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 March 31, 2003
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 incorporation (I.R.S. Employer
or organization) Identification No.)
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 May 9, 2003.
J NET ENTERPRISES, INC. AND SUBSIDIARIES
INDEX
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited) -
March 31, 2003 and June 30, 2002
Condensed Consolidated Statements of Operations (Unaudited) -
Three and Nine Months Ended March 31, 2003
Condensed Consolidated Statement of Stockholders' Equity
(Unaudited) - Nine Months Ended March 31, 2003
Condensed Consolidated Statement of Stockholders' Equity
(Unaudited) - Nine Months Ended March 31, 2002
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Nine Months Ended March 31, 2003 and 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)
March 31, June 30,
2003 2002
ASSETS _________ ________
______
Current assets:
Cash and cash equivalents $ 6,646 $ 6,674
Short-term investments 11,969 29,590
Accounts receivable, net 23 213
Notes receivable - related parties - 288
Notes receivable - 132
Federal income taxes receivable - 983
Assets held for sale - 4,950
Prepaid expenses 12 351
Other current assets - 293
_______ _______
Total current assets 18,650 43,474
Investments in technology-related
businesses 2,425 2,425
Property and equipment, net of
accumulated depreciation 85 180
Other non-current assets 731 764
_______ _______
Total assets $21,891 $46,843
======= =======
See Notes to Condensed Consolidated Financial Statements.
J NET ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
(Concluded)
March 31, June 30,
2003 2002
LIABILITIES AND STOCKHOLDERS' EQUITY _________ ________
____________________________________
Current liabilities:
Accounts payable and other current liabilities $ 3,138 $ 4,095
Current portion of convertible subordinated notes - 27,750
Deferred revenue and customer deposits 824 1,306
________ ________
Total current liabilities 3,962 33,151
________ ________
Deferred income taxes 6,910 -
Deferred rent 198 213
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 (48,689) (46,031)
Less 1,708,929 shares of common stock in
treasury, at cost (16,054) (16,054)
________ ________
Total stockholders' equity 10,609 13,267
________ ________
Total liabilities and stockholders' equity $ 21,891 $ 46,843
======== ========
See Notes to Condensed Consolidated Financial Statements.
J NET ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED MARCH 31, 2003 AND 2002
(Dollars in thousands, except per share data)
(Unaudited)
Three Months ended Nine Months ended
March 31, March 31,
__________________ _________________
2003 2002 2003 2002
_______ _______ _______ _______
Revenues, net
Product licenses $ - $ 10 $ 21 $ 893
Maintenance 630 620 1,654 2,779
Services 88 - 406 998
______ _______ _______ ________
Total revenues, net 718 630 2,081 4,670
Cost of revenues:
Product licenses - - - 400
Maintenance 5 14 92 307
Services 145 42 406 2,027
______ _______ _______ ________
Total cost of revenues 150 56 498 2,734
______ _______ _______ ________
Gross profit 568 574 1,583 1,936
Operating expenses:
Research and development 430 404 1,284 4,739
Sales - 26 - 5,919
Marketing alliances - - - 1,616
General and administrative 1,014 2,038 3,281 7,689
Impairment of assets - - 1,050 -
Bad debt expense - - 20 -
Restructuring and unusual charges - (156) - 6,216
Gains from settlements with
unsecured creditors - - (46) -
Total operating expenses 1,444 2,312 5,589 26,179
______ _______ _______ ________
Operating loss (876) (1,738) (4,006) (24,243)
Other income (expense):
Interest and other income 317 974 889 2,418
Interest expense - (556) - (1,689)
Gain from repurchase of
convertible subordinated notes - - 553 -
Gain on disposal of assets 44 - 147 -
______ _______ _______ ________
Total other income 361 418 1,589 729
Loss from operations before
income tax (515) (1,320) (2,417) (23,514)
______ _______ _______ ________
Provision for Federal income tax - - 241 -
______ _______ _______ ________
Net loss $ (515) $(1,320) $(2,658) $(23,514)
====== ======= ======= ========
Basic loss per share $ (.06) $ (.15) $ (.31) $ (2.76)
Dilutive loss per share $ (.06) $ (.15) $ (.31) $ (2.76)
See Notes to Condensed Consolidated Financial Statements.
