-----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, GUG+yljI3hNCOCo01F8aTrEEOmuDVV9OgmymhP0s8XzYk784z5H7SAtV76Jfo3BG ZZxqHFqo+U4hqQBe7TdlOQ== 0000351903-03-000034.txt : 20030515 0000351903-03-000034.hdr.sgml : 20030515 20030515152723 ACCESSION NUMBER: 0000351903-03-000034 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20030331 FILED AS OF DATE: 20030515 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: 03704587 BUSINESS ADDRESS: STREET 1: 4020 LAKE CREEK DRIVE, #100 CITY: WILSON STATE: WY ZIP: 83014 BUSINESS PHONE: 307-739-8603 MAIL ADDRESS: STREET 1: 4020 LAKE CREEK DRIVE, #100 CITY: WILSON STATE: WY ZIP: 83014 FORMER COMPANY: FORMER CONFORMED NAME: JACKPOT ENTERPRISES INC DATE OF NAME CHANGE: 19920703 10-Q 1 march31.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, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to___________________ Commission file no. 1-9728 J NET ENTERPRISES, INC. ____________________________________________________ (Exact name of registrant as specified in its charter) Nevada 88-0169922 _____________________________________________ ___________________ (State or other jurisdiction of incorporation (I.R.S. Employer or organization) Identification No.) 4020 Lake Creek Drive, #100, Wilson, Wyoming 83014 ____________________________________________ ________ (Address of principal executive offices) (Zip Code) 307-739-8603 __________________________________________________ (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ___ ___ There were 8,524,541 shares of the Registrant's common stock outstanding as of May 9, 2003. J NET ENTERPRISES, INC. AND SUBSIDIARIES INDEX Part I. Financial Information Item 1. Financial Statements Condensed Consolidated Balance Sheets (Unaudited) - March 31, 2003 and June 30, 2002 Condensed Consolidated Statements of Operations (Unaudited) - Three and Nine Months Ended March 31, 2003 Condensed Consolidated Statement of Stockholders' Equity (Unaudited) - Nine Months Ended March 31, 2003 Condensed Consolidated Statement of Stockholders' Equity (Unaudited) - Nine Months Ended March 31, 2002 Condensed Consolidated Statements of Cash Flows (Unaudited) - Nine Months Ended March 31, 2003 and 2002 Notes to Condensed Consolidated Financial Statements - (Unaudited) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosure About Market Risk Item 4. Controls and Procedures Part II. Other Information Item 1. Legal Proceedings Item 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, 2003 2002 ASSETS _________ ________ ______ Current assets: Cash and cash equivalents $ 6,646 $ 6,674 Short-term investments 11,969 29,590 Accounts receivable, net 23 213 Notes receivable - related parties - 288 Notes receivable - 132 Federal income taxes receivable - 983 Assets held for sale - 4,950 Prepaid expenses 12 351 Other current assets - 293 _______ _______ Total current assets 18,650 43,474 Investments in technology-related businesses 2,425 2,425 Property and equipment, net of accumulated depreciation 85 180 Other non-current assets 731 764 _______ _______ Total assets $21,891 $46,843 ======= ======= 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, 2003 2002 LIABILITIES AND STOCKHOLDERS' EQUITY _________ ________ ____________________________________ Current liabilities: Accounts payable and other current liabilities $ 3,138 $ 4,095 Current portion of convertible subordinated notes - 27,750 Deferred revenue and customer deposits 824 1,306 ________ ________ Total current liabilities 3,962 33,151 ________ ________ Deferred income taxes 6,910 - Deferred rent 198 213 Other non-current liabilities 212 212 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 Accumulated deficit (48,689) (46,031) Less 1,708,929 shares of common stock in treasury, at cost (16,054) (16,054) ________ ________ Total stockholders' equity 10,609 13,267 ________ ________ Total liabilities and stockholders' equity $ 21,891 $ 46,843 ======== ======== 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, 2003 AND 2002 (Dollars in thousands, except per share data) (Unaudited) Three Months ended Nine Months ended March 31, March 31, __________________ _________________ 2003 2002 2003 2002 _______ _______ _______ _______ Revenues, net Product licenses $ - $ 10 $ 21 $ 893 Maintenance 630 620 1,654 2,779 Services 88 - 406 998 ______ _______ _______ ________ Total revenues, net 718 630 2,081 4,670 Cost of revenues: Product licenses - - - 400 Maintenance 5 14 92 307 Services 145 42 406 2,027 ______ _______ _______ ________ Total cost of revenues 150 56 498 2,734 ______ _______ _______ ________ Gross profit 568 574 1,583 1,936 Operating expenses: Research and development 430 404 1,284 4,739 Sales - 26 - 5,919 Marketing alliances - - - 1,616 General and administrative 1,014 2,038 3,281 7,689 Impairment of assets - - 1,050 - Bad debt expense - - 20 - Restructuring and unusual charges - (156) - 6,216 Gains from settlements with unsecured creditors - - (46) - Total operating expenses 1,444 2,312 5,589 26,179 ______ _______ _______ ________ Operating loss (876) (1,738) (4,006) (24,243) Other income (expense): Interest and other income 317 974 889 2,418 Interest expense - (556) - (1,689) Gain from repurchase of convertible subordinated notes - - 553 - Gain on disposal of assets 44 - 147 - ______ _______ _______ ________ Total other income 361 418 1,589 729 Loss from operations before income tax (515) (1,320) (2,417) (23,514) ______ _______ _______ ________ Provision for Federal income tax - - 241 - ______ _______ _______ ________ Net loss $ (515) $(1,320) $(2,658) $(23,514) ====== ======= ======= ======== Basic loss per share $ (.06) $ (.15) $ (.31) $ (2.76) Dilutive loss per share $ (.06) $ (.15) $ (.31) $ (2.76) See Notes to Condensed Consolidated Financial Statements. J NET ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY NINE MONTHS ENDED MARCH 31, 2003 (Dollars and shares in thousands) (Unaudited) Common Stock Additional Retained Treasury Stock _______________ Paid-In Earnings ________________ Shares Amount Capital (Deficit) Shares Amount Totals ______ ______ __________ _________ ______ ________ _______ Balance June 30, 2002 10,233 $102 $75,250 $(46,031) (1,709) $(16,054) $13,267 Net loss (2,658) (2,658) ______ ____ _______ ________ ______ ________ _______ Balance March 31, 2003 10,233 $102 $75,250 $(48,689) (1,709) $(16,054) $10,609 ====== ==== ======= ======== ====== ======== =======
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 (Dollars and shares in thousands) (Unaudited) Accumulated Common Stock Additional Retained Treasury Stock Other ______________ Paid-In Earnings ______________ Comprehensive Shares Amount Capital (Deficit) Shares Amount Income (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 ====== ==== ======= ======== ====== ======== ====== ========
See Notes to Condensed Consolidated Financial Statements. J NET ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED MARCH 31, 2003 AND 2002 (Dollars in thousands) (Unaudited) 2003 2002 ________ ________ Operating activities: Net loss $ (2,658) $(23,514) Adjustments to reconcile net loss to net cash provided by operating activities: Receipt of Federal tax refund 6,910 - (Gain)loss on disposal of assets (147) 394 Impairment of assets 1,050 3,066 Amortization of stock-based compensation - 290 Depreciation and amortization 100 510 Deferred tax benefit - (334) Changes in assets and liabilities: Federal income taxes receivable 983 6,538 Accounts receivable 190 1,350 Marketable securities (379) (1,876) Prepaid expenses and other current assets 242 730 Notes receivable - related parties - 1,006 Other non-current assets 33 223 Accounts payable and other current liabilities (957) (2,564) Deferred revenue and customer deposits (482) (1,079) Deferred rent (15) (137) Other, net - 62 ________ ________ Net cash provided by (used in) continuing operations 4,870 (15,335) Investing activities: Investments in technology-related businesses - (1,338) Investment in marketable securities (6,000) (125) Collection of notes receivable - related parties 288 - Collection of note receivable 132 - Security deposits received - 212 Redemption of marketable securities 24,000 - Proceeds from sale of assets 4,437 260 Purchase of property and equipment (5) (82) ________ ________ Net cash provided by (used in) investing activities 22,852 (1,073) Financing activities: Repayment of debt (27,750) - ________ ________ Net cash used in financing activities (27,750) - ________ ________ Net decrease in cash and cash equivalents (28) (16,408) Cash and cash equivalents at beginning of period 6,674 24,272 ________ ________ Cash and cash equivalents at end of period $ 6,646 $ (7,864) ======== ======== Supplemental disclosures of cash flow data: Cash paid during the year for: Interest paid $ - $ 1,667 Non-cash investing and financing activities: Value of notes receivable discharged in exchange for common stock $ - $ 1,024 See Notes to Consolidated Financial Statements J NET ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Significant accounting policies and business Business: J Net Enterprises, Inc. ("J Net" or the "Company") is a holding company with concentrated investments in enterprise software (the "E-Commerce Operations") and technology infrastructure companies (the "Technology- elated Businesses"). E-Commerce Operations are conducted through IW Holdings, Inc. ("IWH"), a wholly owned subsidiary of the Company and the successor to the business formerly conducted by InterWorld Corporation ("InterWorld"), a 95% owned subsidiary of the Company. IWH became the owner of the intellectual property and assets of InterWorld in May 2002 when InterWorld defaulted on a secured promissory note with J Net. Upon completion of foreclosure proceedings by J Net against InterWorld, the assets and intellectual property of InterWorld were transferred to IWH at the direction of J Net in full satisfaction of the debt. The Technology-Related Businesses segment includes minority investments in other technology companies including, but not limited to, systems development and software companies. Investments in Technology-Related Businesses are made directly by the Company, or through J Net Ventures I ("Ventures I" or the "Fund"), a wholly-owned subsidiary of the Company. The E-Commerce Operations have required a substantial amount of Management's time and the Company's financial resources. As a result, the Technology-Related Businesses investments have been curtailed and there have been no investments in Technology-Related Businesses since July 2001. Recent events: The Company completed the sale of its real estate and improvements located in Wellington, Florida in March 2003. Net proceeds were $4.3 million. The property, which was acquired through foreclosure actions in June 2001, was held as an asset held for sale by the Company. Business segments: The Company has two reportable business segments; E-Commerce Operations and Technology-Related Businesses. Prior to May 2001, the Company operated in only one segment, the Technology-Related Businesses. Basis of presentation: The accompanying unaudited condensed consolidated financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations, although Management believes that the disclosures are adequate to make the information presented not misleading. The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany accounts and transactions are eliminated. The Company's fiscal year ends on June 30. Unless the context indicates otherwise, references to "2003" and "2002" are for the fiscal years ended June 30, 2003 and 2002, respectively. 