-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RmypCjbkozY8M7kuFYRM999vho3IsI58N8nH4HXv3bSTED1RR5rmiClht1Qc5SIJ SiGqklnMA2o3SVR+WhJ4nA== 0000351903-02-000020.txt : 20020515 0000351903-02-000020.hdr.sgml : 20020515 20020515170549 ACCESSION NUMBER: 0000351903-02-000020 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: J NET ENTERPRISES INC CENTRAL INDEX KEY: 0000351903 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISCELLANEOUS AMUSEMENT & RECREATION [7990] IRS NUMBER: 880169922 STATE OF INCORPORATION: NV FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09728 FILM NUMBER: 02653563 BUSINESS ADDRESS: STREET 1: 8750 N CENTRAL EXPRESSWAY 600 CITY: DALLAS STATE: TX ZIP: 75231 BUSINESS PHONE: 7022635555 MAIL ADDRESS: STREET 1: 8750 N CENTRAL EXPRESSWAY 600 CITY: DALLAS STATE: TX ZIP: 75231 FORMER COMPANY: FORMER CONFORMED NAME: JACKPOT ENTERPRISES INC DATE OF NAME CHANGE: 19920703 10-Q 1 mar3102.txt 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 March 31, 2002 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 May 13, 2002. J NET ENTERPRISES, INC. AND SUBSIDIARIES INDEX Part I. Financial Information Item 1. Financial Statements Condensed Consolidated Balance Sheets (Unaudited) - March 31, 2002 and June 30, 2001 Condensed Consolidated Statements of Operations (Unaudited) - Three and Nine Months Ended March 31, 2002 and 2001 Condensed Consolidated Statement of Stockholders' Equity (Unaudited) - Nine Months Ended March 31, 2002 and 2001 Condensed Consolidated Statements of Cash Flows (Unaudited) - Nine Months Ended March 31, 2002 and 2001 (Unaudited) 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) March 31, June 30, ASSETS 2002 2001 ______ _________ ________ Current assets: Cash and cash equivalents $ 7,864 $24,272 Short-term investments 29,257 27,381 Accounts receivable, net 182 1,532 Current portion of notes receivable - related parties 282 1,288 Notes receivable - trade 129 - Federal income taxes receivable - 6,538 Current portion of deferred tax asset 1,219 - Assets held for sale 5,250 5,450 Other current assets 822 1,556 _______ _______ Total current assets 45,005 68,017 Investments in technology-related businesses 4,628 3,290 Property and equipment, net of accumulated depreciation 220 4,010 Deferred tax asset - 885 Other non-current assets 830 1,211 _______ _______ Total assets $50,683 $77,413 ======= ======= See Notes to Condensed Consolidated Financial Statements. J NET ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in thousands) (Unaudited) (Concluded) March 31, June 30, LIABILITIES AND STOCKHOLDERS' EQUITY 2002 2001 ____________________________________ _________ ________ Current liabilities: Accounts payable and other current liabilities $ 5,135 $ 7,699 Deferred revenue and customer deposits 2,043 3,122 ________ ________ Total current liabilities 7,178 10,821 ________ ________ Convertible subordinated notes 27,750 27,750 Deferred rent 219 356 Other non-current liabilities 212 - 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) (44,019) (20,795) Less 1,708,918 shares of common stock in treasury, at cost (16,054) (16,054) Cumulative translation adjustment 45 (17) ________ ________ Total stockholders' equity 15,324 38,486 ________ ________ Total liabilities and stockholders' equity $ 50,683 $ 77,413 ======== ======== See Notes to Condensed Consolidated Financial Statements. J NET ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS THREE AND NINE MONTHS ENDED MARCH 31, 2002 and 2001 (Dollars in thousands, except per share data) (Unaudited) Three Months Ended Nine Months Ended __________________ _________________ 2002 2001 2002 2001 _______ ________ ________ ________ Revenues, net Product licenses $ 10 $ - $ 893 $ - Maintenance 620 - 2,779 - Services - - 998 - _______ ________ ________ ________ Total revenues, net 630 - 4,670 - _______ ________ ________ ________ Cost of revenues: Product licenses - - 400 - Maintenance 14 - 307 - Services 42 - 2,027 - _______ ________ ________ ________ Total cost of revenues 56 - 2,734 - _______ ________ ________ ________ Gross profit 574 - 1,936 - Operating expenses: Research and development 404 - 4,739 - Sales 26 - 5,919 - Marketing alliances - - 1,616 - General and administrative 2,038 1,707 7,689 4,404 Restructuring charges and impairments (156) 9,630 6,216 19,435 _______ ________ ________ ________ Total operating expenses 2,312 11,337 26,179 23,839 _______ ________ ________ ________ Operating loss from continuing operations (1,738) (11,337) (24,243) (23,839) _______ ________ ________ ________ Other income (expense): Interest and other income 974 2,026 2,418 4,066 Interest expense (556) (1,660) (1,689) (4,572) Equity losses in technology- related businesses - (14,623) - (19,426) _______ ________ ________ ________ Total other income (expense) 418 (14,257) 729 (19,932) _______ ________ ________ ________ Loss from continuing operations before income tax (1,320) (25,594) (23,514) (43,771) _______ ________ ________ ________ Federal income tax benefit - (2,823) - (8,355) _______ ________ ________ ________ Net loss from continuing operations (1,320) (22,771) (23,514) (35,416) Gain on sale of discontinued operations, net of operating results during the period of $0 and $(250), net of tax and $0 and $6,711 tax from gain on sale for nine months ended - 137 - 12,776 _______ ________ ________ ________ Net loss $(1,320) $(22,634) $(23,514)$(22,640) ======= ======== ======== ======== Basic earnings (loss) per share: Loss from continuing operations $ (.15) $ (2.57) $ (2.76)$ (3.96) Income from discontinued operations - .02 - 1.43 _______ ________ ________ ________ $ (.15) $ (2.55) $ (2.76)$ (2.53) ======= ======== ======== ======== Dilutive earnings (loss) per share: Loss from continuing operations $ (.15) $ (2.57) $ (2.76) $ (3.96) Income from discontinued operations - .02 - 1.43 _______ ________ ________ ________ $ (.15) $ (2.55) $ (2.76)$ (2.53) ======= ======== ======== ======== See Notes to Condensed Consolidated Financial Statements. J NET ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY NINE MONTHS ENDED MARCH 31, 2002 AND 2001 (Dollars and shares in thousands) (Unaudited) Accumu- lated Other Addi- Compre- Common Stock tional Retained Treasury Stock hensive _____________ Paid-In Earnings ________________ Income Shares Amount Capital (Deficit) Shares Amount (loss) Totals ______ ______ _______ ________ ______ ________ _______ ________ Balance July 1, 2001 10,233 $102 $75,250 $(20,795) (1,709) $(16,054) $ (17) $ 38,486 Comprehensive loss: Net loss (23,514) (23,514) Cumulative translation adjustment 62 62 ________ Total comprehensive loss (23,452) Amortization of employee stock based compensation 290 290 ______ ____ _______ ________ ______ ________ _____ ________ Balance March 31, 2002 10,233 $102 $75,250 $(44,019) (1,709) $(16,054) $ 45 $ 15,324 ====== ==== ======= ======== ====== ======== ===== ======== Balance July 1, 2000 10,233 $102 $73,875 $ 27,710 (1,259) $(13,777) $ - $ 87,910 Comprehensive loss: Net loss from continuing operations (35,416) (35,416) Gain on sale of discontinued operations, net of tax 12,776 12,776 Repurchase of common stock (221) (1,204) (1,204) Amount allocated to additional paid-in capital in connection with the issuance of 8% convertible subordinated notes 1,375 1,375 ______ ____ _______ ________ ______ ________ _____ ________ Balance March 31, 2001 10,233 $102 $75,250 $ 5,070 (1,480) $(14,981) $ - $ 65,441 ====== ==== ======= ======== ====== ======== ===== ======== See Notes to Condensed Consolidated Financial Statements.
J NET ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED MARCH 31, 2002 AND 2001 (Dollars in thousands) (Unaudited) 2002 2001 ________ ________ Operating activities: Net loss $(23,514) $(22,640) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Equity in loss of technology-related businesses - 19,426 Non-cash impairment charges 3,066 8,665 Allowance for uncollectible receivables - 7,980 Gain from discontinued operations, net of $6,940 taxes - (12,776) Amortization of stock-based compensation 290 - Depreciation and amortization 510 363 Amortization of original issue discount - 3,139 Loss on disposal of assets 394 1,650 Deferred income tax benefit (334) (4,702) Changes in assets and liabilities: Decrease in federal income taxes receivable 6,538 - Decrease in accounts receivable 1,350 - Increase in marketable securities (1,876) - Decrease in prepaid expenses and other current assets 730 165 Decrease (increase) in notes receivable - related parties 1,006 (303) Decrease (increase) in other non-current assets 223 (60) Decrease in accounts payable and other current liabilities (2,564) (5,186) Decrease in deferred revenue and customer deposits (1,079) - Decrease in deferred rent (137) - Decrease in current tax liability, net of taxes related to discontinued operations - (2,559) Other, net 62 - ________ ________ Net cash used in operations (15,335) (6,838) ________ ________ Investing activities: Investments in technology-related businesses (1,338) (30,034) Investments in notes receivable (125) (12,446) Investment in marketable securities - (25,444) Security deposits received 212 - Net proceeds from discontinued operations - 35,815 Proceeds from sale of assets 260 - Purchases of property and equipment (82) (2,278) ________ ________ Net cash used in investing activities (1,073) (34,387) Financing activities: Proceeds from issuance of convertible subordinated notes - 12,250 Purchases of treasury stock - (1,204) ________ ________ Net cash provided by financing activities - 11,046 ________ ________ Net decrease in cash and cash equivalents (16,408) (30,179) Cash and cash equivalents at beginning of period 24,272 60,090 ________ ________ Cash and cash equivalents at end of period $ 7,864 $ 29,911 ======== ======== Supplemental disclosures of cash flow data: Cash paid during the period for: Interest paid $ 1,667 $ 1,515 Federal income tax $ - $ 2,300 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 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 the 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. InterWorld's software products run on the industry standard J2EE server. Since the time the Company acquired a controlling interest in the equity securities of InterWorld, J Net has actively sought partners and evaluated a number of strategic alternatives specific to InterWorld's operations. Significant cost reductions have been implemented since September 2001 which include reductions in the United States workforce and termination of business operations in foreign countries. Facility costs were also reduced as a result of negotiating releases from costly lease obligations and relocating New York operations to more economical office space. In February 2002, J Net entered into a Strategic Partnership with Titan Ventures, L.P. ("Titan"). Under this agreement, Titan received an exclusive right to market InterWorld's products in the United States. Upon the achievement of certain milestones, Titan earns-in a percentage of InterWorld's equity. Proceeds from the sale of InterWorld products are shared between Titan and InterWorld. Costs of the marketing efforts are borne entirely by Titan. Concurrent with the execution of the Strategic Partnership Agreement, J Net and InterWorld entered into an Acknowledgment of Default Agreement (the "Default Agreement") which assigns proceeds from InterWorld's operations, including those derived from Titan's activities, to J Net as partial repayment of advances to InterWorld to fund its operations. To date, no sales have been closed under the Strategic Partnership Agreement. J Net is also a senior secured creditor of InterWorld under terms of a secured promissory note (the "Secured Note") and has a priority claim on the assets, including intellectual property, of InterWorld. Advances under the Secured Note are made by J Net at its sole discretion. As of March 31, 2002, such advances totaled $17.2 million, excluding interest. Concurrent with the execution of the Strategic Partnership Agreement with Titan, InterWorld and J Net entered into an Acknowledgment of Default and Assignment of Payments Agreement (the "Default Agreement"). In addition to InterWorld acknowledging default under terms of the Secured Note between InterWorld and J Net, the Default Agreement assigned all proceeds received by InterWorld to be directed to J Net, including proceeds derived from revenues created from the Strategic Partnership Agreement with Titan. In April 2002, the Management of J Net concluded that InterWorld's ability to repay its debt of approximately $17.2 million was not likely. As a result, J Net notified InterWorld of its intent to begin foreclosure proceedings. On May 3, 2002, J Net and InterWorld finalized foreclosure proceedings. Such actions resulted in the employees, contracts and other assets being transferred to IW Holdings, Inc., a newly formed J Net subsidiary, in full satisfaction of the debt. Although the consolidation method of accounting is used for its ownership in InterWorld, the liabilities and debts of InterWorld are legally separate and distinct from J Net. The Company is not liable for the debts and other obligations of InterWorld. J Net also holds minority investments in other technology companies including, but not limited to, systems development and software companies. These investments are held directly by the Company, or by J Net Ventures I, LLC (the "Fund" or "Ventures I"), a fund 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 or IW Holdings, InterWorld's successor entity. In April 2002, the Company was notified by the New York Stock Exchange ("NYSE") that the NYSE was initiating steps to delist J Net. On May 8, 2002 the delisting steps were completed. J Net's common stock is now traded on the over-the-counter bulletin board ("OTCBB") and trades under the symbol "JNEI". 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 March 31, 2002, the results of its operations for the three and nine months ended March 31, 2002 and 2001 and its cash flows for the nine months ended March 31, 2002 and 2001. The results for the nine months ended March 31, 2002 and 2001 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 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 $25.4 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 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 the periods beginning November 2000 through April 2001, J Net owned $20 million of mandatorily redeemable preferred stock of InterWorld (the "Preferred Stock"). The Preferred Stock voted on as an "as-if" converted basis with common stock, which represented approximately 10% voting rights. J Net used the equity method of accounting during the time it owned only the Preferred Stock. In May 2001, when the redemption of the Preferred Stock became due, J Net exchanged the Preferred Stock for common stock in lieu of cash. As a result of this redemption, J Net became a 95.3% owner of the equity securities and began using the consolidation method for InterWorld. Property and equipment: Leasehold improvements and other property and equipment are recorded at cost and are depreciated on a straight line basis over the shorter of estimated useful life of the asset or lease terms, as applicable, as follows: 2 to 7 years for equipment and 3 to 10 years for leasehold improvements. Property sold or retired is eliminated from the accounts in the period of disposition. Assets held for sale: Assets which will be sold rather than used are recorded at their estimated fair value less estimated cost to sell. As of March 31, 2002, the Company holds 40 acres of land with building improvements in the city of Wellington, Florida. The property was received as a result of a foreclosure on a loan to Michael Donahue, the former Vice Chairman and Chief Executive Officer of InterWorld. The property is not core to J Net's business and is currently listed for sale. The carrying value of $5.3 million is net of estimated and sales costs. Income taxes: The Company accounts for income taxes in accordance with SFAS 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 requires that deferred tax assets and liabilities arising from temporary differences between book and tax bases will be recognized using enacted tax rates at the time such temporary differences reverse. In the case of deferred tax assets, SFAS 109 requires a reduction to deferred tax assets if it is more likely than not that some portion or all of the deferred tax asset will not be realized. As of March 31, 2002, J Net is carrying a current deferred tax asset of $1.2 million, which represents Management's estimate of a tax refund resulting from the carryback of operating losses incurred during the current fiscal year. The receivable is net of a deferred tax allowance of approximately $5 million for fiscal 2002. An additional allowance of $9.3 million for prior fiscal years has been recognized. In order to realize the deferred benefits represented by the accumulated allowance, approximately $42 million of future taxable income (predominantly from InterWorld) would be required. Management believes that achieving this level of required income in the foreseeable future is not likely. There are no provisions for current income taxes recognized. 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 arrangement fee is recognized as follows: (a) the total fair value of the undelivered elements, as indicated by vendor-specific objective evidence, is deferred and (b) the difference between the total arrangement fee and the amount deferred for the undelivered elements is recognized as revenue related to the delivered elements. Software license agreements generally include two elements: the software license and post-contract customer support. The Company has established sufficient vendor-specific objective evidence for the value of maintenance and post-contract customer support services based on the price when these elements are sold separately and/or when stated renewal rates for maintenance and post-contract customer support services are included in the agreement, and the actual renewal rate achieved. Product licenses: Revenue from the licensing of software products is recognized upon shipment to the customer, pursuant to an executed software licensing agreement when no significant vendor obligations exist and collection is probable. If acceptance by the customer is required, revenue is recognized upon customer acceptance. Amounts received from customers in advance of product shipment or customer acceptance are classified as deposits from customers. Other licensing arrangements such as reseller agreements, typically provide for license fees payable to the Company based on a percentage of the list price for the software products. The license revenues are generally recognized when shipment by the reseller occurs, or when collection is probable. Contracts for product licenses where professional services require significant production, modification or customization are recognized on a percentage of completion basis. Services revenue: Revenue from professional services, such as custom development and installation and integration support is recognized as the services are rendered. Maintenance revenue: Revenue from maintenance and post-contract customer support services, such as telephone support and product enhancements is recognized ratably over the period of the agreement under which the services are provided, typically one year. Recognition of revenue is deferred until advance payments from customers is received for maintenance and support. Deferred revenue consists principally of billings in advance for services and support not yet provided and uncollected billings to customers for maintenance and post contract support. Recently issued accounting standards: In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141") and Statement of 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 March 31, 2002, 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 operating results and subsequent gain from the sale 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 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 $2.7 million of a $4.0 million commitment to eStara's $15.0 million Series B round of financing in September 2000. The remaining commitment of $1.3 million was funded in July 2001 at a substantially lower valuation than the original investment. As a result, an impairment of $1.4 million 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. Additional cost savings and improved operating results have further reduced cash burn and recent projections provided by eStara's management indicate sufficient funds to continue operations beyond the end of calendar 2002. 