UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 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 Number 1-9728
J NET ENTERPRISES, INC.
____________________________________________________________________________
Exact name of registrant as specified in its charter
Nevada 88-0169922
___________________________________________ ________________________________
State or other jurisdiction of incorporation I.R.S. Employer Identification
or organization No.
4020 Lake Creek Drive, #100, Wilson, Wyoming 83014
____________________________________________ ________
Address of principal executive offices Zip Code
Registrant's telephone number, including area code: (307) 739-8603
_____________
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
________________________________________________
Common Stock - Par value $.01 per share, which
includes certain preferred stock purchase rights
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days: Yes x No
___ ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K: x
___
As of September 22, 2003, the aggregate market value of the voting stock held
by non-affiliates of the Registrant was $8,566,165.
As of September 22, 2003, there were 8,524,541 shares of the Registrant's
common stock outstanding.
PART I
ITEM 1. BUSINESS
________
J Net Enterprises, Inc. ("J Net" or the "Company") is a holding company
conducting operations through a wholly owned enterprise software subsidiary
(the "E-Commerce Operations"). The Company also holds investments in
technology infrastructure companies (the "Technology-Related Businesses").
As of June 30, 2003, one Technology-Related Business investment continues to
have value assigned. J Net uses a fiscal year which ends on June 30 of each
calendar year. Unless the context indicates otherwise, references to "2003",
"2002" and "2001" indicate the fiscal years ended June 30, 2003, 2002 and
2001, respectively.
E-Commerce Operations are conducted through IW Holdings, Inc. ("IWH"), a
wholly owned subsidiary of the Company and successor to the business formerly
conducted by InterWorld Corporation ("InterWorld"). InterWorld is a separate
publicly traded entity in which J Net owns 95.3% of the outstanding equity
securities.
J Net also holds minority investments in other technology companies
including, but not limited to, systems development and software companies.
These investments are held directly by the Company, or by J Net Ventures I,
LLC (the "Fund" or "Ventures I"), a fund which is 100% owned and managed by
the Company. Due to the significant financial and management resources
required to stabilize the E-Commerce Operations, Management has not pursued
additional minority interest investments since 2001. There are presently no
plans to reinstate this strategy.
The Company is actively seeking potential acquisitions of operating companies
and enhancement opportunities for its E-Commerce Operations. Such
enhancements for E-Commerce Operations include strategic alternatives
including, but not limited to, expansion of marketing efforts, seeking
business partners, or the sale of IWH. Management will devote its time and
resources to these efforts and may incur expenses in connection with such
activities. The Company anticipates that, as it continues to engage 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 expansion and acquisition opportunities,
there can be no assurance that such opportunities will be available on terms
acceptable to J Net or that, if undertaken, they will be successful.
Recent Events and 2003 Highlights
In May 2002, the Company commenced a voluntary repurchase offer to the
holders of its $27.8 million subordinated promissory notes (the "Notes").
Such offer was made at the face amount of the Notes, but excluded
approximately $.5 million of unpaid interest which had accrued since March
31, 2002, the last interest payment date. In June 2002, all holders of the
Notes agreed to accept the voluntary offer. The repayment of the Notes
occurred in July 2002.
In March 2003 the Company completed the sale of its real estate and
improvements located in the Village of Wellington, Florida. The property,
which was acquired as a result of foreclosure actions taken in June 2001, was
classified as an asset held for sale until its disposition. Net proceeds
were $4.4 million.
In June 2003, employment contracts for the President and Chief Operating
Officer and the Executive Vice President and Chief Financial Officer expired
according to their terms. The contracts were not extended and the officers
terminated their employment with the Company. A severance obligation of $.6
million arose as a result of the employment contract expirations. Such
amount is included as compensation expense in the 2003 Consolidated Statement
of Operations and as an accrued liability on the June 30, 2003 Consolidated
Balance Sheet.
E-Commerce Operations
IWH, as the successor to the business formerly conducted by InterWorld, is a
provider of integrated enterprise commerce software solutions. Its products
include software 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.
IWH's applications, components and tools are based on its Process-Centric(TM)
architecture, which enables medium and large-sized companies to maximize
returns on investments ("ROI") in information technology by allowing them to
quickly implement and to rapidly adapt to changing market conditions without
the need for programmers.
IWH's open software solutions are designed to assist its clients to increase
customer profitability, efficiency and satisfaction by allowing a business to
enhance selling opportunities, manage complex sales channels, orchestrate
sophisticated marketing campaigns, leverage and integrate disparate
technology systems, capture and rapidly respond to critical business
intelligence and facilitate complex business process interactions among its
customers, vendors and partners.
Additionally, the software solutions are designed to help companies:
.. Get to market quickly with e-business initiatives by offering over 680
ready-to-deploy e-business processes, which can save companies thousands
of hours of costly development work.
.. Automate customer relationship management and sales and support processes,
which enable companies to continuously update and improve these processes
across multiple channels, including the World Wide Web, point-of-sale,
call center, and wireless marketplaces.
.. Achieve lower total-cost-of-ownership with the Process-Centric(TM)
approach, which is easily adaptable and designed to facilitate dynamic
business and technology changes. These solutions also reduce the need for
proprietary development through support of industry standards such as XML,
CIF, BizTalk and Rosetta Net.
.. Improve profitability and deepen understanding of their business by
utilizing IWH's sophisticated business intelligence application. The
software facilitates enterprise-wide collaboration enabling companies to
quickly and simply gather and act on business intelligence, without the
need for technical support.
.. Facilitate enterprise integration through pre-built software adaptors that
easily connect multiple back-office systems, sales channels, digital
marketplaces and business trading partners. In addition, IWH's enterprise
integration capabilities enable a company to continue to use existing
legacy systems, rather than forcing a company to buy or build new systems
from scratch.
The focus on ROI is particularly important in today's economic climate as
capital, once readily available to build an entirely new application, is now
limited. Increasingly, companies are demanding that their suppliers and
vendors offer them the option to do business online. Given the high costs
associated with information technology, companies need to ensure that their
investments will lead to enhanced profitability. To drive profitability,
companies must not only understand buying trends of their customers, they
must also be in a position to act on these trends. Further, companies must
be able to collaborate on an enterprise-wide basis as well as with their
customers and suppliers to sustain growth and remain competitive.
Significant customers of IWH include, among others, Verizon, Burlington Coat
Factory, Marks & Spencer, IKON Office Solutions, Oki Data Americas, and Walt
Disney Internet Group.
In January 2003, IWH released Version 6.0 of Commerce Exchange ("Version
6.0"). Significant additions with Version 6.0 include a new Workflow
Management Engine application built on the Process-Centric(TM) architecture
that will allow users to extend and manage business processes to both human
and system interaction layers. Version 6.0 added operational support for
IBM's WebSphere J2EE application server to current support of BEA's WebLogic,
allowing broader coverage and customer choice of application server. IWH
also added significant product functionality including a user managed Gift
Registry system.
IWH customer activity included upgrades and significant extensions of
functionality by Marks & Spencer, Verizon, Disney Stores Online and Ann
Taylor. Marks & Spencer has released the IWH Gift Registry functionality
to their online store and in-store kiosks in its 300 plus department stores.
Marks & Spencer is also in the process of replacing its in-house catering
order management system with IWH's Commerce Exchange application.
Technology-Related Businesses
Unconsolidated minority investments in other technology companies include,
but are not limited to, systems development and software companies. The
investments are held directly by the Company or by Ventures I. As a result
of weak market conditions with respect to Technology-Related Businesses and
the significance of Management's efforts with IWH, J Net suspended its
minority investment strategy in 2001. Evaluation of investment opportunities
continues, but the process is very selective due to continued weakness in the
technology community. No minority investments have been made since July
2001.
Between March 2000 and July 2001, the Company invested approximately $58
million in eleven companies, including its initial $20 million purchase of
Mandatorily Redeemable Preferred Stock of InterWorld (the "Preferred Stock").
As of June 30, 2003, four of these companies continue to operate: Tellme
Networks, Inc., eStara, Inc., Strategic Data Corporation and certain
investments contained in Meister Brothers Investments, LLC. However,
based on Management's periodic analysis of its investment portfolio, only
Tellme Networks, Inc. continues to have value. The following table sets
forth the activity for each of the investments from inception through June
30, 2003 (Dollars in thousands):
Balance
at Equity Value at
June 30, income Goodwill Impairments June 30,
Investments 1999 Additions (loss) amortization and sales Other 2003
_______________________ ________ _________ ________ ____________ ____________ __________ ________
Digital Boardwalk, LLC $ - $ 4,767 $ (497) $ (19) $ (4,501) $ 250 (a) $ -
Meister Brothers
Investments, LLC - 2,554 - - (40) (2,514)(b) -
CyberBills, Inc. - 3,186 - - (2,986) (200)(c) -
Carta, Inc. - 4,000 - - (4,000) - -
TechTrader, Inc. - 8,563 (3,346) (407) (4,810) - -
Alistia, Inc. - 2,480 (2,000) (11) (469) - -
Strategic Data
Corporation - 1,100 - - (1,100) - -
eStara, Inc. - 4,003 - - (4,003) - -
Jasmine Networks,
Inc. - 5,000 - - (5,000) - -
Tellme Networks, Inc. - 2,000 - - - - 2,000
InterWorld (d) - 20,340 (20,340) - - - -
Other - 5 - - - (5)(e) -
____ _______ ________ _____ ________ _______ ______
Total $ - $57,998 $(26,183) $(437) $(26,909) $(2,469) $2,000
==== ======= ======== ===== ======== ======= ======
(a) Represents a loan made to Digital Boardwalk, LLC, which was written off to expense when the
Company sold its interest for a loss of $4,501 in 2001.
(b) J Net owned a controlling interest in Meister Brothers Investments, LLC. The minority
interest was eliminated upon impairment in 2001.
(c) Proceeds from sale of investment.
(d) InterWorld became a consolidated subsidiary of J Net in May 2001. Between November 2000 and
April 2001, the Company used the equity method of accounting for its investment in InterWorld.
(e) Abandoned deal screening costs written off to general and administrative expenses.
Industry Background
Advances in technology and the increasing use of the Internet as a tool for
communications, information sharing and the conduct of commerce was the basis
for the investment strategy used by J Net. Despite a three year trend of
reductions in capital and information technology spending, projections by
many research firms indicate some growth in technology products and services.
The E-Commerce Operations primary products compete in the enterprise software
market. This particular market segment has experienced significant declines
in sales. Simultaneously, the industry has been required to invest in
continued research and development activities to remain current with rapidly
changing market demand. Since inception, including periods prior to J Net's
involvement, InterWorld and IWH have invested in excess of $75.0 million in
its products, which currently run on the industry standard J2EE application
servers.
Competition
There is intense competition in the e-commerce software industry in which the
Company operates and competition is expected to intensify in the future. In
addition to competing against in-house development efforts of companies
entering e-commerce initiatives, there are several application vendors and
developers in the Internet-based marketplace. Current competitors include
Art Technology Group, Blue Martini, Broadvision, IBM, Microsoft, Oracle, i2
Technologies and Spirea Systems. It is expected that other competitors will
also enter the market.
The Company believes that IWH can compete on the basis of product
performance, client service, rapid go-live deployment and price. New
products or continued deferral of information technology spending by
prospective customers could have adverse effects on future results of
operations or financial condition of the Company and its competitors.
Intellectual Property Rights
The Company and its subsidiaries rely on a combination of trade secrets,
nondisclosure and other contractual arrangements and copyright and trademark
laws to protect proprietary rights. Where possible, the Company will enter
into confidentiality agreements with its employees, and will generally
require that consultants and clients enter into such agreements as well as
limit access to and distribution of proprietary information. It cannot
be assured that the steps taken by the Company in this regard will be
adequate to deter misappropriation of proprietary information or that
unauthorized use will be detected and the appropriate steps will be taken to
enforce the Company's intellectual property rights.
IWH currently owns one U.S. patent relating to its product architecture and
technology. While the patent is believed to be valid, it may be challenged,
invalidated or circumvented. Moreover, the rights granted under any patent
issued to the Company, its subsidiaries or investees under licensing
agreements may not provide competitive advantages. Due to the rapid pace of
technological innovation for e-business solutions, the ability to establish
and maintain a position of technology leadership in the industry is dependent
more on the skills of development personnel than upon the legal protections
for existing technologies.
Agreements with employees, consultants and others who participate in the
development of IWH software or products developed by the companies in which J
Net holds an investment, may be breached and there may not be adequate
remedies for any breach. In addition, trade secrets may otherwise become
known to or independently developed by competitors. Furthermore, efforts to
protect proprietary technology may fail to prevent the development and design
by others of products or technology similar to or competitive with those
developed by J Net's Technology-Related Businesses.
Employees
As of June 30, 2003, the Company employed 23 persons of which 16 were
involved with the E-Commerce Operations business segment. Certain
administrative support functions are consolidated for both business segments
to reduce costs. None of the Company's employees are covered by collective
bargaining agreements and the Company believes it has satisfactory employee
relations.
The Company began a restructuring process in September 2001 which resulted in
significant reductions in its workforce. Between September 2001 and December
2001, when the restructuring efforts were essentially completed, the total
number of employees declined from approximately 270 employees to 29 as of
June 30, 2002. The reductions in 2003 are the result of expired employment
contracts and attrition.
Regulation and Licensing Requirements of Discontinued Operations
As a condition to the sale of the assets associated with the discontinued
operations, the Company was required to maintain licenses in the state of
Nevada in order to conduct gaming machine route operations (the "Route
Operations") and obtain approvals from various state of Nevada agencies in
order to sell the stock of the subsidiaries conducting the Route Operations.
All such approvals were obtained prior to November 22, 2000, the effective
date of the sale of the Route Operations.
Specific information regarding the regulations that were relevant to the
Company's discontinued operations can be obtained by referring to the
Company's Form 10-K's for prior fiscal years.
ITEM 2. PROPERTIES
__________
J Net's corporate headquarters are currently located in Wilson, Wyoming under
a month-to-month lease. J Net also conducts certain corporate affairs in
offices in Plano, Texas with approximately 3,000 square feet under a lease
which expires in February 2004.
The Company is the primary party to a lease in New York, New York with
approximately 8,500 square feet, which expires in 2010. In January 2002, a
sublease agreement was executed with an unrelated third party. While the
Company remains responsible under terms of the original lease, the subtenant
has assumed those responsibilities and is performing its obligations under
the sublease agreement. Proceeds from the sublease more than offset costs in
the primary lease, net of profit sharing with the landlord.
IWH has its principal offices in New York, New York and leases approximately
2,000 square feet of office space. The lease on the office space renews in
three month increments. The current renewal expires in October 2003.
ITEM 3. LEGAL PROCEEDINGS
_________________
As of June 30, 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 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 indicated 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.
Although the Company is unaware of any activity with respect to the
investigation for the past year, InterWorld intends to fully cooperate with
the Commission.
PBS Realty ("PBS"), a real estate broker conducting business in New York City
filed a $1.2 million claim against InterWorld in April 2002. The claim
alleges that PBS is owed commissions by InterWorld for services related to
PBS's attempts to sublease office space previously occupied by InterWorld in
New York City. InterWorld is vigorously contesting the claim and InterWorld
management does not believe a liability exists at this time. J Net was not a
party to the brokerage agreement and no claim against J Net has been asserted
by PBS.
From time to time, the Company or its subsidiaries are parties to claims,
legal actions and complaints arising in the ordinary course of business.
Management believes its defenses are substantial and that its legal position
can be successfully defended without material adverse effect on its
consolidated financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
___________________________________________________
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
_____________________________________________________________
MATTERS
_______
On May 8, 2002, J Net's Common Stock commenced quotation on the OTC Bulletin
Board ("OTCBB") under the trading symbol "JNEI". Prior to May 8, 2002, the
Company's Common Stock was listed on the New York Stock Exchange ("NYSE").
In April 2002, the Company was notified by the NYSE that the NYSE was
initiating steps to delist the Common Stock of J Net. On May 8, 2002, the
NYSE formally delisted the shares of Common Stock of J Net from its exchange.
The following table sets forth the range of prices for shares of the Common
Stock for the fiscal quarters indicated. No cash dividends were paid during
those fiscal quarters. Future payment of quarterly cash dividends, if any,
is subject to periodic review and reconsideration by J Net's Board of
Directors (the "Board").
J NET COMMON STOCK
_____________________________________________________________________________
High Low
_____________________________________________________________________________
Fiscal 2003
First Quarter $ .90 $ .53
Second Quarter .75 .48
Third Quarter 1.56 .70
Fourth Quarter 1.71 1.08
_____________________________________________________________________________
Fiscal 2002
First Quarter $4.55 $2.85
Second Quarter 4.00 1.95
Third Quarter 2.76 1.55
Fourth Quarter (April 1, 2002 - May 8, 2002) 2.23 .70
Fourth Quarter (May 8, 2002 - June 28, 2002) 1.00 .57
_____________________________________________________________________________
As of September 22, 2003 there were 1,160 holders of record of J Net's Common
Stock. The number of holders of record of J Net's Common Stock on September
22, 2003 was computed by a count of record holders.
ITEM 6. SELECTED FINANCIAL DATA
_______________________
The following selected financial data includes consolidated operating results
of InterWorld since May 2001. Discontinued operations represent the Route
Operations, which was J Net's only business segment until February 2000, when
the Company changed its business strategy.
Years Ended June 30,
________________________________________________________
2003 2002 2001 2000 1999
________ _______ ________ ________ ______
(Dollars and shares in thousands, except per share data)
OPERATING DATA
Income (loss) from
continuing
operations (a) $ (3,828) $(25,236) $(61,449) $ 6,295 (b) $ (978)
____________________________________________________________________________
Income from
discontinued
operations $ - $ - $ 12,754 (c) $ 346 $ 5,581
____________________________________________________________________________
Net income
(loss) (a) $ (3,828) $(25,236) $(48,695) $ 6,641 $ 4,603
____________________________________________________________________________
Basic earnings
(loss) per share
from continuing
operations $ (.45) $ (2.96) $ (6.95) $ .73 $ (.11)
____________________________________________________________________________
Diluted earnings
(loss) per share
from continuing
operations $ (.45) $ (2.96) $ (6.95) $ .71 $ (.11)
____________________________________________________________________________
Average common
shares
outstanding -
Basic 8,525 8,525 8,839 8,674 8,641
____________________________________________________________________________
Average common
shares - Diluted 8,525 8,525 8,839 8,987 8,641
____________________________________________________________________________
BALANCE SHEET DATA
(at end of period):
Cash and cash
equivalents $ 5,537 $ 6,674 $ 24,272 $ 60,090 $44,137
____________________________________________________________________________
Short-term
investments $ 12,325 $ 29,590 $ 27,381 $ - $ 7,292
____________________________________________________________________________
Total assets $ 20,842 $ 46,843 $ 77,413 $104,735 $77,721
____________________________________________________________________________
Long-term debt,
including
current portion $ - $ 27,750 (d) $ 27,750 $ 12,750 $ -
____________________________________________________________________________
Stockholders'
equity $ 9,439 $ 13,267 $ 38,486 $ 87,910 $74,614
____________________________________________________________________________
(a) Beginning with May 2001 and through the end of fiscal 2003, the E-
Commerce Operations business segment accounted for 100% of the Company's
revenues. For the 1999 through February 2000 periods presented above,
Route Operations, which was J Net's only business segment during these
periods, generated 100% of the revenues. The Company's Technology-
Related Businesses segment began operating in February 2000 and has not
generated any operating revenues since inception. The losses from
continuing operations in 2003 are $.3 million and $3.5 million from E-
Commerce Operations and Technology-Related Businesses segments,
respectively. Loss from continuing operations in 2001 was due primarily
to impairment of investments and losses on sales of certain investments
of $24.3 million, equity method losses of $26.1 million (including $20.3
million attributable to InterWorld), and $5.8 million of consolidated
losses from InterWorld for May and June of 2001.
(b) Includes a net fee earned of $11.1 million from a terminated merger.
(c) Represents an after-tax gain of $13 million from sale of the Route
Operations less a $.3 after tax operating loss.
