UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to___________________
Commission file no. 1-9728
J NET ENTERPRISES, INC.
____________________________________________________________________
(Exact name of registrant as specified in its charter)
Nevada 88-0169922
_____________________________________________ ________________
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
4020 Lake Creek Drive, #100, Wilson, Wyoming 83014
____________________________________________ __________
(Address of principal executive offices) (Zip Code)
307-739-8603
____________________________________________________
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes x No
___ ___
Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Exchange Act).
Yes No x
___ ___
There were 8,524,541 shares of the Registrant's common stock outstanding as
of November 10, 2003.
J NET ENTERPRISES, INC. AND SUBSIDIARIES
INDEX
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited) -
September 30, 2003 and June 30, 2003
Condensed Consolidated Statements of Operations (Unaudited) -
Three Months Ended September 30, 2003 and 2002
Condensed Consolidated Statement of Stockholders' Equity
(Unaudited) - Three Months Ended September 30, 2003 and 2002
Condensed Consolidated Statements of Cash Flows
(Unaudited) - Three Months Ended September 30, 2003 and 2002
Notes to Condensed Consolidated Financial Statements -
(Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
J NET ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
September 30, June 30,
2003 2003
_____________ __________
ASSETS
______
Current assets:
Cash and cash equivalents $ 4,873 $ 5,537
Short-term investments 12,493 12,325
Accounts receivable, net 312 132
Prepaid expenses 60 34
_______ _______
Total current assets 17,738 18,028
_______ _______
Investments in technology-related businesses 2,000 2,000
Property and equipment, net of accumulated
depreciation 70 79
Other non-current assets 730 735
_______ _______
Total assets $20,538 $20,842
======= =======
See Notes to Condensed Consolidated Financial Statements.
J NET ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
(Concluded)
September 30, June 30,
2003 2003
_____________ __________
LIABILITIES AND STOCKHOLDERS' EQUITY
____________________________________
Current liabilities:
Accounts payable and other current
liabilities $ 3,170 $ 3,399
Deferred revenue and customer deposits 711 689
________ ________
Total current liabilities 3,881 4,088
________ ________
Deferred income taxes 6,910 6,910
Deferred rent 187 193
Other non-current liabilities 212 212
Commitments and contingencies (Note 6)
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 (49,950) (49,859)
Less 1,708,929 shares of common stock in
treasury, at cost (16,054) (16,054)
________ ________
Total stockholders' equity 9,348 9,439
________ ________
Total liabilities and stockholders' equity $ 20,538 $ 20,842
======== ========
See Notes to Condensed Consolidated Financial Statements.
J NET ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(Dollars in thousands, except per share data)
(Unaudited)
2003 2002
______ _______
Revenues, net
Product licenses $ 24 $ -
Maintenance 352 504
Services 331 152
______ _______
Total revenues, net 707 656
______ _______
Cost of revenues:
Product licenses - -
Maintenance 38 26
Services 130 122
______ _______
Total cost of revenues 168 148
______ _______
Gross profit 539 508
Operating expenses:
Research and development 196 441
General and administrative 749 1,181
Gains from settlements with unsecured
creditors - (46)
______ _______
Total operating expenses 945 1,576
______ _______
Operating loss (406) (1,068)
______ _______
Other income:
Interest and other income 315 172
Gain from repurchase of convertible
subordinated notes - 553
______ _______
Total other income 315 725
______ _______
Loss from operations before income tax (91) (343)
Benefit for Federal income tax - -
______ _______
Net loss $ (91) $ (343)
====== =======
Basic loss per share $ (.01) $ (.04)
====== =======
Dilutive loss per share $ (.01) $ (.04)
====== =======
See Notes to Condensed Consolidated Financial Statements.
