-----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, RRXsLoK1Cb9GFdB9z356yOIFA++0uDPdBpm2RGItwTnc9Eer05XauoiEhc8Gn6Ts m3Jt8T+NVU4NykT0jlDb2w== 0001005477-01-003313.txt : 20010516 0001005477-01-003313.hdr.sgml : 20010516 ACCESSION NUMBER: 0001005477-01-003313 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: J NET ENTERPRISES INC CENTRAL INDEX KEY: 0000351903 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISCELLANEOUS AMUSEMENT & RECREATION [7990] IRS NUMBER: 880169922 STATE OF INCORPORATION: NV FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-09728 FILM NUMBER: 1637395 BUSINESS ADDRESS: STREET 1: 8750 N CENTRAL EXPRESSWAY 600 CITY: DALLAS STATE: TX ZIP: 75231 BUSINESS PHONE: 7022635555 MAIL ADDRESS: STREET 1: 8750 N CENTRAL EXPRESSWAY 600 CITY: DALLAS STATE: TX ZIP: 75231 FORMER COMPANY: FORMER CONFORMED NAME: JACKPOT ENTERPRISES INC DATE OF NAME CHANGE: 19920703 10-Q 1 0001.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to___________________ Commission file no. 1-9728 J NET ENTERPRISES, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) NEVADA 88-0169922 - ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 4020 W. Lake Creek Drive, #100, Wilson, Wyoming 83014 - ----------------------------------------------- ---------- (Address of principal executive offices) (Zip Code) 307-739-8603 ---------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| There were 8,524,552 shares of the Registrant's common stock outstanding as of May 4, 2001. J NET ENTERPRISES, INC. AND SUBSIDIARIES INDEX Page No. -------- Part I. Financial Information Item 1. Financial Statements Condensed Consolidated Balance Sheets (Unaudited) - March 31, 2001 and June 30, 2000 3-4 Condensed Consolidated Statements of Operations (Unaudited) - Three and Nine Months Ended March 31, 2001 and 2000 5 Condensed Consolidated Statement of Stockholders' Equity (Unaudited) - Nine Months Ended March 31, 2001 6 Condensed Consolidated Statements of Cash Flows (Unaudited) - Nine Months Ended March 31, 2001 and 2000 7 Notes to Condensed Consolidated Financial Statements 8-22 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 23 Item 3. Quantitative and Qualitative Disclosure About Market Risk 28 Part II. Other Information Item 6. Exhibits and Reports on Form 8-K 29 -2- J NET ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in thousands) (Unaudited) March 31, June 30, ASSETS 2001 2000 ------- -------- Current assets: Cash and cash equivalents $29,911 $ 60,090 Marketable securities 26,576 -- Current portion of notes receivable 1,000 -- Net assets of discontinued operations -- 16,645 Other current assets 532 697 ------- -------- Total current assets 58,019 77,432 ------- -------- Note receivable - related parties 1,303 1,000 Investments in technology-related businesses 23,232 24,136 Excess of costs over equity in underlying net assets of investments in technology-related businesses, net of amortization 1,444 1,657 Notes receivable, net of allowance 4,404 -- Leasehold improvements and other equipment, net of accumulated depreciation 2,218 -- Deferred tax asset 4,702 -- Other non-current assets 570 510 ------- -------- Total assets $95,892 $104,735 ======= ======== See Notes to Condensed Consolidated Financial Statements. -3- J NET ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except share data) (Concluded) (Unaudited) March 31, June 30, LIABILITIES AND STOCKHOLDERS' EQUITY 2001 2000 -------- --------- Current liabilities: Accounts payable and other current liabilities $ 1,417 $ 799 Accrued federal taxes payable 907 -- -------- --------- Total current liabilities 2,324 799 Convertible subordinated notes, net of amortized discount of $736 and $2,500 27,013 12,750 Deferred income tax -- 762 Minority interest in subsidiary 1,114 2,514 -------- --------- Total liabilities and minority interest 30,451 16,825 -------- --------- 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 73,875 Retained earnings 5,070 27,710 Less 1,480,328 and 1,258,624 shares of common stock in treasury, at cost (14,981) (13,777) -------- --------- Total stockholders' equity 65,441 87,910 -------- --------- Total liabilities and stockholders' equity $ 95,892 $ 104,735 ======== ========= See Notes to Condensed Consolidated Financial Statements. -4- J NET ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS THREE AND NINE MONTHS ENDED MARCH 31, 2001 AND 2000 (Dollars in thousands, except per share data) (Unaudited)
Three Months Ended Nine Months Ended March 31, March 31, --------------------- ---------------------- 2001 2000 2001 2000 -------- ------- -------- -------- Costs and expenses: Depreciation and amortization $ 139 $ -- $ 363 $ -- Impairment on technology-related businesses -- -- 8,665 -- Loss on sale of investments 1,650 -- 1,650 -- General and administrative 1,568 3,322 5,181 4,909 Allowance on receivables 7,980 -- 7,980 -- -------- ------- -------- -------- Totals 11,337 3,322 23,839 4,909 -------- ------- -------- -------- Operating loss from continuing operations 11,337 3,322 23,839 4,909 -------- ------- -------- -------- Other income (expense): Net fee from terminated merger -- -- -- 11,116 Equity in income (loss) in technology-related businesses (14,623) -- (19,426) -- Gain on sale of short-term investments -- -- -- 2,361 Interest and other income 2,026 539 4,066 1,475 Interest expense (1,660) -- (4,572) -- -------- ------- -------- -------- Totals (14,257) 539 (19,932) 14,952 -------- ------- -------- -------- Income (loss) from continuing operations before provision (benefit) for income tax (25,594) (2,783) (43,771) 10,043 Provision (benefit) for Federal income tax (2,823) (1,113) (8,355) 2,893 -------- ------- -------- -------- Net income (loss) from continuing operations (22,771) (1,670) (35,416) 7,150 Gain (loss) from discontinued operations, net of tax of $145 and $(190) -- 281 -- (369) Gainon sale of discontinued operations, net of operating results of $ - and $(250), net of tax, and $6,711 tax from gain for nine months ended 137 -- 12,776 -- -------- ------- -------- -------- Net income (loss) $(22,634) $(1,389) $(22,640) $ 6,781 ======== ======= ======== ======== Basic earnings (loss) per share: Income (loss) from continuing operations $ (2.57) $ (.19) $ (3.96) $ .83 Income (loss) from discontinued operations .02 .03 1.43 (.04) -------- ------- -------- -------- $ (2.55) $ (.16) $ (2.53) $ .79 ======== ======= ======== ======== Diluted earnings (loss) per share: Income (loss) from continuing operations $ (2.57) $ (.19) $ (3.96) $ .82 Income (loss) from discontinued operations .02 .03 1.43 (.04) -------- ------- -------- -------- $ (2.55) $ (.16) $ (2.53) $ .78 ======== ======= ======== ========
See Notes to Condensed Consolidated Financial Statements. -5- J NET ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY NINE MONTHS ENDED MARCH 31, 2001 (Dollars and shares in thousands) (Unaudited)
Common Stock Additional Treasury Stock ------------------ Paid-In Retained ------------------- Shares Amount Capital Earnings Shares Amount Totals ------ ------ ---------- -------- ------ ------ ------ Balance July 1, 2000 10,233 $ 102 $73,875 $ 27,710 (1,259) $(13,777) $ 87,910 Comprehensive loss: Net loss from continuing operations (35,416) (35,416) Gain on sale of discontinued operations, net of tax 12,776 12,776 Repurchase of common stock (221) (1,204) (1,204) Amount allocated to additional paid-in capital in connection with the issuance of the 8% convertible subordinated notes (See Note 2) 1,375 1,375 ------ ------ ------- -------- ------ -------- -------- Balance March 31, 2001 10,233 $ 102 $75,250 $ 5,070 (1,480) $(14,981) $ 65,441 ====== ====== ======= ======== ====== ======== ========
See Notes to Condensed Consolidated Financial Statements. -6- J NET ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED MARCH 31, 2001 AND 2000 (Dollars in thousands) (Unaudited)
2001 2000 -------- -------- Operating activities: Net income (loss) $(22,640) $ 7,150 Adjustments to reconcile net income (loss) to net cash used in operating activities: Equity in loss of technology-related businesses 19,426 -- Loss on sale of investments 1,650 -- Impairment on technology-related investments 8,665 -- Allowance for uncollectable receivables 7,980 -- (Gain) loss from discontinued operations, net of taxes of $6,711 and $(190) (12,776) 369 Net fee from terminated merger -- (11,116) Depreciation and amortization 363 -- Amortization of original issue debt discount 3,139 -- Deferred Federal income tax asset (4,702) (18) Gain on sale of short-term investments -- (2,361) Increase (decrease) from changes in: Prepaid expenses and other current assets 165 (105) Notes receivable from related parties (303) 8 Other non-current assets (60) -- Accounts payable and other current liabilities (1,269) 784 Accrued current federal income taxes (3,917) Current tax liabilities and assets, net of taxes related to discontinued operations (2,559) -- -------- -------- Net cash used in operating activities (6,838) (5,289) -------- -------- Investing activities: Investments in technology-related businesses (30,034) (6,183) Investment in notes receivable (12,446) Investments in marketable securities (25,444) -- Break-up fee from terminated merger -- 13,500 Proceeds from sale of short-term investments -- 8,488 Net proceeds from discontinued operations 35,815 6,002 Purchases of property and equipment (2,278) -- Increase in lease acquisition costs and other intangible and non-current assets -- (1,669) -------- -------- Net cash provided by (used in) investing activities (34,387) 20,138 Financing activities: Proceeds from convertible subordinated notes 12,250 -- Proceeds from issuance of common stock -- 295 Purchases of treasury stock (1,204) (1) -------- -------- Net cash provided by (used in) financing activities 11,046 294 -------- -------- Net increase (decrease) in cash and cash equivalents (30,179) 15,143 Cash and cash equivalents at beginning of period 60,090 47,637 -------- -------- Cash and cash equivalents at end of period $ 29,911 $ 62,780 ======== ======== Supplemental disclosures of cash flow data: Cash paid during the period for: Federal income tax $ 2,300 $ 1,275 Interest $ 1,515 $ -- Non-cash investing and financial activities: Debt discount on convertible subordinated notes $ 1,375 $ -- Note receivable - related parties $ 250 $ -- Issuance of common stock for investments in technology-related businesses $ -- $ 1,746
See Notes to Condensed Consolidated Financial Statements. -7- J NET ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Significant accounting policies and business: Business: J Net Enterprises, Inc. (formerly known as "Jackpot Enterprises, Inc." and referred to hereinafter as "J Net" or the "Company") is a technology holding company with concentrated investments in enterprise software and technology infrastructure companies (the "Technology-Related Businesses") . The assets of the Company consist primarily of cash and investments. Prior to the Company's change in emphasis to a technology holding company, the Company had been actively engaged, through its subsidiaries, in the gaming industry for over 30 years. The Company invests directly in Technology-Related Businesses or through J Net Ventures I ("Venture I"), a fund managed by J Net Venture Partners, LLC (the "Manager"), an affiliate of the Company. The Company and Venture I will make investments primarily in early stage ventures (first and second round financing) exhibiting reasonable risk adjusted valuations and may also make later stage investments based on the merits of the transaction, the quality of the investment and the company's ability to go public or have the investment monetized through some other clearly defined exit strategy. Additionally, investments in the securities of public companies may be made when an opportunity exists for value creation. This might occur in the case of companies with existing products, services and customer base that have been affected by the decline in the interest in funding by capital markets (referred to herein as "fallen angels"). Investments generally will range in size from $1 million to $10 million. J Net and the Manager intends to play a role in helping to advise and assist its partner/portfolio companies in meeting and exceeding their objectives. The Company expects the average investment holding period to be three years with investment emphasis in the following: (1) B2B infrastructure and solutions for legacy businesses with valuable branding, (2) Restructuring of B2B and B2C fallen angels and (3) Technology and infrastructure investments. As of March 31, 2001, the Company owned 100% of Venture I. While entities affiliated with Gilbert Global Equity Partners have committed an aggregate of $15 million to the fund, they have not yet exercised any of their co-investment rights. As of March 31, 2001, the Company had invested approximately $68 million in Technology-Related Businesses and notes receivable discussed in Note 3 and Note 4 to the condensed consolidated financial statements. Of the $68 million, the Company invested approximately $32 million on behalf of Venture I. Business segments: The Company operates in a single business segment, its Technology-Related Business segment. In November 2000, the Company completed the sale of its gaming machine route operations ("Route Operations") segment. Activities of the Route Operations up to the effective date of the sale are reported as discontinued operations. For additional information on the Route Operations, please refer to Note 9 in the condensed consolidated financial statements and disclosures included in the Company's Annual Report to the Securities and Exchange Commission on Form 10-K for the fiscal year ended June 30, 2000 (the "2000 Form 10-K"). -8- J NET ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Significant accounting policies and business (continued): Basis of presentation: The accompanying unaudited condensed consolidated financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although management believes that the disclosures are adequate to make the information presented not misleading. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting of normal recurring accruals, necessary to present fairly the Company's financial position as of March 31, 2001, the results of its operations for the three and nine months ended March 31, 2001 and 2000 and its cash flows for the nine months ended March 31, 2001 and 2000. The results for the nine months ended March 31, 2001 and 2000 are not necessarily indicative of results for a full year. Information included in the condensed consolidated balance sheet as of June 30, 2000 has been derived from the 2000 Form 10-K. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and disclosures included in the 2000 Form 10-K. 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 applicable entity. For investments accounted for under the equity method, the excess of the cost of the investment over the Company's equity in the underlying net assets of such investment is amortized on a straight-line basis over 5 years. Such amortization is included in the line captioned depreciation and amortization in the accompanying condensed consolidated statements of operations. The Company periodically assesses the investment value and/or recoverability of its investments in accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS No. 121") and Accounting Principles Board Opinion No. 17, "Intangible Assets" ("APB No. 17"). During the nine months ended March 31, 2001, the Company determined the value of certain investments had been permanently impaired. Such assessments were based on internal evaluations of the ongoing business models presented by the applicable entities, discounted cash flow models and projections, or by dilutive transactions caused by the Company's election not to participate in additional financings. Such impairments totaled $8,665,000 for the nine months ended March -9- J NET ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Significant accounting policies and business (continued): Investments in Technology-Related Businesses (concluded): 31, 2001. No such impairments were incurred during the three months ended March 31, 2001 or for the three and nine months ended March 31, 2000. Investments in debt and equity securities: The Company accounts for investments in debt and equity securities in accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). This statement addresses the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities, and requires such securities be classified as either held to maturity, trading, or available-for-sale. Management determines the appropriate classification of its investments in securities at the time of purchase and reevaluates such classification at each balance sheet date. Marketable securities: In October and November 2000 and January 2001, the Company invested a total of $25 million in Mariner Partners, L.P. ("Mariner"), a private investment fund. Mariner employs a multi-strategy approach, emphasizing market neutral and event driven styles, to opportunistically seek, identify, and capitalize on investment opportunities across the financial markets. This approach mitigates the episodic returns generally experienced by single sector funds. According to fund documents, Mariner has consistently generated above average returns relative to hedge fund industry benchmarks while taking lower levels of risk as indicated by comparative measures such as Sharpe Ratios, actual volatility, cumulative loss, and % of months profitable. J Net can withdraw all or a portion of its investment upon 45 days prior written notice. The Company classifies those securities as trading under definitions provided in SFAS 115 and records changes in the value of the accounts in the item captioned interest income and other income in the condensed consolidated statement of operations. Interest and other income representing the increase in the Company's investment in Mariner Partners, L.P. were $688,000 and $1,132,000 respectively, for the three and nine months ended March 31, 2001. Realized gains from the sale of securities for the three and nine months ended March 31, 2000 were $0 and $2,361,000, respectively. -10- J NET ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Significant accounting policies and business (continued): 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 "Summary of Proceedings of the FASB 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 defined other investments in the investee to include preferred stock, debt securities and loans. The conclusions of the task force also prescribes the order in which equity method losses shall be recognized as the seniority of the other investments (that is, priority in liquidation). The company uses the equity method to account for its investments in InterWorld Corporation, Alistia Inc., and Tech Trader, Inc. All of the investments are in the form of preferred stock. In addition, the common stockholders equity in each of the investee's is in a deficit position. Therefore, equity losses are recognized in accordance with the company's proportionate ownership percentages, in preferred stock the applicable percentage of equity losses were 100% for InterWorld Corporation, 39.8% for Alistia, Inc. and 42.1% for Tech Trader, Inc. As a result of the business combination with InterWorld, the consolidation method will be used beginning in the quarter ending June 30, 2001. Leasehold improvements and other equipment: Leasehold improvements and other equipment are recorded at cost and are depreciated on a straight line basis over the estimated useful lives of the assets, as follows: 3 to 7 years for equipment; and 3 to 10 years for leasehold improvements. Property sold or retired is eliminated from the accounts in the year of disposition. Recently adopted accounting standards: In June 1998, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), as amended by Statements of Financial Accounting Standards No. 137 and No. 138 in June 1999 and June 2000, respectively. These statements, which were required to be adopted for fiscal years beginning after June 15, 2000, established additional accounting and reporting standards for derivative instruments and hedging activities. The statements require 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 income statement 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 -11- J NET ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Significant accounting policies and business (concluded): Recently adopted accounting standards (concluded): market. In cases where derivatives relate to financial instruments of nonpublic 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. Based on management's review, the Company has determined that the warrant purchased by the Company in connection with the Company's purchase of an interest in Series B Preferred Stock of TechTrader, Inc. in fiscal 2000 is a derivative as defined in SFAS 133. On July 1, 2000, the Company adopted SFAS 133, as amended and recorded the Tech Trader derivatives at fair market value. The cumulative effect of the change in accounting principle for the nine months ended March 31, 2001 was not significant. In March 2000, the FASB issued FASB Interpretation 44 "Accounting for Certain Transactions involving Stock Compensation" ("FIN 44"), which provides clarification on the application of Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees". The Company adopted the provisions of FIN 44 on July 1, 2000. Such adoption had no effect on the Company's results of operations. Recently issued accounting standards: In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 clarifies existing accounting principles related to revenue recognition in financial statements. The Company is required to comply with the provisions of SAB 101 in its year ended June 30, 2001. Based upon the current nature of the Company's continuing operations, management believes that SAB 101 will not have a significant impact on the Company's results of operations. Note 2 - Convertible subordinated notes: On October 2, 2000, the Company completed its offering of $27.75 million of unregistered 8% convertible subordinated notes (the "Notes") to a small group of investors. The stockholders at the Annual Stockholders' meeting on December 6, 2000 approved issuance of a portion of the Notes pursuant to rules of the New York Stock Exchange. Due to market fluctuation between commitment and funding dates, the Company is required to amortize a portion of the notes. Such noncash amortization totaled approximately $3.9 million at issuance, which will be fully amortized at June 1, 2001, the earliest possible conversion date. For the nine months ended March 31, 2001, interest expense related to the Notes was $4,572,000. Of such amount, approximately $3,139,000 was from the noncash amortization of the debt discount and the remaining $1,433,000 represented interest paid to the Note holders at 8% on the principal amount. For further information concerning the Notes, see Note 2 of Notes to Consolidated Financial statements in the 2000 Form 10-K. -12- J NET ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 2 - Convertible subordinated notes (concluded): As of March 31, 2001, three directors of J Net or entities controlled by such directors, the adult children of certain directors or entities controlled by such children, Meister Brothers Holdings, LLC, and one officer of the Company have invested $3 million, $4 million, $3 million, and $.5 million, respectively, in the Notes. In connection with the issuance of the Notes, the Company loaned $1 million and $250,000 to Meister Brothers Holdings, LLC and the officer, respectively. Interest on the loans accrues at 8% per annum. The principal amount and accrued interest is payable on June 30, 2002. Both obligations are full recourse in nature and are also secured by the right, title and interest in and to the Notes purchased by such persons. Mark W. Hobbs, President and Chief Operating Officer of the Company entered into an agreement with Mariner GP, an unaffiliated entity, with respect to Mr. Hobbs' participation in the ownership of $2 million of the Company's Notes owned by Mariner GP. Pursuant to the arrangement, Mr. Hobbs obtains the full economic benefit with respect to $1 million of the Notes including the interest thereon and the potential upside upon conversion to common stock and the sale thereof. With respect to an additional $1 million, Mr. Hobbs obtained the potential upside upon conversion to common stock and the sale thereof. Mr. Hobbs is at risk in the event of default on the two million dollar original purchase price and has pledged his limited partnership interests in Mariner GP, L.P. as collateral against such default. Mariner GP, L.P., a Delaware limited partnership is the general partner of Mariner Partners, L.P. In connection with such transaction, Mr. Hobbs waived his right under his employment agreement to receive up to a $1 million loan from the Company to purchase up to $2 million of the Notes. For information regarding J Net's investment in Mariner Partners, L.P., see Note 1, Marketable securities. For the nine months ended March 31, 2001, interest expense related to the Notes was $4,572,000. Of such amount, approximately $3,139,000 was from the amortization of the debt discount and the remaining $1,433,000 represented interest paid to the Note holders at 8% on the principal amount. For further information concerning the Notes, see Note 2 of Notes to Consolidated Financial statements in the 2000 Form 10-K. Note 3 - Investments in Technology-Related Businesses: As of March 31, 2001, all of the Company's investments in Technology-Related Businesses under the applicable accounting methods are summarized as follows (dollars in thousands): March 31, 2001 June 30, 2000 -------------- ------------- Consolidation $ 1,140 $ 2,540 Equity method, net of accumulated equity losses 10,149 13,544 Cost method 11,943 8,052 ------- ------- Total $23,232 $24,136 ======= ======= -13- J NET ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 3 - Investments in Technology-Related Businesses (continued): In March 2001, the Company entered into an agreement in principal to sell its membership interest in Digital Boardwalk, LLC. On April 6, 2001, the Company entered into a purchase agreement with an unrelated party to sell the membership interests and forgive a loan in the amount of $250,000. As a result of the sale, a loss of $1,650,000 was incurred. The Company accounted for its investment in Digital Boardwalk under the equity method. Although the transaction was executed on April 6, 2001, the loss was recognized in the March 31, 2001 condensed consolidated financial statements. The Company will participate in a Series B financing for Alistia, Inc. The initial funding for Series B placement is expected to occur in early May 2001. Additional funding will be required if certain performance criteria are met. The Company accounts for its investment in Alistia under the equity method. On October 12, 2000, J Net and InterWorld Corporation ("InterWorld") entered into a definitive Securities Purchase Agreement (the "Securities Purchase Agreement"). Pursuant to the terms of the Securities Purchase Agreement, J Net purchased $20 million in aggregate principal amount of Series A Preferred Stock of InterWorld (the "Series A Preferred Stock") on November 10, 2000. Each share of Series A Preferred Stock is 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 Series A 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 Series A Preferred Stock, InterWorld issued to J Net warrants to purchase 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 19.999% of the current outstanding shares of Common Stock less the amount of shares issuable upon the conversion of the Series A Preferred Stock. The Company has determined these warrants are a derivative as defined by SFAS 133, as amended. Because there is no public market for these warrants, the value of the warrants has been determined using the Black-Scholes methodology. 