-----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, NX5G1z1/3eH9w/YXxU3sUXTJntrnjhMfNAWDbd+tk/CcoJ/jB2ytd0a7yeQcgePL 5iQlXevoVRX82ro6m9w5zA== 0000351903-03-000042.txt : 20030929 0000351903-03-000042.hdr.sgml : 20030929 20030929152717 ACCESSION NUMBER: 0000351903-03-000042 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030929 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-09728 FILM NUMBER: 03914808 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-K 1 form10kfy03.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 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 Number 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 Identification or organization No. 4020 Lake Creek Drive, #100, Wilson, Wyoming 83014 ____________________________________________ ________ Address of principal executive offices Zip Code Registrant's telephone number, including area code: (307) 739-8603 _____________ Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Title of each class ________________________________________________ Common Stock - Par value $.01 per share, which includes certain preferred stock purchase rights 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 ___ ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K: x ___ As of September 22, 2003, the aggregate market value of the voting stock held by non-affiliates of the Registrant was $8,566,165. As of September 22, 2003, there were 8,524,541 shares of the Registrant's common stock outstanding. PART I ITEM 1. BUSINESS ________ J Net Enterprises, Inc. ("J Net" or the "Company") is a holding company conducting operations through a wholly owned enterprise software subsidiary (the "E-Commerce Operations"). The Company also holds investments in technology infrastructure companies (the "Technology-Related Businesses"). As of June 30, 2003, one Technology-Related Business investment continues to have value assigned. J Net uses a fiscal year which ends on June 30 of each calendar year. Unless the context indicates otherwise, references to "2003", "2002" and "2001" indicate the fiscal years ended June 30, 2003, 2002 and 2001, respectively. E-Commerce Operations are conducted through IW Holdings, Inc. ("IWH"), a wholly owned subsidiary of the Company and successor to the business formerly conducted by InterWorld Corporation ("InterWorld"). InterWorld is a separate publicly traded entity in which J Net owns 95.3% of the outstanding equity securities. J Net also holds minority investments in other technology companies including, but not limited to, systems development and software companies. These investments are held directly by the Company, or by J Net Ventures I, LLC (the "Fund" or "Ventures I"), a fund which is 100% owned and managed by the Company. Due to the significant financial and management resources required to stabilize the E-Commerce Operations, Management has not pursued additional minority interest investments since 2001. There are presently no plans to reinstate this strategy. The Company is actively seeking potential acquisitions of operating companies and enhancement opportunities for its E-Commerce Operations. Such enhancements for E-Commerce Operations include strategic alternatives including, but not limited to, expansion of marketing efforts, seeking business partners, or the sale of IWH. Management will devote its time and resources to these efforts and may incur expenses in connection with such activities. The Company anticipates that, as it continues to engage 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 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. Recent Events and 2003 Highlights In May 2002, the Company commenced a voluntary repurchase offer to the holders of its $27.8 million subordinated promissory notes (the "Notes"). Such offer was made at the face amount of the Notes, but excluded approximately $.5 million of unpaid interest which had accrued since March 31, 2002, the last interest payment date. In June 2002, all holders of the Notes agreed to accept the voluntary offer. The repayment of the Notes occurred in July 2002. In March 2003 the Company completed the sale of its real estate and improvements located in the Village of Wellington, Florida. The property, which was acquired as a result of foreclosure actions taken in June 2001, was classified as an asset held for sale until its disposition. Net proceeds were $4.4 million. In June 2003, employment contracts for the President and Chief Operating Officer and the Executive Vice President and Chief Financial Officer expired according to their terms. The contracts were not extended and the officers terminated their employment with the Company. A severance obligation of $.6 million arose as a result of the employment contract expirations. Such amount is included as compensation expense in the 2003 Consolidated Statement of Operations and as an accrued liability on the June 30, 2003 Consolidated Balance Sheet. E-Commerce Operations IWH, as the successor to the business formerly conducted by InterWorld, is a provider of integrated enterprise commerce software solutions. Its products include software 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. IWH's applications, components and tools are based on its Process-Centric(TM) architecture, which enables medium and large-sized companies to maximize returns on investments ("ROI") in information technology by allowing them to quickly implement and to rapidly adapt to changing market conditions without the need for programmers. IWH's open software solutions are designed to assist its clients to increase customer profitability, efficiency and satisfaction by allowing a business to enhance selling opportunities, manage complex sales channels, orchestrate sophisticated marketing campaigns, leverage and integrate disparate technology systems, capture and rapidly respond to critical business intelligence and facilitate complex business process interactions among its customers, vendors and partners. Additionally, the software solutions are designed to help companies: .. Get to market quickly with e-business initiatives by offering over 680 ready-to-deploy e-business processes, which can save companies thousands of hours of costly development work. .. Automate customer relationship management and sales and support processes, which enable companies to continuously update and improve these processes across multiple channels, including the World Wide Web, point-of-sale, call center, and wireless marketplaces. .. Achieve lower total-cost-of-ownership with the Process-Centric(TM) approach, which is easily adaptable and designed to facilitate dynamic business and technology changes. These solutions also reduce the need for proprietary development through support of industry standards such as XML, CIF, BizTalk and Rosetta Net. .. Improve profitability and deepen understanding of their business by utilizing IWH's sophisticated business intelligence application. The software facilitates enterprise-wide collaboration enabling companies to quickly and simply gather and act on business intelligence, without the need for technical support. .. Facilitate enterprise integration through pre-built software adaptors that easily connect multiple back-office systems, sales channels, digital marketplaces and business trading partners. In addition, IWH's enterprise integration capabilities enable a company to continue to use existing legacy systems, rather than forcing a company to buy or build new systems from scratch. The focus on ROI is particularly important in today's economic climate as capital, once readily available to build an entirely new application, is now limited. Increasingly, companies are demanding that their suppliers and vendors offer them the option to do business online. Given the high costs associated with information technology, companies need to ensure that their investments will lead to enhanced profitability. To drive profitability, companies must not only understand buying trends of their customers, they must also be in a position to act on these trends. Further, companies must be able to collaborate on an enterprise-wide basis as well as with their customers and suppliers to sustain growth and remain competitive. Significant customers of IWH include, among others, Verizon, Burlington Coat Factory, Marks & Spencer, IKON Office Solutions, Oki Data Americas, and Walt Disney Internet Group. In January 2003, IWH released Version 6.0 of Commerce Exchange ("Version 6.0"). Significant additions with Version 6.0 include a new Workflow Management Engine application built on the Process-Centric(TM) architecture that will allow users to extend and manage business processes to both human and system interaction layers. Version 6.0 added operational support for IBM's WebSphere J2EE application server to current support of BEA's WebLogic, allowing broader coverage and customer choice of application server. IWH also added significant product functionality including a user managed Gift Registry system. IWH customer activity included upgrades and significant extensions of functionality by Marks & Spencer, Verizon, Disney Stores Online and Ann Taylor. Marks & Spencer has released the IWH Gift Registry functionality to their online store and in-store kiosks in its 300 plus department stores. Marks & Spencer is also in the process of replacing its in-house catering order management system with IWH's Commerce Exchange application. Technology-Related Businesses Unconsolidated minority investments in other technology companies include, but are not limited to, systems development and software companies. The investments are held directly by the Company or by Ventures I. As a result of weak market conditions with respect to Technology-Related Businesses and the significance of Management's efforts with IWH, J Net suspended its minority investment strategy in 2001. Evaluation of investment opportunities continues, but the process is very selective due to continued weakness in the technology community. No minority investments have been made since July 2001. Between March 2000 and July 2001, the Company invested approximately $58 million in eleven companies, including its initial $20 million purchase of Mandatorily Redeemable Preferred Stock of InterWorld (the "Preferred Stock"). As of June 30, 2003, four of these companies continue to operate: Tellme Networks, Inc., eStara, Inc., Strategic Data Corporation and certain investments contained in Meister Brothers Investments, LLC. However, based on Management's periodic analysis of its investment portfolio, only Tellme Networks, Inc. continues to have value. The following table sets forth the activity for each of the investments from inception through June 30, 2003 (Dollars in thousands): Balance at Equity Value at June 30, income Goodwill Impairments June 30, Investments 1999 Additions (loss) amortization and sales Other 2003 _______________________ ________ _________ ________ ____________ ____________ __________ ________ Digital Boardwalk, LLC $ - $ 4,767 $ (497) $ (19) $ (4,501) $ 250 (a) $ - Meister Brothers Investments, LLC - 2,554 - - (40) (2,514)(b) - CyberBills, Inc. - 3,186 - - (2,986) (200)(c) - Carta, Inc. - 4,000 - - (4,000) - - TechTrader, Inc. - 8,563 (3,346) (407) (4,810) - - Alistia, Inc. - 2,480 (2,000) (11) (469) - - Strategic Data Corporation - 1,100 - - (1,100) - - eStara, Inc. - 4,003 - - (4,003) - - Jasmine Networks, Inc. - 5,000 - - (5,000) - - Tellme Networks, Inc. - 2,000 - - - - 2,000 InterWorld (d) - 20,340 (20,340) - - - - Other - 5 - - - (5)(e) - ____ _______ ________ _____ ________ _______ ______ Total $ - $57,998 $(26,183) $(437) $(26,909) $(2,469) $2,000 ==== ======= ======== ===== ======== ======= ====== (a) Represents a loan made to Digital Boardwalk, LLC, which was written off to expense when the Company sold its interest for a loss of $4,501 in 2001. (b) J Net owned a controlling interest in Meister Brothers Investments, LLC. The minority interest was eliminated upon impairment in 2001. (c) Proceeds from sale of investment. (d) InterWorld became a consolidated subsidiary of J Net in May 2001. Between November 2000 and April 2001, the Company used the equity method of accounting for its investment in InterWorld. (e) Abandoned deal screening costs written off to general and administrative expenses.
Industry Background Advances in technology and the increasing use of the Internet as a tool for communications, information sharing and the conduct of commerce was the basis for the investment strategy used by J Net. Despite a three year trend of reductions in capital and information technology spending, projections by many research firms indicate some growth in technology products and services. The E-Commerce Operations primary products compete in the enterprise software market. This particular market segment has experienced significant declines in sales. Simultaneously, the industry has been required to invest in continued research and development activities to remain current with rapidly changing market demand. Since inception, including periods prior to J Net's involvement, InterWorld and IWH have invested in excess of $75.0 million in its products, which currently run on the industry standard J2EE application servers. Competition There is intense competition in the e-commerce software industry in which the Company operates and competition is expected to intensify in the future. In addition to competing against in-house development efforts of companies entering e-commerce initiatives, there are several application vendors and developers in the Internet-based marketplace. Current competitors include Art Technology Group, Blue Martini, Broadvision, IBM, Microsoft, Oracle, i2 Technologies and Spirea Systems. It is expected that other competitors will also enter the market. The Company believes that IWH can compete on the basis of product performance, client service, rapid go-live deployment and price. New products or continued deferral of information technology spending by prospective customers could have adverse effects on future results of operations or financial condition of the Company and its competitors. Intellectual Property Rights The Company and its subsidiaries rely on a combination of trade secrets, nondisclosure and other contractual arrangements and copyright and trademark laws to protect proprietary rights. Where possible, the Company will enter into confidentiality agreements with its employees, and will generally require that consultants and clients enter into such agreements as well as limit access to and distribution of proprietary information. It cannot be assured that the steps taken by the Company in this regard will be adequate to deter misappropriation of proprietary information or that unauthorized use will be detected and the appropriate steps will be taken to enforce the Company's intellectual property rights. IWH currently owns one U.S. patent relating to its product architecture and technology. While the patent is believed to be valid, it may be challenged, invalidated or circumvented. Moreover, the rights granted under any patent issued to the Company, its subsidiaries or investees under licensing agreements may not provide competitive advantages. Due to the rapid pace of technological innovation for e-business solutions, the ability to establish and maintain a position of technology leadership in the industry is dependent more on the skills of development personnel than upon the legal protections for existing technologies. Agreements with employees, consultants and others who participate in the development of IWH software or products developed by the companies in which J Net holds an investment, may be breached and there may not be adequate remedies for any breach. In addition, trade secrets may otherwise become known to or independently developed by competitors. Furthermore, efforts to protect proprietary technology may fail to prevent the development and design by others of products or technology similar to or competitive with those developed by J Net's Technology-Related Businesses. Employees As of June 30, 2003, the Company employed 23 persons of which 16 were involved with the E-Commerce Operations business segment. Certain administrative support functions are consolidated for both business segments to reduce costs. None of the Company's employees are covered by collective bargaining agreements and the Company believes it has satisfactory employee relations. The Company began a restructuring process in September 2001 which resulted in significant reductions in its workforce. Between September 2001 and December 2001, when the restructuring efforts were essentially completed, the total number of employees declined from approximately 270 employees to 29 as of June 30, 2002. The reductions in 2003 are the result of expired employment contracts and attrition. Regulation and Licensing Requirements of Discontinued Operations As a condition to the sale of the assets associated with the discontinued operations, the Company was required to maintain licenses in the state of Nevada in order to conduct gaming machine route operations (the "Route Operations") and obtain approvals from various state of Nevada agencies in order to sell the stock of the subsidiaries conducting the Route Operations. All such approvals were obtained prior to November 22, 2000, the effective date of the sale of the Route Operations. Specific information regarding the regulations that were relevant to the Company's discontinued operations can be obtained by referring to the Company's Form 10-K's for prior fiscal years. ITEM 2. PROPERTIES __________ J Net's corporate headquarters are currently located in Wilson, Wyoming under a month-to-month lease. J Net also conducts certain corporate affairs in offices in Plano, Texas with approximately 3,000 square feet under a lease which expires in February 2004. The Company is the primary party to a lease in New York, New York with approximately 8,500 square feet, which expires in 2010. In January 2002, a sublease agreement was executed with an unrelated third party. While the Company remains responsible under terms of the original lease, the subtenant has assumed those responsibilities and is performing its obligations under the sublease agreement. Proceeds from the sublease more than offset costs in the primary lease, net of profit sharing with the landlord. IWH has its principal offices in New York, New York and leases approximately 2,000 square feet of office space. The lease on the office space renews in three month increments. The current renewal expires in October 2003. ITEM 3. LEGAL PROCEEDINGS _________________ As of June 30, 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 is 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 indicated 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. Although the Company is unaware of any activity with respect to the investigation for the past year, InterWorld intends to fully cooperate 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 alleges that PBS is owed commissions by InterWorld for services related to PBS's attempts to sublease office space previously occupied by InterWorld in New York City. InterWorld is vigorously contesting the claim and InterWorld management does not believe a liability exists at this time. J Net was not a party to the brokerage agreement and no claim against J Net has been asserted by PBS. From time to time, the Company or its subsidiaries are parties to claims, legal actions and complaints arising in the ordinary course of business. Management believes its defenses are substantial and that its legal position can be successfully defended without material adverse effect on its consolidated financial position. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ___________________________________________________ Not applicable. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER _____________________________________________________________ MATTERS _______ On May 8, 2002, J Net's Common Stock commenced quotation on the OTC Bulletin Board ("OTCBB") under the trading symbol "JNEI". Prior to May 8, 2002, the Company's Common Stock was listed on the New York Stock Exchange ("NYSE"). In April 2002, the Company was notified by the NYSE that the NYSE was initiating steps to delist the Common Stock of J Net. On May 8, 2002, the NYSE formally delisted the shares of Common Stock of J Net from its exchange. The following table sets forth the range of prices for shares of the Common Stock for the fiscal quarters indicated. No cash dividends were paid during those fiscal quarters. Future payment of quarterly cash dividends, if any, is subject to periodic review and reconsideration by J Net's Board of Directors (the "Board"). J NET COMMON STOCK _____________________________________________________________________________ High Low _____________________________________________________________________________ Fiscal 2003 First Quarter $ .90 $ .53 Second Quarter .75 .48 Third Quarter 1.56 .70 Fourth Quarter 1.71 1.08 _____________________________________________________________________________ Fiscal 2002 First Quarter $4.55 $2.85 Second Quarter 4.00 1.95 Third Quarter 2.76 1.55 Fourth Quarter (April 1, 2002 - May 8, 2002) 2.23 .70 Fourth Quarter (May 8, 2002 - June 28, 2002) 1.00 .57 _____________________________________________________________________________ As of September 22, 2003 there were 1,160 holders of record of J Net's Common Stock. The number of holders of record of J Net's Common Stock on September 22, 2003 was computed by a count of record holders. ITEM 6. SELECTED FINANCIAL DATA _______________________ The following selected financial data includes consolidated operating results of InterWorld since May 2001. Discontinued operations represent the Route Operations, which was J Net's only business segment until February 2000, when the Company changed its business strategy. Years Ended June 30, ________________________________________________________ 2003 2002 2001 2000 1999 ________ _______ ________ ________ ______ (Dollars and shares in thousands, except per share data) OPERATING DATA Income (loss) from continuing operations (a) $ (3,828) $(25,236) $(61,449) $ 6,295 (b) $ (978) ____________________________________________________________________________ Income from discontinued operations $ - $ - $ 12,754 (c) $ 346 $ 5,581 ____________________________________________________________________________ Net income (loss) (a) $ (3,828) $(25,236) $(48,695) $ 6,641 $ 4,603 ____________________________________________________________________________ Basic earnings (loss) per share from continuing operations $ (.45) $ (2.96) $ (6.95) $ .73 $ (.11) ____________________________________________________________________________ Diluted earnings (loss) per share from continuing operations $ (.45) $ (2.96) $ (6.95) $ .71 $ (.11) ____________________________________________________________________________ Average common shares outstanding - Basic 8,525 8,525 8,839 8,674 8,641 ____________________________________________________________________________ Average common shares - Diluted 8,525 8,525 8,839 8,987 8,641 ____________________________________________________________________________ BALANCE SHEET DATA (at end of period): Cash and cash equivalents $ 5,537 $ 6,674 $ 24,272 $ 60,090 $44,137 ____________________________________________________________________________ Short-term investments $ 12,325 $ 29,590 $ 27,381 $ - $ 7,292 ____________________________________________________________________________ Total assets $ 20,842 $ 46,843 $ 77,413 $104,735 $77,721 ____________________________________________________________________________ Long-term debt, including current portion $ - $ 27,750 (d) $ 27,750 $ 12,750 $ - ____________________________________________________________________________ Stockholders' equity $ 9,439 $ 13,267 $ 38,486 $ 87,910 $74,614 ____________________________________________________________________________ (a) Beginning with May 2001 and through the end of fiscal 2003, the E- Commerce Operations business segment accounted for 100% of the Company's revenues. For the 1999 through February 2000 periods presented above, Route Operations, which was J Net's only business segment during these periods, generated 100% of the revenues. The Company's Technology- Related Businesses segment began operating in February 2000 and has not generated any operating revenues since inception. The losses from continuing operations in 2003 are $.3 million and $3.5 million from E- Commerce Operations and Technology-Related Businesses segments, respectively. Loss from continuing operations in 2001 was due primarily to impairment of investments and losses on sales of certain investments of $24.3 million, equity method losses of $26.1 million (including $20.3 million attributable to InterWorld), and $5.8 million of consolidated losses from InterWorld for May and June of 2001. (b) Includes a net fee earned of $11.1 million from a terminated merger. (c) Represents an after-tax gain of $13 million from sale of the Route Operations less a $.3 after tax operating loss. (d) The long-term debt was repaid in its entirety in July 2002. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND _______________________________________________________________ RESULTS OF OPERATIONS _____________________ Forward-looking Statements; Risks and Uncertainties Certain information included in this Annual Report on Form 10-K and other materials filed or to be filed by the Company with the Securities and Exchange Commission contains statements that may be considered forward- looking. All statements other than statements of historical information provided herein may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes", "anticipates", "plans", "expects", "should", and similar expressions are intended to identify forward-looking statements. In addition, from time to time, the Company may release or publish forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments and similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, the Company notes that a variety of factors could cause the Company's actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. The risks and uncertainties that may affect operations, performance 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 control costs. In other investment or partnering activities, the Company must identify and successfully acquire interests in systems development or other technology- based companies and grow such businesses. The ability of entities in which the Company has invested to raise additional capital on terms which are acceptable to the Company, or other investors, is critical in the ongoing success of such companies and obtaining additional capital in markets which are performing poorly may be difficult to obtain. The Company is actively seeking potential acquisitions of operating companies and enhancement opportunities for its E-Commerce Operations. Such enhancements include strategic alternatives including, but not limited to, expansion of marketing efforts, seeking business partners, or the sale of IWH. Management will devote its time and resources to these efforts and may incur expenses in connection with such activities. The Company anticipates that, as it continues to engage 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 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. Overview J Net Enterprises, Inc. ("J Net" or the "Company") is a holding company conducting operations through a wholly owned enterprise software subsidiary (the "E-Commerce Operations"). The Company also holds investments in technology infrastructure companies (the "Technology-Related Businesses"). As of June 30, 2003, one Technology-Related Business investment continues to have value assigned. Unless the context indicates otherwise, references to "2003", "2002" and "2001" indicate the fiscal years ended June 30, 2003, 2002 and 2001, respectively. 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 95.3% owned subsidiary of the Company. J Net also holds minority investments in other technology companies including, but not limited to, systems development and software companies. These investments are held directly by the Company, or J Net Ventures I, LLC, a fund which is owned 100% by the Company ("Ventures I" or the "Fund"). Due to the significant financial and management resources required to stabilize the E-Commerce Operations since 2001, Management has not pursued additional minority investments and has no plans to actively reinstate that strategy in the near future. Marketing of E-Commerce products and services in the United States was conducted through an exclusive Strategic Partnership Agreement from February 2002 through September 2002. Immediately following termination of the aforementioned exclusive agreement, the Company entered into a non-exclusive reseller agreement with an unrelated third party. The reseller agreement contained a stated profit sharing percentage, typically between 40% and 60% depending on the product or services sold, to be received from each sale. No sales or services have been recognized from the reseller agreement. In August 2003, the Company hired personnel to initiate internal marketing efforts. The climate in the technology markets has been sluggish and business investment has steadily declined since 2000. Estimates for the recovery of many of the businesses in which the Company is involved vary widely. The Company is continuing to monitor its activities closely and is seeking business partners given the economic environment and may take further steps to reduce operating costs. Critical Accounting Policies ____________________________ General The policies outlined below are critical to the Company's operations and the understanding of the results of operations. The impact of these policies on operations is discussed throughout Management's Discussion and Analysis of Financial Condition and Results of Operations where such policies affect the 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 Consolidated Financial Statements contained in this Annual Report on Form 10-K. Note that preparation of this Annual Report on Form 10-K requires the Company 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. Actual results may differ from those estimates. Consolidation The accompanying consolidated financial statements include the accounts of J Net, its wholly owned subsidiaries and 100% of InterWorld. The Company owns 95.3% of the equity securities of InterWorld. Because InterWorld has no assets or operations, the minority shareholders of InterWorld hold a deficit position and no minority interest is included. Investments in Technology-Related Businesses The various interests that the Company acquires in Technology-Related Businesses are accounted for under one of three methods: consolidation, equity or cost. The applicable accounting method is generally determined based on the Company's voting interest and its ability to influence or control the Technology-Related Businesses. For the periods beginning November 2000 through April 2001, J Net owned $20 million of InterWorld Preferred Stock. The Preferred Stock voted on an "as-if" converted basis with common stock, which represented approximately 10% voting rights. J Net used the equity method of accounting during the time it owned only InterWorld Preferred Stock. The determination to use the equity method of accounting was based on the Company's ability to influence operations through its board membership, which consisted of 2 of 5 seats. In May 2001, when the redemption of the Preferred Stock became due, J Net exchanged the Preferred Stock for common stock in lieu of cash. As a result of this redemption, J Net became a 95.3% owner of the equity securities and began using the consolidation method for InterWorld. Between June 2001 and April 2002, J Net funded InterWorld's operations under a secured promissory note (the "Secured Note") and was InterWorld's senior secured creditor. During this time, advances under the Secured Note totaled $17.2 million. In February 2002, InterWorld's management acknowledged its default under the Secured Note and foreclosure proceedings began. In May 2002, the foreclosure was completed and IWH became the owner of the intellectual property and other assets of InterWorld. Unless specifically stated otherwise, IWH is intended to describe the E-Commerce Operations of the Company. References to InterWorld are specific to that entity, which remains a consolidated subsidiary of J Net but is presently inactive. 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 and 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 and other requirements contained within the services contract are satisfied. Maintenance revenue Revenue from maintenance and post-contract customer support services, such as telephone support and product enhancements, is recognized ratably over the period of the agreement under which the services are provided, typically one year. Recognition of revenue is deferred until payments from customers 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 It is the policy of the Company to evaluate its investments in Technology- Related Businesses and other long lived assets for possible impairment on a quarterly basis. Determination of impairment is based on a number of factors designed to detect if any specific indicators of impairment exist. Such factors include, but are not limited to, significant decreases in the market value of the investment, discounted cash flow analyses, adverse changes in the business or legal environment, loss of significant customers, the introduction of new technologies which accelerate obsolescence of existing products and sustained operating losses and negative cash flows which could not be resolved or improved within a reasonable amount of time to justify continued operations. Capital Resources and Liquidity _______________________________ Liquidity As of June 30, 2003, the Company had $17.9 million of cash and short term investments. On a consolidated operating basis, the Company and its subsidiaries require approximately $2.4 million annually to fund operations. Management continually seeks ways to reduce overhead cost and enhance its operations to reduce the existing funding requirements. Sources of funds are generated from E-Commerce Operations revenues, interest from cash deposits, and Mariner Partners, L.P. ("Mariner") earnings. Management believes the existing cash and short term investments are adequate to continue funding existing operations and provide resources for the Company to pursue its other business opportunities. As a result of the restructuring efforts initiated since J Net acquired the controlling interest in E-Commerce Operations in May 2001, the net cash required to fund the E-Commerce Operations has decreased from approximately $3.0 million per month to approximately cash break even as of June 30, 2003. Provided that IWH can maintain the existing customer base, Management expects IWH should be able to remain self sustaining and continue to provide upgrade enhancements, such as the recent release of Version 6.0. The ability to achieve profitability depends on future revenue increases, which will be dependent on the success of the Company's marketing efforts and new sales from resellers in Europe and Japan. In 2003, the Company received proceeds from the sale of assets of approximately $4.4 million and income tax refunds of approximately $7.7 million. In July 2002, a total of $27.3 million was used to repurchase the Notes pursuant to the voluntary repurchase offer made by the Company in May 2002. As of June 30, 2003, the total accounts payable and accrued liabilities include approximately $1.5 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. Between April 2002 and June 2003, approximately $1.0 million of liabilities were settled for approximately $.3 million. Although there can be no assurances, Management believes the remaining obligations may be settled at amounts substantially less then their respective face values. J Net has a noncancellable office lease in New York, New York which expires on December 31, 2010. Future minimum payments under such lease total $3.4 million at June 30, 2003. J Net also has a noncancellable office lease in Plano, Texas. Future minimum payments under such lease, which expires in February 2004 total $72,000 as of June 30, 2003. Future minimum payments under the E-Commerce operations lease which expires on October 31, 2003, total $66,000 at June 30, 2003. In January 2002, J Net entered into a sublease agreement for its office lease in New York. The Company remains responsible for its obligations under the original lease. Future minimum receipts from the tenant under the sublease, net of profit sharing with the landlord, are $4.1 million. Total rent expenses by the Technology-Related Businesses segment were $.6 million in 2003, $.6 million in 2002 and $.7 million in 2001. Rent receipts under the sublease through June 30, 2003, net of profit sharing expenses with the primary landlord were $.5 million. Rental expenses for the E-Commerce Operations in 2003 totaled $.3 million, $1.0 million in 2002 and $.5 million in 2001. In December 2001, InterWorld negotiated a release from all of its obligations under lease obligations at its offices in New York City, including certain past due expenses which included subleased office space. The release, together with forgiveness of the past due expenses, relieved InterWorld of approximately $50 million in gross lease obligations. IWH now leases office space on a month-to-month basis in New York City at a cost of approximately $18,000 per month. The following table outlines the consolidated lease obligations of the Company (Dollars in thousands): Fiscal Years Ended June 30, ______________________________________________ 2005 - 2007 - 2010 and 2004 2007 2010 thereafter Total _____ _______ _______ __________ _______ Lease Obligations Gross operating lease obligations $ 576 $ 1,406 $ 1,441 $ 160 $ 3,583 Sublease receipts (527) (1,639) (1,720) (192) (4,078) _____ _______ ______ _____ ______ Net lease obligations (profit) $ 49 $ (233) $ (279) $ (32) $ (495) ===== ======= ======= ===== ======= The Company also has severance obligations to former executive officers totaling $.6 million as of June 30, 2002. The Company raised $26.5 million through the issuance of Convertible Subordinated Notes (the "Notes") between June 2000 and October 2000, net of $1.3 million loaned for the purchases of the Notes. In September 2001, $1.0 million of the loans were paid as part of the termination agreements with former employees. In May 2002, the Company initiated a voluntary repurchase program to the holders of the Notes. The terms of the offer were at face value of each Note, but excluded any interest which had accrued on the Notes since March 2002, the last interest payment date. In July 2002, $27.3 million was paid to discharge the Notes. The payments represented the face value of the Notes less the $.5 million remaining loans due to the Company. In November 2000, the Company completed the sale of its Route Operations, which resulted in receiving net proceeds of $36.9 million. On January 4, 2001, the Board of Directors authorized the repurchase of up to 1,000,000 shares of the Company's Common Stock. Repurchases under this program in 2001 were 370,305 shares for an aggregate cost of $1.8 million. In addition, 80,000 shares, with an aggregate cost of $.4 million, were repurchased in 2001 under a separate, now terminated, program. There were no purchases in 2002 or 2003 and the Company does not expect to seek additional purchases in the near future. Cash Flows In 2003, cash provided by operations was $3.8 million, which included $7.7 million of income tax refunds. Excluding the tax refunds, funds used in operations were approximately $3.9 million compared to $16.5 million used in operations in 2002. The improvement from the prior year reflects the impacts of the restructuring efforts to reduce operating costs taken by the Company in 2002. Cash provided by investing activities in 2003 was $22.9 million. During 2003, the Company liquidated $24 million of investments with Mariner, of which $23 million was used to facilitate the repurchase of the Notes in July 2002 and received proceeds from asset sales of $4.4 million. In February 2003, the Company purchased $6 million of short-term investments after receipt of Federal income tax refunds. The Company's sole financing activity in 2003 was the repurchase of the $27.8 million of Notes in July 2002 pursuant to a voluntary repurchase offer from the Company to the holders of the Notes initiated in May 2002. Actual cash payments to repurchase the Notes was $27.3 million due to the Company recoupment of $.5 million of loans plus accrued interest it had made to facilitate purchases of the Notes. Results of Operations _____________________ 2003 compared to 2002 Total revenues Revenues, which consist of license sales, post production maintenance, and professional services, were $2.6 million in 2003 compared to $5.8 million in 2002, representing a decrease of 55%. All components of revenue decreased during 2003, most notably license sales which were $21,000 in 2003 compared to $1.3 million in 2002. Only one license was sold during 2003 compared with six licenses in the previous year. Management has hired internal marketing staff to improve the license revenue prospects. Post contract maintenance support revenues were $2.1 million for 2003, representing a decrease of $1.2 million from 2002. The decrease reflects the combination of fewer license sales, which are typically a new source of maintenance revenues, and a deterioration of the customer base for existing maintenance services. As of June 30, 2003, there were 20 customers contracted for maintenance support compared with 44 in 2002. Professional services revenues were $.5 million in 2003 compared with $1.2 million in 2002. The revenues for 2002 include one significant project, which accounted for approximately 60% of the 2002 revenues. Excluding this project, year over year revenues from professional services were consistent. Cost of revenues Cost of revenues include costs attributable to royalties or maintenance fees paid by IWH to third party vendors necessary to operate IWH's software and direct labor costs of employees engaged in the maintenance or professional service functions. In 2003, cost of revenues were $.6 million compared with costs of $2.9 million in 2002. The 2003 decrease in costs is mostly attributable to reduced personnel costs. In 2002, Management implemented a restructuring program which was completed by the middle of 2002. Operating expenses Operating costs consist of personnel costs associated with development of E-Commerce Operations products, marketing costs, and general and administrative expenses ("G & A"). In addition, G & A costs attributable to the Technology-Related Businesses segment and other costs, such as impairment of assets and equity method losses from minority investments are included in this caption. In 2003, total operating costs were $7.7 million compared with $29.1 million in 2002. The following table presents the significant components of operating costs and their changes from the previous year (Dollars in thousands): Favorable/(Unfavorable) 2003 2002 change from prior year ______ ______ ______________________ Research, development, marketing and general and administrative $6,448 $20,693 $14,245 Impairment of assets 1,328 2,703 1,375 Restructuring and unusual charges (53) 6,362 6,415 Gains from settlements with unsecured creditors (46) (669) (623) ______ _______ _______ Total operating expenses $7,677 $29,089 $21,412 ====== ======= ======= The decrease in research, development, marketing and G & A costs is due primarily to lower personnel costs attributable to the 2002 restructuring which reduced staffing from approximately 270 employees to 29 employees between September and December 2001. Asset impairments in 2003 include a $1.0 million charge on the Company's assets held for sale and a $.4 million impairment of the investment in eStara, Inc. ("eStara"). The charge against the assets held for sale was to recognize the loss from the sale of those assets in March 2003. The impairment of eStara, a cost method investment, was due to the issuance of a new series of preferred stock in May 2003, in which J Net did not participate. While the operations of eStara have improved, it has limited liquidity and faces significant operating challenges. Because the new preferred stock is senior in liquidation to the series of preferred stock held by J Net, Management concluded its ability to recover its investment was remote and determined it was necessary to impair the remaining carrying value of its investment in eStara. The 2002 impairments include $.5 million and $2.2 million charges against the carrying values of assets held for sale and eStara, respectively. The charge against the assets held for sale was due to increased carrying costs. The eStara impairment was due to Management's regular quarterly evaluation of investments. At the end of 2002, J Net was aware of eStara's intent to seek additional financing. In addition, eStara had arranged for a bridge financing and J Net had already communicated that it would not participate in either bridge loans or new preferred stock issuances. As a result, Management made a partial impairment to its carrying value in eStara based on estimated dilutive terms contained in the bridge loan. The 2002 restructuring costs included $1.8 million of severance costs, $1.6 million in contract settlements, and $3 million of leasehold improvement abandonments. As previously mentioned, the restructuring efforts were initiated in the first half of 2002 and included significant staff reductions in the United States, closing of foreign offices, the sale of Japanese operations to the local reseller and relocation of offices. The amount reflected in 2003 is due to final adjustments of estimated remaining obligations to the actual restructuring charges incurred. During 2002, Management actively negotiated settlements with significant unsecured vendors of InterWorld. The negotiations were initiated as InterWorld's finances became scarce. Approximately $1.0 million of liabilities were settled for $.3 million. There remains $1.5 million of such unsecured liabilities of InterWorld at June 30, 2003 which are separate and distinct to InterWorld. When foreclosure proceedings by J Net against InterWorld were competed in May 2002, InterWorld was left with no assets with which to pay these liabilities. In 2003, there were only 2 settlements executed. Other income and expenses In 2003, interest and other income totaled $2.1 million and consisted of $1.5 million in earnings from the Company's investments at Mariner, interest on cash investments and sublease income. In addition, 2003 also includes a $.6 million gain from the repurchase of the Notes. Such gain was due to the acceptance of offers to the holders to repurchase the Notes at a face value in exchange for forgiving the accrued interest on the Notes since March 31, 2002, the last interest payment date. In 2002, the other income components totaled $3.5 million, which was $2.0 million higher than 2003. The decrease in other income was due to a reduction in cash and short term investment balances during 2003 attributable to withdrawals of funds used to repurchase the Company's Notes in July 2002. Interest expense for 2002 was $2.3 million, which represented 12 months of interest on the Notes outstanding at June 30, 2002. The repurchase of Notes was completed in July 2002, and pursuant to its terms, $.6 million of the interest accrued in 2002 was forgiven. The unpaid portion of this interest expense was reported as a gain from the repurchase of the Notes in the 2003 Consolidated Statement of Operations. Income taxes Income tax provisions were $.2 million for 2003 and 2002. The provisions for each year are the result of adjustments of estimated tax refunds to actual refunds. As of June 30, 2003, the Company has operating loss and capital loss carryforwards totaling approximately $10.7 million. Accordingly, the ability to utilize these carried forward losses are dependent on the ability to generate profits in the future. Net loss The net loss of $3.8 million for 2003 reflects an improvement of $21.4 million from the $25.2 million loss incurred in 2002. The aforementioned staff reductions and restructuring costs contributed $20.7 million in cost reductions from 2002. 