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, 2003 and June 30, 2002, the results of its operations for the three and nine months ended March 31, 2003 and 2002 and its cash flows for the nine months ended March 31, 2003 and 2002. The results for the three and nine months ended March 31, 2003 and 2002 are not necessarily indicative of results for a full year. Information included in the condensed consolidated balance sheet as of June 30, 2002 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, 2002 (the "2002 Form 10-K"). These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and disclosures included in the 2002 Form 10-K. Use of estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires Management to make estimates and assumptions that affect the amounts reported in the accompanying unaudited condensed consolidated financial statements and notes. Actual results could differ from those estimates. Cash equivalents: Cash equivalents are liquid investments comprised primarily of debt instruments and money market accounts with maturities of three months or less when acquired and are considered cash equivalents for purposes of the unaudited condensed consolidated balance sheets and statements of cash flows. Cash equivalents are stated at cost which approximates fair value due to their short maturity. Short-term investments: At March 31, 2003, the Company held short-term investments in Mariner Partners, L.P. ("Mariner"), a private investment fund which had a value of $12.0 million. J Net can withdraw all or a portion of its investment upon 45 days prior written notice. The Company classifies those securities as short-term investments and records changes in the value of the accounts in the item captioned interest and other income in the unaudited condensed consolidated statement of operations. Fair value of financial instruments: The carrying value of certain of the Company's financial instruments, including accounts receivable, accounts payable and accrued expenses approximates fair value due to their short maturities. As of March 31, 2003, the unaudited condensed consolidated balance sheet contains approximately $1.7 million of unsecured creditor liabilities of InterWorld which, although consolidated, are separate and distinct from J Net. As a result of J Net's foreclosure on its secured promissory note with InterWorld and the subsequent transfer of assets to IWH in settlement of the secured promissory note, InterWorld does not have the financial resources to pay the face value of the obligations. Management expects, but cannot provide assurance, that the remaining unsecured creditor liabilities of InterWorld will be satisfied at substantially less than their face 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. Impairments: The Company adopted Statement of Financial Accounting Standards No. 144, a Statement on Asset Impairment, on July 1, 2002 ("SFAS 144"). There was no impact on the financial statements in connection with the adoption of SFAS 144. 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 December 31, 2002, the Company held 40 acres of land with building improvements in the village of Wellington, Florida. The property was obtained as a result of a foreclosure on a loan to Michael Donahue, the former Vice Chairman and Chief Executive Officer of InterWorld. In February 2003, the Company reached an agreement to sell its real estate and related improvements. Closing of the transaction occurred on March 21, 2003. The Company received proceeds, net of selling and other costs, of $4.3 million. Income taxes: The Company accounts for income taxes in accordance with SFAS 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 requires that deferred tax assets and liabilities arising from temporary differences between book and tax bases will be recognized using enacted tax rates at the time such temporary differences reverse. In the case of deferred tax assets, SFAS 109 requires a reduction to deferred tax assets if it is more likely than not that some portion or all of the deferred tax asset will not be realized. There are accumulated deferred tax assets of $18.8 million, which are fully offset by a valuation allowance pursuant to SFAS 109. Such losses are limited by certain IRS regulations. While Management continues to take actions required to turn the Company profitable, the ability to generate income at levels sufficient to realize the accumulated deferred benefits is not determinable at this time. Revenue recognition: The Company follows AICPA Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-2"), as amended by SOP 98-4, further amended by SOP 98-9, and Staff Accounting Bulletin 101. These pronouncements provide guidance on when revenue should be recognized and in what amounts as well as what portion of licensing transactions should be deferred. Revenue under multiple element arrangements is allocated to each element using the "residual method", in accordance with Statement of Position No. 98-9, "Modification of SOP 97-2 with Respect to Certain Transactions" ("SOP 98-9"). Under the residual method, the arrangement fee is recognized as follows: (a) the total fair value of the undelivered elements, as indicated by vendor-specific objective evidence, is deferred and (b) the difference between the total arrangement fee and the amount deferred for the undelivered elements is recognized as revenue related to the delivered elements. Software license agreements generally include two elements: the software license and post-contract customer support. The Company has established sufficient vendor-specific objective evidence for the value of maintenance and post-contract customer support services based on the price when these elements are sold separately and/or when stated renewal rates for maintenance and post-contract customer support services are included in the agreement, and the actual renewal rate achieved. Product licenses: Revenue from the licensing of software products is recognized upon shipment to the customer, pursuant to an executed software licensing agreement when no significant vendor obligations exist and collection is probable. If acceptance by the customer is required, revenue is recognized upon customer acceptance. Amounts received from customers in advance of product shipment or customer acceptance are classified as deposits from customers. Other licensing arrangements, such as reseller agreements, typically provide for license fees payable to the Company based on a percentage of the list price for the software products. The license revenues are generally recognized when shipment by the reseller occurs, or when collection is probable. Contracts for product licenses where professional services require significant production, modification or customization are 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 maintenance and support revenue is deferred until payments are received, or sufficient evidence that payment will be received exists. Deferred revenue consists principally of billings in advance for services and support not yet provided and uncollected billings to customers for maintenance and post contract support. Recently issued accounting standards: In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure ("SFAS 148"). This statement is an amendment of the disclosure provisions of SFAS 123, "Accounting for Stock-Based Compensation", and APB Opinion No. 28, "Interim Financial Reporting". SFAS 148 requires disclosure of the method of accounting used for stock-based employee compensation and the effect of that method on income and earnings per share in annual and interim financial statements. SFAS 148 is effective for all interim periods beginning after December 15, 2002. The Company adopted the expanded disclosure requirements in this Form 10-Q. The FASB recently issued Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 nullifies the Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity". SFAS 146 requires that a liability associated with an exit or disposal activity be recognized when the liability is incurred while EITF Issue No. 94-3 recognized such liabilities at such time that an entity committed to an exit plan. The provisions of SFAS 146 are effective for exit or disposal activities initiated after December 31, 2002 with early application encouraged. In April 2002, the FASB issued Statement of Financial Accounting Standards No. 145, "Rescission of FASB Statements No. 4, 44 and 62, Amendment of FASB Statement 13, and Technical Corrections ("SFAS 145"). For most companies, SFAS 145 requires gains and losses from the extinguishment of debt to be classified as a component of income or loss from continuing operations. Prior to the issuance of SFAS 145, early debt extinguishments were required to be recognized as extraordinary items. SFAS 145 amended other previously issued statements and made numerous technical corrections. With the exception of the accounting treatment for extinguishments of debts, those other modifications are not expected to impact the consolidated financial statements of the Company. SFAS 145 is effective for fiscal years beginning after May 15, 2002. Accordingly, the Company adopted such provisions effective July 1, 2002. Note 2 - Stock option plans The Company accounts for stock based compensation using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). The Company has adopted the disclosure requirements of Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation ("SFAS 123"). On December 31, 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 148, "Accounting for Stock Based Compensation - Transition and Disclosure ("SFAS 148"). The purpose of SFAS 148 is to provide alternative methods of transition to SFAS 123's fair value method of accounting for stock-based employee compensation and amend the disclosure requirements of an entity's accounting policy with respect to reported net income and earnings per share in annual and interim financial statements prescribed by Accounting principles Board Opinion No. 28, "Interim Financial Reporting". SFAS 148 does not require companies to account for employee stock options using the fair value method of SFAS 123 and the Company does not plan to adopt the fair value method at this time. Had the Company used the fair value method for stock compensation expenses, its net loss and loss per share would have been increased to the pro forma amounts presented on the following table (dollars in thousands, except per share data): Three Months Ended Nine Months Ended March 31, March 31, __________________ _________________ 2003 2002 2003 2002 _____ _______ _______ ________ Net loss, as reported $(515) $(1,320) $(2,658) $(23,514) Fair value based compensation expenses, net of taxes: Fiscal year ended 6/30/02 - - - - Fiscal year ended 6/30/01 (10) (30) (29) (91) _____ _______ _______ ________ Pro forma net loss $(525) $(1,350) $(2,687) $(23,605) ===== ======= ======= ======== Loss per share: Basic - as reported $ (.06) $ (.15) $ (.31) $ (2.76) Basic - pro forma $ (.06) $ (.16) $ (.32) $ (2.77) Diluted - as reported $ (.06) $ (.15) $ (.31) $ (2.76) Diluted - pro forma $ (.06) $ (.16) $ (.32) $ (2.77) The Company's option plan expired on September 30, 2002. Under that plan, each Director of the Company was to receive 27,500 options on June 30 of each year. Such options were to vest on the following September 30 at the current market price of the Company's common stock on that date. The June 30, 2002 options, which totaled 137,500 (27,500 to each of five directors), were voluntarily returned and cancelled by each Director. As a result of these actions, combined with the contractual termination of the stock option plan, no options have been granted in 2003. Note 3 - Investments in Technology-Related Businesses The Company invested in eleven companies represented by the Technology- Related Businesses segment. The investments occurred between March 2000 and July 2001. As of March 31, 2003, the Company is ascribing value to two of these investments: eStara, Inc. and Tellme Networks, Inc. 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 invested a total of $4.0 million in two separate financing rounds of eStara between September 2000 and July 2001. As a result of Management's periodic assessments of eStara's valuation, impairments totaling $3.6 million have been charged against the carrying value of this investment. eStara's operations are being funded under a $2.0 million bridge loan. eStara's management believes the funds provided by the bridge loan are adequate to allow eStara to achieve self-funding capabilities. J Net is not a party to the group of investors providing the bridge financing and the terms of the proposed financing are not available at this time. Management believes the current carrying value of $.4 million approximates fair market value of the investment as of March 31, 2003. 