(d) The long-term debt was repaid in its entirety in July 2002.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
_______________________________________________________________
RESULTS OF OPERATIONS
_____________________
Forward-looking Statements; Risks and Uncertainties
Certain information included in this Annual Report on Form 10-K and other
materials filed or to be filed by the Company with the Securities and
Exchange Commission contains statements that may be considered forward-
looking. All statements other than statements of historical information
provided herein may be deemed to be forward-looking statements. Without
limiting the foregoing, the words "believes", "anticipates", "plans",
"expects", "should", and similar expressions are intended to identify
forward-looking statements. In addition, from time to time, the Company may
release or publish forward-looking statements relating to such matters as
anticipated financial performance, business prospects, technological
developments and similar matters. The Private Securities Litigation Reform
Act of 1995 provides a safe harbor for forward-looking statements. In order
to comply with the terms of the safe harbor, the Company notes that a variety
of factors could cause the Company's actual results and experience to differ
materially from the anticipated results or other expectations expressed in
the Company's forward-looking statements.
The risks and uncertainties that may affect operations, performance 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 control 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 to obtain.
The Company is actively seeking potential acquisitions of operating companies
and enhancement opportunities for its E-Commerce Operations. Such
enhancements include strategic alternatives including, but not limited to,
expansion of marketing efforts, seeking business partners, or the sale of
IWH. Management will devote its time and resources to these efforts and may
incur expenses in connection with such activities. The Company anticipates
that, as it continues to engage 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 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.
Overview
J Net Enterprises, Inc. ("J Net" or the "Company") is a holding company
conducting operations through a wholly owned enterprise software subsidiary
(the "E-Commerce Operations"). The Company also holds investments in
technology infrastructure companies (the "Technology-Related Businesses"). As
of June 30, 2003, one Technology-Related Business investment continues to
have value assigned. Unless the context indicates otherwise, references to
"2003", "2002" and "2001" indicate the fiscal years ended June 30, 2003, 2002
and 2001, respectively.
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 95.3% owned
subsidiary of the Company.
J Net also holds minority investments in other technology companies
including, but not limited to, systems development and software companies.
These investments are held directly by the Company, or J Net Ventures I, LLC,
a fund which is owned 100% by the Company ("Ventures I" or the "Fund"). Due
to the significant financial and management resources required to stabilize
the E-Commerce Operations since 2001, Management has not pursued additional
minority investments and has no plans to actively reinstate that strategy in
the near future.
Marketing of E-Commerce products and services in the United States was
conducted through an exclusive Strategic Partnership Agreement from February
2002 through September 2002. Immediately following termination of the
aforementioned exclusive agreement, the Company entered into a non-exclusive
reseller agreement with an unrelated third party. The reseller agreement
contained a stated profit sharing percentage, typically between 40% and 60%
depending on the product or services sold, to be received from each sale. No
sales or services have been recognized from the reseller agreement. In
August 2003, the Company hired personnel to initiate internal marketing
efforts.
The climate in the technology markets has been sluggish and business
investment has steadily declined since 2000. Estimates for the recovery of
many of the businesses in which the Company is involved vary widely. The
Company is continuing to monitor its activities closely and is seeking
business partners given the economic environment and may take further steps
to reduce operating costs.
Critical Accounting Policies
____________________________
General
The policies outlined below are critical to the Company's operations and the
understanding of the results of operations. The impact of these policies on
operations is discussed throughout Management's Discussion and Analysis of
Financial Condition and Results of Operations where such policies affect the
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 Consolidated Financial Statements contained in this Annual
Report on Form 10-K. Note that preparation of this Annual Report on Form
10-K requires the Company 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. Actual results may differ from those estimates.
Consolidation
The accompanying consolidated financial statements include the accounts of J
Net, its wholly owned subsidiaries and 100% of InterWorld. The Company owns
95.3% of the equity securities of InterWorld. Because InterWorld has no
assets or operations, the minority shareholders of InterWorld hold a deficit
position and no minority interest is included.
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.
For the periods beginning November 2000 through April 2001, J Net owned $20
million of InterWorld Preferred Stock. The Preferred Stock voted on an
"as-if" converted basis with common stock, which represented approximately
10% voting rights. J Net used the equity method of accounting during the
time it owned only InterWorld Preferred Stock. The determination to use the
equity method of accounting was based on the Company's ability to influence
operations through its board membership, which consisted of 2 of 5 seats. In
May 2001, when the redemption of the Preferred Stock became due, J Net
exchanged the Preferred Stock for common stock in lieu of cash. As a result
of this redemption, J Net became a 95.3% owner of the equity securities and
began using the consolidation method for InterWorld.
Between June 2001 and April 2002, J Net funded InterWorld's operations under
a secured promissory note (the "Secured Note") and was InterWorld's senior
secured creditor. During this time, advances under the Secured Note totaled
$17.2 million. In February 2002, InterWorld's management acknowledged its
default under the Secured Note and foreclosure proceedings began. In May
2002, the foreclosure was completed and IWH became the owner of the
intellectual property and other assets of InterWorld. Unless specifically
stated otherwise, IWH is intended to describe the E-Commerce Operations of
the Company. References to InterWorld are specific to that entity, which
remains a consolidated subsidiary of J Net but is presently inactive.
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 and 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 and other requirements contained within the services contract are
satisfied.
Maintenance revenue
Revenue from maintenance and post-contract customer support services, such as
telephone support and product enhancements, is recognized ratably over the
period of the agreement under which the services are provided, typically one
year. Recognition of revenue is deferred until payments from customers 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
It is the policy of the Company to evaluate its investments in Technology-
Related Businesses and other long lived assets for possible impairment on a
quarterly basis. Determination of impairment is based on a number of factors
designed to detect if any specific indicators of impairment exist. Such
factors include, but are not limited to, significant decreases in the market
value of the investment, discounted cash flow analyses, adverse changes in
the business or legal environment, loss of significant customers, the
introduction of new technologies which accelerate obsolescence of existing
products and sustained operating losses and negative cash flows which could
not be resolved or improved within a reasonable amount of time to justify
continued operations.
Capital Resources and Liquidity
_______________________________
Liquidity
As of June 30, 2003, the Company had $17.9 million of cash and short term
investments. On a consolidated operating basis, the Company and its
subsidiaries require approximately $2.4 million annually to fund operations.
Management continually seeks ways to reduce overhead cost and enhance its
operations to reduce the existing funding requirements. Sources of funds are
generated from E-Commerce Operations revenues, interest from cash deposits,
and Mariner Partners, L.P. ("Mariner") earnings. Management believes the
existing cash and short term investments are adequate to continue funding
existing operations and provide resources for the Company to pursue its other
business opportunities.
As a result of the restructuring efforts initiated since J Net acquired the
controlling interest in E-Commerce Operations in May 2001, the net cash
required to fund the E-Commerce Operations has decreased from approximately
$3.0 million per month to approximately cash break even as of June 30, 2003.
Provided that IWH can maintain the existing customer base, Management expects
IWH should be able to remain self sustaining and continue to provide upgrade
enhancements, such as the recent release of Version 6.0. The ability to
achieve profitability depends on future revenue increases, which will be
dependent on the success of the Company's marketing efforts and new sales
from resellers in Europe and Japan.
In 2003, the Company received proceeds from the sale of assets of
approximately $4.4 million and income tax refunds of approximately $7.7
million. In July 2002, a total of $27.3 million was used to repurchase the
Notes pursuant to the voluntary repurchase offer made by the Company in May
2002.
As of June 30, 2003, the total accounts payable and accrued liabilities
include approximately $1.5 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. Between April 2002 and June 2003,
approximately $1.0 million of liabilities were settled for approximately $.3
million. Although there can be no assurances, Management believes the
remaining obligations may be settled at amounts substantially less then their
respective face values.
J Net has a noncancellable office lease in New York, New York which expires
on December 31, 2010. Future minimum payments under such lease total $3.4
million at June 30, 2003. J Net also has a noncancellable office lease in
Plano, Texas. Future minimum payments under such lease, which expires in
February 2004 total $72,000 as of June 30, 2003. Future minimum payments
under the E-Commerce operations lease which expires on October 31, 2003,
total $66,000 at June 30, 2003. In January 2002, J Net entered into a
sublease agreement for its office lease in New York. The Company remains
responsible for its obligations under the original lease. Future minimum
receipts from the tenant under the sublease, net of profit sharing with the
landlord, are $4.1 million.
Total rent expenses by the Technology-Related Businesses segment were $.6
million in 2003, $.6 million in 2002 and $.7 million in 2001. Rent receipts
under the sublease through June 30, 2003, net of profit sharing expenses with
the primary landlord were $.5 million. Rental expenses for the E-Commerce
Operations in 2003 totaled $.3 million, $1.0 million in 2002 and $.5 million
in 2001.
In December 2001, InterWorld negotiated a release from all of its obligations
under lease obligations at its offices in New York City, including certain
past due expenses which included subleased office space. The release,
together with forgiveness of the past due expenses, relieved InterWorld of
approximately $50 million in gross lease obligations. IWH now leases office
space on a month-to-month basis in New York City at a cost of approximately
$18,000 per month.
The following table outlines the consolidated lease obligations of the
Company (Dollars in thousands):
Fiscal Years Ended June 30,
______________________________________________
2005 - 2007 - 2010 and
2004 2007 2010 thereafter Total
_____ _______ _______ __________ _______
Lease Obligations
Gross operating lease
obligations $ 576 $ 1,406 $ 1,441 $ 160 $ 3,583
Sublease receipts (527) (1,639) (1,720) (192) (4,078)
_____ _______ ______ _____ ______
Net lease obligations
(profit) $ 49 $ (233) $ (279) $ (32) $ (495)
===== ======= ======= ===== =======
The Company also has severance obligations to former executive officers
totaling $.6 million as of June 30, 2002.
The Company raised $26.5 million through the issuance of Convertible
Subordinated Notes (the "Notes") between June 2000 and October 2000, net of
$1.3 million loaned for the purchases of the Notes. In September 2001, $1.0
million of the loans were paid as part of the termination agreements with
former employees. In May 2002, the Company initiated a voluntary repurchase
program to the holders of the Notes. The terms of the offer were at face
value of each Note, but excluded any interest which had accrued on the Notes
since March 2002, the last interest payment date. In July 2002, $27.3
million was paid to discharge the Notes. The payments represented the face
value of the Notes less the $.5 million remaining loans due to the Company.
In November 2000, the Company completed the sale of its Route Operations,
which resulted in receiving net proceeds of $36.9 million.
On January 4, 2001, the Board of Directors authorized the repurchase of up to
1,000,000 shares of the Company's Common Stock. Repurchases under this
program in 2001 were 370,305 shares for an aggregate cost of $1.8 million.
In addition, 80,000 shares, with an aggregate cost of $.4 million, were
repurchased in 2001 under a separate, now terminated, program. There were no
purchases in 2002 or 2003 and the Company does not expect to seek additional
purchases in the near future.
Cash Flows
In 2003, cash provided by operations was $3.8 million, which included $7.7
million of income tax refunds. Excluding the tax refunds, funds used in
operations were approximately $3.9 million compared to $16.5 million used in
operations in 2002. The improvement from the prior year reflects the impacts
of the restructuring efforts to reduce operating costs taken by the Company
in 2002.
Cash provided by investing activities in 2003 was $22.9 million. During
2003, the Company liquidated $24 million of investments with Mariner, of
which $23 million was used to facilitate the repurchase of the Notes in July
2002 and received proceeds from asset sales of $4.4 million. In February
2003, the Company purchased $6 million of short-term investments after
receipt of Federal income tax refunds.
The Company's sole financing activity in 2003 was the repurchase of the $27.8
million of Notes in July 2002 pursuant to a voluntary repurchase offer from
the Company to the holders of the Notes initiated in May 2002. Actual cash
payments to repurchase the Notes was $27.3 million due to the Company
recoupment of $.5 million of loans plus accrued interest it had made to
facilitate purchases of the Notes.
Results of Operations
_____________________
2003 compared to 2002
Total revenues
Revenues, which consist of license sales, post production maintenance, and
professional services, were $2.6 million in 2003 compared to $5.8 million in
2002, representing a decrease of 55%. All components of revenue decreased
during 2003, most notably license sales which were $21,000 in 2003 compared
to $1.3 million in 2002. Only one license was sold during 2003 compared with
six licenses in the previous year. Management has hired internal marketing
staff to improve the license revenue prospects.
Post contract maintenance support revenues were $2.1 million for 2003,
representing a decrease of $1.2 million from 2002. The decrease reflects the
combination of fewer license sales, which are typically a new source of
maintenance revenues, and a deterioration of the customer base for existing
maintenance services. As of June 30, 2003, there were 20 customers
contracted for maintenance support compared with 44 in 2002.
Professional services revenues were $.5 million in 2003 compared with $1.2
million in 2002. The revenues for 2002 include one significant project,
which accounted for approximately 60% of the 2002 revenues. Excluding this
project, year over year revenues from professional services were consistent.
Cost of revenues
Cost of revenues include costs attributable to royalties or maintenance fees
paid by IWH to third party vendors necessary to operate IWH's software and
direct labor costs of employees engaged in the maintenance or professional
service functions. In 2003, cost of revenues were $.6 million compared with
costs of $2.9 million in 2002. The 2003 decrease in costs is mostly
attributable to reduced personnel costs. In 2002, Management implemented a
restructuring program which was completed by the middle of 2002.
Operating expenses
Operating costs consist of personnel costs associated with development of
E-Commerce Operations products, marketing costs, and general and
administrative expenses ("G & A"). In addition, G & A costs attributable to
the Technology-Related Businesses segment and other costs, such as impairment
of assets and equity method losses from minority investments are included in
this caption. In 2003, total operating costs were $7.7 million compared with
$29.1 million in 2002. The following table presents the significant
components of operating costs and their changes from the previous year
(Dollars in thousands):
Favorable/(Unfavorable)
2003 2002 change from prior year
______ ______ ______________________
Research, development, marketing
and general and administrative $6,448 $20,693 $14,245
Impairment of assets 1,328 2,703 1,375
Restructuring and unusual charges (53) 6,362 6,415
Gains from settlements with
unsecured creditors (46) (669) (623)
______ _______ _______
Total operating expenses $7,677 $29,089 $21,412
====== ======= =======
The decrease in research, development, marketing and G & A costs is due
primarily to lower personnel costs attributable to the 2002 restructuring
which reduced staffing from approximately 270 employees to 29 employees
between September and December 2001.
Asset impairments in 2003 include a $1.0 million charge on the Company's
assets held for sale and a $.4 million impairment of the investment in
eStara, Inc. ("eStara"). The charge against the assets held for sale was to
recognize the loss from the sale of those assets in March 2003. The
impairment of eStara, a cost method investment, was due to the issuance of
a new series of preferred stock in May 2003, in which J Net did not
participate. While the operations of eStara have improved, it has limited
liquidity and faces significant operating challenges. Because the new
preferred stock is senior in liquidation to the series of preferred stock
held by J Net, Management concluded its ability to recover its investment was
remote and determined it was necessary to impair the remaining carrying value
of its investment in eStara.
The 2002 impairments include $.5 million and $2.2 million charges against the
carrying values of assets held for sale and eStara, respectively. The charge
against the assets held for sale was due to increased carrying costs. The
eStara impairment was due to Management's regular quarterly evaluation of
investments. At the end of 2002, J Net was aware of eStara's intent to seek
additional financing. In addition, eStara had arranged for a bridge
financing and J Net had already communicated that it would not participate in
either bridge loans or new preferred stock issuances. As a result,
Management made a partial impairment to its carrying value in eStara based on
estimated dilutive terms contained in the bridge loan.
The 2002 restructuring costs included $1.8 million of severance costs, $1.6
million in contract settlements, and $3 million of leasehold improvement
abandonments. As previously mentioned, the restructuring efforts were
initiated in the first half of 2002 and included significant staff reductions
in the United States, closing of foreign offices, the sale of Japanese
operations to the local reseller and relocation of offices. The amount
reflected in 2003 is due to final adjustments of estimated remaining
obligations to the actual restructuring charges incurred.
During 2002, Management actively negotiated settlements with significant
unsecured vendors of InterWorld. The negotiations were initiated as
InterWorld's finances became scarce. Approximately $1.0 million of
liabilities were settled for $.3 million. There remains $1.5 million of such
unsecured liabilities of InterWorld at June 30, 2003 which are separate and
distinct to InterWorld. When foreclosure proceedings by J Net against
InterWorld were competed in May 2002, InterWorld was left with no assets with
which to pay these liabilities. In 2003, there were only 2 settlements
executed.
Other income and expenses
In 2003, interest and other income totaled $2.1 million and consisted of $1.5
million in earnings from the Company's investments at Mariner, interest on
cash investments and sublease income. In addition, 2003 also includes a $.6
million gain from the repurchase of the Notes. Such gain was due to the
acceptance of offers to the holders to repurchase the Notes at a face value
in exchange for forgiving the accrued interest on the Notes since March 31,
2002, the last interest payment date.
In 2002, the other income components totaled $3.5 million, which was $2.0
million higher than 2003. The decrease in other income was due to a
reduction in cash and short term investment balances during 2003 attributable
to withdrawals of funds used to repurchase the Company's Notes in July 2002.
Interest expense for 2002 was $2.3 million, which represented 12 months of
interest on the Notes outstanding at June 30, 2002. The repurchase of Notes
was completed in July 2002, and pursuant to its terms, $.6 million of the
interest accrued in 2002 was forgiven. The unpaid portion of this interest
expense was reported as a gain from the repurchase of the Notes in the 2003
Consolidated Statement of Operations.
Income taxes
Income tax provisions were $.2 million for 2003 and 2002. The provisions for
each year are the result of adjustments of estimated tax refunds to actual
refunds. As of June 30, 2003, the Company has operating loss and capital
loss carryforwards totaling approximately $10.7 million. Accordingly, the
ability to utilize these carried forward losses are dependent on the ability
to generate profits in the future.
Net loss
The net loss of $3.8 million for 2003 reflects an improvement of $21.4
million from the $25.2 million loss incurred in 2002. The aforementioned
staff reductions and restructuring costs contributed $20.7 million in cost
reductions from 2002.
2002 compared to 2001
The results of operations for 2002 and 2001 vary significantly due, in large
part, to differences in accounting methods which were used for E-Commerce
Operations during 2001. In 2002, the results of E-Commerce Operations are
consolidated for the entire year. In 2001, J Net accounted for its initial
investment in InterWorld using the equity method of accounting for the first
ten months and the consolidation method of accounting for the last two
months. The following discussion of results of operations includes
comparisons of the historical operating results under accounting principles
generally accepted in the United States. In certain cases, Management
believes analysis between years on a pro forma basis will assist users of
these consolidated financial statements in understanding changes between
these years more thoroughly. When pro forma comparisons are used, they are
emphasized in separate sentences or paragraphs, which follow the analysis of
historical results of operations.
Total revenues
Total revenues for 2002 were $5.8 million compared to $2.2 million in 2001.
The 2001 revenues included May and June 2001 only. On a pro forma basis,
total revenues declined to $5.8 million in 2002 from $30.6 million in 2001.
The pro forma decline includes reductions in all components of revenues.
Throughout 2002, the market conditions were weak for e-commerce products,
which contributed to the reduced license sales and related professional
services. Reductions in post production maintenance support was due
primarily to cancellations of support contracts and weakening financial
condition of many "dot com" clients.
Total cost of revenues
Total cost of revenues, all of which are attributable to the E-Commerce
Operations segment, was $2.9 million for 2002 and $.9 million for 2001. As
with revenues, the costs include only the final two months of 2001. These
costs include third party royalty payments from license sales and third party
implementation costs, both of which are variable in nature. Because license
sales have decreased, the related cost of sales has also declined.
On a pro forma basis, the 2002 cost of revenues was $2.9 million compared to
$21.3 million in 2001, an average cost per month of $.2 million and $1.8
million for 2002 and 2001, respectively. The reductions are due primarily to
the reductions in workforce and lower contractor costs in 2002.
Operating expenses
Operating expenses consist of personnel costs associated with development of
the Company's e-commerce products, marketing costs and general and
administrative expenses ("G & A"). In addition, costs attributable to
impairment of assets, equity losses, restructuring and gains from settlements
with unsecured creditors are included. In 2002, total operating costs were
$29.1 million compared to $73.9 million in 2001. The following table
presents the significant operating cost components and their change from the
previous fiscal year (Dollars in thousands).