J NET ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(Dollars and shares in thousands)
(Unaudited)
Additional
Common Stock Paid-In Treasury Stock
______________ Capital _______________
Shares Amount Deficit Shares Amount Totals
______ ______ __________ ________ ______ _______ ________
Balance June 30, 2003 10,233 $102 $75,250 $(49,859) (1,709) $(16,054) $ 9,439
Net loss (91) (91)
______ ____ _______ ________ ______ ________ _______
Balance September 30, 2003 10,233 $102 $75,250 $(49,950) (1,709) $(16,054) $ 9,348
====== ==== ======= ======== ====== ======== =======
Balance June 30, 2002 10,233 $102 $75,250 $(46,031) (1,709) $(16,054) $13,267
Net loss (343) (343)
______ ____ _______ ________ ______ ________ _______
Balance September 30, 2002 10,233 $102 $75,250 $(46,374) (1,709) $(16,054) $12,924
====== ==== ======= ======== ====== ======== =======
See Notes to Condensed Consolidated Financial Statements.
J NET ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(Dollars in thousands)
(Unaudited)
2003 2002
_______ ________
Operating activities:
Net loss $ (91) $ (343)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Allowance for uncollectable receivables - 20
Depreciation and amortization 9 39
Gain on repurchase of subordinated notes - (553)
Accounts receivable (180) 143
Short-term investments (168) (8)
Prepaid expenses and other current assets (26) 181
Notes receivable, related parties - 288
Other non-current assets 5 9
Accounts payable and other current liabilities (229) (5)
Deferred revenue and customer deposits 22 (364)
Deferred rent (6) (5)
_______ ________
Net cash used in operations (664) (598)
Investing activities:
Purchase of property and equipment - (6)
Redemption of short-term investments - 23,000
_______ ________
Net cash provided by investing activities - 22,994
Financing activities:
Repayment of debt - (27,750)
_______ ________
Net cash used in financing activities - (27,750)
Net decrease in cash and cash equivalents (664) (5,354)
Cash and cash equivalents at beginning of period 5,537 6,674
_______ ________
Cash and cash equivalents at end of period $ 4,873 $ 1,320
======= ========
Supplemental disclosures of cash flow data:
None
See Notes to Consolidated Financial Statements
J NET ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Significant accounting policies and business
Business:
J Net Enterprises, Inc. ("J Net" or the "Company") is a holding company
with concentrated investments in enterprise software (the "E-Commerce
Operations") and technology infrastructure companies (the "Technology-
Related Businesses").
E-Commerce Operations are conducted through IW Holdings, Inc. ("IWH"), a
wholly owned subsidiary of the Company and the successor to the business
formerly conducted by InterWorld Corporation ("InterWorld"), a 95.3% owned
subsidiary of the Company. While InterWorld remains a consolidated
subsidiary of the Company, it has not conducted business operations since
May 2002, when its assets were foreclosed on by J Net. IWH has conducted
the E-Commerce Operations since that time.
J Net also holds minority investments in other technology companies
including, but not limited to, systems development and software companies.
Business segments:
The Company has two reportable business segments; E-Commerce Operations and
Technology-Related Businesses.
Principles of consolidation and basis of presentation:
The accompanying unaudited condensed consolidated financial statements
included herein have been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC"). Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally
accepted in the United States have been condensed or omitted pursuant to
such rules and regulations, although Management believes that the
disclosures are adequate to make the information presented not misleading.
The accompanying unaudited condensed consolidated financial statements
include the accounts of the Company and its subsidiaries. All material
intercompany accounts and transactions are eliminated. The Company's
fiscal year ends on June 30.
In the opinion of Management, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments, consisting of
normal recurring accruals, necessary to present fairly the Company's
financial position as of September 30, 2003 and June 30, 2003, the results
of its operations for the three months ended September 30, 2003 and 2002
and its cash flows for the three months ended September 30, 2003 and 2002.
The results for the three months ended September 30, 2003 are not
necessarily indicative of results for a full year. Information included in
the condensed consolidated balance sheet as of June 30, 2003 has been
derived from the Company's Annual Report to the Securities and Exchange
Commission on Form 10-K for the fiscal year ended June 30, 2003 (the "2003
Form 10-K"). These unaudited condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements
and disclosures included in the 2003 Form 10-K.
Reclassifications:
Certain reclassifications have been made to prior year financial statements
to conform to the current year's 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 unaudited condensed consolidated financial statements and
notes. Actual results could differ from those estimates.
Cash equivalents:
Cash equivalents are liquid investments comprised primarily of debt
instruments and money market accounts with maturities of three months or
less when acquired and are considered cash equivalents for purposes of the
unaudited condensed consolidated balance sheets and statements of cash
flows. Cash equivalents are stated at cost which approximates fair value
due to their short maturity.