2002 compared to 2001 The results of operations for 2002 and 2001 vary significantly due, in large part, to differences in accounting methods which were used for E-Commerce Operations during 2001. In 2002, the results of E-Commerce Operations are consolidated for the entire year. In 2001, J Net accounted for its initial investment in InterWorld using the equity method of accounting for the first ten months and the consolidation method of accounting for the last two months. The following discussion of results of operations includes comparisons of the historical operating results under accounting principles generally accepted in the United States. In certain cases, Management believes analysis between years on a pro forma basis will assist users of these consolidated financial statements in understanding changes between these years more thoroughly. When pro forma comparisons are used, they are emphasized in separate sentences or paragraphs, which follow the analysis of historical results of operations. Total revenues Total revenues for 2002 were $5.8 million compared to $2.2 million in 2001. The 2001 revenues included May and June 2001 only. On a pro forma basis, total revenues declined to $5.8 million in 2002 from $30.6 million in 2001. The pro forma decline includes reductions in all components of revenues. Throughout 2002, the market conditions were weak for e-commerce products, which contributed to the reduced license sales and related professional services. Reductions in post production maintenance support was due primarily to cancellations of support contracts and weakening financial condition of many "dot com" clients. Total cost of revenues Total cost of revenues, all of which are attributable to the E-Commerce Operations segment, was $2.9 million for 2002 and $.9 million for 2001. As with revenues, the costs include only the final two months of 2001. These costs include third party royalty payments from license sales and third party implementation costs, both of which are variable in nature. Because license sales have decreased, the related cost of sales has also declined. On a pro forma basis, the 2002 cost of revenues was $2.9 million compared to $21.3 million in 2001, an average cost per month of $.2 million and $1.8 million for 2002 and 2001, respectively. The reductions are due primarily to the reductions in workforce and lower contractor costs in 2002. Operating expenses Operating expenses consist of personnel costs associated with development of the Company's e-commerce products, marketing costs and general and administrative expenses ("G & A"). In addition, costs attributable to impairment of assets, equity losses, restructuring and gains from settlements with unsecured creditors are included. In 2002, total operating costs were $29.1 million compared to $73.9 million in 2001. The following table presents the significant operating cost components and their change from the previous fiscal year (Dollars in thousands). Favorable/(Unfavorable) 2002 2001 change from prior year _______ _______ _______________________ Research, development, marketing and administrative $20,693 $22,379 $ 1,686 Equity losses in Technology- Related Businesses - 26,121 26,121 Impairment of assets 2,703 24,281 21,578 Restructuring and unusual charges 6,362 1,140 (5,222) Gains from settlements with unsecured creditors (669) - 669 _______ _______ _______ Total operating expenses $29,089 $73,921 $44,832 ======= ======= ======= G & A costs for 2001 include the consolidated results of InterWorld for May and June 2001 and $8.6 million of expenses associated with a loss on a loan to Michael J. Donahue, then the Vice Chairman and Chief Executive Officer of InterWorld. Excluding the Michael J. Donahue loss, the G & A for 2001 would have been $13.8 million, of which $7.1 million represented InterWorld G & A for May and June 2001. Normal recurring G & A costs for the three months ended June 30, 2002 averaged approximately $.5 million per month, which represents a decrease of over 70% from the 2002 annual average. The decreases were primarily due to the reductions in workforce. There were no equity losses in 2002 due to (a) the acquisition of InterWorld, which caused the Company to begin consolidating those operations and (b) the abandonment or full impairment of the Company's investments in Digital Boardwalk, LLC, Alistia, Inc. and TechTrader, Inc. in 2001. The 2001 equity losses include $20.4 million attributable to InterWorld and $3.2 million, $1.9 million and $.6 million for TechTrader, Inc., Alistia, Inc. and Digital Boardwalk, LLC, respectively. Impairments of assets in 2002 consisted of a $2.2 million impairment against the Company's investment in eStara and a $.5 million reduction in the carrying cost of assets held for sale. The eStara impairment provision is based on the estimated dilution to J Net based on valuation terms contained in the bridge loan entered into by eStara with a group of investors which did not include J Net. The Company elected not to participate in the bridge loan and therefore carried its investment in eStara based on this recent valuation. The reduction in carrying value of the assets held for sale is due to the combination of reduced value of InterWorld common stock received as part of the acquisition of the assets and higher operating costs associated with an extended holding period of the asset. During the first half of 2002, the Company initiated a series of actions designed to lower its operating costs. Such actions were due to the combination of significant ongoing losses at InterWorld, persistent sluggishness in the market for e-commerce products, and the reduced focus on J Net's minority interest investment strategy. These restructuring efforts included significant staff reductions in the U.S., closing of foreign offices of InterWorld, the sale of the Japanese operations to the local reseller, and the closing and relocation of office leases. The total restructuring costs included severance costs of $1.8 million, $1.6 million in contract settlements and $3 million of leasehold abandonments in 2002. In 2001, severance costs of $1.1 million were incurred as a result of the Company's sale of its Route Operations. The foreclosure against InterWorld by J Net, which began in February 2002, and subsequent transfer of assets to IWH left InterWorld insolvent. Immediately following the foreclosure, InterWorld had approximately $3.3 million of unsecured creditor liabilities. Management attempted to settle certain significant liabilities to facilitate the transfer of intellectual property and retain ongoing business relationships. This process resulted in approximately $1.0 million of liabilities being settled for $.3 million, resulting in a $.7 million gain on such settlements in 2002. Other income (expenses) Net other income was $1.2 million, consisting of interest and other income of $3.5 million offset by interest expense of $2.3 million, was recognized in 2002 compared to a loss of $.4 million in 2001. The significant components of this $1.6 million favorable change included $3.9 million of non cash amortization of original debt discount of the Company's Notes issued in 2000 and 2001. Income taxes Income tax expense for 2002 was $.2 million. The provision is the result of a reduction in the amount of estimated income tax refunds to be collected from carry-backs of 2002 operating losses caused by the alternative minimum tax. While the Company has incurred losses in 2001 and 2002, the available carrybacks are limited by Section 382 of the IRS regulations and separate return loss limitations for E-Commerce operations pertaining to InterWorld. Therefore, the available carry-backs are limited to losses incurred in the Technology-Related Businesses segment and the operations assumed by IWH in May 2002. In 2001, the Company recognized a net tax benefit of $4.9 million consisting of $11.6 million of benefits due to losses from continuing operations offset by a $6.7 million tax liability from the sale of Route Operations. Net loss from continuing operations The net loss from continuing operations for 2002 was $25.2 million compared to $61.4 million in 2001. The significant components of the $36.2 million reduced loss include increased gross profit of $1.6 million, reduced asset impairments of $21.5 million, reduced equity losses of $26.1 million, lower G & A of $1.8 million, and a $1.6 million improvement in other expenses. Partially offsetting those favorable items were restructuring costs and vendor settlement gains of $4.6 million and a net reduction in income tax benefits of $11.8 million. Discontinued operations In November 2000, the Company completed the sale of its Route Operations and recognized a gain of $13.0 million after a tax provision of $6.7 million. Operating results for July 2001 through November 2001, the period when the Company owned the Route Operations, were a $.2 million loss, net of taxes. Financial results from the Route Operations were restated and reported as discontinued operations beginning in 2000. Net loss The net loss for 2002 was $25.2 million compared to $48.7 million in 2001. The variance between periods includes the components described in the net loss from continuing operations for 2002 and 2001. Additionally, the loss from continuing operations for 2001 of $61.4 million was reduced by $12.7 million of net gains from discontinued operations. Recently issued accounting standards In May 2003, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 150, "Accounting For Certain Financial Instruments With Characteristics of Both Liabilities and Equity", ("SFAS 150"). This statement establishes standards for how an entity classifies and measures certain financial instruments with characteristics of both liabilities and equity, such as mandatorily redeemable shares. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003 and otherwise effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS 150 will have no impact on the consolidated financial statements of the Company. In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149, Amendment of SFAS No. 133 on Derivative Instruments and Hedging Activities, ("SFAS 149"). The primary change in SFAS 149 is the requirement that contracts with comparable characteristics be accounted for similarly. SFAS 149 is effective for contracts entered into or modified after June 30, 2003 in most cases. Because the Company has no derivative financial instruments, the adoption of the amendments contained in SFAS 149 will not affect the consolidated financial statements of the Company. In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51". FIN 46 requires a company to consolidate a variable interest entity ("VIE") if the company has a variable interest (or combination of variable interests) that is exposed to a majority of the entity's expected losses if they occur or receive a majority of the entity's expected residual returns if they occur, or both. FIN 46 applies immediately to VIEs created after January 31, 2003, and to VIEs in which an enterprise obtains an interest after that date. While the guidance contained in the interpretation is complex, the Company does not have any interests in a VIE. Therefore, the impact from this interpretation will not have an effect on the Company's consolidated financial statements. Factors which may affect future results The Company's financial and management resources have been concentrated on its E-Commerce Operations since 2001. 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) closed deals from internal marketing efforts and resellers, (2) an increase in information technology spending by businesses, (3) continued solvency of existing customers, (4) availability of capital, (5) an increase in the use of the Internet by businesses and individuals, (6) preservation of existing patents and trademarks, and (7) 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. Pending or threatened litigation As of June 30, 2003, J Net did not have any litigation pending or threatened, or other claims filed against the Company. However, InterWorld, a 95.3% owned subsidiary, is subject to two claims. 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 is 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 has occurred nor should the investigation be construed as an adverse reflection on any person, entity or security. Although the Company is unaware of any activity with respect to the investigation for the last year, InterWorld intends to fully cooperate 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 alleges that PBS is owed commissions by InterWorld for services related to PBS's attempts to sublease office space previously occupied by InterWorld in New York City. InterWorld is vigorously contesting the claim and InterWorld management does not believe a liability exists at this time. J Net was not a party to the brokerage agreement and no claim against J Net has been asserted by PBS. From time to time, the Company or its subsidiaries are parties to claims, legal actions and complaints arising in the ordinary course of business. Management believes its defenses are substantial and that its legal position can be successfully defended without material adverse effect on its consolidated financial position. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK _________________________________________________________ The Company generally is exposed to market risk from adverse changes in interest rates and 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 earn a fixed rate of interest over short periods (7-35 days). In July 2002, $23 million of the short-term investments in Mariner were liquidated to repurchase the Company's Notes. Based upon the invested cash balances at June 30, 2003, a 10% drop in interest rates or historical returns from short-term investments at Mariner would reduce pretax interest income by less than $.2 million per year. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ___________________________________________ The Financial Statements and Supplementary Data required by this Item 8 are set forth as indicated in Item 15(a)(1)(2). ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND _______________________________________________________________ FINANCIAL DISCLOSURE ____________________ The Company had no changes in or disagreements with its independent auditors. ITEM 9A. CONTROLS AND PROCEDURES _______________________ Within the 90-day period prior to the filing of this Annual Report on Form 10-K, an evaluation was carried out under the supervision and with the participation of the Company's management, including the Chief Executive Officer (the "CEO") and Chief Financial Officer ("CFO"), of the effectiveness and design of disclosure controls and procedures used to prepare consolidated financial statements. Based on that evaluation, the CEO and CFO have concluded the disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in reports filed or to be filed with the Securities and Exchange Commission (the "SEC") are adequate and are operating in an effective manner. There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the most recent evaluation. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT __________________________________________________ Directors of the Registrant At the annual meeting on January 29, 2003, five directors were elected to serve and hold office (subject to J Net's By-Laws) until the next annual meeting of stockholders and until a respective successor is elected and qualified. The directors of J Net (none of whom has a family relationship with one another) are as follows: Name Age Position _______________________ ___ _____________________ Allan R. Tessler 67 Chairman of the Board Alan J. Hirschfield 67 Vice Chairman Eugene M. Freedman 71 Director David R. Markin 72 Director Robert L. McDonald, Sr. 83 Director Allan R. Tessler has served as Chief Executive Officer and Chairman of the Board since March 2000 and May 1994, respectively, and has been a director of J Net since 1980. Mr. Tessler also served as Secretary of J Net from 1980 through August 1993. He has been Chairman and Chief Executive Officer of International Financial Group, Inc., an international merchant banking firm, since 1987. He was Co-Chairman and Co-Chief Executive Officer of Interactive Data Corporation (formerly Data Broadcasting Corporation), a securities market data supplier, from June 1992 through February 2000. Mr. Tessler was Chairman of the Board of Enhance Financial Services, Inc., an insurance holding company from 1986 through 2001, and was Chairman of the Board of Great Dane Holdings Inc., a diversified holding company, from 1987 through December 1996. He is also a director of The Limited, Inc. and Interactive Data Corporation. Mr. Tessler has been a director of InterWorld Corporation since November 2000 and Chairman of the Board of InterWorld since February 2001. Alan J. Hirschfield has been a director of J Net since January 2000. Mr. Hirschfield was Co-Chairman of the Board and Co-Chief Executive Officer of Interactive Data Corporation (formerly Data Broadcasting Corporation), a securities market data supplier, from June 1992 to 1999. Prior to becoming Co-Chief Executive Officer in June 1992, Mr. Hirschfield served as managing director of Schroder Wertheim & Co. Inc. and as a consultant to the entertainment and media industry. He formerly served as Chief Executive Officer of Twentieth Century Fox Film Corp. and Columbia Pictures Inc. from 1980 to 1985 and 1973 to 1978, respectively. Mr. Hirschfield currently serves on the boards of Cantel Industries, Inc., Carmike Cinemas, WilTel Communications Group, Inc. and Interactive Data Corporation. Eugene M. Freedman became a Director of J Net in June, 2001. Mr. Freedman was a Founder, Director, President and then a Senior Advisor of Monitor Clipper Partners, Inc., a private equity firm until December, 2002. He is a Senior Advisor of Monitor Company Group Limited Partnership, an international business strategy and consulting firm, which he joined in 1995. Until October 1994 and for many prior years, Mr. Freedman was a senior partner of Coopers & Lybrand, where he served as Chairman and Chief Executive Officer of Coopers & Lybrand LLP, U.S. and as Chairman of Coopers & Lybrand International. Mr. Freedman is Director of Limited Brands, Inc., Pathmark Stores, Inc., e-Studio Live, Inc. and Outcome Sciences, Inc., and an Advisory Board Member of The Cross Country Group, Inc. David R. Markin has been a director of J Net since 1980. Mr. Markin has been Chairman of the Board, Chief Executive Officer and President of Checker Motors Corporation ("Checker"), an automobile parts manufacturer and taxicab fleet operator since 1970. Mr. Markin was President and Chief Executive Officer of Great Dane Holdings Inc. from 1989 through December 1996. Mr. Markin is presently President of Checker Holdings Corp. IV, the parent company of Checker. Robert L. McDonald, Sr. has been a director of J Net since 1980. Mr. McDonald is a senior partner in the law firm of McDonald Carano Wilson LLP, counsel to J Net. Mr. McDonald is a principal stockholder, executive officer and a director of Little Bonanza, Inc., the corporate operator of the Bonanza Casino located in Reno, Nevada. Executive Officers and Significant Employees of the Registrant Year Became an Name Age Position Executive Officer ________________ ___ ___________________________ _________________ Allan R. Tessler 67 Chief Executive Officer and Chairman of the Board 2000 Mark E. Wilson 44 Chief Financial Officer 2003 Allan R. Tessler's biography is set forth above. Mark E. Wilson was appointed Vice President and Controller in September 2000 and Chief Financial Officer in June 2003. From 1997 through his appointment with J Net, Mr. Wilson served as the United States and Latin American Manager of Finance and Corporate Development for Repsol-YPF, an international integrated energy company. From 1993 to 1997, Mr. Wilson served as a Manger in Coopers & Lybrand's utility industry practice. Prior to 1993, Mr. Wilson served as Corporate Controller for Snyder Oil Corporation and held various positions with progressive increases in responsibility with Diamond Shamrock/Maxus Energy Corporation. ITEM 11. EXECUTIVE COMPENSATION ______________________ The following table sets forth certain information concerning compensation for those persons who were (i) the Chief Executive Officer and (ii) the other most highly paid executive officers whose total annual salary and bonuses exceeded $100,000 (collectively, the "Named Executives") for service provided for the fiscal years ended June 30, 2003, 2002 and 2001. SUMMARY COMPENSATION TABLE Long-Term Compensation _______________________ Annual Compensation AWARDS PAYOUTS _______________________________ ____________ ________ Other Annual Stock Option Name and Fiscal Compensation Awards LTIP All Other Principal Position (1) Year Salary Bonus (2) (in shares) (3) Payout Compensation ______________________ ______ ________ _______ ____________ _______________ ______ ____________ Allan R. Tessler 2003 $ - $ - $50,000 (4) - - $ - Chief Executive 2002 $ - $ - $50,000 (4) - - $ - Officer and Chairman 2001 $ - $ - $50,000 (4) 27,500 - $ - of the Board Mark E. Wilson (5) 2003 $150,000 $ - $ - - - $ - Chief Financial 2002 $150,000 $22,500 $ - - - $ - Officer 2001 $105,379 $ - $ - 40,000 - $ - Mark W. Hobbs (6) 2003 $300,000 $ - $ - - - $ - Former President 2002 $300,000 $ - $ - - - $ - and Chief Operating 2001 $300,000 $ - $ - - - $ - Officer Steven L. Korby (7) 2003 $250,000 $ - $ - - - $ - Former Executive 2002 $250,000 $ - $ - - - $ - Vice President and 2001 $250,000 $ - $ - - - $ - Chief Financial Officer Michael J. Donahue (8) 2003 $ - $ - $ - - - $ 176,000 Former Chief Executive 2002 $291,667 $ - $ - - - $ 57,000 Officer and Vice 2001 $ 83,333 $ - $ - - - $ - Chairman - InterWorld
(1) Reflects the primary capacity served during 2003, except where otherwise noted. (2) The Named Executives each received certain perquisites, the aggregate value of which did not exceed, as to any Named Executive in any of the last three fiscal years, the lesser of $50,000 or 10% of such Named Executive's annual salary and bonus. (3) Represents the number of shares subject to options granted during the respective fiscal year. (4) Includes fees earned by Mr. Tessler for services on the Board of Directors. Mr. Tessler, who has served as Chief Executive Officer since March 2000, did not receive a salary or bonus during 2003, 2002 or 2001. (5) Mr. Wilson was appointed Vice President and Controller on September 11, 2000 and Chief Financial Officer on June 30, 2003. (6) Mr. Hobbs was appointed President and Chief Operating Officer on June 21, 2000. On June 21, 2003, Mr. Hobbs' contract with the Company expired per its terms and the contract was not renewed. (7) Mr. Korby was appointed Executive Vice President and Chief Financial Officer on June 21, 2000. On June 21, 2003, Mr. Korby's contract with the Company expired per its terms and the contract was not renewed. Mr. Korby serves as Executive Vice President and Chief Financial Officer of InterWorld Corporation, a subsidiary of the Company. He has held such position since February 2001. Mr. Korby's salary, benefits and other costs related to services performed are billed to InterWorld on a time spent basis. Salary billed to InterWorld for the fiscal year ended June 30, 2001 was approximately $104,000. Because InterWorld is a consolidated subsidiary, the amounts billed from J Net to InterWorld are not presented as a reduction to Mr. Korby's salary. (8) Mr. Donahue's 2001 compensation covers May 2001 through June 2001, the period from which InterWorld became a consolidated subsidiary of the Company. Compensation for 2002 includes July 2001 through March 2002 when Mr. Donahue resigned his position. All other compensation includes consulting fees paid to Mr. Donahue beginning in April 2002 for services rendered as a part time consultant. The consulting agreement with Mr. Donahue was terminated in June 2003. Option Grants There were no option grants in fiscal 2003. Option Exercises and Fiscal Year-End Values The following table summarizes information with respect to the exercise of options to purchase Common Stock of J Net during the last fiscal year by each of the Named Executives and the value of unexercised options held by each of them as of the end of fiscal 2003. None of the Named Executives exercised any options during fiscal 2003. AGGREGATED OPTION EXERCISES IN FISCAL 2003 AND FISCAL YEAR-END OPTION VALUES Number of Shares Underlying Unexercised Value of Unexercised Shares Value Options at Fiscal In-the-Money Options at Acquired on Realized Year-End (#) Fiscal Year-End ($) Name Exercise ($) Exercisable/Unexercisable Exercisable/Unexercisable (1) _________________ ____________ ________ _________________________ _____________________________ Allan R. Tessler - - 112,500/ - - / - Mark E. Wilson - - 26,666/13,334 - / - (1) Based on the closing price of $1.08 for J Net's Common Stock on the OTCBB on June 30, 2003.
