UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 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 8,539,021 shares of the Registrant's common stock outstanding as
of February 12, 2004.
J NET ENTERPRISES, INC. AND SUBSIDIARIES
INDEX
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited) -
December 31, 2003 and June 30, 2003
Condensed Consolidated Statements of Operations (Unaudited) -
Three and Six Months Ended December 31, 2003 and 2002
Condensed Consolidated Statement of Stockholders' Equity
(Unaudited) - Six Months Ended December 31, 2003
Condensed Consolidated Statements of Cash Flows
(Unaudited) - Six Months Ended December 31, 2003 and 2002
Notes to Condensed Consolidated Financial Statements -
(Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
J NET ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
December 31, June 30,
2003 2003
____________ _______
ASSETS
______
Current assets:
Cash and cash equivalents $ 4,635 $ 5,537
Short-term investments 12,762 12,325
Accounts receivable, net 105 132
Prepaid expenses 64 34
_______ _______
Total current assets 17,566 18,028
_______ _______
Investments in technology-related businesses 2,000 2,000
Property and equipment, net of accumulated
depreciation 69 79
Other non-current assets 697 735
_______ _______
Total assets $20,332 $20,842
======= =======
See Notes to Condensed Consolidated Financial Statements.
J NET ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
(Concluded)
December 31, June 30,
2003 2003
____________ _______
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other current
liabilities $ 3,052 $ 3,399
Deferred revenue and customer deposits 698 689
________ ________
Total current liabilities 3,750 4,088
________ ________
Deferred income taxes 6,910 6,910
Deferred rent 182 193
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 (50,019) (49,859)
Less 1,694,449 and 1,708,929 shares of
common stock in treasury, at cost (16,055) (16,054)
________ ________
Total stockholders' equity 9,278 9,439
________ ________
Total liabilities and stockholders'
equity $ 20,332 $ 20,842
======== ========
See Notes to Condensed Consolidated Financial Statements.
J NET ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND SIX MONTHS ENDED DECEMBER 31, 2003 AND 2002
(Dollars in thousands, except per share data)
(Unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
__________________ ________________
2003 2002 2003 2002
______ _________ ______ _______
Revenues, net
Product licenses $ 2 $ 21 $ 26 $ 21
Maintenance 478 520 830 1,024
Services 120 166 451 318
______ _______ ______ _______
Total revenues, net 600 707 1,307 1,363
______ _______ ______ _______
Cost of revenues:
Product licenses - - - -
Maintenance 22 61 60 87
Services 136 139 266 261
______ _______ ______ _______
Total cost of revenues 158 200 326 348
______ _______ ______ _______
Gross profit 442 507 981 1,015
Operating expenses:
Research and development 142 413 338 854
General and administrative 803 1,106 1,552 2,287
Impairment of assets - 947 - 947
Gains from settlements with
unsecured creditors - - - (46)
______ _______ ______ _______
Total operating expenses 945 2,466 1,890 4,042
______ _______ ______ _______
Operating loss (503) (1,959) (909) (3,027)
______ _______ ______ _______
Other income:
Interest and other income 434 400 749 572
Gain from repurchase of
convertible subordinated notes - - - 553
______ _______ ______ _______
Total other income 434 400 749 1,125
______ _______ ______ _______
Loss from operations before
income tax (69) (1,559) (160) (1,902)
______ _______ ______ _______
Federal income tax expense - (241) - (241)
______ _______ ______ _______
Net loss $ (69) $(1,800) $ (160) $(2,143)
====== ======= ====== =======
Basic and dilutive loss per share $ (.01) $ (.21) $ (.02) $ (.25)
====== ======= ====== =======
See Notes to Condensed Consolidated Financial Statements.
J NET ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED DECEMBER 31, 2003
(Dollars and shares in thousands)
(Unaudited)
Common Stock Additional Treasury Stock
______________ Paid-In ________________
Shares Amount Capital Deficit Shares Amount Totals
______ ______ ___________ _______ ______ ________ ______
Balance June 30, 2003 10,233 $102 $75,250 $(49,859) (1,709) $(16,054) $9,439
Purchases of stock (1) (1)
Treasury stock adjustment (a) 15
Net loss (160) (160)
______ ____ _______ ________ ______ ________ _______
Balance December 31, 2003 10,233 $102 $75,250 $(50,019) (1,694) $(16,055) $ 9,278
====== ==== ======= ======== ====== ======== =======
(a) On October 1, 2003, treasury shares were reduced by 14,900 shares to reflect shares which were
never delivered and settled per the Company's transfer agent.