Short-term investments:
As of September 30, 2003, the Company held short-term investments in
Mariner Partners, L.P. ("Mariner"), a private investment fund which had a
value of $12.5 million. J Net can withdraw all or a portion of its
investment upon 45 days prior written notice. The Company classifies those
securities as short-term investments and records changes in the value of
the accounts in the item captioned interest and other income in the
unaudited condensed consolidated statements 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 unaudited condensed consolidated balance sheet as of September 30, 2003
contains approximately $1.5 million of unsecured creditor liabilities of
InterWorld. As a result of J Net's foreclosure on its secured promissory
note with InterWorld in 2002 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, on behalf of InterWorld, has been actively negotiating with
significant creditors of InterWorld to settle certain liabilities. Between
April 2002 and September 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 investments in funds managed by Mariner which are short
term and subject to fluctuations based on Mariner's investment strategies.
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-
elated 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).
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 96-18, "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 disclosure provisions of SFAS 148 beginning March 31, 2003. Until such
time that the FASB specifies the methodology used to calculate charges to
earnings for stock-based compensation, the Company will continue using the
intrinsic value method prescribed by APB 25.
The following table discloses pro forma amounts for net loss and basic and
dilutive loss per share for the three months ended September 30, 2003 and
2002 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 (dollars in thousands, except per share
data).
2003 2002
_____ _____
Net loss:
As reported $ (91) $(343)
Fair value of grants to employees (FY01) - (10)
_____ _____
Pro forma $ (91) $(353)
===== =====
Basic loss per share:
As reported $(.01) $(.04)
Pro forma $(.01) $(.04)
Diluted loss per share:
As reported $(.01) $(.04)
Pro forma $(.01) $(.04)
Weighted average assumptions:
Expected stock price volatility - -
Risk-free interest rate - -
Expected option lives (in years) - -
Estimated fair value of options granted $ - $ -
The Company's stock option plan expired on September 30, 2002. Under that
plan, each Director of the Company was to receive 27,500 options on June 30
of each year. Such options were to vest on the following September 30 at
the current market price of the Common Stock on that date. The June 30,
2002 stock option grant, which totaled 137,500 (27,500 to each of five
directors), was voluntarily returned and cancelled by each Director in
2002. As a result of these actions, combined with the contractual
termination of the stock option plan, no options have been, or are expected
to be granted in the foreseeable future.
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.
Income taxes:
The Company accounts for income taxes in accordance with SFAS 109,
"Accounting for Income Taxes" ("SFAS 109"). SFAS 109 requires that
deferred tax assets and liabilities arising from temporary differences
between book and tax bases will be recognized using enacted tax rates at
the time such temporary differences reverse. In the case of deferred tax
assets, SFAS 109 requires a reduction to deferred tax assets if it is more
likely than not that some portion or all of the deferred tax asset will not
be realized.
There are accumulated deferred tax assets of $19.8 million, which are fully
offset by a valuation allowance pursuant to SFAS 109. Such losses are
limited by certain Internal Revenue Service ("IRS") regulations. While
Management continues to take actions required to turn the Company
profitable, the ability to generate income at levels sufficient to realize
the accumulated deferred benefits is not determinable at this time.
Revenue recognition:
The Company follows AICPA Statement of Position 97-2, "Software Revenue
Recognition" ("SOP 97-2"), as amended by SOP 98-4, further amended by SOP
98-9, and Staff Accounting Bulletin 101. These pronouncements provide
guidance on when revenue should be recognized and in what amounts as well
as what portion of licensing transactions should be deferred.
Revenue under multiple element arrangements is allocated to each element
using the "residual method", in accordance with Statement of Position No.
98-9, "Modification of SOP 97-2 with Respect to Certain Transactions" ("SOP
98-9"). Under the residual method, the arrangement fee is recognized as
follows: (a) the total fair value of the undelivered elements, as
indicated by vendor-specific objective evidence, is deferred and (b) the
difference between the total arrangement fee and the amount deferred for
the undelivered elements is recognized as revenue related to the delivered
elements. Software license agreements generally include two elements: the
software license and post-contract customer support. The Company has
established sufficient vendor-specific objective evidence for the value of
maintenance and post-contract customer support services based on the price
when these elements are sold separately and/or when stated renewal rates
for maintenance and post-contract customer support services are included in
the agreement, and the actual renewal rate achieved.