Favorable/(Unfavorable)
2002 2001 change from prior year
_______ _______ _______________________
Research, development, marketing
and administrative $20,693 $22,379 $ 1,686
Equity losses in Technology-
Related Businesses - 26,121 26,121
Impairment of assets 2,703 24,281 21,578
Restructuring and unusual charges 6,362 1,140 (5,222)
Gains from settlements with
unsecured creditors (669) - 669
_______ _______ _______
Total operating expenses $29,089 $73,921 $44,832
======= ======= =======
G & A costs for 2001 include the consolidated results of InterWorld for May
and June 2001 and $8.6 million of expenses associated with a loss on a loan
to Michael J. Donahue, then the Vice Chairman and Chief Executive Officer of
InterWorld. Excluding the Michael J. Donahue loss, the G & A for 2001 would
have been $13.8 million, of which $7.1 million represented InterWorld G & A
for May and June 2001. Normal recurring G & A costs for the three months
ended June 30, 2002 averaged approximately $.5 million per month, which
represents a decrease of over 70% from the 2002 annual average. The
decreases were primarily due to the reductions in workforce.
There were no equity losses in 2002 due to (a) the acquisition of InterWorld,
which caused the Company to begin consolidating those operations and (b) the
abandonment or full impairment of the Company's investments in Digital
Boardwalk, LLC, Alistia, Inc. and TechTrader, Inc. in 2001. The 2001 equity
losses include $20.4 million attributable to InterWorld and $3.2 million,
$1.9 million and $.6 million for TechTrader, Inc., Alistia, Inc. and Digital
Boardwalk, LLC, respectively.
Impairments of assets in 2002 consisted of a $2.2 million impairment against
the Company's investment in eStara and a $.5 million reduction in the
carrying cost of assets held for sale. The eStara impairment provision is
based on the estimated dilution to J Net based on valuation terms contained
in the bridge loan entered into by eStara with a group of investors which did
not include J Net. The Company elected not to participate in the bridge loan
and therefore carried its investment in eStara based on this recent
valuation. The reduction in carrying value of the assets held for sale is
due to the combination of reduced value of InterWorld common stock received
as part of the acquisition of the assets and higher operating costs
associated with an extended holding period of the asset.
During the first half of 2002, the Company initiated a series of actions
designed to lower its operating costs. Such actions were due to the
combination of significant ongoing losses at InterWorld, persistent
sluggishness in the market for e-commerce products, and the reduced focus on
J Net's minority interest investment strategy. These restructuring efforts
included significant staff reductions in the U.S., closing of foreign offices
of InterWorld, the sale of the Japanese operations to the local reseller, and
the closing and relocation of office leases. The total restructuring costs
included severance costs of $1.8 million, $1.6 million in contract
settlements and $3 million of leasehold abandonments in 2002. In 2001,
severance costs of $1.1 million were incurred as a result of the Company's
sale of its Route Operations.
The foreclosure against InterWorld by J Net, which began in February 2002,
and subsequent transfer of assets to IWH left InterWorld insolvent.
Immediately following the foreclosure, InterWorld had approximately $3.3
million of unsecured creditor liabilities. Management attempted to settle
certain significant liabilities to facilitate the transfer of intellectual
property and retain ongoing business relationships. This process resulted in
approximately $1.0 million of liabilities being settled for $.3 million,
resulting in a $.7 million gain on such settlements in 2002.
Other income (expenses)
Net other income was $1.2 million, consisting of interest and other income of
$3.5 million offset by interest expense of $2.3 million, was recognized in
2002 compared to a loss of $.4 million in 2001. The significant components
of this $1.6 million favorable change included $3.9 million of non cash
amortization of original debt discount of the Company's Notes issued in 2000
and 2001.
Income taxes
Income tax expense for 2002 was $.2 million. The provision is the result of
a reduction in the amount of estimated income tax refunds to be collected
from carry-backs of 2002 operating losses caused by the alternative minimum
tax.
While the Company has incurred losses in 2001 and 2002, the available
carrybacks are limited by Section 382 of the IRS regulations and separate
return loss limitations for E-Commerce operations pertaining to InterWorld.
Therefore, the available carry-backs are limited to losses incurred in the
Technology-Related Businesses segment and the operations assumed by IWH in
May 2002.
In 2001, the Company recognized a net tax benefit of $4.9 million consisting
of $11.6 million of benefits due to losses from continuing operations offset
by a $6.7 million tax liability from the sale of Route Operations.
Net loss from continuing operations
The net loss from continuing operations for 2002 was $25.2 million compared
to $61.4 million in 2001. The significant components of the $36.2 million
reduced loss include increased gross profit of $1.6 million, reduced asset
impairments of $21.5 million, reduced equity losses of $26.1 million, lower
G & A of $1.8 million, and a $1.6 million improvement in other expenses.
Partially offsetting those favorable items were restructuring costs and
vendor settlement gains of $4.6 million and a net reduction in income tax
benefits of $11.8 million.
Discontinued operations
In November 2000, the Company completed the sale of its Route Operations and
recognized a gain of $13.0 million after a tax provision of $6.7 million.
Operating results for July 2001 through November 2001, the period when the
Company owned the Route Operations, were a $.2 million loss, net of taxes.
Financial results from the Route Operations were restated and reported as
discontinued operations beginning in 2000.
Net loss
The net loss for 2002 was $25.2 million compared to $48.7 million in 2001.
The variance between periods includes the components described in the net
loss from continuing operations for 2002 and 2001. Additionally, the loss
from continuing operations for 2001 of $61.4 million was reduced by $12.7
million of net gains from discontinued operations.
Recently issued accounting standards
In May 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 150, "Accounting For Certain
Financial Instruments With Characteristics of Both Liabilities and Equity",
("SFAS 150"). This statement establishes standards for how an entity
classifies and measures certain financial instruments with characteristics of
both liabilities and equity, such as mandatorily redeemable shares. SFAS 150
is effective for financial instruments entered into or modified after May 31,
2003 and otherwise effective at the beginning of the first interim period
beginning after June 15, 2003. The adoption of SFAS 150 will have no impact
on the consolidated financial statements of the Company.
In April 2003, the FASB issued Statement of Financial Accounting Standards
No. 149, Amendment of SFAS No. 133 on Derivative Instruments and Hedging
Activities, ("SFAS 149"). The primary change in SFAS 149 is the requirement
that contracts with comparable characteristics be accounted for similarly.
SFAS 149 is effective for contracts entered into or modified after June 30,
2003 in most cases. Because the Company has no derivative financial
instruments, the adoption of the amendments contained in SFAS 149 will not
affect the consolidated financial statements of the Company.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of Accounting
Research Bulletin No. 51". FIN 46 requires a company to consolidate a
variable interest entity ("VIE") if the company has a variable interest (or
combination of variable interests) that is exposed to a majority of the
entity's expected losses if they occur or receive a majority of the entity's
expected residual returns if they occur, or both. FIN 46 applies immediately
to VIEs created after January 31, 2003, and to VIEs in which an enterprise
obtains an interest after that date. While the guidance contained in the
interpretation is complex, the Company does not have any interests in a VIE.
Therefore, the impact from this interpretation will not have an effect on the
Company's consolidated financial statements.
Factors which may affect future results
The Company's financial and management resources have been concentrated on
its E-Commerce Operations since 2001. 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) closed deals from internal marketing efforts
and resellers, (2) an increase in information technology spending by
businesses, (3) continued solvency of existing customers, (4) availability of
capital, (5) an increase in the use of the Internet by businesses and
individuals, (6) preservation of existing patents and trademarks, and (7) the
Company's ability to build and deliver products ahead of its competitors.
There is no assurance that any of the events will occur, or be sustainable if
they do occur.
Pending or threatened litigation
As of June 30, 2003, J Net did not have any litigation pending or threatened,
or other claims filed against the Company. However, InterWorld, a 95.3%
owned subsidiary, is subject to two claims.
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 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 has occurred nor should the investigation
be construed as an adverse reflection on any person, entity or security.
Although the Company is unaware of any activity with respect to the
investigation for the last year, InterWorld intends to fully cooperate with
the Commission.
PBS Realty ("PBS"), a real estate broker conducting business in New York City
filed a $1.2 million claim against InterWorld in April 2002. The claim
alleges that PBS is owed commissions by InterWorld for services related to
PBS's attempts to sublease office space previously occupied by InterWorld in
New York City. InterWorld is vigorously contesting the claim and InterWorld
management does not believe a liability exists at this time. J Net was not a
party to the brokerage agreement and no claim against J Net has been asserted
by PBS.
From time to time, the Company or its subsidiaries are parties to claims,
legal actions and complaints arising in the ordinary course of business.
Management believes its defenses are substantial and that its legal position
can be successfully defended without material adverse effect on its
consolidated financial position.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
_________________________________________________________
The Company generally is exposed to market risk from adverse changes in
interest rates and interest income is affected by changes in the general
level of U.S. interest rates. Changes in U.S. interest rates could affect
interest earned on the Company's cash equivalents, debt instruments and money
market funds. A majority of the interest earning instruments earn a fixed
rate of interest over short periods (7-35 days). In July 2002, $23 million
of the short-term investments in Mariner were liquidated to repurchase the
Company's Notes. Based upon the invested cash balances at June 30, 2003, a
10% drop in interest rates or historical returns from short-term investments
at Mariner would reduce pretax interest income by less than $.2 million per
year.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
___________________________________________
The Financial Statements and Supplementary Data required by this Item 8 are
set forth as indicated in Item 15(a)(1)(2).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
_______________________________________________________________
FINANCIAL DISCLOSURE
____________________
The Company had no changes in or disagreements with its independent auditors.
ITEM 9A. CONTROLS AND PROCEDURES
_______________________
Within the 90-day period prior to the filing of this Annual Report on
Form 10-K, an evaluation was carried out under the supervision and with the
participation of the Company's management, including the Chief Executive
Officer (the "CEO") and Chief Financial Officer ("CFO"), of the effectiveness
and design of disclosure controls and procedures used to prepare
consolidated financial statements. Based on that evaluation, the CEO and CFO
have concluded the disclosure controls and procedures designed to ensure that
information required to be disclosed by the Company in reports filed or to be
filed with the Securities and Exchange Commission (the "SEC") are adequate
and are operating in an effective manner.
There were no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date
of the most recent evaluation.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
__________________________________________________
Directors of the Registrant
At the annual meeting on January 29, 2003, five directors were elected to
serve and hold office (subject to J Net's By-Laws) until the next annual
meeting of stockholders and until a respective successor is elected and
qualified.
The directors of J Net (none of whom has a family relationship with one
another) are as follows:
Name Age Position
_______________________ ___ _____________________
Allan R. Tessler 67 Chairman of the Board
Alan J. Hirschfield 67 Vice Chairman
Eugene M. Freedman 71 Director
David R. Markin 72 Director
Robert L. McDonald, Sr. 83 Director
Allan R. Tessler has served as Chief Executive Officer and Chairman of the
Board since March 2000 and May 1994, respectively, and has been a director of
J Net since 1980. Mr. Tessler also served as Secretary of J Net from 1980
through August 1993. He has been Chairman and Chief Executive Officer of
International Financial Group, Inc., an international merchant banking firm,
since 1987. He was Co-Chairman and Co-Chief Executive Officer of Interactive
Data Corporation (formerly Data Broadcasting Corporation), a securities
market data supplier, from June 1992 through February 2000. Mr. Tessler was
Chairman of the Board of Enhance Financial Services, Inc., an insurance
holding company from 1986 through 2001, and was Chairman of the Board of
Great Dane Holdings Inc., a diversified holding company, from 1987 through
December 1996. He is also a director of The Limited, Inc. and Interactive
Data Corporation. Mr. Tessler has been a director of InterWorld Corporation
since November 2000 and Chairman of the Board of InterWorld since February
2001.
Alan J. Hirschfield has been a director of J Net since January 2000. Mr.
Hirschfield was Co-Chairman of the Board and Co-Chief Executive Officer of
Interactive Data Corporation (formerly Data Broadcasting Corporation), a
securities market data supplier, from June 1992 to 1999. Prior to becoming
Co-Chief Executive Officer in June 1992, Mr. Hirschfield served as managing
director of Schroder Wertheim & Co. Inc. and as a consultant to the
entertainment and media industry. He formerly served as Chief Executive
Officer of Twentieth Century Fox Film Corp. and Columbia Pictures Inc. from
1980 to 1985 and 1973 to 1978, respectively. Mr. Hirschfield currently
serves on the boards of Cantel Industries, Inc., Carmike Cinemas, WilTel
Communications Group, Inc. and Interactive Data Corporation.
Eugene M. Freedman became a Director of J Net in June, 2001. Mr. Freedman
was a Founder, Director, President and then a Senior Advisor of Monitor
Clipper Partners, Inc., a private equity firm until December, 2002. He is a
Senior Advisor of Monitor Company Group Limited Partnership, an international
business strategy and consulting firm, which he joined in 1995. Until
October 1994 and for many prior years, Mr. Freedman was a senior partner of
Coopers & Lybrand, where he served as Chairman and Chief Executive Officer of
Coopers & Lybrand LLP, U.S. and as Chairman of Coopers & Lybrand
International. Mr. Freedman is Director of Limited Brands, Inc., Pathmark
Stores, Inc., e-Studio Live, Inc. and Outcome Sciences, Inc., and an Advisory
Board Member of The Cross Country Group, Inc.
David R. Markin has been a director of J Net since 1980. Mr. Markin has been
Chairman of the Board, Chief Executive Officer and President of Checker
Motors Corporation ("Checker"), an automobile parts manufacturer and taxicab
fleet operator since 1970. Mr. Markin was President and Chief Executive
Officer of Great Dane Holdings Inc. from 1989 through December 1996. Mr.
Markin is presently President of Checker Holdings Corp. IV, the parent
company of Checker.
Robert L. McDonald, Sr. has been a director of J Net since 1980. Mr.
McDonald is a senior partner in the law firm of McDonald Carano Wilson LLP,
counsel to J Net. Mr. McDonald is a principal stockholder, executive officer
and a director of Little Bonanza, Inc., the corporate operator of the Bonanza
Casino located in Reno, Nevada.
Executive Officers and Significant Employees of the Registrant
Year Became an
Name Age Position Executive Officer
________________ ___ ___________________________ _________________
Allan R. Tessler 67 Chief Executive Officer and
Chairman of the Board 2000
Mark E. Wilson 44 Chief Financial Officer 2003
Allan R. Tessler's biography is set forth above.
Mark E. Wilson was appointed Vice President and Controller in September 2000
and Chief Financial Officer in June 2003. From 1997 through his appointment
with J Net, Mr. Wilson served as the United States and Latin American Manager
of Finance and Corporate Development for Repsol-YPF, an international
integrated energy company. From 1993 to 1997, Mr. Wilson served as a Manger
in Coopers & Lybrand's utility industry practice. Prior to 1993, Mr. Wilson
served as Corporate Controller for Snyder Oil Corporation and held various
positions with progressive increases in responsibility with Diamond
Shamrock/Maxus Energy Corporation.
ITEM 11. EXECUTIVE COMPENSATION
______________________
The following table sets forth certain information concerning compensation
for those persons who were (i) the Chief Executive Officer and (ii) the other
most highly paid executive officers whose total annual salary and bonuses
exceeded $100,000 (collectively, the "Named Executives") for service provided
for the fiscal years ended June 30, 2003, 2002 and 2001.
SUMMARY COMPENSATION TABLE
Long-Term Compensation
_______________________
Annual Compensation AWARDS PAYOUTS
_______________________________ ____________ ________
Other Annual Stock Option
Name and Fiscal Compensation Awards LTIP All Other
Principal Position (1) Year Salary Bonus (2) (in shares) (3) Payout Compensation
______________________ ______ ________ _______ ____________ _______________ ______ ____________
Allan R. Tessler 2003 $ - $ - $50,000 (4) - - $ -
Chief Executive 2002 $ - $ - $50,000 (4) - - $ -
Officer and Chairman 2001 $ - $ - $50,000 (4) 27,500 - $ -
of the Board
Mark E. Wilson (5) 2003 $150,000 $ - $ - - - $ -
Chief Financial 2002 $150,000 $22,500 $ - - - $ -
Officer 2001 $105,379 $ - $ - 40,000 - $ -
Mark W. Hobbs (6) 2003 $300,000 $ - $ - - - $ -
Former President 2002 $300,000 $ - $ - - - $ -
and Chief Operating 2001 $300,000 $ - $ - - - $ -
Officer
Steven L. Korby (7) 2003 $250,000 $ - $ - - - $ -
Former Executive 2002 $250,000 $ - $ - - - $ -
Vice President and 2001 $250,000 $ - $ - - - $ -
Chief Financial
Officer
Michael J. Donahue (8) 2003 $ - $ - $ - - - $ 176,000
Former Chief Executive 2002 $291,667 $ - $ - - - $ 57,000
Officer and Vice 2001 $ 83,333 $ - $ - - - $ -
Chairman - InterWorld
(1) Reflects the primary capacity served during 2003, except where otherwise
noted.
(2) The Named Executives each received certain perquisites, the aggregate
value of which did not exceed, as to any Named Executive in any of the
last three fiscal years, the lesser of $50,000 or 10% of such Named
Executive's annual salary and bonus.
(3) Represents the number of shares subject to options granted during the
respective fiscal year.
(4) Includes fees earned by Mr. Tessler for services on the Board of
Directors. Mr. Tessler, who has served as Chief Executive Officer since
March 2000, did not receive a salary or bonus during 2003, 2002 or 2001.
(5) Mr. Wilson was appointed Vice President and Controller on September 11,
2000 and Chief Financial Officer on June 30, 2003.
(6) Mr. Hobbs was appointed President and Chief Operating Officer on June
21, 2000. On June 21, 2003, Mr. Hobbs' contract with the Company
expired per its terms and the contract was not renewed.
(7) Mr. Korby was appointed Executive Vice President and Chief Financial
Officer on June 21, 2000. On June 21, 2003, Mr. Korby's contract with
the Company expired per its terms and the contract was not renewed. Mr.
Korby serves as Executive Vice President and Chief Financial Officer of
InterWorld Corporation, a subsidiary of the Company. He has held such
position since February 2001. Mr. Korby's salary, benefits and other
costs related to services performed are billed to InterWorld
on a time spent basis. Salary billed to InterWorld for the fiscal year
ended June 30, 2001 was approximately $104,000. Because InterWorld is a
consolidated subsidiary, the amounts billed from J Net to InterWorld are
not presented as a reduction to Mr. Korby's salary.
(8) Mr. Donahue's 2001 compensation covers May 2001 through June 2001, the
period from which InterWorld became a consolidated subsidiary of the
Company. Compensation for 2002 includes July 2001 through March 2002
when Mr. Donahue resigned his position. All other compensation includes
consulting fees paid to Mr. Donahue beginning in April 2002 for services
rendered as a part time consultant. The consulting agreement with Mr.
Donahue was terminated in June 2003.
Option Grants
There were no option grants in fiscal 2003.
Option Exercises and Fiscal Year-End Values
The following table summarizes information with respect to the exercise of
options to purchase Common Stock of J Net during the last fiscal year by each
of the Named Executives and the value of unexercised options held by each of
them as of the end of fiscal 2003. None of the Named Executives exercised
any options during fiscal 2003.
AGGREGATED OPTION EXERCISES IN FISCAL 2003
AND FISCAL YEAR-END OPTION VALUES
Number of Shares
Underlying Unexercised Value of Unexercised
Shares Value Options at Fiscal In-the-Money Options at
Acquired on Realized Year-End (#) Fiscal Year-End ($)
Name Exercise ($) Exercisable/Unexercisable Exercisable/Unexercisable (1)
_________________ ____________ ________ _________________________ _____________________________
Allan R. Tessler - - 112,500/ - - / -
Mark E. Wilson - - 26,666/13,334 - / -
(1) Based on the closing price of $1.08 for J Net's Common Stock on the OTCBB on June 30, 2003.
Director Compensation
Directors who are not salaried employees of the Company receive annual fees
of $32,000. In addition, a director who serves as a member of the
Compensation Committee and/or Audit Committee is entitled to receive $10,800
and $7,200, respectively, per year. For the fiscal year ended June 30, 2003,
Messrs. Freedman, Markin and Hirschfield each received aggregate fees of
$50,000 and Mr. McDonald received $42,800. Mr. Tessler, who serves as
Chairman of the Board and Chief Executive Officer of the Company, receives
$50,000 per year as fees. Mr. Tessler receives no salary from the Company
for his services as Chief Executive Officer.
The 1992 Incentive and Non-qualified Stock Option Plan (the "1992 Plan")
provides that each individual who is a member of the Board of Directors on
June 30 of any year, including any future director on any such date, will
automatically be granted a nonqualified option to purchase 27,500 shares of
Common Stock on each such June 30. The exercise price for each June 30 grant
will be 100% of the fair market value of the Common Stock on the following
September 30. Each option granted to a director will become exercisable
after September 30 of each year and expire five years from the date of grant.
