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, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to___________________
Commission file no. 1-9728
J NET ENTERPRISES, INC.
____________________________________________________________________
(Exact name of registrant as specified in its charter)
NEVADA 88-0169922
_______________________________ ____________________________________
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4020 W. 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
f 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 No x
____ ____
There were 8,524,552 shares of the Registrant's common stock outstanding as
of November 9, 2001.
J NET ENTERPRISES, INC. AND SUBSIDIARIES
INDEX
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited) -
September 30, 2001 and June 30, 2001
Condensed Consolidated Statements of Operations (Unaudited) -
Three Months Ended September 30, 2001 and 2000
Condensed Consolidated Statement of Stockholders'
Equity (Unaudited) - Three Months Ended September 30, 2001
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Three Months Ended September 30, 2001 and 2000
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosure About Market Risk
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,
ASSETS 2001 2001
______ _____________ ________
Current assets:
Cash and cash equivalents $ 13,256 $ 24,272
Short-term investments 27,850 27,381
Accounts receivable, net 1,302 1,532
Notes receivable - related parties 272 1,288
Federal income taxes receivable 3,815 6,538
Assets held for sale 5,450 5,450
Other current assets 1,050 1,556
________ _______
Total current assets 52,995 68,017
________ _______
Investments in technology-related businesses 4,623 3,290
Property and equipment, net of accumulated
depreciation 2,140 4,010
Deferred tax asset 885 885
Other non-current assets 1,375 1,211
________ ________
Total assets $ 62,018 $ 77,413
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
____________________________________
Current liabilities:
Accounts payable and other current liabilities $ 6,891 $ 7,699
Deferred revenue and customer deposits 2,193 3,122
________ ________
Total current liabilities 9,084 10,821
________ ________
Convertible subordinated notes, net of
amortized discount of $2,500 27,750 27,750
Deferred rent 559 356
Commitments and contingencies
Stockholders' equity:
Preferred stock - authorized
1,000,000 shares of $1 par value;
none issued
Common stock - authorized
60,000,000 shares of $.01 par
value; 10,233,470 shares issued 102 102
Additional paid-in capital 75,250 75,250
Retained earnings (deficit) (34,755) (20,795)
Less 1,708,918 shares of common stock
in treasury, at cost (16,054) (16,054)
Cumulative translation adjustment 82 (17)
________ ________
Total stockholders' equity 24,625 38,486
________ ________
Total liabilities and stockholders' equity $ 62,018 $ 77,413
======== ========
See Notes to Condensed Consolidated Financial Statements.
J NET ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2001 and 2000
(Dollars in thousands, except per share data)
(Unaudited)
2001 2000
________ _______
Revenues, net
Product licenses $ 883 $ -
Maintenance 1,262 -
Services 680 -
________ _______
Total revenues, net 2,825 -
Cost of revenues:
Product licenses 146 -
Maintenance 195 -
Services 1,075 -
________ _______
Total cost of revenues 1,416 -
________ _______
Gross profit 1,409 -
Operating expenses:
Research and development 3,012 -
Sales 3,400 -
Marketing alliances 1,351 -
General and administrative (including stock
based compensation of $240 for the
three months ended September 30, 2001) 3,449 1,270
Restructuring and unusual charges 4,548 -
________ _______
Total operating expenses 15,760 1,270
________ _______
Operating loss from continuing operations (14,351) (1,270)
Other income (expense):
Interest and other income 718 933
Interest expense (567) (1,244)
Equity losses in technology-related businesses - (1,786)
________ _______
Total other income (expense) 151 (2,097)
________ _______
Loss from continuing operations before income tax (14,200) (3,367)
Provision (benefit) for Federal income tax - (800)
________ _______
Net loss from continuing operations (14,200) (2,567)
Income from discontinued operations, net of taxes
of $0 and $86 - 132
________ _______
Net loss $(14,200) $(2,435)
======== =======
Basic earnings (loss) per share:
Loss from continuing operations $ (1.67) $ (.29)
Income from discontinued operations - .02
________ _______
$ (1.67) $ (.27)
======== =======
Dilutive earnings (loss) per share:
Loss from continuing operations $ (1.67) $ (.29)
Income from discontinued operations - .02
________ _______
$ (1.67) $ (.27)
======== =======
See Notes to Condensed Consolidated Financial Statements.
J NET ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED SEPTEMBER 30, 2001
(Dollars and shares in thousands)
(Unaudited)
Accumu-
lated
Other
Compre-
Common Stock Additional Retained Treasury Stock hensive
_____________ Paid-In Earnings _________________ Income
Shares Amount Capital (Deficit) Shares Amount (loss) Totals
______ ______ __________ _________ ______ _________ ___________ _________
Balance June 30, 2001 10,233 $102 $75,250 $(20,795) (1,709) $(16,054) $(17) $ 38,486
Comprehensive loss:
Net loss (14,200) (14,200)
Cumulative translation
adjustment 99 99
________
Total comprehensive loss (14,101)
Amortization of
employee stock
options 240 240
Balance September 30,
2001 ______ ____ _______ ________ ______ ________ ____ ________
10,233 $102 $75,250 $(34,755) (1,709)$(16,054) $ 82 $ 24,625
====== ==== ======= ======== ====== ======== ==== ========
See Notes to Condensed Consolidated Financial Statements.