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 uses the equity method to account for its investment in InterWorld. -14- J NET ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 3 - Investments in Technology-Related Businesses (continued): 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 Series A Preferred Stock and the related warrants for 46,153,846 newly-issued shares of InterWorld Common Stock. In connection with such exchange, J Net had agreed to suspend its option to require InterWorld to redeem its Series A Preferred Stock, provided such exchange is approved by InterWorld's shareholders. In addition, pursuant to the Agreements, InterWorld had agreed to offer for sale to all holders of InterWorld Common Stock up to $20 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 had agreed to purchase the difference between $20 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 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 trading day 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 Hobbs, J Net's President and Chief Operating Officer was appointed to InterWorld's Board of Directors. J Net shall maintain the right to designate up to 4 nominees to InterWorld's Board of Directors (subject to certain percentage ownership thresholds) after the closing of the Stand-By Commitment and Over Allotment Option. On April 19, 2001, the Company announced that there were several factors which precluded 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 the NASDAQ, the securities exchange where InterWorld is traded, had notified InterWorld that unless certain conditions were satisfied, that 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 Series A Preferred Stock in accordance with its terms. Those provisions entitle 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. Such issuance of stock will result in J Net holding over 92% of the outstanding common stock of InterWorld. -15- J NET ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 3 - Investments in Technology-Related Businesses (concluded): For the companies in which J Net uses the equity accounting method, the percentages owned vary from approximately 10% to 42%. For the three and nine months ended March 31, 2001, the Company's equity in losses from the investments, excluding impairments of such investments, was $14,623,000 and $19,426,000, respectively. The amounts consist of the Company's proportionate losses in InterWorld, Alistia, Inc., and TechTrader, Inc. No losses for Digital Boardwalk are included in the three months due to the sale of the investment. In the case of InterWorld, the Company owns approximately 10% of voting rights as the sole owner of the Series A Preferred Stock. During December 2000, InterWorld's common shareholders' equity became a deficit. As a result of the Company's 100% ownership of the Preferred Stock, the Company is required to recognize 100% of InterWorld's losses using the equity method or to such amounts that would adjust our invested balance to its net realizable value. Such losses and adjustments were approximately $13,200,000 and $14,300,000 for the three and nine months ended March 31,2001. Note 4 - Notes receivable: On October 12, 2000 J Net, on behalf of Venture I, entered into a Loan Assumption and Forbearance Agreement with Michael Donahue, Vice Chairman of InterWorld, pursuant to which J Net purchased from Salomon Smith Barney ("SSB") a loan from SSB to Mr. Donahue in the amount of $12,445,500. The loan is secured by 4,270,406 shares of InterWorld Common Stock and other assets owned by Mr. Donahue. The loan is due in October 2003, subject to an acceleration in October 2001 if InterWorld does not effect a merger transaction with J Net, and bears 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 has sole power to vote and dispose of the shares, although he is 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 contains certain events of default beyond non-payment, the most significant of which include 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 falls below $2.00 per share for more than 10 days. J Net has notified Mr. Donahue of such closing price default but has elected not to enforce its rights relating to such closing price default as of the date hereof. -16- J NET ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 4 - Notes receivable (concluded): On April 4, 2001, the Company, on behalf of Venture I, 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 is secured by 4,270,406 shares of InterWorld common stock and the assets of Excalibur. The loan is 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 has elected not to enforce its rights relating to such defaults at this time. The loan bears interest at 8% per annum and calls for payment of accrued interest at the end of each calendar quarter. Principal payments of $500,000 commencing December 31, 2001 are due each quarter. The Call/Participation Agreement contained in the original 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 agreement was not deemed to have any value. During the three months ended March 31, 2001, management assessed the value of the assets securing the loan and related interest and determined a reserve was necessary due to, among other things, the probable delisting of InterWorld's common stock by the NASDAQ and the net realizable value of Excalibur. The reserve against the value of the loan was $7,980,000. Note 5 - Federal income taxes: The effective tax rate for the three and nine month period ended March 31, 2001 was approximately 11% and 21%, respectively, which differs from the statutory rate due to differences in recognition of expenses between the tax accounting regulations and financial statements prepared in accordance with generally accepted accounting principles in the United States of America. The rate is also impacted by an allowance against deferred tax benefits of $4,850,000. The allowance lowered the effective rate for the three months ended March 31, 2001 by approximately 20% and by 7% for the nine months ended March 31, 2001. The Company has a net deferred tax asset of $4,702,000 as of March 31, 2001. Management believes it is more likely than not that this asset can be carried back against the recognized gains from asset and securities sales for prior fiscal years or forward to offset anticipated gains in future years. -17- J NET ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 5 - Federal income taxes (concluded): In March 2001, the Company paid a $2,300,000 deposit for estimated federal income taxes for fiscal year 2001, which ends on June 30, 2001. Note 6 - Earnings (loss) per share: Basic earnings (loss) per share from continuing operations for the three and nine months ended March 31, 2001 and 2000 and diluted loss per share from continuing operations for the three and nine months ended March 31, 2001 are computed by dividing net income (loss) from continuing operations by the weighted average number of common shares outstanding for the respective period. Diluted earnings per share from continuing operations for the nine months ended March 31, 2000 is computed by dividing net income by the weighted average number of common and common equivalent shares outstanding. Options and warrants to purchase common stock, whose exercise price was greater than the average market price for the three and nine months ended March 31, 2000, have been excluded from the computation of diluted earnings per share from continuing operations. Such antidilutive options and warrants were 712,217. Because the three and nine months ended March 31, 2001 and three months ended March 31, 2000 had a loss from continuing operations, no potential common shares from the assumed exercise of stock options, the put options and the assumed conversion of the 8% convertible subordinated notes have been included in the diluted loss per share from continuing operations computation pursuant to accounting principles generally accepted in the United States of America. The following is the amount of income (loss) and the number of -18- J NET ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 6 - Earnings (loss) per share (concluded): shares used in the basic and diluted earnings (loss) per share computations for continuing operations (dollars and shares in thousands, except per share data):
Three Months Ended Nine Months Ended March 31, March 31, --------------------- --------------------- 2001 2000 2001 2000 -------- ------- -------- ------- Basic earnings per share: Earnings: Income (loss) available to common stockholders $(22,771) $(1,670) $(35,416) $ 7,150 ======== ======= ======== ======= Shares: Weighted average number of common shares outstanding 8,865 8,631 8,938 8,620 ======== ======= ======== ======= Basic earnings (loss) per share from continuing operations $ (2.57) $ (.19) $ (3.96) $ .83 ======== ======= ======== ======= Diluted earnings (loss) per share from continuing operations: Earnings (loss): Income (loss) available to common stockholders $(22,771) $(1,670) $(35,416) $ 7,150 Effect of dilutive securities -- -- -- -- -------- ------- -------- ------- Income (loss), as adjusted $(22,771) $(1,670) $(35,416) $ 7,150 ======== ======= ======== ======= Shares: Weighted average number of common shares outstanding 8,865 8,631 8,938 8,620 Common shares issuable upon assumed exercise of dilutive stock options -- -- -- 1,056 Less common shares assumed to be repurchased by application of the treasury stock method to the proceeds using the average market price for the period -- -- -- (1,005) Common shares issuable upon assumed conversion of the 8% convertible subordinated notes -- -- -- -- Common shares issuable upon assumed exercise of the put option -- -- -- -- -------- ------- -------- ------- Weighted average number of common shares and common share equivalents outstanding 8,865 8,631 8,938 8,671 ======== ======= ======== ======= Diluted earnings (loss) per share from continuing operations $ (2.57) $ (.19) $ (3.96) $ .82 ======== ======= ======== =======
-19- J NET ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 7 - The 1992 Incentive and Non-qualified Stock Option Plan: On September 29, 2000, the exercise price of the June 30, 2000 grant of nonqualified stock options to purchase an aggregate of 110,000 shares of common stock (27,500 each to four directors) was vested at $9.50 per share, the fair market value of the stock on that date, pursuant to the terms of the 1992 Incentive and Non-qualified Stock Option Plan (the "1992 Plan"). See Note 6 of Notes to Consolidated Financial Statements in the 2000 Form 10-K for further information regarding the 1992 Plan and option grants. On November 22, 2000, 23,936 stock options were issued to former officers under termination provisions in employment agreements associated with the sale of the Route Operations. Such options are vested at $6.63 per share, the fair market value of the stock on that date and expire 24 months after the date of issue. There were no options issued during the three months ended March 31, 2001. Note 8 - 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 expire on June 21, 2003. The aggregate commitment for future salaries at March 31, 2001, excluding bonuses, under the employment agreements is approximately $1,200,000. Note 9 - Discontinued operations: Definitive agreement and conditional modification agreement: The Company completed the sale of its Route Operations on November 22, 2000 pursuant to a definitive agreement dated July 8, 2000 and a conditional modification agreement dated October 30, 2000. Total cash received was approximately $44,000,000 representing $38,000,000 of proceeds related to the subsidiaries sold and $6,000,000 of working capital and prorated expense reimbursements. The gain from the sale of the Route Operations, net of estimated income taxes of $6,711,000 and selling expenses of $1,096,000 was $13,026,000. In accordance with accounting principles applicable to discontinued operations, the results of operations up to the effective date of the sale and previously reported financial statements have been reclassified to reflect the Route Operations as discontinued. Settlement with Rite Aid Corporation: On March 27, 2000, J Net entered into amendments to its two license agreements with Rite Aid Corporation ("Rite Aid"). As a result of the subsequent receipt of certain administrative approvals from the Nevada State Gaming Control Board ("Nevada Board") for 31 Rite Aid locations, such amendments became effective October 9, 2000. Pursuant to the terms of the amendments, license fees payable to Rite Aid were reduced by approximately $2.5 million annually over the remaining term of the amended agreements. Such reductions were effective March1, 2000. All disputes between the parties, including J Net's lawsuit against Rite Aid have been resolved or settled as a result of the filing by the parties of the Stipulation for Dismissal on October 16, 2000. -20- J NET ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 9 - Discontinued operations (concluded): For the fiscal year ended June 30, 2000, the Company incurred an operating loss of approximately $3,400,000 at the Rite Aid locations. As a result of the reduction in license fees described above, the Company's operating loss at the Rite Aid locations for the period up to the sale of the Route Operations was reduced substantially. The following are the summary operating results of the discontinued operations (dollars in thousands): July 1, 2000 to Nine Months Ended November 22, 2000 March 31, 2000 ----------------- ----------------- Revenues $ 28,002 $ 66,689 Costs and expenses (28,387) (67,278) -------- -------- Operating income (loss) (385) (589) Other income 7 30 -------- -------- Income (loss) before provision (benefit) for income tax (378) (559) Provision (benefit) for income tax (128) (190) -------- -------- Income (loss) from discontinued operations, net of tax $ (250) $ (369) ======== ======== The following are the net assets of the discontinued operations sold on November 22, 2000 (dollars in thousands):
As of November 22, 2000 As of June 30, 2000 ----------------------- ------------------- Assets: Cash $ 3,500 $ 3,500 Prepaid expenses 819 1,209 Other current assets 2,223 1,020 Deferred income tax -- 384 Property and equipment at cost, net 10,803 11,907 Lease acquisition costs and other intangible assets, net 5,279 5,190 ------- ------- Total assets $22,624 $23,210 ======= ======= Liabilities: Accounts payable and other current liabilities $ 1,490 $ 2,516 Deferred rent 3,945 4,049 ------- ------- Total liabilities 5,435 6,565 ------- ------- Net assets of discontinued operations $17,189 $16,645 ======= =======