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 March 31, 2002. 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 nine months ended March 31, 2002. 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. Based on Tellme's positive financial condition, its current and projected cash utilization and continued positive operating developments, Management believes the original $2.0 million 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 nine months ended March 31, 2002 (dollars in thousands): Net Carrying value balance at as of 6/30/01 Additions Impairments March 31, 2002 __________ _________ ___________ ______________ eStara, Inc. $1,290 $1,333 $ - $2,623 Tellme Networks 2,000 - - 2,000 Other - 5 - 5 ______ ______ ____ ______ Totals $3,290 $1,338 $ - $4,628 ====== ====== ==== ====== 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. In January 2002, additional cash savings were generated when InterWorld's New York offices were relocated to less costly facilities. During February and March 2002, J Net funded $0.5 million to InterWorld. Such funding included costs associated with office relocation and remaining obligation to close foreign offices and certain severance payments. While current operations are very close to cash break-even, InterWorld's ability to continue at that level remains uncertain. 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 and has continued to incur operating losses. Without continued funding, there remains substantial doubt about InterWorld continuing as a going concern. Note 4 - Pro Forma information: Set forth in the following table is certain unaudited pro forma financial information for each of the three and nine months ended March 31, 2002 and 2001. 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 nine months ended March 31, 2002 reflects actual operating results since J Net began consolidating InterWorld in May 2001. The pro forma statements of operations are for information purposes only and they should not be interpreted to be indicative of the Company's consolidated results of operations had the transaction actually occurred on the assumed date and should not be used to project results for any future date or period. Condensed Consolidated Pro forma Statement of Operations (dollars in thousands, except per share data) Three Months Ended Nine Months Ended March 31, March 31, _________________ __________________ 2002 2001 2002 2001 ________ ________ ________ ________ Revenues $ 630 $ 8,031 $ 4,670 $ 27,320 Cost of revenues 56 6,968 2,734 19,053 _______ ________ ________ ________ Gross profit 574 1,063 1,936 8,267 _______ ________ ________ ________ Operating expenses 2,468 14,634 19,963 60,265 Restructuring and unusual charges (156) 9,630 6,216 19,435 _______ ________ ________ ________ Total operating expenses 2,312 24,264 26,179 79,700 _______ ________ ________ ________ Loss from operations (1,738) (23,201) (24,243) (71,433) Other income (expense) 418 (880) 729 (4,748) _______ ________ ________ ________ Net loss before income tax (1,320) (24,081) (23,514) (76,181) Income tax benefit - (2,823) - (8,355) _______ ________ ________ ________ Net loss $(1,320) $(21,258)$(23,514) $(67,826) _______ ________ ________ ________ Basic loss per share $ (.15) $ (2.40)$ (2.76) $ (7.59) ======= ======== ======== ======== Note 5 - Loss per share: Basic loss per share for the three and nine months ended March 31, 2002 and basic loss per share from continuing operations for the three and nine months ended March 31, 2001 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 nine month periods ended March 31, 2002 and 2001 had losses from continuing operations, no potential common shares from the assumed exercise of options or convertible subordinated notes 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 Nine Months Ended March 31, March 31, _________________ __________________ 2002 2001 2002 2001 ________ ________ ________ ________ Basic earnings (loss) per share from continuing operations: Earnings (loss): Income (loss) available to common stockholders $(1,320) $(22,771) $(23,514) $(35,416) ======= ======== ======== ======== Shares: Weighted average number of common shares outstanding 8,525 8,865 8,525 8,938 ======= ======== ======== ======== Basic earnings (loss) per share from continuing operations $ ( .15) $ (2.57) $ (2.76) $ (3.96) ======= ======== ======== ======== Diluted earnings (loss) per share: Earnings (loss): Income (loss) available to common shareholders $ (1,320) $(22,771) $(23,514) $(35,416) ======= ======== ======== ======== Shares: Weighted average number of common shares outstanding 8,525 8,865 8,525 8,938 ======= ======== ======== ======== Weighted average number of common shares and common share equivalents outstanding 8,525 8,865 8,525 8,938 ======= ======== ======== ======== Diluted earnings (loss) per share from continuing operations $ ( .15) $ (2.57) $ (2.76) $ (3.96) ======= ======== ======== ======== Note 6 - Related party transactions: As of March 31, 2002, an officer of the Company held a subordinated note with a face value of $500,000. The Company loaned the officer $250,000 to purchase the subordinated note in September 2000. The loan bears interest of 8% per annum and is secured by the right, title and interest to the note. The loan, together with accrued interest is due on June 30, 2002. The total principal and interest on the loan as of March 31, 2002 was $282,000. 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, which has a face value of $250,000, and has a value of $129,000 as of March 31, 2002. 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 are parties to a secured credit agreement which allowed InterWorld to draw up to a total of $20.0 million in cash from J Net, at the Company's discretion. The advances are secured by the assets of InterWorld, including intellectual property. Advances, excluding interest, totaled $17.2 million as of March 31, 2002. In April 2002, the Management of J Net concluded that InterWorld's ability to repay its debt of approximately $17.2 million was not likely. As a result, J Net notified InterWorld of its intent to begin foreclosure proceedings. On May 3, 2002, J Net and InterWorld finalized foreclosure proceedings. Such actions resulted in the employees, contracts and other assets being transferred to IW Holdings, Inc., a newly formed J Net subsidiary, in full satisfaction of the debt. 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 nine months ended March 31, 2002. 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 million in the convertible subordinated notes issued by the Company. Officers and employees have invested either directly or indirectly $2.5 million in the notes as of March 31, 2002. Notes totaling $3 million 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. A note with a face value of $250,000 held by a former employee remains outstanding and is also no longer classified as related party due to the termination of employment in January 2002. The Company foreclosed on assets securing a loan to Michael J. Donahue, former 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 March 31, 2002. On March 29, 2002, Michael Donahue resigned his position as Vice Chairman and Chief Executive Officer of InterWorld. Mr. Donahue will remain as a part time consultant to the Company. 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 nine months ended March 31, 2001, 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 Ended Nine Months Ended March 31, 2002 March 31, 2002 __________________ _________________ Net loss: InterWorld Operations $(1,314) $(18,157) J Net Technology-Related Businesses (6) (5,357) _______ ________ Net loss (1,320) (23,514) InterWorld Operations Revenues $ 630 $ 4,670 Cost of revenues 56 2,734 _______ ________ Gross profit 574 1,936 Operating expenses 1,235 18,590 Other income (expense) (653) (1,503) _______ ________ Net loss from InterWorld $(1,314) $(18,157) ======= ======== J Net Technology-Related Businesses Total operating expenses $ 1,077 $ 7,589 Interest income 1,071 2,232 _______ ________ Net loss from J Net Technology-Related Businesses $ (6) $ (5,357) ======= ======== As of March 31, 2002 ______________ Assets InterWorld $ 612 J Net Technology-Related Businesses 50,071 ________ Total $ 50,683 ======== 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. The Company has employment contracts with its President and Chief Financial Officer. Minimum remaining obligations under those contracts totaled approximately $.7 million as of March 31, 2002. PBS Realty ("PBS"), a real estate broker conducting business in New York City filed a $1.2 million claim against InterWorld Corporation, a subsidiary of the Company, in April 2002. The claim alleges that PBS is owed commissions by InterWorld for services related to PBS's attempts to sublease office space previously occupied by InterWorld at 395 Hudson Street in New York City. InterWorld is vigorously contesting the claim and InterWorld management does not believe a liability exists at this time. J Net was not a party to the brokerage agreement and no claim has been asserted by PBS. 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 number of employees at J Net and its InterWorld subsidiary was reduced from a total of approximately 270 employees to 30 employees. In addition to reductions in workforce, office space was either subleased or relocated. The costs for such restructuring includes $1.8 million of severance, $1.6 million in contract settlements and cancellations and $2.9 million of non-cash charges associated with the abandonment of leasehold improvements at office locations. Note 10 - Convertible subordinated notes: The Company completed its offering of up to $28 million of unregistered convertible subordinated notes (the "Notes") to a small group of investors in October 2000. Certain of such investors include officers and directors of the Company or entities controlled by such directors and the former Co- residents of the Manager. The issuance of the Notes was approved by the Company's Board of Directors on January 31, 2000. The initial conversion price of $10.75 was set by the Company in connection with the limited circulation of a Confidential Memorandum prior to the public announcement of the Company's intention to effect its business transformation and was equal to an 18% premium over the then twenty day trailing average market price. In June 2000, the Company raised $15,250,000 through the issuance of the Notes. The principal amount of the Notes is payable on March 31, 2007 and bears interest at 8% per annum, payable on a quarterly basis. The Notes may not be prepaid in whole or in part by the Company. The Notes shall be convertible automatically if at any time after April 1, 2004, the common stock of the Company shall have a market price (as determined by the principal trading market for the Company's common stock or as otherwise specified in the Note) of over 250% of the then current conversion price for a period of ten trading days within any twenty consecutive trading day period. At the option of the holder of a Note, the Note shall be convertible into the Company's common stock at any time after June 1, 2001. The number of shares of common stock to be received by a Note holder upon conversion will be determined by dividing the principal amount of the Note by the conversion price in effect at the time of the conversion, which was initially $10.75. The conversion price is subject to adjustment in the event of any subdivision, combination, or reclassification of outstanding shares of the Company's common stock. Note 11 - Subsequent event: The Company intends to make a voluntary repurchase offer to the existing holders of the unregistered Notes. Such offer shall be made at the face amount of the Notes and shall not include any accrued but unpaid interest since March 31, 2002, the last interest payment date. A closing of the repurchase will occur in July 2002. Such action was approved on May 8, 2002 by a special committee of the Board of Directors of the Company, consisting of directors who had no financial interest in the Notes, following a request made by the largest third party holder of such Notes. Item 2. Management's Discussion and Analysis of Financial Condition and _______________________________________________________________ Results of Operations _____________________ Critical Accounting Policies ____________________________ General: The policies outlined below are critical to our operations and the understanding of our results of operations. The impact of these policies on our operations is discussed throughout Management's Discussion and Analysis of Financial Condition and Results of Operations where such policies affect our reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, refer to Note 1 in the Notes to the Condensed Consolidated Financial Statements for this Quarterly Report. Note that our preparation of this Quarterly Report on Form 10-Q requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates. Accounting methods for Investments in Technology-Related Businesses: The various interests that the Company acquires in Technology-Related Businesses are accounted for under one of three methods: consolidation, equity or cost. The applicable accounting method is generally determined based on the Company's voting interest and its ability to influence or control the Technology-Related Businesses. For the periods beginning November 2000 through April 2001, J Net owned $20 million of mandatorily redeemable preferred stock of InterWorld (the "Preferred Stock"). The Preferred Stock voted on as an "as-if" converted basis with common stock, which represented approximately 10% voting rights. J Net used the equity method of accounting during the time it owned only the Preferred Stock. In May 2001, when the redemption of the Preferred Stock became due, J Net exchanged the Preferred Stock for common stock in lieu of cash. As a result of this redemption, J Net became a 95.3% owner of the equity securities and began using the consolidation method for InterWorld. 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 arrangement fee is recognized as follows: (a) the total fair value of the undelivered elements, as indicated by vendor-specific objective evidence, is deferred and (b) the difference between the total arrangement fee and the amount deferred for the undelivered elements is recognized as revenue related tot he delivered elements. Software license agreements generally include two elements: the software license and post-contract customer support. The Company has established sufficient vendor-specific objective evidence for the value of maintenance and post-contract customer support services based on the price when these elements are sold separately and/or when stated renewal rates for maintenance and post-contract customer support services are included in the agreement, and the actual renewal rate achieved. Product licenses Revenue from the licensing of software products is recognized upon shipment to the customer, pursuant to an executed software licensing agreement when no significant vendor obligations exist and collection is probable. If acceptance by the customer is required, revenue is recognized upon customer acceptance. Amounts received from customers in advance of product shipment or customer acceptance are classified as deposits from customers. Other licensing arrangements such as reseller agreements, typically provide for license fees payable to the Company based on a percentage of the list price for the software products. The license revenues are generally recognized when shipment by the reseller occurs, or when collection is probable. Contracts for product licenses where professional services require significant production, modification or customization are recognized on a percentage of completion basis. Services revenue Revenue from professional services, such as custom development and installation and integration support is recognized as the services are rendered. Revenue from maintenance and post-contract customer support services, such as telephone support and product enhancements is recognized ratably over the period of the agreement under which the services are provided, typically one year. Recognition of revenue is deferred until advance payments from customers is received for maintenance and support. Deferred revenue consists principally of billings in advance for services and support not yet provided and uncollected billings to customers for maintenance and post contract support. Impairments: 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. Convertible subordinated notes: The Company completed its offering of up to $28 million of unregistered convertible subordinated notes (the "Notes") to a small group of investors in October 2000. Certain of such investors include officers and directors of the Company or entities controlled by such directors and the former Co- residents of the Manager. The issuance of the Notes was approved by the Company's Board of Directors on January 31, 2000. The initial conversion price of $10.75 was set by the Company in connection with the limited circulation of a Confidential Memorandum prior to the public announcement of the Company's intention to effect its business transformation and was equal to an 18% premium over the then twenty day trailing average market price. In June 2000, the Company raised $15,250,000 through the issuance of the Notes. The principal amount of the Notes is payable on March 31, 2007 and bears interest at 8% per annum, payable on a quarterly basis. The Notes may not be prepaid in whole or in part by the Company. The Notes shall be convertible automatically if at any time after April 1, 2004, the common stock of the Company shall have a market price (as determined by the principal trading market for the Company's common stock or as otherwise specified in the Note) of over 250% of the then current conversion price for a period of ten trading days within any twenty consecutive trading day period. At the option of the holder of a Note, the Note shall be convertible into the Company's common stock at any time after June 1, 2001. The number of shares of common stock to be received by a Note holder upon conversion will be determined by dividing the principal amount of the Note by the conversion price in effect at the time of the conversion, which was initially $10.75. The conversion price is subject to adjustment in the event of any subdivision, combination, or reclassification of outstanding shares of the Company's common stock. The Company intends to make a voluntary repurchase offer to the existing holders of the unregistered Notes. Such offer shall be made at the face amount of the Notes and shall not include any accrued but unpaid interest since March 31, 2002, the last interest payment date. A closing of the repurchase will occur in July 2002. Such action was approved on May 8, 2002 by a special committee of the Board of Directors of the Company, consisting of directors who had no financial interest in the Notes, following a request made by the largest third party holder of such Notes. 