See Notes to Condensed Consolidated Financial Statements.
J NET ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED DECEMBER 31, 2003 AND 2002
(Dollars in thousands)
(Unaudited)
2003 2002
_______ ________
Operating activities:
Net loss $ (160) $ (2,143)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Receipt of Federal income tax refund - 6,910
Gain on repurchase of subordinated notes - (553)
(Gain) loss on disposal of assets - (103)
Impairment of assets - 1,050
Depreciation and amortization 10 79
Changes in assets and liabilities:
Federal income tax receivable - 241
Accounts receivable 27 (224)
Short-term investments (437) (227)
Prepaid expenses and other current assets (30) 179
Other non-current assets 38 26
Accounts payable and other current
liabilities (346) (255)
Deferred revenue and customer deposits 9 (518)
Deferred rent (11) (10)
Other, net (1) -
_______ ________
Net cash provided by (used) in operations (901) 4,452
Investing activities:
Collection of note receivable - related party - 288
Collection of notes receivable - 132
Redemption of short-term investments - 24,000
Purchase of treasury stock (1) -
Purchase of property and equipment - (5)
_______ ________
Net cash provided by (used in)
investing activities (1) 24,415
Financing activities:
Repayment of debt - (27,750)
_______ ________
Net cash provided by financing
activities - (27,750)
_______ ________
Net decrease in cash and cash equivalents (902) 1,117
Cash and cash equivalents at beginning of period 5,537 6,674
_______ ________
Cash and cash equivalents at end of period $ 4,635 $ 7,791
======= ========
Supplemental disclosures of cash flow data:
None
Non-cash investing and financing activities:
Uncollected proceeds from sale of
furniture and fixtures - 103
See Notes to Consolidated Financial Statements
J NET ENTERPRISES, INC.
NOTES TO CONDENSES 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 represent the Company's primary operations and 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, which was InterWorld's sole secured
creditor. 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.
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. Such investments are included in the Technology-Related
Businesses segment, which is presently inactive. No minority investments
have been made since July 2001 and the Company presently has no plans to
reinstate such investment strategy.
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 and estimates, necessary to present fairly the
Company's financial position as of December 31, 2003 and June 30, 2003, the
results of its operations for the three and six months ended December 31,
2003 and 2002 and its cash flows for the six months ended December 31, 2003
and 2002. The results for the three and six months ended December 31, 2003
and 2002 are not necessarily indicative of results for a full year.
Information included in the condensed consolidated balance sheet as of June
30, 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 December 31, 2003, the Company held short-term investments in Mariner
Partners, L.P. ("Mariner"), a private investment fund which had a value of
$12.8 million. J Net can withdraw all or a portion of its investment upon
45 days prior written notice. The Company classifies those securities as
short-term investments and records changes in the value of the accounts in
the item captioned interest and other income in the unaudited condensed
consolidated statement of operations.
Fair value of financial instruments:
The carrying value of certain of the Company's financial instruments,
including accounts receivable, accounts payable and accrued expenses
approximates fair value due to their short maturities.
The unaudited condensed consolidated balance sheet as of December 31, 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 December 2003, liabilities with a face value of $1.0 million
were 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 and
money markets which limit J Net's exposure to concentrations of credit
risk.
The Company owns short-term investments which are managed by Mariner and
are 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-
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.
In July 2003, IWH amended an agreement (the "Amended Agreement") related to
licensing of software with EB2B Commerce, Inc. ("EB2B"). The Amended
Agreement allows the customer to continue to use IWH's software for a two-
year term. Compensation received by IWH under the Amended Agreement
included (a) $20 thousand in cash, (b) issuance of 170,015 shares of the
client's common stock, which when combined with 145,906 shares previously
issued by the client to InterWorld, would equal 9.9% of the issued and
outstanding common shares of the client, (c) 10% of the revenues that the
client generates through the use of IWH's software, and (d) 7.5% of the
revenues (excluding those generated under provision (c)) received by the
customer from maintenance and other services performed by the customer for
its clients. Total compensation under provisions (c) and (d), excluding
the $20 thousand of cash received, shall not exceed $300 thousand.
IWH uses the cost method to account for the investment in the common shares
of the customer. However, the customer is subject to certain debts which
are senior in preference to the common shares. As a result, no value has
been assigned to the common shares received as part of the Amended
Agreement.