J NET ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(Dollars in thousands)
(Unaudited)
2001 2000
________ ________
Operating activities:
Net loss $(14,200) $ (2,435)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Equity in loss of technology-related businesses - 1,786
Income from discontinued operations, net of
taxes of $0 and $86 - (132)
Amortization of stock-based compensation 240 -
Depreciation and amortization 200 79
Write-off of impaired leasehold improvements 1,700 -
Deferred income tax benefit - (740)
Increase (decrease) from changes in:
Increase in federal income taxes receivable 2,723 -
Increase in marketable securities (469) -
Prepaid expenses, accounts receivable
and other current assets 736 216
Notes receivable, related parties 1,016 -
Other non-current assets (164) (162)
Accounts payable and other current liabilities (808) 1,411
Deferred revenue and customer deposits (929) -
Deferred rent 203 -
Other, net 99 -
________ ________
Net cash provided by (used in)
continuing operations (9,653) 23
________ ________
Net cash provided by discontinued
operations - 1,323
________ ________
Net cash provided by (used in) operating
activities (9,653) 1,346
Investing activities:
Investments in technology-related businesses (1,333) (10,409)
Purchases of property and equipment (30) (138)
________ ________
Net cash used in continuing operations (1,363) (10,547)
Net cash used in discontinued operations - (434)
________ ________
Net cash used in investing activities (1,363) (10,981)
Financing activities:
Proceeds from issuance of convertible
subordinated notes - 8,250
Other - (31)
________ ________
Net cash provided by financing activities - 8,219
________ ________
Net decrease in cash and cash equivalents (11,016) (1,416)
Cash and cash equivalents at beginning of period 24,272 60,090
________ ________
Cash and cash equivalents at end of period $ 13,256 $ 58,674
======== ========
Supplemental disclosures of cash flow data:
Cash paid during the period for:
Interest paid $ 555 $ -
Non-cash investing and financial activities:
Debt discount on convertible subordinated notes $ - $ 1,375
Value of notes receivable discharged in
exchange for common stock $ 1,024 $ -
Notes receivable - related parties $ - $ 250
See Notes to Condensed Consolidated Financial Statements.
J NET ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 - Significant accounting policies and business:
Business:
J Net Enterprises, Inc. ("J Net" or the "Company") is a technology holding
company with concentrated investments in enterprise software and technology
infrastructure companies (the "Technology-Related Businesses"). The
Company conducts its business through two business segments: InterWorld
Corporation ("InterWorld) and J Net Technology Related Businesses.
The Company owns 95.3% of InterWorld, a provider of integrated enterprise
e-commerce software solutions. Its products include software that supports
customer relationship management, supplier relationship management, sales
channel management, and business intelligence. Existing customers cover a
wide range of industries including retail, manufacturing, distribution,
telecommunications and transportation. In September 2001, InterWorld
announced completion of its new Commerce Exchange 5.0 version ("Version
5.0") of its software product. Version 5.0 runs on the industry standard
J2EE server and is backwards compatible with prior releases. In addition,
a new marketing strategy to promote sales of Version 5.0 is being deployed.
J Net also holds minority investments in other technology companies
including, but not limited to, systems development and software companies.
The investments are held directly by the Company, or by J Net Ventures I,
LLC (the "Fund" or "Ventures I"), a fund owned and managed by the Company.
As a result of the changes in market conditions with respect to Technology-
elated Businesses and the significance of the InterWorld operations, J Net
has suspended its minority investment strategy and concentrated its efforts
and financial resources on InterWorld.
Business segments:
The Company has two reportable business segments; InterWorld and J Net
Technology-Related Businesses. Prior to May 2001, the Company operated in
only one segment, J Net Technology-Related Businesses. J Net Technology-
Related Businesses include the effect of transactions and operations of the
Company's non-consolidated investments. All intersegment activity has been
eliminated. Accordingly, segment results reported exclude the effect of
transactions between the Company and its subsidiary. Assets are the owned
assets used by each operating segment.
Basis of presentation:
The accompanying unaudited condensed consolidated financial statements
included herein have been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared
in accordance with accounting principles generally accepted in the United
States of America 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.
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, 2001, the results of its operations
for the three months ended September 30, 2001 and 2000 and its cash flows
for the three months ended September 30, 2001 and 2000. The results for
the three months ended September 30, 2001 and 2000 are not necessarily
indicative of results for a full year. Information included in the
condensed consolidated balance sheet as of June 30, 2001 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, 2001 (the "2001 Form
10-K"). These unaudited condensed consolidated financial statements should
be read in conjunction with the consolidated financial statements and
disclosures included in the Company's June 30, 2001 Annual Report on Form
10-K.
Reclassifications:
Certain reclassifications have been made to prior year financial statements
to conform to the current year presentation.
Use of estimates:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the amounts reported in the
accompanying consolidated financial statements and notes. Actual results
could differ from those estimates.
Cash equivalents:
Cash equivalents are liquid investments comprised primarily of debt
instruments and money market accounts with maturities of three months or
less when acquired and are considered cash equivalents for purposes of the
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:
In October and November 2000 and January 2001, the Company invested a total
of $25,444,000 in Mariner Partners, L.P. ("Mariner"), a private investment
fund. Mariner employs a multi-strategy approach, emphasizing market
neutral and event driven styles, to opportunistically seek, identify, and
capitalize on investment opportunities across the financial markets. This
approach mitigates the episodic returns generally experienced by single
sector funds. According to fund documents, Mariner has consistently
generated above average returns relative to hedge fund industry benchmarks
while taking lower levels of risk as indicated by comparative measures such
as Sharpe Ratios, actual volatility, cumulative loss, and % of months
profitable. 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 consolidated statement
of operations. Interest and other income representing the increase in the
Company's investment in Mariner for the three months ended September 30,
2001 was $469,000.