-21- J NET ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 10 - Subsequent events: Please refer to Note 3 Investments in Technology-Related Businesses for discussions related to InterWorld. -22- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements; Risks and Uncertainties Certain information included in this Form 10-Q as well as 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 the operations, performance, development and results of the Company's Technology-Related Businesses include, but are not limited to, the ability of the Company to identify and negotiate on terms acceptable to the Company an acquisition of systems development or other technology infrastructure companies and the ability to successfully integrate and grow such business if acquired, the success of those entities in which the Company has invested, the ability of those entities, in which the Company has existing minority investments, to raise additional capital on terms that such entities find attractive to themselves and to the Company or to otherwise monetize their securities, and the ability of the Company to raise additional outside capital for J Net Ventures I, LLC or for any future funds to be established. Readers are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date thereof. The Company assumes no obligation to update or supplement forward-looking statements as a result of new circumstances or subsequent events. Overview J Net Enterprises, Inc. (formerly known as "Jackpot Enterprises, Inc." and referred to hereinafter as "J Net" or the "Company") is a technology holding company with concentrated investments in enterprise software and technology infrastructure companies (the "Technology-Related Businesses"). The assets of the Company consist primarily of cash and investments. Prior to the Company's change in emphasis to a technology holding company, the Company had been actively engaged, through its subsidiaries, in the gaming industry for over 30 years. The Company invests directly in Technology-Related Businesses or through J Net Ventures I ("Venture I"), a fund managed by J Net Venture Partners, LLC (the "Manager"), an affiliate of the Company. The Company and Venture I will make investments primarily in early stage ventures (first and second round financing) exhibiting reasonable risk adjusted valuations and may also make later stage investments based on the merits of the -23- transaction, the quality of the investment and the company's ability to go public or have the investment monetized through some other clearly defined exit strategy. Additionally, investments in the securities of public companies may be made when an opportunity exists for value creation. This might occur in the case of companies with existing products, services and customer base that have been affected by the decline in the interest in funding by capital markets (referred to herein as "fallen angels"). Investments generally will range in size from $1 million to $10 million. J Net and Venture I intends to play a role in helping to advise and assist its partner/portfolio companies in meeting and exceeding their objectives. The Company expects the average investment holding period to be three years with investment emphasis in the following: (1) B2B infrastructure and solutions for legacy businesses with valuable branding, (2) Restructuring of B2B and B2C fallen angels and (3) Technology and infrastructure investments. As of March 31, 2001, the Company owned 100% of Venture I. While entities affiliated with Gilbert Global Equity Partners have committed an aggregate of $15 million to the fund, they have not yet exercised any of their co-investment rights. As of March 31, 2001, the Company had invested approximately $68 million in Technology-Related Businesses and notes receivable discussed in Note 3 and Note 4 to the condensed consolidated financial statements. Of the $68 million, the Company invested approximately $32 million on behalf of Venture I. The Company operates in a single business segment, its Technology-Related Business segment. In November 2000, the Company completed the sale of its gaming machine route operations ("Route Operations") segment. Activities of the Route Operations up to the effective date of the sale are reported as discontinued operations. For additional information on the Route Operations, please refer to Note 9 in the condensed consolidated financial statements and disclosures included in the Company's Annual Report to the Securities and Exchange Commission on Form 10-K for the fiscal year ended June 30, 2000 (the "2000 Form 10-K"). At various times during the past several years, the Company engaged in the active consideration of potential acquisitions and expansion opportunities, including most recently in 1999 in connection with the potential acquisition of Players International, Inc. ("Players") and CRC Holdings, Inc. d/b/a Carnival Resorts & Casinos ("CRC"), a privately owned company. The Company devoted significant management and other resources to these efforts and incurred substantial expenses in connection with such activities. The discussion that follows is based on giving retroactive effect to the discontinued operations. Since the Route Operations was the Company's only business segment from its inception through February 2000, the following discussion focuses primarily on J Net's continuing operations, which consisted primarily of general and administrative activities of the parent company and since March 2000, J Net's Technology-Related Businesses segment. Results of Operations Revenues: The Company had no revenues from continuing operations for the three and nine months ended March 31, 2001 (the "2001 three months" and the "2001 nine months") and 2000 (the "2000 three months" and the "2000 nine months"). -24- Costs and expenses: Cash based costs and expenses for J Net consist primarily of general and administrative expenses. The Company also had substantial noncash expenses for impairment reserves and realized losses from sales of its investments in Technology-Related Businesses. In addition, for the three months ended March 31, 2001, the Company reserved $7,980,000 against the notes receivable with Michael Donahue, the Vice Chairman of InterWorld. General and administrative costs for the nine months ended March 31, 2001 of $5,181,000 were unchanged for the nine months ended March 31, 2000. Both periods contain nonrecurring severance costs of $1,140,000 and $2,835,000 for the nine months ended March 31, 2001 and 2000, respectively. Excluding these nonrecurring costs, the ongoing expenses in the 2001 nine months are approximately $4,000,000 compared to $2,100,000 for the 2000 nine months. Most of the increase between periods reflects higher costs from increased staff and facilities. In addition, the three months ended March 31, 2001 included increases of outside legal fees of approximately $200,000. For the 2001 nine months, the Company made impairment provisions of $8,665,000 to reflect estimated permanent declines in values of investments in certain Technology-Related Businesses. For the 2001 three months, a loss of $1,650,000 was recognized as a result of the sale of the Company's investment in Digital Boardwalk, LLC. There were no such losses in the 2000 three months or the 2000 nine months. Other income (expense): For the nine months ended March 31, 2001, net other expenses were $19,932,000 consisting of equity losses in Technology-Related Businesses of $19,426,000 and interest expense of $4,572,000. Interest income of $4,066,000 partially offset the other expenses. For the 2000 nine months, the Company reported net other income of $14,952,000, which included net fees from a terminated merger of $11,116,000 and gains from the sale of short-term investments of $2,361,000. Both the terminated merger fee and security sales gains were related to the Company's transaction with Players International, Inc. Complete details related to the Players International, Inc. transactions are disclosed in the Company's 2000 Form 10-K filed with the Securities and Exchange Commission. For the three months ended March 31, 2001, net other expenses were $14,257,000. The majority of the loss is related to equity losses from InterWorld Corporation ("InterWorld"), Alistia, Inc. and TechTrader. Income (loss) from continuing operations before provision (benefit) for income tax: Income (loss) from continuing operations before provision for income tax was a loss of $43,771,000 for the 2001 nine months compared with income of $10,043,000 for the 2000 nine months. For the 2001 three months and 2000 three months, the pretax results were a loss of $25,594,000 compared with a loss of $2,783,000. The variances for both of the 2001 periods are due mostly to the impairments on certain Technology-Related Business investments, the allowances for accounts and notes receivable, higher general and administrative expenses and the items in other income (expenses) previously discussed. -25- Income taxes: Effective income tax rates for the 2001 three and nine months are lower due to a deferred income tax allowance of $4,850,000 established by the Company. Net income (loss): Net income (loss) for the 2001 nine months was a loss of $22,640,000 compared with net income of $6,781,000 for the 2000 nine months. The 2001 nine month results reflect the equity losses, asset impairments, and bad debt provision, which are partially offset by the gain from the sale of the route operations, while the 2000 nine months were largely the result of the nonrecurring gains related to the previously discussed Players International, Inc. transactions. Net losses from continuing operations for the 2001 three months and 2000 three months were $22,771,000 and $1,670,000, respectively. The large increase between the two periods is due primarily to the equity losses and bad debt provisions recognized in the 2001 three months. Capital Resources and Liquidity Liquidity: Cash and cash equivalents at March 31, 2001 totaled $29,911,000 and marketable securities were $26,576,000, providing the Company with $56,487,000 of liquidity to support ongoing operations and continue its investment strategy. At March 31, 2001, the Company did not have any revenue sources other than earnings on its cash and securities. On January 4, 2001, the Board of Directors authorized the repurchase of up to 1,000,000 shares of common stock. Repurchases under this program as of April 27, 2001 were 370,294 shares for an aggregate cost of $1,872,000. In addition, 80,000 shares with an aggregate cost of $405,000 were repurchased in the current year under a separate, now terminated, program. On October 12, 2000, J Net and InterWorld entered into a definitive Securities Purchase Agreement (the "Purchase Agreement"). Pursuant to the terms of the Purchase Agreement, J Net purchased $20 million in aggregate principal amount of Series A Preferred Stock of InterWorld on November 10, 2000. On April 19, 2001, J Net and InterWorld announced that under certain provisions contained in the Purchase Agreement, J Net would redeem the Series A Preferred Stock for common stock of InterWorld. After such redemption, J Net will own more than 92% of InterWorld and will be its controlling shareholder. On October 12, 2000, J Net, on behalf of Venture I, entered into a Loan Assumption and Forbearance Agreement with Michael Donahue, Vice Chairman of InterWorld. Such agreement was modified on April 6, 2001. The loan, as amended, has a face value of $12,445,000 and bears interest at 8% per annum. The loan is secured by 4,270,406 shares of InterWorld common stock and other assets of Mr. Donahue. In March 2001, the Company made a book reserve against the loan to reflect the actual market value of the assets securing the loan. -26- The Company raised $27,750,000 through the issuance of Notes between June 2000 and October 2000. As a result of this placement, management believes its resources are sufficient to fund its commitment to Venture I, InterWorld and other investees and operations. With respect to the Company's commitments of $55 million to Venture I, approximately $32 million has been invested on behalf of the fund as of March 31, 2001. Cash Flows: J Net's principle sources of cash for the 2001 nine months consisted of $12,250,000 received from the issuance of notes, and its available cash and marketable securities, which were $56,487,000 at March 31, 2001. Net cash used in investing activities for the 2001 three months consisted of $67,924,000 of investments in Technology-Related Businesses, investments in Mariner Partners, L.P. and notes receivable offset by proceeds received from the sale of the route operations of $35,815,000. While it is anticipated that InterWorld will require additional funds to support their operations, recent reductions in operating expenses should minimize the need for incremental cash. InterWorld's operating expenses during the most recent quarter were roughly half those of the preceding quarter. InterWorld's cost structure is continually being re-evaluated for savings. J Net has received various inquiries from potential partners in InterWorld and intends to continue those discussions. Management believes the Company maintains adequate resources to complete and implement its business plan with InterWorld. It is expected that InterWorld will begin to provide positive cash flow in the next calendar year. Recently Issued Accounting Standards: In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 clarifies existing accounting principles related to revenue recognition in financial statements. The Company is required to comply with the provisions of SAB 101 in its fiscal year ending June 30, 2001. Based upon the current nature of the Company's continuing operations, management does not believe that SAB 101 will have a significant impact on the Company's results of operations. Factors Which May Affect Future Results With its change in business strategy, the Company is operating in a significantly different environment involving a number of risks and uncertainties. Some factors including, but not limited to the following, may affect the Company's future results of operations: (1) the Company's ability to successfully execute its new business model; (2) the development of the internet and the infrastructure that