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 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 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 and six months ended December 31,
2003 and 2002 assuming compensation cost for employee and director stock
options granted in fiscal 2001 had been determined using the fair value-
based method prescribed by SFAS 123. There were no options granted in
fiscal 2002, 2003 or 2004 to date. 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):
Three Months Ended Six Months Ended
December 31, December 31,
___________________ _______________
2003 2002 2003 2002
_____ _______ _____ _______
Net loss:
As reported $ (69) $(1,800) $(160) $(2,143)
Fair value of grants to
employees (FY01) - (10) (20)
_____ _______ _____ _______
Pro forma $ (69) $(1,810) $(160) $(2,163)
===== ======= ===== =======
Basic and diluted loss per share:
As reported $(.01) $ (.21) $(.02) $ (.25)
Pro forma $(.01) $ (.21) $(.02) $ (.25)
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 Company's 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
September 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.
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 held 40 acres of land
with building improvements in the Village of Wellington, Florida which was
obtained as a result of a foreclosure on a loan to Michael Donahue, the
former Vice Chairman and Chief Executive Officer of InterWorld, until March
2003, when the property was sold. The Company received proceeds of $4.3
million from the sale.
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 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.
In March 2002, the Job Creation and Worker Assistance Act of 2002 (the
"Act") was signed into law. Among other things, the Act extended the
carry-back period for operating losses incurred in fiscal years ended in
2001 and 2002 from two years to five years. Based on this legislation, on
November 26, 2002, the Company filed for a refund of Federal income taxes
previously paid of $7.7 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.
Revenue recognition:
The Company follows AICPA Statement of Position 97-2, "Software Revenue
Recognition" ("SOP 97-2"), as amended by SOP 98-4, further amended by SOP
98-9, and Staff Accounting Bulletin 101. These pronouncements provide
guidance on when revenue should be recognized and in what amounts as well
as what portion of licensing transactions should be deferred.
Revenue under multiple element arrangements is allocated to each element
using the "residual method", in accordance with Statement of Position No.
98-9, "Modification of SOP 97-2 with Respect to Certain Transactions" ("SOP
98-9"). Under the residual method, the arrangement fee is recognized as
follows: (a) the total fair value of the undelivered elements, as
indicated by vendor-specific objective evidence, is deferred and (b) the
difference between the total arrangement fee and the amount deferred for
the undelivered elements is recognized as revenue related to the delivered
elements. Software license agreements generally include two elements: the
software license and post-contract customer support. The Company has
established sufficient vendor-specific objective evidence for the value of
maintenance and post-contract customer support services based on the price
when these elements are sold separately and/or when stated renewal rates
for maintenance and post-contract customer support services are included in
the agreement, and the actual renewal rate achieved.
Product licenses:
Revenue from the licensing of software products is recognized upon shipment
to the customer, pursuant to an executed software licensing agreement when
no significant vendor obligations exist and collection is probable. If
acceptance by the customer is required, revenue is recognized upon customer
acceptance. Amounts received from customers in advance of product shipment
or customer acceptance are classified as deposits from customers. Other
licensing arrangements, such as reseller agreements, typically provide for
license fees payable to the Company based on a percentage of the list price
for the software products. The license revenues are generally recognized
when shipment by the reseller occurs, or when collection is probable.
Contracts for product licenses where professional services require
significant production, modification or customization are generally
recognized on a percentage of completion basis unless contractual terms
indicate an alternative method is more appropriate.
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 December 2003, the Financial Accounting Standards Board ("FASB") issued
a revision to Statement of Financial Accounting Standards No. 132 (revised
2003), "Employers' Disclosures About Pensions and Other Postretirement
Benefits" ("SFAS 132(R)"). The revisions to SFAS 132(R) require
disclosures regarding an employer's percentages of plan assets, description
of investing strategies and descriptions used to determine the overall
expected rate of return on assets in the employer's pension or defined
benefit plans. The expanded disclosure requirements for domestic plans are
effective for interim periods beginning after December 15, 2003. The
Company does not have a pension, defined benefit plan or any future
postretirement obligations. Therefore, the requirements contained within
SFAS 132(R) have no impact to J Net or its subsidiaries.
Note 2 Investments in Technology-Related Businesses
Between March 2000 and November 2001, the Company invested in eleven
companies, including its initial investment in InterWorld.
As of December 31, 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 addition to these four investments, as part of the Amended Agreement
with EB2B (see Note 1), IWH holds 9.9% of the issued and outstanding shares
of EB2B.