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 unregistered
convertible subordinated notes are not traded in the open market and a
market price is not available. However, based on the Company's financial
position, management believes that the carrying value of such debt
approximates fair value.
Investments in Technology-Related Businesses:
The various interests that the Company acquires in Technology-Related
Businesses are accounted for under one of three methods: consolidation,
equity or cost. The applicable accounting method is generally determined
based on the Company's voting interest and its ability to influence or
control the Technology-Related Businesses. For investments accounted for
under the equity method, the excess of the cost of the investment over the
Company's equity in the underlying net assets of such investment is
amortized on a straight-line basis over 5 years.
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: 3 to 7 years for equipment and 3 to 10 years for leasehold
improvements. Property sold or retired is eliminated from the accounts in
the year of disposition.
The Company periodically assesses the value and/or recoverability of its
non-current assets in accordance with Statement of Financial Accounting
Standards No. 121, "Accounting for Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of" ("SFAS 121"). During the
three months ended September 30, 2001, as a result of market analysis
for comparable office space, Management determined that approximately
$1,700,000 of leasehold improvements for certain office space which the
Company currently leases, would not likely be recovered. The Company
is in the process of attempting to sublet all of such space. Accordingly,
$1,700,000 is included as part of restructuring and unusual charges
for the three months ended September 30, 2001.
Assets held for sale:
Assets which will be sold rather than used are recorded at their estimated
fair value less estimated cost to sell.
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. The adoption
of these pronouncements did not have a material impact on results.
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 total fair value of the
undelivered elements is deferred and subsequently recognized in accordance
with SOP 97-2. Software license agreements generally include two elements:
the software license and post-contract customer support. InterWorld has
established sufficient vendor-specific objective evidence for the value of
maintenance and post-contract customer support services based on the price
when these elements are sold separately and/or when stated renewal rates
for maintenance and post-contract customer support services are included in
the agreement, and the actual renewal rate achieved.
Product licenses:
Revenue from the licensing of software products is recognized upon shipment
to the customer, pursuant to an executed software licensing agreement when
no significant vendor obligations exist and collection is probable. If
acceptance by the customer is required, revenue is recognized upon customer
acceptance. Amounts received from customers in advance of product shipment
or customer acceptance are classified as deposits from customers. Other
licensing arrangements such as reseller agreements, typically provide for
license fees payable to the Company based on a percentage of the list price
for the software products. The license revenues are generally recognized
when shipment by the reseller occurs, or when collection is probable.
Contracts for product licenses where professional services require
significant production, modification or customization are recognized on a
percentage of completion basis.
Services revenue:
Revenue from professional services, such as custom development,
installation and integration support, is recognized as the services are
rendered.
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.
Deferred revenue consists principally of billings in advance for services
and support not yet provided.
Recently issued accounting standards:
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141, "Business
Combinations" ("SFAS 141") and Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 addresses
the initial recognition and measurement of goodwill and other intangible
assets acquired in a business combination. SFAS 142 addresses the initial
measurement and recognition of intangible assets acquired outside of a
business combination, whether acquired with a group of other assets or
acquired individually, and the accounting and reporting for goodwill and
other intangibles subsequent to their acquisition. These standards require
all future business combinations to be accounted for using the purchase
method of accounting. Goodwill will no longer be amortized but instead will
be subject to impairment test on an annual basis at a minimum. The Company
is required to adopt SFAS 141 and SFAS 142 on a go forward basis beginning
January 1, 2002; however, certain provisions of these new standards may
also apply to any acquisition made after June 30, 2001. As of September
30, 2001, the Company had no goodwill or other intangible assets due to
impairments or losses incurred on investments where goodwill had been
recorded. The adoption of SFAS 141 and SFAS 142 will be made as required
for future transactions. No significant impact of such adoption is
expected by the Company.
The FASB recently issued a final statement on asset impairment ("SFAS 144")
that is applicable to financial statements issued for fiscal years
beginning after December 15, 2001 (January 2002 for calendar year-end
companies). The FASB's new rules on asset impairment supercede FASB
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of", and provide a single accounting
model for long-lived assets to be disposed of.
Although retaining many of the fundamental recognition and measurement
provisions of Statement 121, the new rules significantly change the
criteria that would have to be met to classify an asset as held-for-sale.
This distinction is important because assets held-for-sale are stated at
the lower of their fair values or carrying amounts and depreciation is no
longer recognized.
The Company will adopt SFAS 144 as required and does not anticipate its
application to have a significant impact on the results of operations as
compared with practices in place today.
Note 2 - Discontinued operations
Prior to March 2000, when the Company began emphasizing technology-related
activities, J Net was named Jackpot Enterprises, Inc. and was engaged,
through various subsidiaries, in the gaming industry for over 30 years. In
July 2000, the Company executed a definitive agreement to sell the Route
Operations. The sale, which was subject to regulatory approvals and other
customary closing conditions, was completed on November 22, 2000. Because
of the sale, the results of the Route Operations are presented as
discontinued operations in this Form 10-Q for the three months ended
September 30, 2001.
Note 3 - Investments in Technology-Related Businesses:
On September 28, 2001, the Company completed the purchase of the remaining
99% of Meister Brothers Investments, LLC ("MBI") that the Company did not
already own. The purchase was executed pursuant to a settlement of a put
agreement (the "Put Agreement") entered into as part of the original
investment in March 2000 between the Company and Keith Meister and Todd
Meister, Co-Presidents (the "Co-Presidents") and managers of the Fund.
