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, 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 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 No x
____ ____
There were 8,524,552 shares of the Registrant's common stock outstanding as
of February 12, 2002.
J NET ENTERPRISES, INC. AND SUBSIDIARIES
INDEX
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited) -
December 31, 2001 and June 30, 2001
Condensed Consolidated Statements of Operations (Unaudited) -
Three and Six Months Ended December 31, 2001 and 2000
Condensed Consolidated Statement of Stockholders'
Equity (Unaudited) - Six Months Ended December 31, 2001
Condensed Consolidated Statement of Stockholders'
Equity (Unaudited) - Six Months Ended December 31, 2000
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Six Months Ended December 31, 2001 and 2000
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
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)
December 31, June 30,
ASSETS 2001 2001
______ ____________ ________
Current assets:
Cash and cash equivalents $ 6,183 $ 24,272
Short-term investments 28,427 27,381
Accounts receivable, net 102 1,532
Current portion of notes receivable -
related parties 404 1,288
Federal income taxes receivable 3,815 6,538
Assets held for sale 5,250 5,450
Other current assets 1,537 1,556
________ ________
Total current assets 45,718 68,017
________ ________
Investments in technology-related businesses 4,623 3,290
Property and equipment, net of accumulated
depreciation 423 4,010
Deferred tax asset 885 885
Other non-current assets 1,040 1,211
________ ________
Total assets $ 52,689 $ 77,413
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
____________________________________
Current liabilities:
Accounts payable and other current
liabilities $ 6,451 $ 7,699
Deferred revenue and customer deposits 1,625 3,122
________ ________
Total current liabilities 8,076 10,821
________ ________
Convertible subordinated notes 27,750 27,750
Deferred rent 221 356
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) (42,699) (20,795)
Less 1,708,918 shares of common stock
in treasury, at cost (16,054) (16,054)
Cumulative translation adjustment 43 (17)
________ ________
Total stockholders' equity 16,642 38,486
________ ________
Total liabilities and stockholders' equity $ 52,689 $ 77,413
======== ========
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, 2001 and 2000
(Dollars in thousands, except per share data)
(Unaudited)
Three Months Ended Six Months Ended
__________________ __________________
2001 2000 2001 2000
_______ ________ ________ ________
Revenues, net
Product licenses $ - $ - $ 883 $ -
Maintenance 897 - 2,159 -
Services 318 - 998 -
_______ ________ ________ ________
Total revenues, net 1,215 - 4,040 -
_______ ________ ________ ________
Cost of revenues:
Product licenses 254 - 400 -
Maintenance 98 - 293 -
Services 910 - 1,985 -
_______ ________ ________ ________
Total cost of revenues 1,262 - 2,678 -
_______ ________ ________ ________
Gross profit (loss) (47) - 1,362 -
Operating expenses:
Research and development 1,323 - 4,335 -
Sales 2,493 - 5,893 -
Marketing alliances 265 - 1,616 -
General and administrative 2,202 1,427 5,651 2,697
Restructuring charges and
impairments 1,824 9,805 6,372 9,805
_______ ________ ________ ________
Total operating expenses 8,107 11,232 23,867 12,502
_______ ________ ________ ________
Operating loss from continuing
operations (8,154) (11,232) (22,505) (12,502)
_______ ________ ________ ________
Other income (expense):
Interest and other income 726 1,107 1,444 2,040
Interest expense (566) (1,668) (1,133) (2,912)
Equity losses in technology-
related businesses - (3,017) - (4,803)
_______ ________ ________ ________
Total other income (expense) 160 (3,578) 311 (5,675)
_______ ________ ________ ________
Loss from continuing operations
before income tax (7,994) (14,810) (22,194) (18,177)
_______ ________ ________ ________
Federal Income tax benefit - (4,732) - (5,532)
_______ ________ ________ ________
Net loss from continuing
operations (7,994) (10,078) (22,194) (12,645)
Gain on sale of discontinued
operations, net of operating
results of $382 and $250, net of
tax, and $6,940 taxes from sale - 12,507 - 12,639
_______ ________ ________ ________
Net income (loss) $(7,994) $ 2,429 $(22,194) $ (6)
======= ======== ======== ========
Basic earnings (loss) per share:
Loss from continuing operations $ (.94) $ (1.12) $ (2.60) $ (1.41)
Income from discontinued
operations - 1.39 - 1.41
_______ ________ ________ ________
$ (.94) $ .27 $ (2.60) $ -
======= ======== ======== ========
Dilutive earnings (loss) per share:
Loss from continuing operations $ (.94) $ (1.12) $ (2.60) $ (1.41)
Income from discontinued
operations - 1.39 - 1.41
_______ ________ ________ ________
$ (.94) $ .27 $ (2.60) $ -
======= ======== ======== ========
See Notes to Condensed Consolidated Financial Statements.