The 1992 Plan terminated in accordance with its terms on September 30, 2002.
Accordingly, there were no grants of options to the directors in 2003.
Employment Agreements
On September 1, 2000 the Company entered into an employment agreement with
Mr. Hobbs. Pursuant to the employment agreement, Mr. Hobbs was employed as
President and Chief Operating Officer. The employment term commenced as of
June 21, 2000 and expired on June 21, 2003, when Mr. Hobbs' employment with
the Company terminated pursuant to the expiration terms of the contract.
During the term of the contract, Mr. Hobbs received an annual base salary of
$300,000. Mr. Hobbs' employment agreement also entitled him to participate
in an incentive bonus plan payable by the Company on such terms and
conditions as determined by the Board or the Compensation Committee, in any
event, not to exceed 50% of his base salary. During his employment term, no
bonuses were paid under this provision of the contract. In addition, Mr.
Hobbs was granted a non-qualified option to purchase up to 300,000 shares of
the Company's Common Stock. The option has an exercise price of $13.125 per
share and vested as follows: 100,000 shares on June 21, 2001; 100,000 shares
on June 21, 2002 and 100,000 shares on June 21, 2003. In addition, the option
would vest immediately if the Company terminated Mr. Hobbs' employment
without cause or if Mr. Hobbs terminated his employment for good reason.
Mr. Hobbs' employment may have been terminated for cause, without cause, by
voluntary resignation, death or disability. When Mr. Hobbs' employment was
terminated by the Company without cause on June 21, 2003, he was entitled to
payment of all base salary earned but unpaid, any accrued but unused vacation
pay, all expenses not yet reimbursed and all other benefits earned, accrued
and owing, plus equal monthly payments in an amount equal to his monthly rate
of base salary plus the amount of any incentive bonus paid to him the prior
fiscal year, annualized, divided by twelve. As of June 30, 2003, the
Company's obligation to Mr. Hobbs totaled $.3 million.
Pursuant to Mr. Hobbs' agreement, he received the right to buy $2 million of
the Company's Notes and to have the Company loan him $1 million to do so. Mr.
Hobbs did not exercise his right to borrow such funds. At June 30, 2002, Mr.
Hobbs was beneficial owner of $2 million of the Company's Notes under a
separate agreement with an unrelated party and no loan existed between the
Company and Mr. Hobbs. In July 2002, the Notes were redeemed by the Company
pursuant to a voluntary repurchase program.
Steven L. Korby, Executive Vice President and Chief Financial Officer, was
employed pursuant to an employment agreement that was entered into on October
1, 2000. The employment term commenced as of June 21, 2000 and expired on
June 21, 2003 when Mr. Korby's employment with the Company terminated
pursuant to the expiration terms of the contract. Mr. Korby received an
annual base salary of $250,000. Mr. Korby's employment agreement also
entitled him to participate in an incentive bonus plan payable by the Company
on such terms and conditions as determined by the Board or the Compensation
Committee, in any event, not to exceed 50% of his base salary.
During his employment term, no bonuses were paid under the provision of the
contract. In addition, Mr. Korby was granted a non-qualified option to
purchase up to 200,000 shares of the Company's Common Stock. The option has
an exercise price of $13.125 per share and vested as follows: 66,666 shares
on June 21, 2001; 66,667 shares on June 21, 2002 and 66,667 shares on June
21, 2003. In addition, the option would have vested immediately if the
Company terminated Mr. Korby's employment without cause or if Mr. Korby
terminated his employment for good reason.
Mr. Korby's employment may have been terminated for cause, without cause, by
voluntary resignation, death or disability. When Mr. Korby's employment was
terminated by the Company without cause on June 21, 2003, he was entitled to
payment of all base salary earned but unpaid, any accrued but unused vacation
pay, all expenses not yet reimbursed and all other benefits earned, accrued
and owing, plus equal monthly payments in an amount equal to his monthly rate
of base salary plus the amount of any incentive bonus paid to him the prior
fiscal year, annualized, divided by twelve. As of June 30, 2003, the
Company's obligation to Mr. Korby totaled $.3 million.
Pursuant to Mr. Korby's agreement, he received the right to buy $500,000 of
the Company's Notes and to have the Company loan him $250,000 to do so. Such
right was exercised by Mr. Korby in September 2000. In July 2002, the Notes
were redeemed by the Company pursuant to a voluntary repurchase program. Mr.
Korby's loan, plus accrued interest thereon, was deducted from the face value
of his Note when the repurchase occurred.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee consists of four non-employee directors.
Currently the members of the Compensation Committee are Messrs. Freedman,
Hirschfield, Markin and McDonald. See Item 13, Certain Relationships and
Related Transactions, for a description of transactions and agreements in
which members of the Compensation Committee and their associates were
involved. None of the executive officers of J Net serves as a director of
another corporation in a case where an executive officer of such other
corporation serves as a director of J Net.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
______________________________________________________________
The following table sets forth as of September 15, 2003, certain information
regarding the shares of Common Stock beneficially owned by (i) each
beneficial holder of more than five percent of the outstanding shares of
Common Stock ("Beneficial Holder"), (ii) each director, (iii) each Named
Executive and (iv) all directors and executive officers of J Net as a group.
OWNERSHIP OF J NET COMMON STOCK
________________________________________________________________________
Amount and Nature
Name of Beneficial Holder, of Beneficial
Director, Named Executive Ownership of Percent
or Identity of Group Common Stock (1) of Class (1)
________________________________________________________________________
Beneficial Holders:
__________________________________
Gabelli Asset Management, Inc. (2) 1,671,100 19.60%
Dimensional Fund Advisors, Inc. (3) 515,678 6.05%
David R. Markin 510,320 5.81%
Bedford Oak Advisors LLC (4) 491,000 5.76%
Alan J. Hirschfield 490,000 5.60%
Enterprise Group of Funds (5) 475,500 5.58%
Allan R. Tessler 473,557 5.48%
Highfields Capital Management LP (6) 307,531 3.61%
Directors other than Messrs. Hirschfield,
Markin and Tessler
________________________________________
Robert L. McDonald, Sr. 366,484 4.17%
Eugene M. Freedman 67,500 *
Named Executive
_______________
Mark E. Wilson 40,000 *
All directors and executive officers
as a group (6 persons) 1,947,861 20.59%
____________________________________
* less than one percent
(1) Includes shares of Common Stock which may be acquired upon the exercise
of vested options held by the following: Mr. Hirschfield (232,500), Mr.
Markin (262,500), Mr. Tessler (112,500), Mr. McDonald (262,500), Mr.
Freedman (27,500), and Mr. Wilson (40,000) and all directors and
executive officers as a group (937,500). The nature of the beneficial
ownership for all the shares is sole voting and investment power.
(2) Based solely upon a Schedule 13D/A filed by Gabelli Asset Management,
Inc. on September 15, 2003.
(3) Based solely upon a Schedule 13G/A filed by Dimensional Fund Advisors,
Inc. on February 10, 2003.
(4) Based solely upon a Schedule 13G/A filed by Bedford Oak Advisors on
February 12, 2002.
(5) Based solely upon a Schedule 13G filed by Enterprise Group of Funds on
February 13, 2002.
(6) Based solely upon a Schedule 13G/A filed by Highfields Capital
Management LP on February 14, 2003.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
______________________________________________
Robert L. McDonald, Sr., a director of J Net, is a senior partner in the law
firm of McDonald Carano Wilson LLP ("McDonald Carano"), counsel to J Net. In
addition, A. J. Hicks, a partner in McDonald Carano is the Secretary of J
Net. For the fiscal year ended June 30, 2003, the amount of fees paid by the
Company to McDonald Carano, based on representation provided by McDonald
Carano to the Company, did not exceed 5% of the gross revenues of such firm
for its last full fiscal year. The Company believes that the fees for the
services provided by McDonald Carano were at least as favorable to the
Company as the fees for such services from unaffiliated third parties.
In June 2000, the Company issued $6,250,000 of Notes to Messrs. Tessler,
Markin, and Hirschfield, directors of the Company, or to entities controlled
by these individuals or their adult children. In addition, officers and
employees of the Company purchased $3,750,000 of Notes between June 2000 and
October 2000. The principal amount of the Notes were payable on March 31,
2007 and bore interest at 8% per annum, payable on a quarterly basis. Such
terms were identical to Notes issued to unrelated parties. All such Notes
were repurchased pursuant to a voluntary repurchase offer in July 2002.
In connection with the purchase of $500,000 of Notes, the Company lent Mr.
Korby $250,000 pursuant to a secured promissory note which bore interest at
8% per annum. The loan was secured by the Note as collateral. In July 2002,
when the Notes were repurchased by the Company pursuant to a voluntary
repurchase, the loan, together with accrued interest thereon, was deducted
from the payment to Mr. Korby.
Mr. Hobbs was a beneficial owner of $2,000,000 of Notes pursuant to an
agreement with Mariner LLC, an unrelated entity that purchased $4,000,000 of
Notes in October 2000. Under the arrangement, Mr. Hobbs obtained full
economic benefit with respect to $1,000,000 of the Notes, including interest
thereon and potential upside conversion to Common Stock and the sale thereof.
With respect to the additional $1,000,000, Mr. Hobbs obtained potential
upside upon conversion to Common Stock and the sale thereof. Mr. Hobbs was
at risk in the event of default on the two million dollar original purchase
price and had pledged his limited partnership interests in Mariner GP, LP as
collateral against such default. The Note, in which Mr. Hobbs was a
beneficial owner, was repurchased in July 2002 pursuant to a voluntary
repurchase plan.
Mr. Tessler, Chairman and Chief Executive Officer of the Company, owns
approximately 15% of J Net Venture Partners LLC (the "Manager"), the managing
member of Venture I. The Manager is to be paid a fee from Venture I equal to
20% of the profits, if any, of Venture I after the accumulation of a
preferred return to the investors of Venture 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. There were no profits in Venture I during the
twelve months ended June 30, 2003 and accordingly, no profits were paid to
Mr. Tessler.
Mr. Donahue served as Vice Chairman and Chief Executive Officer of InterWorld
until March 2002, when he voluntarily resigned his position. Mr. Donahue
continued to serve as a part time consultant to IWH through June 30, 2003.
Item 14. Principal Accountant Fees and Services
______________________________________
The aggregate fees paid or accrued to Ernst & Young LLP ("E & Y") for
professional services rendered for the audit of the Company's annual
financial statements and for reviews of the financial statements included in
the Company's Quarterly Reports on Form 10-Q for the fiscal years ended June
30, 2003 and 2002 were as follows (Dollars in thousands):
2003 2002
____ ____
Audit fees $171 $240
Tax services - 30
____ ____
Total $171 $270
==== ====
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
_______________________________________________________________
(a) (1) and (2) Consolidated Financial Statements and Schedules
For a list of the consolidated financial statements and
consolidated financial statement schedules filed as a part of this
annual report on Form 10-K, see "Index to Financial Statements,
Supplementary Data and Financial Statement Schedules" on page F-1.
(a) (3) The exhibits filed and incorporated by reference are listed in the
index of Exhibits required by Item 601 of Regulation S-K at Item (c)
below.
(b) Reports on Form 8-K
J Net filed two reports on Form 8-K, dated December 5, 2002 and
March 24, 2003, respectively.
The form filed on December 5, 2002 disclosed in Item 5 that the
Company had filed for a $7.66 million income tax refund pursuant to
five year operating loss carryback rules contained in the Job
Creation and Workers Assistance Act of 2002.
The form filed on March 24, 2003 disclosed in Item 2 that J Net
completed the sale of its property located in Wellington, Florida on
March 21, 2003.
(c) Exhibits
3.1 Articles of Incorporation of the Registrant, as amended (J)
3.2 By-laws of the Registrant, as amended (A)
4.1 Stockholder Rights Agreement dated as of July 11, 1994 between the
Registrant and Continental Stock Transfer & Trust Company, as
Rights Agent (D)
10.1 Indemnification Agreement (Sample) (B)
10.2 1992 Incentive and Non-qualified Stock Option Plan (C)(N)
10.16 Call Agreement dated as of March 1, 2000 among Keith A. Meister,
Todd A. Meister and the Registrant (K)
10.17 Put Agreement dated as of March 1, 2000, among Keith A. Meister,
Todd A. Meister and the Registrant (K)
10.21 J Net Ventures I, LLC Operating Agreement (E)
10.22 Subscription Agreement and Investment Representation (Sample) (E)
10.23 Convertible Subordinated Note (Sample) (E)
10.24 Registration Rights Agreement (Sample) (E)
10.25 Employment Agreement between Registrant and Mark W. Hobbs (F)(N)
10.26 Employment Agreement between Registrant and Steven L. Korby (F)(N)
10.27 Securities Purchase Agreement dated October 12, 2000 by and among
Jackpot Enterprises, Inc. and InterWorld Corporation (G)
10.28 Loan Assumption and Forbearance Agreement dated October 12, 2000
by and between Michael J. Donahue and Jackpot Enterprises, Inc.
(G)
10.29 Call/Profit Participation Agreement dated October 12, 2000 by and
between Michael J. Donahue and Jackpot Enterprises, Inc. (G)
10.30 Modification letter dated October 30, 2000 to Stock Purchase
Agreement between E-T-T, Inc. and the Registrant (F)
10.31 Stock Purchase Agreement by and between InterWorld Corporation and
J Net Enterprises, Inc. dated January 25, 2001 (H)
10.32 Stand-By Purchase Agreement dated January 25, 2001 (H)
10.33 Amended and Restated Loan Assumption and Forbearance Agreement
dated April 4, 2001 by and between Michael J. Donahue and J Net
Ventures I, LLC (I)
10.34 Termination of Amended and Restated Loan Assumption and
Forbearance Agreement dated June 29, 2001 by and among Michael J.
Donahue, Excalibur Polo Farm, LLC, Ginny Bond Donahue and J Net
Ventures I, LLC (J)
10.35 Promissory Note by and between InterWorld Corporation and J Net
Enterprises, Inc. dated June 30, 2001 (J)
10.36 Security Agreement by and between InterWorld Corporation and J Net
Enterprises, Inc. dated June 30, 2001 (J)
10.37 Assignment of Intellectual Property dated May 3, 2002 by and among
J Net Enterprises, Inc., InterWorld Corporation and IW Holdings,
Inc. (K)
10.38 InterWorld Master Alliance Agreement (L)
10.39 Acknowledgment of Default Assignment of Payments Agreement (L)
21.1 List of Registrant's subsidiaries (M)
23.1 Consent of Ernst & Young LLP (M)
31.1 Principal Executive Officer Certification (M)
31.2 Principal Financial Officer Certification (M)
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002 (M)
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002 (M)
(A) Incorporated by reference to Registrant's Annual Report on
Form 10-K for the year ended June 30, 1989.
(B) Incorporated by reference to Registrant's Annual Report on
Form 10-K for the year ended June 30, 1991.
(C) Incorporated by reference to Registrant's 1992 Proxy
Statement.
(D) Incorporated by reference to Registrant's Form 8-A dated July
12, 1994.
(E) Incorporated by reference to Registrant's Annual Report on
Form 10-K for the year ended June 30, 2000.
(F) Incorporated by reference to Registrant's Form 10-Q for the
quarter ended September 30, 2000.
(G) Incorporated by reference to Registrant's Form 8-K filed
October 25, 2000.
(H) Incorporated by reference to Registrant's Form 8-K filed
February 2, 2001.
(I) Incorporated by reference to Registrant's Form 10-Q for the
quarter ended March 31, 2001.
(J) Incorporated by reference to Registrant's Annual Report on
Form 10-K for the year ended June 30, 2001.
(K) Incorporated by reference to Registrant's Form 8-K filed May
13, 2002.
(L) Incorporated by reference to Registrant's Form 10-Q for the
quarter ended March 31, 2002.
(M) Included herein.
(N) Management contract or compensatory arrangement which is
separately identified in accordance with Item 15(a)(3) of
Form 10-K.
(d) Schedules
For a list of the financial statement schedules filed as a part of this
annual report on Form 10-K, see "Index to Financial Statements, Supplementary
Data and Financial Statement Schedules" on page F-1.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Dated: September 29, 2003 J NET ENTERPRISES, INC.
(Registrant)
By: /s/ Allan R. Tessler
_____________________
Allan R. Tessler
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
___________________________ ___________________________ __________________
/s/ Allan R. Tessler Chief Executive Officer and
___________________________ Chairman of the Board September 29, 2003
Allan R. Tessler
/s/ Mark E. Wilson Chief Financial Officer September 29, 2003
___________________________ (Principal Accounting Officer)
Mark E. Wilson
/s/ Eugene M. Freedman Director September 29, 2003
___________________________
Eugene M. Freedman
/s/ Alan J. Hirschfield Director September 29, 2003
___________________________
Alan J. Hirschfield
/s/ David R. Markin Director September 29, 2003
___________________________
David R. Markin
/s/ Robert L. McDonald, Sr. Director September 29, 2003
___________________________
Robert L. McDonald, Sr.
J NET ENTERPRISES, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS, SUPPLEMENTARY DATA
AND FINANCIAL STATEMENT SCHEDULES
[ITEMS 8 AND 15(a)]
(1) FINANCIAL STATEMENTS:
Report of Independent Auditors
Consolidated Balance Sheets - June 30, 2003 and 2002
Consolidated Statements of Operations -
Years Ended June 30, 2003, 2002 and 2001
Consolidated Statements of Stockholders' Equity -
Years Ended June 30, 2003, 2002 and 2001
Consolidated Statements of Cash Flows -
Years Ended June 30, 2003, 2002 and 2001
Notes to Consolidated Financial Statements
(2) SUPPLEMENTARY DATA:
Quarterly Financial Information (Unaudited) -
Years Ended June 30, 2003 and 2002
(3) FINANCIAL STATEMENT SCHEDULES
Valuation and Qualifying Accounts
Certain financial statement schedules are omitted because the required
information is provided in the Consolidated Financial Statements or the notes
thereto.
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable and therefore have been omitted.
Report of Independent Auditors
We have audited the accompanying consolidated balance sheets of J Net
Enterprises, Inc. and subsidiaries (the "Company") as of June 30, 2003 and
2002, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended June
30, 2003. Our audits also included the financial statement schedule listed
in the Index at Item 15(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of J Net
Enterprises, Inc. and subsidiaries at June 30, 2003 and 2002, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended June 30, 2003, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion,
the related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
New York, New York
August 21, 2003
J NET ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - JUNE 30, 2003 AND 2002
(Dollars in thousands)
ASSETS 2003 2002
______ _______ _______
Current assets:
Cash and cash equivalents $ 5,537 $ 6,674
Short-term investments 12,325 29,590
Accounts receivable, net of $0 and
$109 allowance 132 213
Notes receivable - related parties - 288
Notes receivable - trade - 132
Federal income taxes receivable - 983
Assets held for sale - 4,950
Prepaid expenses 34 351
Other current assets - 293
_______ _______
Total current assets 18,028 43,474
Investments in technology-related businesses 2,000 2,425
Property and equipment, net of accumulated
depreciation 79 180
Other non-current assets 735 764
_______ _______
Total assets $20,842 $46,843
======= =======
See Notes to Consolidated Financial Statements.
LIABILITIES AND STOCKHOLDERS' EQUITY 2003 2002
____________________________________ ________ ________
Current liabilities:
Accounts payable and accrued expenses $ 3,399 $ 4,095
Current portion of convertible subordinated notes - 27,750
Deferred revenue and customer deposits 689 1,306
________ ________
Total current liabilities 4,088 33,151
________ ________
Deferred income taxes 6,910 -
Deferred rent 193 213
Other non-current liabilities 212 212
Commitments and contingencies (Note 14)
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 (49,859) (46,031)
Less 1,708,929 shares of common stock
in treasury for each period, at cost (16,054) (16,054)
________ ________
Total stockholders' equity 9,439 13,267
________ ________
Total liabilities and stockholders' equity $ 20,842 $ 46,843
======== ========
See Notes to Consolidated Financial Statements.
