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.