J NET ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED DECEMBER 31, 2001
(Dollars and shares in thousands)
(Unaudited)
Accumu-
lated
Addi- Other
Common Stock tional Retained Treasury Stock Compre-
_____________ Paid-In Earnings ________________ hensive
Shares Amount Capital (Deficit) Shares Amount Income Totals
______ ______ _______ ________ ______ ________ _______ ________
Balance July 1, 2001 10,233 $102 $75,250 $(20,795) (1,709) $(16,054) $ (17) $ 38,486
Comprehensive loss:
Net loss (22,194) (22,194)
Cumulative translation
adjustment 60 60
________
Total comprehensive loss (22,134)
Amortization of employee
stock options 290 290
______ ____ _______ ________ ______ ________ _____ ________
Balance December 31, 2001 10,233 $102 $75,250 $(42,699) (1,709) $(16,054) $ 43 $ 16,642
====== ==== ======= ======== ====== ======== ===== ========
See Notes to Condensed Consolidated Financial Statements.
J NET ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED DECEMBER 31, 2000
(Dollars and shares in thousands)
(Unaudited)
Accumu-
lated
Addi- Other
Common Stock tional Treasury Stock Compre-
_____________ Paid-In Retained ________________ hensive
Shares Amount Capital Earnings Shares Amount Income Totals
______ ______ _______ ________ ______ ________ _______ ________
Balance July 1, 2000 10,233 $102 $73,875 $27,710 (1,259) $(13,777) $ - $87,910
Comprehensive loss:
Net income (loss) from
continuing operations (12,645) (12,645)
Gain on sale of discontinued
operations, net of tax 12,639 12,639
Other comprehensive
loss:
Comprehensive income
Repurchase of common stock (80) (405) (405)
Amount allocated to additional
paid-in capital in connection
with the issuance of the 8%
convertible subordinated
notes (See Note 2) 1,375 1,375
______ ____ _______ ________ ______ ________ _____ ________
Balance December 31, 2000 10,233 $102 $75,250 $ 27,704 (1,339) $(14,182) $ - $88,874
====== ==== ======= ======== ====== ======== ===== ========
Disclosure of reclassification amount:
Unrealized loss for the three
months ended September 30, 2000 $(235)
Less reclassification adjustment
for loss included in net loss
for the three months ended
December 31, 2000 235
____
Comprehensive loss as of
December 31, 2000 $ -
====
See Notes to Condensed Consolidated Financial Statements.
J NET ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED DECEMBER 31, 2001 AND 2000
(Dollars in thousands)
(Unaudited)
2001 2000
________ ________
Operating activities:
Net loss $(22,194) $ (6)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Equity in loss of technology-related businesses - 4,803
Non-cash impairment charges 2,908 8,665
Gain from discontinued operations, net of
$6,940 taxes - (12,639)
Amortization of stock-based compensation 290 -
Depreciation and amortization 471 224
Amortization of original issue discount - 2,034
Loss on disposal of assets 271 -
Deferred income tax benefit - (3,137)
Changes in assets and liabilities:
Decrease in federal income taxes receivable 2,723 -
Decrease in accounts receivable 1,430 -
Increase in marketable securities (1,046) -
Decrease (increase) in prepaid expenses and
other current assets 238 (450)
Decrease (increase) in notes receivable -
related parties 1,009 (47)
Decrease (increase) in other non-current assets 171 (286)
(Decrease) increase in accounts payable and
other current liabilities (1,248) 892
Decrease in deferred revenue and customer deposits (1,497) -
Decrease in deferred rent (135) -
Decrease in current tax liability, net of
taxes related to discontinued operations - (2,616)
Other, net 60 -
________ ________
Net cash used in operations (16,549) (2,563)
________ ________
Investing activities:
Investments in technology-related businesses (1,333) (29,847)
Investments in notes receivable (125) (12,446)
Investment in marketable securities - (15,444)
Net proceeds from discontinued operations - 35,906
Purchases of property and equipment (82) (1,401)
________ ________
Net cash used in investing activities (1,540) (23,232)
Financing activities:
Proceeds from issuance of convertible subordinated
notes - 12,250
Purchases of treasury stock - (405)
________ ________
Net cash provided by financing activities - 11,845
________ ________
Net decrease in cash and cash equivalents (18,089) (13,950)
Cash and cash equivalents at beginning of period 24,272 60,090
________ ________
Cash and cash equivalents at end of period $ 6,183 $ 46,140
======== ========
Supplemental disclosures of cash flow data:
Cash paid during the period for:
Interest paid $ 1,119 $ 968
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 $ -
Uncollected proceeds from sale of fixed assets $ 219 $ -
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 the outstanding equity securities 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.