J NET ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED MARCH 31, 2003
(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 (2,658) (2,658)
______ ____ _______ ________ ______ ________ _______
Balance March 31, 2003 10,233 $102 $75,250 $(48,689) (1,709) $(16,054) $10,609
====== ==== ======= ======== ====== ======== =======
See Notes to Condensed Consolidated Financial Statements.
J NET ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED MARCH 31, 2002
(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 July 1, 2001 10,233 $102 $75,250 $(20,795) (1,709) $(16,054) $(17) $ 38,486
Comprehensive loss:
Net loss (23,514) (23,514)
Cumulative
translation
adjustment 62 62
________
Total comprehensive
loss (23,452)
Amortization of
employee stock
based
compensation 290 290
______ ____ _______ ________ ______ ________ _____ ________
Balance March 31, 2002 10,233 $102 $75,250 $(44,019) (1,709) $(16,054) $ 45 $ 15,324
====== ==== ======= ======== ====== ======== ====== ========
See Notes to Condensed Consolidated Financial Statements.
J NET ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED MARCH 31, 2003 AND 2002
(Dollars in thousands)
(Unaudited)
2003 2002
________ ________
Operating activities:
Net loss $ (2,658) $(23,514)
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 (147) 394
Impairment of assets 1,050 3,066
Amortization of stock-based compensation - 290
Depreciation and amortization 100 510
Deferred tax benefit - (334)
Changes in assets and liabilities:
Federal income taxes receivable 983 6,538
Accounts receivable 190 1,350
Marketable securities (379) (1,876)
Prepaid expenses and other current assets 242 730
Notes receivable - related parties - 1,006
Other non-current assets 33 223
Accounts payable and other current liabilities (957) (2,564)
Deferred revenue and customer deposits (482) (1,079)
Deferred rent (15) (137)
Other, net - 62
________ ________
Net cash provided by (used in)
continuing operations 4,870 (15,335)
Investing activities:
Investments in technology-related businesses - (1,338)
Investment in marketable securities (6,000) (125)
Collection of notes receivable - related parties 288 -
Collection of note receivable 132 -
Security deposits received - 212
Redemption of marketable securities 24,000 -
Proceeds from sale of assets 4,437 260
Purchase of property and equipment (5) (82)
________ ________
Net cash provided by (used in)
investing activities 22,852 (1,073)
Financing activities:
Repayment of debt (27,750) -
________ ________
Net cash used in financing activities (27,750) -
________ ________
Net decrease in cash and cash equivalents (28) (16,408)
Cash and cash equivalents at beginning of period 6,674 24,272
________ ________
Cash and cash equivalents at end of period $ 6,646 $ (7,864)
======== ========
Supplemental disclosures of cash flow data:
Cash paid during the year for:
Interest paid $ - $ 1,667
Non-cash investing and financing activities:
Value of notes receivable discharged in
exchange for common stock $ - $ 1,024
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-
elated 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. Investments in Technology-Related
Businesses are made directly by the Company, or through J Net Ventures I
("Ventures I" or the "Fund"), a wholly-owned subsidiary of the Company.
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 and there
have been no investments in Technology-Related Businesses since July 2001.
Recent events:
The Company completed the sale of its real estate and improvements located
in Wellington, Florida in March 2003. Net proceeds were $4.3 million. The
property, which was acquired through foreclosure actions in June 2001, was
held as an asset held for sale by the Company.
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.
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 "2003" and "2002" are for the fiscal years ended June 30,
2003 and 2002, 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 March 31, 2003 and June 30, 2002, the results of
its operations for the three and nine months ended March 31, 2003 and 2002
and its cash flows for the nine months ended March 31, 2003 and 2002. The
results for the three and nine months ended March 31, 2003 and 2002 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 March 31, 2003, the Company held short-term investments in Mariner
Partners, L.P. ("Mariner"), a private investment fund which had a value of
$12.0 million. 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 March 31, 2003, the unaudited condensed consolidated balance sheet
contains approximately $1.7 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"). 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 held 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.
In February 2003, the Company reached an agreement to sell its real estate
and related improvements. Closing of the transaction occurred on March 21,
2003. The Company received proceeds, net of selling and other costs, of
$4.3 million.