Product licenses:
Revenue from the licensing of software products is recognized upon shipment
to the customer, pursuant to an executed software licensing agreement when
no significant vendor obligations exist and collection is probable. If
acceptance by the customer is required, revenue is recognized upon customer
acceptance. Amounts received from customers in advance of product shipment
or customer acceptance are classified as deposits from customers. Other
licensing arrangements, such as reseller agreements, typically provide for
license fees payable to IWH 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 maintenance and support revenue is
deferred until payments are received, or sufficient evidence that payment
will be received exists.
Deferred revenue consists principally of billings in advance for services
and support not yet provided and uncollected billings to customers for
maintenance and post contract support.
Recently issued accounting standards:
In 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 to VIEs created after January 31, 2003, and to VIEs in which
an enterprise obtains an interest after that date. FIN 46 is effective as
of June 30, 2004. While the guidance contained in the interpretation is
complex, the Company does not have any interests in any VIEs. Therefore,
the adoption of this interpretation will have no impact on the Company's
consolidated financial statements.
Note 2 - Investments in Technology-Related Businesses
Between March 2000 and November 2000, the Company invested in eleven
companies, including its initial investment in InterWorld.
As of September 30, 2003, four of these investments continue operations:
Tellme Networks, Inc., eStara, Inc., Strategic Data Corporation, and
certain companies contained in the Meister Brothers Investment portfolio.
The Company uses the cost method of accounting for these investments. The
Company continues to ascribe value to its investment in Tellme Networks,
Inc. The other investments have been written off.
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.
In July 2003, IWH amended a software license agreement (the "Amended
Agreement") with an existing customer. The Amended Agreement allows the
customer to continue to use IWH's software for a two year term ending July
2005. Compensation received by IWH included (a) $20 thousand in cash, (b)
issuance of 170,015 shares of the customer's common stock, which when
combined with 145,906 shares previously issued by the customer to
InterWorld, would equal 9.9% of the issued and outstanding common shares of
the customer, (c) 10% of any customer revenues as defined that includes the
use of IWH software, and (d) 7.5% of additional revenues and other services
as defined in the Amended Agreement. Total compensation under provisions
(c) and (d), excluding the $20 thousand of cash received in July 2003,
shall not exceed $.3 million over the two year term.
IWH uses the cost method to account for the investment in the common shares
of the customer. When the Company acquired a controlling interest in
InterWorld in May 2001, the Company believed the stock already owned by
InterWorld was worthless. The customer is subject to a substantial amount
of notes and other debts which are senior to common shareholders. As a
result, Management determined that the additional 170,015 shares received
as part of the Amended Agreement had no value.
Note 3 - Loss per share
Basic loss per share for the three months ended September 30, 2003 and 2002
are computed by dividing net loss from operations by the weighted average
number of common shares outstanding for the respective period. Since the
three month periods ended September 30, 2003 and 2002 had losses from
operations, no potential common shares from the assumed exercise of options
which were outstanding in 2002 have been included in the diluted loss per
share computations pursuant to accounting principles generally accepted in
the United States.
The following is the amount of loss and number of shares used in the basic
and diluted loss per share computations (dollars and shares in thousands,
except per share data):
Three Months Ended
September 30,
__________________
2003 2002
_____ _____
Basic and diluted loss per share:
Net loss $ (91) $(343)
===== =====
Shares:
Weighted average number of common
shares outstanding 8,525 8,525
===== =====
Basic and diluted loss per share $(.01) $(.04)
===== =====
The calculation of earnings per share data excluded 877,500 of outstanding
stock options as of September 30, 2003 and 1,233,836 stock options as of
September 30, 2002 because their effect would be antidilutive.
Note 4 - Related party transactions
One Director of J Net is a partner of a law firm that provides legal
services to the Company. Payments to the law firm during the three months
ended September 30, 2003 were less than one thousand dollars.