J NET ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 2003, 2002 AND 2001
(Dollars in thousands, except per share data)
2003 2002 2001
_______ ________ ________
Revenues, net:
Product licenses $ 21 $ 1,343 $ 7
Maintenance 2,090 3,292 809
Services 514 1,180 1,340
_______ ________ ________
Total revenues, net 2,625 5,815 2,156
_______ ________ ________
Cost of revenues:
Product licenses - 400 430
Maintenance 108 343 119
Services 501 2,169 328
_______ ________ ________
Total cost of revenues 609 2,912 877
_______ ________ ________
Gross profit 2,016 2,903 1,279
Operating expenses:
Research and development 1,603 5,125 2,264
Sales - 5,981 2,142
Marketing alliances - 1,616 1,085
General and administrative (including
stock based compensation of $0, $0 and
$190 for the years ended June 30, 2003,
2002 and 2001, respectively) 4,845 7,971 16,888
Equity losses in technology-related
businesses - - 26,121
Loss on disposal and impairments of assets 1,328 2,703 24,281
Restructuring and unusual charges (53) 6,362 1,140
Gains from settlements with unsecured
creditors (46) (669) -
_______ ________ ________
Total operating expenses 7,677 29,089 73,921
_______ ________ ________
Operating loss from continuing operations (5,661) (26,186) (72,642)
Other income (expense):
Interest and other income 1,521 3,485 5,524
Interest expense - (2,299) (5,889)
Gain from repurchase of convertible
subordinated notes 553 - -
_______ ________ ________
Total other income (expense) 2,074 1,186 (365)
Loss from continuing operations
before income tax (3,587) (25,000) (73,007)
_______ ________ ________
Provision (benefit) for Federal
income tax 241 236 (11,558)
_______ ________ ________
Loss from continuing operations,
net of tax (3,828) (25,236) (61,449)
_______ ________ ________
Loss from discontinued operations
net of taxes of $(99) - - (250)
Gain on sale of discontinued operations,
net of taxes of $6,711 - - 13,004
_______ ________ ________
Discontinued operations, net of tax - - 12,754
_______ ________ ________
Net loss $(3,828) $(25,236) $(48,695)
======= ======== ========
Basic loss per share:
Loss from continuing operations $ (.45) $ (2.96) $ (6.95)
Income from discontinued operations $ - $ - $ 1.44
_______ ________ ________
Basic loss per share $ (.45) $ (2.96) $ (5.51)
======= ======== ========
Dilutive loss per share:
Loss from continuing operations $ (.45) $ (2.96) $ (6.95)
_______ ________ ________
Income from discontinued operations $ - $ - $ 1.44
Dilutive loss per share $ (.45) $ (2.96) $ (5.51)
======= ======== ========
See Notes to Consolidated Financial Statements.
J NET ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 2003, 2002 AND 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, 2000 10,233 $102 $73,875 $ 27,710 (1,259) $(13,777) $ - $87,910
Loss from continuing
operations (61,449) (61,449)
Cumulative translation
adjustment (17) (17)
Income from discontinued
operations, net of tax 12,754 12,754
_______
Total Comprehensive loss (48,712)
Amortization of employee
stock options 190 190
Repurchases of common
stock (450) (2,277) (2,277)
Amount allocated to
additional paid-in
capital in connection
with the issuance of
the 8% convertible
subordinated notes
(See Note 2) 1,375 1,375
______ ____ _______ ________ ______ ________ ______ _______
Balance June 30, 2001 10,233 $102 $75,250 $(20,795) (1,709) $(16,054) $ (17) $38,486
Net loss (25,236) (25,236)
Cumulative translation
adjustment 17 17
_______
Total Comprehensive
loss (25,219)
______ ____ _______ ________ ______ ________ ______ _______
Balance June 30, 2002 10,233 $102 $75,250 $(46,031) (1,709) $(16,054) $ - $13,267
Net loss (3,828) (3,828)
______ ____ _______ ________ ______ ________ ______ _______
Balance June 30, 2003 10,233 $102 $75,250 $(49,859) (1,709) $(16,054) $ - $ 9,439
====== ==== ======= ======== ====== ========= ====== =======
See Notes to Consolidated Financial Statements.
J NET ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2003, 2002 AND 2001
(Dollars in thousands)
2003 2002 2001
__________ _________ _________
Operating activities:
Net loss $ (3,828) $(25,236) $(48,695)
Adjustments to reconcile loss to
net cash provided by (used in)
operating activities:
Equity in loss of technology-related
businesses - - 26,121
Loss on disposal and impairment of
assets 1,328 5,962 24,281
Gain from repurchase of convertible
subordinated notes (553) - -
Bad debt expenses and losses on loans - 109 8,582
Amortization of original issue
debt discount - - 3,875
Amortization of stock-based
compensation - - 190
Depreciation 106 551 814
Deferred income taxes - 885 (1,263)
Loss from discontinued operations,
net of $99 of taxes - - 250
Gain on sale of discontinued operations,
net of $6,711 tax - - (13,004)
Changes in assets and liabilities:
Income taxes 7,893 5,555 (13,150)
Accounts receivable 81 1,210 2,280
Short-term investments (735) (2,209) (1,937)
Prepaid expenses and other current assets 220 905 (955)
Notes receivable - related parties - 1,000 (288)
Other non-current assets 29 289 (278)
Accounts payable and other current
liabilities (143) (3,604) (981)
Deferred revenue and customer deposits (617) (1,816) (610)
Deferred rent (20) (126) (8)
_________ ________ ________
Net cash provided by (used in)
continuing operations 3,761 (16,525) (14,776)
Net cash provided by discontinued
operations - - 1,435
_________ ________ ________
Net cash provided by (used in)
operating activities 3,761 (16,525) (13,341)
Investing activities:
Investments in technology-related
businesses - (1,338) (30,767)
Purchases of short-term investments (6,000) - (25,444)
Investments in notes receivable - (125) (12,490)
Collection of notes receivable -
related party 288 - -
Collection of notes receivable 132 - -
Security deposits received - 212 -
Redemption of short-term investments 24,000 - -
Cash of InterWorld at acquisition - - 4,378
Proceeds from sale of discontinued
operations - - 36,905
Proceeds from sale of assets 4,437 260 -
Purchase of property and equipment (5) (82) (2,507)
_________ ________ ________
Net cash provided by (used in)
investing activities -
continuing operations 22,852 (1,073) (29,925)
_________ ________ ________
Net cash used in discontinued
operations - - (2,525)
Net cash provided by (used in)
investing activities 22,852 (1,073) (32,450)
Financing activities:
Repayment of debt (27,750) - -
Repurchases of common stock - - (2,277)
Proceeds from issuance of convertible
subordinated notes - - 12,250
_________ ________ ________
Net cash provided by (used in)
financing activities (27,750) - 9,973
_________ ________ ________
Net decrease in cash and cash equivalents (1,137) (17,598) (35,818)
Cash and cash equivalents at beginning
of year 6,674 24,272 60,090
_________ ________ ________
Cash and cash equivalents at end of year $ 5,537 $ 6,674 $ 24,272
========= ======== ========
Supplemental disclosures of cash flow data:
Cash paid during the year for:
Federal income tax $ - $ - $ 2,300
Interest paid $ - $ 1,667 $ 1,976
Non-cash investing and financing
activities:
Value of notes receivable discharged
in exchange for common stock $ - $ 1,024 $ -
Original issue debt discount on
convertible subordinated notes $ - $ - $ 1,375
Minority interest in subsidiary $ - $ - $ (2,514)
Note receivable - related parties $ - $ - $ 250
Property received in foreclosure
on loans $ - $ - $ 5,450
See Notes to Consolidated Financial Statements.
J NET ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Significant Accounting Policies And Business
Business:
J Net Enterprises, Inc. ("J Net" or the "Company") is a holding company with
concentrated investments in enterprise software ("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 95.3% owned
subsidiary of the Company.
J Net also holds minority investments in other technology companies
including, but not limited to, systems development and software companies.
These investments are held directly by the Company, or by J Net Ventures I,
LLC (the "Fund" or "Ventures I"), a fund which is 100% owned and managed 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. Segment results
reported exclude the effect of transactions between the Company and its
subsidiaries. Assets are the owned assets used by each operating segment.
Principles of consolidation and basis of presentation:
The accompanying 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", "2002" and
"2001" are for the fiscal years ended June 30, 2003, 2002 and 2001,
respectively.
Reclassifications:
Certain reclassifications have been made to prior year financial statements
to conform to the current year presentation.
Use of estimates:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the amounts reported in the
accompanying consolidated financial statements and notes. Actual results
could differ from those estimates.
Cash equivalents:
Cash equivalents are liquid investments comprised primarily of debt
instruments and money market accounts with maturities of three months or less
when acquired. Cash equivalents are stated at cost which approximates fair
value due to their short maturity.
Short-term investments:
The Company owns short term investments in Mariner Partners, L.P.
("Mariner"), a private investment fund. 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
accompanying 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.
The consolidated balance sheet as of June 30, 2003 contains approximately
$1.5 million of unsecured creditor liabilities of InterWorld. At June 30,
2002, the consolidated balance sheet included $2.3 million of InterWorld's
unsecured creditor liabilities. As a result of J Net's foreclosure on its
Secured Note with InterWorld and the transfer of assets, contracts,
intellectual property and employees to IWH, InterWorld does not have
financial resources to pay the face value of these obligations. Management
of J Net has been actively negotiating with the significant creditors to
settle certain liabilities. Between April 2002 and June 2003, liabilities
with a face value of $1.0 million have been settled for approximately $.3
million. Management expects, but cannot provide assurance, that the
remaining obligations may be settled at substantially less than their face
value.
Financial instruments with concentration of credit risk:
The financial instruments that potentially subject J Net to concentrations of
credit risk consist principally of cash and cash equivalents. J Net
maintains cash and certain cash equivalents with financial institutions in
amounts which, at times, may be in excess of the FDIC insurance limits. J
Net's cash equivalents are invested in several high-grade securities which
limit J Net's exposure to concentrations of credit risk.
The Company owns short-term investments which are managed by Mariner.
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.
It is the policy of the Company to evaluate its investments in Technology-
Related Businesses for possible impairment on a quarterly basis. Management
uses a number of different criteria when evaluating an asset for possible
impairment. Indicators such as significant decreases in market value of an
investment, discounted cash flow analyses, adverse changes in the business
climate or legal matters, losses of significant customers or new technologies
which could accelerate obsolescence of business products and sustained
operating losses and cash flows which cannot be resolved or improved within a
reasonable amount of time to justify continued business operations are used
by Management when making its evaluations.
Accounting for equity method investments:
When the Company uses the equity method to account for its investments in
Technology-Related Businesses it uses the procedures outlined in the Emerging
Issues Task Force issue number 98-13 ("EITF 98-13"), which covers accounting
by equity method investors for investee losses when the investor has loans to
and investments in other securities of the investee. EITF 98-13 generally
defines other investments in the investee to include preferred stock, debt
securities and loans. The conclusions of the task force also prescribe the
order in which equity method losses shall be recognized as the seniority of
the other investments (that is, priority in liquidation).
In 2001, the Company used the equity method to account for its investments in
InterWorld (up to May 2001, when the consolidation method was applied),
Alistia, Inc., Digital Boardwalk, LLC and TechTrader, Inc. All of the
investments were in the form of preferred stock. When common stockholders'
equity is a deficit, equity losses are recognized in accordance with the
Company's proportionate ownership percentages in preferred stock. The
applicable percentage of equity losses recognized in 2001 was 100% for
InterWorld, 39.8% for Alistia, Inc., 100% for Digital Boardwalk, Inc., and
42.1% for TechTrader, Inc. As a result of the business combination with
InterWorld, the consolidation method was applied beginning May 1, 2001.
There were no equity method investments remaining after the fiscal year ended
June 30, 2001.
For the period from November 2000 through April 2001, J Net owned $20 million
of mandatorily redeemable preferred stock of InterWorld (the "Preferred
Stock"). The Preferred Stock voted on an "as-if" converted basis with common
stock, which represented approximately 10% voting rights. J Net used the
equity method of accounting during the time it owned the Preferred Stock. In
May 2001, when the redemption of the Preferred Stock became due, J Net
exchanged the Preferred Stock for common stock in lieu of cash. As a result
of this redemption, J Net became a 95.3% owner of the equity securities and
began using the consolidation method for InterWorld. The results of IWH, the
successor entity to InterWorld's operations after the Company's foreclosure
on its Secured Note with InterWorld in May 2002, are also consolidated with
operating results of J Net.
Stock-based compensation:
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB 25") and the pro forma disclosures
required in accordance with Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123") to account for
employee based stock compensation using the fair market value method. The
Company also follows the provisions contained within the Financial Accounting
Standards Board of the American Institute of Certified Public Accountants
("AICPA") Interpretation 44 ("FIN 44"), which provides clarification on the
application of APB 25.
When the Company issues stock-based compensation awards to non-employees or
Directors, the grants are accounted for in accordance with the Emerging
Issues Task Force Issue 95-18, "Accounting for Equity Instruments that are
Issued to Other Than Employees for Acquiring or in Conjunction with Selling
Goods or Services" ("EITF 96-18").
The Company measures the fair value of equity instruments for employee and
non-employee grants using the Black-Scholes option pricing model.
In 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"). This statement amended
certain disclosure provisions in SFAS 123 and Accounting Principles Board
Opinion No. 28, "Interim Financial Reporting". The Company adopted the
provisions of SFAS 148 beginning March 31, 2003.
The following table discloses pro forma amounts for net loss and basic and
dilutive loss per share for 2003, 2002 and 2001 assuming compensation cost
for employee and director stock options had been determined using the fair
value-based method prescribed by SFAS 123. The pro forma results may not be
representative of the effects of options on net income in future years. The
model assumes no expected future dividend payments on the Company's Common
Stock for the options granted in 2003, 2002 and 2001 (Dollars in thousands,
except per share data):
2003 2002 2001
_______ ________ ________
Net loss:
As reported $(3,828) $(25,236) $(48,695)
Fair value of grants to employees (39) (122) (179)
Fair value of grants to Directors - - (468)
_______ ________ ________
Pro forma $(3,867) $(25,358) $(49,342)
======= ======== ========
Basic loss per share:
As reported $ (.45) $ (2.96) $ (5.51)
Pro forma $ (.45) $ (2.97) $ (5.58)
Diluted loss per share:
As reported $ (.45) $ (2.96) $ (5.51)
Pro forma $ (.45) $ (2.97) $ (5.58)
Weighted average assumptions:
Expected stock price volatility - 95.0% 60.0%
Risk-free interest rate - 3.3% 5.8%
Expected option lives (in years) - 3.0 3.0
Estimated fair value of options granted $ - $ 1.10 $ 4.19
Accounting for Derivative Instruments and Hedging Activities:
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"), as amended,
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position. This statement also
defines and allows companies to apply hedge accounting to its designated
derivatives under certain instances. It also requires that all derivatives
be marked to market on an ongoing basis. This applies whether the
derivatives are stand-alone instruments, such as warrants or interest rate
swaps, or embedded derivatives, such as call options contained in convertible
debt investments. Along with the derivatives, in the case of qualifying
hedges, the underlying hedged items are also to be marked to market. These
market value adjustments are to be included either in the statement of
operations or other comprehensive income, depending on the nature of the
hedged transaction. The fair value of financial instruments is generally
determined by reference to market values resulting from trading on a national
securities exchange or in an over the counter market. In cases where
derivatives relate to financial instruments of non public companies, or where
quoted market prices are otherwise not available, such as for derivative
financial instruments, fair value is based on estimates using present value
or other valuation techniques.
As a result of the Company's abandonment of its investment in TechTrader,
Inc. in 2001, a warrant previously classified as an asset was expensed and
reported as an impairment in the amount of $1.5 million.
The Company did not have any derivative instruments at June 30, 2003 or June
30, 2002.
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. The Company owned 40 acres of land
with building improvements, which were classified as held for sale, between
June 2001 and March 2003, when the property was sold. The property was
received as a result of a foreclosure on a loan to Michael J. Donahue, the
former Vice Chairman and Chief Executive Officer of InterWorld. In June
2001, when the assets became the property of J Net, they were valued at $5.5
million, the estimated net proceeds expected to be received based on a fair
market value assessment of the assets. From June 2001 to March 2003, when
the Company held the asset for sale, impairments and operating costs totaling
$1.1 million were recognized. Net proceeds from the sale totaled $4.4
million.
Income taxes:
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standard No. 109, "Accounting for Income Taxes" ("SFAS
109"). SFAS 109 requires that deferred tax assets and liabilities arising
from temporary differences between book and tax basis will be recognized
using enacted rates at the time such temporary differences reverse. In the
case of deferred tax assets, SFAS 109 requires a reduction in deferred tax
assets if it is more likely than not that some portion or all of the deferred
tax will not be realized.
There are accumulated deferred tax assets of $19.9 million, which are offset
by a valuation allowance pursuant to SFAS 109. Such losses are limited by
certain Internal Revenue Service 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 SOP No. 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 and requirements contained within the contracts are satisfied.
Maintenance revenue:
Revenue from maintenance and post-contract customer support services, such as
telephone support and product enhancements is recognized ratably over the
period of the agreement under which the services are provided, typically one
year. Recognition of revenue is deferred until payments from customers is
received for maintenance and support.
Deferred revenue consists principally of billings in advance for services and
support not yet provided and uncollected billings to customers for
maintenance and post contract support.
Recently issued accounting standards:
In May 2003, the FASB issued Statement of Financial Accounting Standards No.
150, "Accounting for Certain Financial Instruments with Characteristics of
Both Liabilities and Equity", ("SFAS 150"). This statement establishes
standards for how an entity classifies and measures certain financial
instruments with characteristics of both liabilities and equity, such as
mandatorily redeemable shares. SFAS 150 is effective for financial
instruments entered into or modified after May 31, 2003 and otherwise
effective at the beginning of the first interim period beginning after June
15, 2003. The adoption of SFAS 150 will have no impact on the consolidated
financial statements of the Company.
In April 2003, the FASB issued Statement of Financial Accounting Standards
No. 149, Amendment of SFAS No. 133 on Derivative Instruments and Hedging
Activities, ("SFAS 149"). The primary change in SFAS 149 is the requirement
that contracts with comparable characteristics be accounted for similarly.
SFAS 149 is effective for contracts entered into or modified after June 30,
2003 in most cases. Because the Company has no derivative financial
instruments, the adoption of the amendments contained in SFAS 149 will not
affect the consolidated financial statements of the Company.
In January 2003, the FASB issued Interpretation No. 46, ("FIN 46"),
Consolidation of Variable Interest Entities, an Interpretation of Accounting
Research Bulletin No. 51". FIN 46 requires a company to consolidate a
variable interest entity ("VIE") if the company has a variable interest (or
combination of variable interests) that is exposed to a majority of the
entity's expected losses if they occur or receive a majority of the entity's
expected residual returns if they occur, or both. FIN 46 applies immediately
to VIEs created after January 31, 2003, and to VIEs in which an enterprise
obtains an interest after that date. While the guidance contained in the
interpretation is complex, the Company does not have any interests in a VIE.
Therefore, the impact from this interpretation will not have an effect on the
Company's consolidated financial statements.
Note 2 - Convertible Subordinated Notes
In fiscal years 2000 and 2001 the Company raised $27.75 million from the
issuance of unregistered Convertible Subordinated Notes (the "Notes") to a
group of private investors. Investors included officers and directors of the
Company or entities controlled by such directors and certain employees (see
Note 10).
The principal amount of the Notes was payable on March 31, 2007 and bore
interest at 8% per annum, payable on a quarterly basis. At the option of the
holder, a Note was convertible into the Common Stock at any time after June
1, 2001. The number of shares of common stock to be received by a Note
holder upon conversion was determined by dividing the principal amount of the
Note by the conversion price in effect at the time of the conversion, which
was initially $10.75. The conversion price was subject to adjustment in the
event of any subdivision, combination, or reclassification of outstanding
shares of the Common Stock.
For financial statement purposes, a substantial portion of the Notes were
deemed to have been in-the-money at the commitment date. The Company
calculated the beneficial conversion feature as the difference between the
fair value of the Company's Common Stock at the commitment date and the
initial conversion price, multiplied by the number of shares into which the
debt is convertible. For the fiscal year ending June 30, 2000 approximately
$2.5 million of the proceeds from issuance of the Notes was recorded as debt
discount and allocated to additional paid-in capital. Additional Notes
issued during the fiscal year ended June 30, 2001 resulted in additional
discount of $1.4 million. Because the earliest date available for the
holders to convert the Notes to Common Stock was June 1, 2001, the entire
debt discount was amortized to interest expense during the fiscal year ended
June 30, 2001.
In May 2002, a special committee of the Board of Directors (the "Committee"),
consisting solely of Directors who did not hold any direct or indirect
financial interest in the Notes was formed to investigate the possibility of
repurchasing the Notes. After evaluating, among other things, the risk
profile associated with the Company's cash investment strategy and the
reduced yield that would result from a more conservative program, the
Committee determined that redeeming the Notes would be in the best interest
of the Company. As a result of the Committee's decision, the Company
extended a voluntary repurchase offer to the holders of the Notes. The offer
was made at the face value of each Note, but excluded accrued interest since
March 31, 2002, the last interest payment date.