Director Compensation Directors who are not salaried employees of the Company receive annual fees of $32,000. In addition, a director who serves as a member of the Compensation Committee and/or Audit Committee is entitled to receive $10,800 and $7,200, respectively, per year. For the fiscal year ended June 30, 2003, Messrs. Freedman, Markin and Hirschfield each received aggregate fees of $50,000 and Mr. McDonald received $42,800. Mr. Tessler, who serves as Chairman of the Board and Chief Executive Officer of the Company, receives $50,000 per year as fees. Mr. Tessler receives no salary from the Company for his services as Chief Executive Officer. The 1992 Incentive and Non-qualified Stock Option Plan (the "1992 Plan") provides that each individual who is a member of the Board of Directors on June 30 of any year, including any future director on any such date, will automatically be granted a nonqualified option to purchase 27,500 shares of Common Stock on each such June 30. The exercise price for each June 30 grant will be 100% of the fair market value of the Common Stock on the following September 30. Each option granted to a director will become exercisable after September 30 of each year and expire five years from the date of grant. The 1992 Plan terminated in accordance with its terms on September 30, 2002. Accordingly, there were no grants of options to the directors in 2003. Employment Agreements On September 1, 2000 the Company entered into an employment agreement with Mr. Hobbs. Pursuant to the employment agreement, Mr. Hobbs was employed as President and Chief Operating Officer. The employment term commenced as of June 21, 2000 and expired on June 21, 2003, when Mr. Hobbs' employment with the Company terminated pursuant to the expiration terms of the contract. During the term of the contract, Mr. Hobbs received an annual base salary of $300,000. Mr. Hobbs' employment agreement also entitled him to participate in an incentive bonus plan payable by the Company on such terms and conditions as determined by the Board or the Compensation Committee, in any event, not to exceed 50% of his base salary. During his employment term, no bonuses were paid under this provision of the contract. In addition, Mr. Hobbs was granted a non-qualified option to purchase up to 300,000 shares of the Company's Common Stock. The option has an exercise price of $13.125 per share and vested as follows: 100,000 shares on June 21, 2001; 100,000 shares on June 21, 2002 and 100,000 shares on June 21, 2003. In addition, the option would vest immediately if the Company terminated Mr. Hobbs' employment without cause or if Mr. Hobbs terminated his employment for good reason. Mr. Hobbs' employment may have been terminated for cause, without cause, by voluntary resignation, death or disability. When Mr. Hobbs' employment was terminated by the Company without cause on June 21, 2003, he was entitled to payment of all base salary earned but unpaid, any accrued but unused vacation pay, all expenses not yet reimbursed and all other benefits earned, accrued and owing, plus equal monthly payments in an amount equal to his monthly rate of base salary plus the amount of any incentive bonus paid to him the prior fiscal year, annualized, divided by twelve. As of June 30, 2003, the Company's obligation to Mr. Hobbs totaled $.3 million. Pursuant to Mr. Hobbs' agreement, he received the right to buy $2 million of the Company's Notes and to have the Company loan him $1 million to do so. Mr. Hobbs did not exercise his right to borrow such funds. At June 30, 2002, Mr. Hobbs was beneficial owner of $2 million of the Company's Notes under a separate agreement with an unrelated party and no loan existed between the Company and Mr. Hobbs. In July 2002, the Notes were redeemed by the Company pursuant to a voluntary repurchase program. Steven L. Korby, Executive Vice President and Chief Financial Officer, was employed pursuant to an employment agreement that was entered into on October 1, 2000. The employment term commenced as of June 21, 2000 and expired on June 21, 2003 when Mr. Korby's employment with the Company terminated pursuant to the expiration terms of the contract. Mr. Korby received an annual base salary of $250,000. Mr. Korby's employment agreement also entitled him to participate in an incentive bonus plan payable by the Company on such terms and conditions as determined by the Board or the Compensation Committee, in any event, not to exceed 50% of his base salary. During his employment term, no bonuses were paid under the provision of the contract. In addition, Mr. Korby was granted a non-qualified option to purchase up to 200,000 shares of the Company's Common Stock. The option has an exercise price of $13.125 per share and vested as follows: 66,666 shares on June 21, 2001; 66,667 shares on June 21, 2002 and 66,667 shares on June 21, 2003. In addition, the option would have vested immediately if the Company terminated Mr. Korby's employment without cause or if Mr. Korby terminated his employment for good reason. Mr. Korby's employment may have been terminated for cause, without cause, by voluntary resignation, death or disability. When Mr. Korby's employment was terminated by the Company without cause on June 21, 2003, he was entitled to payment of all base salary earned but unpaid, any accrued but unused vacation pay, all expenses not yet reimbursed and all other benefits earned, accrued and owing, plus equal monthly payments in an amount equal to his monthly rate of base salary plus the amount of any incentive bonus paid to him the prior fiscal year, annualized, divided by twelve. As of June 30, 2003, the Company's obligation to Mr. Korby totaled $.3 million. Pursuant to Mr. Korby's agreement, he received the right to buy $500,000 of the Company's Notes and to have the Company loan him $250,000 to do so. Such right was exercised by Mr. Korby in September 2000. In July 2002, the Notes were redeemed by the Company pursuant to a voluntary repurchase program. Mr. Korby's loan, plus accrued interest thereon, was deducted from the face value of his Note when the repurchase occurred. Compensation Committee Interlocks and Insider Participation The Compensation Committee consists of four non-employee directors. Currently the members of the Compensation Committee are Messrs. Freedman, Hirschfield, Markin and McDonald. See Item 13, Certain Relationships and Related Transactions, for a description of transactions and agreements in which members of the Compensation Committee and their associates were involved. None of the executive officers of J Net serves as a director of another corporation in a case where an executive officer of such other corporation serves as a director of J Net. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ______________________________________________________________ The following table sets forth as of September 15, 2003, certain information regarding the shares of Common Stock beneficially owned by (i) each beneficial holder of more than five percent of the outstanding shares of Common Stock ("Beneficial Holder"), (ii) each director, (iii) each Named Executive and (iv) all directors and executive officers of J Net as a group. OWNERSHIP OF J NET COMMON STOCK ________________________________________________________________________ Amount and Nature Name of Beneficial Holder, of Beneficial Director, Named Executive Ownership of Percent or Identity of Group Common Stock (1) of Class (1) ________________________________________________________________________ Beneficial Holders: __________________________________ Gabelli Asset Management, Inc. (2) 1,671,100 19.60% Dimensional Fund Advisors, Inc. (3) 515,678 6.05% David R. Markin 510,320 5.81% Bedford Oak Advisors LLC (4) 491,000 5.76% Alan J. Hirschfield 490,000 5.60% Enterprise Group of Funds (5) 475,500 5.58% Allan R. Tessler 473,557 5.48% Highfields Capital Management LP (6) 307,531 3.61% Directors other than Messrs. Hirschfield, Markin and Tessler ________________________________________ Robert L. McDonald, Sr. 366,484 4.17% Eugene M. Freedman 67,500 * Named Executive _______________ Mark E. Wilson 40,000 * All directors and executive officers as a group (6 persons) 1,947,861 20.59% ____________________________________ * less than one percent (1) Includes shares of Common Stock which may be acquired upon the exercise of vested options held by the following: Mr. Hirschfield (232,500), Mr. Markin (262,500), Mr. Tessler (112,500), Mr. McDonald (262,500), Mr. Freedman (27,500), and Mr. Wilson (40,000) and all directors and executive officers as a group (937,500). The nature of the beneficial ownership for all the shares is sole voting and investment power. (2) Based solely upon a Schedule 13D/A filed by Gabelli Asset Management, Inc. on September 15, 2003. (3) Based solely upon a Schedule 13G/A filed by Dimensional Fund Advisors, Inc. on February 10, 2003. (4) Based solely upon a Schedule 13G/A filed by Bedford Oak Advisors on February 12, 2002. (5) Based solely upon a Schedule 13G filed by Enterprise Group of Funds on February 13, 2002. (6) Based solely upon a Schedule 13G/A filed by Highfields Capital Management LP on February 14, 2003. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ______________________________________________ Robert L. McDonald, Sr., a director of J Net, is a senior partner in the law firm of McDonald Carano Wilson LLP ("McDonald Carano"), counsel to J Net. In addition, A. J. Hicks, a partner in McDonald Carano is the Secretary of J Net. For the fiscal year ended June 30, 2003, the amount of fees paid by the Company to McDonald Carano, based on representation provided by McDonald Carano to the Company, did not exceed 5% of the gross revenues of such firm for its last full fiscal year. The Company believes that the fees for the services provided by McDonald Carano were at least as favorable to the Company as the fees for such services from unaffiliated third parties. In June 2000, the Company issued $6,250,000 of Notes to Messrs. Tessler, Markin, and Hirschfield, directors of the Company, or to entities controlled by these individuals or their adult children. In addition, officers and employees of the Company purchased $3,750,000 of Notes between June 2000 and October 2000. The principal amount of the Notes were payable on March 31, 2007 and bore interest at 8% per annum, payable on a quarterly basis. Such terms were identical to Notes issued to unrelated parties. All such Notes were repurchased pursuant to a voluntary repurchase offer in July 2002. In connection with the purchase of $500,000 of Notes, the Company lent Mr. Korby $250,000 pursuant to a secured promissory note which bore interest at 8% per annum. The loan was secured by the Note as collateral. In July 2002, when the Notes were repurchased by the Company pursuant to a voluntary repurchase, the loan, together with accrued interest thereon, was deducted from the payment to Mr. Korby. Mr. Hobbs was a beneficial owner of $2,000,000 of Notes pursuant to an agreement with Mariner LLC, an unrelated entity that purchased $4,000,000 of Notes in October 2000. Under the arrangement, Mr. Hobbs obtained full economic benefit with respect to $1,000,000 of the Notes, including interest thereon and potential upside conversion to Common Stock and the sale thereof. With respect to the additional $1,000,000, Mr. Hobbs obtained potential upside upon conversion to Common Stock and the sale thereof. Mr. Hobbs was at risk in the event of default on the two million dollar original purchase price and had pledged his limited partnership interests in Mariner GP, LP as collateral against such default. The Note, in which Mr. Hobbs was a beneficial owner, was repurchased in July 2002 pursuant to a voluntary repurchase plan. Mr. Tessler, Chairman and Chief Executive Officer of the Company, owns approximately 15% of J Net Venture Partners LLC (the "Manager"), the managing member of Venture I. The Manager is to be paid a fee from Venture I equal to 20% of the profits, if any, of Venture I after the accumulation of a preferred return to the investors of Venture I. Following the accumulation of a 35% internal rate of return, the 20% increases to 35%. The Company, which is obligated to advance certain expenses of the Manager will never own less than 51% of the Manager. There were no profits in Venture I during the twelve months ended June 30, 2003 and accordingly, no profits were paid to Mr. Tessler. Mr. Donahue served as Vice Chairman and Chief Executive Officer of InterWorld until March 2002, when he voluntarily resigned his position. Mr. Donahue continued to serve as a part time consultant to IWH through June 30, 2003. Item 14. Principal Accountant Fees and Services ______________________________________ The aggregate fees paid or accrued to Ernst & Young LLP ("E & Y") for professional services rendered for the audit of the Company's annual financial statements and for reviews of the financial statements included in the Company's Quarterly Reports on Form 10-Q for the fiscal years ended June 30, 2003 and 2002 were as follows (Dollars in thousands): 2003 2002 ____ ____ Audit fees $171 $240 Tax services - 30 ____ ____ Total $171 $270 ==== ==== PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K _______________________________________________________________ (a) (1) and (2) Consolidated Financial Statements and Schedules For a list of the consolidated financial statements and consolidated financial statement schedules filed as a part of this annual report on Form 10-K, see "Index to Financial Statements, Supplementary Data and Financial Statement Schedules" on page F-1. (a) (3) The exhibits filed and incorporated by reference are listed in the index of Exhibits required by Item 601 of Regulation S-K at Item (c) below. (b) Reports on Form 8-K J Net filed two reports on Form 8-K, dated December 5, 2002 and March 24, 2003, respectively. The form filed on December 5, 2002 disclosed in Item 5 that the Company had filed for a $7.66 million income tax refund pursuant to five year operating loss carryback rules contained in the Job Creation and Workers Assistance Act of 2002. The form filed on March 24, 2003 disclosed in Item 2 that J Net completed the sale of its property located in Wellington, Florida on March 21, 2003. (c) Exhibits 3.1 Articles of Incorporation of the Registrant, as amended (J) 3.2 By-laws of the Registrant, as amended (A) 4.1 Stockholder Rights Agreement dated as of July 11, 1994 between the Registrant and Continental Stock Transfer & Trust Company, as Rights Agent (D) 10.1 Indemnification Agreement (Sample) (B) 10.2 1992 Incentive and Non-qualified Stock Option Plan (C)(N) 10.16 Call Agreement dated as of March 1, 2000 among Keith A. Meister, Todd A. Meister and the Registrant (K) 10.17 Put Agreement dated as of March 1, 2000, among Keith A. Meister, Todd A. Meister and the Registrant (K) 10.21 J Net Ventures I, LLC Operating Agreement (E) 10.22 Subscription Agreement and Investment Representation (Sample) (E) 10.23 Convertible Subordinated Note (Sample) (E) 10.24 Registration Rights Agreement (Sample) (E) 10.25 Employment Agreement between Registrant and Mark W. Hobbs (F)(N) 10.26 Employment Agreement between Registrant and Steven L. Korby (F)(N) 10.27 Securities Purchase Agreement dated October 12, 2000 by and among Jackpot Enterprises, Inc. and InterWorld Corporation (G) 10.28 Loan Assumption and Forbearance Agreement dated October 12, 2000 by and between Michael J. Donahue and Jackpot Enterprises, Inc. (G) 10.29 Call/Profit Participation Agreement dated October 12, 2000 by and between Michael J. Donahue and Jackpot Enterprises, Inc. (G) 10.30 Modification letter dated October 30, 2000 to Stock Purchase Agreement between E-T-T, Inc. and the Registrant (F) 10.31 Stock Purchase Agreement by and between InterWorld Corporation and J Net Enterprises, Inc. dated January 25, 2001 (H) 10.32 Stand-By Purchase Agreement dated January 25, 2001 (H) 10.33 Amended and Restated Loan Assumption and Forbearance Agreement dated April 4, 2001 by and between Michael J. Donahue and J Net Ventures I, LLC (I) 10.34 Termination of Amended and Restated Loan Assumption and Forbearance Agreement dated June 29, 2001 by and among Michael J. Donahue, Excalibur Polo Farm, LLC, Ginny Bond Donahue and J Net Ventures I, LLC (J) 10.35 Promissory Note by and between InterWorld Corporation and J Net Enterprises, Inc. dated June 30, 2001 (J) 10.36 Security Agreement by and between InterWorld Corporation and J Net Enterprises, Inc. dated June 30, 2001 (J) 10.37 Assignment of Intellectual Property dated May 3, 2002 by and among J Net Enterprises, Inc., InterWorld Corporation and IW Holdings, Inc. (K) 10.38 InterWorld Master Alliance Agreement (L) 10.39 Acknowledgment of Default Assignment of Payments Agreement (L) 21.1 List of Registrant's subsidiaries (M) 23.1 Consent of Ernst & Young LLP (M) 31.1 Principal Executive Officer Certification (M) 31.2 Principal Financial Officer Certification (M) 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002 (M) 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002 (M) (A) Incorporated by reference to Registrant's Annual Report on Form 10-K for the year ended June 30, 1989. (B) Incorporated by reference to Registrant's Annual Report on Form 10-K for the year ended June 30, 1991. (C) Incorporated by reference to Registrant's 1992 Proxy Statement. (D) Incorporated by reference to Registrant's Form 8-A dated July 12, 1994. (E) Incorporated by reference to Registrant's Annual Report on Form 10-K for the year ended June 30, 2000. (F) Incorporated by reference to Registrant's Form 10-Q for the quarter ended September 30, 2000. (G) Incorporated by reference to Registrant's Form 8-K filed October 25, 2000. (H) Incorporated by reference to Registrant's Form 8-K filed February 2, 2001. (I) Incorporated by reference to Registrant's Form 10-Q for the quarter ended March 31, 2001. (J) Incorporated by reference to Registrant's Annual Report on Form 10-K for the year ended June 30, 2001. (K) Incorporated by reference to Registrant's Form 8-K filed May 13, 2002. (L) Incorporated by reference to Registrant's Form 10-Q for the quarter ended March 31, 2002. (M) Included herein. (N) Management contract or compensatory arrangement which is separately identified in accordance with Item 15(a)(3) of Form 10-K. (d) Schedules For a list of the financial statement schedules filed as a part of this annual report on Form 10-K, see "Index to Financial Statements, Supplementary Data and Financial Statement Schedules" on page F-1. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. Dated: September 29, 2003 J NET ENTERPRISES, INC. (Registrant) By: /s/ Allan R. Tessler _____________________ Allan R. Tessler Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date ___________________________ ___________________________ __________________ /s/ Allan R. Tessler Chief Executive Officer and ___________________________ Chairman of the Board September 29, 2003 Allan R. Tessler /s/ Mark E. Wilson Chief Financial Officer September 29, 2003 ___________________________ (Principal Accounting Officer) Mark E. Wilson /s/ Eugene M. Freedman Director September 29, 2003 ___________________________ Eugene M. Freedman /s/ Alan J. Hirschfield Director September 29, 2003 ___________________________ Alan J. Hirschfield /s/ David R. Markin Director September 29, 2003 ___________________________ David R. Markin /s/ Robert L. McDonald, Sr. Director September 29, 2003 ___________________________ Robert L. McDonald, Sr. J NET ENTERPRISES, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS, SUPPLEMENTARY DATA AND FINANCIAL STATEMENT SCHEDULES [ITEMS 8 AND 15(a)] (1) FINANCIAL STATEMENTS: Report of Independent Auditors Consolidated Balance Sheets - June 30, 2003 and 2002 Consolidated Statements of Operations - Years Ended June 30, 2003, 2002 and 2001 Consolidated Statements of Stockholders' Equity - Years Ended June 30, 2003, 2002 and 2001 Consolidated Statements of Cash Flows - Years Ended June 30, 2003, 2002 and 2001 Notes to Consolidated Financial Statements (2) SUPPLEMENTARY DATA: Quarterly Financial Information (Unaudited) - Years Ended June 30, 2003 and 2002 (3) FINANCIAL STATEMENT SCHEDULES Valuation and Qualifying Accounts Certain financial statement schedules are omitted because the required information is provided in the Consolidated Financial Statements or the notes thereto. All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted. Report of Independent Auditors We have audited the accompanying consolidated balance sheets of J Net Enterprises, Inc. and subsidiaries (the "Company") as of June 30, 2003 and 2002, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended June 30, 2003. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of J Net Enterprises, Inc. and subsidiaries at June 30, 2003 and 2002, and the consolidated results of their operations and their cash flows for each of the three years in the period ended June 30, 2003, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. New York, New York August 21, 2003 J NET ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - JUNE 30, 2003 AND 2002 (Dollars in thousands) ASSETS 2003 2002 ______ _______ _______ Current assets: Cash and cash equivalents $ 5,537 $ 6,674 Short-term investments 12,325 29,590 Accounts receivable, net of $0 and $109 allowance 132 213 Notes receivable - related parties - 288 Notes receivable - trade - 132 Federal income taxes receivable - 983 Assets held for sale - 4,950 Prepaid expenses 34 351 Other current assets - 293 _______ _______ Total current assets 18,028 43,474 Investments in technology-related businesses 2,000 2,425 Property and equipment, net of accumulated depreciation 79 180 Other non-current assets 735 764 _______ _______ Total assets $20,842 $46,843 ======= ======= See Notes to Consolidated Financial Statements. LIABILITIES AND STOCKHOLDERS' EQUITY 2003 2002 ____________________________________ ________ ________ Current liabilities: Accounts payable and accrued expenses $ 3,399 $ 4,095 Current portion of convertible subordinated notes - 27,750 Deferred revenue and customer deposits 689 1,306 ________ ________ Total current liabilities 4,088 33,151 ________ ________ Deferred income taxes 6,910 - Deferred rent 193 213 Other non-current liabilities 212 212 Commitments and contingencies (Note 14) 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 (49,859) (46,031) Less 1,708,929 shares of common stock in treasury for each period, at cost (16,054) (16,054) ________ ________ Total stockholders' equity 9,439 13,267 ________ ________ Total liabilities and stockholders' equity $ 20,842 $ 46,843 ======== ======== See Notes to Consolidated Financial Statements. J NET ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED JUNE 30, 2003, 2002 AND 2001 (Dollars in thousands, except per share data) 2003 2002 2001 _______ ________ ________ Revenues, net: Product licenses $ 21 $ 1,343 $ 7 Maintenance 2,090 3,292 809 Services 514 1,180 1,340 _______ ________ ________ Total revenues, net 2,625 5,815 2,156 _______ ________ ________ Cost of revenues: Product licenses - 400 430 Maintenance 108 343 119 Services 501 2,169 328 _______ ________ ________ Total cost of revenues 609 2,912 877 _______ ________ ________ Gross profit 2,016 2,903 1,279 Operating expenses: Research and development 1,603 5,125 2,264 Sales - 5,981 2,142 Marketing alliances - 1,616 1,085 General and administrative (including stock based compensation of $0, $0 and $190 for the years ended June 30, 2003, 2002 and 2001, respectively) 4,845 7,971 16,888 Equity losses in technology-related businesses - - 26,121 Loss on disposal and impairments of assets 1,328 2,703 24,281 Restructuring and unusual charges (53) 6,362 1,140 Gains from settlements with unsecured creditors (46) (669) - _______ ________ ________ Total operating expenses 7,677 29,089 73,921 _______ ________ ________ Operating loss from continuing operations (5,661) (26,186) (72,642) Other income (expense): Interest and other income 1,521 3,485 5,524 Interest expense - (2,299) (5,889) Gain from repurchase of convertible subordinated notes 553 - - _______ ________ ________ Total other income (expense) 2,074 1,186 (365) Loss from continuing operations before income tax (3,587) (25,000) (73,007) _______ ________ ________ Provision (benefit) for Federal income tax 241 236 (11,558) _______ ________ ________ Loss from continuing operations, net of tax (3,828) (25,236) (61,449) _______ ________ ________ Loss from discontinued operations net of taxes of $(99) - - (250) Gain on sale of discontinued operations, net of taxes of $6,711 - - 13,004 _______ ________ ________ Discontinued operations, net of tax - - 12,754 _______ ________ ________ Net loss $(3,828) $(25,236) $(48,695) ======= ======== ======== Basic loss per share: Loss from continuing operations $ (.45) $ (2.96) $ (6.95) Income from discontinued operations $ - $ - $ 1.44 _______ ________ ________ Basic loss per share $ (.45) $ (2.96) $ (5.51) ======= ======== ======== Dilutive loss per share: Loss from continuing operations $ (.45) $ (2.96) $ (6.95) _______ ________ ________ Income from discontinued operations $ - $ - $ 1.44 Dilutive loss per share $ (.45) $ (2.96) $ (5.51) ======= ======== ======== See Notes to Consolidated Financial Statements. J NET ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED JUNE 30, 2003, 2002 AND 2001 (Dollars and shares in thousands) Accumulated Common Stock Additional Retained Treasury Stock Other ______________ Paid-In Earnings _______________ Comprehensive Shares Amount Capital (Deficit) Shares Amount Income (loss) Totals ______ ______ _________ _________ _____ ________ _____________ ______ Balance June 30, 2000 10,233 $102 $73,875 $ 27,710 (1,259) $(13,777) $ - $87,910 Loss from continuing operations (61,449) (61,449) Cumulative translation adjustment (17) (17) Income from discontinued operations, net of tax 12,754 12,754 _______ Total Comprehensive loss (48,712) Amortization of employee stock options 190 190 Repurchases of common stock (450) (2,277) (2,277) Amount allocated to additional paid-in capital in connection with the issuance of the 8% convertible subordinated notes (See Note 2) 1,375 1,375 ______ ____ _______ ________ ______ ________ ______ _______ Balance June 30, 2001 10,233 $102 $75,250 $(20,795) (1,709) $(16,054) $ (17) $38,486 Net loss (25,236) (25,236) Cumulative translation adjustment 17 17 _______ Total Comprehensive loss (25,219) ______ ____ _______ ________ ______ ________ ______ _______ Balance June 30, 2002 10,233 $102 $75,250 $(46,031) (1,709) $(16,054) $ - $13,267 Net loss (3,828) (3,828) ______ ____ _______ ________ ______ ________ ______ _______ Balance June 30, 2003 10,233 $102 $75,250 $(49,859) (1,709) $(16,054) $ - $ 9,439 ====== ==== ======= ======== ====== ========= ====== ======= See Notes to Consolidated Financial Statements.