Note 5 - Operating segments
The Company has two reportable segments: E-Commerce Operations and
Technology-Related Businesses. Prior to May 2001, the Company operated
only in one segment, Technology-Related Businesses. Assets are the owned
assets used by each operating segment. Summary of consolidated loss from
operations, net of tax (dollars in thousands):
Three Months Ended
September 30,
__________________
2003 2002
_____ _____
Net income (loss):
E-Commerce Operations $ 82 $(201)
Technology-Related Businesses (173) (142)
_____ _____
Net loss $ (91) $(343)
===== =====
E-Commerce Operations:
Revenues $ 707 $ 656
Cost of revenues 168 148
_____ _____
Gross profit 539 508
Operating expenses 461 709
Other (income) expense (4) -
_____ _____
Net income (loss) from E-Commerce
Operations $ 82 $(201)
====== =====
Technology-Related Businesses:
Total operating expenses 484 867
Other income 311 725
_____ _____
Net loss from Technology-Related $(173) $(142)
Businesses ===== =====
As of September 30, 2003
________________________
Assets:
E-Commerce Operations $ 490
Technology-Related Businesses 20,048
_______
Total assets $20,538
Note 6 - 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 were entitled to receive $.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". As of September 30, 2003, the unpaid liability for the
severance was $.4 million.
Legal matters:
J Net is not a party to any legal matters that could have a material impact
on its operations as of September 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 SEC commenced a formal order directing a private investigation by
the SEC 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 SEC 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 SEC has advised that the
investigation should not be construed as an indication by the SEC 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, to date InterWorld has, and will continue
to fully cooperate with the SEC.
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 the management of InterWorld 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 2. Management's Discussion and Analysis of Financial Condition and
_______________________________________________________________
Results of Operations
_____________________
Forward-Looking Statements; Risks and Uncertainties
Certain information included in this Form 10-Q and other materials filed or
to be filed by J Net Enterprises, Inc. ("J Net" or the "Company") with the
Securities and Exchange Commission (the "SEC") contains statements that may
be considered forward-looking. All statements other than statements of
historical information provided herein may be deemed to be forward-looking
statements. Without limiting the foregoing, the words "believes",
"anticipates", "plans", "expects", "should" and similar expressions are
intended to identify forward-looking statements. In addition, from time to
time, the Company may release or publish forward-looking statements
relating to such matters as anticipated financial performance, business
prospects, technological developments and similar matters. The Private
Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. In order to comply with the terms of the safe
harbor, the Company notes that a variety of factors could cause the
Company's actual results and experience to differ materially from the
anticipated results or other expectations expressed in the Company's
forward-looking statements.
The risks and uncertainties that may affect operations, performance,
development and results of the Company include, but are not limited to, the
ability to increase sales of its e-commerce software products, attract new
clients, maintain existing clients in the face of new competition and
reduce costs. In other investment or partnering activities, the Company
must identify and successfully acquire interests in systems development or
other technology-based companies and grow such businesses. The ability of
entities in which the Company has invested to raise additional capital on
terms which are acceptable to the Company, or other investors, is critical
in the ongoing success of such companies and obtaining additional capital
in markets which are performing poorly may be difficult.
Overview
J Net 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 September 30, 2003, one Technology-
Related Business investment continues to have value assigned.
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.
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.
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, will be successful.
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, IWH 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 our operations and the
understanding of our results of operations. The impact of these policies
on our operations is discussed throughout Management's Discussion and
Analysis of Financial Condition and Results of Operations where such
policies affect our reported and expected financial results. For a
detailed discussion on the application of these and other accounting
policies, refer to Note 1 in the Notes to the Condensed Consolidated
Financial Statements for this quarterly report. Note that our
preparation of this Quarterly Report on Form 10-Q requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities and the
reported amounts of revenue and expenses during the reporting period.
There can be no assurance that actual results will not differ from those
estimates.
Accounting for Investments in Technology-Related Businesses:
The various interests that the Company acquires in Technology-Related
Businesses are accounted for under one of three methods: consolidation,
equity or cost. The applicable accounting method is generally determined
based on the Company's voting interest and its ability to influence or
control the Technology-Related Businesses.
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.
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 IWH 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.