Under terms of the original Put Agreement, the Company was required to
issue 275,938 shares of the Company's common stock in exchange for each of
the member interests in MBI owned by the Co-Presidents. A corresponding
call agreement (the "Call Agreement") would have required the Company to
issue 312,500 shares of the Company's common stock. The Company entered
into a series of agreements relating to the termination of the employment
of the Co-Presidents, a cancellation of the Put Agreement and corresponding
Call Agreement and the repurchase of the shares issuable under the Put
Agreement and as a result paid an aggregate of $1,604,000 of consideration
related to the cancellation of the Put Agreement. A portion of such
consideration equal to $1,024,000 was used to offset a loan from the
Company to the Co-Presidents. As a result, the entire $1,604,000 of
consideration was expensed as restructuring and unusual charges upon
completion of the transaction.
eStara, Inc. ("eStara") is a non public development stage company that
provides voice communication technology that enables on-line customers to
talk and conduct e-business over the Internet. The Company uses the cost
method to account for this investment. The Company funded $2,667,000 of a
$4,000,000 commitment to eStara's $15,000,000 Series B round of financing
in September 2000. The remaining commitment of $1,333,000 was funded in
July 2001 at a substantially lower valuation than the original investment.
As a result, an impairment of $1,375,000 on the original investment was
recorded as of June 30, 2001. Accordingly, the Company is carrying the
eStara investment at the July 2001 valuation, which it believes represents
a fair market valuation as of September 30, 2001.
Tellme Networks, Inc. ("Tellme") provides voice driven interactive services
to consumers and businesses. Tellme enables users through voice
recognition and speech synthesis to utilize a telephone to access the
Internet and listen to on-line information. The Company uses the cost
method to account for its investment in Tellme. There were no additional
investments or other activity in Tellme for the three months ended
September 30, 2001. Based on Tellme's positive financial condition and its
current and projected cash utilization, Management believes the original
$2,000,000 investment represents the lower of cost or market at September
30, 2001.
The following table sets forth the acquisition cost for the Company's
investments and the related activity of each active investment for the
three months ended September 30, 2001 (dollars in thousands):
Net Carrying value
balance at as of
June 30, 2001 Additions Impairments September 30, 2001
_____________ _________ ___________ __________________
eStara, Inc. $1,290 $1,333 $ - $2,623
Tellme Networks 2,000 - - 2,000
______ ______ _____ ______
Totals $3,290 $1,333 $ - $4,623
====== ====== ===== ======
J Net is presently funding InterWorld under a $20,000,000 secured credit
facility in the form of a promissory note. Advances are secured by all of
the assets of InterWorld, including intellectual property. J Net funds
InterWorld at its sole discretion and is under no obligation to continue
funding or to fund the full amount of the credit facility.
From the time the Company began funding the operations of InterWorld
through October 31, 2001, InterWorld required approximately $3,000,000 per
month to fund its operations. As a result of restructuring, the cash burn
rate has been reduced to approximately $1,200,000 per month beginning in
November 2001. As of September 30, 2001, the Company has funded
$12,350,000 under the aforementioned promissory note and had funded
$14,600,000 by October 31, 2001. InterWorld has historically operated at a
loss and received a going concern opinion from its independent auditors for
the twelve months ended December 31, 2000. Through September 30, 2001,
InterWorld continued to incur operating losses and without continued
funding, there remains substantial doubt about InterWorld continuing as a
going concern.
J Net is evaluating its current ownership interest in InterWorld and is
exploring a number of strategic alternatives including, but not limited to,
seeking a strategic partner to provide additional funding, pursuing a
possible sale, or terminating the business operations of InterWorld
altogether.
As a result of the Company's acquisition of a controlling interest in
InterWorld, the accounts of InterWorld have been consolidated with J Net
beginning in May 2001. Because the net book value of InterWorld is a
deficit, the minority interest share of losses have been included in the
consolidated financial statements.
Note 4 - Pro Forma information:
Set forth in the following table is certain unaudited pro forma financial
information for each of the three months ended September 30, 2001 and 2000.
This information has been prepared assuming that J Net's acquisition of
InterWorld was consummated on July 1, 2000. Because J Net functioned
primarily as a holding company and InterWorld as an operating company at
the assumed date of acquisition date, no cost savings have been assumed in
the pro forma tables.
The pro forma statement of operations are for information purposes only and
they should not be interpreted to be indicative of the Company's
consolidated results of operations had the transaction actually occurred on
the assumed date and should not be used to project results for any future
date or period.