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.
There are accumulated deferred tax assets of $18.8 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 December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation - Transition
and Disclosure ("SFAS 148"). This statement is an amendment of the
disclosure provisions of SFAS 123, "Accounting for Stock-Based
Compensation", and APB Opinion No. 28, "Interim Financial Reporting". SFAS
148 requires disclosure of the method of accounting used for stock-based
employee compensation and the effect of that method on income and earnings
per share in annual and interim financial statements. SFAS 148 is
effective for all interim periods beginning after December 15, 2002. The
Company adopted the expanded disclosure requirements in this Form 10-Q.
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.
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 adopted such
provisions effective July 1, 2002.
Note 2 - Stock option plans
The Company accounts for stock based compensation using the intrinsic value
method prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"). The Company has
adopted the disclosure requirements of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock Based Compensation ("SFAS 123").
On December 31, 2002, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 148, "Accounting for
Stock Based Compensation - Transition and Disclosure ("SFAS 148"). The
purpose of SFAS 148 is to provide alternative methods of transition to SFAS
123's fair value method of accounting for stock-based employee compensation
and amend the disclosure requirements of an entity's accounting policy with
respect to reported net income and earnings per share in annual and interim
financial statements prescribed by Accounting principles Board Opinion No.
28, "Interim Financial Reporting". SFAS 148 does not require companies to
account for employee stock options using the fair value method of SFAS 123
and the Company does not plan to adopt the fair value method at this time.
Had the Company used the fair value method for stock compensation expenses,
its net loss and loss per share would have been increased to the pro forma
amounts presented on the following table (dollars in thousands, except per
share data):
Three Months Ended Nine Months Ended
March 31, March 31,
__________________ _________________
2003 2002 2003 2002
_____ _______ _______ ________
Net loss, as reported $(515) $(1,320) $(2,658) $(23,514)
Fair value based compensation
expenses, net of taxes:
Fiscal year ended 6/30/02 - - - -
Fiscal year ended 6/30/01 (10) (30) (29) (91)
_____ _______ _______ ________
Pro forma net loss $(525) $(1,350) $(2,687) $(23,605)
===== ======= ======= ========
Loss per share:
Basic - as reported $ (.06) $ (.15) $ (.31) $ (2.76)
Basic - pro forma $ (.06) $ (.16) $ (.32) $ (2.77)
Diluted - as reported $ (.06) $ (.15) $ (.31) $ (2.76)
Diluted - pro forma $ (.06) $ (.16) $ (.32) $ (2.77)
The Company's option plan expired on September 30, 2002. Under that plan,
each Director of the Company was to receive 27,500 options on June 30 of
each year. Such options were to vest on the following September 30 at the
current market price of the Company's common stock on that date. The June
30, 2002 options, which totaled 137,500 (27,500 to each of five directors),
were voluntarily returned and cancelled by each Director. As a result of
these actions, combined with the contractual termination of the stock
option plan, no options have been granted in 2003.
Note 3 - Investments in Technology-Related Businesses
The Company invested in eleven companies represented by the Technology-
Related Businesses segment. The investments occurred between March 2000
and July 2001. As of March 31, 2003, the Company is ascribing value to two
of these investments: eStara, Inc. and Tellme Networks, Inc.
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.
eStara's operations are being funded under a $2.0 million bridge loan.
eStara's management believes the funds provided by the bridge loan are
adequate to allow eStara to achieve self-funding capabilities. 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 March 31, 2003.