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. Subsequent to the Company's investment in Tellme, operating losses in the development stage company have been reduced each calendar quarter. In addition, Tellme has sufficient cash and liquid investments to fund operations for several years. It is the policy of the Company to evaluate its investments for possible impairments quarterly. Recent forecasts continue to call for improved operations in Tellme, and combined with their existing financial resources, management believes there are no indicators which would require the recognition of an impairment. The following table sets forth the carrying values of the Company's investments and the related activity of each active investment for the three months ended March 31, 2003 (dollars in thousands): Net balance Carrying value at 6/30/02 Additions Impairments as of 3/31/03 ___________ _________ ___________ ______________ eStara, Inc. $ 425 $ - $ - $ 425 Tellme Networks 2,000 - - 2,000 ______ ____ ____ ______ Totals $2,425 $ - $ - $2,425 ====== ==== ==== ====== The following table sets forth the ownership information and accounting methodology used for each of the Company's investments where value is assigned: Accounting Type of Voting Date(s) Acquired Method Security Percentage __________________ __________ __________ __________ eStara, Inc. September 29, 2000 Cost Series "C" 14% July 1, 2001 Preferred Stock Tellme Networks September 12, 2000 Cost Series "D" Less Preferred than 1% Stock Note 4 - Loss per share Basic loss per share for the three and nine months ended March 31, 2003 and for the three and nine months ended March 31, 2002 are computed by dividing net loss from operations by the weighted average number of common shares outstanding for the respective period. Since the three and nine month periods ended March 31, 2003 and 2002 had losses from continuing operations, no potential common shares from the assumed exercise of options or Convertible Subordinate Notes (the "Notes") which were outstanding in 2002 have been included in the diluted loss per share computations pursuant to accounting principles generally accepted in the United States. The following is the amount of loss and number of shares used in the basic and diluted loss per share computations (dollars and shares in thousands, except per share data): Three Months Nine Months Ended Ended March 31, March 31, ________________ _______________ 2003 2002 2003 2002 ______ _______ _______ _______ Basic loss per share: Loss available to common stockholders $ (515) $(1,320) $(2,658) $(23,514) ====== ======= ======= ======== Shares: Weighted average number of common shares outstanding 8,525 8,525 8,525 8,525 ====== ======= ======= ======== Basic loss per share $ (.06) $ (.15) $ (.31) $ (2.76) ====== ======= ======= ======== Diluted loss per share: Loss available to common shareholders $ (515) $(1,320) $(2,658) $(23,514) ====== ======= ======= ======== Shares: Weighted average number of common shares outstanding 8,525 8,525 8,525 8,525 ====== ======= ======= ======== Weighted average number of common shares and common share equivalents outstanding 8,525 8,525 8,525 8,525 ====== ======= ======= ======== Diluted loss per share $ (.06) $ (.15) $ (.31) (2.76) ====== ======= ======= ======== The calculation of earnings per share data excluded the following items as their effect is antidilutive: Antidilutive Share Calculation (shares in thousands) As of As of Description March 31, 2003 March 31, 2002 ______________ ______________ Potentially dilutive stock options 1,570 1,926 Common shares issuable from assumed conversion of subordinated notes - 2,581 _____ _____ Total antidilutive securities 1,570 4,507 ===== ===== Note 5 - Related party transactions 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 approximately $12 thousand for the nine months ended March 31, 2003 and $8 thousand for the nine months ended March 31, 2002. Management believes that fees charged are competitive with fees charged by other law firms. Note 6 - Operating segments The Company has two reportable segments: E-Commerce Operations and Technology-Related Businesses. Prior to May 2001, the Company operated only in one segment, Technology-Related Businesses. Assets are the owned assets used by each operating segment. Summary of consolidated loss from operations, net of tax (dollars in thousands): Three Months ended Nine Months Ended March 31, March 31, __________________ ___________________ 2003 2002 2003 2002 _______ ________ _________ ________ Net loss: E-Commerce Operations $(143) $(1,314) $ (455) $(18,157) Technology-Related Businesses (372) (6) (2,203) (5,357) _____ _______ ________ ________ Net loss $(515) $(1,320) $ (2,658) $(23,514) ===== ======= ======== ======== E-Commerce Operations: Revenues $ 718 $ 630 $ 2,081 $ 4,670 Cost of Revenues 150 56 498 2,734 _____ _______ ________ ________ Gross profit 568 574 1,583 1,936 Operating expenses 711 1,235 2,083 18,590 Other (income) expense - 653 (45) 1,503 _____ _______ ________ ________ Net loss from E-Commerce Operations $(143) $(1,314) $ (455) $(18,157) ===== ======= ======== ======== Technology-Related Businesses: Total Operating Expenses $ 733 $ 1,077 $ 3,506 $ 7,589 Other Income (361) (1,071) (1,544) (2,232) Provision for Federal Income Tax - - 241 - _____ _______ ________ ________ Net loss from Technology- Related Businesses $ (372) $ (6) $ (2,203) $ (5,357) ====== ======= ======== ======== As of March 31, 2003 ______________ Assets: E-Commerce Operations $ 418 Technology-Related Businesses 21,473 _______ Total assets $21,891 ======= Note 7 - 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 Federal Deposit Insurance Corporation 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. 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. As of March 31, 2003, the unaudited condensed consolidated balance sheet contains approximately $1.7 million of unsecured creditor liabilities of InterWorld, which are separate and distinct from J Net. As a result of J Net's foreclosure on its secured promissory note with InterWorld and the subsequent transfer of assets to IWH in settlement of the secured promissory note, InterWorld does not have the financial resources to pay the face value of the obligations. Management expects, but cannot provide assurance, that the remaining unsecured creditor liabilities of InterWorld will be satisfied at substantially less than their face value. The Company has employment contracts with its President and Chief Financial Officer. Minimum remaining obligations under those contracts totaled approximately $.1 million as of March 31, 2003. If the contracts expire and are not renewed, there is an obligation of $.6 million at expiration, which reflects severance pay in accordance with the contractual terms. In the event that either person is terminated involuntarily or as a result of a change in control, the obligations under the contracts increase to $.8 million. As of March 31, 2003, J Net did not have any litigation, pending or threatened, or other claims filed against the Company. However, InterWorld is subject to two claims. On March 8, 2001, as amended on May 29, 2001, InterWorld received notice that the Securities and Exchange Commission (the "Commission") had 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 was certain trading activity in InterWorld stock. All the above events are related to periods prior to the Company's common stock ownership in InterWorld. The investigation is confidential and the Commission has advised that the investigation should not be construed as an indication by the Commission, or its staff, that any violation of law as 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 in April 2002. The claim alleged that PBS was owed commissions by InterWorld for services related to PBS's attempts to sublease office space previously occupied by InterWorld in New York City. In January 2003, InterWorld and PBS reached a tentative agreement to resolve the dispute which was to include a payment by InterWorld in exchange for, among other things, discontinuance with prejudice of the lawsuit and a release. The final terms of the release were not satisfactory to InterWorld and could not be resolved. Thus, the settlement was never consummated. The amount accrued in the quarter ended December 31, 2003, in conjunction with settlement discussions with PBS, remains on the financial statements as an estimate of the cost of continuing litigation in this matter. InterWorld will continue to vigorously defend itself against the claims of PBS. 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 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. Revenue Recognition: The Company follows AICPA Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-2"), as amended by SOP 98-4, further amended by SOP 98-9, and Staff Accounting Bulletin 101. These pronouncements provide guidance on when revenue should be recognized and in what amounts as well as what portion of licensing transactions should be deferred. Revenue under multiple element arrangements is allocated to each element using the "residual method", in accordance with Statement of Position No. 98-9, "Modification of SOP 97-2 with Respect to Certain Transactions" ("SOP 98-9"). Under the residual method, the arrangement fee is recognized as follows: (a) the total fair value of the undelivered elements, as indicated by vendor-specific objective evidence, is deferred and (b) the difference between the total arrangement fee and the amount deferred for the undelivered elements is recognized as revenue related to the delivered elements. Software license agreements generally include two elements: the software license and post-contract customer support. The Company has established sufficient vendor-specific objective evidence for the value of maintenance and post-contract customer support services based on the price when these elements are sold separately and/or when stated renewal rates or 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 maintenance and support revenue is deferred until payments are received, or sufficient evidence that payment will be received exists. Deferred revenue consists principally of billings in advance for services and support not yet provided and uncollected billings to customers for maintenance and post contract support. Impairments: The Company adopted Statement of Financial Accounting Standards No. 144 on July 1, 2002 ("SFAS 144"). There was no impact on the financial statements in connection with the adoption of SFAS 144. Gain on repurchase of Notes: In April 2002, the FASB issued Statement of Financial Accounting Standards No. 145, "Rescission of FASB Statements No. 4, 44 and 62, Amendment of FASB Statement 13, and Technical Corrections ("SFAS 145"). For most companies, SFAS 145 requires gains and losses from the extinguishment of debt to be classified as a component of income or loss from continuing operations. Prior to the issuance of SFAS 145, early debt extinguishments were required to be recognized as extraordinary items. SFAS 145 amended other previously issued statements and made numerous technical corrections. With the exception of the accounting treatment for extinguishments of debts, those other modifications are not expected to impact the consolidated financial statements of the Company. Forward-Looking Statements; Risks and Uncertainties Certain information included in this Form 10-Q and other materials filed or to be filed by the Company with the Securities and Exchange Commission (the "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. Overview J Net Enterprises, Inc. (referred to hereinafter as "J Net" or the "Company") is a technology holding company with concentrated investments in enterprises software and technology infrastructure companies. The Company operates in two business segments, E-Commerce Operations and Technology-Related Businesses. E-Commerce Operations are conducted through IW Holdings, Inc. ("IWH"), a wholly owned subsidiary of the Company and the successor to the business formerly conducted by InterWorld Corporation ("InterWorld"). The e-commerce software products include functionality that addresses distributed order management, customer relationship management, supplier relationship management, sales channel management, and business intelligence for companies in the retail, manufacturing, distribution, telecommunications and transportation industries. The E- Commerce Operations applications, components and tools are based on IWH's Process-Centric(tm) architecture which enables companies