Three Months Ended September 30,
2001 2000
________ ________
(Dollars in thousands)
Revenues, net:
Product licenses $ 883 $ 5,944
Services 680 7,148
Maintenance 1,262 -
________ ________
Total revenues, net 2,825 13,092
________ ________
Cost of revenues:
Product licenses 146 670
Services 1,075 5,830
Maintenance 195 -
________ ________
Total cost of revenues 1,416 6,500
________ ________
Gross profit 1,409 6,592
Operating expenses:
Research and development 3,012 6,880
Sales and marketing 4,751 10,459
General and administrative 3,449 5,345
Restructuring and unusual charges 4,548 -
________ ________
Total operating expenses 15,760 22,684
________ ________
Loss from operations (14,351) (16,092)
________ ________
Other income (expense):
Interest and other income 718 1,263
Interest expense (567) (1,244)
Equity in income (loss) of internet-related
businesses - (1,786)
________ ________
Total other income (expense) 151 (1,767)
________ ________
Loss before income taxes (14,200) (17,859)
________ ________
Provision (benefit) for Federal income tax - (800)
________ ________
Loss from continuing operations (14,200) (17,059)
Income from discontinued operations,
net of tax - 132
________ ________
Net loss $(14,200) $(16,927)
======== ========
Basic and diluted loss per share:
Income (loss) from continuing operations $ (1.67) $ (1.90)
Income from discontinued operations - .01
________ ________
$ (1.67) $ (1.89)
======== ========
Weighted average common shares
outstanding - basic 8,524 8,975
======== ========
Note 5 - Loss per share:
Basic loss per share from continuing operations for the three months ended
September 30, 2001 and 2000 and diluted loss per share from continuing
operations for the three months ended September 30, 2001 and 2000 are
computed by dividing net loss from continuing operations by the weighted
average number of common shares outstanding for the respective period.
Since both the three month periods ended September 30, 2001 and 2000 had
losses from continuing operations, no potential common shares from the
assumed exercise of options have been included in the diluted loss per
share from continuing operations 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 for continuing operations (dollars
and shares in thousands, except per share data):
Three Months
Ended
September 30,
_________________
2001 2000
________ _______
Basic earnings (loss) per share from
continuing operations:
Earnings (loss):
Income (loss) available to common stockholders $(14,200) $(2,567)
======== =======
Shares:
Weighted average number of common shares
outstanding 8,524 8,975
======== =======
Basic earnings (loss) per share from continuing
operations $ (1.67) $ (.29)
======== =======
Diluted earnings (loss) per share:
Earnings (loss):
Income (loss) available to common shareholders $(14,200) $(2,567)
======== =======
Shares:
Weighted average number of common shares
outstanding 8,524 8,975
Weighted average number of common shares and
common share equivalents outstanding 8,524 8,975
======== =======
Diluted earnings (loss) per share from
continuing operations $ (1.67) $ (.29)
======== =======
Note 6 - Related party transactions:
In connection with the subordinated notes held by officers or employees
having a face value of $3,250,000, the Company has loaned $1,250,000 to
facilitate the purchase of the notes. The loans bear interest of 8% per
annum and are secured by the right, title and interest to those notes. The
loans and any accrued interest are due on June 30, 2002. The total
principal and accrued interest due on the loans was approximately $300,000
and $1,300,000 as of September 30, 2001 and 2000, respectively. On
September 28, 2001, pursuant to the settlement of the Put Agreement with
the Co-Presidents described in Note 3, the Company discharged the value of
the note with the Co-Presidents in exchange for the shares that were to
otherwise be issued under the Put Agreement.
Since February 2001, the Executive Vice President and Chief Financial
Officer of the Company has also served in a similar capacity at InterWorld.
The costs of the executive's employment are shared between J Net and
InterWorld on a time spent basis.
The Company and InterWorld have entered into a secured credit agreement
which allows InterWorld to draw up to a total of $20,000,000 in cash from J
Net, at the Company's discretion. The advances are secured by
the assets of InterWorld including intellectual property. Advances totaled
$12,350,000 as of September 30, 2001 and $14,600,000 as of October 31,
2001.
One director of J Net is a partner of a law firm that provides legal
services to the Company. Fees paid to that firm were not material for the
three months ended September 30, 2001. Management believes that fees
charged are competitive with fees charged by other law firms.
Three directors, entities controlled by those directors or adult children
of those directors have invested $7,000,000 in the convertible subordinated
notes issued by the Company. Officers and employees have invested either
directly or indirectly $2,750,000 in the notes as of September 30, 2001.
Notes totaling $3,000,000 owned by the Co-Presidents of the Fund are still
outstanding, but no longer classified as related party due to the
termination of the Co-Presidents in September 2001.
The Company foreclosed on assets securing a loan to Michael J. Donahue,
Vice Chairman and Chief Executive Officer of InterWorld on June 29, 2001.
The assets received in the foreclosure are presently for sale and have an
estimated net realizable value of $5,450,000.
The agreements entered into on June 29, 2001 also provided for the Company
to loan Mr. Donahue up to $800,000. The obligation has been recorded, but
no such loan has been made as of October 31, 2001.
Note 7 - Operating segments:
The Company has two reportable segments; InterWorld and J Net Technology-
elated Businesses. Prior to May 2001, the Company operated only in one
segment, J Net Technology-Related Businesses. J Net Technology-Related
Businesses include the effect of transactions and operations of the
Company's non consolidated investments, including InterWorld prior to the
acquisition of a majority of its outstanding common stock in May 2001. All
significant intersegment activity has been eliminated. Accordingly,
segment results reported exclude the effect of transactions between the
Company and its subsidiary. Assets are the owned assets used by each
operating segment.