supports it; (3) the Company's success may depend greatly on increased use of the internet by businesses and individuals; (4) the ability of the Company's investees to compete against direct and indirect competitors; (5) the Company's ability to acquire interests in additional Technology-Related Businesses; (6) the ability of the Company's investees to raise additional capital; and (7) changes in the market for securities of Technology-Related Businesses in general and for initial public offerings of internet companies in particular. -27- By their very nature, the entities in which the Company has and will be investing capital will be in an earlier stage of development and maturity, and therefore a higher level of risk and reward. Except for the proposed transactions with InterWorld (See Note 3 of Notes to Condensed Consolidated Financial Statements), all of the Company's investments in Technology-Related Businesses are in nonpublic companies. Substantially all such companies are development stage companies and are presently incurring operating losses. There can be no assurance that such companies will generate operating income in the future. Item 3. Quantitative and Qualitative Disclosure About Market Risk The Company is generally exposed to market risk from adverse changes in interest rates. The Company's interest income is affected by changes in the general level of U.S. interest rates. Changes in U.S. interest rates could affect interest earned on the Company's cash equivalents, debt instruments and money market funds. A majority of the interest earning instruments earns a fixed rate of interest over short periods (7-35 days). Based upon the invested balances at March 31, 2001, a 10% change in interest rates would change pretax interest income by approximately $280,000 per year. Therefore, the Company does not anticipate that exposure to interest rate market risk will have a material impact on the Company due to the nature of the Company's investments. From June 2000 through October 2, 2000, the Company raised approximately $28 million from the issuance of unregistered 8% convertible subordinated notes ("the Notes"). The principal amount of the Notes is payable on March 31, 2007 and bears interest at 8% per annum, payable on a quarterly basis. For financial statement purposes, certain of the Notes were deemed to have been beneficially converted, as the conversion feature was in-the-money at the commitment date. The Company has calculated the beneficial conversion feature as the difference between the fair value of the common stock at the commitment date and the initial conversion price, multiplied by the number of shares into which the debt is convertible. Approximately $3.9 million of the proceeds from issuance of the Notes, equal to the intrinsic value, has been recorded as debt discount and allocated to additional paid-in capital. Management believes that the carrying value of the Notes approximates fair value as of March 31, 2001. On July 1, 2000, the Company adopted SFAS 133. The Company has one derivative instrument in the form of warrants to purchase common stock in a nonpublic company. There is currently no public market for these warrants. A 10% change in the value of the warrants based upon the Company's valuation of the warrants using Black Scholes valuation techniques would affect earnings by $160,000. -28- PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 10.31 Stock Purchase Agreement by and between InterWorld Corporation and J Net Enterprises, Inc. dated January 25, 2001. (A) 10.32 Stand-By Purchase Agreement dated January 25, 2001. (A) 10.33 Amended and Restated Loan Assumption and Forbearance Agreement. (A) Incorporated by reference to the Registrants Form 8-K filed February 2, 2001. (b) Reports on Form 8-K: During the three months ended March 31, 2001, no reports were filed on Form 8-K. Signature Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. J NET ENTERPRISES, INC. (Registrant) By: /s/ Steven L. Korby ---------------------------------------- STEVEN L. KORBY Executive Vice President and Chief Financial Officer Date: May 15, 2001 -29- EX-10.33 2 0002.txt AMENDED AND RESTATED LOAN ASSUMPTION EXHIBIT 10.33 EXECUTION COPY AMENDED AND RESTATED LOAN ASSUMPTION AND FORBEARANCE AGREEMENT THIS AMENDED AND RESTATED LOAN ASSUMPTION AND FORBEARANCE AGREEMENT (this "Amendment") made and entered into as of April 4, 2001 by and among MICHAEL J. DONAHUE, an individual having an address at 395 Hudson Street, 6th Floor, New York, New York 10014 ("Borrower"), Excalibur Polo Farm, L.L.C., a Florida limited liability company ("Excalibur"), and J NET VENTURES I LLC, a Delaware limited liability company (the "Lender"), amends and restates that certain Loan Assumption and Forbearance Agreement (the "Agreement") dated as of October 12, 2000 by and between Borrower and Lender. WITNESSETH: WHEREAS, Borrower is a party to a Loan Agreement, dated October 13, 1999 (the "Loan Agreement"), between Salomon Smith Barney Inc. ("SSB") and Borrower, pursuant to which SSB agreed to loan (the "Loan") Borrower, on a demand basis, up to U.S. $14 million. WHEREAS, the Lender agreed to assume the Loan from SSB and to not call a demand under the Loan on October 12, 2000. WHEREAS, Lender expressly assumed all rights and obligations of J Net Enterprises, Inc. (f/k/a Jackpot Enterprises, Inc.), a Nevada corporation ("Jackpot"), acting as Lender's agent in connection with the Agreement, under an Assignment and Assumption Agreement, dated as of October 13, 2000, between Lender and Jackpot. WHEREAS, U.S. $12,672,285, representing U.S. $12,445,500, principal amount outstanding under the Loan as of the date of the Agreement plus Compounded Interest (as defined below) accrued thereon through December 31, 2000 but excluding interest owing but unaccrued through the date hereof, remains outstanding under the Loan. WHEREAS, Lender has agreed to loan Borrower, on a demand basis, up to U.S. $72,000 (the "Expense Reimbursement") in order to pay certain fees and expenses payable by Borrower in connection with his obligations hereunder. WHEREAS, the Loan is presently secured by 4,270,406 shares of common stock of InterWorld Corporation (the "Stock Collateral") owned of record and beneficially by Borrower, which security interest has been perfected by SSB by virtue of SSB's physical possession. WHEREAS, Borrower granted a security interest in the Additional Collateral (as defined below) to Lender on the date of the Agreement and wishes to make Excalibur a party to the Agreement. WHEREAS, Excalibur, is the record owner of the Additional Collateral (as defined below) set forth on Schedule I hereto under a warranty deed dated as of February 16, 2000 and Excalibur wishes to grant a security interest in the Additional Collateral to Lender as evidenced by the Mortgage (as defined below) and become a party to the Agreement. WHEREAS, the parties hereto desire to amend and restate the Agreement. NOW, THEREFORE, in consideration of the mutual representations, warranties, covenants and agreements herein contained, the sufficiency of which is hereby acknowledged, the parties hereto represent and agree as follows: 1. Definitions. For purposes of this Amendment the following capitalized terms shall have the meanings set forth below: 1.1 "Additional Collateral" shall have the meaning set forth in Section 3.2 of this Amendment. 1.2 "Business Day" shall mean any day on which commercial banks are not authorized or required to close in New York, New York. 1.3 "Collateral" shall mean the Stock Collateral and the Additional Collateral. 1.4 "Contractual Obligation" of any Person shall mean, any indenture, note, security, deed of trust, mortgage, security agreement, lease, guaranty, instrument, contract, agreement or other form of obligation or undertaking to which such Person is a party or by which such Person or any of its property is bound. 1.5 "Default" shall mean any event or circumstance not yet constituting an Event of Default but which, with the giving of any notice or the lapse of any period of time or both, would become an Event of Default. 1.6 "Event of Default" shall have the meaning set forth in Section 8.1 of this Amendment. 1.7 "Governmental Authority" shall mean any domestic or foreign national, state or local government, any political subdivision thereof, any department, agency, authority or bureau of any of the foregoing, or any other entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. 2 1.8 "Governmental Rule" shall mean any law, rule, regulation, ordinance, order, code interpretation, judgment, decree, directive, guidelines, policy or similar form of decision of any Governmental Authority. 1.9 "Indebtedness" of any Person shall mean and include the aggregate amount of, without duplication (a) all obligations of such Person for borrowed money, (b) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (c) all obligations of such Person to pay the deferred purchase price of property or services (other than accounts payable incurred in the ordinary course of business determined in accordance with generally accepted accounting principles), (d) all obligations under capital leases of such Person, (e) all obligations or liabilities of others secured by alien on any asset of such Person, whether or not such obligation or liability is assumed, (f) all guaranties of such Person of the obligations of another Person, (g) all obligations created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person (even if the rights and remedies of the seller or lender under such agreement upon an event of default are limited to repossession or sale of such property), (h) net exposure under any interest rate swap, currency swap, forward, cap, floor or other similar contract that is not entered to in connection with a bona fide hedging operation that provides offsetting benefits to such Person, which agreements shall be marked to market on a current basis, (i) all reimbursement and other payment obligations, contingent or otherwise, in respect of letters of credit and (j) all tax obligations owed or expected to be owed to any Governmental Authority. 1.10 "Lien" shall mean, with respect to any property, any security interest, mortgage, pledge, lien, claim, charge or other encumbrance in, of, or on such property or the income therefrom, including, without limitation, the interest of a vendor or lessor under a conditional sale agreement, capital lease or other title retention agreement, or any agreement to provide any of the foregoing, and the filing of any financing statement or similar instrument under the Uniform Commercial Code or comparable law of any jurisdiction. 1.11 "Loan" shall have the meaning set forth in the preamble of this Amendment. 1.12 "Obligations" shall mean and include all loans, advances, debts, liabilities, and obligations (including without limitation the Loan and the Expense Reimbursement), owed by Borrower to Lender of every kind and description (whether or not evidenced by any note or instrument and whether or not for the payment of money), now existing or hereafter arising under or pursuant to the terms of this Amendment or the other Operative Documents, including, without limitation, all interest, fees, charges, expenses, attorneys' fees and costs and accountants' fees and costs chargeable to and payable by Borrower hereunder and thereunder, in each case, whether direct or indirect, absolute or contingent, due or to become due, and whether or not arising after the commencement of a proceeding under Title 11 of the United States Code (11 U.S.C. Section 101 et seq.), as amended from time to time (including post-petition interest) and whether or not allowed or allowable as a claim in any such proceeding. 1.13 "Operative Documents" shall mean, collectively, this Amendment, the Agreement, the Call/Profit Participation Agreement, dated as of October 12, 2000, by and 3 between Borrower and Lender (the "Call Agreement"), the Assignment and Assumption Agreement, dated as of October 12, 2000, by and between SSB and Lender, the Loan Agreement and any documents relating to the perfection of any security interest contemplated by this Amendment or any of the other Operative Documents. 1.14 "Permitted Liens" shall mean and include: (a) Liens for taxes or other Governmental Charges not at the time delinquent or thereafter payable without penalty or being contested in good faith, provided provision is made to the reasonable satisfaction of Lender for the eventual payment thereof if subsequently found payable; (b) Liens of carriers, warehousemen, mechanics, material men, vendors, and landlords incurred in the ordinary course of business for sums not overdue or being contested in good faith, provided provision is made to the reasonable satisfaction of Lender for the eventual payment thereof if subsequently found payable; (c) a commercially reasonable mortgage on the Additional Collateral in an amount not to exceed U.S. $800,000 which shall be used as more fully described in Section 4.12 and (d) Liens in favor of Lender. 1.15 "Person" shall mean and include an individual, a partnership, a corporation (including a business trust), a joint stock company, a limited liability company, an unincorporated association, a joint venture or other entity or a Governmental Authority. 1.16 "Requirement of Law" applicable to any Person shall mean (a) the articles or certificate of incorporation, bylaws or other governing documents of such Person, (b) any Governmental Rule applicable to such Person, (c) any license, permit, approval or other authorization granted by any Governmental Authority to or for the benefit of such Person and (d) any judgment, decision or determination of any Governmental Authority or arbitrator, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject. 2. Loan; Interest. 