to maximize returns on investments in information technology by allowing them to quickly implement the software and adapt to changing market conditions without the need for programmers. The Technology-Related Businesses segment invests in technology companies which include, but are not limited to, systems development and software companies. Investments have been made directly by the Company or through Ventures I and the Fund, which are owned and controlled by the Company. The E-commerce operations have required substantial funding and management resources since May 2001. As a result, investments in Technology-Related Businesses have been curtailed. There have been no such investments since July 2001. The Company continues to actively seek potential acquisitions and expansion opportunities. Management expects to devote resources to these efforts and may incur expenses in connection with these activities. The Company anticipates that, as it engages in such activities, it will periodically incur expenses that may have a material effect on the Company's operating income. Although the Company is exploring such expansion and acquisition opportunities, there can be no assurance that such opportunities will be available on terms acceptable to J Net, or that, if undertaken, they will be successful. Marketing IWH entered into a nonexclusive reselling alliance with Nextjet, Inc. in November 2002. The Company also has existing reseller and marketing agreements in Europe and Japan. Three Months Ended March 31, 2003 and 2002: Results of Operations Total revenues: Consolidated revenues, all of which are related to E-Commerce Operations, were $.7 million for the three months ended March 31, 2003 versus $.6 million for the three months ended March 31, 2002, reflecting an increase of $.1 million. The increase reflects no attrition in maintenance revenue from the prior year and professional services totaling $.1 million for the three months ended March 31, 2003 compared to $0 for the three months ending March 31, 2002. Total cost of revenues: Cost of revenues, all of which are related to E-Commerce Operations, were $.2 million for the three months ended March 31, 2003. The total cost of revenues was $.1 million for the three months ended March 31, 2002. The primary cause of the $.1 million increase compared to the three months ended March 31, 2002 is a credit for consulting fees of $.1 million for the three months ended March 31, 2002 resulting from vendor settlements. Operating expenses: Total operating expenses were $1.4 million for the three months ended March 31, 2003 compared to $2.3 million for the three months ended March 31, 2002. The decrease of $ .9 million is primarily a reflection of cost saving measures of IWH, which resulted in a $.7 million reduction in quarterly G&A costs compared to the three months ended March 31, 2002. Other income (expense): Net other income items were $.4 million for each of the three months ended March 31, 2003 and 2002, respectively. Interest and other income decreased to $.3 million for the three months ended March 31, 2003 from $1.0 million in the prior year quarter due primarily to reductions in the average amount of cash and investments at Mariner Investments, L.P. ("Mariner") resulting from the repurchase of the subordinated convertible notes (the "Notes"). The March 31, 2003 three months also include a small gain from the disposition of assets held for sale. Interest expense decreased from $.6 million for the three months ended March 31, 2002 to $0 in the comparable quarter ended March 31, 2003 as a result of the repurchase of the Notes. Federal income taxes: There is no federal income tax provision for the three months ended March 31, 2003. All taxable transactions and temporary differences for federal income taxes in the current fiscal year are fully offset by a valuation allowance. Such allowances will continue to be provided until such time as the Company begins to generate operating income. Net loss: The net loss was $.5 million for the three months ended March 31, 2003 compared to a loss of $1.3 million in the comparable 2002 quarter. The $.8 million improvement is due primarily to reductions in operating expenses and the elimination of interest expense as a result of the repurchase of the Notes. Nine Months Ended March 31, 2003 and 2002: Results of Operations Total revenues: Consolidated revenues, all of which are related to E-Commerce Operations, were $2.1 million for the nine months ended March 31, 2003 versus $4.7 million for the nine months ended March 31, 2002, reflecting a decrease of $2.6 million, or 55%. The decrease reflects ongoing declines in markets for e-commerce products, which began in 2000. All revenue components; licenses, professional services and post contract customer support were down from the previous year. Product license sales declined to $21 thousand from $.9 million in 2002. Professional service revenue declined to $.4 million in 2003 from $1.0 million in 2002. Post contract maintenance revenue also declined due primarily to reductions in renewals from "dot-com" customers to $1.7 million in 2003 from $2.8 million in 2002. During the nine months ended March 31, 2003, one license was sold compared to six license sales in the prior year's nine month period. The decline in professional service revenue is directly attributable to the lower license sales. The number of customers receiving post-contract maintenance support was seventeen at March 31, 2003 compared to nineteen at March 31, 2002. Total cost of revenues: Cost of revenues, all of which are related to E-Commerce Operations, were $.5 million for the nine months ended March 31, 2003. The total cost of revenues was $2.7 million for nine months ended March 31, 2002. The primary causes of the $2.2 million decrease compared to the nine months ended March 31, 2002 are the substantial reductions in workforce and the variable cost impacts from reduced license sales. Operating expenses: Total operating expenses were $5.6 million for the nine months ended March 31, 2003 compared to $26.2 million for the nine months ended March 31, 2002. The decrease of $20.6 million reflects savings of $15.4 million from workforce and other cost reductions in IWH initiated in September 2001. The nine months ended March 31, 2003 included $1.0 million of impairment charges while the nine months ended March 31, 2002 contained $6.2 million of restructuring charges. There were no restructuring charges for the nine months ended March 31, 2003. Other income (expense): For the nine months ended March 31, 2003, the Company had net other income of $1.6 million compared with net other income of $.7 million for the nine months ended March 31, 2002. Interest income decreased to $.9 million for the nine months ended March 31, 2003 from $2.4 million in the prior year because of reductions in the average amount invested at Mariner which was redeemed to repurchase the Notes. Interest expense decreased from $1.7 million for the nine months ended March 31, 2002 to $0 in the comparable nine months ended March 31, 2003, as a result of the repurchase of the Notes. The 2003 nine months also include gains from the repurchase of Notes and gains from asset sales which totaled $.7 million. Federal income taxes: There is a $.2 million federal income tax provision for the nine months ended March 31, 2003 resulting from a downward adjustment of the estimated tax refund to the actual amount claimed in the Company's fiscal 2002 Federal income tax return. There was no provision for the nine months ending March 31, 2002. All taxable transactions and temporary differences for federal income taxes in the current fiscal year are fully offset by a reserve allowance. Such allowances will continue to be provided until such time as the Company begins to generate operating income. Net loss: The net loss was $2.7 million for the nine months ended March 31, 2003 compared to a loss of $23.5 million for the nine months ended March 31, 2002. The $20.8 million improvement is due primarily to the significant workforce reductions of approximately $15.4 million and the $6.2 million nonrecurring restructuring charges from the nine months ended March 31, 2002. The total benefits from these reductions are partially offset by the impairments in 2003 of $1.1 million and the federal taxes. Capital Resources and Liquidity Liquidity: The Company's sources of funds for the nine months ended March 31, 2003 were generated from E-Commerce Operations revenues, tax refund receipts, interest from cash deposits, Mariner earnings and cash received from the sale of the property held for sale in Wellington, Florida. As of March 31, 2003, cash and marketable securities totaled $18.6 million, an increase of $5.0 million from the balance at December 31, 2002. The primary sources of the increase were the $4.3 million proceeds from the sale of the property held for sale in Wellington, Florida and the final portion of the tax refund of $.7 million. The Company believes its existing resources are adequate to fund existing operations and allow additional time for the marketing efforts to increase cash flows from operations. These funds are also adequate to pay for resources required for the Company to explore new expansion or acquisition opportunities. As of March 31, 2003, the total accounts payable and accrued liabilities include approximately $1.7 million attributable to unsecured creditors of InterWorld. While these liabilities are included as part of the consolidated group, these liabilities remain separate and distinct to InterWorld. Management has actively been negotiating with many of the significant unsecured creditors to settle aged claims. No vendor settlements were finalized in the quarter ended March 31, 2003. Although there can be no assurances, Management believes the remaining obligations will be settled at amounts substantially less then their respective face values. Cash flows: For the nine months ended March 31, 2003, net cash provided from operations was $4.9 million. The increase in cash reflects the $7.7 million income tax refund, which is partially offset by cash used in operations of $1.0 million in e-commerce operations and $1.8 million in Technology-Related Businesses. Investing and financial activities: For the nine months ended March 31, 2003, the Company redeemed $24 million of its short term investments at Mariner to purchase the Notes. Upon receipt of the Federal tax refunds, the Company purchased $6 million of short term investments in Mariner. In addition to the Mariner activities, the Company received $4.3 million in proceeds from asset sales during the nine months ended March 31, 2003. Recently Issued Accounting Standards: In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure ("SFAS 148"). This statement is an amendment of the disclosure provisions of SFAS 123, "Accounting for Stock-Based Compensation", and APB Opinion No. 28, "Interim Financial Reporting". SFAS 148 requires disclosure of the method of accounting used for stock-based employee compensation and the effect of that method on income and earnings per share in annual and interim financial statements. SFAS 148 is effective for all interim periods beginning after December 15, 2002. The Company adopted the expanded disclosure requirements in this Form 10-Q. The FASB recently issued Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 nullifies the Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity". SFAS 146 requires that a liability associated with an exit or disposal activity be recognized when the liability is incurred while EITF Issue No. 94-3 recognized such liabilities at such time that an entity committed to an exit plan. The provisions of SFAS 146 are effective for exit or disposal activities initiated after December 31, 2002 with early application encouraged. In April 2002, the FASB issued Statement of Financial Accounting Standards No. 145, "Rescission of FASB Statements No. 4, 44 and 62, Amendment of FASB Statement 13, and Technical Corrections ("SFAS 145"). For most companies, SFAS 145 requires gains and losses from the extinguishment of debt to be classified as a component of income or loss from continuing operations. Prior to the issuance of SFAS 145, early debt extinguishments were required to be recognized as extraordinary items. SFAS 145 amended