10-Q 1 q1203.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to___________________ Commission file no. 1-9728 J NET ENTERPRISES, INC. ______________________________________________________ (Exact name of registrant as specified in its charter) Nevada 88-0169922 _____________________________________________ ____________________ (State or other jurisdiction of incorporation (I.R.S. Employer or organization) Identification No.) 4020 Lake Creek Drive, #100, Wilson, Wyoming 83014 ____________________________________________ __________ (Address of principal executive offices) (Zip Code) 307-739-8603 ____________________________________________________ (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ___ ___ Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act). Yes No x ___ ___ There were 8,539,021 shares of the Registrant's common stock outstanding as of February 12, 2004. J NET ENTERPRISES, INC. AND SUBSIDIARIES INDEX Part I. Financial Information Item 1. Financial Statements Condensed Consolidated Balance Sheets (Unaudited) - December 31, 2003 and June 30, 2003 Condensed Consolidated Statements of Operations (Unaudited) - Three and Six Months Ended December 31, 2003 and 2002 Condensed Consolidated Statement of Stockholders' Equity (Unaudited) - Six Months Ended December 31, 2003 Condensed Consolidated Statements of Cash Flows (Unaudited) - Six Months Ended December 31, 2003 and 2002 Notes to Condensed Consolidated Financial Statements - (Unaudited) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosure About Market Risk Item 4. Controls and Procedures Part II. Other Information Item 1. Legal Proceedings Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K J NET ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in thousands) (Unaudited) December 31, June 30, 2003 2003 ____________ _______ ASSETS ______ Current assets: Cash and cash equivalents $ 4,635 $ 5,537 Short-term investments 12,762 12,325 Accounts receivable, net 105 132 Prepaid expenses 64 34 _______ _______ Total current assets 17,566 18,028 _______ _______ Investments in technology-related businesses 2,000 2,000 Property and equipment, net of accumulated depreciation 69 79 Other non-current assets 697 735 _______ _______ Total assets $20,332 $20,842 ======= ======= See Notes to Condensed Consolidated Financial Statements. J NET ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in thousands) (Unaudited) (Concluded) December 31, June 30, 2003 2003 ____________ _______ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and other current liabilities $ 3,052 $ 3,399 Deferred revenue and customer deposits 698 689 ________ ________ Total current liabilities 3,750 4,088 ________ ________ Deferred income taxes 6,910 6,910 Deferred rent 182 193 Other non-current liabilities 212 212 Commitments and contingencies (Note 6) Stockholders' equity: Preferred stock - authorized 1,000,000 shares of $1 par value; none issued - - Common stock - authorized 60,000,000 shares of $.01 par value; 10,233,470 shares issued 102 102 Additional paid-in capital 75,250 75,250 Accumulated deficit (50,019) (49,859) Less 1,694,449 and 1,708,929 shares of common stock in treasury, at cost (16,055) (16,054) ________ ________ Total stockholders' equity 9,278 9,439 ________ ________ Total liabilities and stockholders' equity $ 20,332 $ 20,842 ======== ======== See Notes to Condensed Consolidated Financial Statements. J NET ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS THREE AND SIX MONTHS ENDED DECEMBER 31, 2003 AND 2002 (Dollars in thousands, except per share data) (Unaudited) Three Months Ended Six Months Ended December 31, December 31, __________________ ________________ 2003 2002 2003 2002 ______ _________ ______ _______ Revenues, net Product licenses $ 2 $ 21 $ 26 $ 21 Maintenance 478 520 830 1,024 Services 120 166 451 318 ______ _______ ______ _______ Total revenues, net 600 707 1,307 1,363 ______ _______ ______ _______ Cost of revenues: Product licenses - - - - Maintenance 22 61 60 87 Services 136 139 266 261 ______ _______ ______ _______ Total cost of revenues 158 200 326 348 ______ _______ ______ _______ Gross profit 442 507 981 1,015 Operating expenses: Research and development 142 413 338 854 General and administrative 803 1,106 1,552 2,287 Impairment of assets - 947 - 947 Gains from settlements with unsecured creditors - - - (46) ______ _______ ______ _______ Total operating expenses 945 2,466 1,890 4,042 ______ _______ ______ _______ Operating loss (503) (1,959) (909) (3,027) ______ _______ ______ _______ Other income: Interest and other income 434 400 749 572 Gain from repurchase of convertible subordinated notes - - - 553 ______ _______ ______ _______ Total other income 434 400 749 1,125 ______ _______ ______ _______ Loss from operations before income tax (69) (1,559) (160) (1,902) ______ _______ ______ _______ Federal income tax expense - (241) - (241) ______ _______ ______ _______ Net loss $ (69) $(1,800) $ (160) $(2,143) ====== ======= ====== ======= Basic and dilutive loss per share $ (.01) $ (.21) $ (.02) $ (.25) ====== ======= ====== ======= See Notes to Condensed Consolidated Financial Statements. J NET ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY SIX MONTHS ENDED DECEMBER 31, 2003 (Dollars and shares in thousands) (Unaudited) Common Stock Additional Treasury Stock ______________ Paid-In ________________ Shares Amount Capital Deficit Shares Amount Totals ______ ______ ___________ _______ ______ ________ ______ Balance June 30, 2003 10,233 $102 $75,250 $(49,859) (1,709) $(16,054) $9,439 Purchases of stock (1) (1) Treasury stock adjustment (a) 15 Net loss (160) (160) ______ ____ _______ ________ ______ ________ _______ Balance December 31, 2003 10,233 $102 $75,250 $(50,019) (1,694) $(16,055) $ 9,278 ====== ==== ======= ======== ====== ======== ======= (a) On October 1, 2003, treasury shares were reduced by 14,900 shares to reflect shares which were never delivered and settled per the Company's transfer agent. See Notes to Condensed Consolidated Financial Statements.