IWH uses the cost method to account for the investment in the common shares
of EB2B. However, EB2B is subject to certain debts which are senior in
preference to the common shares. As a result, no value has been assigned
to the common shares received as part of the Amended Agreement.
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.
Note 3 Loss per share
Basic loss per share for the three and six months ended December 31, 2003
and 2002 is computed by dividing net loss from operations by the weighted
average number of common shares outstanding for the respective period.
Since the three and six month periods ended December 31, 2003 and 2002 had
losses from operations, no potential common shares from the assumed
exercise of options 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 Six Months Ended
December 31, December 31,
___________________ ________________
2003 2002 2003 2002
_____ _______ _____ _______
Basic and diluted loss per share:
Net loss $ (69) $(1,800) $(160) $(2,143)
===== ======= ===== =======
Shares:
Weighted average number of
common shares and common
share equivalents
outstanding 8,539 8,525 8,532 8,525
===== ======= ===== =======
Basic and diluted loss
per share $(.01) $ (.21) $(.02) $ (.25)
===== ======= ===== =======
The calculation of earnings per share data excluded 1,487,500 and 1,678,786
of outstanding stock options for the three months ended December 31, 2003
and 2002, respectively, and 1,487,500 and 1,741,420 outstanding stock
options for the six months ended December 31, 2003 and 2002, respectively.
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 and six
months ended December 31, 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 Six Months
Ended Ended
December 31, December 31,
_______________ _______________
2003 2002 2003 2002
_____ _______ ______ _______
Net income (loss):
E-Commerce Operations $ 1 $ (111) $ 83 $ (312)
Technology-Related Businesses (70) (1,689) (243) (1,831)
_____ _______ ______ _______
Net loss $ (69) $(1,800) $ (160) $(2,143)
===== ======= ====== =======
E-Commerce Operations:
Revenues $ 600 $ 707 $1,307 $ 1,363
Cost of revenues (158) (200) (326) (348)
_____ _______ ______ _______
Gross profit 442 507 981 1,015
Operating expenses (446) (663) (907) (1,372)
Other income (expense) 5 45 9 45
_____ _______ ______ _______
Net income (loss) from E-Commerce
Operations $ 1 $ (111) $ 83 $ (312)
===== ======= ====== =======
Technology-Related Businesses:
Total operating expenses (499) (1,906) (983) (2,773)
Other income 429 458 740 1,183
Provision for Federal income tax - (241) - (241)
_____ _______ ______ _______
Net loss from Technology-Related
Businesses $ (70) $(1,689) $ (243) $(1,831)
===== ======= ====== =======
As of December 31, 2003
_______________________
Assets:
E-Commerce Operations $ 451
Technology-Related Businesses 19,881
_______
Total assets $20,332
=======
Note 6 Commitments and contingencies
Employment agreements:
J Net entered into employment agreements with Mark W. Hobbs, the former
President and Chief Operating Officer, and Steven L. Korby, the former
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 payable 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 December 31, 2003, the unpaid liability for
the severance was $.3 million. The liability is reflected as a component
of accounts payable and accrued liabilities on the unaudited condensed
consolidated balance sheet as of December 31, 2003.
Legal matters:
J Net is not a party to any legal matters that could have a material impact
on its operations as of December 31, 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, InterWorld intends 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 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 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 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").
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 which no longer conducts any business operations.
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, Management has not pursued
additional minority investments and has no plans to actively reinstate that
strategy in the foreseeable future.
The Company is actively seeking potential acquisitions of operating
companies and enhancement opportunities for its E-Commerce Operations.
Such enhancements include strategic alternatives comprised of 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.
Marketing of E-Commerce products is conducted with a limited internal staff
which is supported by a combination of a third party contractor and
licensed resellers in Germany and Japan. IWH is also pursuing negotiations
with additional resellers. Internal marketing staff increases are
dependent on the ability to sell products and a demonstrated improvement in
the market for E-Commerce products, which have been sluggish for the past
several years.
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 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.
Three Months Ended December 31, 2003 and 2002:
Results of Operations
Total revenues:
Consolidated revenues were $.6 million for the three months ended December
31, 2003 compared to $.7 million for the three months ended December 31,
2002.
During the December 2003 quarter, no license deals were completed. The
license revenue of $2 thousand in the December 31, 2003 three months was
the result of a settlement of a prior years' claim in the amount of $20
thousand, which is being recognized over a two year period pursuant to the
settlement terms. The Company had one new license sale in the three months
ended December 31, 2002 totaling $21 thousand.