J NET ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 2003, 2002 AND 2001 (Dollars in thousands) 2003 2002 2001 __________ _________ _________ Operating activities: Net loss $ (3,828) $(25,236) $(48,695) Adjustments to reconcile loss to net cash provided by (used in) operating activities: Equity in loss of technology-related businesses - - 26,121 Loss on disposal and impairment of assets 1,328 5,962 24,281 Gain from repurchase of convertible subordinated notes (553) - - Bad debt expenses and losses on loans - 109 8,582 Amortization of original issue debt discount - - 3,875 Amortization of stock-based compensation - - 190 Depreciation 106 551 814 Deferred income taxes - 885 (1,263) Loss from discontinued operations, net of $99 of taxes - - 250 Gain on sale of discontinued operations, net of $6,711 tax - - (13,004) Changes in assets and liabilities: Income taxes 7,893 5,555 (13,150) Accounts receivable 81 1,210 2,280 Short-term investments (735) (2,209) (1,937) Prepaid expenses and other current assets 220 905 (955) Notes receivable - related parties - 1,000 (288) Other non-current assets 29 289 (278) Accounts payable and other current liabilities (143) (3,604) (981) Deferred revenue and customer deposits (617) (1,816) (610) Deferred rent (20) (126) (8) _________ ________ ________ Net cash provided by (used in) continuing operations 3,761 (16,525) (14,776) Net cash provided by discontinued operations - - 1,435 _________ ________ ________ Net cash provided by (used in) operating activities 3,761 (16,525) (13,341) Investing activities: Investments in technology-related businesses - (1,338) (30,767) Purchases of short-term investments (6,000) - (25,444) Investments in notes receivable - (125) (12,490) Collection of notes receivable - related party 288 - - Collection of notes receivable 132 - - Security deposits received - 212 - Redemption of short-term investments 24,000 - - Cash of InterWorld at acquisition - - 4,378 Proceeds from sale of discontinued operations - - 36,905 Proceeds from sale of assets 4,437 260 - Purchase of property and equipment (5) (82) (2,507) _________ ________ ________ Net cash provided by (used in) investing activities - continuing operations 22,852 (1,073) (29,925) _________ ________ ________ Net cash used in discontinued operations - - (2,525) Net cash provided by (used in) investing activities 22,852 (1,073) (32,450) Financing activities: Repayment of debt (27,750) - - Repurchases of common stock - - (2,277) Proceeds from issuance of convertible subordinated notes - - 12,250 _________ ________ ________ Net cash provided by (used in) financing activities (27,750) - 9,973 _________ ________ ________ Net decrease in cash and cash equivalents (1,137) (17,598) (35,818) Cash and cash equivalents at beginning of year 6,674 24,272 60,090 _________ ________ ________ Cash and cash equivalents at end of year $ 5,537 $ 6,674 $ 24,272 ========= ======== ======== Supplemental disclosures of cash flow data: Cash paid during the year for: Federal income tax $ - $ - $ 2,300 Interest paid $ - $ 1,667 $ 1,976 Non-cash investing and financing activities: Value of notes receivable discharged in exchange for common stock $ - $ 1,024 $ - Original issue debt discount on convertible subordinated notes $ - $ - $ 1,375 Minority interest in subsidiary $ - $ - $ (2,514) Note receivable - related parties $ - $ - $ 250 Property received in foreclosure on loans $ - $ - $ 5,450 See Notes to Consolidated Financial Statements. J NET ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO 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 ("E-Commerce Operations") and technology infrastructure companies (the "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"), a 95.3% owned subsidiary of the Company. J Net also holds minority investments in other technology companies including, but not limited to, systems development and software companies. These investments are held directly by the Company, or by J Net Ventures I, LLC (the "Fund" or "Ventures I"), a fund which is 100% owned and managed 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. Segment results reported exclude the effect of transactions between the Company and its subsidiaries. Assets are the owned assets used by each operating segment. Principles of consolidation and basis of presentation: The accompanying 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", "2002" and "2001" are for the fiscal years ended June 30, 2003, 2002 and 2001, respectively. Reclassifications: Certain reclassifications have been made to prior year financial statements to conform to the current year presentation. Use of estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the accompanying consolidated financial statements and notes. Actual results could differ from those estimates. Cash equivalents: Cash equivalents are liquid investments comprised primarily of debt instruments and money market accounts with maturities of three months or less when acquired. Cash equivalents are stated at cost which approximates fair value due to their short maturity. Short-term investments: The Company owns short term investments in Mariner Partners, L.P. ("Mariner"), a private investment fund. 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 accompanying Consolidated Statement of Operations. Fair value of financial instruments: The carrying value of certain of the Company's financial instruments, including accounts receivable, accounts payable and accrued expenses approximates fair value due to their short maturities. The consolidated balance sheet as of June 30, 2003 contains approximately $1.5 million of unsecured creditor liabilities of InterWorld. At June 30, 2002, the consolidated balance sheet included $2.3 million of InterWorld's unsecured creditor liabilities. As a result of J Net's foreclosure on its Secured Note with InterWorld and the transfer of assets, contracts, intellectual property and employees to IWH, InterWorld does not have financial resources to pay the face value of these obligations. Management of J Net has been actively negotiating with the significant creditors to settle certain liabilities. Between April 2002 and June 2003, liabilities with a face value of $1.0 million have been settled for approximately $.3 million. Management expects, but cannot provide assurance, that the remaining obligations may be settled at substantially less than their face value. Financial instruments with concentration of credit risk: The financial instruments that potentially subject J Net to concentrations of credit risk consist principally of cash and cash equivalents. J Net maintains cash and certain cash equivalents with financial institutions in amounts which, at times, may be in excess of the FDIC insurance limits. J Net's cash equivalents are invested in several high-grade securities which limit J Net's exposure to concentrations of credit risk. The Company owns short-term investments which are managed by Mariner. 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. It is the policy of the Company to evaluate its investments in Technology- Related Businesses for possible impairment on a quarterly basis. Management uses a number of different criteria when evaluating an asset for possible impairment. Indicators such as significant decreases in market value of an investment, discounted cash flow analyses, adverse changes in the business climate or legal matters, losses of significant customers or new technologies which could accelerate obsolescence of business products and sustained operating losses and cash flows which cannot be resolved or improved within a reasonable amount of time to justify continued business operations are used by Management when making its evaluations. Accounting for equity method investments: When the Company uses the equity method to account for its investments in Technology-Related Businesses it uses the procedures outlined in the Emerging Issues Task Force issue number 98-13 ("EITF 98-13"), which covers accounting by equity method investors for investee losses when the investor has loans to and investments in other securities of the investee. EITF 98-13 generally defines other investments in the investee to include preferred stock, debt securities and loans. The conclusions of the task force also prescribe the order in which equity method losses shall be recognized as the seniority of the other investments (that is, priority in liquidation). In 2001, the Company used the equity method to account for its investments in InterWorld (up to May 2001, when the consolidation method was applied), Alistia, Inc., Digital Boardwalk, LLC and TechTrader, Inc. All of the investments were in the form of preferred stock. When common stockholders' equity is a deficit, equity losses are recognized in accordance with the Company's proportionate ownership percentages in preferred stock. The applicable percentage of equity losses recognized in 2001 was 100% for InterWorld, 39.8% for Alistia, Inc., 100% for Digital Boardwalk, Inc., and 42.1% for TechTrader, Inc. As a result of the business combination with InterWorld, the consolidation method was applied beginning May 1, 2001. There were no equity method investments remaining after the fiscal year ended June 30, 2001. For the period from November 2000 through April 2001, J Net owned $20 million of mandatorily redeemable preferred stock of InterWorld (the "Preferred Stock"). The Preferred Stock voted on an "as-if" converted basis with common stock, which represented approximately 10% voting rights. J Net used the equity method of accounting during the time it owned the Preferred Stock. In May 2001, when the redemption of the Preferred Stock became due, J Net exchanged the Preferred Stock for common stock in lieu of cash. As a result of this redemption, J Net became a 95.3% owner of the equity securities and began using the consolidation method for InterWorld. The results of IWH, the successor entity to InterWorld's operations after the Company's foreclosure on its Secured Note with InterWorld in May 2002, are also consolidated with operating results of J Net. Stock-based compensation: The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and the pro forma disclosures required in accordance with Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") to account for employee based stock compensation using the fair market value method. The Company also follows the provisions contained within the Financial Accounting Standards Board of the American Institute of Certified Public Accountants ("AICPA") Interpretation 44 ("FIN 44"), which provides clarification on the application of APB 25. When the Company issues stock-based compensation awards to non-employees or Directors, the grants are accounted for in accordance with the Emerging Issues Task Force Issue 95-18, "Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring or in Conjunction with Selling Goods or Services" ("EITF 96-18"). The Company measures the fair value of equity instruments for employee and non-employee grants using the Black-Scholes option pricing model. In 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"). This statement amended certain disclosure provisions in SFAS 123 and Accounting Principles Board Opinion No. 28, "Interim Financial Reporting". The Company adopted the provisions of SFAS 148 beginning March 31, 2003. The following table discloses pro forma amounts for net loss and basic and dilutive loss per share for 2003, 2002 and 2001 assuming compensation cost for employee and director stock options had been determined using the fair value-based method prescribed by SFAS 123. The pro forma results may not be representative of the effects of options on net income in future years. The model assumes no expected future dividend payments on the Company's Common Stock for the options granted in 2003, 2002 and 2001 (Dollars in thousands, except per share data): 2003 2002 2001 _______ ________ ________ Net loss: As reported $(3,828) $(25,236) $(48,695) Fair value of grants to employees (39) (122) (179) Fair value of grants to Directors - - (468) _______ ________ ________ Pro forma $(3,867) $(25,358) $(49,342) ======= ======== ======== Basic loss per share: As reported $ (.45) $ (2.96) $ (5.51) Pro forma $ (.45) $ (2.97) $ (5.58) Diluted loss per share: As reported $ (.45) $ (2.96) $ (5.51) Pro forma $ (.45) $ (2.97) $ (5.58) Weighted average assumptions: Expected stock price volatility - 95.0% 60.0% Risk-free interest rate - 3.3% 5.8% Expected option lives (in years) - 3.0 3.0 Estimated fair value of options granted $ - $ 1.10 $ 4.19 Accounting for Derivative Instruments and Hedging Activities: Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), as amended, requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position. This statement also defines and allows companies to apply hedge accounting to its designated derivatives under certain instances. It also requires that all derivatives be marked to market on an ongoing basis. This applies whether the derivatives are stand-alone instruments, such as warrants or interest rate swaps, or embedded derivatives, such as call options contained in convertible debt investments. Along with the derivatives, in the case of qualifying hedges, the underlying hedged items are also to be marked to market. These market value adjustments are to be included either in the statement of operations or other comprehensive income, depending on the nature of the hedged transaction. The fair value of financial instruments is generally determined by reference to market values resulting from trading on a national securities exchange or in an over the counter market. In cases where derivatives relate to financial instruments of non public companies, or where quoted market prices are otherwise not available, such as for derivative financial instruments, fair value is based on estimates using present value or other valuation techniques. As a result of the Company's abandonment of its investment in TechTrader, Inc. in 2001, a warrant previously classified as an asset was expensed and reported as an impairment in the amount of $1.5 million. The Company did not have any derivative instruments at June 30, 2003 or June 30, 2002. 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. The Company owned 40 acres of land with building improvements, which were classified as held for sale, between June 2001 and March 2003, when the property was sold. The property was received as a result of a foreclosure on a loan to Michael J. Donahue, the former Vice Chairman and Chief Executive Officer of InterWorld. In June 2001, when the assets became the property of J Net, they were valued at $5.5 million, the estimated net proceeds expected to be received based on a fair market value assessment of the assets. From June 2001 to March 2003, when the Company held the asset for sale, impairments and operating costs totaling $1.1 million were recognized. Net proceeds from the sale totaled $4.4 million. Income taxes: The Company accounts for income taxes in accordance with Statement of Financial Accounting Standard No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 requires that deferred tax assets and liabilities arising from temporary differences between book and tax basis will be recognized using enacted rates at the time such temporary differences reverse. In the case of deferred tax assets, SFAS 109 requires a reduction in deferred tax assets if it is more likely than not that some portion or all of the deferred tax will not be realized. There are accumulated deferred tax assets of $19.9 million, which are offset by a valuation allowance pursuant to SFAS 109. Such losses are limited by certain Internal Revenue Service 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 SOP No. 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 and requirements contained within the contracts are satisfied. Maintenance revenue: Revenue from maintenance and post-contract customer support services, such as telephone support and product enhancements is recognized ratably over the period of the agreement under which the services are provided, typically one year. Recognition of revenue is deferred until payments from customers is received for maintenance and support. Deferred revenue consists principally of billings in advance for services and support not yet provided and uncollected billings to customers for maintenance and post contract support. Recently issued accounting standards: In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity", ("SFAS 150"). This statement establishes standards for how an entity classifies and measures certain financial instruments with characteristics of both liabilities and equity, such as mandatorily redeemable shares. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003 and otherwise effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS 150 will have no impact on the consolidated financial statements of the Company. In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149, Amendment of SFAS No. 133 on Derivative Instruments and Hedging Activities, ("SFAS 149"). The primary change in SFAS 149 is the requirement that contracts with comparable characteristics be accounted for similarly. SFAS 149 is effective for contracts entered into or modified after June 30, 2003 in most cases. Because the Company has no derivative financial instruments, the adoption of the amendments contained in SFAS 149 will not affect the consolidated financial statements of the Company. In January 2003, the FASB issued Interpretation No. 46, ("FIN 46"), Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51". FIN 46 requires a company to consolidate a variable interest entity ("VIE") if the company has a variable interest (or combination of variable interests) that is exposed to a majority of the entity's expected losses if they occur or receive a majority of the entity's expected residual returns if they occur, or both. FIN 46 applies immediately to VIEs created after January 31, 2003, and to VIEs in which an enterprise obtains an interest after that date. While the guidance contained in the interpretation is complex, the Company does not have any interests in a VIE. Therefore, the impact from this interpretation will not have an effect on the Company's consolidated financial statements. Note 2 - Convertible Subordinated Notes In fiscal years 2000 and 2001 the Company raised $27.75 million from the issuance of unregistered Convertible Subordinated Notes (the "Notes") to a group of private investors. Investors included officers and directors of the Company or entities controlled by such directors and certain employees (see Note 10). The principal amount of the Notes was payable on March 31, 2007 and bore interest at 8% per annum, payable on a quarterly basis. At the option of the holder, a Note was convertible into the Common Stock at any time after June 1, 2001. The number of shares of common stock to be received by a Note holder upon conversion was determined by dividing the principal amount of the Note by the conversion price in effect at the time of the conversion, which was initially $10.75. The conversion price was subject to adjustment in the event of any subdivision, combination, or reclassification of outstanding shares of the Common Stock. For financial statement purposes, a substantial portion of the Notes were deemed to have been in-the-money at the commitment date. The Company calculated the beneficial conversion feature as the difference between the fair value of the Company's Common Stock at the commitment date and the initial conversion price, multiplied by the number of shares into which the debt is convertible. For the fiscal year ending June 30, 2000 approximately $2.5 million of the proceeds from issuance of the Notes was recorded as debt discount and allocated to additional paid-in capital. Additional Notes issued during the fiscal year ended June 30, 2001 resulted in additional discount of $1.4 million. Because the earliest date available for the holders to convert the Notes to Common Stock was June 1, 2001, the entire debt discount was amortized to interest expense during the fiscal year ended June 30, 2001. In May 2002, a special committee of the Board of Directors (the "Committee"), consisting solely of Directors who did not hold any direct or indirect financial interest in the Notes was formed to investigate the possibility of repurchasing the Notes. After evaluating, among other things, the risk profile associated with the Company's cash investment strategy and the reduced yield that would result from a more conservative program, the Committee determined that redeeming the Notes would be in the best interest of the Company. As a result of the Committee's decision, the Company extended a voluntary repurchase offer to the holders of the Notes. The offer was made at the face value of each Note, but excluded accrued interest since March 31, 2002, the last interest payment date. In June 2002, all of the existing holders of the Notes agreed to accept the terms of the voluntary repurchase offer. In July 2002, cash payments of $27.3 million, representing the face value of the Notes less recoupments of loans made to an officer and a former employee which were secured by the Notes, were executed. Funds to pay the obligation were derived by liquidating a substantial portion of the Company's short-term investments. Note 3 - Investments In Technology-Related Businesses In fiscal 2000, the Company changed its primary business focus to an investment manager and investor/incubator in technology-related companies. Between March 2000 and November 2000, J Net made investments in eleven companies, including its initial investment in InterWorld. As of June 30, 2003, four of these investments continue operations: Tellme Networks, Inc., eStara, Inc., Strategic Data Corporation and certain companies contained in Meister Brothers Investment portfolio. The Company uses the cost method of accounting for each of these investments. The Company continues to ascribe value to its investment in Tellme Networks, Inc. The other investments have been written off. The following tables present pertinent details for each of the Company's investments: Status Date(s) Accounting Voting as of Investment Acquired Method Type of Security Percentage June 30, 2003 ______________________ ______________ ______________ ________________ __________ _____________ Digital Boardwalk, LLC (a) (e) March 1, 2000 Equity Preferred Stock 35% Sold Meister Brothers Investments, LLC (b) March 1, 2000 Consolidation Membership Interest 100% Fully impaired Cyberbills, Inc. (e) March 10, 2000 Cost Series "C" Preferred Stock 11% Sold Carta, Inc. May 31, 2000 Cost Convertible Loan 0% Out of business TechTrader, Inc. (a) June 12, 2000 Equity Series "B" Preferred Stock 28% Out of business Alistia, Inc. (a) May 18, 2000 Out of May 1, 2001 Equity Preferred Stock 20% business Strategic Data May 2, 2000 Cost Series "B & C" Corporation May 31, 2001 Preferred Stock 13% Fully impaired eStara, Inc. (c) Sep. 29, 2000 Cost Series "C" July 1, 2001 Preferred Stock 14% Fully impaired May 31, 2003 Cost 6% Jasmine Networks, Inc. August 30, 2000 Cost Series "C" Preferred Stock 6% Out of business Tellme Networks, Inc. September 12, 2000 Cost Series "D" Preferred Stock Less than 1% Operating InterWorld (a) (d) November 20, 2000 Equity up to Mandatorily May 21, Redeemable 10% to May 2001 Preferred Stock 21, 2001 up to May 21, 2001 May 21, 2001 Consoli- Common Stock 95.3% from Consolidated dation from May 22, 2001 subsidiary May 22, 2001 to present to present