In June 2002, all of the existing holders of the Notes agreed to accept the
terms of the voluntary repurchase offer. In July 2002, cash payments of
$27.3 million, representing the face value of the Notes less recoupments of
loans made to an officer and a former employee which were secured by the
Notes, were executed. Funds to pay the obligation were derived by
liquidating a substantial portion of the Company's short-term investments.
Note 3 - Investments In Technology-Related Businesses
In fiscal 2000, the Company changed its primary business focus to an
investment manager and investor/incubator in technology-related companies.
Between March 2000 and November 2000, J Net made investments in eleven
companies, including its initial investment in InterWorld.
As of June 30, 2003, four of these investments continue operations: Tellme
Networks, Inc., eStara, Inc., Strategic Data Corporation and certain
companies contained in Meister Brothers Investment portfolio. The Company
uses the cost method of accounting for each of these investments. The
Company continues to ascribe value to its investment in Tellme Networks, Inc.
The other investments have been written off.
The following tables present pertinent details for each of the Company's
investments:
Status
Date(s) Accounting Voting as of
Investment Acquired Method Type of Security Percentage June 30, 2003
______________________ ______________ ______________ ________________ __________ _____________
Digital Boardwalk,
LLC (a) (e) March 1, 2000 Equity Preferred Stock 35% Sold
Meister Brothers
Investments, LLC (b) March 1, 2000 Consolidation Membership
Interest 100% Fully impaired
Cyberbills, Inc. (e) March 10, 2000 Cost Series "C"
Preferred Stock 11% Sold
Carta, Inc. May 31, 2000 Cost Convertible Loan 0% Out of
business
TechTrader, Inc. (a) June 12, 2000 Equity Series "B"
Preferred Stock 28% Out of
business
Alistia, Inc. (a) May 18, 2000 Out of
May 1, 2001 Equity Preferred Stock 20% business
Strategic Data May 2, 2000 Cost Series "B & C"
Corporation May 31, 2001 Preferred Stock 13% Fully impaired
eStara, Inc. (c) Sep. 29, 2000 Cost Series "C"
July 1, 2001 Preferred Stock 14% Fully impaired
May 31, 2003 Cost 6%
Jasmine Networks, Inc. August 30, 2000 Cost Series "C"
Preferred Stock 6% Out of
business
Tellme Networks, Inc. September 12, 2000 Cost Series "D"
Preferred Stock Less than
1% Operating
InterWorld (a) (d) November 20, 2000 Equity
up to Mandatorily
May 21, Redeemable 10% to May
2001 Preferred Stock 21, 2001
up to May 21, 2001
May 21, 2001 Consoli- Common Stock 95.3% from Consolidated
dation from May 22, 2001 subsidiary
May 22, 2001 to present
to present
(a) The investments in Digital Boardwalk, LLC, Alistia, Inc. and TechTrader
Inc. were accounted for using the equity method of accounting based on
voting percentages. The equity method was also used for the Company's
investment in InterWorld during the period of November 2000 through
April 2001. The Company determined that it was appropriate to use the
equity method of accounting for the investment in InterWorld during this
period, even though its voting interest was less than 20%, due to the
Company holding two of five Board seats at InterWorld. This Board
representation was determined to provide significant influence over
operations at InterWorld resulting in the equity method being used.
(b) The Company consolidated its investment in Meister Brothers Investments,
LLC ("MBI") upon its acquisition of the 1% managing member interest in
March 2000. This accounting treatment was used due to the Company
having complete authority and responsibility for the operations and
management of the investment.
(c) J Net's voting interest decreased to approximately 6% in May 2003 due to
a new series of preferred stock issued by eStara, Inc. J Net did not
participate in the new issue.
(d) In April 2001 when the Mandatorily Redeemable Preferred Stock became
due, InterWorld was unable to pay cash to settle its redemption
obligation. J Net elected to accept shares of InterWorld Common Stock
in lieu of cash in May 2001 and the consolidation method was applied.
(e) The investments in Digital Boardwalk, LLC and Cyberbills, Inc. were sold
in 2001.
Based on the preceding information about each investment, the following table
presents the inception to date financial data pertinent to those investments
(Dollars in thousands):
Balance at Equity Value at
June 30, income Goodwill Impairments June 30,
Investments 1999 Additions (loss) amortization and sales Other 2003
______________________ _________ _________ _______ ____________ ____________ __________ ________
Digital Boardwalk, LLC $ - $ 4,767 $ (497) $ (19) $ (4,501) $ 250 (a) $ -
Meister Brothers
Investments, LLC - 2,554 - - (40) (2,514)(b) -
Cyberbills, Inc. - 3,186 - - (2,986) (200)(c) -
Carta, Inc. - 4,000 - - (4,000) - -
TechTrader, Inc. - 8,563 (3,346) (407) (4,810) - -
Alistia, Inc. - 2,480 (2,000) (11) (469) - -
Strategic Data
Corporation - 1,100 - - (1,100) - -
eStara, Inc. - 4,003 - - (4,003) - -
Jasmine Networks, Inc. - 5,000 - - (5,000) - -
Tellme Networks, Inc. - 2,000 - - - - 2,000
InterWorld (d) - 20,340 (20,340) - - - -
Other - 5 - - - (5) (e) -
____ _______ ________ _____ ________ _______ ______
Total $ - $57,998 $(26,183) $(437) $(26,909) $(2,469) $2,000
==== ======= ======== ===== ======== ======= ======
(a) Represents a loan made to Digital Boardwalk, LLC which was written off
to expense when the Company sold its interest for a loss of $4,501 in
2001.
(b) J Net owned a controlling interest in Meister Brothers Investments,
LLC. The minority interest was eliminated upon impairment in 2001.
(c) Proceeds from sale of investment.
(d) InterWorld became a consolidated subsidiary of J Net in May 2001.
Between November 2000 and April 2001, the Company used the equity method
of accounting for its investment in InterWorld.
(e) Abandoned deal screening costs written off to general and administrative
expenses.
Active investments with carrying value as of June 30, 2003:
In September 2000, the Company purchased 136,500 shares of Series "D"
Preferred Stock of Tellme Networks, Inc. ("Tellme"), representing less than
1% voting interest in Tellme and applied the cost method to account for its
investment. Tellme is a non public company that provides voice technology
that delivers information from the Internet over the phone. 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 at Tellme. Management believes there are no indicators of
impairment for this investment.
Impairments recognized in 2003 and 2002:
eStara, Inc. ("eStara"). The Company invested $4.0 million in Series B & C
Preferred Stock in its fiscal years 2001 and 2002, representing a voting
interest of approximately 14%. The Company applied the cost method of
accounting for its investment. eStara is a non public development stage
company that provides communication technology that enables online customers
to talk with e-commerce businesses over the Internet.
In July 2001, when the Company purchased its investment in the Series C
Preferred Stock of eStara, the valuations in that preferred stock offering
were substantially lower than the valuation used when the Series B preferred
stock was purchased. The Company had previously recorded a partial
impairment of approximately $1.4 million in its fiscal year 2001 to reflect
this reduced valuation.
In fiscal 2002, eStara's Board entered into a bridge loan agreement with
certain investors and commenced seeking an additional round of financing. J
Net did not participate in the bridge loan. Pursuant to valuation terms
contained in the bridge loan, the Company determined that the resulting
dilution in its interest would reduce the carrying value to $.4 million. As
a result of this determination, the Company recorded an additional impairment
of $2.2 million in 2002 as presented by the table below.
Investments in Technology-Related Businesses
(Dollars in thousands)
Value at Equity Goodwill Impairments Value at
Investment June 30, 2001 Additions income (loss) amortization and sales Other June 30, 2002
_______________ ______________ __________ ____________ ____________ __________ _____ _____________
eStara, Inc. $1,290 $1,338 $ - $ - $(2,203) $ - $ 425
Tellme Networks,
Inc. 2,000 - - - - - 2,000
______ ______ ___ ___ _______ ___ ______
Total $3,290 $1,338 $ - $ - $(2,203) $ - $2,425
====== ====== === === ======= === ======
In May 2003, the participants in the bridge loan to eStara converted their loans to a new series of
preferred stock which is senior to all other preferred issues. As a result of this conversion, J
Net's voting percentage was reduced from approximately 14% to 6%. Management evaluated the impact of
this conversion and concluded that its ability to recover any of the investment was remote given its
subordinated position to the new series of preferred stock. Accordingly, in 2003 the Company recorded
a $.4 million impairment to bring the carrying value to $0 as indicated on the table which follows.
Investments in Technology-Related Businesses
(Dollars in thousands)
Value at Equity Goodwill Impairments Value at
Investment June 30, 2002 Additions income (loss) amortization and sales Other June 30, 2003
_______________ ______________ __________ ____________ ____________ __________ _____ _____________
eStara, Inc. $ 425 $ - $ - $ - $(425) $ - $ -
Tellme Networks,
Inc. 2,000 - - - - - 2,000
______ ____ ___ ___ _____ ___ ______
Total $2,425 $ - $ - $ - $(425) $ - $2,000
====== ==== === === ===== === ======
Investments sold, abandoned or impaired during fiscal 2001:
A summary of the activity of the Company's investments in 2001 is presented
below. A description of each of the investments follows the table.
Investments in Technology-Related Businesses
(Dollars in thousands)
Balance at Equity Value at
June 30, income Goodwill Impairments June 30,
Investments 2000 Additions (loss) amortization and sales Other 2001
______________________ _________ _________ _______ ____________ ____________ __________ ________
Digital Boardwalk, LLC $ 4,888 $ - $ (627) $ (10) $ (4,501) $ 250 (a) $ -
Meister Brothers
Investments, LLC 2,554 - - - (40) (2,514)(b) -
Cyberbills, Inc. 3,186 - - - (2,986) (200)(c) -
Carta, Inc. 4,000 - - - (4,000) - -
TechTrader, Inc. 8,410 27 (3,247) (380) (4,810) - -
Alistia, Inc. 1,905 480 (1,907) (9) (469) - -
Strategic Data
Corporation 850 250 - - (1,100) - -
eStara, Inc. - 2,665 - - (1,375) - 1,290
Jasmine Networks, Inc. - 5,000 - - (5,000) - -
Tellme Networks, Inc. - 2,000 - - - - 2,000
InterWorld (d) - 20,340 (20,340) - - - -
Other - 5 - - - (5) (e) -
_______ _______ ________ _____ ________ _______ ______
Total $25,793 $30,767 $(26,121) $(399) $(24,281) $(2,469) $3,290
======= ======= ======== ===== ======== ======= ======
(a) Represents a loan made to Digital Boardwalk, LLC which was written off
to expense when the Company sold its interest for a loss of $4,501 in
2001.
(b) J Net owned a controlling interest in Meister Brothers Investments,
LLC. The minority interest was eliminated upon impairment in 2001.
(c) Proceeds from sale of investment.
(d) InterWorld became a consolidated subsidiary of J Net in May 2001.
Between November 2000 and April 2001, the Company used the equity method
of accounting for its investment in InterWorld.
(e) Abandoned deal screening costs written off to general and administrative
expenses.
Jasmine Networks, Inc. ("Jasmine"). The Company invested $5 million as part
of an $80 million Series C financing in August 2000. As of June 30, 2001,
Jasmine was actively engaged in negotiations to sell a division of its
company to a third party at a value which would represent a discount to the
original investment. In addition, other events which transpired in August
and September 2001, including the loss of a significant customer and the
terrorist attacks in New York and Washington D.C., resulted in J Net
recording an impairment for its entire investment of $5 million for fiscal
year 2001. Jasmine ceased conducting business operations in February 2002.
The Company used the cost method to account for its investment in Jasmine.
Strategic Data Corporation ("Strategic Data"). The Company invested $.2
million and $.9 million in Strategic Data Corporation in May 2001 and May
2000, respectively. The investment was accounted for under the cost method.
Management's analysis of Strategic Data's business model, which relies on
Internet advertising, resulted in an impairment of the full $1.1 million
investment as of June 30, 2001. Strategic Data continues to conduct
operations and has recently obtained additional financing. J Net did not
participate in a recent financing offering.
Meister Brothers Investments, LLC ("MBI"). On March 1, 2000, the Company
acquired a 1% membership interest in and became the managing member of MBI
for $40 thousand pursuant to an agreement between MBI, the Company, Keith
Meister ("KM") and Todd Meister ("TM"). KM and TM each owned 49.5% of the
membership interests in MBI and were Co-Presidents of the Fund until
September 2001. As managing member, the Company has complete authority and
responsibility for the operations and management of MBI and its ownership
interests. Through its ownership interests, MBI owns a portfolio of
investments (the "Portfolio") in development stage Technology-Related
Businesses. Such investments are accounted for under the cost method. As of
June 30, 2003, certain companies within the portfolio continue operating. J
Net has not contributed additional funds and the investment was fully
impaired in 2001.
On March 1, 2000 in connection with the agreement described above, KM, TM and
the Company entered into a combination of Put and Call Agreements. Pursuant
to the terms of the Call Agreement, KM and TM granted an option to the
Company to purchase from KM and TM, and KM and TM were each obligated to sell
to the Company, upon proper exercise, under such option (the "Call Option")
all of their membership interests in MBI. Upon exercise of the Call Option
by the Company, KM and TM were to receive no less than 312,500 and no more
than 500,000 shares of the Company's Common Stock, as calculated by a
predetermined formula in the Call Agreement. The Call Option could be
exercised by the Company at any time after March 1, 2002 and expired on March
1, 2004. Pursuant to the terms of the Put Agreement, the Company granted an
option to each of KM and TM to sell to the Company and the Company would be
obligated to purchase from each of KM and TM, upon proper exercise, under
such option (the "Put Option") any or all of the membership interests in MBI
held by each of them in exchange for a number of common shares of the
Company, as calculated by a predetermined formula in the Put Option. Upon
exercise of the Put Option by KM and TM, KM and TM would receive no less than
275,938 and no more than 441,501 shares of the Company's Common Stock, as
calculated by a predetermined formula in the Put Agreement. The Put Option
could be exercised at any time after the first to occur of (i) September 1,
2001 or (ii) the date the Portfolio Value, as defined in the Put Option, is
fixed at $4 million, but in no event would the Put Option become exercisable
any earlier than March 1, 2001. The Put Option was scheduled to expire on
March 1, 2004.
Prior to the execution of the agreements described above, KM, TM and the
Company mutually agreed that the estimated Portfolio value was $2.5 million.
Based upon such value, the minimum number of shares to be received by KM and
TM was determined by using a $9.06 per share value of J Net's Common Stock,
which was the average closing price for the 30 days prior to the parties'
mutual agreement of the estimated Portfolio value.
If neither the Put Option nor the Call Option was exercised, KM and TM would
have a further option to purchase, or cause MBI to purchase, the Company's
interest in MBI at its fair market value as determined by appraisal. Such
option was exercisable on or after April 1, 2004 and was scheduled to expire
on April 30, 2004.
Based upon the Company's control over MBI as described above, the Company
consolidated MBI in its June 30, 2000 balance sheet and reflected the
interest of MBI owned by KM and TM as a minority interest.
In 2001, the Company determined that the entities contained within the MBI
portfolio of companies had no value due to a combination of factors. The
Portfolio contained nine (9) separate investments in development stage
companies. At the time the impairment decision was made, seven of the
investments within the Portfolio had ceased conducting business operations,
or were very close to terminating operations. Two of such companies had
already been impaired by the Company in previous quarters. The remaining two
were in need of additional capital to continue operations and the Company was
not willing to participate in additional financing rounds. Management
concluded that the combination of each company's performance and the dilutive
effects caused by not participating in further financing activities provided
substantive evidence that the entire investment was impaired. More
specifically, management concluded that the likelihood of receiving a return
from any of the companies in the MBI portfolio was unlikely.
In September 2001, the Company completed the acquisition of the 99% of MBI
that it did not already own pursuant to contractual obligations contained
within the Put Option which was entered into in March 2000 when the Company
acquired its managing member interest in MBI. Even though the
determination of a permanent impairment had already been made, the exercise
of the put option obligated the Company to acquire the remaining interest,
which resulted in the value of the settlement being expensed. The timing of
the exercise was accelerated in connection with the termination of employment
of KM and TM to the original put agreement.
Cyberbills, Inc. ("Cyberbills"). In March 2000, the Company purchased
3,385,106 shares of Series C Preferred Stock of Cyberbills, a non public
development stage company at a cost of $3.2 million. The Company's share of
the total investment was approximately 11% of the total Series C placement.
The cost method of accounting was used to account for the investment in
Cyberbills.
In May 2001, the management of Cyberbills entered into an asset purchase
agreement with an unrelated party to sell the assets for $15.0 million. The
closing of the sale occurred on June 20, 2001. After payment of creditors
and estimated reserves for transaction and other transition expenses, the
Series C shareholders were expected to receive a distribution of
approximately $2.0 million, or approximately $.2 million net to the Company.
Such payment was received in January 2002. The loss on the investment, net
of proceeds was reported as a $2.9 million loss on disposal and impairments
in the Consolidated Statement of Operations in 2001. In January 2003, a
second distribution of proceeds were received from the purchaser of
Cyberbills from funds originally escrowed for undisclosed liabilities. The
distribution, which was $.1 million was recorded as a reduction to the loss
on disposal and impairment of assets in the 2003 Consolidated Statement of
Operations.
Digital Boardwalk, LLC ("Digital"). The Company's investment in Digital, an
e-services company was sold in April 2001. Losses from the operations and
sale during the time the Company held the investment were approximately $5.0
million, which included the Company's initial investment of $3.0 million in
cash and $1.7 million in J Net Common Stock in March 2000, and a $.3 million
working capital loan made during 2001. Prior to its disposal, the Company
used the equity method to account for the investment in Digital.
Alistia, Inc. ("Alistia"). On May 18, 2000, J Net purchased a 39.8%
ownership interest in Series A Preferred Stock ("Series A Stock") of Alistia,
a non public development stage company for $2.0 million in cash. The Series
A Preferred Stockholders were entitled to vote along with the common
stockholders based on the number of common stock in which the Series A Stock
could be converted. On an as-converted basis, the Company had a 19.95%
voting interest in the initial investment. In addition, a member of J Net's
board of directors was a member of Alistia's five member board. As a result
of the voting percentage and board representation, the Company used the
equity method of accounting.
On May 8, 2001, the Company participated in a second round financing in
Alistia, Inc., of Redeemable Preferred Stock (the "Series B Stock"). In June
2001, Alistia notified its Board of Directors and investors that the
performance targets specified in the Series B Stock would not be attained
thereby nullifying any further funding obligation. J Net recorded an
impairment of its remaining investment in Alistia of $.5 million in addition
to $1.9 million of equity method losses in 2001. Alistia ceased conducting
operations in the first quarter of calendar 2002.
TechTrader, Inc. ("TechTrader"). In June 2000, the Company purchased 42.1%
of the Series B Preferred Stock and a warrant to acquire 827,796 shares of
common stock in TechTrader, a development stage non public company. The
aggregate purchase price totaled $8.5 million consisting of $6 million in
cash and $2.5 million in the Company's Common Stock (178,571 shares). The
Company used the equity method to account for the investment in TechTrader.
In June 2001, the board of TechTrader held a meeting to review, among other
things, the sale of TechTrader to competitors. At June 22, 2001, there was
sufficient cash to continue operations through July 31, 2001. Negotiations
with prospective buyers had not resulted in a letter of intent, and further
due diligence by a prospective buyer still would be required. The board of
TechTrader concluded that additional funding was necessary in order to
accommodate negotiating and closing this possible sale to the third party.
Additionally, such funding only would be sufficient to cover creditor
obligations. The Company was not willing to provide additional funding in
the absence of a definitive purchase and sale agreement. Management of the
Company believed the aforementioned factors provided sufficient evidence of
impairment. Accordingly, the value of the entity was deemed to be worthless
and written off. Subsequently, the pending sale negotiations collapsed and
business operations were terminated in September 2001.
Carta, Inc. ("Carta"). Carta ceased operations in February 2001 and the
Company's investment of $4.0 million was written off in 2001. The Company
used the cost method of accounting for Carta.
Note 4 - IW Holdings, Inc. (IWH)
The Company's E-Commerce Operations are conducted through IWH, a wholly owned
subsidiary which owns the intellectual property and assets previously owned
by InterWorld. J Net owns 95.3% of the equity securities of InterWorld,
which it acquired through a series of transactions described below.