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 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. 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 outstanding equity securities of InterWorld and also holds minority investments in other companies involved in technology-related businesses. In May 2001, the Company became the majority shareholder of InterWorld, which currently is the Company's most significant component of operations. Management has evaluated several strategic alternatives for InterWorld and actively sought financial or other strategic partners to assist with making InterWorld profitable. During this process, J Net has funded InterWorld operations. InterWorld, along with most other companies involved in technology and e-commerce, experienced significant declines in sales of its products during this period. The declines were amplified by the September 11, 2001 terrorist attacks on New York City and Washington, D.C. In February 2002, J Net entered into a Strategic Partnership with Titan Ventures, L.P. ("Titan"). Under this agreement, Titan received an exclusive right to market InterWorld's products in the United States. Upon the achievement of certain milestones, Titan earns-in a percentage of InterWorld's equity. Proceeds from the sale of InterWorld products are shared between Titan and InterWorld. Costs of the marketing efforts are borne entirely by Titan. Concurrent with the execution of the Strategic Partnership Agreement, J Net and InterWorld entered into an Acknowledgment of Default Agreement (the "Default Agreement") which assigns proceeds from InterWorld's operations, including those derived from Titan's activities, to J Net as partial repayment of advances to InterWorld to fund its operations. To date, no sales have been closed under the Strategic Partnership Agreement. In April 2002, the Management of J Net concluded that InterWorld's ability to repay its debt of approximately $17.2 million was not likely. As a result, J Net notified InterWorld of its intent to begin foreclosure proceedings. On May 3, 2002, J Net and InterWorld finalized foreclosure proceedings. Such actions resulted in the employees, contracts and other assets being transferred to IW Holdings, Inc., a newly formed J Net subsidiary, in full satisfaction of the debt. In addition to the evaluation of the alternatives for InterWorld, the Company's management has taken a number of steps to improve its financial position, refine its costs structure and refocus business strategies. A summary of significant actions which have occurred during the Company's current fiscal year include: (1) Restructuring at InterWorld. In response to the continued economic slowdown, sluggish e-commerce sales, 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 240 employees at June 30, 2001 to 21 employees at March 31, 2002. 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 success of Titan and foreign resellers to market InterWorld's products and overall market conditions. 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. Receipts from existing customers for product maintenance and support are expected to fund existing operations. On June 30, 2001, J Net and InterWorld entered into a secured credit facility in which J Net agreed to loan up to $20 million to InterWorld. Indebtedness under the credit facility was secured by, among other things, all of the assets and intellectual property of InterWorld. As of March 31, 2002, advances under the credit facility totaled $17.2 million, excluding accrued interest thereon. On February 15, 2002, J Net notified InterWorld of certain defaults under the credit facility and InterWorld acknowledge such defaults. On May 3, 2002, J Net and InterWorld completed foreclosure proceedings in which InterWorld agreed to assign, among other things, all of its intellectual property to IW Holdings, Inc., a wholly-owned subsidiary of J Net, in full satisfaction of the outstanding indebtedness under the credit facility. In connection with such assignment, all of InterWorld's employees, contracts and other assets were transferred to J Net. (2) Restructuring at J Net. During the nine months ended March 31, 2002, 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 and severance payments have 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 with 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. In April 2002, the Company was notified by the New York Stock Exchange ("NYSE") that the NYSE was initiating steps to delist J Net. On May 8, 2002 the delisting steps were completed. J Net's common stock is now traded on the over-the-counter bulletin board ("OTCBB") and trades under the symbol "JNEI". Three Months Ended March 31, 2002 and 2001: 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 March 31, 2001, 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). For the three months ended March 31, 2002, InterWorld's operating are reported using the consolidation method. Note 4 of the condensed consolidated financial statements contains pro forma information as if the operations were consolidated for the three month reporting period. Total revenues: Consolidated revenues were $.6 million for the three months ended March 31, 2002. For the three months ended March 31, 2001, J Net did not consolidate InterWorld's operations resulting in no reported revenue. On a pro forma basis, total revenues for the quarter ended March 31, 2001 were $8.0 million, reflecting a decrease of $7.4 million, or approximately 93%. The decrease on the pro forma basis reflects declines in purchases of e- commerce products and services which began in the year 2000. Total cost of revenues: Cost of revenues, all of which are related to InterWorld operations, were $.1 million for the three months ended March 31, 2002. As previously noted, InterWorld did not become a consolidated subsidiary until May 2001. Consequently, the reported cost of revenues for the three months ended March 31, 2001 are zero. On a pro forma basis, the total cost of revenues were $7.0 million for the three months ended March 31, 2001. The primary cause of the $6.9 million decrease from the March 31, 2001 period is due to substantial reductions in InterWorld's workforce due to the combination of lower sales caused from declining market conditions from the prior year and restructuring actions taken during the current fiscal year. Operating expenses: Total operating expenses were $2.3 million for the three months ended March 31, 2002 compared to $11.3 million for the three months ended March 31, 2001. The decrease of $9.0 million is due primarily to a reduction in operating costs, including impairments of $9.6 million from the prior year. There were no impairments for the three months ended March 31, 2002. There were no restructuring charges or impairments for the three months ended March 31, 2002. For the three months ended March 31, 2001, impairments were $9.6 million, which consisted of bad debt provisions of $8.0 million associated with a loan to Michael Donahue, the previous Vice Chairman and Chief Executive Officer of InterWorld and a $1.7 million loss from the sale of an investment held by J Net's technology-related business segment. Other income (expense): For the three months ended March 31, 2002, the Company had other income of $.4 million compared with other expenses of $14.3 million in the prior years quarter. The March 31, 2001 expenses included $14.6 million of losses recognized on the Company's investments accounted for under the equity method, including $13.2 million attributable to InterWorld. There were no equity method losses for the three months ended March 31, 2002. Interest expenses decreased to $.6 million for the three months ended March 31, 2002 from $1.7 million in the prior year due to non cash amortization of original issue debt discount of $1.0 million for the three months ended March 31, 2002. Interest income also decreased to $1.0 million from $2.0 million during the three months ended March 31, 2002 and 2001 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 March 31, 2002. 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 March 31, 2001, the Company recognized a federal income tax benefit from continuing operations of $2.8 million, net of a $4.9 million valuation allowance. Such benefit was attributable to the ability to utilize loss carrybacks to prior taxable years. Net loss: The net loss was $1.3 million for the three months ended March 31, 2002 compared to a loss of $22.6 million in the prior years' quarter. The $21.3 million improvement is due primarily to the March 31, 2001 quarter's results including losses from bad debts of $8.0 million, equity losses of $14.6 million and $1.6 million of losses from the sale of investments. The 2001 quarter's variance were partially offset by higher operating costs and reduced income in the quarter ended March 31, 2002. Nine Months Ended March 31, 2002 and 2001: Results of Operations _____________________ The Company's investment in InterWorld was carried as an equity investment from November 2000 through April 2001. For the nine months ended March 31, 2001, InterWorld's losses were reported using the equity method of accounting and appear on the condensed consolidated statement of operations as a component of other income (expense). For the nine months ended March 31, 2002, InterWorld's operating results are reported using the consolidation method in the Company's condensed consolidated statement of operations. Note 4 of the condensed consolidated financial statements contains pro forma information as if the operations were consolidated for the nine month reporting periods. Total revenues: For the nine months ended March 31, 2002, revenues totaled $4.7 million and zero for the nine months ended March 31, 2001 due to InterWorld not being a consolidated subsidiary at the end of the 2001 reporting period. On a pro forma basis, revenues declined to $4.7 million from $27.3 million for the nine months ended March 31, 2002 and 2001, respectively. The declines in pro forma revenues reflect substantial reductions in license sales and related services due to weakening market conditions for e-commerce products combined with reduced maintenance receipts. Maintenance receipts declined due primarily to the weakening 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 nine months ended March 31, 2002 and $0 for the nine months ended March 31, 2001 due to InterWorld not being a consolidated subsidiary at the end of the 2001 reporting period. On a pro forma basis, the total cost of revenues were $19.1 million for the nine months ended March 31, 2001. The decrease of $16.4 million for the March 31, 2001period is due primarily to reductions in InterWorld's workforce and declining market conditions, and reduced sales. Operating expenses: Consolidated operating expenses were $26.2 million and $23.8 million for the nine months ended March 31, 2002 and 2001, respectively. On a pro forma basis, operating expenses were $79.7 million for the nine months ended March 31, 2001. The decrease of $53.5 million, between 2002 and pro forma 2001, is due primarily to substantial reductions in workforce and office space requirements and a reduction of $13.2 million in restructuring and impairment costs of $6.2 million and $19.4 million for the nine months ended March 31, 2002 and 2001, respectively. The 2002 restructuring and impairment charges consist of severance payments, contract settlements and cancellations, and certain non-cash charges associated with the abandonment of leasehold improvements (See Note 9). The 2001 restructuring and impairment charges consist of $10.3 million of impairment losses on technology-related investments, $8.0 million of debt forgiveness on a loan to Michael Donahue, the former Vice Chairman and Chief Executive Officer of InterWorld, and $1.1 million of severance paid to former officers of J Net. Other income (expense): Other income and expenses include four significant components: interest income on cash deposits, increase in the values of short-term investments, interest expense on the Company's convertible subordinated notes, and losses on technology-related investments where the equity method of accounting is used. Interest and other income totaled $2.4 million for the nine months ended March 31, 2002 compared to $4.1 million for the nine months ended March 31, 2001. The decrease in the earnings from cash investments is due primarily to a combination of lower cash balances and lower interest rates. Earnings from short-term investments at Mariner L.P. were $1.9 million and $1.1 million for the nine months ended March 31, 2002 and 2001, respectively. The increase in earnings from Mariner is due primarily to the March 31, 2002 period containing nine full months of earnings while the March 31, 2001 period reflects a holding period of 6 months. Interest expense was $1.7 million for the nine months ended March 31, 2002 compared to $4.6 million for the nine months ended March 31, 2001. The decrease of $2.9 million was due primarily to non-cash amortization of original issue discount recognized upon issuance on certain convertible notes which were deemed "in-the-money" as to their conversion price upon subscription. The entire discount on those notes was fully amortized by May 2001, the earliest possible conversion date for the convertible notes. Accordingly, there was no amortization for the nine months ended March 31, 2002. Cash paid for interest was $1.7 million for the nine months ended March 31, 2002 and $1.5 million for the nine months ended March 31, 2001. There are no equity losses for the nine months ended March 31, 2002. For the nine months ended March 31, 2001, equity losses totaled $19.4 million, of which $13.2 million was 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 nine months ended March 31, 2001 have either been written off or sold. Income taxes: There is no benefit for income taxes recognized for the nine months ended March 31, 2002. Presently, all benefits from J Net operating loss carrybacks are reflected as a receivable in the condensed consolidated balance sheet as of March 31, 2002. Due to limitations in the Federal tax regulations on carrybacks and the near term outlook for profitability remaining uncertain, Management does not anticipate additional benefits from taxes to be recognized. For the nine months ended March 31, 2001, a tax benefit of $8.4 million was recognized for losses attributable to continuing operations. Net loss from continuing operations: The consolidated net loss from continuing operations was $23.5 million and $35.4 million for the nine months ended March 31, 2002 and 2001, respectively. The reduced loss of $11.9 million was due primarily to reductions in restructuring and unusual charges (which includes severance pay, asset impairments and bad debt provisions) of $13.1 million and lower equity losses from non-InterWorld investments of $5.1 million. Due to the nine months ended March 31, 2002 having no income tax benefit, there is a $8.4 million decrease in tax benefits from the prior year which offset the decreased expenses. Discontinued operations: In November 2000, the Company completed the sale of its Route Operations and recognized an after tax gain of $12.7 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 $23.5 million for the nine months ended March 31, 2002 compared to a net loss of $22.6 million for the nine months ended March 31, 2001. While the net results are similar, each period contains significant variances. For the nine months March 31, 2002, the loss from continuing operations declined by $11.9 million from the March 31, 2001 nine months as discussed in the net loss from continuing operations section. These improved operating results in the 2002 nine months were offset by the gain in the 2001 nine months from the sale of the Company's route operations. Capital Resources and Liquidity _______________________________ Liquidity: Total cash and short-term investments were $37.1 million as of March 31, 2002. 