The Company has been seeking partners and evaluating other strategic
alternatives specific to InterWorld. During the six month period ended
December 31, 2001, InterWorld took significant steps to continue reducing its
cost structure which included reduction in its workforce, terminating
business operations in foreign countries and negotiating releases from costly
lease obligations. J Net is also a senior secured creditor of InterWorld
and has a priority claim on its assets. Although, for accounting purposes,
InterWorld's liabilities and debts are consolidated, as separate legal
entities, J Net is not liable for the liabilities and debts of InterWorld.
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-Related
Businesses and the significance of the InterWorld operations, J Net has
suspended its minority investment strategy conducted through Ventures I 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 subsidiaries. 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 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 December 31, 2001, the results of its operations for
the three and six months ended December 31, 2001 and 2000 and its cash flows
for the six months ended December 31, 2001 and 2000. The results for the six
months ended December 31, 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 2001 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 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
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:
In October and November 2000 and January 2001, the Company invested a total
of $25.4 million 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 percent 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 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 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.
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 December 31, 2001, the Company had no goodwill or
other intangible assets due to previous 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 gaming
machine route operations ("Route Operations"). The sale, which was subject
to regulatory approvals and other customary closing conditions, was completed
on November 22, 2000. Because of the change to technology-related investing
and the sale, the results of the Route Operations are presented as
discontinued operations.
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. On September 28, 2001, 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 $1.6 million of
consideration. A portion of such consideration equal to $1.0 million was
used to offset a loan from the Company to the former Co-Presidents. As a
result, the entire $1.6 million 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. In October 2001, eStara acquired a
division of ITXC, a publicly traded company, for stock representing 19.9%
ownership in eStara. Recent operating results have improved as a result of
this acquisition. In addition, eStara has taken steps to reduce its cash
burn to $.3 million per month. As of January 31, 2002, eStara estimates it
has adequate funds to operate at existing levels for approximately 4-5
months. Although eStara will likely seek additional financing, there is no
assurance such financing will be obtained. Management believes that the
carrying value represents the fair market value as of December 31, 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 six months ended December 31, 2001. In December 2001,
Tellme announced the launch of the first voice activated 511 traveler
information line. Such service will be launched by Department of
Transportation agencies on a state-by-state basis. The 511 service is
available throughout the state of Utah and will feature services during the
2002 Winter Olympic Games beginning in February 2002. Based on Tellme's
positive financial condition, its current and projected cash utilization and
continued positive operating developments, Management believes the original
$2,000,000 investment represents the fair market value as of December 31,
2001.
The following table sets forth the acquisition cost for the Company's
investments and the related activity of each active investment for the six
months ended December 31, 2001 (dollars in thousands):
Net Carrying value
balance at as of
6/30/01 Additions Impairments December 31, 2001
__________ _________ ___________ _________________
eStara, Inc. $1,290 $1,333 $ - $2,623
Tellme Networks 2,000 - - 2,000
______ ______ _____ ______
Totals $3,290 $1,333 $ - $4,623
====== ====== ===== ======
J Net owns 95.3% of the outstanding equity securities of InterWorld and
is presently funding InterWorld up to $20 million under a under a senior
secured credit facility. Advances, which total $16.8 million as of January
31, 2002, 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. No material additional funding is expected.
From the time the Company began funding the operations of InterWorld through
October 31, 2001, InterWorld required approximately $3.0 million per month to
fund its operations. As a result of restructuring, the cash burn rate was
reduced to approximately $1.2 million per month beginning in November 2001
and further reduced in December 2001 to approximately $.4 million per month.