Professional services revenues were $.1 million for both the three months
ended December 31, 2003 and 2002. The December 31, 2003 quarter included
three engagements, two of which were related to upgrades at existing
clients and one training engagement.
Post contract support revenue was $.5 million for both the three months
ended December 31, 2003 and 2002. There was minimal attrition in this
revenue stream from the prior year quarter.
Total cost of revenues:
Cost of revenues, which include 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
December 31, 2003, which were approximately the same as the prior year
costs.
Operating expenses:
Total operating expenses were $.9 million for the three months ended
December 31, 2003 compared to $2.5 million for the three months ended
December 31, 2002. The decrease of $1.6 million is due primarily to a $.9
impairment of property held for sale in the three months ended December 31,
2002. Additional reductions resulted from staff reductions within the E-
Commerce Operations and Technology-Related Business segments from 30
employees at December 31, 2002 to 17 employees at December 31, 2003. The
Company also benefitted from a reduction in liability insurance and other
operating costs during the three months ended December 31, 2003.
Other income:
Net other income, which consists of increases in the value of short-term
investments at Mariner, interest on the Company's cash deposits and
sublease rental income, was $.4 million for both the three months ended
December 31, 2003 and 2002.
Net loss:
The net loss was $69 thousand for the three months ended December 31, 2003
compared to a loss of $1.8 million in the comparable quarter ended December
31, 2002. The improvement is due primarily to the $.9 million impairment
of property held for sale, the $.2 million tax provision that increased the
loss reported on December 31, 2002 and other reductions in personnel and
operating expenses since that date.
Six Months Ended December 31, 2003 and 2002:
Results of Operations
Total revenues:
Consolidated revenues were $1.3 million for the six months ended December
31, 2003 as compared with $1.4 million for the six months ended December
31, 2002.
During the six months ended December 2003, two license deals were
completed. One was the result of a settlement of a prior years' claim in
the amount of $20 thousand. The license revenue from the $20 thousand cash
payment is being recognized ratably over a two year period pursuant to the
contract terms. In addition to the cash portion of the settlement, the
Company received 9.9% of the outstanding common shares of the customer. No
economic value was placed on the shares received due to the common shares
being subordinated to other securities of the customer. The third
component of the settlement also contained provisions which entitle the
Company to receive up to $.3 million in royalties and maintenance from
revenues generated by the client from the use of IWH's products in the
future. Revenues from the royalty and maintenance arrangements will be
recognized on a cash basis due to their contingent nature. The additional
license revenue was from the sale of additional capacity on an existing
license through IWH's reseller in Germany.
Professional services revenues were $.5 million for the December 31, 2003
six months, compared to $.3 million in the prior year quarter. The six
months ended December 31, 2003 included three engagements, two of which
were related to upgrades at existing clients and one training engagement.
The increased professional service revenues were offset by a decrease in
post contract maintenance support revenue, which decreased to $.8 million
for the six months ended December 31, 2003 from $1.0 million for the six
months ended December 31, 2002. The decline was due to the combination of
non-renewals and renegotiated rates with certain customers.
Total cost of revenues:
Cost of revenues, which include direct labor costs related to professional
services and maintenance activities and imbedded third party customer
software maintenance fees, were $.3 million for the six months ended
December 31, 2003, which were approximately the same as the prior year
costs.
Operating expenses:
Total operating expenses were $1.9 million for the six months ended
December 31, 2003 compared to $4.0 million for the six months ended
December 31, 2002. The decrease of $2.1 million is due primarily to a $.9
impairment of property held for sale in the six months ended December 31,
2002 and staff reductions throughout the Company. There were a total of 30
employees at December 31, 2002 compared to 17 employees at December 31,
2003. Most of the reductions were in the software engineering functions.
Certain savings associated with these staff reductions were used to
increase sales efforts. The Company also benefitted from a reduction in
liability insurance and other operating costs for the six months ended
December 31, 2003.
Other income:
Net other income, which consists of increases to the value of short-term
investments at Mariner, interest income on cash deposits and sublease
rental income, was $.7 million for the six months ended December 31, 2003
as compared to $1.1 million for the six months ended December 31, 2002. The
six months ended December 31, 2002 included two components: other income as
described above of $.6 million and a $.5 million gain from the repurchase
of the Company's convertible subordinated notes (the "Notes") in July 2002.
Such gain was the result of a voluntary offer by the Company to repurchase
the Notes at face value, but excluding any accrued interest on the Notes
from March 31, 2002, the last interest payment date.
