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 December 31, 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 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 February 10, 2003.
J NET ENTERPRISES, INC. AND SUBSIDIARIES
INDEX
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited) -
December 31, 2002 and June 30, 2002
Condensed Consolidated Statements of Operations (Unaudited) -
Three and Six Months Ended December 31, 2002 and 2001
Condensed Consolidated Statement of Stockholders' Equity
(Unaudited) - Six Months Ended December 31, 2002
Condensed Consolidated Statement of Stockholders' Equity
(Unaudited) - Six Months Ended December 31, 2001
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Six Months Ended December 31, 2002 and 2001
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)
December 31, June 30,
ASSETS 2002 2002
____________ _________
Current assets:
Cash and cash equivalents $ 7,791 $ 6,674
Short-term investments 5,817 29,590
Accounts receivable, net 540 213
Notes receivable - related parties - 288
Notes receivable - 132
Federal income taxes receivable 742 983
Assets held for sale 4,283 4,950
Prepaid expenses 82 351
Other current assets - 293
_______ _______
Total current assets 19,255 43,474
Investments in technology-related
businesses 2,425 2,425
Property and equipment, net of
accumulated depreciation 106 180
Other non-current assets 738 764
_______ _______
Total assets $22,524 $46,843
======= =======
See Notes to Condensed Consolidated Financial Statements.
J NET ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
(Concluded)
December 31, June 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 2002 2002
____________________________________ ____________ ________
Current liabilities:
Accounts payable and other current
liabilities $ 3,287 $ 4,095
Current portion of convertible
subordinated notes - 27,750
Deferred revenue and customer deposits 788 1,306
________ ________
Total current liabilities 4,075 33,151
________ ________
Deferred income taxes 6,910 -
Deferred rent 203 213
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 (48,174) (46,031)
Less 1,708,929 shares of common stock in
treasury, at cost (16,054) (16,054)
________ ________
Total stockholders' equity 11,124 13,267
________ ________
Total liabilities and stockholders'
equity $ 22,524 $ 46,843
======== ========
See Notes to Condensed Consolidated Financial Statements.
J NET ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND SIX MONTHS ENDED DECEMBER 31, 2002 AND 2001
(Dollars in thousands, except per share data)
(Unaudited)
Three Months ended Six Months ended
December 31, December 31,
__________________ __________________
2002 2001 2002 2001
________ _______ _______ ________
Revenues, net
Product licenses $ 21 $ $ 21 $ 883
Maintenance 520 897 1,024 2,159
Services 166 318 318 998
_______ _______ _______ ________
Total revenues, net 707 1,215 1,363 4,040
_______ _______ _______ ________
Cost of revenues:
Product licenses - 254 - 400
Maintenance 61 98 87 293
Services 139 910 261 1,985
_______ _______ _______ ________
Total cost of revenues 200 1,262 348 2,678
_______ _______ _______ ________
Gross profit 507 (47) 1,015 1,362
Operating expenses:
Research and development 413 1,323 854 4,335
Sales - 2,493 - 5,893
Marketing alliances - 265 - 1,616
General and administrative 1,106 2,202 2,267 5,651
Impairment of assets held for
sale 1,050 - 1,050 -
Bad debt expense - - 20 -
Restructuring and unusual
charges - 1,824 - 6,372
Gains from settlements with
unsecured creditors - - (46) -
_______ _______ _______ ________
Total operating expenses 2,569 8,107 4,145 23,867
_______ _______ _______ ________
Operating loss (2,062) (8,154) (3,130) (22,505)
Other income (expense):
Interest and other income 400 726 572 1,444
Interest expense - (566) - (1,133)
Gain from repurchase of
convertible subordinated notes - - 553 -
Gain on disposal of assets 103 - 103 -
_______ _______ _______ ________
Total other income 503 160 1,228 311
Loss from operations before
income tax (1,559) (7,994) (1,902) (22,194)
_______ _______ _______ ________
Provision for Federal income tax 241 - 241 -
_______ _______ _______ ________
Net loss $(1,800) $(7,994) $(2,143) $(22,194)
======= ======= ======= ========
Basic loss per share $ (.21) $ (.94) $ (.25) $ (2.60)
Dilutive loss per share $ (.21) $ (.94) $ (.25) $ (2.60)
See Notes to Condensed Consolidated Financial Statements.