As of December 31, 2001, the Company had funded $16.6 million in principal
under the aforementioned promissory note and had funded $16.8 million by
January 31, 2002. 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 December 31, 2001, InterWorld
continued to incur operating losses and without continued funding, there
remains substantial doubt about InterWorld continuing as a going concern.
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 with which to form a marketing
alliance and/or to provide additional capital, pursuing a possible sale, or
terminating InterWorld's business operations entirely. Negotiations are
underway with several different third parties, and the Company expects to
reach a definitive agreement during the next fiscal quarter.
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 and six months ended December 31, 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. Information for the three and six months ended December
31, 2001 reflects actual operating results since J Net began consolidating
InterWorld in May 2001.
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.
Condensed Consolidated Pro forma Statement of Operations
(dollars in thousands, except per share data)
Three Months Ended Six Months Ended
__________________ __________________
2001 2000 2001 2000
_______ ________ ________ _______
Revenues $ 1,215 $ 6,197 $ 4,040 $ 19,289
Cost of revenues 1,262 5,585 2,678 12,085
_______ ________ ________ ________
Gross profit (loss) (47) 612 1,362 7,204
Operating expenses 6,283 32,752 17,495 55,436
Restructuring and unusual charges 1,824 - 6,372 -
_______ ________ ________ ________
Total operating expenses 8,107 32,752 23,867 55,436
_______ ________ ________ ________
Loss from operations (8,154) (32,140) (22,505) (48,232)
Other income (expense) 160 (3,169) 311 (4,936)
_______ ________ ________ ________
Net loss before income tax (7,994) (35,309) (22,194) (53,168)
Income tax benefit - (4,732) - (5,532)
_______ ________ ________ ________
Net loss $(7,994) $(30,577) $(22,194) $(47,636)
======= ======== ======== ========
Basic loss per share $ (.94) $ (3.41) $ (2.60) $ (5.31)
======= ======== ======== ========
Note 5 - Loss per share:
Basic loss per share for the three and six months ended December 31, 2001 and
basic loss per share from continuing operations for the three and six months
ended December 31, 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 and six month periods ended
December 31, 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 Six Months
Ended Ended
December 31, December 31,
_________________ __________________
2001 2000 2001 2000
_______ ________ ________ ________
Basic earnings (loss) per share
from continuing operations:
Earnings (loss):
Income (loss) available to
common stockholders $(7,994) $(10,078) $(22,194) $(12,645)
======= ======== ======== ========
Shares:
Weighted average number of
common shares outstanding 8,525 8,974 8,525 8,974
======= ======== ======== ========
Basic earnings (loss) per share
from continuing operations $ ( .94) $ (1.12) $ (2.60) $ (1.41)
======= ======== ======== ========
Diluted earnings (loss) per share:
Earnings (loss):
Income (loss) available to common
shareholders $(7,994) $(10,078) $(22,194) $(12,645)
======= ======== ======== ========
Shares:
Weighted average number of common
shares outstanding 8,525 8,974 8,525 8,974
======= ======== ======== ========
Weighted average number of common
shares and common share
equivalents outstanding 8,525 8,974 8,525 8,974
======= ======== ======== ========
Diluted earnings (loss) per share
from continuing operations $ ( .94) $ (1.12) $ (2.60) $ (1.41)
======= ======== ======== ========
Note 6 - Related party transactions:
Certain officers and employees hold subordinated notes with a face value of
$750,000 as of December 31, 2001. The Company has loans to officers and
employees which total $375,000. The loans bear interest of 8% per annum and
are secured by the right, title and interest to those notes. The loans and
accrued interest are due on June 30, 2002. The total principal and interest
on the loans as of December 31, 2001 was $404,000.
In January 2002, an employee of the Company with a loan of $125,000
terminated his employment. There were no revisions to the terms contained in
the original loan, which remains due on June 30, 2002. The loan remains
secured by the former employee's subordinated note.
In September 2001, pursuant to the exercise of the Put Agreement described in
Note 3, the Company discharged a $1.0 million note to former employees in
exchange for the shares that were otherwise to 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 $16.6 million
as of December 31, 2001 and $16.8 million as of January 31, 2002.
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 six months
ended December 31, 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 December 31, 2001.