J NET ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED DECEMBER 31, 2003 AND 2002 (Dollars in thousands) (Unaudited) 2003 2002 _______ ________ Operating activities: Net loss $ (160) $ (2,143) Adjustments to reconcile net loss to net cash provided by operating activities: Receipt of Federal income tax refund - 6,910 Gain on repurchase of subordinated notes - (553) (Gain) loss on disposal of assets - (103) Impairment of assets - 1,050 Depreciation and amortization 10 79 Changes in assets and liabilities: Federal income tax receivable - 241 Accounts receivable 27 (224) Short-term investments (437) (227) Prepaid expenses and other current assets (30) 179 Other non-current assets 38 26 Accounts payable and other current liabilities (346) (255) Deferred revenue and customer deposits 9 (518) Deferred rent (11) (10) Other, net (1) - _______ ________ Net cash provided by (used) in operations (901) 4,452 Investing activities: Collection of note receivable - related party - 288 Collection of notes receivable - 132 Redemption of short-term investments - 24,000 Purchase of treasury stock (1) - Purchase of property and equipment - (5) _______ ________ Net cash provided by (used in) investing activities (1) 24,415 Financing activities: Repayment of debt - (27,750) _______ ________ Net cash provided by financing activities - (27,750) _______ ________ Net decrease in cash and cash equivalents (902) 1,117 Cash and cash equivalents at beginning of period 5,537 6,674 _______ ________ Cash and cash equivalents at end of period $ 4,635 $ 7,791 ======= ======== Supplemental disclosures of cash flow data: None Non-cash investing and financing activities: Uncollected proceeds from sale of furniture and fixtures - 103 See Notes to Consolidated Financial Statements J NET ENTERPRISES, INC. NOTES TO CONDENSES CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Significant accounting policies and business Business: J Net Enterprises, Inc. ("J Net" or the "Company") is a holding company with concentrated investments in enterprise software (the "E-Commerce Operations") and technology infrastructure companies (the "Technology- Related Businesses"). E-Commerce Operations represent the Company's primary operations and are conducted through IW Holdings, Inc. ("IWH"), a wholly owned subsidiary of the Company and the successor to the business formerly conducted by InterWorld Corporation ("InterWorld"), a 95.3% owned subsidiary of the Company. While InterWorld remains a consolidated subsidiary of the Company, it has not conducted business operations since May 2002, when its assets were foreclosed on by J Net, which was InterWorld's sole secured creditor. IWH has conducted the E-Commerce Operations since that time. J Net also holds minority investments in other technology companies including, but not limited to, systems development and software companies. These investments are held directly by the Company, or by J Net Ventures I, LLC (the "Fund" or "Ventures I"), a fund which is 100% owned and managed by the Company. Such investments are included in the Technology-Related Businesses segment, which is presently inactive. No minority investments have been made since July 2001 and the Company presently has no plans to reinstate such investment strategy. Business segments: The Company has two reportable business segments: E-Commerce Operations and Technology-Related Businesses. Principles of consolidation and 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 ("SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations, although Management believes that the disclosures are adequate to make the information presented not misleading. The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany accounts and transactions are eliminated. The Company's fiscal year ends on June 30. In the opinion of Management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting of normal recurring accruals and estimates, necessary to present fairly the Company's financial position as of December 31, 2003 and June 30, 2003, the results of its operations for the three and six months ended December 31, 2003 and 2002 and its cash flows for the six months ended December 31, 2003 and 2002. The results for the three and six months ended December 31, 2003 and 2002 are not necessarily indicative of results for a full year. Information included in the condensed consolidated balance sheet as of June 30, 2003 has been derived from the Company's Annual Report to the Securities and Exchange Commission on Form 10-K for the fiscal year ended June 30, 2003 (the "2003 Form 10-K"). These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and disclosures included in the 2003 Form 10-K. Reclassifications: Certain reclassifications have been made to prior year financial statements to conform to the current year's presentation. Use of estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires Management to make estimates and assumptions that affect the amounts reported in the accompanying unaudited condensed consolidated financial statements and notes. Actual results could differ from those estimates. Cash equivalents: Cash equivalents are liquid investments comprised primarily of debt instruments and money market accounts with maturities of three months or less when acquired and are considered cash equivalents for purposes of the unaudited condensed consolidated balance sheets and statements of cash flows. Cash equivalents are stated at cost which approximates fair value due to their short maturity. Short-term investments: As of December 31, 2003, the Company held short-term investments in Mariner Partners, L.P. ("Mariner"), a private investment fund which had a value of $12.8 million. J Net can withdraw all or a portion of its investment upon 45 days prior written notice. The Company classifies those securities as short-term investments and records changes in the value of the accounts in the item captioned interest and other income in the unaudited condensed consolidated statement of operations. Fair value of financial instruments: The carrying value of certain of the Company's financial instruments, including accounts receivable, accounts payable and accrued expenses approximates fair value due to their short maturities. The unaudited condensed consolidated balance sheet as of December 31, 2003 contains approximately $1.5 million of unsecured creditor liabilities of InterWorld. As a result of J Net's foreclosure on its secured promissory note with InterWorld in 2002 and the transfer of assets, contracts, intellectual property and employees to IWH, InterWorld does not have financial resources to pay the face value of these obligations. Management of J Net, on behalf of InterWorld, has been actively negotiating with significant creditors of InterWorld to settle certain liabilities. Between April 2002 and December 2003, liabilities with a face value of $1.0 million were settled for approximately $.3 million. Management expects, but cannot provide assurance, that the remaining obligations may be settled at substantially less than their face value. Financial instruments with concentration of credit risk: The financial instruments that potentially subject J Net to concentrations of credit risk consist principally of cash and cash equivalents. J Net maintains cash and certain cash equivalents with financial institutions in amounts which, at times, may be in excess of the FDIC insurance limits. J Net's cash equivalents are invested in several high-grade securities and money markets which limit J Net's exposure to concentrations of credit risk. The Company owns short-term investments which are managed by Mariner and are subject to fluctuations based on Mariner's investment strategies. Investments in Technology-Related Businesses: The various interests that the Company acquires in Technology-Related Businesses are accounted for under one of three methods: consolidation, equity or cost. The applicable accounting method is generally determined