J NET ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED DECEMBER 31, 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
Comprehensive loss:
Net loss (2,143) (2,143)
______ ____ _______ ________ ______ ________ _______
Balance December 31,
2002 10,233 $102 $75,250 $(48,174) (1,709) $(16,054) $11,124
====== ==== ======= ======== ====== ======== =======
See Notes to Condensed Consolidated Financial Statements
J NET ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED DECEMBER 31, 2001
(Dollars and shares in thousands)
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 (22,194) (22,194)
Cumulative
translation
adjustment 60 60
____ ________
Total comprehensive
loss (22,134)
Amortization of
employee stock
options 290 290
______ ____ _______ ________ ______ ________ _____ ________
Balance December 31,
2001 10,233 $102 $75,250 $(42,699) (1,709) $(16,054) $ 43 $ 16,642
====== ==== ======= ======== ====== ======== ===== ========
See Notes to Condensed Consolidated Financial Statements.
J NET ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED DECEMBER 31, 2002 AND 2001
(Dollars in thousands)
2002 2001
_________ ________
Operating activities:
Net loss $ (2,143) $(22,194)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Receipt of Federal tax refund 6,910 -
(Gain)/loss on disposal of assets (103) 271
Impairment of assets 1,050 2,908
Amortization of stock-based compensation - 290
Depreciation and amortization 79 471
Changes in assets and liabilities:
Federal income taxes receivable 241 2,723
Accounts receivable (224) 1,430
Marketable securities (227) (1,046)
Prepaid expenses and other current assets 179 238
Other non-current assets 26 171
Accounts payable and other current liabilities (808) (1,248)
Deferred revenue and customer deposits (518) (1,497)
Deferred rent (10) (135)
Other, net - 60
_________ ________
Net cash provided by (used in) continuing
operations 4,452 (17,558)
Investing activities:
Investments in technology-related businesses - (1,333)
Investment in notes receivable - (125)
Collection of notes receivable related parties 288 1,009
Collection of note receivable 132 -
Redemption of marketable securities 24,000 -
Purchase of property and equipment (5) (82)
_________ ________
Net cash provided by (used in)
investing activities 24,415 (531)
Financing activities:
Repayment of debt (27,750) -
_________ ________
Net cash used in financing activities (27,750) -
_________ ________
Net increase (decrease) in cash and cash
equivalents 1,117 (18,089)
Cash and cash equivalents at beginning of period 6,674 24,272
_________ ________
Cash and cash equivalents at end of period $ 7,791 $ 6,183
========= ========
Supplemental disclosures of cash flow data:
Cash paid during the year for:
Interest paid $ - $ 1,119
Non-cash investing and financing activities:
Value of notes receivable discharged in
exchange for common stock $ - $ 1,024
Uncollected proceeds from sale of fixed
assets and investments $ 103 $ 219
See Notes to 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 IWH at the direction of J Net in
full satisfaction of the debt.
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. As a result, the Technology-Related Businesses
investments have been curtailed.
Recent events:
In March 2002, the Job Creation and Worker Assistance Act of 2002 (the
"Act") was signed into law. Among other things, the Act extended the
carry-back period for operating losses incurred in fiscal years ended in
2001 and 2002 from two years to five years. Based on this legislation, on
November 26, 2002, the Company filed for an aggregate refund of federal
income taxes previously paid of $7.7 million. The December 31, 2002
balance sheet reflects the receipt of $6.9 million of the refund with the
remainder still outstanding as of January 31, 2003. The refund claim is
subject to audit by the Internal Revenue Service ("IRS") and the review and
approval of the Congressional Joint Committee on Taxation. There can be no
assurance as to what part, if any, of such refund will ultimately be
allowed. Of the $7.7 million refund claim, Management deferred recognition
of $6.9 million pending further review by the IRS. The remaining amount
is not expected to be reserved.
On September 18, 2002, the Company's Board of Directors approved a new
stock option plan for IWH. Options to acquire 555,000 shares were issued
at an exercise price of $.50 per share, which Management believes is
representative of the fair market value at the issue date. With the
exception of 40,000 shares, which vest upon successful completion and
shipment of Commerce Exchange Version 6.0, the options have a three year
vesting period.