other previously issued statements and made numerous technical corrections. With the exception of the accounting treatment for extinguishments of debts, those other modifications are not expected to impact the consolidated financial statements of the Company. SFAS 145 is effective for fiscal years beginning after May 15, 2002. Accordingly, the Company adopted such provisions on July 1, 2002. Factors Which May Affect Future Results The Company's financial and management resources have been concentrated on its E-Commerce Operations. For the past two years, the technology-related markets have experienced significant declines in sales, market value, and available capital resources to develop new products. In addition, the technology-related environment is extremely competitive. The combination of the above factors involves a number of risks and uncertainties. Even with the significant reductions to its cost structure, the Company's operations will require an increase in sales of e-commerce products to avoid further cost reductions. Increases in sales are dependent on several factors including (1) successfully closed deals from its channel partners and resellers, (2) an increase in information technology spending by businesses, (3) continued solvency of existing customers, (4) availability of capital, (5) preservation of existing patents and trademarks, and (6) the Company's ability to build and deliver products ahead of its competitors. There is no assurance that any of the events will occur, or be sustainable if they do occur. Item 3. Quantitative and Qualitative Disclosure About Market Risk The Company 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, 2003, a 10% change in interest rates would change pretax interest income by approximately $2 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 $12.0 million in Mariner Partners, L.P., a private investment fund. 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, 2003 and the average return of such investment for the previous nine months, a 10% reduction in those rates would reduce pretax income by approximately $.1 million a 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 size and nature of the Company's investments. Item 4. Controls and Procedures Based on their evaluation of the Company's disclosure controls and procedures as of a date within 90 days of the filing of this Report, the Chief Executive Officer and Chief Financial Officer have concluded that such controls and procedures are effective. There were no significant changes in the Company's internal controls or in other factors that could significantly affect such controls subsequent to the date of such evaluation by the Chief Executive Officer and Chief Financial Officer. PART II. OTHER INFORMATION Item 1. Legal Proceedings On March 8, 2001, as amended on May 29, 2001, InterWorld received notice that the Commission had 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 was 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 in April 2002. The claim alleged that PBS was owed commissions by InterWorld for services related to PBS's attempts to sublease office space previously occupied by InterWorld in New York City. In January 2003, InterWorld and PBS reached a tentative agreement to resolve the dispute which was to include a payment by InterWorld in exchange for, among other things, discontinuance with prejudice of the lawsuit and a release. The final terms of the release were not satisfactory to InterWorld and could not be resolved. Thus, the settlement was never consummated. The amount accrued in the quarter ended December 31, 2003, in conjunction with settlement discussions with PBS, remains on the financial statements as an estimate of the cost of continuing litigation in this matter. InterWorld will continue to vigorously defend itself against the claims of 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. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 10.40 Form of Indemnification Agreement. 99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. SS 1350, Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. SS 1350, Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K: The Company filed a Form 8-K dated March 24, 2003 disclosing in Item 2 that it had completed the sale of its property located in Wellington, Florida, resulting in net cash proceeds of $4.3 million. 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, 2003 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report on Form 10-Q of J Net Enterprises, Inc. for the period ending March 31, 2003 as filed with the Securities and Exchange Commission on the date hereof, I, Allan R. Tessler, Chairman and Chief Executive Officer of registrant, certify, pursuant to 18 U.S.C. SS 1350, as adopted pursuant to SS 302 of the Sarbanes-Oxley Act of 2002, that: (1) I have reviewed this quarterly report on Form 10-Q of J Net Enterprises, Inc. (2) Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and (3) Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of registrant as of, and for, the periods presented in this quarterly report; and (4) The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (b) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; (5) The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and (6) The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: May 15, 2003 By: /s/ Allan R. Tessler ____________________ Allan R. Tessler Chairman and Chief Executive Officer This certification accompanies this Quarterly Report on Form 10-Q pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed by registrant for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report on Form 10-Q of J Net Enterprises, Inc. for the period ending March 31, 2003 as filed with the Securities and Exchange Commission on the date hereof, I, Steven L. Korby, Chief Financial Officer of registrant, certify, pursuant to 18 U.S.C. SS 1350, as adopted pursuant to SS 302 of the Sarbanes-Oxley Act of 2002, that: (1) I have reviewed this quarterly report on Form 10-Q of J Net Enterprises, Inc. (2) Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and (3) Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of registrant as of, and for, the periods presented in this quarterly report; and (4) The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (b) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; (5) The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and (6) The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: May 15, 2003 By: /s/ Steven L. Korby ___________________ Steven L. Korby Chief Financial Officer This certification accompanies this Quarterly Report on Form 10-Q pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed by registrant for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. EX-99 3 exhibit991.txt Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report on Form 10-Q of J Net Enterprises, Inc. (the "Company") for the quarter ended March 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Allan R. Tessler, Chairman and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. SS 1350, as adopted pursuant to SS 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. Dated: May 15, 2003 By: /s/ Allan R. Tessler ____________________ Allan R. Tessler Chairman and Chief Executive Officer This certification accompanies this Quarterly Report on Form 10-Q pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. EX-99 4 exhibit992.txt Exhibit 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report on Form 10-Q of J Net Enterprises, Inc. (the "Company") for the quarter ended March 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Steven L. Korby, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. SS 1350, as adopted pursuant to SS 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. Dated: May 15, 2003 By: /s/ Steven L. Korby _______________________ Steven L. Korby Chief Financial Officer This certification accompanies this Quarterly Report on Form 10-Q pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. EX-10 5 indemexhibit.txt EXHIBIT 10.40 INDEMNIFICATION AGREEMENT THIS AGREEMENT is made, entered into and effective as of the ____ day of ____________ ____, by and between J NET ENTERPRISES, INC., a Nevada corporation (the "Company"), and the undersigned (the "Indemnitee"). RECITALS WHEREAS, the Indemnitee is a ________ of the Company; and WHEREAS, the Company and the Indemnitee recognize the continued difficulty in obtaining liability insurance for its directors, officers, employees, agents and fiduciaries, the significant increases in the cost of such insurance and the general reductions in the coverage of such insurance; and WHEREAS, the Company and the Indemnitee further recognize the substantial increase in corporate litigation in general, subjecting directors, officers, employees, agents and fiduciaries to expensive litigation risks at the same time as the availability and coverage of liability insurance has been severely limited; and WHEREAS, the Indemnitee does not regard the current protection available as adequate under the present circumstances, and the Indemnitee and other directors, officers, employees, agents and fiduciaries of the Company may not be willing to continue to serve in such capacities without additional protection; and WHEREAS, the Company desires to attract and retain the services of highly qualified individuals, such as the Indemnitee, to serve the Company and, in part, in order to induce the Indemnitee to continue to provide services to the Company, wishes to provide for the indemnification and advancing of expenses to the Indemnitee to the maximum extent permitted by law; and WHEREAS, in view of the considerations set forth above, the Company desires that the Indemnitee be indemnified by the Company to the fullest extent permitted by law as set forth herein; NOW, THEREFORE, in consideration of the foregoing, the covenants contained herein and the Indemnitee's continued service to the Company, the Company and the Indemnitee, intending to be legally bound, hereby agree as follows: 1. Indemnification. ________________ (a) Indemnification of Expenses. The Company shall indemnify Indemnitee to the fullest extent permitted by law if Indemnitee is or becomes a party to or witness or other participant in, or is threatened to be made a party to or witness or other participant in, any threatened, pending or completed action, suit, proceeding or alternative dispute resolution mechanism, or any hearing, inquiry or investigation that Indemnitee in good faith believes might lead to the institution of any such action, suit, proceeding or alternative dispute resolution mechanism, whether civil, criminal, administrative, investigative or other (hereinafter a "Claim") by reason of (or arising in part out of) any event or occurrence related to the fact that Indemnitee is or was a director, officer, employee, agent or fiduciary of the Company, or any subsidiary of the Company, or is or was serving at the request of the Company as a director, officer, employee, agent or fiduciary of another corporation, partnership, joint venture, employee benefit plan, trust or other enterprise, or by reason of any action or inaction on the part of Indemnitee while serving in such capacity (hereinafter an "Indemnifiable Event") against any and all expenses incurred by or on behalf of Indemnitee (including attorneys' fees and all other costs, expenses and obligations incurred in connection with investigating, defending, being a witness in or participating in (including on appeal), or preparing to defend, be a witness in or participate in, any such action, suit, proceeding, alternative dispute resolution mechanism, hearing, inquiry or investigation), costs of supersedes and other appeal bonds, judgments, fines, penalties and amounts paid in settlement (if such settlement is approved in advance by the Company, which approval shall not be unreasonably withheld or delayed) of such Claim and any federal, state, local or foreign taxes imposed on Indemnitee as a result of the actual or deemed receipt of any payments under this Agreement (collectively, hereinafter "Expenses"), including all interest, assessments and other charges paid or payable in connection with or in respect of such Expenses. The Company shall make such payment of Expenses as soon as practicable but in any