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 $3.0 million per month to fund its operations from May to October 2001. Starting in November 2001 through March 2002, monthly cash requirements were reduced to near zero. Funding to InterWorld was provided by J Net under a $20.0 million secured credit facility and J Net was under no obligation to continue funding. During the three months ended March 31, 2002, InterWorld was advanced $.5 million under the credit facility. However, increased sales are required for InterWorld to generate positive cash flows. J Net's total investment in InterWorld, including its initial $20.0 million purchase of preferred stock, is $37.2 million as of March 31, 2002. In April 2002, the Management of J Net concluded that InterWorld's ability to repay its debt of approximately $17.2 million was not likely. As a result, J Net notified InterWorld of its intent to begin foreclosure proceedings. On May 3, 2002, J Net and InterWorld finalized foreclosure proceedings. Such actions resulted in the employees, contracts and other assets being transferred to IW Holdings, Inc., a newly formed J Net subsidiary, in full satisfaction of the debt. In February 2002, J Net entered into a Strategic Partnership with Titan Ventures, L.P. ("Titan"). Under this agreement, Titan received an exclusive right to market InterWorld's products in the United States. Upon the achievement of certain milestones, Titan earns-in a percentage of InterWorld's equity. Proceeds from the sale of InterWorld products are shared between Titan and InterWorld. Costs of the marketing efforts are borne entirely by Titan. Concurrent with the execution of the Strategic Partnership Agreement, J Net and InterWorld entered into an Acknowledgment of Default Agreement (the "Default Agreement") which assigns proceeds from InterWorld's operations, including those derived from Titan's activities, to J Net as partial repayment of advances to InterWorld to fund its operations. To date, no sales have been closed under the Strategic Partnership Agreement. For the nine months ended March 31, 2002, net cash used in operating activities was $15.3 million. The use of cash was principally the ongoing funding requirements for InterWorld of $14.2 million, cash restructuring costs of $3.4 million and working capital changes. Partially offsetting uses of cash was collection of a tax refunds of approximately $6.2 million. The Company expects to receive cash from the sale of assets classified as held for resale which resulted from the foreclosure actions taken on a loan to the former Vice Chairman and Chief Executive Officer of InterWorld in June 2001. The estimated amount to be received, net of selling expenses and carrying costs is approximately $5.3 million. The Company intends to make a voluntary repurchase offer to the existing holders of the unregistered Notes. Such offer shall be made at the face amount of the Notes and shall not include any accrued but unpaid interest since March 31, 2002, the last interest payment date. A closing of the repurchase will occur in July 2002. Such action was approved on May 8, 2002 by a special committee of the Board of Directors of the Company, consisting of directors who had no financial interest in the Notes, following a request made by the largest third party holder of such Notes. As a result of the foreclosure actions on J Net's loan to InterWorld, there are approximately $3 million of liabilities owed by InterWorld to unsecured creditors, which J Net is not responsible for funding. Management has been actively negotiating and settling with the larger creditors in this group and believes that such liabilities will ultimately be settled for substantially less than their face value. In addition, J Net has amounts accrued as liabilities on the March 31, 2002 balance sheet which, pending receipt of definitive documentation, management believes will be reduced. In aggregate, management believes that $3.5 - $4.5 million of liabilities reflected as of March 31, 2002 will likely not require the use of cash. Investing activities: Net cash used in investing activities for the nine months ended March 31, 2002 was $1.1 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 March 31, 2002, 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 March 31, 2002, a 10% change in interest rates would change pretax interest income by approximately $16 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 $29.3 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 March 31, 2002 and the average return of such investment for the previous six months, a 10% reduction in those returns would reduce pretax income by approximately $.3 million. 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. PBS Realty ("PBS"), a real estate broker conducting business in New York City filed a $1.2 million claim against InterWorld Corporation, a subsidiary of the Company, in April 2002. The claim alleges that PBS is owed commissions by InterWorld for services related to PBS's attempts to sublease office space previously occupied by InterWorld at 395 Hudson Street in New York City. InterWorld is vigorously contesting the claim and InterWorld management does not believe a liability exists at this time. J Net was not a party to the brokerage agreement and no claim has been asserted by PBS. 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 April 2002, the Company was notified by the New York Stock Exchange ("NYSE") that the NYSE was initiating steps to delist J Net. On May 8, 2002 the delisting steps were completed. J Net's common stock is now traded on the over-the-counter bulletin board ("OTCBB") and trades under the symbol "JNEI". Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 10.38 InterWorld Master Alliance Agreement 10.39 Acknowledgment of Default and Assignment of Payments Agreement (b) Reports on Form 8-K: The Company filed a Form 8-K dated May 3, 2002 disclosing in Item 5 that it had received notice from the New York Stock Exchange that its common shares would be suspended from trading effective May 8, 2002. On May 13, 2002, the Company filed a report on Form 8-K, disclosing in Item 5, J Net's foreclosure of its secured promissory note with InterWorld Corporation. 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: May 15, 2002 EX-10 3 exhibit1038.txt RCT = Request for Confidential Treatment Exhibit 10.38 InterWorld Master Alliance Agreement This Master Alliance Agreement (this "Agreement") is entered into and made effective as of February 15, 2002 (the "Effective Date") among InterWorld Corporation, a Delaware Corporation, with its principal office located at 41 East 11th St., 11th Floor, New York, N.Y. 10003, ("InterWorld"), J Net Enterprises, Inc, a Nevada corporation, senior secured creditor and majority stockholder of InterWorld, with its principal office located at 4020 West Lake Creek Drive, Suite 100, Wilson, Wyoming 83014 ("J Net"), and Titan Technologies, LP, doing business as Titan Ventures, LP and its Affiliates (as defined below), with its principal office located at 16000 Dallas Parkway, Suite 285, Dallas, TX 75248 ("Licensee"). As used herein, "Affiliates" shall mean any of the entities that control, are controlled by or are under common control with such party. For purposes of this definition, "control" shall mean the possession, directly or indirectly, of a majority of the voting power of such entity (whether through ownership of securities or partnership or other ownership interests, by contract or otherwise). WHEREAS, InterWorld is engaged in the business of developing, marketing and selling computer software solutions for its customers, using InterWorld's own technology and services, and/or the technology or services of third parties; WHEREAS, Licensee is a systems integrator and reseller of software and related support and professional services; and WHEREAS, InterWorld, J Net and Licensee have entered into that certain binding letter of agreement, dated February 15, 2002 (the "Letter of Agreement"); NOW THEREFORE, in consideration of the premises and mutual promises set forth herein, and other good and valuable consideration, the receipt of which are hereby acknowledged, the parties hereto, intending to be legally bound, agree as follows: LICENSE GRANTS 1.1 Internal Use. Subject to the terms and conditions of this Agreement, Licensee shall be entitled to receive a limited, non-exclusive, non-transferable, non-assignable and terminable license for a reasonable number copies of each of the products listed on the attached Exhibit A (the "InterWorld Products") and associated documentation. Each copy of the InterWorld Products shall be used for Licensee's marketing, demonstration, development (including integration and acceptance testing), internal education and non-commercial internal use in the territories listed on Exhibit A for the sole purpose of furthering Licensee's rights under this Agreement. Each copy of the InterWorld Products may be installed on a single server at each of Licensee's business locations, provided that Licensee has notified InterWorld of each such location using the form attached hereto as Exhibit B. In addition, Licensee shall be able to install the InterWorld Products on laptops, etc. for demonstration and training purposes provided InterWorld is so informed. Licensee may change such locations from time to time by submitting a modified Exhibit B to InterWorld. The foregoing licenses are for the use of machine-readable object code only, excluding any source code. 1.2 Reseller License. Subject to the terms and conditions of this Agreement, InterWorld grants Licensee a limited, non-transferable, non- assignable and terminable right to market and resell copies of the InterWorld Products, in the exclusive and non-exclusive territories set forth on the attached Exhibit A, to Licensee's customers ("End Users") for their internal business purposes only. 1.3 End User Support License. Subject to the terms and conditions of this Agreement, InterWorld grants to Licensee a limited, non-transferable, non-assignable and terminable right to market, resell and provide End User Support (as defined in Section 6 below) for the InterWorld Products, in the exclusive and non-exclusive territories set forth on the attached Exhibit A, to End Users. 1.4 System Integrator License. Subject to the terms and conditions of this Agreement, InterWorld grants Licensee a limited, non-exclusive, non- transferable, non-exclusive, non-assignable and terminable license to provide consulting, systems integration and implementation services of the InterWorld Products to Licensee's End Users in the territories set forth on the attached Exhibit A. 1.5 Trademark and Logo License. Subject to the terms and conditions of this Agreement, InterWorld grants to Licensee a limited, non-transferable, non-assignable and terminable right to use InterWorld's trademarks, service marks, combination marks and logos ("Marks") solely in connection with Licensee's advertising and promotion of the InterWorld Products as specifically permitted hereunder. Use of the Marks shall be subject to any usage guidelines and notice requirements provided in writing by InterWorld from time to time. All uses of the Marks by Licensee shall inure to the benefit of InterWorld and except for the limited right and license granted above, Licensee shall not have nor obtain any right, title or interest in or to the Marks. Licensee agrees not to adopt, use or apply for registration of the Marks (or any mark confusingly similar thereto) anywhere in the world, nor shall Licensee engage, participate or otherwise become involved in any activity or course of action that diminishes and/or tarnishes the image and/or reputation of the Marks. Any marketing materials used by Licensee under this Agreement that include the Marks, other than materials generated or supplied by InterWorld, shall be subject to a one time review and prior written approval of InterWorld in its sole discretion, provided such use may be revoked in the event of material breach of this clause by Licensee upon written notice to Licensee. InterWorld and Licensee agree that Licensee shall not be required to resubmit for InterWorld's approval marketing materials that previously have been approved in writing by InterWorld, or slight variations thereof that materially conform in all respects to such marketing materials previously approved in writing by InterWorld. InterWorld and Licensee further agree that, from time to time, InterWorld may require changes to previously approved marketing materials. 1.6 Reserved Rights. All rights not expressly granted hereunder are reserved by InterWorld, and no rights or licenses are implied by this Agreement. If Licensee desires to use the InterWorld Products for its commercial business purposes, Licensee shall negotiate in good faith with InterWorld the terms and conditions of such use based on the then current form of InterWorld Corporation Software License Agreement. Except as expressly provided herein, InterWorld does not convey any intellectual property rights to the Licensee. The InterWorld Products shall only be resold and distributed by Licensee in object code form and except as otherwise provided herein, Licensee shall have no right whatsoever to receive, review, or otherwise use or have access to the source code for the InterWorld Products. InterWorld reserves the right to discontinue the development, production, licensing or distribution of any of the InterWorld Products and to modify, replace or add to the InterWorld Products in its discretion at any time. 1.7 Resale Limitations. Licensee shall not resell any products or services of InterWorld's competitors, as set forth in Exhibit A that are competitive with the products or services then being offered by InterWorld. Licensee may not resell the InterWorld Products to third parties where Licensee knows that such third party is purchasing the InterWorld Products for resale unless such third party has been approved by InterWorld as an authorized reseller and such approval shall not be unreasonably withheld. Unless otherwise specifically agreed to by InterWorld in writing, Licensee will not appoint or permit (directly or indirectly) any independent agent, representative, distributor, system integrator, value-added reseller or other third party to promote, license, distribute or otherwise market, maintain or support the InterWorld Products. 1.8 Other Reseller Arrangements: To the extent InterWorld is a party to any other reseller agreements, other than reseller agreements with aziza GmbH, NETHolding B.V., or Nippon System Development Co., Ltd., any revenues under such agreements shall be included as Net License Fees and shall be apportioned as set forth in Section 3 below. 2. OWNERSHIP OF PRODUCTS. 2.1 Ownership. The InterWorld Products are owned exclusively by InterWorld or its sub-licensors and are protected by trademark, patent, copyright, or trade secret laws and international conventions. All rights in and to the patents, copyrights, trademarks and trade secrets of the InterWorld Products are and shall remain with InterWorld and its licensors. No title to, or ownership, of the InterWorld Products is transferred to Licensee. Licensee agrees not to adopt, use or apply for registration of the Marks (or any mark confusingly similar thereto) anywhere in the world, nor shall Licensee engage, participate or otherwise become involved directly or indirectly in any activity or course of action that challenges InterWorld's exclusive rights of ownership in and to the Marks, or diminishes and/or tarnishes the image and/or reputation of the Marks. Licensee agrees to execute such further documents as may be requested by InterWorld for the purpose of confirming, registering, or defending InterWorld's exclusive ownership rights in and to the Marks anywhere in the world. Licensee shall be allowed to make a reasonable number of copies of the InterWorld Products or their associated documentation exclusively for backup or archival purposes only. 2.2 Prohibitions. Licensee shall not permit any of its personnel to remove any proprietary or other legend or restrictive notice contained or included in any material provided by InterWorld and Licensee shall not permit its personnel to reproduce or copy any such material except as expressly authorized hereunder. Except as expressly provided herein, Licensee shall not copy, translate, localize, distribute, license, or modify any portion of the InterWorld Products without the prior written consent of InterWorld. Licensee shall not attempt to decompile, reverse engineer, disassemble or create derivative works of the object code or source code of the InterWorld Products. 2.3 Escrow of InterWorld Source Code: The parties agree that Licensee may, at any time while the Agreement is in effect, enter into an escrow arrangement with InterWorld and its escrow agent, DSI Technology Escrow Services ("DSI"). Licensee shall use the source code deposited into escrow only in the event that InterWorld or its successor in interest is unable to perform its obligations under this Agreement due to bankruptcy, insolvency, or cessation of business and such use shall be limited to such purpose. At Licensee's option, Licensee may allow its end user customers to be beneficiaries of the escrow agreement. InterWorld may change escrow agents by providing written notice to Licensee, provided that the terms of the escrow arrangement with such new agent are in all material respects the same as those in place with DSI. Furthermore, InterWorld hereby agrees that should Licensee elect to participate in the aforementioned escrow arrangement, Licensee will be a preferred beneficiary. All costs associated with Licensee being a preferred beneficiary shall be the responsibility of Licensee exclusive of the costs for depositing the Software with DSI, which will be the responsibility of InterWorld. 3. ROYALTY PAYMENTS. 3.1 Price List. A copy of the applicable price list for InterWorld's Products is attached as Exhibit C. InterWorld and Licensee will review and if applicable agree on an adjustment of the above mentioned price list every six (6) months. The parties' consent to adjustments to the price list will not be unreasonably withheld. 3.2 Interim Requirements. Licensee shall be required to meet the following requirements ("Interim Requirements"): RCT RCT RCT RCT RCT RCT RCT RCT 3.3 Royalties for Product Sales. For all Licensee sales of the InterWorld Products to each of its End Users in the Territory, Licensee shall pay directly to J Net, as senior secured creditor of InterWorld, a royalty amount of RCT of the Net License Fees. Net License Fees shall be calculated as the actual license fees charged by Licensee to End Users as set forth in Licensee's agreements with its End Users and provided with Licensee's order to InterWorld using the attached Exhibit E less the third party licensor fees described in Section 3.5 and less the royalties as noted in Exhibit A exclusive of fees attributable to support and maintenance, third party licensor royalties and services fees. For example, if the Licensee generates a total sale of RCT with software licenses accounting for RCT, maintenance for RCT, services for RCT and third party royalty payments totaling RCT, then the Net License Fees would be calculated as follows: RCT - RCT = RCT and the royalty amount owed to J Net, as senior secured creditor of InterWorld would be RCT. The royalty shall be due J Net, as senior secured creditor of InterWorld, as it is received by Licensee. Licensee may apply a discount to the license fees listed on the InterWorld Price List included as Exhibit C herein, provided such discount shall not exceed RCT without the prior written authorization of InterWorld. 3.4 Royalties for Support and Maintenance. Licensee shall include first year support and maintenance fees in any sale of the InterWorld Products to its End Users, which shall be a fixed percentage of the list price of the InterWorld Products as described in Exhibit C. InterWorld shall receive as royalties RCT of such support and maintenance fees charged to End Users by Licensee. For purposes of this clause, maintenance revenue shall not include customer maintenance revenues derived from pre-existing InterWorld customers. 