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.
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 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.
The accompanying unaudited condensed consolidated financial statements
include the accounts of the Company and its subsidiaries. All material
intercompany accounts and transactions are eliminated. The Company's
fiscal year ends on June 30. Unless the context indicates otherwise,
references to "2002" and "2001" are for the fiscal years ended June 30,
2002 and 2001, respectively.
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 December 31, 2002, the results of its operations
for the three and six months ended December 31, 2002 and 2001 and its cash
flows for the six months ended December 31, 2002 and 2001. The results for
the three and six months ended December 31, 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 unaudited condensed 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
unaudited condensed 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 December 31, 2002, the Company held short-term investments in Mariner
Partners, L.P. ("Mariner"), a private investment fund which had a value of
$5.8 million. 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 unaudited condensed
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 December 31, 2002, the unaudited condensed consolidated balance sheet
contains approximately $1.8 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. Management expects,
but cannot provide assurance, that the remaining unsecured creditor
liabilities of InterWorld will be satisfied 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, a
Statement on Asset Impairment, 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. There was no impact on the financial statements in
connection with the adoption of SFAS 144.
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 December 31, 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. On June 29, 2001, the loan,
together with accrued interest, totaled $13.2 million. Due to the
financial condition of Mr. Donahue, the Company executed a series of
agreements which foreclosed on the real property assets securing the loan.
In addition, 85,408 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, was estimated to be
$5.5 million on the date of the foreclosure. The $7.7 million loss,
representing the difference in the estimated value of the assets received
and the total value of the loan, is reported as compensation expense as a
component of general and administrative expenses in the 2001 consolidated
statement of operations.
In February 2003, the Company reached an agreement to sell its real estate
and related improvements. Closing of the transaction is expected to occur in
March 2003. The Company expects to receive proceeds, net of selling and
other costs, of approximately $4.3 million. As a result of this agreement,
the Company has recorded an impairment loss of approximately $1.1 million for
the three months ended December 31, 2002.
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 December 31, 2002, the Company is carrying a $.7 million receivable
and a $6.9 million deferred tax liability, representing the total tax
refund claim filed with the IRS resulting from the carry-back of operating
losses incurred in fiscal years 2001 and 2002. There are accumulated
deferred tax assets of $18.3 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 maintenance and support revenue is
deferred until payments are received, or sufficient evidence that payment
will be received exists.
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 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. SFAS 145 is effective for fiscal years
beginning after May 15, 2002. Accordingly, the Company has applied such
provisions in the accompanying unaudited condensed consolidated financial
statements for the quarter ended December 31, 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 a wholly-owned
subsidiary which holds technology-related investments. 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
$4.0 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 $2.0 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 December 31, 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. Subsequent to the
Company's investment in Tellme, operating losses in the development stage
company have been reduced each calendar quarter. In addition, Tellme has
sufficient cash and liquid investments to fund operations for several
years. It is the policy of the Company to evaluate its investments for
possible impairments quarterly. Recent forecasts continue to call for
improved operations in Tellme, and combined with their existing financial
resources, management believes there is not a sufficient set of indicators
which require the recognition of an impairment.