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 are no indicators which would 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 March 31, 2003 (dollars in thousands):
Net balance Carrying value
at 6/30/02 Additions Impairments as of 3/31/03
___________ _________ ___________ ______________
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 where value is
assigned:
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 4 - Loss per share
Basic loss per share for the three and nine months ended March 31, 2003 and
for the three and nine months ended March 31, 2002 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 nine month
periods ended March 31, 2003 and 2002 had losses from continuing
operations, no potential common shares from the assumed exercise of options
or Convertible Subordinate Notes (the "Notes") which were outstanding in
2002 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 Nine Months
Ended Ended
March 31, March 31,
________________ _______________
2003 2002 2003 2002
______ _______ _______ _______
Basic loss per share:
Loss available to common
stockholders $ (515) $(1,320) $(2,658) $(23,514)
====== ======= ======= ========
Shares:
Weighted average number of common
shares outstanding 8,525 8,525 8,525 8,525
====== ======= ======= ========
Basic loss per share $ (.06) $ (.15) $ (.31) $ (2.76)
====== ======= ======= ========
Diluted loss per share:
Loss available to common
shareholders $ (515) $(1,320) $(2,658) $(23,514)
====== ======= ======= ========
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 $ (.06) $ (.15) $ (.31) (2.76)
====== ======= ======= ========
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 March 31, 2003 March 31, 2002
______________ ______________
Potentially dilutive stock options 1,570 1,926
Common shares issuable from assumed
conversion of subordinated notes - 2,581
_____ _____
Total antidilutive securities 1,570 4,507
===== =====
Note 5 - 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 approximately $12
thousand for the nine months ended March 31, 2003 and $8 thousand for the
nine months ended March 31, 2002. Management believes that fees charged
are competitive with fees charged by other law firms.
Note 6 - 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. 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 Nine Months Ended
March 31, March 31,
__________________ ___________________
2003 2002 2003 2002
_______ ________ _________ ________
Net loss:
E-Commerce Operations $(143) $(1,314) $ (455) $(18,157)
Technology-Related Businesses (372) (6) (2,203) (5,357)
_____ _______ ________ ________
Net loss $(515) $(1,320) $ (2,658) $(23,514)
===== ======= ======== ========
E-Commerce Operations:
Revenues $ 718 $ 630 $ 2,081 $ 4,670
Cost of Revenues 150 56 498 2,734
_____ _______ ________ ________
Gross profit 568 574 1,583 1,936
Operating expenses 711 1,235 2,083 18,590
Other (income) expense - 653 (45) 1,503
_____ _______ ________ ________
Net loss from E-Commerce
Operations $(143) $(1,314) $ (455) $(18,157)
===== ======= ======== ========
Technology-Related Businesses:
Total Operating Expenses $ 733 $ 1,077 $ 3,506 $ 7,589
Other Income (361) (1,071) (1,544) (2,232)
Provision for Federal Income
Tax - - 241 -
_____ _______ ________ ________
Net loss from Technology-
Related Businesses $ (372) $ (6) $ (2,203) $ (5,357)
====== ======= ======== ========
As of
March 31, 2003
______________
Assets:
E-Commerce Operations $ 418
Technology-Related Businesses 21,473
_______
Total assets $21,891
=======
Note 7 - 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. 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 March 31, 2003, the unaudited condensed consolidated balance sheet
contains approximately $1.7 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 $.1 million as of March 31, 2003. If the contracts expire
and are not renewed, there is an obligation of $.6 million at expiration,
which reflects severance pay in accordance with the contractual terms. In
the event that either person is terminated involuntarily or as a result of
a change in control, the obligations under the contracts increase to $.8
million.
As of March 31, 2003, 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 was 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 a
tentative agreement to resolve the dispute which was to include a payment
by InterWorld in exchange for, among other things, discontinuance with
prejudice of the lawsuit and a release. The final terms of the release were
not satisfactory to InterWorld and could not be resolved. Thus, the
settlement was never consummated. The amount accrued in the quarter ended
December 31, 2003, in conjunction with settlement discussions with PBS,
remains on the financial statements as an estimate of the cost of
continuing litigation in this matter. InterWorld will continue to
vigorously defend itself against the claims of PBS.
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"). 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 Technology-Related Businesses segment invests in technology companies
which include, but are not limited to, systems development and software
companies. Investments have been made directly by the Company or through
Ventures I and the Fund, which are owned and controlled by the Company.
The E-commerce operations have required substantial funding and management
resources since May 2001. As a result, investments in Technology-Related
Businesses have been curtailed. There have been no such investments since
July 2001.
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
IWH entered into a nonexclusive reselling alliance with Nextjet, Inc. in
November 2002. The Company also has existing reseller and marketing
agreements in Europe and Japan.