3.5 Royalties for Third Party Licensors of InterWorld Products. For any sale of the InterWorld Products to its End Users, Licensee shall pay to InterWorld the Third Party Licensor Fees as set forth on Exhibit H out of the actual license fees charged by Licensee to End Users as set forth in Licensee's agreements with its End Users and provided with Licensee's order to InterWorld using the attached Exhibit E exclusive of fees attributable to support and maintenance and services fees. 3.6 Shipping and Taxes. All shipments are F.O.B. the designated point of delivery. Licensee shall pay all applicable federal, state, local or similar taxes, import and export fees and duties unless it can provide a valid exemption certificate. If applicable, Licensee will furnish InterWorld with appropriate tax exemption certificates. In no event shall Licensee be responsible for InterWorld's income taxes, franchise taxes or similar taxes. 3.7 Payment. Except as otherwise agreed upon in writing by the parties, all royalties due to J Net or InterWorld, as the case may be, pursuant to this Agreement shall be due net thirty (30) days from the date of receipt of fees by Licensee for the InterWorld Products. Interest shall accrue on any delinquent amounts owed by Licensee for the InterWorld Products at the rate of 1.5% per month, or the maximum rate permitted by law, whichever is less. 4. END USER LICENSE TERMS AND CONDITIONS. Licensee shall ensure that all End Users shall execute the InterWorld End User License Agreement ("End User License Agreement"), attached hereto as Exhibit D and signed by an authorized representative of the End User or if licensed under Licensee's own software license agreement, then the use shall be governed by Licensee's license agreement, which shall contain terms substantially the same as those contained in Exhibit D. Licensee shall submit its End User License Agreement for InterWorld's review prior to commencing any licensing activity. 5. ORDERING AND DELIVERY. InterWorld shall initially deliver five (5) copies of the InterWorld Products to Licensee for delivery to End User in accordance with this Agreement. Thereafter, the parties shall mutually work together to insure that Licensee has adequate copies of Software on hand to address the pipeline. 6. PRODUCT SUPPORT AND MAINTENANCE. Licensee shall use its best efforts to ensure that each End User purchases first year maintenance and support ("End User Support") from Licensee for the InterWorld Products licensed to such End Users. Licensee shall be solely responsible for providing First Level End User Support for the InterWorld Products to its End Users in accordance with the terms and conditions of Exhibit F attached hereto. Additionally, Licensee and InterWorld shall split all Upgrade Service Fees generated from any current customer not set forth on Schedule 1 hereto, with InterWorld receiving RCT of such Upgrade Service Fees and Licensee receiving RCT of such Upgrade Service Fees; provided, however, that InterWorld performs such upgrade service. InterWorld shall receive RCT of any Upgrade Service Fees generated from any current customer set forth on Schedule 1 hereto. "Upgrade Service Fees" shall mean any fees generated by InterWorld from any sale of a suite of services aimed at upgrading the InterWorld Products to current customers. 7. LICENSEE IMPLEMENTATIONS. 7.1 Licensee Implementations Support. Licensee shall have the option to purchase the services of InterWorld's Professional Services consultants to assist in implementations and/or to provide services to its End Users. Fees for such consultants shall be charged to Licensee at a mutually agreed upon hourly rate. In addition to any fees relating to InterWorld's Professional Services consultants, for all Licensee sales of "courseware training" licenses to third parties, Licensee shall pay directly to InterWorld a royalty amount equal to RCT of all revenues derived from such "courseware training" licenses. However, in the event Licensee trains its End Users in the Territory, Licensee shall pay directly to InterWorld a royalty equal to RCT for each student that is trained during such "courseware training" in lieu of such RCT royalty payment referenced above. 7.2 Subsequent Joint Implementations. For any End User engagement in which InterWorld and Licensee jointly provide implementation services to End Users, the following three tasks, at a minimum, will be performed: (a) install, or provide quality assurance following the installation on the End User's equipment of any InterWorld Products purchased by the End User; (b) work with End User to develop a detailed implementation work plan for the implementation of the purchased InterWorld Products; and (c) conduct periodic quality assurance reviews throughout the End User's implementation cycle. All remaining implementation tasks to be performed, whether by End User, Licensee, or InterWorld or other third party, will be determined via the detailed implementation planning process. 8. TRIAL AND BETA LICENSES. 8.1 Trial Licenses. Pursuant to Licensee's rights under Section 1.2 of the Agreement, Licensee may distribute trial licenses to its End Users provided that such End Users agree to use InterWorld Products substantially in accordance with the terms and conditions of the InterWorld Trial License Agreement attached hereto as Exhibit G. If licensed under Licensee's own trial software license agreement, then the use shall be governed by Licensee's license agreement, which shall contain terms substantially similar to those contained in Exhibit G. Licensee shall submit its End User License Agreement for InterWorld's review prior to commencing any licensing activity. At the close of each month, Licensee shall deliver to InterWorld a copy of all executed Trial License Agreements. 8.2 Beta Licenses. If Licensee is selected for participation and elects to participate in a beta release program ("Beta Release"), Licensee agrees (i) InterWorld shall have no obligation to correct errors or deliver updates to the Beta Release; and (ii) InterWorld shall have no obligation to otherwise support the Beta Release or any later version of the Beta Release delivered to Licensee; and (iii) Licensee shall provide InterWorld with appropriate test data for the Beta Release if necessary to resolve problems in the Beta Release encountered by Licensee and will promptly report to InterWorld any error condition discovered in the Beta Release; and (iv) the Beta Release is experimental, may contain problems and errors and is being provided to Licensee on an as-is basis with no warranty of any kind, express or implied; and (v) neither party will be responsible or liable to the other for any losses, claims or damages of whatever nature, arising out of or in connection with the performance or nonperformance of the Beta Release; and (vi) Licensee's use of the Beta Release shall not be related in any way to production applications or to Licensee's delivery of the InterWorld Products to Licensee's End Users; and (vii) Licensee will not distribute the Beta Release to third parties without the prior written approval of InterWorld; and (viii) Licensee shall promptly install each later version of the Beta Release received from InterWorld and, upon such receipt, shall stop use of the prior version. 9. TERM AND TERMINATION. 9.1 Term. Unless otherwise terminated in accordance with the terms and conditions of this Agreement and/or any addenda thereto, this Agreement shall initially be effective from the date of execution and shall continue in full force and effect for a period of RCT. Upon termination, all licenses granted hereunder shall terminate except as needed to support End Users, and Licensee shall immediately cease using the InterWorld Products and their associated documentation except as needed to support End Users. 9.2 Termination. Except as otherwise provided in this Agreement, either party may terminate this Agreement immediately upon written notice to the other party if such party: (i) becomes the subject of any voluntary or involuntary bankruptcy or insolvency proceeding under any applicable law; provided, however, that such proceeding does not relate to a proceeding initiated against InterWorld by J Net, as a senior secured creditor of InterWorld; (ii) ceases to be actively engaged in business; provided, however, that J Net or its designee has not succeeded to the ownership of the InterWorld Products; or (iii) breaches any material term or condition of this Agreement (including but not limited to, failure to pay when due any fees hereunder) and fails to remedy such breach within thirty (30) days after receiving written notice thereof. Any breach, which by nature cannot be remedied, shall entitle the non-breaching party to terminate this Agreement immediately upon written notice to the other party. This remedy shall not be an exclusive remedy and shall be in addition to any other remedies the non- breaching party may have under this Agreement or otherwise. 9.3 Termination by InterWorld. In addition to Section 9.2, InterWorld may terminate this Agreement upon thirty (30) days written notice in the event the Letter of Agreement has been terminated (for whatever reason) or if Licensee's Interim Requirements, as specified in Section 3.2 are not achieved. 9.4 Either party may terminate this Agreement and the licenses granted hereunder by giving written notice of termination to the other, effective immediately upon its sending without need of intervention of any court or other authority if the other party (a) shall disclose, publish, display or otherwise make available any Confidential Information (as defined herein) to any person in violation of this Agreement or (b) materially fail to perform, or be in material breach of, any other of its obligations hereunder and shall fail to remedy such deficiency or breach within thirty (30) business days after receipt of notice from InterWorld with respect thereto. 9.5 Expiration or termination of this Agreement shall not relieve either party of any obligation to pay amounts due as a result of transactions occurring prior to such expiration or termination, or effect any obligations of either InterWorld or Licensee to End User. In the event of termination of this agreement, Licensee shall use best efforts to transfer all maintenance and support contracts to InterWorld. 9.6 The parties acknowledge that this Agreement is for a limited period only. The expiration or termination of this Agreement at the end of the original term or any renewal term shall not give rise to the payment of any indemnity, compensation or damages whatsoever by either party to the other. 9.7 Survival. 1.6, 2, 3, 4, 9, 10, 12, 13, 14, 15 and 17 of this Agreement shall survive the termination of this Agreement. 10. CONFIDENTIALITY. Neither party shall disclose or use any information of the other party designated as "Confidential Information." Confidential Information shall include, without limitation: (i) the InterWorld Products, including all source and object code and associated documentation; (ii) information relating to the disclosing party's software or hardware products, API data files, specifications, databases, networks, system design, file layouts, tool combinations and development methods as well as information relating to the disclosing party's business or financial affairs, which may include business methods, marketing strategies, pricing, competitor information, product development strategies and methods, customer lists and financial results; (iii) information received from others that the disclosing party is obligated to treat as confidential; (iv) information (whether disclose in writing or orally) designated or identified as confidential by either party; and (v) all tangible materials (written or printed documents, computer disks or tapes, or user or machine readable) which contain Confidential Information. Confidential Information does not include information that can be demonstrated by written documentation: (a) was in the public domain at the time it was disclosed or becomes part of the public domain through no act or omission of the other party; (b) is disclosed with prior written approval of InterWorld or Licensee, where applicable; (c) is disclosed by a third party to a party without any obligation of confidentiality; (d) is independently developed by a party without any reliance on Confidential Information; or (e) is disclosed pursuant to the order or requirement of a court, administrative agency, or other governmental body, provided that reasonable notice is provided to InterWorld or Licensee, where applicable, so that it may seek a protective order or other appropriate remedy. The parties agree to maintain the confidentiality of the Confidential Information and to protect as trade secret all of the other party's Confidential Information by preventing any unauthorized copying, use, distribution, installation or transfer of possession of such information. Each party agrees to exercise the same reasonable procedures and precautions towards the other party's Confidential Information that it maintains with respect to its own Confidential Information. Both parties acknowledge that any use or disclosure of the other party's Confidential Information in a manner inconsistent with the provisions of this Agreement may cause the non-disclosing party irreparable damage for which remedies other than injunctive relief may be inadequate. Both parties agree that the non-disclosing party shall be entitled to receive from a court of competent jurisdiction equitable relief to restrain such use or disclosure in addition to other appropriate remedies. The results of benchmarks or other performance tests of the InterWorld Products shall be deemed Confidential Information and may not be disclosed without InterWorld's prior written consent. For each copy of an InterWorld Product in its possession, Licensee shall maintain reasonable and accurate records identifying the location and specific media and make such records available to InterWorld during regular business hours upon reasonable notice. Within five (5) days after the termination or expiration of this Agreement for any reason, each party shall return, except as needed to support End Users, all Confidential Information of the other party provided to it hereunder, and all copies thereof in its possession, custody or control, and shall destroy or render unusable, except as needed to support End Users, all other Confidential Information of the other party and copies thereof which for any reason cannot be delivered. In such event, an executive officer of such party shall certify in writing to the other that all Confidential Information of the other party has been returned or destroyed, and Licensee shall certify that use of the InterWorld Products and documentation has been discontinued by Licensee other than as necessary to support obligations to End Users. The terms and provisions of this Section 10 shall survive any termination of this Agreement for any reason. 11. PROPRIETARY NOTICES, PRESS RELEASE AND MARKETING. 11.1 Proprietary Notices. Licensee shall ensure that all proprietary notices incorporated in, or fixed to the InterWorld Products shall be duplicated by Licensee on all copies or extracts thereof and shall not be altered, removed or obliterated. Licensee will not remove any copyright, trademark or proprietary notices from copies of the InterWorld Products provided to Licensee by InterWorld. In addition, Licensee shall not make any representations concerning the InterWorld Products, which are inconsistent with InterWorld's published specifications, advertising, or marketing materials. 11.2 Joint Press Release. Within sixty (60) days after the execution of this Agreement, Licensee agrees to cooperate with InterWorld to create and issue a joint press release describing the parties' business relationship. Such press release shall, at a minimum, describe the nature of the business of Licensee and may include quotes from the CEO or an authorized representative of one or both parties with respect to such relationship. Such press release is subject to final approval by both parties, which shall not be unreasonably withheld or delayed. 11.3 Website Link. In an effort to publicize this business relationship, each party is hereby granted the right to display the name, trademarks or logo of the other party on its Website, including a hotlink to the other party's Web site and description of the business relationship, provided that any such display and description have been approved in advance by the other party prior to use, which approval shall not be unreasonably withheld or delayed. 11.4 Mutual References. Each party may identify the other in its marketing and advertising materials, and such materials may include relevant quotes from either InterWorld or Licensee; provided that any such materials have been approved in advance by the other party prior to use, which approval shall not be unreasonably withheld or delayed. 12. NON-SOLICITATION OF EMPLOYEES. During the term of this Agreement and for one (1) year thereafter, the parties agree not to solicit for employment, hire, or contract with each other's employees, unless mutually agreed upon by the parties hereto. This provision shall not restrict the right of either party to solicit or recruit generally in the media, and shall not prohibit either party from hiring any employee of the other who answers any advertisement or who otherwise voluntarily applies for employment without having been initially personally solicited or recruited by the applicable party. 13. REPORTS AND AUDITS. 13.1 Licensee Reports. Within thirty (30) days after the end of each calendar quarter during the term of this Agreement, Licensee shall provide InterWorld with (a) reports of the sublicensing of the InterWorld Products in such quarter by Licensee, including the identities of End Users who received trial licenses in such quarter and the identities of all End Users to whom Licensee resold the InterWorld Products in such quarter; and (b) reports and full details of the calculation of amounts payable to InterWorld in connection with any of the InterWorld Products or services requested and granted in such quarter ("Licensee Reports"). In addition, upon request by InterWorld, Licensee shall provide a monthly forecast of Licensee's activity in connection with this Agreement. 13.2 Audit. Licensee shall maintain books and records in connection with its activities under this Agreement for at least three (3) years after the termination of this Agreement. Such records shall include executed software license (including trial licenses) and/or maintenance agreements and the information required in or related to the Licensee Reports. InterWorld may, at any time during the period that Licensee is obligated to maintain such books and records, audit such books and records to ensure Licensee's compliance with the terms of this Agreement. Any such audit shall be conducted during regular business hours at the Licensee's offices, shall not unreasonably interfere with the Licensee's business activities, and shall be performed at InterWorld's expense; however, the cost of such audit up to $10,000 shall be paid by Licensee if such audit reveals an underpayment by Licensee of more than ten percent (10%) of the amounts payable by Licensee to InterWorld in any six (6) month period. 