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 December 31, 2002 (dollars in thousands):
Net balance Carrying value
at 6/30/02 Additions Impairments as of 12/31/02
___________ _________ ___________ ______________
eStara, Inc. $ 425 $ - $ - $ 425
Tellme Networks 2,000 - - 2,000
______ ____ ____ ______
Totals $2,425 $ - $ - $2,425
====== ==== ==== ======
The following table sets forth the ownership information and accounting
methodology used for each of the Company's investments:
Accounting Type of Voting
Date(s) Acquired Method Security Percentage
_________________ __________ ________ __________
eStara, Inc. September 29, 2000 Cost Series "C" 14%
July 1, 2001 Preferred
Stock
Tellme Networks September 12, 2000 Cost Series "D" Less
Preferred than 1%
Stock
Note 3 - Loss per share
Basic loss per share for the three and six months ended December 31, 2002
and for the three and six months ended December 31, 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 and six
month periods ended December 31, 2002 and 2001 had losses from continuing
operations, no potential common shares from the assumed exercise of options
or 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 Six Months
Ended Ended
December 31, December 31,
__________________ _________________
2002 2001 2002 2001
_______ _______ ______ ________
Basic loss per share:
Loss available to common
stockholders $(1,800) $(7,994) $(2,143) $(22,194)
======= ======= ======= ========
Shares:
Weighted average number of
common shares outstanding 8,525 8,525 8,525 8,525
======= ======= ======= ========
Basic loss per share $ (.21) $ (.94) $ (.25) $ (2.60)
======= ======= ======= ========
Diluted loss per share:
Loss available to common
shareholders $(1,800) $(7,994) $(2,143) $(22,194)
======= ======= ======= ========
Shares:
Weighted average number of
common shares outstanding 8,525 8,525 8,525 8,525
======= ======= ======= ========
Weighted average number of
common shares and common
share equivalents
outstanding 8,525 8,525 8,525 8,525
======= ======= ======= ========
Diluted loss per share $ (.21) $ (.94) $ (.25) $ (2.60)
======= ======= ======= ========
The calculation of earnings per share data excluded the following items as
their effect is antidilutive:
Antidilutive Share Calculation
______________________________
(shares in thousands)
As of As of
Description December 31, 2002 December 31, 2001
___________ _________________ _________________
Potentially dilutive stock options 1,570 1,975
Common shares issuable
from assumed conversion
of subordinated notes - 2,581
Common shares issuable
from assumed exercise
of put option - -
_____ _____
Total antidilutive securities 1,570 4,556
===== =====
Note 4 - Related party transactions
Allan R. Tessler, Chairman and Chief Executive Officer of the Company, owns
approximately 15% of J Net Venture Partners, LLC (the "Manager"), the
managing member of Ventures I, a fund that invests in Technology-Related
businesses and is 100% owned by the Company. The Manager is to be paid a
fee from Ventures I equal to 20% of the profits, if any, of Ventures I
after the accumulation of preferred return to the investors, if any, of
Ventures I. Following the accumulation of a 35% internal rate of return,
the 20% increases to 35%. The Company, which is obligated to advance
certain expenses of the Manager, will never own less than 51% of the
Manager. Mr. Tessler has not received any compensation at any time from
the Manager as no profits have been generated.
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 approximately $4
thousand for the six months ended December 31, 2002 and $8 thousand for the
six months ended December 31, 2001. Management believes that fees charged
are competitive with fees charged by other law firms.
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 operations, net of tax (dollars in
thousands):
Three Months ended Six Months Ended
December 31, December 31,
___________________ _________________
2002 2001 2002 2001
Net loss: _______ _______ _______ ________
________
E-Commerce Operations $ (111) $(7,297) $ (312) $(16,843)
Technology-Related Businesses (1,689) (697) (1,831) (5,351)
_______ _______ _______ ________
Net loss (1,800) (7,994) (2,143) (22,194)
======= ======= ======= ========
E-Commerce Operations:
_____________________
Revenues 707 1,215 1,363 4,040
Cost of Revenues 200 1,262 348 2,678
_______ _______ _______ ________
Gross profit 507 (47) 1,015 1,362
Operating expenses 663 6,680 1,372 17,355
Other (income) expense (45) 570 (45) 850
_______ _______ _______ ________
Net loss from E-Commerce
Operations (111) (7,297) (312) (16,843)
======= ======= ======= ========
Technology-Related Businesses:
_____________________________
Total Operating Expenses 1,906 1,427 2,773 6,512
Other Income (458) (730) (1,183) (1,161)
Provision for Federal Income
Tax 241 - 241 -
_______ _______ _______ ________
Net loss from Technology-
Related Businesses $(1,689) $ (697) $(1,831) $ (5,351)
======= ======= ======= ========
As of
December 31, 2002
Assets: _________________
______
E-Commerce Operations $ 542
Technology-Related Businesses 21,982
_______
Total assets $22,524
=======
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 Federal Deposit Insurance
Corporation 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 December 31, 2002, the unaudited condensed consolidated balance sheet
contains approximately $1.8 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. Management expects, but cannot provide
assurance, that the remaining unsecured creditor liabilities of InterWorld
will be satisfied 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 $.3 million as of December 31, 2002.