Notes totaling $3,000,000 owned by the former 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 $5.3 million.
The agreements entered into on June 29, 2001 also provided for the Company to
loan Mr. Donahue up to $800,000. An obligation of $600,000 has been
recorded, but no such loan has been made as of December 31, 2001.
Note 7 - Operating segments:
The Company has two reportable segments; InterWorld and J Net Technology-
Related 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.
For the six months ended December 31, 2000, the Company operated in only one
business segment, J Net Technology-Related Businesses. Consequently, no
comparative information is provided.
Summary of Consolidated loss from Continuing Operations, net of tax (dollars
in thousands):
Three Months Six Months
Ended Ended
December 31, 2001 December 31, 2001
_________________ _________________
Net loss:
InterWorld Operations $(7,297) $(16,843)
J Net Technology-Related Businesses (697) (5,351)
_______ ________
Net loss (7,994) (22,194)
InterWorld Operations
Revenues $ 1,215 $ 4,040
Cost of revenues 1,262 2,678
_______ ________
Gross profit (loss) (47) 1,362
Operating expenses 6,680 17,355
Other income (expense) (570) (850)
_______ ________
Net loss from InterWorld $(7,297) $(16,843)
======= ========
J Net Technology-Related Businesses
Total operating expenses $ 1,427 $ 6,512
Other income 730 1,161
_______ ________
Net loss from J Net Technology-Related
Businesses $ (697) $ (5,351)
======= ========
As of
December 31, 2001
_________________
Assets
InterWorld $ 1,159
J Net Technology-Related Businesses 51,530
________
Total $ 52,689
========
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.
Note 9 - Restructuring Charges
Beginning with its 2002 fiscal year, the Company began a restructuring
process. Objectives of the restructuring plans were to reduce operating
costs in light of the sluggish technology environment and weak economic
conditions. Between July 1, 2001 and December 31, 2001, the employees at
J Net and its InterWorld subsidiary were reduced from a total of
approximately 270 employees to 30 employees. In addition to reduction in
workforce, office space was either subleased or relocated. The costs for
such restructuring include $1.8 million of severance, of which $1.5 million
has been paid, $1.6 million in contract settlements and cancellations
and $3.0 million of non-cash charges associated with the abandonment of
leasehold improvements at office locations.
Item 2. Management's Discussion and Analysis of Financial Condition and
_______________________________________________________________
Results of Operations
_____________________
Forward-Looking Statements; Risks and Uncertainties
___________________________________________________
Certain information included in this Form 10-Q and other materials filed or
to be filed by J Net Enterprises, Inc. ("J Net" or the "Company") with
the Securities and Exchange Commission 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 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 Corporation ("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 is a technology holding company which conducts operations through its
InterWorld subsidiary. The Company owns approximately 95% of the outstanding
equity securities 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 with which to form a marketing
alliance and/or to provide additional capital, pursuing a possible sale, or
terminating InterWorld's business operations entirely. Negotiations are
underway with several different third parties, and the Company expects to
reach a definitive agreement during the next fiscal quarter.
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
December 31, 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 December 31, 2001
included:
(1) Restructuring at InterWorld. In response to the continued economic
slowdown, sluggish e-commerce sales during the quarter, the September
11, 2001 terrorist attacks in New York City and Washington, D.C. and
completion of software enhancement projects, the workforce was reduced
from approximately 90 employees at September 30, 2001 to approximately
30 employees at December 31, 2001. Management believes this 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.
Additionally, InterWorld negotiated a release from all lease obligations
at its 395 Hudson Street office in New York City, including forgiveness
of certain past due expenses. In January 2002, InterWorld relocated its
offices to less expensive facilities under a short term lease
commitment.
In November and December 2001, InterWorld also ceased conducting
business operations in Australia and the United Kingdom. The existing
customers will continue to be serviced from the United States.
In Japan, InterWorld's subsidiary operations were sold to the local
reseller agent in exchange for a 40% royalty on any future licensing
sales. Primary support will be provided by Japan at no cost to
InterWorld. Technical support will be provided by the United States.
As a result of these actions, monthly operating expenses at InterWorld
have been reduced to approximately $.4 million per month beginning
January 2002.