(a) The investments in Digital Boardwalk, LLC, Alistia, Inc. and TechTrader Inc. were accounted for using the equity method of accounting based on voting percentages. The equity method was also used for the Company's investment in InterWorld during the period of November 2000 through April 2001. The Company determined that it was appropriate to use the equity method of accounting for the investment in InterWorld during this period, even though its voting interest was less than 20%, due to the Company holding two of five Board seats at InterWorld. This Board representation was determined to provide significant influence over operations at InterWorld resulting in the equity method being used. (b) The Company consolidated its investment in Meister Brothers Investments, LLC ("MBI") upon its acquisition of the 1% managing member interest in March 2000. This accounting treatment was used due to the Company having complete authority and responsibility for the operations and management of the investment. (c) J Net's voting interest decreased to approximately 6% in May 2003 due to a new series of preferred stock issued by eStara, Inc. J Net did not participate in the new issue. (d) In April 2001 when the Mandatorily Redeemable Preferred Stock became due, InterWorld was unable to pay cash to settle its redemption obligation. J Net elected to accept shares of InterWorld Common Stock in lieu of cash in May 2001 and the consolidation method was applied. (e) The investments in Digital Boardwalk, LLC and Cyberbills, Inc. were sold in 2001. Based on the preceding information about each investment, the following table presents the inception to date financial data pertinent to those investments (Dollars in thousands): Balance at Equity Value at June 30, income Goodwill Impairments June 30, Investments 1999 Additions (loss) amortization and sales Other 2003 ______________________ _________ _________ _______ ____________ ____________ __________ ________ Digital Boardwalk, LLC $ - $ 4,767 $ (497) $ (19) $ (4,501) $ 250 (a) $ - Meister Brothers Investments, LLC - 2,554 - - (40) (2,514)(b) - Cyberbills, Inc. - 3,186 - - (2,986) (200)(c) - Carta, Inc. - 4,000 - - (4,000) - - TechTrader, Inc. - 8,563 (3,346) (407) (4,810) - - Alistia, Inc. - 2,480 (2,000) (11) (469) - - Strategic Data Corporation - 1,100 - - (1,100) - - eStara, Inc. - 4,003 - - (4,003) - - Jasmine Networks, Inc. - 5,000 - - (5,000) - - Tellme Networks, Inc. - 2,000 - - - - 2,000 InterWorld (d) - 20,340 (20,340) - - - - Other - 5 - - - (5) (e) - ____ _______ ________ _____ ________ _______ ______ Total $ - $57,998 $(26,183) $(437) $(26,909) $(2,469) $2,000 ==== ======= ======== ===== ======== ======= ======
(a) Represents a loan made to Digital Boardwalk, LLC which was written off to expense when the Company sold its interest for a loss of $4,501 in 2001. (b) J Net owned a controlling interest in Meister Brothers Investments, LLC. The minority interest was eliminated upon impairment in 2001. (c) Proceeds from sale of investment. (d) InterWorld became a consolidated subsidiary of J Net in May 2001. Between November 2000 and April 2001, the Company used the equity method of accounting for its investment in InterWorld. (e) Abandoned deal screening costs written off to general and administrative expenses. Active investments with carrying value as of June 30, 2003: In September 2000, the Company purchased 136,500 shares of Series "D" Preferred Stock of Tellme Networks, Inc. ("Tellme"), representing less than 1% voting interest in Tellme and applied the cost method to account for its investment. Tellme is a non public company that provides voice technology that delivers information from the Internet over the phone. 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 at Tellme. Management believes there are no indicators of impairment for this investment. Impairments recognized in 2003 and 2002: eStara, Inc. ("eStara"). The Company invested $4.0 million in Series B & C Preferred Stock in its fiscal years 2001 and 2002, representing a voting interest of approximately 14%. The Company applied the cost method of accounting for its investment. eStara is a non public development stage company that provides communication technology that enables online customers to talk with e-commerce businesses over the Internet. In July 2001, when the Company purchased its investment in the Series C Preferred Stock of eStara, the valuations in that preferred stock offering were substantially lower than the valuation used when the Series B preferred stock was purchased. The Company had previously recorded a partial impairment of approximately $1.4 million in its fiscal year 2001 to reflect this reduced valuation. In fiscal 2002, eStara's Board entered into a bridge loan agreement with certain investors and commenced seeking an additional round of financing. J Net did not participate in the bridge loan. Pursuant to valuation terms contained in the bridge loan, the Company determined that the resulting dilution in its interest would reduce the carrying value to $.4 million. As a result of this determination, the Company recorded an additional impairment of $2.2 million in 2002 as presented by the table below. Investments in Technology-Related Businesses (Dollars in thousands) Value at Equity Goodwill Impairments Value at Investment June 30, 2001 Additions income (loss) amortization and sales Other June 30, 2002 _______________ ______________ __________ ____________ ____________ __________ _____ _____________ eStara, Inc. $1,290 $1,338 $ - $ - $(2,203) $ - $ 425 Tellme Networks, Inc. 2,000 - - - - - 2,000 ______ ______ ___ ___ _______ ___ ______ Total $3,290 $1,338 $ - $ - $(2,203) $ - $2,425 ====== ====== === === ======= === ====== In May 2003, the participants in the bridge loan to eStara converted their loans to a new series of preferred stock which is senior to all other preferred issues. As a result of this conversion, J Net's voting percentage was reduced from approximately 14% to 6%. Management evaluated the impact of this conversion and concluded that its ability to recover any of the investment was remote given its subordinated position to the new series of preferred stock. Accordingly, in 2003 the Company recorded a $.4 million impairment to bring the carrying value to $0 as indicated on the table which follows. Investments in Technology-Related Businesses (Dollars in thousands) Value at Equity Goodwill Impairments Value at Investment June 30, 2002 Additions income (loss) amortization and sales Other June 30, 2003 _______________ ______________ __________ ____________ ____________ __________ _____ _____________ eStara, Inc. $ 425 $ - $ - $ - $(425) $ - $ - Tellme Networks, Inc. 2,000 - - - - - 2,000 ______ ____ ___ ___ _____ ___ ______ Total $2,425 $ - $ - $ - $(425) $ - $2,000 ====== ==== === === ===== === ======
Investments sold, abandoned or impaired during fiscal 2001: A summary of the activity of the Company's investments in 2001 is presented below. A description of each of the investments follows the table. Investments in Technology-Related Businesses (Dollars in thousands) Balance at Equity Value at June 30, income Goodwill Impairments June 30, Investments 2000 Additions (loss) amortization and sales Other 2001 ______________________ _________ _________ _______ ____________ ____________ __________ ________ Digital Boardwalk, LLC $ 4,888 $ - $ (627) $ (10) $ (4,501) $ 250 (a) $ - Meister Brothers Investments, LLC 2,554 - - - (40) (2,514)(b) - Cyberbills, Inc. 3,186 - - - (2,986) (200)(c) - Carta, Inc. 4,000 - - - (4,000) - - TechTrader, Inc. 8,410 27 (3,247) (380) (4,810) - - Alistia, Inc. 1,905 480 (1,907) (9) (469) - - Strategic Data Corporation 850 250 - - (1,100) - - eStara, Inc. - 2,665 - - (1,375) - 1,290 Jasmine Networks, Inc. - 5,000 - - (5,000) - - Tellme Networks, Inc. - 2,000 - - - - 2,000 InterWorld (d) - 20,340 (20,340) - - - - Other - 5 - - - (5) (e) - _______ _______ ________ _____ ________ _______ ______ Total $25,793 $30,767 $(26,121) $(399) $(24,281) $(2,469) $3,290 ======= ======= ======== ===== ======== ======= ======
(a) Represents a loan made to Digital Boardwalk, LLC which was written off to expense when the Company sold its interest for a loss of $4,501 in 2001. (b) J Net owned a controlling interest in Meister Brothers Investments, LLC. The minority interest was eliminated upon impairment in 2001. (c) Proceeds from sale of investment. (d) InterWorld became a consolidated subsidiary of J Net in May 2001. Between November 2000 and April 2001, the Company used the equity method of accounting for its investment in InterWorld. (e) Abandoned deal screening costs written off to general and administrative expenses. Jasmine Networks, Inc. ("Jasmine"). The Company invested $5 million as part of an $80 million Series C financing in August 2000. As of June 30, 2001, Jasmine was actively engaged in negotiations to sell a division of its company to a third party at a value which would represent a discount to the original investment. In addition, other events which transpired in August and September 2001, including the loss of a significant customer and the terrorist attacks in New York and Washington D.C., resulted in J Net recording an impairment for its entire investment of $5 million for fiscal year 2001. Jasmine ceased conducting business operations in February 2002. The Company used the cost method to account for its investment in Jasmine. Strategic Data Corporation ("Strategic Data"). The Company invested $.2 million and $.9 million in Strategic Data Corporation in May 2001 and May 2000, respectively. The investment was accounted for under the cost method. Management's analysis of Strategic Data's business model, which relies on Internet advertising, resulted in an impairment of the full $1.1 million investment as of June 30, 2001. Strategic Data continues to conduct operations and has recently obtained additional financing. J Net did not participate in a recent financing offering. Meister Brothers Investments, LLC ("MBI"). On March 1, 2000, the Company acquired a 1% membership interest in and became the managing member of MBI for $40 thousand pursuant to an agreement between MBI, the Company, Keith Meister ("KM") and Todd Meister ("TM"). KM and TM each owned 49.5% of the membership interests in MBI and were Co-Presidents of the Fund until September 2001. As managing member, the Company has complete authority and responsibility for the operations and management of MBI and its ownership interests. Through its ownership interests, MBI owns a portfolio of investments (the "Portfolio") in development stage Technology-Related Businesses. Such investments are accounted for under the cost method. As of June 30, 2003, certain companies within the portfolio continue operating. J Net has not contributed additional funds and the investment was fully impaired in 2001. On March 1, 2000 in connection with the agreement described above, KM, TM and the Company entered into a combination of Put and Call Agreements. Pursuant to the terms of the Call Agreement, KM and TM granted an option to the Company to purchase from KM and TM, and KM and TM were each obligated to sell to the Company, upon proper exercise, under such option (the "Call Option") all of their membership interests in MBI. Upon exercise of the Call Option by the Company, KM and TM were to receive no less than 312,500 and no more than 500,000 shares of the Company's Common Stock, as calculated by a predetermined formula in the Call Agreement. The Call Option could be exercised by the Company at any time after March 1, 2002 and expired on March 1, 2004. Pursuant to the terms of the Put Agreement, the Company granted an option to each of KM and TM to sell to the Company and the Company would be obligated to purchase from each of KM and TM, upon proper exercise, under such option (the "Put Option") any or all of the membership interests in MBI held by each of them in exchange for a number of common shares of the Company, as calculated by a predetermined formula in the Put Option. Upon exercise of the Put Option by KM and TM, KM and TM would receive no less than 275,938 and no more than 441,501 shares of the Company's Common Stock, as calculated by a predetermined formula in the Put Agreement. The Put Option could be exercised at any time after the first to occur of (i) September 1, 2001 or (ii) the date the Portfolio Value, as defined in the Put Option, is fixed at $4 million, but in no event would the Put Option become exercisable any earlier than March 1, 2001. The Put Option was scheduled to expire on March 1, 2004. Prior to the execution of the agreements described above, KM, TM and the Company mutually agreed that the estimated Portfolio value was $2.5 million. Based upon such value, the minimum number of shares to be received by KM and TM was determined by using a $9.06 per share value of J Net's Common Stock, which was the average closing price for the 30 days prior to the parties' mutual agreement of the estimated Portfolio value. If neither the Put Option nor the Call Option was exercised, KM and TM would have a further option to purchase, or cause MBI to purchase, the Company's interest in MBI at its fair market value as determined by appraisal. Such option was exercisable on or after April 1, 2004 and was scheduled to expire on April 30, 2004. Based upon the Company's control over MBI as described above, the Company consolidated MBI in its June 30, 2000 balance sheet and reflected the interest of MBI owned by KM and TM as a minority interest. In 2001, the Company determined that the entities contained within the MBI portfolio of companies had no value due to a combination of factors. The Portfolio contained nine (9) separate investments in development stage companies. At the time the impairment decision was made, seven of the investments within the Portfolio had ceased conducting business operations, or were very close to terminating operations. Two of such companies had already been impaired by the Company in previous quarters. The remaining two were in need of additional capital to continue operations and the Company was not willing to participate in additional financing rounds. Management concluded that the combination of each company's performance and the dilutive effects caused by not participating in further financing activities provided substantive evidence that the entire investment was impaired. More specifically, management concluded that the likelihood of receiving a return from any of the companies in the MBI portfolio was unlikely. In September 2001, the Company completed the acquisition of the 99% of MBI that it did not already own pursuant to contractual obligations contained within the Put Option which was entered into in March 2000 when the Company acquired its managing member interest in MBI. Even though the determination of a permanent impairment had already been made, the exercise of the put option obligated the Company to acquire the remaining interest, which resulted in the value of the settlement being expensed. The timing of the exercise was accelerated in connection with the termination of employment of KM and TM to the original put agreement. Cyberbills, Inc. ("Cyberbills"). In March 2000, the Company purchased 3,385,106 shares of Series C Preferred Stock of Cyberbills, a non public development stage company at a cost of $3.2 million. The Company's share of the total investment was approximately 11% of the total Series C placement. The cost method of accounting was used to account for the investment in Cyberbills. In May 2001, the management of Cyberbills entered into an asset purchase agreement with an unrelated party to sell the assets for $15.0 million. The closing of the sale occurred on June 20, 2001. After payment of creditors and estimated reserves for transaction and other transition expenses, the Series C shareholders were expected to receive a distribution of approximately $2.0 million, or approximately $.2 million net to the Company. Such payment was received in January 2002. The loss on the investment, net of proceeds was reported as a $2.9 million loss on disposal and impairments in the Consolidated Statement of Operations in 2001. In January 2003, a second distribution of proceeds were received from the purchaser of Cyberbills from funds originally escrowed for undisclosed liabilities. The distribution, which was $.1 million was recorded as a reduction to the loss on disposal and impairment of assets in the 2003 Consolidated Statement of Operations. Digital Boardwalk, LLC ("Digital"). The Company's investment in Digital, an e-services company was sold in April 2001. Losses from the operations and sale during the time the Company held the investment were approximately $5.0 million, which included the Company's initial investment of $3.0 million in cash and $1.7 million in J Net Common Stock in March 2000, and a $.3 million working capital loan made during 2001. Prior to its disposal, the Company used the equity method to account for the investment in Digital. Alistia, Inc. ("Alistia"). On May 18, 2000, J Net purchased a 39.8% ownership interest in Series A Preferred Stock ("Series A Stock") of Alistia, a non public development stage company for $2.0 million in cash. The Series A Preferred Stockholders were entitled to vote along with the common stockholders based on the number of common stock in which the Series A Stock could be converted. On an as-converted basis, the Company had a 19.95% voting interest in the initial investment. In addition, a member of J Net's board of directors was a member of Alistia's five member board. As a result of the voting percentage and board representation, the Company used the equity method of accounting. On May 8, 2001, the Company participated in a second round financing in Alistia, Inc., of Redeemable Preferred Stock (the "Series B Stock"). In June 2001, Alistia notified its Board of Directors and investors that the performance targets specified in the Series B Stock would not be attained thereby nullifying any further funding obligation. J Net recorded an impairment of its remaining investment in Alistia of $.5 million in addition to $1.9 million of equity method losses in 2001. Alistia ceased conducting operations in the first quarter of calendar 2002. TechTrader, Inc. ("TechTrader"). In June 2000, the Company purchased 42.1% of the Series B Preferred Stock and a warrant to acquire 827,796 shares of common stock in TechTrader, a development stage non public company. The aggregate purchase price totaled $8.5 million consisting of $6 million in cash and $2.5 million in the Company's Common Stock (178,571 shares). The Company used the equity method to account for the investment in TechTrader. In June 2001, the board of TechTrader held a meeting to review, among other things, the sale of TechTrader to competitors. At June 22, 2001, there was sufficient cash to continue operations through July 31, 2001. Negotiations with prospective buyers had not resulted in a letter of intent, and further due diligence by a prospective buyer still would be required. The board of TechTrader concluded that additional funding was necessary in order to accommodate negotiating and closing this possible sale to the third party. Additionally, such funding only would be sufficient to cover creditor obligations. The Company was not willing to provide additional funding in the absence of a definitive purchase and sale agreement. Management of the Company believed the aforementioned factors provided sufficient evidence of impairment. Accordingly, the value of the entity was deemed to be worthless and written off. Subsequently, the pending sale negotiations collapsed and business operations were terminated in September 2001. Carta, Inc. ("Carta"). Carta ceased operations in February 2001 and the Company's investment of $4.0 million was written off in 2001. The Company used the cost method of accounting for Carta. Note 4 - IW Holdings, Inc. (IWH) The Company's E-Commerce Operations are conducted through IWH, a wholly owned subsidiary which owns the intellectual property and assets previously owned by InterWorld. J Net owns 95.3% of the equity securities of InterWorld, which it acquired through a series of transactions described below. On October 12, 2000, J Net and InterWorld entered into a definitive Securities Purchase Agreement. Pursuant to the terms of the Securities Purchase Agreement, J Net purchased $20.0 million in aggregate principal amount of the Preferred Stock of InterWorld on November 10, 2000. Each share of the Preferred Stock was initially convertible into shares of Common Stock of InterWorld (the "Common Stock") at a conversion price of $6.25 per share (the "Conversion Price"), subject to adjustment on the six month anniversary of the date of issue, to 90% of the average daily closing price of Common Stock for such six-month period, but in no event less than $2.00 per share. Furthermore, as of April 12, 2001, J Net, at its sole discretion, had the option to require InterWorld to redeem the Preferred Stock for cash at 150% of the purchase price plus accrued dividends, provided that such right would expire if InterWorld consummated a change of control transaction with J Net on or prior to such date. In connection with the issuance of the Preferred Stock, InterWorld issued to J Net warrants to purchase additional shares of Common Stock at an exercise price of $7.25 per share, subject to adjustment, exercisable at any time until October 12, 2005, equal to 19.99% of the current outstanding shares of Common Stock less the amount of shares issuable upon the conversion of the Preferred Stock. The Company determined these warrants were a derivative security as defined by SFAS 133, as amended. Because there was no public market for these warrants, the value of the warrants was determined using the Black-Scholes methodology. As a result of subsequent transactions described below, the warrants were canceled. Therefore, no accounting for these warrants using SFAS 133 was required. Pursuant to the Securities Purchase Agreement, J Net appointed two of its board members to InterWorld's Board of Directors. Based on the Company's representation on the Board of Directors and the Company's ability to otherwise influence direction of InterWorld's activities, the Company adopted the equity method to account for its initial investment in InterWorld. On January 25, 2001, J Net and InterWorld entered into a Stock Purchase Agreement and a Stand-By Purchase Agreement (collectively, the "Agreements"). Pursuant to the Agreements, J Net was to exchange all of its InterWorld Preferred Stock and the related warrants for 46,153,846 newly issued shares of InterWorld Common Stock. In connection with such exchange, J Net agreed to suspend its option to require InterWorld to redeem its Preferred Stock, provided such exchange was approved by InterWorld's shareholders. In addition, pursuant to the Agreements, InterWorld agreed to offer for sale to all holders of InterWorld Common Stock up to $20.0 million of newly-issued InterWorld Common Stock at a price per share of $.65. If such holders did not purchase all of the new issuance, the Company agreed to purchase the difference between $20.0 million and the amount purchased by other InterWorld shareholders (the "Stand-By Commitment"). The Agreements also provided J Net with an option to purchase an additional $20.0 million of InterWorld Common Stock (the "Over Allotment Option"). A portion of the Over Allotment Option would have been exercisable at a price per share of $.65 and a portion would have been exercisable at a price per share equal to 90% of the volume- weighted average trading price of InterWorld Common Stock for the 10 day trading period prior to the time of exercise. The portions exercisable at each price would have depended on the number of shares purchased pursuant to the Stand-By Commitment, as described in the Agreements. The transactions described in the Agreements were subject to numerous conditions, including obtaining various InterWorld shareholder approvals and the making of various regulatory filings, as described in the Agreements. On February 7, 2001, Mark W. Hobbs, then J Net's President and Chief Operating Officer, was appointed to InterWorld's Board of Directors. On April 19, 2001, the Company announced that there were several factors which precluded the consummation of the transactions contemplated by the Agreements. As a result, J Net and InterWorld