As of December 31, 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 alleged that PBS was owed commissions by InterWorld for services
related to PBS's attempts to sublease office space previously occupied by
InterWorld in New York City. In January 2003, InterWorld and PBS reached
an agreement in principle to resolve the dispute which includes a payment
by InterWorld in exchange for, among other things, discontinuance with
prejudice of the lawsuit and a release. While an estimated probable
settlement amount has been accrued as a component of General and
Administrative expenses in the accompanying unaudited condensed
consolidated statement of operations for the quarter ended December 31,
2002, there remain certain unresolved open issues. Consequently, a
settlement may not be finalized.
Note 7 - Subsequent event
In February 2003, the Company reached an agreement to sell its real estate
and related improvements. Closing of the transaction is expected to occur
in March 2003. The Company expects to receive proceeds, net of selling and
other costs, of approximately $4.3 million. As a result of this agreement,
the Company has recorded an impairment loss of approximately $1.1 million for
the three months ended December 31, 2002.
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 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.
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 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.
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 maintenance and support revenue is
deferred until payments are received, or sufficient evidence that payment
will be received exists.
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. There was no impact on the financial statements in
connection with the adoption of SFAS 144.
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 (the
"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.
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.
Marketing
_________
From February 2002 through October 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 similar alliances with other parties. 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 15 months, activities in the Technology-Related
Businesses segment have been curtailed.
The Company is exploring expansion and acquisition opportunities, including
additional marketing alliances. 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 December 31, 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 December 31, 2002 versus $1.2
million for the three months ended December 31, 2001, reflecting a decrease
of $.5 million or 42%. The decrease reflects ongoing declines in markets
for e-commerce products, which began in 2000. Professional services and
maintenance were down from the previous year. Professional service
revenue declined to $.2 million in 2002 from $.3 million in 2001. Post
contract maintenance revenue also declined due primarily to reductions in
renewals from "dot-com" customers to $.5 million in 2002 from $.9 million
in 2001.
Total cost of revenues:
Cost of revenues, all of which are related to E-Commerce Operations, were
$.2 million for the three months ended December 31, 2002. The total cost
of revenues was $1.3 million for the three months ended December 31, 2001.
The primary causes of the $1.1 million decrease compared to the three
months ended December 31, 2001 are the substantial reductions in workforce
and the variable cost impacts resulting from reduced sales. Such variable
costs include third party contractor costs and royalty payments.
Operating expenses:
Total operating expenses were $2.6 million for the three months ended
December 31, 2002 compared to $8.1 million for the three months ended
December 31, 2001. The decrease of $ 5.5 million reflects savings of $4.8
million from the reduction of workforce and other reductions initiated in
September 2001. In addition to the reduced workforce, the three months
ended December 31, 2001 included $1.8 million of restructuring charges.
These cost improvements from the prior year are partially offset by $1.1
million of impairment charges attributable to the Company's agreement in
principle to sell its property in Wellington, Florida.
Other income (expense):
For the three months ended December 31, 2002, the Company had other income
of $.5 million compared with net other income of $.2 million for the three
months ended December 31, 2001. Interest income decreased to $.4 million
for the three months ended December 31, 2002 from $.7 million in the prior
year quarter due primarily to reductions in the average amount of cash and
investments at Mariner Investments, L.P. ("Mariner") resulting from the
repurchase of the subordinated convertible notes (the "Notes"). Interest
expense decreased from $.6 million for the three months ended December 31,
2001 to $0 in the comparable quarter ended December 31, 2002. In addition,
a $.1 million gain was recognized in the quarter ended December 31, 2002
from the release of escrow funds on the sale of the Company's investment in
Cyberbills in May 2001.
Federal income taxes:
There is a $.2 million federal income tax provision for the three months
ended December 31, 2002 resulting from a downward adjustment of the
estimated tax refund to the actual amount claimed in the Company's fiscal
2002 return. There was no provision for the three months ended December 31,
2001. All taxable transactions and temporary differences for federal
income taxes in the current fiscal year 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.