based on the Company's voting interest and its ability to influence or control the Technology-Related Businesses. It is the policy of the Company to evaluate its investments in Technology- Related Businesses for possible impairment on a quarterly basis. Management uses a number of different criteria when evaluating an asset for possible impairment. Indicators such as significant decreases in market value of an investment, discounted cash flow analyses, adverse changes in the business climate or legal matters, losses of significant customers or new technologies which could accelerate obsolescence of business products, and sustained operating losses and cash flows which cannot be resolved or improved within a reasonable amount of time to justify continued business operations are used by Management when making its evaluations. In July 2003, IWH amended an agreement (the "Amended Agreement") related to licensing of software with EB2B Commerce, Inc. ("EB2B"). The Amended Agreement allows the customer to continue to use IWH's software for a two- year term. Compensation received by IWH under the Amended Agreement included (a) $20 thousand in cash, (b) issuance of 170,015 shares of the client's common stock, which when combined with 145,906 shares previously issued by the client to InterWorld, would equal 9.9% of the issued and outstanding common shares of the client, (c) 10% of the revenues that the client generates through the use of IWH's software, and (d) 7.5% of the revenues (excluding those generated under provision (c)) received by the customer from maintenance and other services performed by the customer for its clients. Total compensation under provisions (c) and (d), excluding the $20 thousand of cash received, shall not exceed $300 thousand. IWH uses the cost method to account for the investment in the common shares of the customer. However, the customer is subject to certain debts which are senior in preference to the common shares. As a result, no value has been assigned to the common shares received as part of the Amended Agreement. Accounting for equity method investments: When the Company uses the equity method to account for its investments in Technology-Related Businesses it uses the procedures outlined in the Emerging Issues Task Force issue number 98-13 ("EITF 98-13"), which covers accounting by equity method investors for investee losses when the investor has loans to and investments in other securities of the investee. EITF 98- 13 generally defines other investments in the investee to include preferred stock, debt securities and loans. The conclusions of the task force also prescribe the order in which equity method losses shall be recognized as the seniority of the other investments (that is, priority in liquidation). Stock-based compensation: The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and the pro forma disclosures required in accordance with Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") to account for employee based stock compensation using the fair market value method. The Company also follows the provisions contained within the Financial Accounting Standards Board of the American Institute of Certified Public Accountants ("AICPA") Interpretation 44 ("FIN 44"), which provides clarification on the application of APB 25. When the Company issues stock-based compensation awards to non-employees or Directors, the grants are accounted for in accordance with the Emerging Issues Task Force Issue 95-18, "Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring or in Conjunction with Selling Goods or Services" ("EITF 96-18"). The Company measures the fair value of equity instruments for employee and non-employee grants using the Black-Scholes option pricing model. In 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure" ("SFAS 148"). This statement amended certain disclosure provisions in SFAS 123 and Accounting Principles Board Opinion No. 28, "Interim Financial Reporting". The Company adopted the disclosure provisions of SFAS 148 beginning March 31, 2003. Until such time that the FASB specifies the methodology used to calculate charges to earnings for stock-based compensation, the Company will continue using the intrinsic value method prescribed by APB 25. The following table discloses pro forma amounts for net loss and basic and dilutive loss per share for the three and six months ended December 31, 2003 and 2002 assuming compensation cost for employee and director stock options granted in fiscal 2001 had been determined using the fair value- based method prescribed by SFAS 123. There were no options granted in fiscal 2002, 2003 or 2004 to date. The pro forma results may not be representative of the effects of options on net income in future years (dollars in thousands, except per share data): Three Months Ended Six Months Ended December 31, December 31, ___________________ _______________ 2003 2002 2003 2002 _____ _______ _____ _______ Net loss: As reported $ (69) $(1,800) $(160) $(2,143) Fair value of grants to employees (FY01) - (10) (20) _____ _______ _____ _______ Pro forma $ (69) $(1,810) $(160) $(2,163) ===== ======= ===== ======= Basic and diluted loss per share: As reported $(.01) $ (.21) $(.02) $ (.25) Pro forma $(.01) $ (.21) $(.02) $ (.25) Weighted average assumptions: Expected stock price volatility - - - - Risk-free interest rate - - - - Expected option lives (in years) - - - - Estimated fair value of options granted $ - $ - $ - $ - The Company's stock option plan expired on September 30, 2002. Under that plan, each Director of the Company was to receive 27,500 options on June 30 of each year. Such options were to vest on the following September 30 at the current market price of the Company's common stock on that date. The June 30, 2002 stock option grant, which totaled 137,500 (27,500 to each of five directors), was voluntarily returned and cancelled by each Director in September 2002. As a result of these actions, combined with the contractual termination of the stock option plan, no options have been, or are expected to be granted in the foreseeable future. Property and equipment: Leasehold improvements and other property and equipment are recorded at cost and are depreciated on a straight line basis over the shorter of estimated useful life of the asset or lease terms, as applicable, as follows: 2 to 7 years for equipment and 3 to 10 years for leasehold improvements. Property sold or retired is eliminated from the accounts in the period of disposition. Assets held for sale: Assets which will be sold rather than used are recorded at their estimated fair value less estimated cost to sell. The Company held 40 acres of land with building improvements in the Village of Wellington, Florida which was obtained as a result of a foreclosure on a loan to Michael Donahue, the former Vice Chairman and Chief Executive Officer of InterWorld, until March 2003, when the property was sold. The Company received proceeds of $4.3 million from the sale. Income taxes: The Company accounts for income taxes in accordance with SFAS 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 requires that deferred tax assets and liabilities arising from temporary differences between book and tax bases will be recognized using enacted tax rates at the time such temporary differences reverse. In the case of deferred tax assets, SFAS 109 requires a reduction to deferred tax assets if it is more likely than not that some portion or all of the deferred tax asset will not be realized. There are accumulated deferred tax assets of $19.8 million, which are fully offset by a valuation allowance pursuant to SFAS 109. Such losses are limited by certain IRS regulations. While Management continues to take actions required to turn the Company profitable, the ability to generate income at levels sufficient to realize the accumulated deferred benefits is not determinable at this time. In March 2002, the Job Creation and Worker Assistance Act of 2002 (the "Act") was signed into law. Among other things, the Act extended the carry-back period for operating losses incurred in fiscal years ended in 2001 and 2002 from two years to five years. Based on this legislation, on November 26, 2002, the Company filed for a refund of Federal income taxes previously paid of $7.7 million. The refund was received in December 2002. The refund is subject to audit by the Internal Revenue Service and the review and approval of the Congressional Joint Committee on Taxation. There can be no assurance as to what part, if any, of such refund will ultimately be allowed. Due to the significance of the refund, Management determined an appropriate amount to reserve pending further review by the Internal Revenue Service. As of June 30, 2003, the amount reserved is $6.9 million. In May 2003, the Internal Revenue Service began an audit of the Company's June 30, 2001 Federal income tax return. Revenue recognition: The Company follows AICPA Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-2"), as amended by SOP 98-4, further amended by SOP 98-9, and Staff Accounting Bulletin 101. These pronouncements provide guidance on when revenue should be recognized and in what amounts as well as what portion of licensing transactions should be deferred. Revenue under multiple element arrangements is allocated to each element using the "residual method", in accordance with Statement of Position No. 98-9, "Modification of SOP 97-2 with Respect to Certain Transactions" ("SOP 98-9"). Under the residual method, the arrangement fee is recognized as follows: (a) the total fair value of the undelivered elements, as indicated by vendor-specific objective evidence, is deferred and (b) the difference between the total arrangement fee and the amount deferred for the undelivered elements is recognized as revenue related to the delivered elements. Software license agreements generally include two elements: the software license and post-contract customer support. The Company has established sufficient vendor-specific objective evidence for the value of maintenance and post-contract customer support services based on the price when these elements are sold separately and/or when stated renewal rates for maintenance and post-contract customer support services are included in the agreement, and the actual renewal rate achieved. Product licenses: Revenue from the licensing of software products is recognized upon shipment to the customer, pursuant to an executed software licensing agreement when no significant vendor obligations exist and collection is probable. If acceptance by the customer is required, revenue is recognized upon customer acceptance. Amounts received from customers in advance of product shipment or customer acceptance are classified as deposits from customers. Other licensing arrangements, such as reseller agreements, typically provide for license fees payable to the Company based on a percentage of the list price for the software products. The license revenues are generally recognized when shipment by the reseller occurs, or when collection is probable. Contracts for product licenses where professional services require significant production, modification or customization are generally recognized on a percentage of completion basis unless contractual terms indicate an alternative method is more appropriate. Services revenue: Revenue from professional services, such as custom development and installation and integration support is recognized as the services are rendered and requirements contained within the contracts are satisfied. Maintenance revenue: Revenue from maintenance and post-contract customer support services, such as telephone support and product enhancements is recognized ratably over the period of the agreement under which the services are provided, typically one year. Recognition of maintenance and support revenue is deferred until payments are received, or sufficient evidence that payment will be received exists. Deferred revenue consists principally of billings in advance for services and support not yet provided and uncollected billings to customers for maintenance and post contract support. Recently issued accounting standards: In December 2003, the Financial Accounting Standards Board ("FASB") issued a revision to Statement of Financial Accounting Standards No. 132 (revised 2003), "Employers' Disclosures About Pensions and Other Postretirement Benefits" ("SFAS 132(R)"). The revisions to SFAS 132(R) require disclosures regarding an employer's percentages of plan assets, description of investing strategies and descriptions used to determine the overall expected rate of return on assets in the employer's pension or defined benefit plans. The expanded disclosure requirements for domestic plans are effective for interim periods beginning after December 15, 2003. The Company does not have a pension, defined benefit plan or any future postretirement obligations. Therefore, the requirements contained within SFAS 132(R) have no impact to J Net or its subsidiaries. Note 2 Investments in Technology-Related Businesses Between March 2000 and November 2001, the Company invested in eleven companies, including its initial investment in InterWorld. As of December 31, 2003, four of these investments continue operations: Tellme Networks, Inc.; eStara, Inc.; Strategic Data Corporation; and certain companies contained in the Meister Brothers Investment portfolio. The Company uses the cost method of accounting for these investments. The Company continues to ascribe value to its investment in Tellme Networks, Inc. The other investments have been written off. In addition to these four investments, as part of the Amended Agreement with EB2B (see Note 1), IWH holds 9.9% of the issued and outstanding shares of EB2B. IWH uses the cost method to account for the investment in the common shares of EB2B. However, EB2B is subject to certain debts which are senior in preference to the common shares. As a result, no value has been assigned to the common