(2) Restructuring at J Net. During the three months ended December 31,
2001, the Company also reduced its cost structure. Staff at J Net's New
York City office were terminated and in January 2002 a sublease
agreement at the 680 5th Avenue location was executed. While J Net
remains obligated under the original terms of its lease, the sublease is
expected to result in a cash neutral result. The sublease transaction
resulted in the Company writing off certain unrecoverable leasehold
improvements which resulted in a one time charge reported as a
restructuring expense.
The business climate in the technology markets has continued to experience
slow growth, and estimates for the recovery of many of the businesses with
which the Company is involved vary widely. 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.
Three Months Ended December 31, 2001 and 2000:
Results of Operations
_____________________
The Company's investment in InterWorld was carried as an equity investment
from November 2000 through April 2001. For the three months ended December
31, 2000, InterWorld's loss is reported using the equity method of accounting
and appears on the condensed consolidated statement of operations as a
component of other income (expense). Beginning in May 2001, the Company
began consolidating InterWorld's operating results into the Company's
condensed consolidated statement of operations.
Total revenues:
Consolidated revenues were $1.2 million for the three months ended December
31, 2001. For the three months ended December 31, 2000, J Net did not
consolidate InterWorld's operations resulting in no reported revenue. On a
pro forma basis, total revenues for the quarter ended December 31, 2000 would
have been $6.2 million, reflecting a decrease of $5.0 million, or
approximately 80%. Such decrease is due to the decline in sales of
e-commerce products which began in the year 2000.
In January 2002, InterWorld sold one license of its Commerce Exchange 5.0
product.
Total cost of revenues:
Cost of revenues, all of which are related to InterWorld operations, were
$1.3 million for the three months ended December 31, 2001. As previously
noted, InterWorld did not become a consolidated subsidiary until May 2001.
Consequently, the reported cost of revenues for the three months ended
December 31, 2000 are zero. On a pro forma basis, the total cost of
revenues were $5.6 million for the three months ended December 31, 2000. The
primary cause of the decrease in the period is due to substantial reductions
in InterWorld's workforce between December 31, 2000 and December 31, 2001.
Operating expenses:
Total operating expenses were $8.1 million for the three months ended
December 31, 2001 compared to $11.2 million for the three months ended
December 31, 2000. The overall decrease of $3.0 million is due to
a decrease in restructuring and impairments of $8.0 million, lower J Net
expenses of $.4 million and a partial offset by InterWorld expenses of
$5.3 million.
Restructuring and impairments were $1.8 million for the three months ended
December 31, 2001 compared to $9.8 million for the three months ended
December 31, 2000. The three months ended December 31, 2001 charges consist
of severance costs totaling $.6 million and $1.2 in million write-offs of
leasehold improvements associated with the subleasing and abandonment of
lease obligations at the Company's 680 5th Avenue and 395 Hudson Street
locations in New York City. For the three months ended December 31, 2000,
the comparable charges of $9.8 million consisted of impairment provisions to
J Net's technology-related business investments, and $1.1 million in
severance associated with the sale of the gaming machine route
operations ("Route Operations").
Other income (expense):
For the three months ended December 31, 2001, the Company had other income of
$.2 million compared with other expenses of $3.6 million in the prior years
quarter. The December 31, 2000 expenses included $3.0 million of losses
recognized on the Company's investment accounted for under the equity method.
The equity loss included a $1.1 million loss attributable to InterWorld's
operations. There were no equity method losses for the three months ended
December 31, 2001. Interest expenses decreased to $.6 million for the three
months ended December 31, 2001 from $1.6 million in the prior year due to non
cash amortization of original issue debt discount of $.9 million. Interest
income also decreased to $.7 million from $1.1 million during the three
months ended December 31, 2001 and 2000 due primarily to lower cash balances
and lower overall interest rates.
Federal income taxes:
There is no federal income tax provision or benefit for the three months
ended December 31, 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 and six months ended December 31,
2000, a federal income tax benefit from continuing operations of $4.7 million
and $5.5 million, respectively, was recognized. Such benefit was
attributable to the ability to utilize loss carrybacks to prior taxable
years.
Discontinued operations:
In November 2000, the Company completed the sale of its Route Operations and
recognized a gain of $12.6 million after a tax provision of $6.9 million.
Financial results from the Route Operations were reported as discontinued
operations beginning in the fiscal year 2001, when the Company changed its
business strategy to technology-focused investments.