Net loss:
The net loss was $.8 million for the three months ended December 31, 2002
compared to a loss of $8.0 million in the comparable 2001 quarter. The
$7.2 million improvement is due primarily to reductions in operating
expenses and the nonrecurring restructuring charges from the December 31,
2001 quarter.
Six Months Ended December 31, 2002 and 2001:
Results of Operations
_____________________
Total revenues:
Consolidated revenues, all of which are related to E-Commerce Operations,
were $1.4 million for the six months ended December 31, 2002 versus $4.0
million for the six months ended December 31, 2001, reflecting a decrease
of $2.6 million or 65%. The decrease reflects ongoing declines in markets
for e-commerce products, which began in 2000. Product license sales,
professional services and maintenance revenues were down from the previous
year. Product license sales declined to $21 thousand from $.9 million in
2001. Professional service revenue declined to $.3 million in 2002 from $1
million in 2001. Post contract maintenance revenue also declined due
primarily to reductions in renewals from "dot-com" customers to $1 million
in 2002 from $2.2 million in 2001.
During the six months ended December 31, 2002, one license was sold
compared to four license sales in the prior year's six month period. The
number of customers receiving post-contract maintenance support was
nineteen at December 31, 2002 compared to forty-four at December 31, 2001.
Total cost of revenues:
Cost of revenues, all of which are related to E-Commerce Operations, were
$.4 million for the six months ended December 31, 2002. The total cost of
revenues was $2.7 million for six months ended December 31, 2001. The
primary causes of the $2.3 million decrease compared to the six months
ended December 31, 2001 are the substantial reductions in workforce and the
variable cost impacts from reduced sales.
Operating expenses:
Total operating expenses were $4.1 million for the six months ended
December 31, 2002 compared to $23.9 million for the six months ended
December 31, 2001. The decrease of $19.8 million reflects savings of $14.4
million from workforce and other cost reductions initiated in September
2001. The six months ended December 31, 2002 included $1.0 million of
impairment charges while the six months ended December 31, 2001 contained
$6.4 million of restructuring charges. There were no restructuring charges
for the six months ended December 31, 2002.
Other income (expense):
For the six months ended December 31, 2002, the Company had other income of
$1.2 million compared with net other income of $.3 million for the six
months ended December 31, 2001. Interest income decreased to $.6 million
for the six months ended December 31, 2002 from $1.4 million in the prior
year quarter because of reductions in the average amount invested at
Mariner which was redeemed to repurchase the Notes. Interest expense
decreased from $1.1 million for the six months ended December 31, 2001 to
$0 in the comparable six months ended December 31, 2002. In addition, a
$.1 million gain was recognized in the quarter ended December 31, 2002 from
the release of escrow funds on the sale of the Company's investment in
Cyberbills in May 2001, and a $.6 million gain was recognized on the
forgiveness of interest related to the repurchase of the Notes.
Federal income taxes:
There is a $.2 million federal income tax provision for the six months
ended December 31, 2002 resulting from a downward adjustment of the
estimated tax refund to the actual amount claimed in the Company's fiscal
2002 Federal income tax return. There was no provision for the six months
ending December 31, 2001. All taxable transactions and temporary
differences for federal income taxes in the current fiscal year 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.
Net loss:
The net loss was $2.1 million for the six months ended December 31, 2002
compared to a loss of $22.2 million for the six months ended December 31,
2001. The $20.1 million improvement is due primarily to the significant
reductions in operating expenses from workforce reductions and the
nonrecurring restructuring charges from the six months ended December 31,
2001.
Capital Resources and Liquidity
_______________________________
Liquidity:
The Company's sources of funds for the quarter ended December 31, 2002 were
generated from E-Commerce Operations revenues, tax refund receipts,
interest from cash deposits and Mariner earnings.
As of December 31, 2002, cash and marketable securities totaled $13.6
million, an increase of $5.7 million from the balance at September 30,
2002. The primary source of the increase was a $6.9 million tax refund.
In fiscal 2003 the Company expects to receive proceeds from the sale of
assets of approximately $4.3 million and receive additional income tax
refunds of approximately $.7 million. Therefore, available liquidity is
expected to reach approximately $18.6 million. However, the Company has
deferred $6.9 million pending final review by the Internal Revenue Service
("IRS"). The Company believes its existing resources are adequate to fund
existing operations and allow additional time for the multi-channel
marketing efforts to increase cash flows from operations. These funds are
also adequate to pay for resources required for the Company to explore new
expansion or acquisition opportunities.