shares received as part of the Amended Agreement. In September 2000, the Company purchased 136,500 shares of Series "D" Preferred Stock of Tellme Networks, Inc. ("Tellme"), representing less than 1% voting interest in Tellme, and applied the cost method to account for its investment. Tellme is a non public company that provides voice technology that delivers information from the Internet over the phone. Tellme has sufficient cash and liquid investments to fund operations for several years. It is the policy of the Company to evaluate its investments for possible impairments quarterly. Recent forecasts continue to call for improved operations at Tellme. Management believes there are no indicators of impairment for this investment. Note 3 Loss per share Basic loss per share for the three and six months ended December 31, 2003 and 2002 is computed by dividing net loss from operations by the weighted average number of common shares outstanding for the respective period. Since the three and six month periods ended December 31, 2003 and 2002 had losses from operations, no potential common shares from the assumed exercise of options have been included in the diluted loss per share computations pursuant to accounting principles generally accepted in the United States. The following is the amount of loss and number of shares used in the basic and diluted loss per share computations (dollars and shares in thousands, except per share data): Three Months Ended Six Months Ended December 31, December 31, ___________________ ________________ 2003 2002 2003 2002 _____ _______ _____ _______ Basic and diluted loss per share: Net loss $ (69) $(1,800) $(160) $(2,143) ===== ======= ===== ======= Shares: Weighted average number of common shares and common share equivalents outstanding 8,539 8,525 8,532 8,525 ===== ======= ===== ======= Basic and diluted loss per share $(.01) $ (.21) $(.02) $ (.25) ===== ======= ===== ======= The calculation of earnings per share data excluded 1,487,500 and 1,678,786 of outstanding stock options for the three months ended December 31, 2003 and 2002, respectively, and 1,487,500 and 1,741,420 outstanding stock options for the six months ended December 31, 2003 and 2002, respectively. Note 4 Related party transactions One director of J Net is a partner of a law firm that provides legal services to the Company. Payments to the law firm during the three and six months ended December 31, 2003 were less than one thousand dollars. Note 5 Operating segments The Company has two reportable segments: E-Commerce Operations and Technology-Related Businesses. Prior to May 2001, the Company operated only in one segment, Technology-Related Businesses. Assets are the owned assets used by each operating segment. Summary of consolidated loss from operations, net of tax (dollars in thousands): Three Months Six Months Ended Ended December 31, December 31, _______________ _______________ 2003 2002 2003 2002 _____ _______ ______ _______ Net income (loss): E-Commerce Operations $ 1 $ (111) $ 83 $ (312) Technology-Related Businesses (70) (1,689) (243) (1,831) _____ _______ ______ _______ Net loss $ (69) $(1,800) $ (160) $(2,143) ===== ======= ====== ======= E-Commerce Operations: Revenues $ 600 $ 707 $1,307 $ 1,363 Cost of revenues (158) (200) (326) (348) _____ _______ ______ _______ Gross profit 442 507 981 1,015 Operating expenses (446) (663) (907) (1,372) Other income (expense) 5 45 9 45 _____ _______ ______ _______ Net income (loss) from E-Commerce Operations $ 1 $ (111) $ 83 $ (312) ===== ======= ====== ======= Technology-Related Businesses: Total operating expenses (499) (1,906) (983) (2,773) Other income 429 458 740 1,183 Provision for Federal income tax - (241) - (241) _____ _______ ______ _______ Net loss from Technology-Related Businesses $ (70) $(1,689) $ (243) $(1,831) ===== ======= ====== ======= As of December 31, 2003 _______________________ Assets: E-Commerce Operations $ 451 Technology-Related Businesses 19,881 _______ Total assets $20,332 ======= Note 6 Commitments and contingencies Employment agreements: J Net entered into employment agreements with Mark W. Hobbs, the former President and Chief Operating Officer, and Steven L. Korby, the former Executive Vice President and Chief Financial Officer on October 1, 2000. Such agreements expired on June 21, 2003. Pursuant to the terms of those agreements, upon expiration Mr. Hobbs and Mr. Korby were entitled to receive $.6 million of severance pay of which $.5 million is payable in fiscal 2004. The unpaid amount was accrued as a liability at June 30, 2003 in accordance with SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". As of December 31, 2003, the unpaid liability for the severance was $.3 million. The liability is reflected as a component of accounts payable and accrued liabilities on the unaudited condensed consolidated balance sheet as of December 31, 2003. Legal matters: J Net is not a party to any legal matters that could have a material impact on its operations as of December 31, 2003. However, InterWorld, a 95.3% owned subsidiary, is subject to two claims. On March 8, 2001, as amended on May 29, 2001, InterWorld received notice that the SEC commenced a formal order directing a private investigation by the SEC with respect to whether InterWorld engaged in violations of Federal Securities Laws as it relates to InterWorld's financial statements, as well as its accounting practices and policies. Also under review by the SEC is certain trading in InterWorld stock. All the above events are related to periods prior to the Company's common stock ownership in InterWorld. The investigation is confidential and the SEC has advised that the investigation should not be construed as an indication by the SEC or its staff that any violation of law has occurred nor should the investigation be construed as an adverse reflection on any person, entity or security. Although the Company is unaware of any activity with respect to the investigation for the past year, InterWorld intends to fully cooperate with the SEC. PBS Realty ("PBS"), a real estate broker conducting business in New York City filed a $1.2 million claim against InterWorld in April 2002. The claim alleges that PBS is owed commissions by InterWorld for services related to PBS's attempts to sublease office space previously occupied by InterWorld in New York City. InterWorld is vigorously contesting the claim and InterWorld management does not believe a liability exists at this time. J Net was not a party to the brokerage agreement and no claim against J Net has been asserted by PBS. From time to time, the Company or its subsidiaries are parties to claims, legal actions and complaints arising in the ordinary course of business. Management believes its defenses are substantial and that its legal position can be successfully defended without material adverse effect on its consolidated financial position. Item 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 and other materials filed or to be filed