14. WARRANTY AND LIMITATION OF LIABILITY. 14.1 InterWorld warrants that, for a period of one (1) year after receipt by Licensee's end user customer of the initial delivery of the InterWorld Products (the "Warranty Period"), the media on which the InterWorld Products is delivered will be free of defects in material and workmanship under normal use and the unmodified InterWorld Products, when properly installed and used, will conform in all material respects to the InterWorld documentation provided to Licensee. . Licensee's remedy in the event of non-conformity of the InterWorld Products will be (a), replacement of the defective InterWorld Products to end user's satisfaction or (b) in the event (a) is not possible, return any license and maintenance royalties paid. Without limitation of any term or condition contained in this Agreement, InterWorld's obligation hereunder does not apply to any nonconformance caused by (A) improper or inadequate maintenance or calibration; (B) software, interfacing equipment, parts or supplies not supplied by InterWorld; or (C) improper site preparation or equipment. 14.2 InterWorld hereby warrants that the functions, calculations and other computing processes of the Software will perform in a consistent manner regardless of the date in time on which the processes are actually performed and regardless of the date input to the Software. Date input, whether before, on or after January 1, 2000 and whether or not the dates are affected by leap years, will retain its integrity barring other third party product or hardware maladies. The Software accepts, manipulates and returns date inputs and date values accurately and in a consistent manner without consequence to calendar dates. The Software accepts and responds to two-digit, year-date input in a manner that resolves any ambiguities as to the century in a defined, predetermined and appropriate manner. 14.3 THE EXPRESS WARRANTY SET FORTH IN SECTIONS 14.1 & 14.2 CONSTITUTE THE ONLY WARRANTY WITH RESPECT TO THE INTERWORLD PRODUCTS. INTERWORLD MAKES NO OTHER REPRESENTATIONS OR WARRANTIES OF ANY KIND, WHETHER EXPRESS OR IMPLIED (EITHER IN FACT OR BY OPERATION OF LAW). INTERWORLD EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR USE OR A PARTICULAR PURPOSE, AND ALL LIABILITY AGAINST INFRINGEMENT, OR ARISING FROM COURSE OF PERFORMANCE, COURSE OF DEALING, OR USAGE OF TRADE. INTERWORLD DOES NOT WARRANT THAT THE INTERWORLD PRODUCTS ARE ERROR-FREE, THAT THEY WILL SUIT AN END USER'S APPLICATIONS OR REQUIREMENTS OR OPERATE IN THE COMBINATIONS WHICH MAY BE SELECTED FOR USE BY AN END USER, OR THAT THE OPERATION OF THE INTERWORLD PRODUCTS WILL BE SECURE OR UNINTERRUPTED. 14.4 THE TOTAL LIABILITY OF INTERWORLD AND ITS SUPPLIERS TO THE LICENSEE, INCLUDING BUT NOT LIMITED TO LIABILITY ARISING OUT OF CONTRACT, TORT, BREACH OF WARRANTY, OR ANY OTHER CLAIMS BY THIRD PARTIES OR OTHERWISE, SHALL NOT, IN ANY EVENT, EXCEED THE LICENSE FEES PAID BY END USER FOR THE SOFTWARE WHICH GAVE RISE TO THE CLAIM EXCEPT FOR LIABILITIES ARISING AS DESCRIBED IN SECTION 15. INTERWORLD AND ITS SUPPLIERS SHALL NOT BE LIABLE FOR INDIRECT DAMAGES HEREUNDER AND IN NO EVENT SHALL INTERWORLD OR ITS SUPPLIERS BE LIABLE FOR LOSS OF PROFITS, LOSS OR INACCURACY OF DATA OR ANY INDIRECT, SPECIAL, INCIDENTAL, PUNITIVE OR CONSEQUENTIAL DAMAGES (INCLUDING WITHOUT LIMITATION THE COST OF ANY SUBSTITUTE PROCUREMENT) EVEN IF SUCH PARTY HAD BEEN ADVISED OF THE POSSIBILITY THEREOF. IN NO EVENT SHALL INTERWORLD BE LIABLE FOR ORAL OR WRITTEN REPRESENTATIONS MADE BY LICENSEE THAT ARE INCONSISTENT WITH INTERWORLD'S (a) PUBLISHED SPECIFICATIONS FOR THE INTERWORLD PRODUCTS, (b) ADVERTISING, OR (c) MARKETING MATERIALS. 15. INDEMNIFICATIONS. 15.1 InterWorld, at its own expense shall, (a) defend, and/or at its option, settle any claim or suit against Licensee on the basis of infringement of any third party intellectual property right by the InterWorld Products or use thereof, and (b) pay all damages and expenses finally paid to third parties as a result of such claim or any settlement thereof, provided that (i) InterWorld has sole control of the defense and/or settlement, and (ii) Licensee promptly notifies InterWorld of such claim and gives InterWorld all information known to Licensee relating thereto, and (iii) Licensee cooperates with InterWorld in the defense of such claim or any related settlement. 15.2 If, within five (5) years from the date of delivery to Licensee's end user customers the InterWorld Products are alleged to be infringing or their use is enjoined, InterWorld shall at its option do one of the following: (a) procure for Licensee the right to use the InterWorld Products, (b) replace the InterWorld Products or affected part thereof with other suitable InterWorld Products, or (c) modify the InterWorld Products or the affected part thereof to make it non-infringing. If the foregoing is not commercially feasible, InterWorld shall return to Licensee all license fees paid by Licensee for the InterWorld Products or affected part thereof and Licensee will return such fees to the End User. 15.3 InterWorld shall not have any obligations under this Section 15 to the extent a claim is based upon (a) the use of any altered version of the InterWorld Products, if infringement would have been avoided by a current unaltered version, (b) use, operation or combination of the InterWorld Products on or with programs, data, equipment or documentation not provided by InterWorld not in accordance with the documentation provided, if infringement would have been avoided by not using, operating or combining the InterWorld Products with such programs, data, equipment or documentation not provided by InterWorld, (c) any information, data, illustrations, graphics, pictures, text or other content placed on the Web site by Licensee or any third party, and (d) any activities of Licensee or its representatives after InterWorld has notified Licensee that such activities may result in the infringement of the intellectual property rights of any third party. This Section 15 states the entire liability of InterWorld and the exclusive remedy of Licensee with respect to any alleged infringement by the InterWorld Products or any part or use thereof. 15.4 This Section 15 shall not apply to any Beta Release (see Section 8.2). 15.5 Licensee shall defend, indemnify and hold harmless InterWorld (including payment of all reasonable costs, attorneys' fees, settlements and damages) from any actions brought against InterWorld arising out of the marketing, advertising or distribution of the InterWorld Products by Licensee, unless such claims or damages would not have occurred but for a material breach by InterWorld of any of the terms of this Agreement, and provided that: (a) Licensee is promptly notified in writing of the claim; (b) Licensee has sole control of the investigation, preparation, defense, and/or settlement of such claim; (c) at Licensee's request and expense, InterWorld provides reasonable assistance and information to Licensee. 16. CUSTOMER RELATIONSHIP AND MARKETING COOPERATION Subject to the provisions of this Agreement, governing the use and protection of Confidential Information, InterWorld and Licensee will provide each other their customer list and contact information. Licensee will coordinate with InterWorld on calls to existing customers and will exercise its best efforts to minimize the risk of duplication and customer confusion. Licensee and InterWorld will share call reports and other customer contact information promptly on an ongoing basis. Licensee and InterWorld will each bear their respective costs on calls to existing InterWorld customers. InterWorld will be entitled to reimbursement of its out of pocket expenses and an appropriate per diem charge for personnel who assist Licensee on sales solicitation calls. 17. MISCELLANEOUS. 17.1 This Agreement and the relationship between the parties hereto shall be governed by and construed and enforced in accordance with the laws of the State of Texas, without regard to the principle of conflicts of law or the United Nations Convention on the International Sale of Goods. Additionally, not withstanding anything to the contrary found herein, the parties agree that the jurisdiction and venue of any action with respect to this Agreement shall be in a court of competent subject matter jurisdiction located in the State of Texas, Dallas County. The parties hereby consent to the personal jurisdiction and proper jurisdiction in the courts in the State of Texas, Dallas County. In view of InterWorld's proprietary rights and the nature of the Confidential Information, the licenses granted herein and the provisions relating to Confidential Information are of a special and unique character, and Licensee acknowledges that money damages alone will not reasonably or adequately compensate InterWorld for any breach of its obligations relating to the InterWorld Products, or InterWorld's intellectual property rights, or Confidential Information. Therefore, the parties expressly agree that in the event of the breach or threatened breach of any such provisions, in addition to other rights or remedies which InterWorld may have, at law, in equity, or otherwise, InterWorld shall be entitled to seek injunctive or other equitable relief compelling specific performance of, and other compliance with, the terms of such provisions. 17.2 Any notice or other communication required or permitted by this Agreement shall be in writing and shall be either delivered personally, sent by first-class mail, nationally recognized courier or by confirmed facsimile transmission to the address of the party set forth above and to the attention of the President or General Counsel. All notices shall be deemed given on the business day actually received. 17.3 No delay or default in performance of any obligation by either party due to a force majeure shall constitute a breach of this Agreement, except for a breach of payment obligations hereunder. 17.4 The provisions of this Agreement are severable and, in the event a court of competent jurisdiction determines any one or more of the provisions contained in this Agreement is invalid, illegal or unenforceable in any respect, the remaining provisions of this Agreement shall remain in full force and effect. 17.5 Except as otherwise provided herein, this Agreement constitutes the entire agreement between the parties and supersedes any and all prior agreements between them, whether written or oral, with respect to the subject matter hereof, and may not be amended or modified except in a writing signed by the parties hereto. No waiver by either party, whether express or implied, of any provision of this Agreement, or of any breach thereof, shall constitute a continuing waiver of such provision or breach or waiver of any other provision or breach of this Agreement. 17.6 The parties are independent contractors and neither party is an employee, agent, partner, or joint venture of the other party. Neither party shall have the right to bind the other party to any agreement with a third party or to incur any obligation or liability on behalf of the other party. 17.7 Licensee shall not assign this Agreement or any of its rights nor delegate its obligations hereunder without the prior written consent of InterWorld, which approval shall not be unreasonably withheld or delayed. Notwithstanding the foregoing, no prior approval shall be required to the extent InterWorld assigns this Agreement to J Net, its designee or to an entity that succeeds to all or substantially all of that its assets as a result of a sale, merger or otherwise. In no event shall any such assignment relieve a party of its financial obligations hereunder. Any attempt at an unauthorized assignment shall be null and void. This Agreement shall be binding upon the parties' successors and permitted assigns. 17.8 Export Restrictions. Licensee shall not transfer, directly or indirectly, any restricted InterWorld Products or technical data received from InterWorld, or the direct product of such data, to any destination subject to export restrictions under U.S. law, unless prior written authorization has been obtained by Licensee from the appropriate U.S. agency. 17.9 U.S. Government Restricted Rights. Use, duplication or disclosure by the U.S. Government is subject to restrictions set forth, as applicable, at: FAR 52.227-14 (JUN 1987) Alternate III(g)(3)(i), 48 CFR Ch. 1 (10-1-96 Edition); FAR 52.227-19 (JUN 1987), 48 CFR Ch. 1 (10-1-96 Edition); DFARS 252.227-7013(b)(3)(A) (NOV 1995), 48 CFR Ch. 2 (10-1-96 Edition); DFARS 252.227-7014(b)(3) (JUN 1995), 48 CFR Ch. 2 (10-1-96 Edition); or DFARS 252.227-7016(b)(2) (JUN 1995), 48 CFR Ch. 2 (10-1-96 Edition). Manufacturer is InterWorld Corporation, 395 Hudson Street, New York, NY 10014. 17.10 This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original and all which together shall constitute a single instrument. [REST OF PAGE INTENTIONALLY LEFT BLANK] INTERWORLD CORPORATION TITAN TECHNOLOGIES, LP By: Titan Ventures Management, LLC, its General Partner By: /s/ Michael Donahue By: /s/ David Cary _________________________ __________________ Name: Michael J. Donahue Name: David Cary Title: Vice Chairman and CEO Title: CFO Attachments: Exhibit A InterWorld Products and Territory; List of Competitors Exhibit B Site Information for Internal Use License for InterWorld Products Exhibit C InterWorld Corporation Price List Exhibit D InterWorld Corporation End User License Agreement Exhibit E Reseller License and Support Order Form Exhibit F Support and Maintenance Exhibit G InterWorld Corporation Trial License Agreement Exhibit H - Royalties for Third Party Licensors Exhibit I Royalties for Reseller Agreements as Noted in Exhibit A Schedule 1 Certain Current Customers SCHEDULE 1 CERTAIN CURRENT CUSTOMERS RCT RCT RCT RCT RCT RCT EXHIBIT A InterWorld Products and Territory 1. Exclusive Territories: RCT RCT RCT RCT Non-Exclusive Territories: RCT RCT Licensee explicitly acknowledges that InterWorld has previously granted exclusive rights to sell, resell, license and sublicense InterWorld Products and services to RCT. Licensee acknowledges and agrees that any sales it makes in those exclusive territories will require Licensee to pay certain royalties to RCT. Licensee further acknowledges that InterWorld has previously granted non-exclusive rights to sell, resell, license and sublicense InterWorld Products and services to RCT. In any event, InterWorld shall transfer to Licensee all rights to sell, resell, and sublicense InterWorld Products not previously transferred to a third party. To the extent not previously transferred, such transferred shall be exclusive. 2. InterWorld Products: All Generally Available InterWorld Products (the "InterWorld Products") 3. List of InterWorld Competitors ATG Broadvision Blue Martini Click Commerce Comergent Technologies InfoNow Corporation Intershop Ironside Technologies, Inc. HAHT Commerce NetVendor OrderFusion SpaceWorks, Inc. EXHIBIT B Site Information for Internal Use License for InterWorld Products Location Address: ______________________________________________________ ________________________________________________________________________ Web Master Name or Server Administrator: _______________________________ ________________________________________________________________________ Phone Number: __________________________________________________________ Contact Name: __________________________________________________________ Email Address: _________________________________________________________ InterWorld Products:____________________________________________________ ________________________________________________________________________ ________________________________________________________________________ EXHIBIT C InterWorld Corporation Price List To be mutually agreed upon.. EXHIBIT D InterWorld Corporation End User License Agreement This Software License Agreement is entered into and made effective on _____________, 2002, (the "Effective Date") between InterWorld Corporation ("InterWorld"), a Delaware corporation, with offices at 41 East 11th Street, 11th Floor, New York, N.Y. 10003, and ___________________________________ ("End User"), a ____________________corporation, with offices at ______________________________________________________________. 1. DEFINITIONS "Agreement" means this Software License Agreement, any applicable addenda thereto and all referenced exhibits. "Functionality Specifications means the functionality of the Software as described in the Documentation. "Software" means the object code (machine readable) version of the software product(s) listed on Exhibit A-III, or any subsequent Exhibit A-III, including prior and future releases. "Price List" means the then-current price list. "Documentation" means installation user manuals for the Software. "Purchase Order" means a purchase authorization document issued by End User for the licensing of Software. "Designated Platform" means the computer central processing unit ("CPU") and operating system software upon which the InterWorld Software is running and is located at the site designated on Exhibit A-III. 2. LICENSE 2.1 InterWorld hereby grants to End User a non-exclusive, perpetual and non-transferable license to use the Software on the Designated Platform for: (i) internal data processing at End User locations within its authorized Territory; and (ii) enabling on-line users to access information about, and to order electronically, products and services offered by End User on its Web site. End User may make copies of the Software in accordance with any such rights granted hereunder. End User shall notify InterWorld if End User elects to transfer the Software: (i) to a different End User location, or (ii) from one Designated Platform to another Designated Platform, (provided such new Designated Platform runs the same binary version of the Software and the same number of processors). 2.2 All right, title and interest in and to the Software and Documentation (in whole or in part) and all copies thereof, in all languages, formats and media throughout the world, including, without limitation, trademarks, copyrights, trade secrets, patents and other intellectual property rights, shall remain the exclusive property of InterWorld and its suppliers. All rights not expressly granted hereunder are reserved by InterWorld and no rights or licenses are implied by this Agreement. End User acknowledges and agrees that except for the rights specifically granted under this Agreement, End User has no proprietary interest in the Software and Documentation. Except as expressly described in the Documentation, End User shall not modify, reverse engineer, decompile or reverse assemble any Software or part thereof (or otherwise attempt to derive the source code for the Software), or modify the Documentation. End User shall not use the Software or Documentation in a timesharing arrangement nor encumber, rent, lease, transmit, distribute, or transfer the Software and/or Documentation to any third party for any purpose. 