As of December 31, 2002, the total accounts payable and accrued liabilities
include approximately $1.8 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. Management has actively been negotiating with many of the
significant unsecured creditors to settle aged claims. No vendor
settlements were finalized in the quarter ended December 31, 2002.
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:
For the six months ended December 31, 2002, net cash provided from
operations was $4.5 million. The increase in cash reflects the $6.9
million income tax refund, which is partially offset by cash used in
operations of $1.2 million in e-commerce operations and $1.2 million in
Technology-Related Businesses. For the six months ended December 31, 2002,
a total of $24.0 million of the marketable securities at Mariner were
redeemed. Of this total, $23.0 million was used to repurchase the
Company's Notes in July 2002. In July 2001, the Company invested $1.3
million in Technology-Related Businesses. Since then, there have been no
additional investments and the company has 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.
Recently Issued Accounting Standards:
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 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) successfully 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) preservation of existing patents and trademarks, and (6)
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 December 31, 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 $5.9 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
December 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 $45 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 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 in April 2002. The
claim alleged that PBS was owed commissions by InterWorld for services
related to PBS's attempts to sublease office space previously occupied by
InterWorld in New York City. In January 2003, InterWorld and PBS reached
an agreement in principle to resolve the dispute which includes a payment
by InterWorld in exchange for, among other things, discontinuance with
prejudice of the lawsuit and a release. While an estimated probable
settlement amount has been accrued as a component of General and
Administrative expenses in the accompanying Condensed Consolidated
Statement of Operations for the quarter ended December 31, 2002, there
remain certain unresolved open issues. Consequently, a settlement may not
be finalized.
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
(b) Reports on Form 8-K:
The Company filed a Form 8-K dated December 5, 2002 disclosing
in Item 5 that it had filed for a refund of federal income
taxes previously paid of $7.66 million and that the refund
would be subject to review and approval of the Congressional
Joint Committee on Taxation.
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: February 14, 2003
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of J Net
Enterprises, Inc. for the period ending December 31, 2002 as filed with
the Securities and Exchange Commission on the date hereof, I, Allan R.
Tessler, Chairman and Chief Executive Officer of registrant, certify,
pursuant to 18 U.S.C. SS 1350, as adopted pursuant to SS 302 of the
Sarbanes-Oxley Act of 2002, that:
(1) I have reviewed this quarterly report on Form 10-Q of J Net
Enterprises, Inc.
(2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report; and
(3) Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of registrant as of, and for, the
periods presented in this quarterly report; and
(4) The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
(5) The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of the registrant's board of directors
(or persons performing the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
(6) The registrant's other certifying officers and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.
Dated: February 14, 2003 By: /s/ Allan R. Tessler
____________________________________
Allan R. Tessler
Chairman and Chief Executive Officer
This certification accompanies this Quarterly Report on Form 10-Q
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and shall not,
except to the extent required by such Act, be deemed filed by registrant
for purposes of Section 18 of the Securities Exchange Act of 1934, as
amended.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of J Net
Enterprises, Inc. for the period ending December 31, 2002 as filed with
the Securities and Exchange Commission on the date hereof, I, Steven L.
Korby, Executive Vice President and Chief Financial Officer of the
registrant, certify, pursuant to 18 U.S.C. SS 1350, as adopted pursuant to SS
302 of the Sarbanes-Oxley Act of 2002, that:
(1) I have reviewed this quarterly report on Form 10-Q of J Net
Enterprises, Inc.
(2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report; and
(3) Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of registrant as of, and for, the
periods presented in this quarterly report; and
(4) The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
(5) The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of the registrant's board of directors
(or persons performing the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
(6) The registrant's other certifying officers and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.
Dated: February 14, 2003 By: /s/ Steven L. Korby
____________________________________
Steven L. Korby
Executive Vice President and
Chief Financial Officer
This certification accompanies this Quarterly Report on Form 10-Q
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and shall not,
except to the extent required by such Act, be deemed filed by registrant
for purposes of Section 18 of the Securities Exchange Act of 1934, as
amended.