Summary of Consolidated loss from Continuing Operations, net of tax
(dollars in thousands):
Three Months
Ended
September 30, 2001
__________________
Net loss:
InterWorld $ (9,546)
J Net Technology-Related Businesses (4,654)
________
Net loss $(14,200)
========
InterWorld Operations
_____________________
Revenue $ 2,825
Cost of sales (1,416)
Operating expenses
Research and development (3,012)
Sales (3,400)
Marketing alliances (1,351)
General and administrative (2,672)
Amortization of stock-based compensation (240)
________
Total operating expenses (10,675)
Other expense, net (280)
Net loss from InterWorld $ (9,546)
========
J Net Technology-Related Businesses
___________________________________
General and administrative, including
restructuring $ (5,085)
________
Total operating expenses (5,085)
Interest income 998
Interest expense (567)
________
Net loss from J Net Technology-Related
Businesses $ (4,654)
========
Assets
______
InterWorld $ 5,157
J Net Technology-Related Businesses 56,861
________
Total $ 62,018
========
Note 8 - Commitments and contingencies:
Financial instruments with concentration of credit risk:
The financial instruments that potentially subject J Net to concentrations
of credit risk consist principally of cash and cash equivalents. J Net
maintains cash and certain cash equivalents with financial institutions in
amounts which, at times, may be in excess of the FDIC insurance limits. J
Net's cash equivalents are invested in several high-grade securities which
limits J Net's exposure to concentrations of credit risk.
The Company owns short-term investments which are managed by Mariner as
described in Note 1. Mariner employs a multi-strategy approach which
emphasizes market-neutral and event driven styles. Such approach is
designed to mitigate risk inherent with market based investments. While
Mariner has consistently generated above average returns relative to hedge
fund industry benchmarks, such returns are subject to fluctuation in the
future.
The carrying value of certain of the Company's financial instruments,
including accounts receivable, accounts payable and accrued expenses
approximates fair value due to their short maturities. The unregistered
convertible subordinated notes are not traded in the open market and a
market price is not available. However, based on the Company's financial
position, management believes that the carrying value of such debt
approximates fair value.
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
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 Internet infrastructure companies and grow such businesses. The
ability of entities in which the Company has invested to raise additional
capital on terms which are acceptable to the Company, or other investors,
is critical in the ongoing success of such companies and obtaining
additional capital in markets which are performing poorly may be difficult
to obtain.
The Company, like many other businesses, is in the process of evaluating
the impact that the tragic events of September 11, 2001 will have on its
business. At this point in time it is too early to predict what the
economic and business consequences will be. At InterWorld, management has
indicated initial hesitancy on the part of clients and prospective clients
to move forward with new e-commerce initiatives. This could result in a
delay or reduction in revenue.
Overview
________
J Net Enterprises, Inc. (referred to hereinafter as "J Net" or the
"Company") is a technology holding company which conducts operations
through its InterWorld Corporation ("InterWorld") subsidiary. The Company
owns approximately 95% of the issued and outstanding stock of InterWorld
and also holds minority investments in other companies involved in
technology-related businesses.
InterWorld represents the most significant component of J Net's operations.
Due to its large ownership in InterWorld, Management has been actively
involved in exploring a number of strategic alternatives including, but not
limited to, seeking a strategic partner to provide additional capital,
pursuing a possible sale, or terminating InterWorld's business operations
entirely. Several prospects have been identified as possible partners or
acquirers for a portion of the Company's ownership in InterWorld. While
actual agreements are not in place, negotiations and business terms are
being explored. Definitive actions from these various strategic
alternatives are expected to occur during the fourth quarter of calendar
year 2001.
In addition to strategies specific to InterWorld, the Company has taken a
number of steps to improve its financial position and refine its cost
structure in the current economic environment. During the three months
ended September 30, 2001, the Company implemented or completed several
actions designed to lower costs and re-focus the business strategies.
Significant actions taken by the Company during the three months ended
September 30, 2001 included:
(1) Restructuring at InterWorld. The combination of continued economic
slowing during the quarter, the September 11, 2001 terrorist attacks
in New York City and Washington, D.C., and completion of software
enhancement projects, resulted in reduction in workforce from
approximately 260 employees at June 30, 2001 to approximately 90
employees at September 30, 2001. The existing staff level is adequate
to service the existing client base and create expansion as
opportunities arise. The staff level is subject to further
increases or decreases depending on the outcome of the strategic
alternatives being pursued for InterWorld.
(2) Suspension of minority investment strategy and fund management
business. These actions resulted in terminations of management
personnel performing services for investments held by J Net Ventures I
(the "Fund") and J Net Venture Partners LLC, the manager of the Fund.
The Company will continue to participate and manage investments
previously executed by the Fund, none of which have third party
participation.
(3) Consolidation of business locations. As a result of staff reductions
and increased demand for office space in the New York City area, the
Company has retained real estate professionals to assist in subletting
certain properties to further reduce overhead.
The business climate in the technology markets has continued to decline,
and estimates for the recovery of many of the businesses in which the
Company is involved with vary widely. Since the June 30, 2001 fiscal year
end, when the Company reported significant declines in market indices
related to technology-focused businesses, the markets have shown no
improvement. In fact, there are many indications that further
deterioration may occur. The Company is continuing to monitor its
activities closely given the economic environment and may take further
steps to control costs depending on the outcomes of the InterWorld
alternatives, the improvement (or deterioration) of the e-commerce software
market, or other external economic factors.
Results of Operations
_____________________
For the three months ended September 30, 2001, all revenues and cost of
revenues are attributable to the operations at InterWorld, a consolidated
subsidiary of J Net since May 2001.
Total revenues, net:
Total revenues were $2,825,000 for the three months ended September 30,
2001. There were no revenues for the three months ended September 30,
2000.
InterWorld revenues for the three months ended September 30, 2000, which
are not consolidated in the operating results, would have been $13,092,000.
The decrease in total revenues compared to the three months ended September
30, 2001 is due primarily to decreased sales of licenses and related
services.