On October 12, 2000, J Net and InterWorld entered into a definitive
Securities Purchase Agreement. Pursuant to the terms of the Securities
Purchase Agreement, J Net purchased $20.0 million in aggregate principal
amount of the Preferred Stock of InterWorld on November 10, 2000. Each share
of the Preferred Stock was initially convertible into shares of Common Stock
of InterWorld (the "Common Stock") at a conversion price of $6.25 per share
(the "Conversion Price"), subject to adjustment on the six month anniversary
of the date of issue, to 90% of the average daily closing price of Common
Stock for such six-month period, but in no event less than $2.00 per share.
Furthermore, as of April 12, 2001, J Net, at its sole discretion, had the
option to require InterWorld to redeem the Preferred Stock for cash at 150%
of the purchase price plus accrued dividends, provided that such right would
expire if InterWorld consummated a change of control transaction with J Net
on or prior to such date.
In connection with the issuance of the Preferred Stock, InterWorld issued to
J Net warrants to purchase additional shares of Common Stock at an exercise
price of $7.25 per share, subject to adjustment, exercisable at any time
until October 12, 2005, equal to 19.99% of the current outstanding shares of
Common Stock less the amount of shares issuable upon the conversion of the
Preferred Stock. The Company determined these warrants were a derivative
security as defined by SFAS 133, as amended. Because there was no public
market for these warrants, the value of the warrants was determined using the
Black-Scholes methodology. As a result of subsequent transactions described
below, the warrants were canceled. Therefore, no accounting for these
warrants using SFAS 133 was required.
Pursuant to the Securities Purchase Agreement, J Net appointed two of its
board members to InterWorld's Board of Directors. Based on the Company's
representation on the Board of Directors and the Company's ability to
otherwise influence direction of InterWorld's activities, the Company adopted
the equity method to account for its initial investment in InterWorld.
On January 25, 2001, J Net and InterWorld entered into a Stock Purchase
Agreement and a Stand-By Purchase Agreement (collectively, the "Agreements").
Pursuant to the Agreements, J Net was to exchange all of its InterWorld
Preferred Stock and the related warrants for 46,153,846 newly issued shares
of InterWorld Common Stock. In connection with such exchange, J Net agreed
to suspend its option to require InterWorld to redeem its Preferred Stock,
provided such exchange was approved by InterWorld's shareholders. In
addition, pursuant to the Agreements, InterWorld agreed to offer for sale to
all holders of InterWorld Common Stock up to $20.0 million of newly-issued
InterWorld Common Stock at a price per share of $.65. If such holders did
not purchase all of the new issuance, the Company agreed to purchase the
difference between $20.0 million and the amount purchased by other InterWorld
shareholders (the "Stand-By Commitment"). The Agreements also provided J Net
with an option to purchase an additional $20.0 million of InterWorld Common
Stock (the "Over Allotment Option"). A portion of the Over Allotment Option
would have been exercisable at a price per share of $.65 and a portion would
have been exercisable at a price per share equal to 90% of the volume-
weighted average trading price of InterWorld Common Stock for the 10 day
trading period prior to the time of exercise. The portions exercisable at
each price would have depended on the number of shares purchased pursuant to
the Stand-By Commitment, as described in the Agreements. The transactions
described in the Agreements were subject to numerous conditions, including
obtaining various InterWorld shareholder approvals and the making of various
regulatory filings, as described in the Agreements. On February 7, 2001,
Mark W. Hobbs, then J Net's President and Chief Operating Officer, was
appointed to InterWorld's Board of Directors.
On April 19, 2001, the Company announced that there were several factors
which precluded the consummation of the transactions contemplated by the
Agreements. As a result, J Net and InterWorld announced that the agreements
had been terminated. In addition, it was disclosed that Nasdaq, the
securities exchange where InterWorld was then traded, had notified InterWorld
that unless certain conditions were satisfied, InterWorld's stock would be
delisted. Such delisting was effective May 4, 2001.
As a result of the cancellation of the Agreements, J Net announced it would
require InterWorld to redeem its Preferred Stock in accordance with its
terms. Those provisions entitled J Net to receive a cash payment or to
convert the Preferred Stock into Common Stock at a fixed discount of the then
market price.
At the close of business on May 21, 2001, InterWorld announced completion of
a one for fifty reverse stock split. The reverse stock split executed by
InterWorld was required in order to facilitate the issuance of shares of
Common Stock of InterWorld to the Company in satisfaction of the redemption
obligation related to the preferred stock purchased by the Company in
November 2000. Without the reverse split, InterWorld would have exceeded the
amount of shares authorized for issuance. The redemption obligation was
executed in two phases. The first phase, which occurred on May 4, 2001 and
prior to the reverse split, issued 61 million shares of InterWorld Common
Stock to the Company in partial satisfaction of the obligation. At the end
of this first phase, the Company owned approximately 67.5% of InterWorld.
The second phase required InterWorld to execute the reverse split in order to
issue the additional shares, equal to approximately 448.6 million pre-split
shares (8.97 million post-split) to the Company in satisfaction of
its obligations under the Preferred Stock redemption. Upon completion of
this second phase, which occurred on May 22, 2001, the Company's ownership in
InterWorld increased from 67.5% to 94.6%. The Company began consolidating
InterWorld in May 2001 as a result of these transactions. In conjunction
with this reverse stock split, InterWorld completed the redemption of the
Preferred Stock with the terms of the mandatory redemption provision.
Subsequent to the reverse stock split, InterWorld had 10,779,033 shares of
Common Stock of which J Net owned 10,191,813 or 94.6% of the total
outstanding shares.
On June 29, 2001, in a transaction related to a loan foreclosure with Michael
J. Donahue, the Company received an additional 85,408 shares of InterWorld
Common Stock. At the close of this transaction, J Net owned 95.3% of the
issued and outstanding shares of InterWorld.
From November 2000 until April 2001, the period in which J Net held the
Preferred Stock, the equity method of accounting was used to account for the
investment in InterWorld. Beginning in May 2001 the consolidation method of
accounting was adopted to reflect J Net's step acquisition of InterWorld
resulting from the exchange of the Preferred Stock for InterWorld common
stock. No minority interest were accounted for due to InterWorld's
significant deficit at the acquisition date,.
Immediately following the stock split and resulting acquisition of a
controlling interest in InterWorld in May 2001, J Net and InterWorld entered
into a secured credit facility in the form of a secured promissory note (the
"Secured Note"). Advances made by J Net to InterWorld were secured by all of
the assets of InterWorld, including its intellectual property. Such advances
were made solely at the discretion of J Net and there was no obligation to
continue funding or to fund the full amount of the credit facility.
Between June 2001 and March 2002, J Net advanced $17.2 million, excluding
interest, to InterWorld pursuant to the Secured Note.
In May 2002, J Net foreclosed on its Secured Note and IWH became the owner of
intellectual property and assets of the E-Commerce Operations.
Note 5 - Pro forma information (unaudited)
Set forth in the following table is certain unaudited pro forma financial
information for the year ended June 30, 2001. This information has been
prepared assuming that J Net's acquisition of InterWorld was consummated on
July 1, 1999. No cost savings have been assumed in the pro forma tables.
The pro forma Consolidated Statement of Operations for the year ended June
30, 2001 is unaudited and was derived by adjusting the historical
consolidated financial statements of J Net and InterWorld for the reporting
period. The historical consolidated financial statements of InterWorld have
been restated to accommodate the June 30 fiscal year end used by J Net.
Because InterWorld became a consolidated subsidiary in May 2001, the 2002 and
2003 statements of operations contain actual results as opposed to pro forma.
The pro forma statements of operations are for information purposes only and
they should not be interpreted to be indicative of the Company's consolidated
results of operations had the transaction actually occurred on the assumed
date and should not be used to project results for any future date or period.
Twelve months ended June 30,
2003 2002 2001
________ _________ _________
(Actual) (Actual) (Pro forma)
(Dollars in thousands)
________ _________ _________
Total revenues $ 2,625 $ 5,815 $ 30,561
Cost of revenues 609 2,912 21,328
_______ ________ _________
Gross profit 2,016 2,903 9,233
Total operating expenses 7,677 29,089 107,778
_______ ________ _________
Loss from operations (5,661) (26,186) (98,545)
Other income (expense) 2,074 1,186 (5,678)
_______ ________ _________
Net loss before taxes (3,587) (25,000) (104,223)
Income tax expense (benefit) 241 236 (11,558)
_______ ________ _________
Net loss $(3,828) $(25,236) $ (92,665)
======= ======== =========
Basic loss per share $ (.45) $ (2.96) $ (10.48)
======= ======== =========
Note 6 - Assets held for sale
On October 12, 2000 J Net entered into a Loan Assumption and Forbearance
Agreement with Michael J. Donahue, the former Vice Chairman and Chief
Executive Officer of InterWorld, pursuant to which J Net purchased from
Salomon Smith Barney ("SSB") a loan from SSB to Michael J. Donahue in the
amount of $12.4 million. The loan was secured by 85,408 shares of InterWorld
Common Stock and other assets owned by Mr. Donahue. The loan was due in
October 2003, subject to an acceleration in October 2001 if InterWorld did
not effect a merger transaction with J Net, and accrued interest payable at
8% per annum. In connection therewith, J Net entered into a
Call/Participation Agreement with Mr. Donahue whereby he agreed that J Net
would share in the profit on a portion of the stock securing the loan once
certain conditions, including the repayment of the loan, were met. Mr.
Donahue had sole power to vote and dispose of the shares, although he was
required to vote the shares in favor of a merger of InterWorld and J Net and
consult with J Net on other matters put before InterWorld's shareholders for
a vote thereon. The loan agreement contained certain events of default
beyond non-payment, the most significant of which included failure by Mr.
Donahue to vote the stock in favor of a merger between InterWorld and J Net
and any time that the closing price of the stock pledged as collateral fell
below $2.00 per share for more than 10 days.
On the date the loan was purchased by the Company, the value of the
InterWorld stock collateralizing the loan was approximately $13.6 million.
The Company also entered into a separate agreement with Mr. Donahue which
allowed J Net to participate in profits from the sale of the stock with Mr.
Donahue. InterWorld's stock price, along with other stock prices in the
technology space, continued to decline throughout 2000 and 2001. Such
declines in the InterWorld stock price necessitated the Company to take more
definitive actions and obtain a negative pledge on the other assets.
On April 4, 2001, the Company entered into an Amended and Restated Loan
Assumption and Forbearance Agreement (the "Amended Agreement") with Mr.
Donahue. The Amended Agreement replaced the Loan and Forbearance Agreement
(the "Original Agreement") dated October 12, 2000. The significant
components in the Amended Agreement added Excalibur Polo Farm ("Excalibur")
as a debtor, changed interest payment terms, revised certain collateral
provisions and changed events allowing acceleration. The amended loan was
secured by 85,408 shares of InterWorld Common Stock and the assets of
Excalibur.
The loan was due on October 11, 2003, subject to acceleration to October 11,
2001, if on or before July 31, 2001, InterWorld did not commence with the
rights offering contemplated by the Stock Purchase and Standby Purchase
Agreements dated January 25, 2001. J Net elected not to enforce its rights
relating to any other defaults at the time. The loan accrued interest at 8%
per annum and called for payment of accrued interest at the end of each
calendar quarter. Principal payments of $.5 million commencing December 31,
2001 were also due each quarter.
The Call/Participation Agreement contained in the Loan Assumption and
Forbearance Agreement whereby J Net would share in the profit on a portion of
the stock securing the loan once certain conditions, including the repayment
of the loan, remained intact in the Amended Agreement. This was deemed to
have no value.
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, the 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 loss from the
foreclosure of $7.7 million was expensed as general and administrative
expense as a component of compensation expense in the Consolidated Statement
of Operations for 2001.
The agreements entered into on June 29, 2001 also provided for the Company to
loan Mr. Donahue up to $.8 million. This obligation was accrued as a general
and administrative expense in the Consolidated Statement of Operations for
2001.
During fiscal 2002, the Company reduced its carrying value of Excalibur by
$.5 million to $5 million. The impairment was recorded as a direct reduction
to the assets held for sale caption on the Consolidated Balance Sheet and an
impairment of assets in the Consolidated Statement of Operations. Such
adjustment reflected the decline in the market value of the 85,408 shares of
InterWorld stock and increased operating costs due to an extended holding
period for the asset.
In June 2002, Michael J. Donahue executed an agreement which released J Net
from its obligation to loan Mr. Donahue up to $.8 million pursuant to the
June 29, 2001 agreement. The obligation was accrued and reported as a
component of general and administrative expenses in 2001 and was reversed in
2002.
In March 2003, the Company completed the sale of Excalibur to an unrelated
third party. Proceeds from the sale were $4.4 million resulting in a loss of
approximately $1.0 million, which is reported as loss on disposal and
impairment of assets in the 2003 Consolidated Statement of Operations.
Note 7 - Accounts payable and accrued expenses
Accounts payable and accrued expenses consist of the following (Dollars in
thousands):
June 30,
2003 2002
______ ______
Trade accounts payable $2,436 $2,985
Accrued professional fees 239 178
Accrued employee benefits 687 358
Accrued interest payable - 553
Other 37 21
______ ______
Totals $3,399 $4,095
====== ======
As of June 30, 2003 and 2002, the total accounts payable and accrued
liabilities include $1.5 and $2.3 million, respectively, attributable to
unsecured creditors of InterWorld Corporation. Although there can be no
assurances, Management believes these obligations may be settled and reduced
to amounts less than their face value.
The accrued employee benefits liability as of June 30, 2003 includes $563
thousand attributable to severance pay to two former executives of the
Company.
In July 2002, when the Company repurchased its Notes pursuant to a voluntary
repurchase offer, the accrued interest obligation was forgiven and a gain on
this forgiveness was recorded in July 2002.
Note 8 - Loss Per Share
Basic loss per share is computed by dividing net loss from continuing
operations by the weighted average number of shares outstanding during each
period. Diluted loss per share is computed by dividing net loss from
continuing operations by the weighted average number of common and common
equivalent shares outstanding during the period. The calculation of loss per
share excluded the following securities as their effect was antidilutive
(shares in thousands):
Antidilutive Securities
_______________________
2003 2002 2001
_____ _____ _____
Description:
Potentially dilutive stock options 1,488 1,844 2,894
Common shares issuable from
assumed conversion of
subordinated notes - 2,581 2,581
Common shares issuable from
assumed exercise of put option - - 276
_____ _____ _____
Total antidilutive securities 1,488 4,425 5,751
===== ===== =====
The following is the amount of loss and number of shares used in the basic
and diluted loss per share computations for continuing operations (dollars
and shares in thousands, except per share data):
2003 2002 2001
________ ________ ________
Basic loss per share from
continuing operations:
Loss from continuing operations $(3,828) $(25,236) $(61,449)
======= ======== ========
Shares:
Weighted average number of common
shares outstanding 8,525 8,525 8,839
======= ======== ========
Basic loss per share from continuing
operations $ (.45) $ (2.96) $ (6.95)
======= ======== ========
Diluted loss per share:
Loss from continuing operations $(3,828) $(25,236) $(61,449)
======= ======== ========
Shares:
Weighted average number of common
shares and common share equivalents
outstanding 8,525 8,525 8,839
======= ======== ========
Diluted loss per share from continuing
operations $ (.45) $ (2.96) $ (6.95)
======= ======== ========
Note 9 - Stockholders' Equity, Stock Options and Defined Contribution Plan
Rights plan:
In June 1994, the Board approved a Stockholder Rights Plan. On July 11,
1994, J Net declared a dividend distribution of one Preferred Stock purchase
right (the "Rights") payable on each outstanding share of the Company's
Common Stock, as of July 15, 1994. The Rights become exercisable only in the
event, with certain exceptions, an acquiring party accumulates 15% or more of
J Net's voting stock, or if a party announces an offer to acquire 30% or more
of J Net's voting stock. Each Right will entitle the holder to purchase one-
hundredth of a share of a Series A Junior Preferred Stock at a price of $30.
In addition, upon the occurrence of certain events, holders of the Rights
will be entitled to purchase either J Net's Preferred Stock or shares in an
"acquiring entity" at half of market value. The Rights, which expire on July
15, 2004, may be redeemed by J Net at $.01 per Right prior to the close of
business on the tenth day after a public announcement that beneficial
ownership of 15% or more of J Net's shares of voting stock has been
accumulated by a single acquiror or a group (with certain exceptions), under
circumstances set forth in the Rights Agreement. As of June 30, 2003 and
2002, 150,000 shares of unissued Series A Junior Preferred Stock were
authorized and reserved for issuance upon exercise of the Rights. The
issuance of the Rights had no effect on dilutive earnings per share in 2003,
2002 and 2001.
On May 21, 2001, the Gabelli Funds, LLC (the "Gabelli Group") filed with the
Securities and Exchange Commission an Amendment to Schedule 13D indicating
that the Gabelli Group had purchased additional shares of issued and
outstanding capital stock of the Company and, therefore, beneficially owned
an aggregate of 16.2% of the issued and outstanding capital stock of the
Company.
On May 30, 2001, Section 3 of the Rights Plan Agreement dated as of July 11,
1994 between J Net Enterprises, Inc. and Continental Stock Transfer & Trust
Company was amended to provide that the Amendment to the Schedule 13D would
not constitute a public announcement that would trigger the Rights Plan.
The Board of Directors of J Net also resolved that the Gabelli Group would be
permitted to purchase up to 19.9% of the issued and outstanding capital stock
of the Company and the public announcement, which may include the filing of
one or more amendments to the Schedule 13D, would not trigger the Rights
under Section 3 of the Rights Plan Agreement.
On September 15, 2003, the Gabelli Group filed an Amendment to Schedule 13D
indicating that the group had increased their stake in the Company to 18.58%
of the issued and outstanding stock of J Net.
Stock option plans:
On January 12, 1993, J Net's stockholders approved the 1992 Incentive and
Non-qualified Stock Option Plan (the "1992 Plan"). On August 17, 1994, the
Board adopted certain amendments (the "Amendments") to the 1992 Plan which
were approved by J Net's stockholders on January 10, 1995. The Amendments
increased the number of shares of J Net's Common Stock authorized for
issuance pursuant to the 1992 Plan from 1,045,000 to 2,545,000. The 1992
Plan provides that each individual who is a member of the Board on June 30 of
any year, including any future director on any such date, will automatically
be granted nonqualified stock options to purchase 27,500 shares of Common
Stock on each such June 30. The option price for each June 30 grant will be
100% of the fair market value of the Common Stock on the following September
30. Each option granted to a director will become exercisable after
September 30 of each year, and expire five years from the date of grant.
Under the 1992 Plan, options granted to J Net's directors to purchase an
aggregate of 357,500 shares of Common Stock which were outstanding and
exercisable at June 30, 2003. The 1992 Plan terminated in accordance with
its terms on September 30, 2002. Options outstanding at the termination date
totaled 877,500 and will remain outstanding until they are exercised or
expired.
On June 30, 2002, a total of 137,500 options (27,500 to each of five
directors) were issued pursuant to the 1992 Plan. On September 30, 2002 when
the options were to vest, each director voluntarily returned their options to
the plan.
Changes in options outstanding under the 1992 stock option plan are
summarized below (shares in thousands):
2003 2002 2001
__________________ __________________ __________________
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
______ ________ _______ ________ _______ ________
Fixed options:
Outstanding at
beginning of
year 1,233 $8.43 2,253 $9.33 2,132 $ 9.47
Granted - - 25 2.00 94 9.42
Exercised - - - - - -
Cancelled (355) 9.86 (1,045) 9.66 (110) 10.00
Automatic grant
to directors - - - - 137 4.00
_____ _____ _____ _____ _____ ______
Outstanding at
end of year 878 $9.02 1,233 $8.43 2,253 $ 9.33
===== ===== ===== ===== ===== ======
Options exercisable
at year-end 857 $8.99 1,016 $9.26 1,636 $ 9.79
===== ===== ===== ===== ===== ======
Weighted average
fair value of
options granted
during the year - $ - - $1.10 - $ 4.19
===== ===== ===== ===== ===== ======
The following table summarizes information about the 1992 Plan stock options
outstanding at June 30, 2003:
Options Outstanding Options Exercisable
__________________________________________________ _______________________
Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 6/30/03 Life Price at 6/30/03 Price
_______________ ___________ ___________ ________ ___________ ________
$ 4.00 137 3.00 years $ 4.00 137 $ 4.00
$ 8.75 - $ 9.50 203 1.85 years $ 9.19 199 $ 9.19
$10.13 - $10.63 518 6.38 years $10.16 504 $10.16
$12.00 - $12.44 20 7.00 years $12.26 17 $12.22
Other nonqualified stock options:
On September 14, 1999, nonqualified stock options to purchase an aggregate of
120,000 shares of Common Stock were granted to the Company's Board of
Directors (30,000 each to four directors) at an exercise price of $9.00 per
share, the fair market value on the date of grant. The option granted to
each director vested 50% on each of the first and second anniversaries of the
date of grant. Such options expire ten years from date of grant.