Net loss from continuing operations:
The net loss of $8.0 million for the three months ended December 31, 2001
compared to a loss of $10.1 million in the prior quarter reflects an
improvement of $2.0 million and is a result of the variances previously
discussed.
Six Months Ended December 31, 2001 and 2000:
Results of Operations
_____________________
The Company's investment in InterWorld was carried as an equity investment
from November 2000 through April 2001. For the six months ended December 31,
2000, InterWorld's loss is reported using the equity method of accounting and
appears on the condensed consolidated statement of operations as a component
of other income (expense). Beginning in May 2001, the Company began
consolidating InterWorld's operating results into the Company's condensed
consolidated statement of operations.
Total revenues:
For the six months ended December 31, 2001, revenues totaled $4.0 million and
$0 for the six months ended December 31, 2000 due to InterWorld not being a
consolidated subsidiary at the end of the 2000 reporting period. On a pro
forma basis, revenues declined to $4.0 million from $19.3 million for the six
months ended December 31, 2001 and 2000, respectively. The declines in pro
forma revenues reflect substantial reductions in license sales and related
services combined with reduced maintenance receipts. Maintenance receipts
decreases contain a substantial decline due to the financial condition of
"dot com" customers.
Total cost of revenues:
Cost of revenues, all of which are attributable to InterWorld, were $2.7
million for the six months ended December 31, 2001 and $0 for the six months
ended December 31, 2000 due to InterWorld not being a consolidated subsidiary
at the end of the 2000 reporting period.
Operating expenses:
Consolidated operating expenses were $24.0 million and $12.5 million,
respectively, for the six months ended December 31, 2001 and 2000. Increases
for the consolidated results reflect InterWorld expenses of $17.4 million for
the six months ended December 31, 2001 which are partially offset by lower J
Net Technology-Related Businesses costs. The pro forma operating expenses
were $24.0 million and $55.4 million, respectively, for the six months ended
December 31, 2001 and 2000.
Expenses for the J Net technology-related business segment were $6.5 million
for the six months ended December 31, 2001 compared with $12.5 million for
the six months ended December 31, 2000. The six months ended December 31,
2001 include unusual charges of $4.3 million which include cost of leasehold
improvement abandonments of approximately $2.0 million, severance pay of $.6
million and $1.6 million of cost associated with cancellation of a Put
Agreement and corresponding Call Agreement discussed in Note 3 to the
Condensed Consolidated Financial Statements. The six months ended December
31, 2000 include unusual charges of $9.8 million which reflect impairments to
the carrying value of certain investments in the J Net technology-related
business portfolio of $8.7 million and $1.1 million of severance associated
with the sale of the Route Operations.
In the InterWorld business segment, pro forma operating costs totaled $17.4
million for the six months ended December 31, 2001 compared with $42.9
million for the six months ended December 31, 2000. The primary cause of the
decrease is attributable to lower personnel costs.
Other income (expense):
Other income and expenses include earnings from the Company's cash and short
term investments, interest expense for the Company's convertible subordinated
notes and losses from investments accounted for using the equity method of
accounting.
Six Months Ended December 31,
(dollars in thousands)
____________________________________
2001 2000 Increase/(Decrease)
_______ _______ __________________
Interest income $ 1,444 $ 2,040 $ (596)
Interest expense (1,133) (2,912) 1,779
Equity losses - (4,803) 4,803
_______ _______ ______
Total other income (expense) $ 311 $(5,675) $5,986
======= ======= ======
The higher interest expenses in FY2000 is attributable to non-cash discount
amortization on the subordinated notes. There was no such amortization for
the six months ended December 31, 2001. See the Company's Annual Report on
Form 10-K for the fiscal year ended June 30, 2001 for additional details on
the Company's convertible subordinated notes.
There are no equity losses for the six months ended December 31, 2001. For
the six months ended December 31, 2000, equity losses include a $1.1 million
loss attributable to J Net's original investment in InterWorld. Beginning in
May 2001, J Net acquired a controlling interest in InterWorld and the results
are now consolidated. All other investments for which the equity method of
accounting was used for the six months ended December 31, 2000 have either
been written off or sold.