by the Company with the Securities and Exchange Commission (the "SEC") contains statements that may be considered forward-looking. All statements other than statements of historical information provided herein may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes", "anticipates", "plans", "expects", "should" and similar expressions are intended to identify forward-looking statements. In addition, from time to time, the Company may release or publish forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments and similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, the Company notes that a variety of factors could cause the Company's actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. The risks and uncertainties that may affect operations, performance, development and results of the Company include, but are not limited to, the ability to increase sales of its e-commerce software products, attract new clients, maintain existing clients in the face of new competition and reduce costs. In other investment or partnering activities, the Company must identify and successfully acquire interests in systems development or other technology-based companies and grow such businesses. The ability of entities in which the Company has invested to raise additional capital on terms which are acceptable to the Company, or other investors, is critical in the ongoing success of such companies and obtaining additional capital in markets which are performing poorly may be difficult. Overview J Net Enterprises, Inc. ("J Net" or the "Company") is a holding company conducting operations through a wholly owned enterprise software subsidiary (the "E-Commerce Operations"). The Company also holds investments in technology infrastructure companies (the "Technology-Related Businesses"). E-Commerce Operations are conducted through IW Holdings, Inc. ("IWH"), a wholly owned subsidiary of the Company and the successor to the business formerly conducted by InterWorld Corporation ("InterWorld"), a 95.3% owned subsidiary of the Company which no longer conducts any business operations. J Net also holds minority investments in other technology companies including, but not limited to, systems development and software companies. These investments are held directly by the Company, or J Net Ventures I, LLC, a fund which is owned 100% by the Company ("Ventures I" or the "Fund"). Due to the significant financial and management resources required to stabilize the E-Commerce Operations, Management has not pursued additional minority investments and has no plans to actively reinstate that strategy in the foreseeable future. The Company is actively seeking potential acquisitions of operating companies and enhancement opportunities for its E-Commerce Operations. Such enhancements include strategic alternatives comprised of expansion of marketing efforts, seeking business partners, or the sale of IWH. Management will devote its time and resources to these efforts and may incur expenses in connection with such activities. The Company anticipates that, as it continues to engage in such activities, it will periodically incur expenses that may have a material effect on the Company's operating income. Although the Company is exploring expansion and acquisition opportunities, there can be no assurance that such opportunities will be available on terms acceptable to J Net or that, if undertaken, they will be successful. Marketing of E-Commerce products is conducted with a limited internal staff which is supported by a combination of a third party contractor and licensed resellers in Germany and Japan. IWH is also pursuing negotiations with additional resellers. Internal marketing staff increases are dependent on the ability to sell products and a demonstrated improvement in the market for E-Commerce products, which have been sluggish for the past several years. Critical Accounting Policies General: The policies outlined below are critical to our operations and the understanding of our results of operations. The impact of these policies on our operations is discussed throughout Management's Discussion and Analysis of Financial Condition and Results of Operations where such policies affect our reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, refer to Note 1 in the Notes to the Condensed Consolidated Financial Statements for this quarterly report. Note that our preparation of this Quarterly Report on Form 10-Q requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates. Accounting for Investments in Technology-Related Businesses: The various interests that the Company acquires in Technology-Related Businesses are accounted for under one of three methods: consolidation, equity or cost. The applicable accounting method is generally determined based on the Company's voting interest and its ability to influence or control the Technology-Related Businesses. It is the policy of the Company to evaluate its investments in Technology- Related Businesses and other long lived assets for possible impairment on a quarterly basis. Determination of impairment is based on a number of factors designed to detect if any specific indicators of impairment exist. Such factors include, but are not limited to, significant decreases in the market value of the investment, discounted cash flow analyses, adverse changes in the business or legal environment, loss of significant customers, the introduction of new technologies which accelerate obsolescence of existing products, and sustained operating losses and negative cash flows which could not be resolved or improved within a reasonable amount of time to justify continued operations. Revenue Recognition: The Company follows AICPA Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-2"), as amended by SOP 98-4, further amended by SOP 98-9, and Staff Accounting Bulletin 101. These pronouncements provide guidance on when revenue should be recognized and in what amounts as well as what portion of licensing transactions should be deferred. Revenue under multiple element arrangements is allocated to each element using the "residual method", in accordance with Statement of Position No. 98-9, "Modification of SOP 97-2 with Respect to Certain Transactions" ("SOP 98-9"). Under the residual method, the arrangement fee is recognized as follows: (a) the total fair value of the undelivered elements, as indicated by vendor-specific objective evidence, is deferred and (b) the difference between the total arrangement fee and the amount deferred for the undelivered elements is recognized as revenue related to the delivered elements. Software license agreements generally include two elements: the software license and post-contract customer support. The Company has established sufficient vendor-specific objective evidence for the value of maintenance and post-contract customer support services based on the price when these elements are sold separately and/or when stated renewal rates for maintenance and post-contract customer support