announced that the agreements had been terminated. In addition, it was disclosed that Nasdaq, the securities exchange where InterWorld was then traded, had notified InterWorld that unless certain conditions were satisfied, InterWorld's stock would be delisted. Such delisting was effective May 4, 2001. As a result of the cancellation of the Agreements, J Net announced it would require InterWorld to redeem its Preferred Stock in accordance with its terms. Those provisions entitled J Net to receive a cash payment or to convert the Preferred Stock into Common Stock at a fixed discount of the then market price. At the close of business on May 21, 2001, InterWorld announced completion of a one for fifty reverse stock split. The reverse stock split executed by InterWorld was required in order to facilitate the issuance of shares of Common Stock of InterWorld to the Company in satisfaction of the redemption obligation related to the preferred stock purchased by the Company in November 2000. Without the reverse split, InterWorld would have exceeded the amount of shares authorized for issuance. The redemption obligation was executed in two phases. The first phase, which occurred on May 4, 2001 and prior to the reverse split, issued 61 million shares of InterWorld Common Stock to the Company in partial satisfaction of the obligation. At the end of this first phase, the Company owned approximately 67.5% of InterWorld. The second phase required InterWorld to execute the reverse split in order to issue the additional shares, equal to approximately 448.6 million pre-split shares (8.97 million post-split) to the Company in satisfaction of its obligations under the Preferred Stock redemption. Upon completion of this second phase, which occurred on May 22, 2001, the Company's ownership in InterWorld increased from 67.5% to 94.6%. The Company began consolidating InterWorld in May 2001 as a result of these transactions. In conjunction with this reverse stock split, InterWorld completed the redemption of the Preferred Stock with the terms of the mandatory redemption provision. Subsequent to the reverse stock split, InterWorld had 10,779,033 shares of Common Stock of which J Net owned 10,191,813 or 94.6% of the total outstanding shares. On June 29, 2001, in a transaction related to a loan foreclosure with Michael J. Donahue, the Company received an additional 85,408 shares of InterWorld Common Stock. At the close of this transaction, J Net owned 95.3% of the issued and outstanding shares of InterWorld. From November 2000 until April 2001, the period in which J Net held the Preferred Stock, the equity method of accounting was used to account for the investment in InterWorld. Beginning in May 2001 the consolidation method of accounting was adopted to reflect J Net's step acquisition of InterWorld resulting from the exchange of the Preferred Stock for InterWorld common stock. No minority interest were accounted for due to InterWorld's significant deficit at the acquisition date,. Immediately following the stock split and resulting acquisition of a controlling interest in InterWorld in May 2001, J Net and InterWorld entered into a secured credit facility in the form of a secured promissory note (the "Secured Note"). Advances made by J Net to InterWorld were secured by all of the assets of InterWorld, including its intellectual property. Such advances were made solely at the discretion of J Net and there was no obligation to continue funding or to fund the full amount of the credit facility. Between June 2001 and March 2002, J Net advanced $17.2 million, excluding interest, to InterWorld pursuant to the Secured Note. In May 2002, J Net foreclosed on its Secured Note and IWH became the owner of intellectual property and assets of the E-Commerce Operations. Note 5 - Pro forma information (unaudited) Set forth in the following table is certain unaudited pro forma financial information for the year ended June 30, 2001. This information has been prepared assuming that J Net's acquisition of InterWorld was consummated on July 1, 1999. No cost savings have been assumed in the pro forma tables. The pro forma Consolidated Statement of Operations for the year ended June 30, 2001 is unaudited and was derived by adjusting the historical consolidated financial statements of J Net and InterWorld for the reporting period. The historical consolidated financial statements of InterWorld have been restated to accommodate the June 30 fiscal year end used by J Net. Because InterWorld became a consolidated subsidiary in May 2001, the 2002 and 2003 statements of operations contain actual results as opposed to pro forma. The pro forma statements of operations are for information purposes only and they should not be interpreted to be indicative of the Company's consolidated results of operations had the transaction actually occurred on the assumed date and should not be used to project results for any future date or period. Twelve months ended June 30, 2003 2002 2001 ________ _________ _________ (Actual) (Actual) (Pro forma) (Dollars in thousands) ________ _________ _________ Total revenues $ 2,625 $ 5,815 $ 30,561 Cost of revenues 609 2,912 21,328 _______ ________ _________ Gross profit 2,016 2,903 9,233 Total operating expenses 7,677 29,089 107,778 _______ ________ _________ Loss from operations (5,661) (26,186) (98,545) Other income (expense) 2,074 1,186 (5,678) _______ ________ _________ Net loss before taxes (3,587) (25,000) (104,223) Income tax expense (benefit) 241 236 (11,558) _______ ________ _________ Net loss $(3,828) $(25,236) $ (92,665) ======= ======== ========= Basic loss per share $ (.45) $ (2.96) $ (10.48) ======= ======== ========= Note 6 - Assets held for sale On October 12, 2000 J Net entered into a Loan Assumption and Forbearance Agreement with Michael J. Donahue, the former Vice Chairman and Chief Executive Officer of InterWorld, pursuant to which J Net purchased from Salomon Smith Barney ("SSB") a loan from SSB to Michael J. Donahue in the amount of $12.4 million. The loan was secured by 85,408 shares of InterWorld Common Stock and other assets owned by Mr. Donahue. The loan was due in October 2003, subject to an acceleration in October 2001 if InterWorld did not effect a merger transaction with J Net, and accrued interest payable at 8% per annum. In connection therewith, J Net entered into a Call/Participation Agreement with Mr. Donahue whereby he agreed that J Net would share in the profit on a portion of the stock securing the loan once certain conditions, including the repayment of the loan, were met. Mr. Donahue had sole power to vote and dispose of the shares, although he was required to vote the shares in favor of a merger of InterWorld and J Net and consult with J Net on other matters put before InterWorld's shareholders for a vote thereon. The loan agreement contained certain events of default beyond non-payment, the most significant of which included failure by Mr. Donahue to vote the stock in favor of a merger between InterWorld and J Net and any time that the closing price of the stock pledged as collateral fell below $2.00 per share for more than 10 days. On the date the loan was purchased by the Company, the value of the InterWorld stock collateralizing the loan was approximately $13.6 million. The Company also entered into a separate agreement with Mr. Donahue which allowed J Net to participate in profits from the sale of the stock with Mr. Donahue. InterWorld's stock price, along with other stock prices in the technology space, continued to decline throughout 2000 and 2001. Such declines in the InterWorld stock price necessitated the Company to take more definitive actions and obtain a negative pledge on the other assets. On April 4, 2001, the Company entered into an Amended and Restated Loan Assumption and Forbearance Agreement (the "Amended Agreement") with Mr. Donahue. The Amended Agreement replaced the Loan and Forbearance Agreement (the "Original Agreement") dated October 12, 2000. The significant components in the Amended Agreement added Excalibur Polo Farm ("Excalibur") as a debtor, changed interest payment terms, revised certain collateral provisions and changed events allowing acceleration. The amended loan was secured by 85,408 shares of InterWorld Common Stock and the assets of Excalibur. The loan was due on October 11, 2003, subject to acceleration to October 11, 2001, if on or before July 31, 2001, InterWorld did not commence with the rights offering contemplated by the Stock Purchase and Standby Purchase Agreements dated January 25, 2001. J Net elected not to enforce its rights relating to any other defaults at the time. The loan accrued interest at 8% per annum and called for payment of accrued interest at the end of each calendar quarter. Principal payments of $.5 million commencing December 31, 2001 were also due each quarter. The Call/Participation Agreement contained in the Loan Assumption and Forbearance Agreement whereby J Net would share in the profit on a portion of the stock securing the loan once certain conditions, including the repayment of the loan, remained intact in the Amended Agreement. This was deemed to have no value. On June 29, 2001, the loan, together with accrued interest totaled $13.2 million. Due to the financial condition of Mr. Donahue, the Company executed a series of agreements which foreclosed on the real property assets securing the loan. In addition, the 85,408 shares of InterWorld Common Stock securing the loan were transferred to the Company. The net realizable value of the real property, net of selling costs and other obligations, was estimated to be $5.5 million on the date of the foreclosure. The loss from the foreclosure of $7.7 million was expensed as general and administrative expense as a component of compensation expense in the Consolidated Statement of Operations for 2001. The agreements entered into on June 29, 2001 also provided for the Company to loan Mr. Donahue up to $.8 million. This obligation was accrued as a general and administrative expense in the Consolidated Statement of Operations for 2001. During fiscal 2002, the Company reduced its carrying value of Excalibur by $.5 million to $5 million. The impairment was recorded as a direct reduction to the assets held for sale caption on the Consolidated Balance Sheet and an impairment of assets in the Consolidated Statement of Operations. Such adjustment reflected the decline in the market value of the 85,408 shares of InterWorld stock and increased operating costs due to an extended holding period for the asset. In June 2002, Michael J. Donahue executed an agreement which released J Net from its obligation to loan Mr. Donahue up to $.8 million pursuant to the June 29, 2001 agreement. The obligation was accrued and reported as a component of general and administrative expenses in 2001 and was reversed in 2002. In March 2003, the Company completed the sale of Excalibur to an unrelated third party. Proceeds from the sale were $4.4 million resulting in a loss of approximately $1.0 million, which is reported as loss on disposal and impairment of assets in the 2003 Consolidated Statement of Operations. Note 7 - Accounts payable and accrued expenses Accounts payable and accrued expenses consist of the following (Dollars in thousands): June 30, 2003 2002 ______ ______ Trade accounts payable $2,436 $2,985 Accrued professional fees 239 178 Accrued employee benefits 687 358 Accrued interest payable - 553 Other 37 21 ______ ______ Totals $3,399 $4,095 ====== ====== As of June 30, 2003 and 2002, the total accounts payable and accrued liabilities include $1.5 and $2.3 million, respectively, attributable to unsecured creditors of InterWorld Corporation. Although there can be no assurances, Management believes these obligations may be settled and reduced to amounts less than their face value. The accrued employee benefits liability as of June 30, 2003 includes $563 thousand attributable to severance pay to two former executives of the Company. In July 2002, when the Company repurchased its Notes pursuant to a voluntary repurchase offer, the accrued interest obligation was forgiven and a gain on this forgiveness was recorded in July 2002. Note 8 - Loss Per Share Basic loss per share is computed by dividing net loss from continuing operations by the weighted average number of shares outstanding during each period. Diluted loss per share is computed by dividing net loss from continuing operations by the weighted average number of common and common equivalent shares outstanding during the period. The calculation of loss per share excluded the following securities as their effect was antidilutive (shares in thousands): Antidilutive Securities _______________________ 2003 2002 2001 _____ _____ _____ Description: Potentially dilutive stock options 1,488 1,844 2,894 Common shares issuable from assumed conversion of subordinated notes - 2,581 2,581 Common shares issuable from assumed exercise of put option - - 276 _____ _____ _____ Total antidilutive securities 1,488 4,425 5,751 ===== ===== ===== The following is the amount of loss and number of shares used in the basic and diluted loss per share computations for continuing operations (dollars and shares in thousands, except per share data): 2003 2002 2001 ________ ________ ________ Basic loss per share from continuing operations: Loss from continuing operations $(3,828) $(25,236) $(61,449) ======= ======== ======== Shares: Weighted average number of common shares outstanding 8,525 8,525 8,839 ======= ======== ======== Basic loss per share from continuing operations $ (.45) $ (2.96) $ (6.95) ======= ======== ======== Diluted loss per share: Loss from continuing operations $(3,828) $(25,236) $(61,449) ======= ======== ======== Shares: Weighted average number of common shares and common share equivalents outstanding 8,525 8,525 8,839 ======= ======== ======== Diluted loss per share from continuing operations $ (.45) $ (2.96) $ (6.95) ======= ======== ======== Note 9 - Stockholders' Equity, Stock Options and Defined Contribution Plan Rights plan: In June 1994, the Board approved a Stockholder Rights Plan. On July 11, 1994, J Net declared a dividend distribution of one Preferred Stock purchase right (the "Rights") payable on each outstanding share of the Company's Common Stock, as of July 15, 1994. The Rights become exercisable only in the event, with certain exceptions, an acquiring party accumulates 15% or more of J Net's voting stock, or if a party announces an offer to acquire 30% or more of J Net's voting stock. Each Right will entitle the holder to purchase one- hundredth of a share of a Series A Junior Preferred Stock at a price of $30. In addition, upon the occurrence of certain events, holders of the Rights will be entitled to purchase either J Net's Preferred Stock or shares in an "acquiring entity" at half of market value. The Rights, which expire on July 15, 2004, may be redeemed by J Net at $.01 per Right prior to the close of business on the tenth day after a public announcement that beneficial ownership of 15% or more of J Net's shares of voting stock has been accumulated by a single acquiror or a group (with certain exceptions), under circumstances set forth in the Rights Agreement. As of June 30, 2003 and 2002, 150,000 shares of unissued Series A Junior Preferred Stock were authorized and reserved for issuance upon exercise of the Rights. The issuance of the Rights had no effect on dilutive earnings per share in 2003, 2002 and 2001. On May 21, 2001, the Gabelli Funds, LLC (the "Gabelli Group") filed with the Securities and Exchange Commission an Amendment to Schedule 13D indicating that the Gabelli Group had purchased additional shares of issued and outstanding capital stock of the Company and, therefore, beneficially owned an aggregate of 16.2% of the issued and outstanding capital stock of the Company. On May 30, 2001, Section 3 of the Rights Plan Agreement dated as of July 11, 1994 between J Net Enterprises, Inc. and Continental Stock Transfer & Trust Company was amended to provide that the Amendment to the Schedule 13D would not constitute a public announcement that would trigger the Rights Plan. The Board of Directors of J Net also resolved that the Gabelli Group would be permitted to purchase up to 19.9% of the issued and outstanding capital stock of the Company and the public announcement, which may include the filing of one or more amendments to the Schedule 13D, would not trigger the Rights under Section 3 of the Rights Plan Agreement. On September 15, 2003, the Gabelli Group filed an Amendment to Schedule 13D indicating that the group had increased their stake in the Company to 18.58% of the issued and outstanding stock of J Net. Stock option plans: On January 12, 1993, J Net's stockholders approved the 1992 Incentive and Non-qualified Stock Option Plan (the "1992 Plan"). On August 17, 1994, the Board adopted certain amendments (the "Amendments") to the 1992 Plan which were approved by J Net's stockholders on January 10, 1995. The Amendments increased the number of shares of J Net's Common Stock authorized for issuance pursuant to the 1992 Plan from 1,045,000 to 2,545,000. The 1992 Plan provides that each individual who is a member of the Board on June 30 of any year, including any future director on any such date, will automatically be granted nonqualified stock options to purchase 27,500 shares of Common Stock on each such June 30. The option price for each June 30 grant will be 100% of the fair market value of the Common Stock on the following September 30. Each option granted to a director will become exercisable after September 30 of each year, and expire five years from the date of grant. Under the 1992 Plan, options granted to J Net's directors to purchase an aggregate of 357,500 shares of Common Stock which were outstanding and exercisable at June 30, 2003. The 1992 Plan terminated in accordance with its terms on September 30, 2002. Options outstanding at the termination date totaled 877,500 and will remain outstanding until they are exercised or expired. On June 30, 2002, a total of 137,500 options (27,500 to each of five directors) were issued pursuant to the 1992 Plan. On September 30, 2002 when the options were to vest, each director voluntarily returned their options to the plan. Changes in options outstanding under the 1992 stock option plan are summarized below (shares in thousands): 2003 2002 2001 __________________ __________________ __________________ Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ______ ________ _______ ________ _______ ________ Fixed options: Outstanding at beginning of year 1,233 $8.43 2,253 $9.33 2,132 $ 9.47 Granted - - 25 2.00 94 9.42 Exercised - - - - - - Cancelled (355) 9.86 (1,045) 9.66 (110) 10.00 Automatic grant to directors - - - - 137 4.00 _____ _____ _____ _____ _____ ______ Outstanding at end of year 878 $9.02 1,233 $8.43 2,253 $ 9.33 ===== ===== ===== ===== ===== ====== Options exercisable at year-end 857 $8.99 1,016 $9.26 1,636 $ 9.79 ===== ===== ===== ===== ===== ====== Weighted average fair value of options granted during the year - $ - - $1.10 - $ 4.19 ===== ===== ===== ===== ===== ====== The following table summarizes information about the 1992 Plan stock options outstanding at June 30, 2003: Options Outstanding Options Exercisable __________________________________________________ _______________________ Weighted Weighted Range of Number Remaining Average Number Average Exercise Outstanding Contractual Exercise Exercisable Exercise Prices at 6/30/03 Life Price at 6/30/03 Price _______________ ___________ ___________ ________ ___________ ________ $ 4.00 137 3.00 years $ 4.00 137 $ 4.00 $ 8.75 - $ 9.50 203 1.85 years $ 9.19 199 $ 9.19 $10.13 - $10.63 518 6.38 years $10.16 504 $10.16 $12.00 - $12.44 20 7.00 years $12.26 17 $12.22 Other nonqualified stock options: On September 14, 1999, nonqualified stock options to purchase an aggregate of 120,000 shares of Common Stock were granted to the Company's Board of Directors (30,000 each to four directors) at an exercise price of $9.00 per share, the fair market value on the date of grant. The option granted to each director vested 50% on each of the first and second anniversaries of the date of grant. Such options expire ten years from date of grant. On January 31, 2000, nonqualified stock options to purchase an aggregate of 150,000 shares of Common Stock were granted to the managing officers of the Company's Ventures I subsidiary (75,000 each) at an exercise price of $10.13 per share, the fair market value on the date of grant. Such options were to vest in thirds on each of the first, second and third anniversaries of the date of grant. In September 2001, the managing officers terminated their employment with the Company. The options expired as a result of the termination. On June 21, 2000, nonqualified stock options to purchase an aggregate of 500,000 shares of Common Stock were granted to the President and Chief Operating Officer and the Executive Vice President and Chief Financial Officer at an exercise price of $13.13 per share, the fair market value on the date of the grant. The options vested in thirds on each of the first, second and third anniversaries of the date of grant and expire ten years from the date of the grant. As of June 30, 2003, all the options were exercisable. On June 21, 2003, the President and Chief Operating Officer and the Executive Vice President and Chief Financial Officer's employment contracts expired and were not renewed. The expiration of those contracts did not affect the expiration of the options granted on June 21, 2000. There were no nonqualified options granted during fiscal 2001, 2002 or 2003. Changes in nonqualified options outstanding are summarized below (shares in thousands): 2003 2002 2001 __________________ _______________ _______________ Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ______ ________ ______ ________ ______ ________ Fixed options: Outstanding at beginning of year 610 $12.38 640 $12.22 640 $12.22 Granted - - - - - - Exercised - - - - - - Cancelled - - (30) 9.00 - - ___ ______ ___ ______ ___ ______ Outstanding at end of year 610 $12.38 610 $12.38 640 $12.22 === ====== === ====== === ====== Options exercisable at year-end 610 $12.38 443 $12.10 237 $11.90 === ====== === ====== === ====== Weighted average fair value of options granted during the year - $ - - $ - - $ - === ====== === ====== === ====== The following table summarizes information about nonqualified stock options outstanding at June 30, 2003 (shares in thousands): Options Outstanding Options Exercisable ______________________________________________ ______________________________ Weighted Weighted Range of Number Remaining Average Number Average Exercise Outstanding Contractual Exercise Exercisable Exercise Prices at 6/30/03 Life Price at 6/30/03 Price _________________ ___________ ___________ ________ ___________ ________ $9.00 per share 110 6.21 years $ 9.00 110 $ 9.00 $13.13 per share 500 6.98 years $13.13 500 $13.13 Shares reserved for issuance: Shares of Common Stock were reserved for the exercise of the following (in thousands): June 30, __________________ 2003 2002 _____ _____ Stock options: Outstanding 878 1,233 Available for grant 1,573 1,218 Other nonqualified stock options 610 610 _____ _____ Totals 3,061 3,061 ===== ===== Defined contribution plan: Employees may participate in a defined contribution plan which qualifies under Section 401(k) of the Internal Revenue Code. Participants may contribute up to 15% of their gross wages, not to exceed annual limitations set by the Internal Revenue Service regulations. The Company does not contribute separately to the plan or match employee contributions. Note 10 - Related Party Transactions One director of J Net is a partner of a law firm that performed legal services for the Company totaling approximately $14,000 in each of 2003 and 2002 and approximately $.1 million in 2001. Three directors, entities controlled by those directors, or adult children of those directors invested $7.0 million in the Notes described in Note 2. As of June 30, 2001, officers and employees invested, either directly or indirectly, $5.8 million in the Notes. As a result of employee terminations in 2002, the amount of Notes held either directly or indirectly by officers and employees was reduced to $2.5 million as of June 30, 2002. All of the Notes, including Notes held by unrelated third parties were repurchased pursuant to a voluntary repurchase program in July 2002. As of June 30, 2001, Notes held by officers or employees had a face value of $3.3 million and the Company loaned $1.3 million to facilitate the purchase of those Notes. On September 28, 2001, pursuant to agreements with the former employees discussed in Note 3, $1 million of the loans, plus accrued interest was collected. The remaining $.3 million was collected in July 2002 when the Notes were repurchased as part of the voluntary repurchase offer (see Note 2). The Company and InterWorld entered into a secured credit agreement which allowed InterWorld to draw up to a total of $20 million in cash from J Net, at the Company's discretion. The advances were secured by the assets of InterWorld including intellectual property. Advances totaled $17.2 million between June 2001 and April 2002. In May 2002, J Net completed foreclosure actions against InterWorld and the assets, intellectual property and employees were transferred to IWH (see Note 4). The Company foreclosed on assets securing a loan to Michael J. Donahue, Vice Chairman and Chief Executive Officer of InterWorld on June 29, 2001 as described in Note 6. The assets received in the foreclosure were sold in March 2003 for $4.4 million. The aforementioned foreclosure agreements entered into on June 29, 2001 between the Company and Michael J. Donahue also provided for the Company to loan Mr. Donahue up to $.8 million. In June 2002, Mr. Donahue released the Company from this obligation. In March 2002, Mr. Donahue resigned his position as Vice Chairman and Chief Executive Officer of InterWorld. Mr. Donahue continued to perform part time consulting services for IWH until June 2003. Payments to Mr. Donahue for consulting services were $176,000 for the fiscal year ended June 30, 2003 and $57,000 in 2002. Note 11 - Federal Income Tax The components of Federal income tax expense (benefit) are as follows (Dollars in thousands): 2003 2002 2001 _____ _____ ________ Federal: Current expense (benefit) $241 $(649) $ (979) Deferred expense (benefit) - 885 (10,579) ____ _____ ________ Federal income tax expense (benefit) on loss from continuing operations 241 236 (11,558) Federal income tax expense of discontinued operations - - 6,612 ____ _____ ________ Total Federal income tax expense (benefit) $241 $ 236 $ (4,946) ==== ===== ======== A reconciliation of the Federal statutory income tax rate to the effective income tax rate based on loss from continuing operations before income tax follows: 2003 2002 2001 _____ _____ _____ Statutory rate (35.0)% (35.0)% (35.0)% Increase (decrease) in tax resulting from: Surtax exemption 1.0 1.0 1.0 Amortization of debt discount - - 5.3 Valuation allowance 48.5 34.6 12.8 Tax-exempt interest - - - Other (7.8) (.5) .1 _____ ____ _____ Effective rate 6.7% .1% (15.8)% ===== ==== ===== The tax items comprising J Net's net deferred tax asset (liability) as of June 30, 2003 and 2002 are as follows (Dollars in thousands): 2003 2002 Equity method losses and impairments $ 8,548 $ 8,403 Net operating losses 8,168 7,076 Capital loss carryforwards 2,560 1,740 Leasehold improvement impairments 692 692 Impairments of assets held for sale - 170 Depreciation (230) (128) Accruals and other (42) 3 _________ ________ Total 19,696 17,956 Less valuation allowance (19,696) (17,956) _________ ________ Net deferred tax asset $ - $ - ========= ======== Deferred tax liability $ 6,910 $ - ========= ======== The Company's net operating losses and capital losses can be carried forward pursuant to Federal tax regulations. The capital loss and operating loss carry forwards will expire in 2007 and 2022, respectively, if not utilized. In March 2002, the Job Creation and Worker Assistance Act or 2002 (the "Act") was signed into law. Among other things, the Act extended the carry-back period for operating losses incurred in fiscal years ended in 2001 and 2002 from two years to five years. Based on this legislation, on November 26, 2002, the Company filed for a refund of Federal income taxes previously paid of $7.66 million. The refund was received in December 2002. The refund is subject to audit by the Internal Revenue Service and the review and approval of the Congressional Joint Committee on Taxation. There can be no assurance as to what part, if any, of such refund will ultimately be allowed. Due to the significance of the refund, Management determined an appropriate amount to reserve pending further review by the Internal Revenue Service. As of June 30, 2003, the amount reserved is $6.9 million. In May 2003, the Internal Revenue Service began an audit of the Company's June 30, 2001 Federal income tax return. Note 12 - 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. The Technology-Related Businesses include the effect of transactions and operations of the Company's non-consolidated investments, including InterWorld prior to the acquisition of a majority of its outstanding Common Stock in May 2001. E-Commerce Operations include the results of IWH and its predecessor, InterWorld. All significant intersegment activity has been eliminated. Accordingly, segment results reported exclude the effect of transactions between the Company and its subsidiary. Assets are the owned assets used by each operating segment. Year Ended Year Ended June 30, 2003 June 30, 2002 _____________ _____________ (Dollars in thousands) Loss from Operations: _____________________ E-Commerce Operations $ (333) $(16,855) Technology-Related Businesses (3,495) (8,381) ________ ________ Net loss $ (3,828) $(25,236) ======== ======== E-Commerce Results of Operations: _________________________________ Revenue $ 2,625 $ 5,815 Cost of revenues 609 2,912 ________ ________ Gross profit 2,016 2,903 Operating expenses: Research and development 1,603 5,125 Sales - 5,981 Marketing alliances - 1,616 General and administrative 1,008 4,814 Restructuring and unusual charges and gain from settlements with unsecured creditors (99) 1,273 ________ ________ Total operating expenses 2,516 18,809 Other income (expense), net 167 (949) ________ ________ Loss from E-Commerce Operations $ (333) $(16,855) ======== ======== Technology-Related Businesses: ______________________________ General and administrative $ 3,833 $ 3,157 Loss on disposal and impairment of Technology-Related Businesses 1,328 2,703 Restructuring and unusual charges and gain from settlements with unsecured creditors - 4,420 ________ ________ Total operating expenses 5,161 10,280 ________ ________ Loss from operations (5,161) (10,280) Interest and other income 1,354 4,434 Interest expense - (2,299) Gain from repurchase of Notes 553 - ________ ________ Loss from operations before income tax (3,254) (8,145) Income tax provision 241 236 ________ ________ Loss from Technology-Related Businesses $ (3,495) $ (8,381) ======== ======== Year Ended Year Ended June 30, 2003 June 30, 2002 _____________ _____________ (Dollars in thousands) Total assets: E-Commerce $ 290 $ 632 Technology-Related Businesses 20,552 46,211 _______ _______ Total $20,842 $46,843 ======= ======= Note 13 - Other Events In November 2000, upon completion of the sale of the gaming machine route operations ("Route Operations"), severance payments totaling $1.1 million were paid to two former officers of the Company pursuant to employment agreements. The costs of the severances are included in the line captioned restructuring and unusual charges in the accompanying 2001 Consolidated Statement of Operations. Note 14 - Commitments And Contingencies Employment agreements: J Net entered into employment agreements with Mark W. Hobbs, President and Chief Operating Officer, and Steven L. Korby, Executive Vice President and Chief Financial Officer on October 1, 2000. Such agreements expired on June 21, 2003. Pursuant to the terms of those agreements upon expiration, Mr. Hobbs and Mr. Korby are entitled to received $.6 million of severance pay. Of which $.5 million is due to be paid in fiscal 2004. The unpaid amount was accrued as a liability at June 30, 2003 in accordance with SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". Legal matters: J Net is not a party to any legal matters that could have a material impact on its operations as of June 30, 2003. However, InterWorld, a 95.3% owned subsidiary, 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") commenced a formal order directing a private investigation by the Commission with respect to whether InterWorld engaged in violations of Federal Securities Laws as it relates to InterWorld's financial statements, as well as its accounting practices and policies. Also under review by the Commission is certain trading in InterWorld stock. All the above events are related to periods prior to the Company's common stock ownership in InterWorld. The investigation is confidential and the Commission has advised that the investigation should not be construed as an indication by the Commission or its staff that any violation of law has occurred nor should the investigation be construed as an adverse reflection on any person, entity or security. Although the Company is unaware of any activity with respect to the investigation for the past year, InterWorld intends to fully cooperate 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 alleges that PBS is owed commissions by InterWorld for services related to PBS's attempts to sublease office space previously occupied by InterWorld in New York City. InterWorld is vigorously contesting the claim and InterWorld management does not believe a liability exists at this time. J Net was not a party to the brokerage agreement and no claim against J Net has been asserted by PBS. From time to time, the Company or its subsidiaries are parties to claims, legal actions and complaints arising in the ordinary course of business. Management believes its defenses are substantial and that its legal position can be successfully defended without material adverse effect on its consolidated financial position. Leases: J Net has a noncancellable office lease in New York, New York which expires on December 31, 2010. Future minimum payments under such lease total $3.4 million at June 30, 2003. J Net also has a noncancellable office lease in Plano, Texas. Future minimum payments under such lease, which expires in February 2004, is $72,000 at June 30, 2003. Future minimum payments under the E-Commerce operations lease which expires on September 30, 2003, total $66,000 at June 30, 2003. In January 2002, J Net entered into a sublease agreement for its office lease in New York. The Company remains responsible for its obligations under the original lease. Future minimum receipts from the tenant under the sublease, net of profit sharing with the landlord, are $4.1 million. Total rent expenses by the Technology-Related Businesses segment were $.6 million in 2003, $.6 million in 2002 and $.7 million in 2001. Rent receipts under the sublease through June 30, 2003, net of profit sharing expenses with the primary landlord were $.5 million. Rental expenses for the E-Commerce Operations in 2003 totaled $.3 million, $1.0 million in 2002 and $.5 million in 2001. In December 2001, InterWorld negotiated a release from all of its obligations under lease obligations at its offices in New York City, including certain past due expenses which included subleased office space. The release, together with forgiveness of the past due expenses, relieved InterWorld of approximately $50 million in gross lease obligations. IWH now leases office space on a three month lease term in New York City at a cost of approximately $18,000 per month. The following table outlines the consolidated lease obligations of the Company (Dollars in thousands): Fiscal Years Ended June 30, ______________________________________________ 2005 - 2007 - 2010 and 2004 2007 2010 thereafter Total _____ _______ _______ __________ _______ Lease Obligations Gross operating lease obligations $ 576 $ 1,406 $ 1,441 $ 160 $ 3,583 Sublease receipts (527) (1,639) (1,720) (192) (4,078) _____ _______ ______ _____ ______ Net lease obligations (profit) $ 49 $ (233) $ (279) $ (32) $ (495) ===== ======= ======= ===== ======= Severance obligations: In June 2003, employment contracts for the President and Chief Operating Officer and the Executive Vice President and Chief Financial Officer expired according to their terms. The contracts were not extended and the officers terminated their employment with the Company. A severance obligation of $.6 million arose as a result of the employment contract expirations. Such amount is included as compensation expense in the 2003 Consolidated Statement of Operations and as an accrued liability on the June 30, 2003 Consolidated Balance Sheet. Significant customers and contracts: During 2003, approximately 74% of consolidated revenues were derived from six customers. Renewals of post production maintenance support from these customers is an important source of operating funds. In addition, new sales are required to achieve profitability and reduce the reliance and associated risks of lost revenues from these significant customers. Note 15 - Discontinued Operations Definitive agreement: On July 8, 2000, the Company entered into a definitive agreement to sell its Route Operations for $45 million in cash. In October 2000, the sales price was reduced to $38 million. The sale, which was subject to closing conditions and regulatory and other approvals, was completed in November 2000 and is reported as discontinued operations. In accordance with accounting principles applicable to discontinued operations, previously reported financial statements have been reclassified to reflect the Route Operations as discontinued. Selected financial data - discontinued operations: The following are the summary operating results of the discontinued operations for 2001, which represent the period of July 1, 2000 to November 22, 2000, the effective date of the sale (Dollars in thousands): 2001 ________ Revenues $ 28,120 Costs and expenses (28,484) ________ Operating income (364) Other income 15 ________ Income before income tax (349) Provision (benefit) for income tax (99) ________ Income from discontinued operations, net of tax $ (250) ======== Note 16 - Restructuring charges The fiscal year ended June 30, 2001 included severance payments of $1.1 million attributable to the sale of the Route Operations due to the Company's change in business direction from gaming to Technology-Related Businesses (See Note 13). During its fiscal year 2002, the Company initiated a restructuring plan designed to, among other things, reduce operating costs, consolidate facilities, and reduce focus on the minority investment strategy. Such restructuring was designed to adjust the Company's operations to existing market conditions and consolidate and streamline the organization. Both the Technology-Related Businesses and E-Commerce Operations segments were impacted by the restructuring activities. The table below presents the restructuring costs incurred by the Company for the year ended June 30, 2002 and 2003. Contractual Severance Impairment Settlements and Benefits of Facilities and Other Total ____________ _____________ ___________ _____ (Dollars in thousands) 2002 ___________________________ Restructuring and unusual charges expensed $ 1,775 $ 2,963 $ 1,624 $ 6,362 Cash payments (1,722) (88) (1,624) (3,434) Non-cash charges - (2,875) - (2,875) _______ _______ ______ _______ Accrued restructuring balance as of June 30, 2002 53 - - 53 2003 ____________________________ Non-cash charges (53) - - (53) _______ _______ ______ _______ Accrued restructuring balance as of June 30, 2003 $ - $ - $ - $ - ======= ======= ======= ======= A description of the restructuring charges presented above is as follows: Severance and Benefits - Between July 1, 2001 and December 31, 2001, the number of employees was reduced from 270 employees to 29 employees. Severance costs included severance pay, related payroll taxes, and certain benefits paid by the Company. In 2003, the accrued severance as of June 30, 2002 was reversed upon confirmation that all obligations and related benefits were satisfied. Impairment of Facilities - The Company subleased office space in New York which was used by the Technology-Related business segment personnel. Based on the terms of the sublease agreement, the Company determined its leasehold improvements were not recoverable and recorded an impairment of $2 million. The Company relocated its Technology-Related business functions from New York to its offices in Texas upon execution of the sublease. InterWorld negotiated a release of lease obligations at its New York facility. Upon release from the underlying obligations contained in that lease, leasehold improvements of $.9 million were written off. The remaining personnel in the E-Commerce operations relocated to less costly facilities in New York under a short term lease arrangement. Contract Settlements and Other - The contract settlements related to agreements, including termination of employment with the managing officers of Ventures I, the fund owned and operated by the Company. Contract charges included in restructuring were attributable to the cancellation of the put agreement referred to in Note 3 to the Consolidated Financial Statements, which was accelerated in connection with the termination of the managing officers. J NET ENTERPRISES, INC. AND SUBSIDIARIES QUARTERLY FINANCIAL INFORMATION YEARS ENDED JUNE 30, 2003 AND 2002 (Dollars in thousands, except per share data) (Unaudited) Summarized quarterly financial information for 2003 and 2002 follows: Quarter ___________________________________________ First Second Third Fourth ________ _______ _______ ________ 2003 ____ Revenues $ 656 $ 707 $ 718 $ 544 Gross profit 508 507 568 433 Operating loss (1,068) (2,062) (876) (1,655) Net loss $ (343) $(1,800) $ (515) $(1,170) Basic earnings (loss) per share: Net loss $ (.04) $ (.21) $ (.06) $ (.14) Dilutive earnings (loss) per share: Net loss $ (.04) $ (.21) $ (.06) $ (.14) Quarter __________________________________________ First Second Third Fourth ________ _______ _______ ________ 2002 ____ Revenues $ 2,825 $ 1,215 $ 630 $ 1,145 Gross profit 1,409 (47) 574 967 Operating loss (a) (14,351) (8,154) (1,738) (1,943) Net loss (a) $(14,200) $(7,994) (1,320) (1,722) Basic earnings (loss) per share: Net loss $ (1.67) $ (.94) $ (.15) $ (.20) Dilutive earnings (loss) per share: Net loss $ (1.67) $ (.94) $ (.15) $ (.20) (a) Operating loss and net loss in fiscal 2002 include restructuring and unusual charges of $4.6 million in the first quarter, $1.8 million in the second quarter, $(.1) million in the third quarter and $.1 million in the fourth quarter. J NET ENTERPRISES, INC. AND SUBSIDIARIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS (Dollars in thousands) Twelve Months Twelve Months Twelve Months Ended Ended Ended June 30, 2003 June 30, 2002 June 30, 2001 _____________ _____________ _____________ Allowance for doubtful accounts: Balance at beginning of period $ 109 $ - $ - Charged to expense - 109 - Deductions and write-offs (109) - - _____ ____ ___ Balance at end of period $ - $109 $ - ===== ==== ===
EX-21 3 ex211fy03.txt EXHIBIT 21.1 SUBSIDIARIES OF J NET ENTERPRISES, INC. STATE OF COMPANY % OWNED INCORPORATION _________________________ _______ _____________ 1. J Net Ventures I, LLC 100% Delaware 2. J Net Holdings, LLC 100% Nevada 3. J Net GP, LLC 100% Nevada 4. InterWorld Corporation 95.3% Delaware 5. IW Holdings, Inc. 100% Delaware EX-23 4 ex231fy03.txt EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement Form S-3 Nos. 33-22990, 33-38210, 33-51588 and 33-61624 and the Registration Statement Form S-8 Nos. 33-86078, 33-27288 and 33-38209 of Jackpot Enterprises, Inc. of our report dated August 21, 2003, with respect to the consolidated financial statements and schedule of J Net Enterprises, Inc. (formerly known as Jackpot Enterprises, Inc.) included in this Annual Report (Form 10-K) for the year ended June 30, 2003. New York, New York September 29, 2003 EX-31 5 ex311fy03.txt Exhibit 31.1 PRINCIPAL EXECUTIVE OFFICER CERTIFICATION I, Allan R. Tessler, Chairman and Chief Executive Officer of J Net Enterprises, Inc. (the "Registrant"), certify that: (1) I have reviewed this annual report on Form 10-K of the Registrant; (2) Based on my knowledge, this 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 report; (3) Based on my knowledge, the financial statements, and other financial information included in this 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 report; (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-15(e) and 15d-15(e)) for the Registrant and we have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) [Paragraph omitted in accordance with SEC transition instructions] (c) Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based upon based such evaluation; and (d) Disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; (5) The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; 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 over financial reporting. Dated: September 29, 2003 By: /s/ Allan R. Tessler _____________________ Allan R. Tessler Chairman and Chief Executive Officer EX-31 6 ex312fy03.txt Exhibit 31.2 PRINCIPAL FINANCIAL OFFICER CERTIFICATION I, Mark E. Wilson, Chief Financial Officer of J Net Enterprises, Inc. (the "Registrant"), certify that: (1) I have reviewed this annual report on Form 10-K of the Registrant; (2) Based on my knowledge, this 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 report; (3) Based on my knowledge, the financial statements, and other financial information included in this 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 report; (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-15(e) and 15d-15(e)) for the Registrant and we have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) [Paragraph omitted in accordance with SEC transition instructions] (c) Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based upon based such evaluation; and (d) Disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; (5) The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; 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 over financial reporting. Dated: September 29, 2003 By: /s/ Mark E. Wilson __________________ Mark E. Wilson Chief Financial Officer EX-32 7 ex321fy03.txt Exhibit 32.1 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 Annual Report of J Net Enterprises, Inc. (the "Company") on Form 10-K for the period ending June 30, 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: September 29, 2003 By: /s/ Allan R. Tessler _____________________ Allan R. Tessler Chairman and Chief Executive Officer This certification accompanies this Report on Form 10-K 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. A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form with the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. EX-32 8 ex322fy03.txt Exhibit 32.2 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 Annual Report of J Net Enterprises, Inc. (the "Company") on Form 10-K for the period ending June 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Mark E. Wilson, 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: September 29, 2003 By: /s/ Mark E. Wilson __________________ Mark E. Wilson Chief Financial Officer This certification accompanies this Report on Form 10-K 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. A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form with the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
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