event no later than [ten (10)] days after written demand by Indemnitee therefor is presented to the Company. (b) Change in Control. (i) Determination. The Company agrees that if there is a Change in Control (as defined in Section 9(c) hereof) of the Company (other than a Change in Control which has been approved by a majority of the Company's Board of Directors who were directors immediately prior to such Change in Control) then, with respect to all matters thereafter arising concerning the rights of Indemnitee to payments of Expenses and Expense Advances under this Agreement or any other agreement or under the Company's Articles of Incorporation or Bylaws as now or hereafter in effect, Independent Legal Counsel (as defined in Section 9(d) hereof) shall be selected by Indemnitee and approved by the Company (which approval shall not be unreasonably withheld or delayed). Such counsel, among other things, shall render its written opinion to the Company's Board of Directors and Indemnitee as to whether and to what extent Indemnitee would be permitted to be indemnified under applicable law and the Company agrees to abide by such opinion. The Company agrees to pay the reasonable fees of the Independent Legal Counsel referred to above and to fully indemnify such counsel against any and all expenses (including attorneys' fees), claims, liabilities and damages arising out of or relating to this Agreement or its engagement pursuant hereto. (ii) Potential Change in Control. Following the occurrence of any Potential Change in Control (as defined in Section 9(e)), the Company, upon receipt of a written request from Indemnitee, shall create a Trust (the "Trust") for the benefit of Indemnitee, the trustee of which shall be a bank or similar financial institution with trust powers chosen by Indemnitee. From time to time, upon the written request of Indemnitee, the Company shall fund the Trust in amounts sufficient to satisfy any and all Expenses reasonably anticipated at the time of each such request to be incurred by Indemnitee for which indemnification may be available under this Agreement. The amount or amounts to be deposited in the Trust pursuant to the foregoing funding obligation shall be determined by mutual agreement of Indemnitee and the Company or, if the Company and Indemnitee are unable to reach such an agreement or, in any event, a Change in Control has occurred, by Independent Legal Counsel (selected pursuant to Section 1(b)(i)). The terms of the Trust shall provide that, except upon the prior written consent of Indemnitee and the Company, (a) the Trust shall not be revoked or that principal thereof invaded, other than to make payments to unsatisfied judgment creditors of the Company, (b) the Trust shall continue to be funded by the company in accordance with the funding obligations set forth in this Section, (c) the Trustee shall promptly pay or advance to Indemnitee any amounts to which Indemnitee shall be entitled pursuant to this Agreement, and (d) all unexpended funds in the Trust shall revert to the Company upon a determination by Independent Legal Counsel (selected pursuant to Section 1(b)(i)) or a court of competent jurisdiction that Indemnitee has been fully indemnified under the terms of this Agreement. All income earned on the assets held in the trust shall be reported as income by the Company for federal, state, local and foreign tax purposes. (iii) Expenses. Following any Change in Control, the Company shall be liable for and shall pay the Expenses paid or incurred by Indemnitee in connection with the making of any determination (irrespective of the determination as to the Indemnitee's entitlement to indemnification) or the prosecution of any Claim pursuant to Section 8.2, and the Company hereby agrees to indemnify and hold Indemnitee harmless therefrom. If requested by counsel for Indemnitee, the Company shall promptly give such counsel an appropriate written agreement with respect to the payment of its fees and expenses and such other matters as may be reasonably requested by such counsel. (c) Mandatory Payment of Expenses. Notwithstanding any other provision of this Agreement other than Section 8 hereof, to the extent that Indemnitee has been successful on the merits or otherwise in defense of any proceeding referred to in Section 1(a) of this Agreement, or in defense of any claims, issue or matter herein, including dismissal without prejudice, Indemnitee shall be indemnified against all Expenses actually and reasonably incurred by Indemnitee (or on his behalf) in connection therewith. If Indemnitee is not wholly successful in any proceeding referred to in Section 1(a) of this Agreement, but is successful on the merits or otherwise (including dismissal without prejudice) as to one or more, but less than all claims, issues or matters therein, including dismissal without prejudice, Indemnitee shall be indemnified against all Expenses actually and reasonably incurred by Indemnitee (or on his behalf) in connection with each successfully resolved claim, issue or matter. For purposes of this Section 1(c), and without limitation, the termination of any claim, issue or matter in any proceeding referred to in Section 1 of this Agreement by dismissal, with or without prejudice, shall be deemed to be a successful result as to such claim, issue or matter. (d) Reimbursement of Expenses Following Adjudication of Negligence. To the fullest extent permitted by applicable law, the Company shall reimburse the Indemnitee for any Expenses (including attorneys' fees) and amounts actually and reasonably incurred or paid by him in connection with the investigation, defense, settlement or appeal of any action or suit described in Section 1(a) hereof that results in an adjudication that the Indemnitee was liable for negligence, gross negligence or recklessness (but not willful misconduct) in the performance of his duty to the Company; provided, however, that the Indemnitee acted in good faith and in a manner he believed to be in the best interests of the Company. 2. Expenses; Indemnification Procedure. (a) Advancement of Expenses. To the fullest extent permitted by applicable law, the Expenses incurred by Indemnitee pursuant to Section 1(a) of this Agreement in connection with any proceeding or any claim, issue or matter therein shall be paid by the Company in advance (an "Expense Advance") of the final disposition of such proceeding or any claim, issue or matter therein no later than 10 days after receipt by the Company of an undertaking by or on behalf of Indemnitee ("Indemnitee Undertaking") to repay such amount to the extent that it is ultimately determined that Indemnitee is not entitled to be indemnified by the Company. The Indemnitee Undertaking shall be in a form reasonably acceptable to the Company, shall not be secured and shall be interest free. (b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a condition precedent to Indemnitee's right to be indemnified under this Agreement, give the Company notice in writing as soon as practicable of any Claim made against Indemnitee for which indemnification will or could be sought under this Agreement. Notice to the Company shall be directed to the Company's Board of Directors of Directors at the address shown on the signature page of this Agreement (or such other address as the Company shall designate in writing to Indemnitee). In addition, Indemnitee shall give the Company such information and cooperation as it may reasonably require and as shall be within Indemnitee's power. (c) Reviewing Party. Upon written request by Indemnitee for indemnification pursuant to Section 2(b) of this Agreement, a determination, if required by applicable law, with respect to Indemnitee's entitlement thereto shall be made in the specific case: (i) if a Change in Control shall have occurred, in the manner set forth in Section 1(b) of this Agreement; or (ii) if a Change in Control shall not have occurred, (A) by a vote of the stockholders of the Company, (B) by the Company's Board of Directors by majority vote of a quorum consisting of directors who were not parties to the action, suit or proceeding, (C) if a majority vote of a quorum consisting of directors who were not parties to the action, suit or proceeding so order, by Independent Legal Counsel in a written opinion to the Company's Board of Directors, or (D) if a quorum consisting of directors who were not parties to the action, suit or proceeding cannot be obtained, by Independent Legal Counsel in a written opinion to the Company's Board of Directors, a copy of which shall be delivered to Indemnitee; and, if so determined that Indemnitee is entitled to indemnification, payment to Indemnitee shall be made within 10 days after such determination. (d) Presumptions; Burden of Proof; Effect of Certain Provisions. (i) In making a determination with respect to entitlement to indemnification hereunder, the person or persons or entity making such determination shall presume that Indemnitee is entitled to indemnification under this Agreement if Indemnitee has submitted a request for indemnification in accordance with Section 2(b) of this Agreement, and the Company shall have the burden of proof in overcoming such presumption by clear and convincing evidence. The termination of any Claim by judgment, order, settlement (whether with or without court approval) or conviction, or upon a plea of nolo contendere, or its equivalent, shall not create a presumption that Indemnitee did not meet any particular standard of conduct or have any particular belief or that a court has determined that indemnification is not permitted by applicable law. Further, neither the failure of the Company (including the Company's Board of Directors or Independent Legal Counsel) to have made a determination prior to the commencement of such action pursuant to this Agreement that indemnification is proper in the circumstances because Indemnitee has met the applicable standard of conduct, nor an actual determination by the Company (including the Company's Board of Directors or Independent Legal Counsel) that Indemnitee has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that Indemnitee has not met the applicable standard of conduct. (ii) If the person, persons or entity empowered or selected in accordance with the terms of this Agreement to determine whether Indemnitee is entitled to indemnification shall not have made a determination within 60 days after receipt by the Company of the request therefor, the requisite determination of entitlement to indemnification shall be deemed to have been made and Indemnitee shall be entitled to such indemnification, absent (i) a misstatement by Indemnitee of a material fact, or an omission of a material fact necessary to make Indemnitee's statement not materially misleading, in connection with the request for indemnification, or (ii) a prohibition of such indemnification under applicable law; provided, however, that such 60-day period may be extended for a reasonable time, not to exceed an additional 30 days, if the person, persons or entity making the determination with respect to entitlement to indemnification in good faith requires such additional time for the obtaining or evaluating of documentation and/or information relating thereto; and provided, further, that the foregoing provisions of this Section 2(d) shall not apply if the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to the terms of this Agreement. (iii) For purposes of any determination of whether Indemnitee acted in good faith and in a manner reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal proceeding, Indemnitee had no reasonable cause to believe his conduct was unlawful (collectively, "Good Faith"), Indemnitee shall be deemed to have acted in Good Faith if Indemnitee's action is based on the records or books of account of the Company and any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise of which Indemnitee is or was serving at the request of the Company as a director, officer, employee or agent ("Enterprise"), including financial statements, or on information supplied to Indemnitee by the officers of any Enterprise in the course of their duties, or on the advice of legal counsel for the Enterprise or on information or records given or reports made to the Enterprise by an independent certified public