services are included in the agreement, and the actual renewal rate achieved. Product licenses: Revenue from the licensing of software products is recognized upon shipment to the customer, pursuant to an executed software licensing agreement when no significant vendor obligations exist and collection is probable. If acceptance by the customer is required, revenue is recognized upon customer acceptance. Amounts received from customers in advance of product shipment or customer acceptance are classified as deposits from customers. Other licensing arrangements such as reseller agreements typically provide for license fees payable to the Company based on a percentage of the list price for the software products. The license revenues are generally recognized when shipment by the reseller occurs and when collection is probable. Contracts for product licenses where professional services require significant production, modification or customization are recognized on a percentage of completion basis. Services revenue: Revenue from professional services, such as custom development and installation and integration support, is recognized as the services are rendered and other requirements contained within the services contract are satisfied. Maintenance revenue: Revenue from maintenance and post-contract customer support services, such as telephone support and product enhancements, is recognized ratably over the period of the agreement under which the services are provided, typically one year. Recognition of revenue is deferred until payments from customers are received, or sufficient evidence that payment will be received exists. Deferred revenue consists principally of billings in advance for services and support not yet provided and uncollected billings to customers for maintenance and post contract support. Impairments: It is the policy of the Company to evaluate its investments in Technology- Related Businesses and other long lived assets for possible impairment on a quarterly basis. Determination of impairment is based on a number of factors designed to detect if any specific indicators of impairment exist. Such factors include, but are not limited to, significant decreases in the market value of the investment, discounted cash flow analyses, adverse changes in the business or legal environment, loss of significant customers, the introduction of new technologies which accelerate obsolescence of existing products and sustained operating losses and negative cash flows which could not be resolved or improved within a reasonable amount of time to justify continued operations. Three Months Ended December 31, 2003 and 2002: Results of Operations Total revenues: Consolidated revenues were $.6 million for the three months ended December 31, 2003 compared to $.7 million for the three months ended December 31, 2002. During the December 2003 quarter, no license deals were completed. The license revenue of $2 thousand in the December 31, 2003 three months was the result of a settlement of a prior years' claim in the amount of $20 thousand, which is being recognized over a two year period pursuant to the settlement terms. The Company had one new license sale in the three months ended December 31, 2002 totaling $21 thousand. Professional services revenues were $.1 million for both the three months ended December 31, 2003 and 2002. The December 31, 2003 quarter included three engagements, two of which were related to upgrades at existing clients and one training engagement. Post contract support revenue was $.5 million for both the three months ended December 31, 2003 and 2002. There was minimal attrition in this revenue stream from the prior year quarter. Total cost of revenues: Cost of revenues, which include direct labor costs related to professional services and maintenance activities and imbedded third party customer software maintenance fees were $.2 million for the three months ended December 31, 2003, which were approximately the same as the prior year costs. Operating expenses: Total operating expenses were $.9 million for the three months ended December 31, 2003 compared to $2.5 million for the three months ended December 31, 2002. The decrease of $1.6 million is due primarily to a $.9 impairment of property held for sale in the three months ended December 31, 2002. Additional reductions resulted from staff reductions within the E- Commerce Operations and Technology-Related Business segments from 30 employees at December 31, 2002 to 17 employees at December 31, 2003. The Company also benefitted from a reduction in liability insurance and other operating costs during the three months ended December 31, 2003. Other income: Net other income, which consists of increases in the value of short-term investments at Mariner, interest on the Company's cash deposits and sublease rental income, was $.4 million for both the three months ended December 31, 2003 and 2002. Net loss: The net loss was $69 thousand for the three months ended December 31, 2003 compared to a loss of $1.8 million in the comparable quarter ended December 31, 2002. The improvement is due primarily to the $.9 million impairment of property held for sale, the $.2 million tax provision that increased the loss reported on December 31, 2002 and other reductions in personnel and operating expenses since that date. Six Months Ended December 31, 2003 and 2002: Results of Operations Total revenues: Consolidated revenues were $1.3 million for the six months ended December 31, 2003 as compared with $1.4 million for the six months ended December 31, 2002. During the six months ended December 2003, two license deals were completed. One was the result of a settlement of a prior years' claim in the amount of $20 thousand. The license revenue from the $20 thousand cash payment is being recognized ratably over a two year period pursuant to the contract terms. In addition to the cash portion of the settlement, the Company received 9.9% of the outstanding common shares of the customer. No economic value was placed on the shares received due to the common shares being subordinated to other securities of the customer. The third component of the settlement also contained provisions which entitle the Company to receive up to $.3 million in royalties and maintenance from revenues generated by the client from the use of IWH's products in the future. Revenues from the royalty and maintenance arrangements will be recognized on a cash basis due to their contingent nature. The additional license revenue was from the sale of additional capacity on an existing license through IWH's reseller in Germany. Professional services revenues were $.5 million for the December 31, 2003 six months, compared to $.3 million in the prior year quarter. The six months ended December 31, 2003 included three engagements, two of which were related to upgrades at existing clients and one training engagement. The increased professional service revenues were offset by a decrease in post contract maintenance