Three Months Ended September 30, 2003 and 2002:
Results of Operations
Total revenues:
Consolidated revenues were $.7 million for both the three months ended
September 30, 2003 and the three months ended September 30, 2002.
During the September 2003 quarter, two license deals were completed. One
was the result of a settlement of a prior claim in the amount of $20
thousand. The settlement allows IWH's customer to continue the use of IWH
software for a period of two years. The cash portion of the settlement is
being recognized over this two year period. In addition to the cash
portion of the settlement, IWH received common stock of the customer which
brought IWH's total ownership of the customer's common shares to 9.9%. The
settlement also contained provisions which potentially entitle the Company
to receive an additional $.3 million over the next two years from royalties
and maintenance revenues generated by the customer from the use of IWH's
products in the future. Revenues from this royalty arrangement will be
recognized on a cash basis due to the uncertainty of how much revenue will
be generated and collected by the customer from its use of IWH software.
The additional license revenue was from the sale of a license through IWH's
reseller in Germany. There were no license revenues for the three months
ended September 30, 2002.
Professional service revenue was $.3 million for the September 30, 2003
three months, compared to $.2 million in the prior year quarter. The
September 30, 2003 quarter included three engagements, two of which were
related to upgrades at existing clients and one training engagement.
The increase in professional service revenue was partially offset by a $.1
million decrease in post contract maintenance support revenue. The decline
from $.5 million in the prior year quarter to $.4 million in the current
quarter was due to a combination of non-renewals of maintenance and reduced
rates.
Total cost of revenues:
Cost of revenues, which include fixed direct labor costs related to
professional services and maintenance activities and imbedded third party
customer software maintenance fees were $.2 million for the three months
ended September 30, 2003, which were approximately the same as the prior
year period.
Operating expenses:
Total operating expenses were $.9 million for the three months ended
September 30, 2003 compared to $1.6 million for the three months ended
September 30, 2002. The decrease of $.7 million is due primarily to staff
reductions within the E-Commerce Operations and Technology-Related Business
segments of $.2 million and $.2 million, respectively. Additional expense
reductions of $.3 million resulted from lower third party professional
service fees and reduced insurance costs.
Other income:
Net other income was $.3 million for the three months ended September 30,
2003 compared to $.7 million for the three months ended September 30, 2002.
The September 30, 2002 quarter included two components: interest income on
the Company's cash and short-term investments of $.2 million and a one-time
$.5 million gain from the repurchase of the Company's convertible
subordinated notes (the "Notes") in July 2002.
Interest income increased to $.3 million for the three months ended
September 30, 2003 from $.2 million for the September 30, 2002 quarter due
to higher short-term investments and interest bearing cash in the current
quarter compared to the same period in the prior year.
Net loss:
The net loss was $.1 million for the three months ended September 30, 2003
compared to a net loss of $.3 million in the comparable 2002 quarter. The
improvement was due to the $.7 million reduction in operating expenses from
the prior year less the one-time gain of $.5 million from the repurchase of
the Notes in the quarter ended September 30, 2002.
Capital Resources and Liquidity
Liquidity:
As of September 30, 2003, the Company had $17.4 million of cash and short
term investments and $.3 million of receivables. The Company estimates that
it will require no more than $1.8 million to fund its operations in fiscal
2004, excluding any significant costs incurred for an acquisition. Such
assumption is based on meeting revenue targets in E-Commerce Operations and
operating expense budgets in both business segments. Sources of funds are
derived from E-Commerce Operations sales, interest on cash deposits, and
returns on short term investments at Mariner. As a result, the existing
cash and short term investments are adequate to continue funding operations
as required and provide resources for the Company to pursue other business
opportunities.