accountant or by an appraiser or other expert selected with the reasonable care by the Enterprise. The provisions of this Section 2(d) shall not be deemed to be exclusive or to limit in any way the other circumstances in which the Indemnitee may be deemed to have met the applicable standard of conduct set forth in this Agreement. (iv) The knowledge and/or actions, or failure to act, of any director, officer, agent or employee of the Enterprise shall not be imputed to Indemnitee for purposes of determining the right to indemnification under this Agreement. (v) If a Change in Control shall have occurred, Indemnitee shall be entitled to a rebuttable presumption that Indemnitee is entitled to indemnification under this Agreement and the Company shall have the burden of proof in rebutting such presumption. (e) Notice to Insurers. If, at the time of the receipt by the Company of a notice of a Claim pursuant to Section 2(b) hereof, the Company has liability insurance in effect which may cover such Claim, the Company shall give prompt notice of the commencement of such Claim to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of Indemnitee, all amounts payable as a result of such action, suit, proceeding, inquiry or investigation in accordance with the terms of such policies. (f) Selection of Counsel. In the event the Company shall be obligated hereunder to pay the Expenses of any Claim, the Company, if appropriate, shall be entitled to assume the defense of such Claim with counsel approved by Indemnitee, upon the delivery to Indemnitee of written notice of its election so to do. After delivery of such notice, approval of such counsel by Indemnitee and the retention of such counsel by the Company, the Company will not be liable to Indemnitee under this Agreement for any fees of counsel subsequently incurred by Indemnitee with respect to the same Claim; provided that, (i) Indemnitee shall have the right to employ Indemnitee's counsel in any such Claim at Indemnitee's expense and (ii) if (A) the employment of counsel by Indemnitee has been previously authorized by the Company, (B) Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and Indemnitee in the conduct of any such defense, or (C) the Company shall not continue to retain such counsel to defend such Claim, then the fees and expenses of Indemnitee's counsel shall be at the expense of the Company. 3. Additional Indemnification Rights; Nonexclusivity. (a) Scope. The Company hereby agrees to indemnify Indemnitee to the fullest extent permitted by law, notwithstanding that such indemnification is not specifically authorized by the other provisions of this Agreement, the Company's Articles of Incorporation, the Company's Bylaws or by statute. In the event of any change after the date of this Agreement in any applicable law, statute or rule which expands the right of a Nevada corporation to indemnify a member of the Company's Board of Directors or an officer, employee, agent or fiduciary, it is the intent of the parties hereto that Indemnitee shall enjoy by this Agreement the greater benefits afforded by such change. In the event of any change in any applicable law, statute or rule which narrows the right of a Nevada corporation to indemnify a member of the Company's Board of Directors or an officer, employee, agent or fiduciary, such change, to the extent not otherwise required by such law, statute or rule to be applied to this Agreement, shall have no effect on this Agreement or the parties' rights and obligations hereunder except as set forth in Section 7(a) hereunder. (b) Nonexclusivity. The indemnification provided by this Agreement shall be in addition to any rights to which Indemnitee may be entitled under the Company's Articles of Incorporation, its Bylaws, any agreement, any vote of stockholders or disinterested directors, the General Corporation Law of the State of Nevada, or otherwise. The indemnification provided under this Agreement shall continue as to Indemnitee for any action taken or not taken while serving in an indemnified capacity even though Indemnitee may have ceased to serve in such capacity. (c) Appeals; Enforcement. (i) In the event that (a) a determination is made that Indemnitee shall not be entitled to indemnification under this Agreement, (b) any determination to be made by Independent Legal Counsel is not made within 90 days of receipt by the Company of a request for indemnification pursuant to Section 2(b) or (c) the Company fails to otherwise perform any of its obligations under this Agreement (including, without limitation, its obligation to make payments to Indemnitee following any determination made or deemed to have been made that such payments are appropriate), Indemnitee shall have the right to commence a Claim in any court of competent jurisdiction, as appropriate, to seek a determination by the court, to challenge or appeal any determination which has been made, or to otherwise enforce this Agreement. If a Change of Control shall have occurred, Indemnitee shall have the option to have any such Claim conducted by a single arbitrator pursuant to the rules of the American Arbitration Association. Any such judicial proceeding challenging or appealing any determination shall be deemed to be conducted de novo and without prejudice by reason of any prior determination to the effect that Indemnitee is not entitled to indemnification under this Agreement. Any such Claim shall be at the sole expense of Indemnitee except as provided in Section 1(b)(iii). (ii) If a determination shall have been made or deemed to have been made pursuant to this Agreement that Indemnitee is entitled to indemnification, the Company shall be bound by such determination in any judicial proceeding or arbitration commenced pursuant to this Section 3(c), except if such indemnification is unlawful. (iii) The Company shall be precluded from asserting in any judicial proceeding or arbitration commenced pursuant to this Section 3(c) that the procedures and presumptions of this Agreement are not valid, biding and enforceable and shall stipulate in any such court or before any such arbitrator that the Company is bound by all the provisions of this Agreement. The Company hereby consents to service of process and to appear in any such judicial or arbitration proceedings and shall not oppose Indemnitee's right to commence any such proceedings. 4. No Duplication of Payments. The Company shall not be liable under this Agreement to make any payment in connection with any Claim made against Indemnitee to the extent Indemnitee has otherwise actually received payment (under any insurance policy, Articles of Incorporation, Bylaw or otherwise) of the amounts otherwise indemnifiable hereunder. 5. Partial Indemnification. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of Expenses incurred in connection with any Claim, but not, however, for all of the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion of such Expenses to which Indemnitee is entitled. 6. Liability Insurance. To the extent the Company maintains liability insurance applicable to directors, officers, employees, agents or fiduciaries, Indemnitee shall be covered by such policies in such a manner as to provide Indemnitee the same rights and benefits as are accorded to the most favorably insured of the Company's directors, if Indemnitee is a director; or of the Company's officers, if Indemnitee is not a director of the Company but is an officer; or of the Company's key employees, agents or fiduciaries, if Indemnitee is not an officer or director but is a key employee, agent or fiduciary. 7. Exceptions. Except where so ordered by a court of competent jurisdiction, any other provision herein to the contrary notwithstanding,the Company shall not be obligated pursuant to the terms of this Agreement: (a) Excluded Action or Omissions. To indemnify Indemnitee for acts, omissions or transactions from which Indemnitee may not be relieved of liability under applicable law; (b) Claims Initiated by Indemnitee. To indemnify or advance expenses to Indemnitee with respect to Claims initiated or brought voluntarily by Indemnitee and not by way of defense, except (i) with respect to actions or proceedings brought to establish or enforce a right to indemnification under this Agreement or any other agreement or insurance policy or under the Company's Articles of Incorporation or Bylaws now or hereafter in effect relating to Claims for Indemnifiable Events, (ii) in specific cases if the Company's Board of Directors of Directors has approved the initiation or bringing of such Claim, (iii) as otherwise required under Section 78.7502 (or other applicable code section) of Nevada General Corporation Law, or (iv) in actions involving a counterclaim, interpleader, or third party claim, regardless of whether Indemnitee ultimately is determined to be entitled to such indemnification, advance expense payment or insurance recovery, as the case may be; (c) Lack of Good Faith. To indemnify Indemnitee for any expenses incurred by Indemnitee with respect to any proceeding instituted by Indemnitee to enforce or interpret this Agreement, if a court of competent jurisdiction determines that each of the material assertions made by Indemnitee in such proceeding was not made in good faith or was frivolous; or (d) Claims Under Section 16(b). To indemnify Indemnitee for expenses and the payment of profits arising from the purchase and sale by Indemnitee of securities in violation of Section 16(b) of the Securities Exchange Act of 1934, as amended, or any similar successor statute. 8. Period of Limitations. No legal action shall be brought and no cause of action shall be asserted by or in the right of the Company against Indemnitee, Indemnitee's estate, spouse, heirs, executors or personal or legal representatives after the expiration of two years from the date of accrual of such cause of action, and any claim or cause of action of the Company shall be extinguished and deemed released unless asserted by the timely filing of a legal action within such two-year period; provided, however, that if any shorter period of limitations is otherwise applicable to any such cause of action, such shorter period shall govern. 9. Construction of Certain Phrases. (a) For purposes of this Agreement, references to the "Company" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, employees, agents or fiduciaries, so that if Indemnitee is or was a director, officer, employee, agent or fiduciary of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee, agent or fiduciary of another corporation, partnership, joint venture, employee benefit plan, trust or other enterprise, Indemnitee shall stand in the same position under the provisions of this Agreement with respect to the resulting or surviving corporation as Indemnitee would have with respect to such constituent corporation if its separate existence had continued. (b) For purposes of this Agreement, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on Indemnitee with respect to an employee benefit plan; and references to "serving at the request of the Company" shall include any service as a director, officer, employee, agent or fiduciary of the Company which imposes duties on, or involves services by, such director, officer, employee, agent or fiduciary with respect to an employee benefit plan, its participants or its beneficiaries; and if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan, Indemnitee shall be deemed to have acted in a manner "not opposed to the best interests of the Company" as referred to in this Agreement. (c) For purposes of this Agreement a "Change in Control" shall be deemed to have occurred if (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company or a corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing more than 50% of the total voting power represented by the Company's then outstanding Voting Securities (as defined below), (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Company's Board of Directors of Directors of the Company and any new director whose election by the Company's Board of Directors of Directors or nomination for election by the Company's was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof, or (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation other than a merger or consolidation which would result in the