2.3 End User may make a reasonable number of copies of the Software for inactive back-up or archival purposes. End User may also make copies of the Documentation for its own internal, non-commercial use. 3. CONFIDENTIALITY 3.1 Neither party shall disclose or use any business and/or technical information of the other party designated orally or in writing as "Confidential" or "Proprietary" (together "Confidential Information") without the prior written consent of the other party. "Confidential Information" includes, without limitation, the Software, (including methods and concepts), Documentation, and all information relating to the disclosing party's business or financial affairs. All Confidential Information shall remain the sole property of the disclosing party. 3.2 Each party shall expressly undertake to use reasonable efforts, not less than it exercises for its own Confidential Information, to retain in confidence and to require its employees and consultants to retain in confidence all Confidential Information. It is expressly understood that a party shall not be liable for disclosure of Confidential Information if such Confidential Information: (a) was already in the public domain at the time it was disclosed; (b) is disclosed with prior written approval of the disclosing party; (c) is disclosed by a third party to a party without any obligation of confidentiality to the disclosing party; or (d) is disclosed pursuant to the order or requirement of a court, administrative agency, or other governmental body, provided that prompt notice is provided to the disclosing party so that it may seek a protective order or other appropriate remedy and/or waive compliance with Section 3 of this Agreement. 3.3 End User shall not release the results of any benchmark of the Software to any third party without the prior written approval of InterWorld for each such release. 4. PROPRIETARY NOTICES The Software and related Documentation are protected by copyright, patent, trademark, and/or trade secret laws and are the intellectual property of and proprietary to InterWorld. All proprietary notices incorporated in or fixed to the Software or Documentation shall be duplicated by End User on all copies or extracts thereof and shall not be altered, removed or obliterated. 5. AUDIT InterWorld or its authorized representatives shall have the right, during normal business hours and with reasonable notice, to audit the relevant records of End User to verify its compliance with this Agreement. In the event End User's license is procured pursuant to a server-based pricing model, and should the number of copies used be greater than that contracted for, or the platform on which the Software is installed differs from the Designated Platform specified, End User shall be invoiced for such additional copies at the price set forth in InterWorld's then-current price list. End User shall remit payment to InterWorld immediately upon receipt of invoice. 6. IDENTIFICATION End User shall display the file containing the phrase "Powered by InterWorld " on the initial screen seen by customers or other end-users when they enter End User's Software application. InterWorld reserves the right to periodically change this file, and End User shall use commercially reasonable efforts to effect such change upon notice from and delivery by InterWorld of such revised file. This phrase shall be a hypertext link to the following Universal Resource Locator ("URL"): www.interworld.com. 7. EXPORT CONTROL Unless prior written authorization has been obtained from the appropriate U.S. agency and reasonable notice has been provided to InterWorld, End User shall not transfer, directly or indirectly, any restricted Software or technical data received from InterWorld, or the direct product of such data, to any destination subject to export restrictions under U.S. law, End User shall indemnify InterWorld for any losses suffered in violation of this Section 7. 8. DELIVERY AND PAYMENTS 8.1 Upon InterWorld's receipt of the this Agreement executed by End User and the Exhibit E from the reseller, InterWorld shall deliver the applicable Software and Documentation to End User by physical medium, electronically or otherwise. 8.2 Unless otherwise specified in writing signed by both parties, payment is due upon the execution of this Agreement. End User shall pay all applicable shipping charges and sales, use, personal property or similar taxes, tariffs or governmental charges, exclusive of InterWorld's income and corporate franchise taxes. End User shall reimburse InterWorld for all costs incurred (including reasonable attorneys' fees) in collecting past due amounts. 8.3 End User must purchase a support and maintenance plan ("Support") from InterWorld for the first year for all Software licensed hereunder. End User will be invoiced for first year Support upon execution of this Agreement. Support shall commence on the date of invoice. Fees for Support in subsequent years shall be subject to increase by InterWorld and billed annually in advance ("Support Fees"). Unless End User notifies InterWorld in writing of its desire not to renew Support sixty (60) days prior to the end of the existing Support period, End User will be invoiced one month prior to the end of the existing Support period for Support for the following year. The renewal invoices will be due net thirty (30) days from the invoice date. In the event that End User is thirty (30) days past due in remitting fees Support fees, InterWorld shall have the right to immediately terminate Support to End User without any liability to End User. End User may reinstate lapsed Support for any then currently supported Software by paying all Support Fees in arrears and InterWorld's professional services costs (on a time and materials basis) plus all travel expenses incurred by InterWorld in updating the Software to the current version. 9. SUPPORT AND MAINTENANCE Provided End User has paid applicable Support Fees, InterWorld shall support the Software in accordance with its then current policies and procedures (a copy of which is attached hereto as Exhibit A-I) and as follows: (a) End User shall designate a primary and secondary End User support staff for all communications with InterWorld's technical support representatives; (b) each support staff may communicate with InterWorld via telephone, facsimile or email for problem resolution during InterWorld's published Support hours; and (c) InterWorld shall make available to End User all updates to the Software commercially released by InterWorld during the Support year. Minor release updates consist of new releases of a particular Software version which provides functional enhancements and error corrections (for example 1.1 to 1.2) and major release updates consist of new releases of a particular Software version which address new system architectures and/or commerce applications (for example 1.0 to 2.0). 10. WARRANTY/LIMITATION OF LIABILITY 10.1 InterWorld warrants that, for a period of ninety (90) days after receipt by End User of the Software (the "Warranty Period"), the media on which the Software is delivered will be free of defects in material and workmanship under normal use and the unmodified Software, when properly installed and used, will conform in all material respects to the Functional Specifications. End Users sole remedy in the event of non-conformity of the Software will be, at InterWorld's sole option, replacement of the defective Software. Without limitation of any term or condition contained in this Agreement, InterWorld's obligation hereunder does not apply to any nonconformance caused by (A) improper or inadequate maintenance or calibration; (B) software, interfacing equipment, parts or supplies not supplied by InterWorld; or (C) improper site preparation or equipment. 10.2 InterWorld hereby warrants that the functions, calculations and other computing processes of the Software will perform in a consistent manner regardless of the date in time on which the processes are actually performed and regardless of the date input to the Software. Date input, whether before, on or after January 1, 2000 and whether or not the dates are affected by leap years, will retain its integrity barring other third party product or hardware maladies. The Software accepts, manipulates and returns date inputs and date values accurately and in a consistent manner without consequence to calendar dates. The Software accepts and responds to two-digit, year-date input in a manner that resolves any ambiguities as to the century in a defined, predetermined and appropriate manner. 10.3 THE EXPRESS WARRANTY SET FORTH IN SECTIONS 10.1 & 10.2 CONSTITUTES THE ONLY WARRANTY WITH RESPECT TO THE SOFTWARE. INTERWORLD MAKES NO OTHER REPRESENTATIONS OR WARRANTIES OF ANY KIND, WHETHER EXPRESS OR IMPLIED (EITHER IN FACT OR BY OPERATION OF LAW). INTERWORLD EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR USE OR A PARTICULAR PURPOSE, AND ALL LIABILITY AGAINST INFRINGEMENT, OR ARISING FROM COURSE OF PERFORMANCE, COURSE OF DEALING, OR USAGE OF TRADE. INTERWORLD DOES NOT WARRANT THAT THE SOFTWARE IS ERROR-FREE, THAT IT WILL SUIT THE END USER'S APPLICATIONS OR REQUIREMENTS OR OPERATE IN THE COMBINATIONS WHICH MAY BE SELECTED FOR USE BY THE END USER, OR THAT THE OPERATION OF THE SOFTWARE WILL BE SECURE OR UNINTERRUPTED. 10.4 THE TOTAL LIABILITY OF INTERWORLD AND ITS SUPPLIERS TO THE END USER, INCLUDING BUT NOT LIMITED TO LIABILITY ARISING OUT OF CONTRACT, TORT, BREACH OF WARRANTY, OR ANY OTHER CLAIMS BY THIRD PARTIES OR OTHERWISE, SHALL NOT, IN ANY EVENT, EXCEED THE LICENSE FEES PAID BY END USER FOR THE SOFTWARE WHICH GAVE RISE TO THE CLAIM. INTERWORLD AND ITS SUPPLIERS SHALL NOT BE LIABLE FOR INDIRECT DAMAGES HEREUNDER AND IN NO EVENT SHALL INTERWORLD OR ITS SUPPLIERS BE LIABLE FOR LOSS OF PROFITS, LOSS OR INACCURACY OF DATA OR ANY INDIRECT, SPECIAL, INCIDENTAL, PUNITIVE OR CONSEQUENTIAL DAMAGES (INCLUDING WITHOUT LIMITATION THE COST OF ANY SUBSTITUTE PROCUREMENT) EVEN IF SUCH PARTY HAD BEEN ADVISED OF THE POSSIBILITY THEREOF. 11. INFRINGEMENT INDEMNITY Notwithstanding Sections 10.3 and 10.4 of this Agreement, InterWorld, at its own expense, shall (i) defend, or at its option, settle any third party claim or suit against End User on the basis of infringement of any trademark, copyright, trade secret or United States patent ("Intellectual Property Right") by the Software or use thereof, and (ii) pay all damages and expenses finally awarded by a court against End User as a result of such claim or any settlement thereof, provided that; (a) InterWorld has sole control of the defense and/or settlement, and (b) End User promptly notifies InterWorld of such claim, and (c) End User cooperates with InterWorld in the defense of such claim or any related settlement (End User shall be reimbursed for any reasonable out-of-pocket expenses). If the Software is alleged to be infringing or is enjoined, InterWorld shall, at its expense, defend such claim and do one of the following: (A) procure for the End User the right to use the Software; (B) replace the Software or affected part thereof with other suitable software; (C) modify the Software or the affected part thereof to make it non-infringing; or (D) if the foregoing are not commercially feasible, InterWorld may terminate the license and return to End User all license fees paid, prorated over a five (5) year from the date of delivery of the Software. InterWorld shall not have any obligations under this Section 11 to the extent a third party claim is based on: (I) use of any altered version of the Software not authorized in writing by InterWorld, (II) use, operation or combination of the Software on or with programs, data, equipment or documentation not provided by InterWorld, (III) any information, data, illustrations, graphics, pictures, text, or other content placed on the Web site by End User or any third party, and/or (IV) any activities of End User or its representatives after InterWorld has notified End User that such activities may result in the infringement of the intellectual property rights of any third party. This Section 11 states the entire liability of InterWorld and the exclusive remedy of End User with respect to any alleged infringement of third party rights by the Software or any part thereof. 12. TERMINATION 12.1 InterWorld may terminate this Agreement if End User has not paid the license fees due hereunder (including, but not limited, to the fees set forth in any addenda and exhibits to this Agreement, and any additional fees due under Section 5 of this Agreement) within fifteen (15) calendar days of the date of written notice to End User that payment is past due. 12.2 Upon termination of this Agreement, End User shall cease using the Software, Documentation and Confidential Information received from InterWorld and shall certify to InterWorld in writing that the Software, Documentation, Confidential Information, and all copies thereof (whether or not modified or merged with other materials) have been destroyed or returned to InterWorld. 12.3 Termination of this Agreement shall not limit either party from pursuing any other remedies available to it, including injunctive relief. In no event shall termination relieve End User of its obligations to pay InterWorld all fees accrued prior to the effective date of termination. Sections 3,5,10.3,10.4,11, and 12 shall survive termination of this Agreement. 13. GENERAL 13.1 Assignment. Neither this Agreement nor any license granted hereunder may be assigned by Client without the prior written consent of InterWorld; any attempt at such prohibited assignment shall be null and void. This Agreement shall be binding upon, inure to the benefit of, and be enforceable by the successors and permitted assigns of the parties. 13.2 Notices. All notices, claims, requests, demands, and other communications hereunder shall be in writing and either delivered personally, or sent by first-class mail, express carrier, or confirmed facsimile transmission to the address of the party set forth above and to the attention of its Chief Financial Officer or General Counsel. All notices shall be deemed given on the business day actually received. 13.3 Governing Law. This Agreement is governed by and construed in accordance with the laws of the State of New York, New York County, without giving effect to conflict of laws. This Agreement shall not be governed by the United Nations Convention of the International Sale of Goods, the application of which is hereby expressly excluded. 13.4 Entire Agreement. This Agreement represents the entire understanding of the parties and supersedes all prior agreements and understandings between the parties. This Agreement may only be altered or otherwise amended or terminated pursuant to an instrument in writing signed by duly authorized representatives of both parties. The waiver by either party of a breach of any provisions of this Agreement shall neither operate nor be construed as a waiver of any subsequent breach. 13.5 Severability. The provisions of this Agreement are severable and, in the event any court of competent jurisdiction shall determine that one or more of the provisions contained in this Agreement is invalid, illegal or unenforceable in any respect, the remaining provisions of this Agreement shall remain in full force and effect. 13.6 Relationship of the Parties. The parties are independent contractors and neither party is an employee, agent, partner of, or in joint venture with the other party. Neither party shall have the right to bind the other party to any agreement with a third party or to incur any obligation or liability on behalf of the other party. 13.7 Joint Publicity. InterWorld may identify Client by name and logo only as a licensee of the Software in its corporate sales presentation, tradeshows, and on its website. Client agrees to cooperate with InterWorld to create two joint press releases: (1) within thirty (30) days after the Software licensed under this Agreement is delivered; and (2) within thirty (30) days of a live implementation of the Software. Such press release is subject to joint approval by Client and InterWorld, which approval shall not be unreasonably withheld or delayed. 13.8 U.S. Government Restricted Rights. If this Agreement is made with the U.S. Government, the use, duplication, or disclosure of this Agreement and the subject matter thereof by the U.S. Government is subject to the restrictions set forth in FAR subparagraphs 52.227-19(a)-(d) for civilian agency contracts and DFARS 252-227-7013(c)(ii) for Department of Defense contracts. InterWorld reserves all unpublished rights under the United States copyright laws. The parties have caused this Agreement to be executed by their respective authorized representatives on the Effective Date. INTERWORLD CORPORATION END USER: BY: ______________________________ BY: ______________________________ Its authorized representative Its authorized representative NAME: _____________________________ NAME: ______________________________ TITLE: _____________________________ TITLE: ______________________________ EXHIBIT E Reseller License and Support Order Form Invoice to: ______________________ Ship to: ______________________ Name: ____________________________ Name: _________________________ Address: _________________________ Address: ______________________ __________________________________ _______________________________ Reseller Contact: ________________ Contact: ______________________ Phone: ___________________________ Phone: ________________________ First Year Support and Maintenance Plan: ___Standard ___Premium ___ Gold Product Qty Processor Number of License Fees Support Fees Name Type Processors _________ _____ __________ ___________ ____________ ___________ _________ _____ __________ ___________ ____________ ___________ _________ _____ __________ ___________ ____________ ___________ _________ _____ __________ ___________ ____________ ___________ _________ _____ __________ ___________ ____________ ___________ _________ _____ __________ ___________ ____________ ___________ _________ _____ __________ ___________ ____________ ___________ _________ _____ __________ ___________ ____________ ___________ Subtotal: ____________ ___________ End User Information: Grand Total: _____________ Company Name: ____________________ Site Address: ____________________ __________________________________ Technical Support Contact: ______________________________ Technical Phone, fax, email: ____________________________ Notes: All InterWorld Products licensed hereunder are governed by the InterWorld End User License Agreement. This order must be submitted to InterWorld with a valid purchase order (if Licensee issues such) and an Exhibit D (End User License Agreement) executed by the End User. EXHIBIT F Support and Maintenance 1. Licensee Support Obligations. Licensee will provide First Level Maintenance and Support Services for the InterWorld Products to its End Users. Unless otherwise agreed in writing by InterWorld, an End User licensee of the Licensee shall contract directly with Licensee for maintenance and support services. 