The Company's lease commitments as of September 30, 2003 are approximately
$3.4 million in total for its office locations in New York, Texas and
Wyoming. A separate office lease in New York has been sublet to an
unrelated third party. The remaining cash inflows from the sublease over
its remaining term, net of profit sharing arrangements with the landlord,
are $3.9 million. While the Company remains the primary responsible party
under terms of the original lease, it has no reason to expect that the
subtenant will default on its obligation under terms of the sublease. As a
result, the Company's net lease commitments are profitable. The following
table sets forth the consolidated lease obligations as of September 30,
2003 (dollars in thousands):
Fiscal Years Ended June 30,
___________________________________
Remainder 2005 - 2008 - 2010 and
of FY 2004 2007 2010 thereafter Total
__________ _______ _______ __________ _______
Lease obligations
Gross operating leases $ 403 $ 1,405 $ 1,442 $160 $ 3,410
Sublease receipts (395) (1,638) (1,722) (191) (3,946)
_____ _______ ______ ____ _______
Net lease obligations
(profit) $ 8 $ (233) $ (280) $(31) $ (536)
===== ====== ======= ==== =======
The Company has a remaining severance obligation to two former executives
in the amount of $.4 million. Such obligation is being paid in semi-monthly
installments until June 2004, when the obligation will be paid in full. The
liability is reflected as a component of accounts payable and accrued
liabilities on the unaudited condensed consolidated balance sheet as of
September 30, 2003.
The September 30, 2003 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. No vendor
settlements were finalized in the quarter ended September 30, 2003.
Although there can be no assurances, Management believes the remaining
obligations will be settled at amounts substantially less then their
respective face values.
Cash flows:
For the three months ended September 30, 2003, net cash used in operations
was $.7 million, almost all of which was attributable to the Technology-
Related Businesses segment. The decrease reflects payments of the Company's
severance obligation of approximately $.1 million and $.2 million of
payments for professional service liabilities accrued at the June 30, 2003
year end. Accounts receivable and short term investment increases totaled
$.3 million for the three months ended September 30, 2003.
Investing and financial activities:
There were no investing or financial activities for the three months ended
September 30, 2003. For the three months ended September 30, 2002, the
Company completed its voluntary repurchase offer for its $27.8 million of
Notes.
Recently Issued Accounting Standards:
In January 2003, the Financial Accounting Standards Board ("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. The Company does not have interest in any VIEs. Therefore,
the adoption of this interpretation will have no impact 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. For the past two years, the technology-related
markets have experienced significant declines in sales, market value, and
available capital resources to develop new products. In addition, the
technology-related environment is extremely competitive. The combination
of the above factors involves a number of risks and uncertainties. Even
with the significant reductions to its cost structure, the Company's
operations will require an increase in sales of e-commerce products to
avoid further cost reductions. Increases in sales are dependent on several
factors including (1) successfully closed deals from its channel partners
and resellers, (2) an increase in information technology spending by
businesses, (3) continued solvency of existing customers, (4) availability
of capital, (5) preservation of existing patents and trademarks, and (6)
the Company's ability to build and deliver products ahead of its
competitors. There is no assurance that any of the events will occur, or
be sustainable if they do occur.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
The Company 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). The Company owns
short-term investments in Mariner.
Item 4. Controls and Procedures
Within the 90-day period prior to the filing of this Quarterly Report on
Form 10-Q, 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 SEC are adequate and are operating in
an effective manner. While the CEO and CFO believe that the Company's
existing disclosure controls and procedures have been effective to
accomplish its objectives, the CEO and CFO intend to examine, refine and
formalize disclosure controls and procedures and monitor ongoing
developments.
There were no significant changes in internal controls or in other factors
that could significantly affect these controls subsequent to the date of
the most recent evaluation.
Notwithstanding the foregoing, there can be no assurance that the Company's
disclosure controls and procedures will detect or uncover all failures of
persons within the Company and its consolidated subsidiaries to disclosure
material information otherwise required to be set forth in the Company's
periodic reports.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As of September 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 SEC had commenced a formal order directing a private investigation
by the SEC 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
SEC 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
SEC has indicated that the investigation should not be construed as an
indication by the SEC, 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, to date InterWorld has, and will continue
to, fully cooperate with the SEC.
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 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
31.1 Principal Executive Officer Certification
31.2 Principal Financial Officer Certification
32.1 Certification Pursuant to 18 U.S.C. Section 1350 as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
32.2 Certification Pursuant to 18 U.S.C. Section 1350 as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(b) Reports on Form 8-K:
None
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
J NET ENTERPRISES, INC.
(Registrant)
By: /s/ Mark E. Wilson
__________________
Mark E. Wilson
Chief Financial Officer
Date: November 14, 2003