Total cost of revenues:
Total cost of revenues were $1,416,000 and $0 for the three months ended
September 30, 2001 and 2000, respectively. For comparative purposes, the
cost of revenues for the three months ended September 30, 2000 would have
been $6,500,000 (which are not consolidated). As with the decline in
revenues mentioned above, the decrease from the three months ended
September 30, 2001 is attributable to fewer licenses and related services.
Operating expenses:
Total operating expenses were $15,760,000 for the three months ended
September 30, 2001 compared with $1,270,000 for the three months ended
September 30, 2000. Significant components contributing to the increase of
$14,490,000 included operating costs of InterWorld, which were $10,031,000
and $4,548,000 of restructuring and unusual charges. The operating costs
for the three months ended September 30, 2000 consisted principally of
general and administrative costs of J Net personnel.
Restructuring and unusual charges include restructuring expenses of
$644,000 consisting of severance and accrued vacation costs related to
staff reductions at InterWorld. An aggregate $2,204,000 relates to
contract settlements, including employment and cancellation of the Put
Agreement described in Note 3 of the condensed consolidated financial
statements, with the former Co-Presidents (the "Co-Presidents") of J Net
Venture Partners, LLC, the manager of J Net Ventures I fund. The remaining
$1,700,000 is related to impairment of leasehold improvements which the
Company does not believe it will recover as a result of subleasing certain
office space.
Other income (expense):
Other income was $151,000 for the three months ended September 30, 2001.
For the three months ended September 30, 2000, the Company recognized other
expenses of $2,097,000. The variance is due primarily to two factors:
equity in losses of technology-related businesses and interest expense.
There were no equity losses in technology-related businesses for the three
months ended September 30, 2001 while such losses were $1,786,000 for the
three months ended September 30, 2000. The reduced losses are due to the
Company's abandonment, sale, or full impairment of its investments where
the equity method of accounting was used during the fiscal year ended June
30, 2001.
Interest expense was $567,000 and $1,244,000 for the three months ended
September 30, 2001 and 2000, respectively. The difference of $677,000 is
due primarily to non-cash amortization of debt discount on the Company's
convertible subordinated notes, which were issued between June 2000 and
October 2000. There was no amortization of the discount for the three
months ended September 30, 2001. For specific details regarding the
convertible subordinated notes, refer to the Company's Annual Report on
Form 10-K for the year ended June 30, 2001.
Federal income taxes:
There is no federal income tax provision or benefit for the three months
ended September 30, 2001. All taxable transactions and temporary
differences for federal income taxes are offset by a reserve allowance.
Such allowances will continue to be provided until such time the Company
begins to generate operating income, if at all. For the three months ended
September 30, 2000, a federal income tax benefit of $800,000 was
recognized. Such benefit was attributable to the ability to utilize
capital loss and operating loss carrybacks to prior taxable years.
Discontinued operations:
Income, net of $86,000 of taxes from discontinued operations was $132,000
for the three months ended September 30, 2000. The discontinued operations
were sold in November 2000. Consequently, no such income was recognized
for the three months ended September 30, 2001.
Net loss:
The net loss for the three months ended September 30, 2001 was $14,200,000
compared to a loss of $2,435,000 for the three months ended September 30,
2000. The increased loss of approximately $12,000,000 is due primarily to
the operating losses of InterWorld and restructuring charges.
Capital Resources and Liquidity
_______________________________
Liquidity:
Total cash and short-term investments were $41,106,000 as of September 30,
2001 and $37,594,000 at October 31, 2001. Since March 2000, when the
Company changed its business strategy and decided to sell its gaming
operations, sources of cash have been solely from the discontinued
operations (for the period of March 2000 up to November 2000), the proceeds
received from the sale of the discontinued operations, and proceeds
received from the issuance of convertible subordinated notes.
InterWorld required approximately $3,000,000 per month to fund its
operations up to October 31, 2001. Since June 30, 2001, such funding is
provided by J Net under a $20,000,000 secured credit facility. J Net is
under no obligation to continue funding. Recent restructuring at
InterWorld will reduce the amount of cash required to continue funding to
approximately $1,200,000 per month beginning in November 2001. However,
increased sales are required for InterWorld to generate positive cash
flows. Cumulative advances under the credit facility were $12,350,000 as
of September 30, 2001 and $14,600,000 as of October 31, 2001. J Net's
total investment in InterWorld, including its initial $20,000,000 purchase
of preferred stock, is $34,600,000 as of October 31, 2001.
Because of the ongoing cash requirements of InterWorld, J Net is actively
seeking partners to assist with providing additional capital, evaluating a
sale of all or part of InterWorld, or ceasing business operations of
InterWorld entirely. Definitive actions from these various strategic
alternatives being evaluated are expected to occur during the fourth
quarter of calendar year 2001.
For the three months ended September 30, 2001, net cash used in operating
activities was $9,653,000. The use of cash was principally the ongoing
funding requirements for InterWorld of $9,350,000, restructuring costs and
working capital changes. Partially offsetting uses of cash was collection
of a tax refund of $2,723,000.
The Company expects to receive cash from the sale of assets received as a
result of foreclosure actions taken on a loan in June 2001. The estimated
amount to be received, net of selling expenses and carrying costs is
approximately $5,450,000. J Net also expects to receive additional refunds
of income taxes of approximately $3,800,000 which are the results of
carrybacks of large operating losses and capital losses incurred during the
fiscal year ended June 30, 2001.