2. InterWorld's Maintenance Obligations. 2.1 InterWorld shall provide Second and Third Level Maintenance Services to a Licensee engineer and/or support center. Second Level Maintenance Services consist of workarounds, code fixes or patches, and technical support. Licensee shall designate a primary and secondary License support staff for all communications with InterWorld's technical support representatives; (b) each support staff may communicate with InterWorld via telephone, facsimile or email for problem resolution during InterWorld's published support hours; and Third Level Maintenance Services consist of updates. InterWorld shall make available to Licensee all updates to the InterWorld Products commercially released by InterWorld during the support year. Minor release updates consist of new releases of a particular software version which provides functional enhancements and error corrections (for example 1.1 to 1.2) and major release updates consist of new releases of a particular software version which address new system architectures and/or commerce applications (for example 1.0 to 2.0). 2.2 InterWorld's Maintenance Obligations shall not include assistance to Licensee in the integration and implementation of the InterWorld Products. 3. Licensee Training Obligations. Licensee will provide Training Services for the InterWorld Products to its End Users. EXHIBIT G InterWorld Corporation Trial License Agreement This Trial License Agreement (the "Agreement") is entered into as of , 2002 between InterWorld Corporation ("INTERWORLD") and ____________________________________ ("Client"). 1. TRIAL LICENSE PRODUCTS. This is a Trial License for the purpose of enabling Client to determine the acceptability for Client's use of the products listed below, including, at INTERWORLD's option, any updates to the product specified below ("Products"). Client is entitled to the trial use of such Products which includes one (1) set of documentation. ____________________________________________________________________ 2. TRIAL LICENSE. The only right granted to Client under this Agreement is a non-transferable right to use the Products at the location specified below for the purposes of evaluating the Products. Client is prohibited from the using the Products in a production environment. Client shall not transfer the Products from the location specified below to any other location. Trial Site Address:_________________________________________________ 3. TERM OF TRIAL LICENSE. Client agrees to install such Products and shall have the 60 (sixty) day period ("Trial Period") following the receipt of such Products in which to test such Products to determine if the Products perform according to agreed upon specifications listed below (or published specifications). Unless otherwise agreed to in writing by both parties, at the end of the Trial Period, Client shall cease using the Products, documentation, and Confidential Information received from INTERWORLD and shall certify to INTERWORLD in writing that all copies have been destroyed or returned to INTERWORLD. PROPRIETARY RIGHTS. The Products are and shall remain at all times the property of INTERWORLD or its licensors, and Client shall have no right, title or interest therein except as expressly set forth in this Agreement. Client agrees that it will protect the proprietary rights of INTERWORLD and its licensors and will take all steps reasonably necessary to prevent the disclosure of the Products, including any associated documentation, to any other person, firm or corporation. Client further agrees that it will not copy or reproduce the Products or associated documentation for any purpose whatsoever. Client shall not modify, reverse engineer, reverse assemble or reverse compile any Products or part thereof, except that Client may modify the data file portions of the Products to the extend and in the manner described in the user manuals for the Products. Client shall not use INTERWORLD's or its licensors' name or refer to them directly or indirectly in any papers, articles, advertisements, sales presentations or press releases without the prior written approval of INTERWORLD for each such use or reference. Client shall not release the results of any performance or functional evaluation of the Products to any third party without the prior written approval of INTERWORLD for each such release. This paragraph shall survive the expiration of this Agreement. 5. CONFIDENTIALITY. Neither party shall disclose or use any business and/or technical information of the other party designated orally or in writing as "Confidential" or "Proprietary" (together "Confidential Information") without the prior written consent of the other party. "Confidential Information" includes, without limitation, the Software, (including methods and concepts), Documentation and all information relating to the disclosing party's business or financial affairs. All Confidential Information shall remain the sole property of the disclosing party. Each party shall expressly undertake, using reasonable efforts not less than it exercises for its own confidential materials, to retain in confidence, and to require its employees and consultants to retain in confidence all Confidential Information. Confidential Information shall not include any information that: (i) is already known to the other party free of any obligation to keep it confidential; (ii) is or becomes publicly known through no wrongful act by the other party; (iii) is received by the other party from a third party without any restriction on confidentiality; (iv) is independently developed by one party without access to the Confidential Information of the other. Client shall not release the results of any benchmark of the Software to any third party without the prior written approval of InterWorld for each such release. 6. LIMITATION OF LIABILITY AND WARRANTIES. INTERWORLD HEREBY REPRESENTS AND WARRANTS THAT IT HAS THE RIGHT TO PROVIDE THE PRODUCTS TO CLIENT UNDER THIS AGREEMENT. THE PRODUCTS ARE DELIVERED AND ACCEPTED AS IS. INTERWORLD MAKES NO OTHER REPRESENTATIONS OR WARRANTIES WITH RESPECT TO THE PRODUCTS, EXPRESS OR IMPLIED, IN FACT OR IN LAW, INCLUDING THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR USE OR A PARTICULAR PURPOSE. CLIENT AGREES THAT THE USE PERMITTED HEREUNDER IS FOR TRIAL PURPOSES ONLY AND INTERWORLD SHALL NOT BE LIABLE FOR ANY LOST PROFITS, OR FOR DIRECT, INDIRECT, SPECIAL, INCIDENTAL, PUNITIVE OR CONSEQUENTIAL DAMAGES, OR ANY CLAIM OR DEMAND AGAINST CLIENT, EVEN IF INTERWORLD HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. 7. GENERAL. THIS AGREEMENT CONSTITUTES THE ENTIRE AGREEMENT BETWEEN THE PARTIES WITH RESPECT TO THE SUBJECT MATTER HEREOF AND SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. INTERWORLD CORPORATION CLIENT:________________________ BY:_________________________ BY:____________________________ NAME: ______________________ NAME: _________________________ TITLE:______________________ TITLE:_________________________ EXHIBIT H ROYALTIES FOR THIRD PARTY LICENSORS Quantity Units IW Product OEM Product Liability Units Total Liability ________ _____ __________________________ _________________ _________ ________ _______________ RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT RCT
EXHIBIT I ROYALTIES FOR RESELLER AGREEMENTS AS NOTED IN EXHIBIT A EX-10 4 exhibit1039.txt Exhibit 10.39 ACKNOWLEDGEMENT OF DEFAULT AND ASSIGNMENT OF PAYMENTS AGREEMENT ACKNOWLEDGEMENT OF DEFAULT AND ASSIGNMENT OF PAYMENTS AGREEMENT, dated as of February 15, 2002, among J Net Enterprises, Inc., a Nevada corporation ("J Net") and InterWorld Corporation, a Delaware corporation ("InterWorld"). W I T N E S S E T H : WHEREAS, on June 30, 2001, InterWorld and J Net entered into a credit facility whereby J Net agreed to loan up to $20,000,000 to InterWorld (the "Credit Facility"); WHEREAS, on June 30, 2001, to secure indebtedness under the Credit Facility, J Net and InterWorld entered into a security agreement granting J Net a security interest in certain collateral of InterWorld, including all of its intellectual property (the "Security Agreement"); WHEREAS, on February 8, 2002, to further secure indebtedness under the Credit Facility, J Net and InterWorld entered into a security agreement granting J Net a security interest in certain trademarks and service marks of InterWorld (the "IP Security Agreement," and together with the Security Agreement, the "Security Agreements"); WHEREAS, as of the date hereof, InterWorld is currently in default of the approximate amount of $17,000,000 outstanding under the Credit Facility; WHEREAS, InterWorld and Titan Technologies, LP d/b/a Titan Ventures, LP ("Titan") have entered into an alliance agreement, dated February 15, 2002 (the "Master Alliance Agreement") pursuant to which Titan has agreed to make use of Interworld's intellectual property to market software products on behalf of InterWorld; WHEREAS, J Net wishes to exercise its interest in InterWorld's intellectual property pursuant to Section 4 of the Security Agreement and SS 9-607 of the Uniform Commercial Code of the State of New York ("UCC") by requiring Titan to make any and all payments due under Section 3.3 of the Master Alliance Agreement as directed by J Net until such time as such payments satisfy the secured indebtedness in full; and WHEREAS, the InterWorld is willing to consent to the waiver of any applicable notice requirements under the UCC, and to cause Titan to make any and all payments due under Section 3.3 of the Master Alliance Agreement as directed by J Net until such time as such payments satisfy the secured indebtedness in full. NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. Acknowledgement of Default and Monies Owed. ACKNOWLEDGEMENT OF DEFAULT AND MONIES OWED acknowledges and agrees that: (A) InterWorld is in default (beyond any and all applicable grace periods) under the Credit Facility and Security Agreements, including without limitation, as a result of its failure to make monthly payments of principal and interest due under the Credit Facility; (B) InterWorld has received timely and proper notice of its default under the Credit Facility and Security Agreement, (C) the entire outstanding principal balance of the Credit Facility is now due and payable, together with all accrued interest thereon and all other sums owed J Net under the Credit Facility; (D) the acceleration of the principal balance of the Note was duly and properly declared by J Net and, accordingly, the entire outstanding principal balance of the Credit Facility in the approximate amount of $17,000,000 is now due and payable together with all accrued interest thereon and all other sums and charges due under the Credit Facility (the "Indebtedness"); and (E) InterWorld has no claims, defenses, setoffs or counterclaims of any kind or nature whatsoever or in respect of the Indebtedness, the Credit Facility or against J Net or otherwise. 2. Assignment of Payments under the Master Alliance Agreement; Waiver of UCC Notice Provisions. (a) InterWorld hereby acknowledges that J Net has a properly perfected and enforceable security interest in, among certain other collateral, the Master Alliance Agreement. Interworld hereby agrees that J Net may exercise all of its rights pursuant to UCC SS9-607, with respect to amounts payable by Titan to InterWorld under Section 3.3 of the Master Alliance Agreement. InterWorld hereby authorizes J Net and its assigns to collect any such amounts payable under Section 3.3 the Master Alliance Agreement directly from Titan, and, upon request of J Net, to so instruct Titan to make payments as directed by J Net. InterWorld hereby expressly authorizes J Net to instruct Titan to make payments as directed by J Net, in the event InterWorld fails to so instruct Titan. InterWorld hereby expressly agrees that J Net may enforce the obligations of Titan with respect to Section 3.3 of the Master Alliance Agreement and exercise the rights of InterWorld with respect to the obligations of Titan. The exercise of this right, power and remedy with respect to amounts payable under Section 3.3 of the Master Alliance Agreement shall not preclude the simultaneous or later exercise of any or all other such rights, powers or remedies with respect to other amounts payable under the Master Alliance Agreement, or any other agreement with respect to the secured collateral. (b) Interworld hereby expressly waives all rights it may have or may have to receive notices under the Security Agreements, UCC SS 9-611 and UCC SS 9-620. 3. No Waiver. InterWorld hereby acknowledges that this Agreement shall not be deemed a waiver by J Net of any default by InterWorld or be deemed to have released InterWorld from any of their obligations under the Credit Facility and/or the Security Agreements. Each of the rights, powers, and remedies provided herein now or hereafter existing at law or in equity or by statute or otherwise shall be cumulative and concurrent and shall be in addition to every other right, power or remedy provided for herein or therein or now or hereafter existing at law or in equity or by statute or otherwise. The exercise of any such right, power or remedy shall not preclude the simultaneous or later exercise of any or all other such rights, powers or remedies. No notice to or demand on InterWorld in any case shall entitle InterWorld to any other notice or demand in similar or other circumstances. 4. InterWorld's Covenants. InterWorld hereby covenants with J Net that during the term of this Agreement: (a) InterWorld shall fulfill and perform each and every term, covenant and provision of the Master Alliance Agreement to be fulfilled or performed by InterWorld thereunder, (b) InterWorld shall, in the manner provided for in this Agreement, give prompt notice to J Net of any notice received by InterWorld under the Master Alliance Agreement, together with a complete copy of any such notice, (c) Interworld shall enforce, short of termination thereof, the performance and observance of each and every term, covenant and provision of the Master Alliance Agreement to be performed or observed, and (d) InterWorld shall not terminate or amend any of the terms or provisions of the Master Alliance Agreement, except as may be permitted pursuant to the terms of the Master Alliance Agreement and done in the ordinary course of business, without the prior written consent of J Net which consent may be withheld by J Net in J Net's sole discretion. 5. Governing Law. This Agreement shall be deemed to be a contract entered into pursuant to the laws of the State of New York and shall in all respects be governed, construed, applied and enforced in accordance with the laws of the State of New York. 6. Notices. All notices or other written communications to InterWorld or J Net hereunder shall be deemed to have been properly given (i) upon delivery, if delivered in person with receipt acknowledged by the recipient thereof, (ii) one (1) Business Day (hereinafter defined) after having been deposited for overnight delivery with any reputable overnight courier service, or (iii) three (3) Business Days after having been deposited in any post office or mail depository regularly maintained by the U.S. Postal Service and sent by registered or certified mail, postage prepaid, return receipt requested, addressed to InterWorld or J Net at their addresses set forth in the Security Agreements or addressed as such party may from time to time designate by written notice to the other parties. For purposes of this Agreement, the term "Business Day" shall mean any day other than Saturday, Sunday or any other day on which banks are required or authorized to close in New York, New York. Either party by notice to the other may designate additional or different addresses for subsequent notices or communication. 7. No Oral Change. This Agreement, and any provisions hereof, may not be modified, amended, waived, extended, changed, discharged or terminated orally or by any act or failure to act on the part of InterWorld or J Net, but only by an agreement in writing signed by the party against whom enforcement of any modification, amendment, waiver, extension, change, discharge or termination is sought. 8. Liability. This Agreement shall be binding upon and inure to the benefit of InterWorld and J Net and their respective successors and assigns forever. 9. Inapplicable Provisions. If any term, covenant or condition of this Agreement is held to be invalid, illegal or unenforceable in any respect, this Agreement shall be construed without such provision. 10. Headings, etc. The headings and captions of various paragraphs of this Agreement are for convenience of reference only and are not to be construed as defining or limiting, in any way, the scope or intent of the provisions hereof. 11. Duplicate Originals; Counterparts. This Agreement may be executed in any number of duplicate originals and each duplicate original shall be deemed to be an original. This Agreement may be executed in several counterparts, each of which counterparts shall be deemed an original instrument and all of which together shall constitute a single Agreement. The failure of any party hereto to execute this Agreement, or any counterpart hereof, shall not relieve the other signatories from their obligations hereunder. 12. Number and Gender. Whenever the context may require, any pronouns used herein shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns and pronouns shall include the plural and vice versa. 13. Miscellaneous. (a) Wherever pursuant to this Agreement (i) J Net exercises any right given to it to approve or disapprove, (ii) any arrangement or term is to be satisfactory to J Net, or (iii) any other decision or determination is to be made by J Net, the decision of J Net to approve or disapprove, all decisions that arrangements or terms are satisfactory or not satisfactory and all other decisions and determinations made by J Net, shall be in the sole and absolute discretion of J Net and shall be final and conclusive, except as may be otherwise expressly and specifically provided herein. (b) Wherever pursuant to this Agreement it is provided that InterWorld pay any costs and expenses, such costs and expenses shall include, but not be limited to, legal fees and disbursements of InterWorld, whether retained firms, the reimbursement for the expenses of in-house staff or otherwise. IN WITNESS WHEREOF the undersigned have executed this Agreement as of the date and year first written above. J NET ENTERPRISES, INC. By: /s/ Mark W. Hobbs ____________________________________________ Name: Mark W. Hobbs Title: President and Chief Operating Officer INTERWORLD CORPORATION By: /s/ Steven L. Korby _____________________________________________ Name: Steven L. Korby Title: Executive Vice President and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----