Voting Securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into Voting Securities of the surviving entity) at least 50% of the total voting power represented by the Voting Securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of (in one transaction or a series of transactions) all or substantially all of the Company's assets. (d) For purposes of this Agreement, "Independent Legal Counsel" shall mean an attorney or firm of attorneys, selected in accordance with the provisions of Section 2(c) hereof, who shall not have otherwise performed services for the Company, the Indemnitee or any officer, director, subsidiary or other affiliate thereof within the last five years (other than with respect to matters concerning the rights of Indemnitee under this Agreement, or of other indemnitees under similar indemnity agreements) and who shall be experienced in matters of corporate law. The Company shall be responsible for any and all fees and expenses of the Independent Legal Counsel. (e) For purposes of this Agreement "Potential Change in Control" shall be deemed to have occurred if (a) the Company enters into an agreement or arrangement the consummation of which would result in the occurrence of a Change in Control, (b) any person (including the Company) publicly announces an intention to take or to consider taking actions which if consummated would constitute a Change in Control or (c) the Company's Board of Directors of Directors of the Company adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. (f) For purposes of this Agreement, a "Reviewing Party" shall mean any appropriate person or body consisting of the stockholders of the Company, the Company's board of directors, or Independent Legal Counsel, as set forth in Section 2(c) of this Agreement in accordance with section 78.751 (or any successor provision) of Nevada General Corporation Law. (g) For purposes of this Agreement, "Voting Securities" shall mean any securities of the Company that vote generally in the election of directors. 10. Contribution. If the indemnification provisions of this Agreement should be unenforceable under applicable law in whole or in part or insufficient to hold Indemnitee harmless in respect of any Expenses incurred by Indemnitee, then for purposes of this Section 10, the Company shall be treated as if it were, or was threatened to be made, a party defendant to the subject Claim and the Company shall contribute to the amounts paid or payable by Indemnitee as a result of such Expenses incurred by Indemnitee in such proportion as is appropriate to reflect the relative benefits accruing to the Company on the one hand and Indemnitee on the other and the relative fault of the Company on the one hand and Indemnitee on the other in connection with such Claim, as well as any other relevant equitable considerations. For purposes of this Section 10 the relative benefit of the Company shall be deemed to be the benefits accruing to it and to al of its directors, officers, employees and agents (other than Indemnitee) on the one hand, as a group and treated as one entity, and the relative benefit of Indemnitee shall be deemed to be an amount not greater than the Indemnitee's yearly base salary or Indemnitee's compensation from the Company during the first year in which the Indemnifiable Event forming the basis for the subject Claim was alleged to have occurred. The relative fault shall be determined by reference to, among other things, the fault of the Company and all of its directors, officers, employees and agents (other than Indemnitee) on the one hand, as a group and treated as one entity, and Indemnitee's and such group's relative intent, knowledge, access to information and opportunity to have altered or prevented the Indemnifiable Event forming the basis for the subject Claim. 11. Nondisclosure of Payments. Except as expressly required by Federal securities laws, neither party shall disclose any payments under this Agreement unless prior approval of the other party is obtained. Any payments to the Indemnitee that must be disclosed shall, unless otherwise required by law, be described only in Company proxy or information statements relating to special and/or annual meetings of the Company's stockholders, and the Company shall afford the Indemnitee the reasonable opportunity to review all such disclosures and, if requested, to explain in such statement any mitigating circumstances regarding the events reported. 12. Covenant Not to Sue, Limitation of Actions and Release of Claims. No legal action shall be brought and no cause of action shall be asserted by or on behalf of the Company (or any of its subsidiaries) against the Indemnitee, his spouse, heirs, executors, personal representatives or administrators after the expiration of two years from the date the Indemnitee ceases (for any reason) to serve as either an officer or a director of the Company, and any claim or cause of action of the Company (or any of its subsidiaries) shall be extinguished and deemed released unless asserted by filing of a legal action within such two-year period. 13. Indemnification of Indemnitee's Estate. Notwithstanding any other provision of this Agreement, and regardless whether indemnification of the Indemnitee would be permitted and/or required under this Agreement, if the Indemnitee is deceased, the Company shall indemnify and hold harmless the Indemnitee's estate, spouse, heirs, administrators, personal representatives and executors (collectively, the "Indemnitee's Estate") against, and the Company shall assume, any and all claims, damages, expenses (including attorneys' fees), penalties, judgments, fines and amounts paid in settlement actually incurred by the Indemnitee or the Indemnitee's Estate in connection with the investigation, defense, settlement or appeal of any action described in Section 1 hereof. Indemnification of the Indemnitee's Estate pursuant to this Section 13 shall be mandatory and not require a Determination or any other finding that the Indemnitee's conduct satisfied a particular standard of conduct. 14. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall constitute an original. 15. Binding Effect; Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors, assigns, including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business and/or assets of the Company, spouses, heirs, and personal and legal representatives. The Company shall require and cause any successor (whether direct or indirect by purchase, merger, consolidation or otherwise) to all, substantially all, or a substantial part, of the business and/or assets of the Company, by written agreement in form and substance satisfactory to Indemnitee, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. This Agreement shall continue in effect regardless of whether Indemnitee continues to serve as a director, officer, employee, agent or fiduciary of the Company or of any other enterprise at the Company's request. 16. Attorneys' Fees. In the event that any action is instituted by Indemnitee under this Agreement or under any liability insurance policies maintained by the Company to enforce or interpret any of the terms hereof or thereof, Indemnitee shall be entitled to be paid all Expenses incurred by Indemnitee with respect to such action, regardless of whether Indemnitee is ultimately successful in such action, and shall be entitled to the advancement of Expenses with respect to such action, unless, as a part of such action, a court of competent jurisdiction over such action determines that each of the material assertions made by Indemnitee as a basis for such action was not made in good faith or was frivolous. In the event of an action instituted by or in the name of the Company under this Agreement to enforce or interpret any of the terms of this Agreement, Indemnitee shall be entitled to be paid all Expenses incurred by Indemnitee in defense of such action (including costs and expenses incurred with respect to Indemnitee's counterclaims and cross-claims made in such action), and shall be entitled to the advancement of Expenses with respect to such action, unless, as a part of such action, a court having jurisdiction over such action determines that each of Indemnitee's material defenses to such action was made in bad faith or was frivolous. 17. Notice. All notices and other communications required or permitted hereunder shall be in writing, shall be effective when given, and shall in any event be deemed to be given (a) five calendar days after deposit with the U.S. Postal Service or other applicable postal service, if delivered by first class mail, postage prepaid, (b) upon delivery, if delivered by hand, (c) one business day after the business day of deposit with Federal Express or similar overnight courier, freight prepaid, or (d) one calendar day after the business day of delivery by facsimile transmission, if delivered by facsimile transmission with copy by first class mail, postage prepaid, and shall be addressed if to the Indemnitee, at the Indemnitee's address as set forth beneath his signature to this Agreement and if to the Company at the address of its principal corporate offices (attention: Secretary) or at such other address as such party may designate by ten calendar days' advance written notice to the other party hereto. 18. Consent to Jurisdiction. The Company and Indemnitee each hereby irrevocably consent to the jurisdiction of the courts of the State of Nevada for all purposes in connection with any action or proceeding which arises out of or relates to this Agreement and agree that any action instituted under this Agreement shall be commenced, prosecuted and continued only in the court of competent jurisdiction of the State of Nevada, which shall be the exclusive and only proper forum for adjudicating such a claim. 19. Severability. The provisions of this Agreement shall be severable in the event that any of the provisions hereof (including any provision within a single section, paragraph or sentence) are held by a court of competent jurisdiction to be invalid, void or otherwise unenforceable, and the remaining provisions shall remain enforceable to the fullest extent permitted by law. Furthermore, to the fullest extent possible, the provisions of this Agreement (including, without limitation, each portion of this Agreement containing any provision held to be invalid, void or otherwise unenforceable, that is not itself invalid, void or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable. 20. Choice of Law. This Agreement shall be governed by and its provisions construed and enforced in accordance with the laws of the State of Nevada, as applied to contracts between Nevada residents, entered into and to be performed entirely within the State of Nevada, without regard to the conflict of laws principles thereof. 21. Subrogation. In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all documents required and shall do all acts that may be necessary to secure such rights and to enable the Company effectively to bring suit to enforce such rights. 22. Amendment and Termination. No amendment, modification, termination or cancellation of this Agreement shall be effective unless it is in writing signed by both the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver. 23. Integration and Entire Agreement. This Agreement sets forth the entire understanding between the parties hereto and supersedes and merges all previous written and oral negotiations, commitments, understandings and agreements relating to the subject matter hereof between the parties hereto. 24. No Construction as Employment Agreement. Nothing contained in this Agreement shall be construed as giving Indemnitee any right to be retained in the employ of the Company or any of its subsidiaries. 25. Effective Date. The provisions of this Agreement shall cover claims, actions, suits and proceedings whether now pending or hereafter commenced and shall be retroactive to cover acts or omissions or alleged acts or omissions which heretofore have taken place. IN WITNESS WHEREOF, the parties hereto have executed this Indemnification Agreement as of the date first above written. J NET ENTERPRISES, INC., a Nevada corporation By ____________________________ Name: Title: AGREED TO AND ACCEPTED BY: ________________________________ -----END PRIVACY-ENHANCED MESSAGE-----