Net loss from continuing operations:
The consolidated net loss from continuing operations was $22.2 million for
the six months ended December 31, 2001 compared to a loss of $12.6 million
for the six months ended December 31, 2000. The increased loss is due
primarily to the inclusion of InterWorld's operating losses of $16.8 million
and reduced federal tax benefit of $5.5 million. Partially offsetting these
increased losses are the reductions in J Net Technology-Related Businesses
operating expenses of $6.0 million and reductions in other expenses of $6.0
million.
Discontinued operations:
In November 2000, the Company completed the sale of its Route Operations and
recognized an after tax gain of $12.6 million after a tax provision of $6.9
million. Financial results from the Route Operations were reported as
discontinued operations beginning in the fiscal year 2000, when the Company
changed its business strategy to technology-focused investments.
Net loss:
Net losses were $22.2 million for the six months ended December 31, 2001
compared to a net loss of $6 thousand for the six months ended December 31,
2001. The increased losses are due to the variances discussed in the net
losses from continuing operations offset by the gain in the six months ended
December 31, 2001 contained in the discontinued operations.
Capital Resources and Liquidity
_______________________________
Liquidity:
Total cash and short-term investments were $34.6 million as of December 31,
2001 and $34.1 million at January 31, 2002. Since March 2000, when the
Company changed its business strategy and decided to sell its Route
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 $3.0 million per month to fund its
operations up to October 31, 2001. Since May 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. Ongoing restructuring at InterWorld reduced
the amount of cash required to approximately $1.2 million per month in
November 2001 and further decreased cash requirements to approximately $.4
million beginning in January 2002. However, increased sales are required for
InterWorld to generate positive cash flows. In January 2002, InterWorld sold
a significant license with related professional services. In addition, a
substantial amount of the annual fees for renewals of maintenance on existing
licenses are being billed during the next fiscal quarter. Collection of
these accounts are important to the ongoing viability of InterWorld.
Cumulative advances under the credit facility were $16.4 million as of
December 31, 2001 and $16.8 million as of January 31, 2002. J Net's total
investment in InterWorld, including its initial $20.0 million purchase of
preferred stock, is $36.8 million as of January 31, 2002.
Because of the ongoing cash requirements of InterWorld, J Net is considering
various strategic alternatives, including, but not limited to, actively
seeking partners with which to form a marketing alliance and/or to provide
additional capital, evaluating a sale of all or part of InterWorld, or
ceasing the business operations of InterWorld entirely. The Company expects
to take definitive action related to these alternatives during the next
fiscal quarter.
For the three months ended December 31, 2001, net cash used in operating
activities was $16.5 million. The use of cash was principally the ongoing
funding requirements for InterWorld of $13.4 million, cash restructuring
costs of $3.0 million and working capital changes. Partially offsetting
uses of cash was collection of a tax refund of $2.7 million.
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 $5.3 million. J Net also expects to receive additional refunds
of income taxes of approximately $3.8 million which are the results of
carrybacks of operating losses and capital losses incurred during the fiscal
year ended June 30, 2001.
Cash flows:
Net cash used in investing activities for the six months ended December 31,
2001 was $1.3 million, which was due primarily to the completion of a prior
funding commitment to the Company's minority investment in eStara, Inc.
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 December 31, 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) 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 operations of
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 December 31, 2001, a 10% change in interest
rates would change pretax interest income by approximately $12 thousand per
year. Therefore, the Company does not anticipate that exposure to interest
rate market risk will have a material impact on the Company due to the nature
of the Company's investments.
The Company holds short term investments with a value of $28.4 million 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 December 31, 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 $300,000.
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.
The Company is a party to other claims, legal actions and complaints arising
in the ordinary course of business. Management believes that its defenses
are substantial and that J Net's legal position can be successfully defended
without material adverse effect on its consolidated financial statements.
Other Information
_________________
In December 2001, the Company was notified by the New York Stock Exchange
("NYSE") that the Company was "below criteria" for continued listing
standards. The notification served as official notice by the NYSE of non-
compliance with total market capitalization of not less than $50 million over
a 30-day trading period and stockholders' equity of not less than $50
million. The Company is in the process of preparing a business plan for
submission to the NYSE which demonstrates how the Company plans to achieve
compliance over the next 18 months.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(b) Reports on Form 8-K:
During the six months ended December 31, 2001, the Company filed one
report on Form 8-K.
(i) November 30, 2001 on Form 8-K, Item 5, the Company reported
significant reductions in the workforce at InterWorld Corporation
and the pursuit of strategic alternatives.
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: February 14, 2002