On January 31, 2000, nonqualified stock options to purchase an aggregate of
150,000 shares of Common Stock were granted to the managing officers of the
Company's Ventures I subsidiary (75,000 each) at an exercise price of $10.13
per share, the fair market value on the date of grant. Such options were to
vest in thirds on each of the first, second and third anniversaries of the
date of grant. In September 2001, the managing officers terminated their
employment with the Company. The options expired as a result of the
termination.
On June 21, 2000, nonqualified stock options to purchase an aggregate of
500,000 shares of Common Stock were granted to the President and Chief
Operating Officer and the Executive Vice President and Chief Financial
Officer at an exercise price of $13.13 per share, the fair market value on
the date of the grant. The options vested in thirds on each of the first,
second and third anniversaries of the date of grant and expire ten years from
the date of the grant. As of June 30, 2003, all the options were
exercisable. On June 21, 2003, the President and Chief Operating Officer and
the Executive Vice President and Chief Financial Officer's employment
contracts expired and were not renewed. The expiration of those contracts
did not affect the expiration of the options granted on June 21, 2000.
There were no nonqualified options granted during fiscal 2001, 2002 or 2003.
Changes in nonqualified options outstanding are summarized below (shares in
thousands):
2003 2002 2001
__________________ _______________ _______________
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
______ ________ ______ ________ ______ ________
Fixed options:
Outstanding at
beginning
of year 610 $12.38 640 $12.22 640 $12.22
Granted - - - - - -
Exercised - - - - - -
Cancelled - - (30) 9.00 - -
___ ______ ___ ______ ___ ______
Outstanding at
end of year 610 $12.38 610 $12.38 640 $12.22
=== ====== === ====== === ======
Options
exercisable
at year-end 610 $12.38 443 $12.10 237 $11.90
=== ====== === ====== === ======
Weighted average
fair value of
options
granted during
the year - $ - - $ - - $ -
=== ====== === ====== === ======
The following table summarizes information about nonqualified stock options
outstanding at June 30, 2003 (shares in thousands):
Options Outstanding Options Exercisable
______________________________________________ ______________________________
Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 6/30/03 Life Price at 6/30/03 Price
_________________ ___________ ___________ ________ ___________ ________
$9.00 per share 110 6.21 years $ 9.00 110 $ 9.00
$13.13 per share 500 6.98 years $13.13 500 $13.13
Shares reserved for issuance:
Shares of Common Stock were reserved for the exercise of the following (in
thousands):
June 30,
__________________
2003 2002
_____ _____
Stock options:
Outstanding 878 1,233
Available for grant 1,573 1,218
Other nonqualified stock options 610 610
_____ _____
Totals 3,061 3,061
===== =====
Defined contribution plan:
Employees may participate in a defined contribution plan which qualifies
under Section 401(k) of the Internal Revenue Code. Participants may
contribute up to 15% of their gross wages, not to exceed annual limitations
set by the Internal Revenue Service regulations. The Company does not
contribute separately to the plan or match employee contributions.
Note 10 - Related Party Transactions
One director of J Net is a partner of a law firm that performed legal
services for the Company totaling approximately $14,000 in each of 2003 and
2002 and approximately $.1 million in 2001.
Three directors, entities controlled by those directors, or adult children of
those directors invested $7.0 million in the Notes described in Note 2. As
of June 30, 2001, officers and employees invested, either directly or
indirectly, $5.8 million in the Notes. As a result of employee terminations
in 2002, the amount of Notes held either directly or indirectly by officers
and employees was reduced to $2.5 million as of June 30, 2002. All of the
Notes, including Notes held by unrelated third parties were repurchased
pursuant to a voluntary repurchase program in July 2002.
As of June 30, 2001, Notes held by officers or employees had a face value of
$3.3 million and the Company loaned $1.3 million to facilitate the purchase
of those Notes. On September 28, 2001, pursuant to agreements with the
former employees discussed in Note 3, $1 million of the loans, plus accrued
interest was collected. The remaining $.3 million was collected in July 2002
when the Notes were repurchased as part of the voluntary repurchase offer
(see Note 2).
The Company and InterWorld entered into a secured credit agreement which
allowed InterWorld to draw up to a total of $20 million in cash from J Net,
at the Company's discretion. The advances were secured by the assets of
InterWorld including intellectual property. Advances totaled $17.2 million
between June 2001 and April 2002. In May 2002, J Net completed foreclosure
actions against InterWorld and the assets, intellectual property and
employees were transferred to IWH (see Note 4).
The Company foreclosed on assets securing a loan to Michael J. Donahue, Vice
Chairman and Chief Executive Officer of InterWorld on June 29, 2001 as
described in Note 6. The assets received in the foreclosure were sold in
March 2003 for $4.4 million.
The aforementioned foreclosure agreements entered into on June 29, 2001
between the Company and Michael J. Donahue also provided for the Company to
loan Mr. Donahue up to $.8 million. In June 2002, Mr. Donahue released the
Company from this obligation.
In March 2002, Mr. Donahue resigned his position as Vice Chairman and Chief
Executive Officer of InterWorld. Mr. Donahue continued to perform part time
consulting services for IWH until June 2003. Payments to Mr. Donahue for
consulting services were $176,000 for the fiscal year ended June 30, 2003 and
$57,000 in 2002.
Note 11 - Federal Income Tax
The components of Federal income tax expense (benefit) are as follows
(Dollars in thousands):
2003 2002 2001
_____ _____ ________
Federal:
Current expense (benefit) $241 $(649) $ (979)
Deferred expense (benefit) - 885 (10,579)
____ _____ ________
Federal income tax expense (benefit)
on loss from continuing operations 241 236 (11,558)
Federal income tax expense of
discontinued operations - - 6,612
____ _____ ________
Total Federal income tax
expense (benefit) $241 $ 236 $ (4,946)
==== ===== ========
A reconciliation of the Federal statutory income tax rate to the effective
income tax rate based on loss from continuing operations before income tax
follows:
2003 2002 2001
_____ _____ _____
Statutory rate (35.0)% (35.0)% (35.0)%
Increase (decrease) in tax resulting from:
Surtax exemption 1.0 1.0 1.0
Amortization of debt discount - - 5.3
Valuation allowance 48.5 34.6 12.8
Tax-exempt interest - - -
Other (7.8) (.5) .1
_____ ____ _____
Effective rate 6.7% .1% (15.8)%
===== ==== =====
The tax items comprising J Net's net deferred tax asset (liability) as of
June 30, 2003 and 2002 are as follows (Dollars in thousands):
2003 2002
Equity method losses and impairments $ 8,548 $ 8,403
Net operating losses 8,168 7,076
Capital loss carryforwards 2,560 1,740
Leasehold improvement impairments 692 692
Impairments of assets held for sale - 170
Depreciation (230) (128)
Accruals and other (42) 3
_________ ________
Total 19,696 17,956
Less valuation allowance (19,696) (17,956)
_________ ________
Net deferred tax asset $ - $ -
========= ========
Deferred tax liability $ 6,910 $ -
========= ========
The Company's net operating losses and capital losses can be carried forward
pursuant to Federal tax regulations. The capital loss and operating loss
carry forwards will expire in 2007 and 2022, respectively, if not utilized.
In March 2002, the Job Creation and Worker Assistance Act or 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 a refund of Federal income taxes previously paid
of $7.66 million. The refund was received in December 2002. The refund is
subject to audit by the Internal Revenue Service 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. Due to
the significance of the refund, Management determined an appropriate amount
to reserve pending further review by the Internal Revenue Service. As of
June 30, 2003, the amount reserved is $6.9 million. In May 2003, the
Internal Revenue Service began an audit of the Company's June 30, 2001
Federal income tax return.
Note 12 - 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. The Technology-Related
Businesses include the effect of transactions and operations of the Company's
non-consolidated investments, including InterWorld prior to the acquisition
of a majority of its outstanding Common Stock in May 2001. E-Commerce
Operations include the results of IWH and its predecessor, InterWorld. All
significant intersegment activity has been eliminated. Accordingly, segment
results reported exclude the effect of transactions between the Company and
its subsidiary. Assets are the owned assets used by each operating segment.
Year Ended Year Ended
June 30, 2003 June 30, 2002
_____________ _____________
(Dollars in thousands)
Loss from Operations:
_____________________
E-Commerce Operations $ (333) $(16,855)
Technology-Related Businesses (3,495) (8,381)
________ ________
Net loss $ (3,828) $(25,236)
======== ========
E-Commerce Results of Operations:
_________________________________
Revenue $ 2,625 $ 5,815
Cost of revenues 609 2,912
________ ________
Gross profit 2,016 2,903
Operating expenses:
Research and development 1,603 5,125
Sales - 5,981
Marketing alliances - 1,616
General and administrative 1,008 4,814
Restructuring and unusual charges and gain
from settlements with unsecured creditors (99) 1,273
________ ________
Total operating expenses 2,516 18,809
Other income (expense), net 167 (949)
________ ________
Loss from E-Commerce Operations $ (333) $(16,855)
======== ========
Technology-Related Businesses:
______________________________
General and administrative $ 3,833 $ 3,157
Loss on disposal and impairment of
Technology-Related Businesses 1,328 2,703
Restructuring and unusual charges and gain
from settlements with unsecured creditors - 4,420
________ ________
Total operating expenses 5,161 10,280
________ ________
Loss from operations (5,161) (10,280)
Interest and other income 1,354 4,434
Interest expense - (2,299)
Gain from repurchase of Notes 553 -
________ ________
Loss from operations before income tax (3,254) (8,145)
Income tax provision 241 236
________ ________
Loss from Technology-Related Businesses $ (3,495) $ (8,381)
======== ========
Year Ended Year Ended
June 30, 2003 June 30, 2002
_____________ _____________
(Dollars in thousands)
Total assets:
E-Commerce $ 290 $ 632
Technology-Related Businesses 20,552 46,211
_______ _______
Total $20,842 $46,843
======= =======
Note 13 - Other Events
In November 2000, upon completion of the sale of the gaming machine route
operations ("Route Operations"), severance payments totaling $1.1 million
were paid to two former officers of the Company pursuant to employment
agreements. The costs of the severances are included in the line captioned
restructuring and unusual charges in the accompanying 2001 Consolidated
Statement of Operations.
Note 14 - Commitments And Contingencies
Employment agreements:
J Net entered into employment agreements with Mark W. Hobbs, President and
Chief Operating Officer, and Steven L. Korby, Executive Vice President and
Chief Financial Officer on October 1, 2000. Such agreements expired on June
21, 2003. Pursuant to the terms of those agreements upon expiration, Mr.
Hobbs and Mr. Korby are entitled to received $.6 million of severance pay. Of
which $.5 million is due to be paid in fiscal 2004. The unpaid amount was
accrued as a liability at June 30, 2003 in accordance with SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities".
Legal matters:
J Net is not a party to any legal matters that could have a material impact
on its operations as of June 30, 2003. However, InterWorld, a 95.3% owned
subsidiary, 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") 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.
Although the Company is unaware of any activity with respect to the
investigation for the past year, InterWorld intends to fully cooperate with
the Commission.
PBS Realty ("PBS"), a real estate broker conducting business in New York City
filed a $1.2 million claim against InterWorld in April 2002. The claim
alleges that PBS is owed commissions by InterWorld for services related to
PBS's attempts to sublease office space previously occupied by InterWorld in
New York City. InterWorld is vigorously contesting the claim and InterWorld
management does not believe a liability exists at this time. J Net was not a
party to the brokerage agreement and no claim against J Net has been asserted
by PBS.
From time to time, the Company or its subsidiaries are parties to claims,
legal actions and complaints arising in the ordinary course of business.
Management believes its defenses are substantial and that its legal position
can be successfully defended without material adverse effect on its
consolidated financial position.
Leases:
J Net has a noncancellable office lease in New York, New York which expires
on December 31, 2010. Future minimum payments under such lease total $3.4
million at June 30, 2003. J Net also has a noncancellable office lease in
Plano, Texas. Future minimum payments under such lease, which expires in
February 2004, is $72,000 at June 30, 2003. Future minimum payments under
the E-Commerce operations lease which expires on September 30, 2003, total
$66,000 at June 30, 2003. In January 2002, J Net entered into a sublease
agreement for its office lease in New York. The Company remains responsible
for its obligations under the original lease. Future minimum receipts from
the tenant under the sublease, net of profit sharing with the landlord, are
$4.1 million.
Total rent expenses by the Technology-Related Businesses segment were $.6
million in 2003, $.6 million in 2002 and $.7 million in 2001. Rent receipts
under the sublease through June 30, 2003, net of profit sharing expenses with
the primary landlord were $.5 million. Rental expenses for the E-Commerce
Operations in 2003 totaled $.3 million, $1.0 million in 2002 and $.5 million
in 2001.
In December 2001, InterWorld negotiated a release from all of its obligations
under lease obligations at its offices in New York City, including certain
past due expenses which included subleased office space. The release,
together with forgiveness of the past due expenses, relieved InterWorld of
approximately $50 million in gross lease obligations. IWH now leases office
space on a three month lease term in New York City at a cost of approximately
$18,000 per month.
The following table outlines the consolidated lease obligations of the
Company (Dollars in thousands):
Fiscal Years Ended June 30,
______________________________________________
2005 - 2007 - 2010 and
2004 2007 2010 thereafter Total
_____ _______ _______ __________ _______
Lease Obligations
Gross operating lease
obligations $ 576 $ 1,406 $ 1,441 $ 160 $ 3,583
Sublease receipts (527) (1,639) (1,720) (192) (4,078)
_____ _______ ______ _____ ______
Net lease obligations
(profit) $ 49 $ (233) $ (279) $ (32) $ (495)
===== ======= ======= ===== =======
Severance obligations:
In June 2003, employment contracts for the President and Chief Operating
Officer and the Executive Vice President and Chief Financial Officer expired
according to their terms. The contracts were not extended and the officers
terminated their employment with the Company. A severance obligation of $.6
million arose as a result of the employment contract expirations. Such
amount is included as compensation expense in the 2003 Consolidated Statement
of Operations and as an accrued liability on the June 30, 2003 Consolidated
Balance Sheet.
Significant customers and contracts:
During 2003, approximately 74% of consolidated revenues were derived from six
customers. Renewals of post production maintenance support from these
customers is an important source of operating funds. In addition, new sales
are required to achieve profitability and reduce the reliance and associated
risks of lost revenues from these significant customers.
Note 15 - Discontinued Operations
Definitive agreement:
On July 8, 2000, the Company entered into a definitive agreement to sell its
Route Operations for $45 million in cash. In October 2000, the sales price
was reduced to $38 million. The sale, which was subject to closing
conditions and regulatory and other approvals, was completed in November 2000
and is reported as discontinued operations. In accordance with accounting
principles applicable to discontinued operations, previously reported
financial statements have been reclassified to reflect the Route Operations
as discontinued.
Selected financial data - discontinued operations:
The following are the summary operating results of the discontinued
operations for 2001, which represent the period of July 1, 2000 to November
22, 2000, the effective date of the sale (Dollars in thousands):
2001
________
Revenues $ 28,120
Costs and expenses (28,484)
________
Operating income (364)
Other income 15
________
Income before income tax (349)
Provision (benefit) for income tax (99)
________
Income from discontinued operations,
net of tax $ (250)
========
Note 16 - Restructuring charges
The fiscal year ended June 30, 2001 included severance payments of $1.1
million attributable to the sale of the Route Operations due to the Company's
change in business direction from gaming to Technology-Related Businesses
(See Note 13).
During its fiscal year 2002, the Company initiated a restructuring plan
designed to, among other things, reduce operating costs, consolidate
facilities, and reduce focus on the minority investment strategy. Such
restructuring was designed to adjust the Company's operations to existing
market conditions and consolidate and streamline the organization. Both the
Technology-Related Businesses and E-Commerce Operations segments were
impacted by the restructuring activities. The table below presents the
restructuring costs incurred by the Company for the year ended June 30, 2002
and 2003.
Contractual
Severance Impairment Settlements
and Benefits of Facilities and Other Total
____________ _____________ ___________ _____
(Dollars in thousands)
2002
___________________________
Restructuring and unusual
charges expensed $ 1,775 $ 2,963 $ 1,624 $ 6,362
Cash payments (1,722) (88) (1,624) (3,434)
Non-cash charges - (2,875) - (2,875)
_______ _______ ______ _______
Accrued restructuring
balance as of June 30,
2002 53 - - 53
2003
____________________________
Non-cash charges (53) - - (53)
_______ _______ ______ _______
Accrued restructuring
balance as of June 30,
2003 $ - $ - $ - $ -
======= ======= ======= =======
A description of the restructuring charges presented above is as follows:
Severance and Benefits - Between July 1, 2001 and December 31, 2001, the
number of employees was reduced from 270 employees to 29 employees.
Severance costs included severance pay, related payroll taxes, and certain
benefits paid by the Company. In 2003, the accrued severance as of June 30,
2002 was reversed upon confirmation that all obligations and related benefits
were satisfied.
Impairment of Facilities - The Company subleased office space in New York
which was used by the Technology-Related business segment personnel. Based on
the terms of the sublease agreement, the Company determined its leasehold
improvements were not recoverable and recorded an impairment of $2 million.
The Company relocated its Technology-Related business functions from New York
to its offices in Texas upon execution of the sublease.
InterWorld negotiated a release of lease obligations at its New York
facility. Upon release from the underlying obligations contained in that
lease, leasehold improvements of $.9 million were written off. The remaining
personnel in the E-Commerce operations relocated to less costly facilities in
New York under a short term lease arrangement.
Contract Settlements and Other - The contract settlements related to
agreements, including termination of employment with the managing officers of
Ventures I, the fund owned and operated by the Company. Contract charges
included in restructuring were attributable to the cancellation of the put
agreement referred to in Note 3 to the Consolidated Financial Statements,
which was accelerated in connection with the termination of the managing
officers.
J NET ENTERPRISES, INC. AND SUBSIDIARIES
QUARTERLY FINANCIAL INFORMATION
YEARS ENDED JUNE 30, 2003 AND 2002
(Dollars in thousands, except per share data)
(Unaudited)
Summarized quarterly financial information for 2003 and 2002 follows:
Quarter
___________________________________________
First Second Third Fourth
________ _______ _______ ________
2003
____
Revenues $ 656 $ 707 $ 718 $ 544
Gross profit 508 507 568 433
Operating loss (1,068) (2,062) (876) (1,655)
Net loss $ (343) $(1,800) $ (515) $(1,170)
Basic earnings (loss)
per share:
Net loss $ (.04) $ (.21) $ (.06) $ (.14)
Dilutive earnings (loss)
per share:
Net loss $ (.04) $ (.21) $ (.06) $ (.14)
Quarter
__________________________________________
First Second Third Fourth
________ _______ _______ ________
2002
____
Revenues $ 2,825 $ 1,215 $ 630 $ 1,145
Gross profit 1,409 (47) 574 967
Operating loss (a) (14,351) (8,154) (1,738) (1,943)
Net loss (a) $(14,200) $(7,994) (1,320) (1,722)
Basic earnings (loss)
per share:
Net loss $ (1.67) $ (.94) $ (.15) $ (.20)
Dilutive earnings (loss)
per share:
Net loss $ (1.67) $ (.94) $ (.15) $ (.20)
(a) Operating loss and net loss in fiscal 2002 include restructuring and
unusual charges of $4.6 million in the first quarter, $1.8 million in
the second quarter, $(.1) million in the third quarter and $.1 million
in the fourth quarter.
J NET ENTERPRISES, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(Dollars in thousands)
Twelve Months Twelve Months Twelve Months
Ended Ended Ended
June 30, 2003 June 30, 2002 June 30, 2001
_____________ _____________ _____________
Allowance for doubtful accounts:
Balance at beginning of period $ 109 $ - $ -
Charged to expense - 109 -
Deductions and write-offs (109) - -
_____ ____ ___
Balance at end of period $ - $109 $ -
===== ==== ===