The increase in interest and other income to $.7 million for the six months
ended December 31, 2003 from $.6 million for the six months ended December
31, 2002 was due primarily to higher cash and short term investment
balances as of December 31, 2003 compared to the same period in the prior
year.
Net loss:
The net loss was $.2 million for the six months ended December 31, 2003
compared to a loss of $2.1 million in the comparable 2002 period. The
improvement is due primarily to a $2.2 million reduction in operating
expenses from the prior year, with such reduction being partially offset by
the 2002 period's gain from the repurchase of the Notes.
Capital Resources and Liquidity
Liquidity:
As of December 31, 2003, the Company had $17.4 million of cash and short
term investments and $.1 million of receivables. The Company estimates that
it will require approximately $1.8 million to fund its operations in fiscal
2004. Such assumption is based on meeting revenue targets in E-Commerce
Operations. Sources of funds are derived from E-Commerce Operations sales,
interest on cash deposits, and returns on short term investments at
Mariner. Management believes that its revenue projections are conservative
and that its costs can be managed to its budgets without difficulty. 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 December 31, 2003 are $3.3 million
for its office locations in Wyoming, Texas and New York. An office lease in
New York has been subleased to an unrelated third party. The remaining cash
inflows from the sublease, net of profit sharing arrangements with the
landlord are $3.8 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
December 31, 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 $ 266 $ 1,405 $ 1,442 $160 $ 3,273
Sublease receipts (264) (1,638) (1,722) (191) (3,815)
_____ _______ _______ ____ _______
Net lease
obligations
(profit) $ 2 $ (233) $ (280) $(31) $ (541)
===== ======= ======= ==== =======
The Company has a remaining severance obligation to two former executives
in the amount of $.3 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 December 31, 2003.
The December 31, 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, they remain separate and distinct to InterWorld.
Although Management has actively negotiated with many of the significant
unsecured creditors to settle aged claims, no vendor settlements were
finalized during the previous twelve months. Although there can be no
assurances, Management believes the remaining obligations will be settled
at amounts substantially less then their respective face values.
Cash flows:
For the six months ended December 31, 2003, consolidated net cash used in
operations was $.9 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 $.2 million and other
working capital components.
Investing and financing activities:
There were no significant investing or financial activities for the three
months ended December 31, 2003. Activity during the six months ended
December 31, 2002 included the repurchase of the Company's $27.8 million of
Notes in July 2002.
Recently Issued Accounting Standards:
In December 2003, the Financial Accounting Standards Board ("FASB") issued
a revision to Statement of Financial Accounting Standards No. 132 (revised
2003), "Employers' Disclosures About Pensions and Other Postretirement
Benefits" ("SFAS 132(R)"). The revisions to SFAS 132(R) require
disclosures regarding an employer's percentages of plan assets, description
of investing strategies and descriptions used to determine the overall
expected rate of return on assets in the employer's pension or defined
benefit plans. The expanded disclosure requirements for domestic plans are
effective for interim periods beginning after December 15, 2003. The
Company does not have a pension, defined benefit plan or any future
postretirement obligations. Therefore, the requirements contained within
SFAS 132(R) have no impact to J Net or its subsidiaries.
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. Based upon the invested cash balances
at December 31, 2003, a 10% drop in interest rates or historical returns
from short-term investments at Mariner would not be material to the
Company's financial statements.
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 the Company's disclosure controls and procedures and monitor
ongoing developments.
There were no significant changes in the Company's 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 December 31, 2003, J Net did not have any litigation, pending or
threatened, or other claims filed against the Company. However, InterWorld
is subject to two claims.
On March 8, 2001, as amended on May 29, 2001, InterWorld received notice
that the 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, InterWorld intends 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 5. Other Information
On January 16, 2004, J Net terminated the engagement of Ernst & Young LLP
("E&Y") as the Company's independent auditors for the fiscal year ending
June 30, 2004. The decision to terminate E&Y was approved by the Company's
Audit Committee with the concurrence of Management.
The Registrant has selected CF & Co., L.L.P. ("CF & Co.") as its new
independent auditors as of January 16, 2004.
On January 30, 2004, the Company executed Amendment No. 2 to its Rights
Plan Agreement. Such amendment allows the Gabelli Group to increase its
holdings in the Company's common stock to 30%. Presently, the Gabelli
Group holds 19.9% of the Company's common stock.
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:
On January 20, 2004 the Company filed a Form 8-K reporting the
change in the Company's auditors from Ernst & Young, LLP to CF &
Co., L.L.P.
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: February 17, 2004