Three Months Ended March 31, 2003 and 2002:
Results of Operations
Total revenues:
Consolidated revenues, all of which are related to E-Commerce Operations,
were $.7 million for the three months ended March 31, 2003 versus $.6
million for the three months ended March 31, 2002, reflecting an increase
of $.1 million. The increase reflects no attrition in maintenance revenue
from the prior year and professional services totaling $.1 million for the
three months ended March 31, 2003 compared to $0 for the three months
ending March 31, 2002.
Total cost of revenues:
Cost of revenues, all of which are related to E-Commerce Operations, were
$.2 million for the three months ended March 31, 2003. The total cost of
revenues was $.1 million for the three months ended March 31, 2002. The
primary cause of the $.1 million increase compared to the three months
ended March 31, 2002 is a credit for consulting fees of $.1 million for the
three months ended March 31, 2002 resulting from vendor settlements.
Operating expenses:
Total operating expenses were $1.4 million for the three months ended March
31, 2003 compared to $2.3 million for the three months ended March 31,
2002. The decrease of $ .9 million is primarily a reflection of cost
saving measures of IWH, which resulted in a $.7 million reduction in
quarterly G&A costs compared to the three months ended March 31, 2002.
Other income (expense):
Net other income items were $.4 million for each of the three months ended
March 31, 2003 and 2002, respectively. Interest and other income decreased
to $.3 million for the three months ended March 31, 2003 from $1.0 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").
The March 31, 2003 three months also include a small gain from the
disposition of assets held for sale. Interest expense decreased from $.6
million for the three months ended March 31, 2002 to $0 in the comparable
quarter ended March 31, 2003 as a result of the repurchase of the Notes.
Federal income taxes:
There is no federal income tax provision for the three months ended March
31, 2003. All taxable transactions and temporary differences for federal
income taxes in the current fiscal year are fully offset by a valuation
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 $.5 million for the three months ended March 31, 2003
compared to a loss of $1.3 million in the comparable 2002 quarter. The $.8
million improvement is due primarily to reductions in operating expenses
and the elimination of interest expense as a result of the repurchase of
the Notes.
Nine Months Ended March 31, 2003 and 2002:
Results of Operations
Total revenues:
Consolidated revenues, all of which are related to E-Commerce Operations,
were $2.1 million for the nine months ended March 31, 2003 versus $4.7
million for the nine months ended March 31, 2002, reflecting a decrease of
$2.6 million, or 55%. The decrease reflects ongoing declines in markets
for e-commerce products, which began in 2000. All revenue components;
licenses, professional services and post contract customer support were
down from the previous year. Product license sales declined to $21
thousand from $.9 million in 2002. Professional service revenue declined
to $.4 million in 2003 from $1.0 million in 2002. Post contract
maintenance revenue also declined due primarily to reductions in renewals
from "dot-com" customers to $1.7 million in 2003 from $2.8 million in 2002.
During the nine months ended March 31, 2003, one license was sold compared
to six license sales in the prior year's nine month period. The decline in
professional service revenue is directly attributable to the lower license
sales. The number of customers receiving post-contract maintenance support
was seventeen at March 31, 2003 compared to nineteen at March 31, 2002.
Total cost of revenues:
Cost of revenues, all of which are related to E-Commerce Operations, were
$.5 million for the nine months ended March 31, 2003. The total cost of
revenues was $2.7 million for nine months ended March 31, 2002. The
primary causes of the $2.2 million decrease compared to the nine months
ended March 31, 2002 are the substantial reductions in workforce and the
variable cost impacts from reduced license sales.
Operating expenses:
Total operating expenses were $5.6 million for the nine months ended March
31, 2003 compared to $26.2 million for the nine months ended March 31,
2002. The decrease of $20.6 million reflects savings of $15.4 million from
workforce and other cost reductions in IWH initiated in September 2001.
The nine months ended March 31, 2003 included $1.0 million of impairment
charges while the nine months ended March 31, 2002 contained $6.2 million
of restructuring charges. There were no restructuring charges for the nine
months ended March 31, 2003.