2.1 Jackpot, as agent for Lender, initially assumed the Loan from SSB and paid SSB an amount equal to the amount then outstanding under the Loan on the date of the Agreement. Lender and Borrower hereby agree that the Loan Agreement and the Agreement are amended and restated in their entirety as provided herein. The rate of interest on the Loan shall be 8% per annum, accruing from the date of the Agreement, payable quarterly in arrears on December 31, March 31, June 30 and September 30 of each year commencing December 31, 2000 (each such date, an "Interest Payment Date") until Borrower's outstanding Loan balance has been repaid in full, whether before or after demand or termination of this Amendment. The amount of interest payable on any Interest Payment Date shall be computed on the basis of a 360-day year of twelve 30-day months. The amount of interest payable for any partial period shall be computed on the basis of the actual number of days elapsed in a 360-day year of twelve months. In lieu of the payment of interest due on each such Interest Payment Date, Borrower may defer such payment of interest for a period not to exceed the term of the Loan. To the extent permitted by applicable law, interest, the payment of which has been deferred pursuant to the immediately preceding sentence, will bear interest thereon at 8% per annum compounded quarterly for each quarter of 4 deferred interest payments ("Compounded Interest"). Upon payment in full of the outstanding Loan balance, Borrower also shall pay any and all interest accrued but unpaid on the Loan, including any Compounded Interest that shall be payable to Lender on such date. 2.2 Borrower agrees to use the Expense Reimbursement in connection with the payment of all fees and expenses contemplated in Section 3.2 and Section 11.3 payable by Borrower hereunder. The rate of interest on the Expense Reimbursement shall be 8% per annum, accruing from the date of this Amendment, payable quarterly in arrears on each Interest Payment Date commencing March 31, 2001 until Borrower's outstanding Expense Reimbursement balance has been repaid in full, whether before or after demand or termination of this Amendment. The amount of interest payable on any Interest Payment Date shall be computed on the basis of a 360-day year of twelve 30-day months. The amount of interest payable for any partial period shall be computed on the basis of the actual number of days elapsed in a 360-day year of twelve months. In lieu of the payment of interest due on each such Interest Payment Date, Borrower may defer such payment of interest for a period not to exceed the term of the Loan. To the extent permitted by applicable law, interest, the payment of which has been deferred pursuant to the immediately preceding sentence, will bear Compounded Interest. Upon payment in full of the outstanding Expense Reimbursement balance, Borrower also shall pay any and all interest accrued but unpaid on the Expense Reimbursement, including any Compounded Interest that shall be payable to Lender on such date. 3. Security Interests. 3.1 Continued Security Interest. Borrower acknowledges that Lender succeeded to SSB's security interest under the Loan Agreement with respect to the Stock Collateral in connection with the Agreement. Borrower further acknowledges that Lender shall undertake to make all necessary filings with state and federal agencies in order to perfect such security interest. 3.2 Grant of Additional Security Interest. As additional collateral security for the Obligations, Excalibur hereby grants to Lender a continuing security interest in and to the real property set forth on Schedule I and any other Mortgaged Property (as defined in the Mortgage of even date herewith between Excalibur and Lender (the "Mortgage") in the form attached as Exhibit B hereto) (the "Additional Collateral"). Concurrently with the execution of this Amendment, Excalibur shall execute the Mortgage and shall pay the expenses for the filing of such Mortgage; provided, however, that Lender shall loan such expenses to Borrower as provided in Section 2.2. Borrower and Excalibur each agrees to execute any other document reasonably requested by the Lender to perfect its security interest in the Collateral. Nothing contained in this section, however, shall give rise to any obligation, or create any security interest, that would constitute a default, or a basis for default, under any existing mortgage or loan to which Borrower or Excalibur is directly or indirectly a party. To the extent that the grant of any additional security interest hereunder requires the Borrower or Excalibur to obtain the consents of any lender, Borrower and Excalibur shall not be obligated to grant such additional security interest unless and until such consent is obtained. Borrower and Excalibur each shall use reasonable efforts to obtain such consents. 5 3.3 Liabilities Unconditional. Borrower and Excalibur each is and shall remain absolutely and unconditionally jointly and severally liable for the performance of their respective obligations under the Operative Documents, including without limitation any deficiency by reason of the failure of the Collateral to satisfy all amounts due Lender under the Loan, the Expense Reimbursement or pursuant to any other Operative Document. 4. Representations and Agreements of Borrower and Excalibur. Borrower and Excalibur each jointly and severally represents to Lender as follows, and Borrower and Excalibur each jointly and severally agrees that the following representations will continue to be true, and that Borrower and Excalibur each jointly and severally will comply with all of the following agreements throughout the term of this Amendment: 4.1 Enforceability. Each Operative Document executed, or to be executed, by Borrower or Excalibur has been, or will be, duly executed and delivered by Borrower and Excalibur, as the case may be, and constitutes, or will constitute, a legal, valid and binding obligation of Borrower and Excalibur, as the case may be, enforceable against each of Borrower and Excalibur, as the case may be, in accordance with its terms. 4.2 Non-Contravention. To the best knowledge and belief of each of Borrower and Excalibur, respectively, the execution and delivery by each of Borrower and Excalibur, as the case may be, of the Operative Documents executed by each of Borrower and Excalibur, as the case may be, and the performance and consummation of the transactions contemplated thereby do not and will not (i) violate any Requirement of Law applicable to Borrower or Excalibur, as the case may be, (ii) violate any provision of, or result in the breach or the acceleration of, or entitle any other Person to accelerate (whether after the giving of notice or lapse of time or both), any Contractual Obligation of Borrower or Excalibur, as the case may be, or (iii) result in the creation or imposition of any Lien upon any property, asset or revenue of Borrower or Excalibur, as the case may be, (except such Liens as may be created in favor of Lender pursuant to this Amendment or the other Operative Documents). 4.3 Approvals. Other than as may be required in connection with the Mortgage, neither Borrower nor Excalibur knows of any consent, approval, order or authorization of, or registration, declaration or filing with, any Governmental Authority or other Person (including, without limitation, the shareholders of any Person) required in connection with the execution and delivery of the Operative Documents executed by Borrower or Excalibur, as the case may be, and the performance and consummation of the transactions contemplated thereby. 4.4 Name; Places of Residence The name of Borrower set forth in this Amendment is his correct name. The address set forth on Schedule II hereto is Borrower's residential address. Borrower will give Lender at least 15 days prior written notice before locating any of the Additional Collateral at any other location. 4.5 Litigation. No actions (including, without limitation, derivative actions), suits, proceedings or investigations are pending or, to the knowledge of Borrower or Excalibur, 6 threatened against Borrower or Excalibur, as the case may be, at law or in equity in any court or before any other Governmental Authority which if adversely determined (i) could reasonably be expected (alone or in the aggregate) to result in a judgment of $100,000 or more or (ii) seeks to enjoin, either directly or indirectly, the execution, delivery or performance by Borrower or Excalibur, as the case may be, of the Operative Documents or the transactions contemplated thereby. 4.6 Title. Borrower and Excalibur, as the case may be, have good and marketable title to all Collateral, free and clear of all Liens, other than Permitted Liens. Each item of Additional Collateral constitutes real property. 4.7 Collateral. Except as otherwise contemplated herein or as consented to by Lender, Lender has and will at all times continue to have a first-priority perfected security interest in all of the Collateral. Borrower and Excalibur, as the case may be, will immediately advise Lender in writing of any material loss or damage to any of the Additional Collateral set forth on Schedule I hereto. 4.8 Taxes; Compliance with Law. Borrower and Excalibur, as the case may be, have filed, and will file, when due, all tax returns and reports required by applicable law, and, upon the sale of the real property set forth on Schedule II hereto as provided in Section 4.13 and the procurement of a mortgage as contemplated in Section 4.12, Borrower and Excalibur, as the case may be, will have paid, and will pay, when due, all taxes, assessments, deposits and contributions now or in the future owed by Borrower and Excalibur, as the case may be. Borrower and Excalibur, as the case may be, have complied, and will comply, in all material respects, with all applicable tax laws, rules and regulations. 4.9 Insurance. Borrower and Excalibur, as the case may be, will at all times adequately insure all of the Additional Collateral and name Lender as an additional insured thereon. 4.10 Indebtedness. Borrower and Excalibur have each set forth all of their respective aggregate Indebtedness in excess of $50,000 on Schedule III hereto and each jointly and severally agrees to extinguish all of such Indebtedness on or before December 31, 2001. During the term of this Amendment, neither Borrower nor Excalibur shall incur, nor shall they allow to have incurred, additional aggregate Indebtedness in excess of U.S. $50,000. 4.11 Financial Statements. Commencing on the date hereof, Borrower and Excalibur each agree, not later than thirty days after the end of each fiscal quarter, to provide Lender quarterly financial statements in a form reasonably acceptable to Lender, providing, without limitation, detailed information relating to each of Borrower's and Excalibur's assets and liabilities, cash flows and income. 4.12 Actions with Respect to the Additional Collateral. Except for a first mortgage in an amount not to exceed U.S. $800,000, the proceeds of which shall be used to pay 7 any Indebtedness set forth on Schedule III hereto, neither Borrower nor Excalibur shall further encumber the Additional Collateral. 4.13 Actions with Respect to Real Property. In the event Borrower sells the real property set forth on Schedule II hereto, Borrower agrees to apply such sale proceeds to pay the Indebtedness set forth on Schedule III hereto. Notwithstanding the foregoing, unless and until such real property set forth on Schedule II hereto is sold, Borrower shall not further encumber the real property set forth on Schedule II hereto. 4.14 5 Star Builders of West Palm Beach, Inc. Borrower and Excalibur jointly and severally agree to pay any and all amounts owed to 5 Star Builders of West Palm Beach, Inc. ("5 Star") payable to 5 Star as of the date hereof in connection with work performed on the Additional Collateral on or before December 31, 2001. 4.15 Additional Representations and Agreements with Respect to Excalibur. (i) it is duly organized, validly existing and in good standing under the laws of the State of Florida, with full power and authority (corporate and other) to own, lease, mortgage, pledge or otherwise encumber, use and operate its properties and to carry on its business as and where now owned, leased, used, operated and conducted. (ii) Borrower and Ginny Bond Donahue, the wife of Borrower, represent the only members of Excalibur. (iii) Borrower and Excalibur have delivered true and accurate copies of all documentation relating to the formation and governance of Excalibur and the good standing thereof. (iv) Excalibur has all franchises, permits, licenses and any similar authority necessary for the conduct of its business, the lack of which could materially and adversely affect the business, properties, or financial condition of Excalibur. Excalibur is not in default in any material respect under any of such franchises, permits, licenses or other similar authority. (v) No representation or warranty of Excalibur, contained in this Agreement, or any other Operative Document contains any untrue statement of a material fact or omitted, omits or will omit to state a material fact necessary in order to make the statements contained herein or therein not misleading in light of the circumstances in which the same were made. There is no material fact known to Excalibur that has had or will have a material adverse effect and that has not been disclosed herein or in such other Operative Document. (vi) Excalibur has good and marketable title to the Additional Collateral. (vii) Excalibur (both before and after giving effect to the transactions contemplated by this Amendment) is solvent (i.e., its assets have a fair market value in excess of the amount required to pay its probable liabilities on its existing debts as they become absolute 8 and matured) and currently Excalibur has no information that would lead it to reasonably conclude that it would not have the ability to, nor does it intend to take any action that would impair its ability to, pay its debts from time to time incurred in connection therewith as such debts mature. (viii) In no event shall Excalibur generate negative cash flows in excess of U.S. $100,000 for the 2001 fiscal year. For any fiscal year thereafter for so long as the Loan or Expense Reimbursement is outstanding, Excalibur shall continue to operate on a "cash flow positive" or "cash flow neutral" basis. In the event Excalibur is unable to maintain such a cash flow position, as demonstrated on any financial statements prepared and delivered to Lender in connection with Section 4.11, Excalibur agrees to allow Lender to take any and all action (including without limitation commencing a possible sale of the Additional Collateral) necessary to prevent the "cash flow negative" operation of Excalibur; provided, however, that Borrower shall under no circumstances provide additional personal funds to maintain Excalibur's "cash flow positive" or "cash flow neutral" position without Lender's consent. (ix) Except for agreements explicitly contemplated by this Amendment or purchase, sale or other agreements entered into in the ordinary course of business, there are no agreements, understandings, instruments, contracts or proposed transactions to which Excalibur or any of its subsidiaries is a party or by which it is bound that involve obligations (contingent or otherwise) of or payments to Excalibur in excess of $50,000. Excalibur has not incurred any Indebtedness for money borrowed or incurred any other liabilities in excess of $50,000 or sold, exchanged or otherwise disposed of any of its assets or rights. 