Cash flows:
Net cash used in investing activities for the three months ended September
30, 2001 was $1,363,000, which was due primarily to the completion of a
prior funding commitment to the Company's minority investment in eStara,
Inc. of $1,333,000.
Recently Issued Accounting Standards:
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141, "Business
Combinations" ("SFAS 141") and Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 addresses
the initial recognition and measurement of goodwill and other intangible
assets acquired in a business combination. SFAS 142 addresses the initial
measurement and recognition of intangible assets acquired outside of a
business combination, whether acquired with a group of other assets or
acquired individually, and the accounting and reporting for goodwill and
other intangibles subsequent to their acquisition. These standards require
all future business combinations to be accounted for using the purchase
method of accounting. Goodwill will no longer be amortized but instead will
be subject to impairment test on an annual basis at a minimum. The Company
is required to adopt SFAS 141 and SFAS 142 on a go forward basis beginning
January 1, 2002; however, certain provisions of these new standards may
also apply to any acquisition made after June 30, 2001. As of September 30,
2001, the Company had no goodwill or other intangible assets due to
impairments or losses incurred on investments where goodwill had been
recorded. The adoption of SFAS 141 and SFAS 142 will be made as required
for future transactions. No significant impact of such adoption is expected
by the Company.
The FASB recently issued a final statement on asset impairment ("SFAS 144")
that is applicable to financial statements issued for fiscal years
beginning after December 15, 2001 (January 2002 for calendar year-end
companies). The FASB's new rules on asset impairment supercede FASB
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of", and provide a single accounting
model for long-lived assets to be disposed of.
Although retaining many of the fundamental recognition and measurement
provisions of Statement 121, the new rules significantly change the
criteria that would have to be met to classify an asset as held-for-sale.
This distinction is important because assets held-for-sale are stated at
the lower of their fair values or carrying amounts and depreciation is no
longer recognized.
The Company will adopt SFAS 144 as required and does not anticipate its
application to have a significant impact on the results of operations as
compared with practices in place today.
Factors Which May Affect Future Results
_______________________________________
With its change in business strategy, the Company is operating in a
significantly different environment involving a number of risks and
uncertainties. Some factors including, but not limited to the following,
may affect the Company's future results of operations: (1) the Company's
ability to successfully execute its new business model; (2) the development
of the Internet and the infrastructure that supports it; (3) the Company's
success may depend greatly on increased use of the Internet by businesses
and individuals; (4) the ability of the Company's investees to compete
against direct and indirect competitors; (5) the Company's ability to
acquire interests in additional Technology-Related Businesses; (6) the
ability of the Company's investees to raise additional capital; and (7)
changes in the market for securities of Technology-Related Businesses in
general and for initial public offerings of Internet companies in
particular.
By their very nature, the entities in which the Company has and may be
investing capital will be in an earlier stage of development and maturity,
and therefore a higher level of risk and reward. Except for the proposed
transactions with InterWorld (See Note 3 of Notes to Condensed Consolidated
Financial Statements), all of the Company's investments in Technology-
Related Businesses are in nonpublic companies. Substantially all such
companies are development stage companies and are presently incurring
operating losses. There can be no assurance that such companies will
generate operating income in the future.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
_________________________________________________________
The Company is generally exposed to market risk from adverse changes in
interest rates. The Company's interest income is affected by changes in
the general level of U.S. interest rates. Changes in U.S. interest rates
could affect interest earned on the Company's cash equivalents, debt
instruments and money market funds. A majority of the interest earning
instruments earns a fixed rate of interest over short periods (7-35 days).
Based upon the invested money market balances at September 30, 2001, a 10%
change in interest rates would change pretax interest income by
approximately $40,000 per year. Therefore, the Company does not anticipate
that exposure to interest rate market risk will have a material impact on
the Company due to the nature of the Company's investments.
The Company holds short-term investments with a value of $27,850,000 of
principal in Mariner Partners, L.P., a private investment fund. Mariner
employs a multi-strategy approach emphasizing a market neutral and event-
driven style to capitalize on investment opportunities across the financial
markets. Mariner's performance has historically generated above average
returns relative to hedge fund industry benchmarks. However, such returns
cannot be assured in the future. Based on the market value of the
investment in Mariner as of September 30, 2001 and the average return of
such investment for the previous six months, a 10% reduction in those
returns would reduce pretax income by approximately $275,000.
PART II. OTHER INFORMATION
_________________
Item 1. Legal Proceedings
On March 8, 2001, as amended on May 29, 2001, InterWorld received notice
that the Securities and Exchange Commission (the "Commission") commenced a
formal order directing a private investigation by the Commission with
respect to whether InterWorld engaged in violations of Federal Securities
Laws as it relates to InterWorld's financial statements, as well as its
accounting practices and policies. Also under review by the Commission is
certain trading in InterWorld stock. All the above events are related to
periods prior to the Company's common stock ownership in InterWorld.
The investigation is confidential and the Commission has advised that the
investigation should not be construed as an indication by the Commission or
its staff that any violation of law has occurred nor should the
investigation be construed as an adverse reflection on any person, entity
or security.
The investigation is ongoing and InterWorld is fully cooperating with the
Commission.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(b) Reports on Form 8-K:
During the three months ended September 30, 2001, no reports
were filed on Form 8-K.
Signature
_________
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
J NET ENTERPRISES, INC.
(Registrant)
By: /s/ Steven L. Korby
____________________________
STEVEN L. KORBY
Executive Vice President and
Chief Financial Officer
Date: November 14, 2001