
owed commissions by InterWorld for services related to PBS's attempts to
sublease office space previously occupied by InterWorld at 395 Hudson
Street in New York City. InterWorld is vigorously contesting the claim
and InterWorld management does not believe a liability exists at this
time. J Net was not a party to the brokerage agreement and no claim has
been asserted against J Net by PBS.
The Company is a party to other claims, legal actions and complaints
arising in the ordinary course of business. Management believes that its
defenses are substantial and that J Net's legal position can be
successfully defended without material adverse effect on its consolidated
financial statements.
Item 6. Exhibits and Reports on Form 8-K
________________________________
(a) Exhibits:
99.1 Certification of Chief Executive Officer pursuant to 18
U.S.C. SS 1350, Section 906 of the Sarbanes-Oxley Act of
2002.
99.2 Certification of Chief Financial Officer pursuant to 18
U.S.C. SS 1350, Section 906 of the Sarbanes-Oxley Act of
2002
99.3 Certification of Chief Executive Officer pursuant to 18
U.S.C. SS 1350, Section 302 of the Sarbanes-Oxley Act of
2002.
99.4 Certification of Chief Financial Officer pursuant to 18
U.S.C. SS 1350, Section 302 of the Sarbanes-Oxley Act of
2002.
(b) Reports on Form 8-K:
None
Signature
Pursuant to the requirements 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.
J NET ENTERPRISES, INC.
(Registrant)
By: /s/ Steven L. Korby
____________________________
STEVEN L. KORBY
Executive Vice President and
Chief Financial Officer
Date: November 14, 2002