5. Representations and Agreements of Ginny Bond Donahue. With respect solely to the matters set forth in this Section 5, Ginny Bond Donahue represents to Lender as follows, and Ginny Bond Donahue agrees that the following representations will continue to be true, and that Ginny Bond Donahue will comply with all of the following agreements throughout the term of this Amendment: 5.1 Ginny Bond Donahue acknowledges that she benefited from the Loan and wishes to become a party to this Amendment solely with respect to this Section 5. 5.2 Ginny Bond Donahue and Borrower are the only members of Excalibur. 5.3 Ginny Bond Donahue will not further encumber the real property set forth on Schedule II hereto. 5.4 Ginny Bond Donahue will apply the proceeds from the sale of the real property set forth on Schedule II hereto toward extinguishing the Indebtedness set forth on Schedule III hereto as contemplated in Section 4.13. 5.5 Except as contemplated in this Amendment, Ginny Bond Donahue will not further encumber her interest in the Additional Collateral. 9 5.6 In no event shall Ginny Bond Donahue's liability extend beyond her membership interest in Excalibur. 6. No Call on Demand Note; Prepayment Obligations. Except as set forth in this Section 6, or unless an Event of Default has occurred, the Lender will not demand payment under the Loan or the Expense Reimbursement until October 11, 2003; which date shall be accelerated to October 11, 2001 if on or before July 31, 2001, InterWorld Corporation does not commence a rights offering transaction with existing holders of its common stock and consummate the related conversion transaction with Lender. Notwithstanding the foregoing, and only for so long as any balance shall remain outstanding on the Loan or the Expense Reimbursement, Borrower shall be required to make the following payments under the Loan and, upon payment in full of the Loan as provided herein, shall be required to make the following payments under the Expense Reimbursement in order to reduce any outstanding balance remaining under the Loan and the Expense Reimbursement: (a) Upon the sale of any of the Stock Collateral (which sale or sales the Borrower may effectuate at his sole discretion), all Net Proceeds (defined below) shall be paid to Lender (b) Upon the sale of any of the Additional Collateral, all Net Proceeds shall be paid to Lender. Commencing December 31, 2001 the Borrower shall make principal payments of at least $500,000 on or before the date of each Interest Payment Date commencing December 31, 2001. If for any period of ten (10) consecutive trading days the closing price of the Stock Collateral is greater than $20.00 (subject to adjustment for stock splits, stock dividends or the like), then the Borrower shall make principal payments of $4,000,000 on or before the date of each Interest Payment Date thereafter. "Net Proceeds" shall mean the gross amount received from such sale less any amount applied to the repayment of the mortgage specified in Section 4.12 less any sales commissions less any income taxes applicable to such sales. 7. Call Agreement. As consideration for the purchase of the Loan and the forbearance described herein, Borrower has entered into the Call Agreement with the Lender attached hereto as Exhibit A. 8. Voting. For so long as the Loan or the Expense Reimbursement shall be outstanding, Borrower agrees that due to the highly leveraged nature of the Loan and the Expense Reimbursement, prior to any vote of the stockholders of Interworld Corporation he shall consult with Lender and obtain Lender's view with respect to such vote. In the event the Board of Directors of InterWorld Corporation approves a merger transaction with Lender, Borrower will execute an appropriate voting agreement pursuant to which he will agree to vote his stock in favor of such merger transaction. 9. Events of Default 9.1 Events of Default and Remedies. The occurrence of any of the following events shall constitute an "Event of Default" under this Amendment: (a) any material representation, statement, report or certificate given to Lender by Borrower, Ginny Bond Donahue or Excalibur, as the case may be, now or in the future, is untrue or misleading in a material respect; or (b) Borrower, Ginny Bond Donahue or Excalibur fail to comply with any of the agreements or 10 covenants herein provided; or (c) Borrower fails to comply with the payments due under Section 2 above; or (d) Borrower fails to pay when due any Loan, Expense Reimbursement or any interest thereon or any other monetary Obligation; or (e) appointment of a receiver, trustee or custodian, for all or any part of the property of, assignment for the benefit of creditors by, or the commencement of any proceeding by or against Borrower or Excalibur, as the case may be, under any reorganization, bankruptcy, insolvency, law or statute of any jurisdiction, now or in the future in effect; or (f) Borrower leaves his position with InterWorld Corporation for any reason; or (g) for any period of ten (10) consecutive trading days the closing price of the Stock Collateral is less than $2.00 (subject to adjustment for stock splits, stock dividends or the like); or (h) Borrower fails to vote his shares of the Stock Collateral in compliance with Section 8 herein; or (i) Borrower and Excalibur jointly and severally fail to extinguish the Indebtedness set forth on Schedule III hereto or any amounts payable to 5 Star as provided in Section 4.14 on or before December 31, 2001. If an Event of Default occurs, Lender, shall have the right to accelerate and declare all of the Obligations to be immediately due and payable and exercise all rights and remedies recorded by applicable law, except in the case of (g) wherein no acceleration may be made until the expiration of a ten (10) Business Day grace period, and except further in the case of (a) or (d) Lender must give Borrower or Excalibur, as the case may be, written notice of any such Event of Default whereupon Borrower or Excalibur, as the case may be, shall have ten (10) Business Days to cure such Event of Default. 9.2 Rights of Lender upon Default. Upon the occurrence or existence of any Event of Default for which notice has been provided and no timely cure made, and at any time thereafter during the continuance of such Event of Default, Lender may, by written notice to Borrower or Excalibur, as the case may be, declare all outstanding Obligations payable by Borrower or Excalibur, as the case may be, hereunder to be immediately due and payable without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived, anything contained herein or in the other Operative Documents to the contrary notwithstanding. Upon the occurrence or existence of any uncured Event of Default described in Section 9.1, immediately and without further notice, all outstanding Obligations payable by Borrower or Excalibur, as the case may be, hereunder shall automatically become immediately due and payable, without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived, anything contained herein or in the other Operative Documents to the contrary notwithstanding. 9.3 Rights Regarding Collateral. Borrower and Excalibur, as the case may be, agree that when any uncured Event of Default has occurred and is continuing after any applicable cure or grace period, Lender shall have the rights, options, duties and remedies of a secured party as permitted by law and, in addition to and without limiting the foregoing, Lender may exercise any one or more or all, and in any order, of the remedies herein set forth, including the following: (a) Lender, personally or by agents or attorneys, shall have the right (subject to compliance with any applicable mandatory legal requirements) to require Borrower or Excalibur, as the case may be, to assemble the Collateral and make it available to Lender at a place to be designated by Lender located within the State of New York, or to take immediate possession of the Collateral, or any portion thereof, and for that purpose may pursue the same wherever it may be found, and may enter any premises of Borrower or Excalibur, as the case may be, with or without notice, 11 demand, process of law or legal procedure, to the extent permitted by applicable law, and search for, take possession of, remove, keep and store the same, or use and operate or lease the same until sold; (b) Lender may, if at the time such action may be lawful and always subject to compliance with any mandatory legal requirements, either with or without taking possession and either before or after taking possession, without instituting any legal proceedings whatsoever, having first given notice of such sale by registered or certified mail to Borrower or Excalibur, as the case may be, once at least ten (10) days prior to the date of such sale, and having first given any other notice which may be required by law, sell and dispose of the Collateral, or any part thereof, at a private sale or at public auction, to the highest bidder, in one lot as an entirety or in separate lots, and either for cash or on credit and on such terms as Lender may determine, and at any place (whether or not it be the location of the Collateral or any part thereof) designated in the notice referred to above. To the extent permitted by applicable law, any such sale or sales may be adjourned from time to time by announcement at the time and place appointed for such sale or sales, or for any such adjourned sale or sales, without further published notice, and Borrower, Excalibur, Lender or the holder or holders of the Loan or Expense Reimbursement, or of any interest therein, may bid and become the purchaser at any such sale; and (c) Lender may proceed to protect and enforce this Amendment and the other Operative Documents by suit or suits or proceedings in equity, at law or in bankruptcy, and whether for the specific performance of any covenant or agreement herein contained or in execution or aid of any power herein granted; or for foreclosure hereunder, or for the appointment of a receiver or receivers for any real property security or any part thereof, or for the recovery of judgment for the Obligations or for the enforcement of any other proper, legal or equitable remedy available under applicable law. 9.4 Waiver by Borrower and Excalibur. Upon the occurrence of an uncured Event of Default, to the extent permitted by law, Borrower and Excalibur each covenants that it will not at any time insist upon or plead, or in any manner whatsoever claim or take any benefit or advantage of, any stay or extension law now or at any time hereafter in force, nor claim, take nor insist upon any benefit or advantage of or from any law now or hereafter in force providing for the valuation or appraisement of the Collateral or any part thereof prior to any sale or sales thereof to be made pursuant to any provision herein contained, or to the decree, judgment or order of any court of competent jurisdiction; nor, after such sale or sales, claim or exercise any right under any statute now or hereafter made or enacted by any state or otherwise to redeem the property so sold or any part thereof, and, to the full extent legally permitted, except as to rights expressly provided herein, hereby expressly waives for itself and on behalf of each and every Person, except decree or judgment creditors of Borrower or Excalibur, as the case may be, acquiring any interest in or title to the Additional Collateral or any part thereof subsequent to the date of this Amendment, all benefit and advantage of any such law or laws, and covenants that it will not invoke or utilize any such law or laws or otherwise hinder, delay or impede the execution of any power herein granted and delegated to Lender, but will suffer and permit the execution of every such power as though no such power, law or laws had been made or enacted. 9.5 Effect of Sale. Any sale, whether under any power of sale available to Lender or by virtue of judicial proceedings, shall operate to divest all right, title, interest, claim and demand whatsoever, either at law or in equity, of Borrower or Excalibur, as the case may be, in and to the property sold, and shall be a perpetual bar, both at law and in equity, against Borrower or 12 Excalibur, as the case may be, their respective successors and assigns, and against any and all persons claiming the property sold or any part thereof under, by or through Borrower or Excalibur, as the case may be, their respective successors or assigns. 