Other income (expense):
For the nine months ended March 31, 2003, the Company had net other income
of $1.6 million compared with net other income of $.7 million for the nine
months ended March 31, 2002. Interest income decreased to $.9 million for
the nine months ended March 31, 2003 from $2.4 million in the prior year
because of reductions in the average amount invested at Mariner which was
redeemed to repurchase the Notes. Interest expense decreased from $1.7
million for the nine months ended March 31, 2002 to $0 in the comparable
nine months ended March 31, 2003, as a result of the repurchase of the
Notes. The 2003 nine months also include gains from the repurchase of
Notes and gains from asset sales which totaled $.7 million.
Federal income taxes:
There is a $.2 million federal income tax provision for the nine months
ended March 31, 2003 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 nine months
ending March 31, 2002. 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 $2.7 million for the nine months ended March 31, 2003
compared to a loss of $23.5 million for the nine months ended March 31,
2002. The $20.8 million improvement is due primarily to the significant
workforce reductions of approximately $15.4 million and the $6.2 million
nonrecurring restructuring charges from the nine months ended March 31,
2002. The total benefits from these reductions are partially offset by the
impairments in 2003 of $1.1 million and the federal taxes.
Capital Resources and Liquidity
Liquidity:
The Company's sources of funds for the nine months ended March 31, 2003
were generated from E-Commerce Operations revenues, tax refund receipts,
interest from cash deposits, Mariner earnings and cash received from the
sale of the property held for sale in Wellington, Florida.
As of March 31, 2003, cash and marketable securities totaled $18.6 million,
an increase of $5.0 million from the balance at December 31, 2002. The
primary sources of the increase were the $4.3 million proceeds from the
sale of the property held for sale in Wellington, Florida and the final
portion of the tax refund of $.7 million. The Company believes its
existing resources are adequate to fund existing operations and allow
additional time for the 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 March 31, 2003, the total accounts payable and accrued liabilities
include approximately $1.7 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 March 31, 2003. 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 nine months ended March 31, 2003, net cash provided from operations
was $4.9 million. The increase in cash reflects the $7.7 million income
tax refund, which is partially offset by cash used in operations of $1.0
million in e-commerce operations and $1.8 million in Technology-Related
Businesses.
Investing and financial activities:
For the nine months ended March 31, 2003, the Company redeemed $24 million
of its short term investments at Mariner to purchase the Notes. Upon
receipt of the Federal tax refunds, the Company purchased $6 million of
short term investments in Mariner. In addition to the Mariner activities,
the Company received $4.3 million in proceeds from asset sales during the
nine months ended March 31, 2003.
Recently Issued Accounting Standards:
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation - Transition
and Disclosure ("SFAS 148"). This statement is an amendment of the
disclosure provisions of SFAS 123, "Accounting for Stock-Based
Compensation", and APB Opinion No. 28, "Interim Financial Reporting". SFAS
148 requires disclosure of the method of accounting used for stock-based
employee compensation and the effect of that method on income and earnings
per share in annual and interim financial statements. SFAS 148 is
effective for all interim periods beginning after December 15, 2002. The
Company adopted the expanded disclosure requirements in this Form 10-Q.
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.
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 adopted such
provisions on July 1, 2002.
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 March 31, 2003, 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 $12.0 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, 2003 and the average return of such investment for the previous nine
months, a 10% reduction in those rates would reduce pretax income by
approximately $.1 million 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 was 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 a
tentative agreement to resolve the dispute which was to include a payment
by InterWorld in exchange for, among other things, discontinuance with
prejudice of the lawsuit and a release. The final terms of the release were
not satisfactory to InterWorld and could not be resolved. Thus, the
settlement was never consummated. The amount accrued in the quarter ended
December 31, 2003, in conjunction with settlement discussions with PBS,
remains on the financial statements as an estimate of the cost of
continuing litigation in this matter. InterWorld will continue to
vigorously defend itself against the claims of 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:
10.40 Form of Indemnification Agreement.
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 March 24, 2003 disclosing
in Item 2 that it had completed the sale of its property
located in Wellington, Florida, resulting in net cash proceeds
of $4.3 million.
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: May 15, 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 March 31, 2003 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) 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
(b) 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: May 15, 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 March 31, 2003 as filed with the Securities and
Exchange Commission on the date hereof, I, Steven L. Korby, Chief Financial
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) 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
(b) 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: May 15, 2003 By: /s/ Steven L. Korby
___________________
Steven L. Korby
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.