9.6 Application of Collateral Proceeds. The proceeds and/or avails of the Collateral, or any part thereof, and the proceeds and the avails of any remedy hereunder (as well as any other amounts of any kind held by Lender at the time of, or received by Lender after, the occurrence of an uncured Event of Default hereunder) shall be paid to and applied as follows: (a) First, to the payment of reasonable costs and expenses, including all amounts expended to preserve the value of the Collateral, of foreclosure or suit, if any, and of such sale and the exercise of any other rights or remedies, and of all proper fees, expenses, liability and advances, including reasonable legal expenses and attorneys' fees, incurred or made hereunder by Lender; (b) Second, to the payment to Lender of the amount then owing or unpaid on the Loan or the Expense Reimbursement, and in case such proceeds shall be insufficient to pay in full the whole amount so due, owing or unpaid upon the Loan or the Expense Reimbursement, then first, to the unpaid interest thereon, and second, to unpaid principal thereof; such application to be made upon presentation of the Loan or the Expense Reimbursement, and the notation thereon of the payment, if partially paid, or the surrender and cancellation thereof, if fully paid; (c) Third, to the payment of other amounts then payable to Lender under any of the Operative Documents; and (d) Fourth, to the payment of the surplus, if any, to Borrower or Excalibur, as the case may be, their respective successors and assigns, or to whomsoever may be lawfully entitled to receive the same. 9.7 Reinstatement of Rights. If Lender shall have proceeded to enforce any right under this Amendment or any other Operative Document by foreclosure, sale, entry or otherwise, and such proceedings shall have been discontinued or abandoned for any reason or shall have been determined adversely, then and in every such case (unless otherwise ordered by a court of competent jurisdiction), Lender shall be restored to its former position and rights hereunder with respect to the property subject to the security interest created under this Amendment. 10. Preservation of Collateral by Lender. Should Borrower or Excalibur, as the case may be, fail or refuse to make any payment, perform or observe any other covenant, condition or obligation, or take any other action which Borrower or Excalibur, as the case may be, is obligated under any Operative Document to make, perform, observe, take or do at the time or in the manner provided in any Operative Document, then at Lender's sole and absolute discretion, without notice to or demand upon Borrower or Excalibur, as the case may be, and without releasing Borrower or Excalibur, as the case may be, from any obligation, covenant or condition in any Operative Document, Lender may make, perform, observe, take or do the same in such manner and to such extent as Lender may deem necessary to protect its security interest in or the value of the Collateral, and Borrower or Excalibur, as the case may be, shall be liable to Lender for all costs and expenses incurred by Lender in connection therewith. 13 11. Miscellaneous. 11.1 Modifications, Amendments or Waivers. The provisions of any Operative Document may be modified, amended or waived only by a written instrument signed by the parties thereto. 11.2 No Implied Waivers; Cumulative Remedies; Writing Required. No delay or failure of Lender in exercising any right, power or remedy hereunder shall affect or operate as a waiver thereof; nor shall any single or partial exercise thereof or any abandonment or discontinuance of steps to enforce such a right, power or remedy preclude any further exercise thereof or of any other right, power or remedy. The rights and remedies hereunder of Lender are cumulative and not exclusive of any rights or remedies which it would otherwise have. Any waiver, permit, consent or approval of any kind or character on the part of Lender of any breach or default under this Amendment or any such waiver of any provision or condition of this Amendment must be in writing and shall be effective only in the specified instance and to the extent specifically set forth in such writing. 11.3 Expenses; Indemnification. Borrower and Excalibur, jointly and severally, agree upon demand to pay or reimburse Lender for all liabilities, Obligations and out-of-pocket expenses, including reasonable fees and expenses of counsel for Lender, from time to time arising in connection with the enforcement or collection of sums due under the Operative Documents. Borrower and Excalibur shall jointly and severally indemnify, reimburse and hold Lender and its permitted assigns, each of Lender's or its permitted assigns' partners, and each of their respective successors, assigns, agents, officers, directors, shareholders, servants, agents and employees harmless from and against all liabilities, losses, damages, actions, suits, demands, claims of any kind and nature (including claims relating to environmental discharge, cleanup or compliance), all costs and expenses whatsoever to the extent they may be incurred or suffered by such indemnified party in connection therewith (including reasonable attorneys' fees and expenses), fines, penalties (and other charges of applicable governmental authorities), licensing fees relating to any item of Collateral, damage to or loss of use of property (including consequential or special damages to third parties or damages to Borrower's or Excalibur's property), or bodily injury to or death of any person (including any agent or employee of Borrower or Excalibur) (each, a "Claim"), directly or indirectly relating to or arising out of the use of the proceeds of the Loan, including acquisition, use, ownership, operation, possession, control, storage, return or condition of any item of equipment constituting Collateral (regardless of whether such item of Equipment is at the time in the possession of Borrower), the falsity of any representation or warranty of Borrower or Excalibur, as the case may be, or Borrower's or Excalibur's, as the case may be, failure to comply with the terms of this Amendment or any other Operative Document during the Term. The foregoing indemnity shall cover, without limitation, (i) any Claim in connection with a design or other defect (latent or patent) in any item of equipment constituting Collateral, (ii) any Claim for infringement of any patent, copyright, trademark or other intellectual property right, (iii) any Claim resulting from the presence on or under or the escape, seepage, leakage, spillage, discharge, emission or release of any hazardous materials from any item of equipment financed by the Loan or constituting Collateral, including 14 any Claims asserted or arising under any environmental law, or (iv) any Claim for negligence or strict or absolute liability in tort; provided, however, that neither Borrower nor Excalibur shall indemnify Lender for any liability incurred by Lender as a direct and sole result of Lender's gross negligence or willful misconduct. Such indemnities shall continue in full force and effect, notwithstanding the expiration or termination of this Amendment. Upon Lender's written demand, Borrower and Excalibur, as the case may be, shall jointly and severally assume and diligently conduct, at their sole cost and expense, the entire defense of Lender and its permitted assigns, each of Lender's or its permitted assigns' partners, and each of their respective successors, assigns, agents, officers, directors, shareholders, servants, agents and employees against any indemnified Claim described in this Section 11.3. Neither Borrower nor Excalibur shall settle or compromise any Claim against or involving Lender without first obtaining Lender's written consent thereto, which consent shall not be unreasonably withheld. NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THIS AMENDMENT OR ANYWHERE ELSE, BORROWER AGREES THAT IT SHALL NOT SEEK FROM LENDER UNDER ANY THEORY OF LIABILITY (INCLUDING ANY THEORY IN TORTS), ANY SPECIAL, INDIRECT, CONSEQUENTIAL OR PUNITIVE DAMAGES. 11.4 Notices; Payments. All notices and other communications given to or made upon any party hereto in connection with this Amendment shall be in writing (including telexed, telecopied or telegraphic communication) and mailed (by certified or registered mail), telexed, telegraphed, telecopied or delivered to the respective parties, as follows: Borrower: 395 Hudson Street, 6th Floor, New York, New York 10014, with a copy to Barnett, Bolt, Kirkwood & Long, P.A., 601 Bayshore Boulevard, Suite 700, P.O. Box 3287, Tampa, Florida 33601, Attention: Peter Kirkwood; Lender c/o J Net Venture Partners, LLC: 680 Fifth Avenue, 11th Floor, New York, New York 10019, Attention: Keith Meister, with a copy to Greenberg Traurig, LLP, 200 Park Avenue, New York, New York 10166, Attention: Alan I. Annex, Esq. or in accordance with any subsequent written direction from either party to the other. All such notices and other communications shall, except as otherwise expressly herein provided, be effective when received; or in the case of delivery by messenger or overnight delivery service, when left at the appropriate address. 11.5 Severability. If any provision of any Operative Document is held invalid or unenforceable to any extent or in any application, the remainder of such Operative Document and all other Operative Documents, or the application of such provision to different Persons or circumstances or in different jurisdictions, shall not be affected thereby. 11.6 Survival. All representations, warranties, covenants and agreements of Borrower and Excalibur contained herein or made in writing in connection herewith shall survive the execution and delivery of the Operative Documents and the granting of security. 11.7 Governing Law. This Amendment, the other Operative Documents and the rights and obligations of the parties hereto and thereto together with matters arising in connection therewith, shall be governed by and construed and enforced in accordance with the laws of the 15 State of New York. Any action to enforce this Amendment against Borrower or Excalibur, as the case may be, may be brought in New York or, with regard to Collateral, may also be brought wherever such Collateral is located. 11.8 Successors and Assigns. This Amendment and the other Operative Documents shall be binding upon and inure to the benefit of Lender, all future holders of the Loan or the Expense Reimbursement, Borrower, Excalibur and their respective successors and permitted assigns, except that Borrower and Excalibur may not assign or transfer their respective rights hereunder or thereunder or any interest herein or therein without the prior written consent of Lender. 11.9 Counterparts. This Amendment may be executed in any number of counterparts and by different parties hereto on separate counterparts, each of which, when so executed and delivered, shall be an original, but all such counterparts shall together constitute one and the same instrument. 11.10 Further Assurances. Borrower and Excalibur will, at their own expense, from time to time do, execute, acknowledge and deliver all and every further acts, deeds, conveyances, transfers and assurances, and all financing and continuation statements and similar notices, reasonably necessary or proper for the perfection of the security interest being herein provided for in the Collateral, whether now owned or hereafter acquired. 11.11 Power of Attorney in Respect of the Collateral. Borrower and Excalibur each does hereby irrevocably appoint Lender (which appointment is coupled with an interest), the true and lawful attorney-in-fact of Borrower or Excalibur, as the case may be, with full power of substitution, for it and in its name (a) to perform (but Lender shall not be obligated to and shall incur no liability to Borrower or Excalibur, as the case may be, or any third party for failure to perform) any act which Borrower or Excalibur, as the case may be, is obligated by this Amendment to perform, (b) to ask, demand, collect, receive, receipt for, sue for, compound and give acquittance for any and all rents, issues, profits, avails, distributions, income, payment draws and other sums in which a security interest is granted under Section 3.1 with full power to settle, adjust or compromise any claim thereunder as fully as if Lender were Borrower or Excalibur, as the case may be, itself, (c) to receive payment of and to endorse the name of Borrower to any items of Additional Collateral (including checks, drafts and other orders for the payment of money) that come into Lender's possession or under Lender's control, (d) to make all demands, consents and waivers, or take any other action with respect to, the Additional Collateral, (e) in Lender's discretion, to file any claim or take any other action or institute proceedings, either in its own name or in the name of Borrower or Excalibur, as the case may be, or otherwise, which Lender may reasonably deem necessary or appropriate to protect and preserve the right, title and interest of Lender in and to the Additional Collateral, and (f) to otherwise act with respect thereto as though Lender were the outright owner of the Additional Collateral; provided, however, that the power of attorney herein granted shall be exercisable only upon the occurrence and during the continuation of an Event of Default unless in Lender's reasonable opinion immediate action is necessary to preserve or protect the Additional Collateral. Borrower and Excalibur, jointly and severally, agree to reimburse Lender upon 16 demand for all reasonable costs and expenses, including attorneys' fees and expenses, which Lender may incur while acting as Borrower' or Excalibur's, as the case may be, attorney in fact hereunder, all of which costs and expenses are included within the Obligations. 17 11.12 Entire Agreement. This Amendment and each of the other Operative Documents, taken together, constitute and contain the entire agreement of Borrower, Excalibur and Lender and supersede any and all prior agreements, negotiations, correspondence, understandings and communications among the parties, whether written or oral, respecting the subject matter hereof. Borrower: _________________________________ MICHAEL J. DONAHUE EXCALIBUR POLO FARM, L.L.C. By:______________________________ Name: Michael J. Donahue Title: Member By:______________________________ Name: Ginny Bond Donahue Title: Member Lender: J NET VENTURES I LLC By:______________________________ Name: Title: With respect solely to the matters set forth in Section 5 hereof: _________________________________ GINNY BOND DONAHUE 18 SCHEDULE I Farm 13659 South 52nd Place Wellington, FL 33414 SCHEDULE II Home (Sold March 2001) 1000 North Lake Way Palm Beach, FL 33480 Primary Residence [ ] 20 SCHEDULE III 1999 Tax $2 million (Extinguished March 2001) 2000 Tax $1 million 5 million - Bank of America (Extinguished March 2001) 2.8 million - Citibank (Extinguished March 2001) Additional Indebtedness $220,000 Executive Jet 21 -----END PRIVACY-ENHANCED MESSAGE-----