support revenue, which decreased to $.8 million for the six months ended December 31, 2003 from $1.0 million for the six months ended December 31, 2002. The decline was due to the combination of non-renewals and renegotiated rates with certain customers. Total cost of revenues: Cost of revenues, which include direct labor costs related to professional services and maintenance activities and imbedded third party customer software maintenance fees, were $.3 million for the six months ended December 31, 2003, which were approximately the same as the prior year costs. Operating expenses: Total operating expenses were $1.9 million for the six months ended December 31, 2003 compared to $4.0 million for the six months ended December 31, 2002. The decrease of $2.1 million is due primarily to a $.9 impairment of property held for sale in the six months ended December 31, 2002 and staff reductions throughout the Company. There were a total of 30 employees at December 31, 2002 compared to 17 employees at December 31, 2003. Most of the reductions were in the software engineering functions. Certain savings associated with these staff reductions were used to increase sales efforts. The Company also benefitted from a reduction in liability insurance and other operating costs for the six months ended December 31, 2003. Other income: Net other income, which consists of increases to the value of short-term investments at Mariner, interest income on cash deposits and sublease rental income, was $.7 million for the six months ended December 31, 2003 as compared to $1.1 million for the six months ended December 31, 2002. The six months ended December 31, 2002 included two components: other income as described above of $.6 million and a $.5 million gain from the repurchase of the Company's convertible subordinated notes (the "Notes") in July 2002. Such gain was the result of a voluntary offer by the Company to repurchase the Notes at face value, but excluding any accrued interest on the Notes from March 31, 2002, the last interest payment date. The increase in interest and other income to $.7 million for the six months ended December 31, 2003 from $.6 million for the six months ended December 31, 2002 was due primarily to higher cash and short term investment balances as of December 31, 2003 compared to the same period in the prior year. Net loss: The net loss was $.2 million for the six months ended December 31, 2003 compared to a loss of $2.1 million in the comparable 2002 period. The improvement is due primarily to a $2.2 million reduction in operating expenses from the prior year, with such reduction being partially offset by the 2002 period's gain from the repurchase of the Notes. Capital Resources and Liquidity Liquidity: As of December 31, 2003, the Company had $17.4 million of cash and short term investments and $.1 million of receivables. The Company estimates that it will require approximately $1.8 million to fund its operations in fiscal 2004. Such assumption is based on meeting revenue targets in E-Commerce Operations. Sources of funds are derived from E-Commerce Operations sales, interest on cash deposits, and returns on short term investments at Mariner. Management believes that its revenue projections are conservative and that its costs can be managed to its budgets without difficulty. As a result, the existing cash and short term investments are adequate to continue funding operations as required and provide resources for the Company to pursue other business opportunities. The Company's lease commitments as of December 31, 2003 are $3.3 million for its office locations in Wyoming, Texas and New York. An office lease in New York has been subleased to an unrelated third party. The remaining cash inflows from the sublease, net of profit sharing arrangements with the landlord are $3.8 million. While the Company remains the primary responsible party under terms of the original lease, it has no reason to expect that the subtenant will default on its obligation under terms of the sublease. As a result, the Company's net lease commitments are profitable. The following table sets forth the consolidated lease obligations as of December 31, 2003 (dollars in thousands): Fiscal Years Ended June 30, ____________________________________ Remainder 2005 - 2008 - 2010 and of FY 2004 2007 2010 thereafter Total __________ _______ _______ __________ _______ Lease obligations Gross operating leases $ 266 $ 1,405 $ 1,442 $160 $ 3,273 Sublease receipts (264) (1,638) (1,722) (191) (3,815) _____ _______ _______ ____ _______ Net lease obligations (profit) $ 2 $ (233) $ (280) $(31) $ (541) ===== ======= ======= ==== ======= The Company has a remaining severance obligation to two former executives in the amount of $.3 million. Such obligation is being paid in semi- monthly installments until June 2004, when the obligation will be paid in full. The liability is reflected as a component of accounts payable and accrued liabilities on the unaudited condensed consolidated balance sheet as of December 31, 2003. The December 31, 2003 accounts payable and accrued liabilities include approximately $1.5 million attributable to unsecured creditors of InterWorld. While these liabilities are included as part of the consolidated group, they remain separate and distinct to InterWorld. Although Management has actively negotiated with many of the significant unsecured creditors to settle aged claims, no vendor settlements were finalized during the previous twelve months. Although there can be no assurances, Management believes the remaining obligations will be settled at amounts substantially less then their respective face values. Cash flows: For the six months ended December 31, 2003, consolidated net cash used in operations was $.9 million, almost all of which was attributable to the Technology-Related Businesses segment. The decrease reflects payments of the Company's severance obligation of approximately $.2 million and other working capital components. Investing and financing activities: There were no significant investing or financial activities for the three months ended December 31, 2003. Activity during the six months ended December 31, 2002 included the repurchase of the Company's $27.8 million of Notes in July 2002. Recently Issued Accounting Standards: In December 2003, the Financial Accounting Standards Board ("FASB") issued a revision to Statement of Financial Accounting Standards No. 132 (revised 2003), "Employers' Disclosures About Pensions and Other Postretirement Benefits" ("SFAS 132(R)"). The revisions to SFAS 132(R) require disclosures regarding an employer's percentages of plan assets, description of investing strategies and descriptions used to determine the overall expected rate of return on assets in the employer's pension or defined benefit plans. The expanded disclosure requirements for domestic plans are effective for interim periods beginning after December 15, 2003. The Company does not have a pension, defined benefit plan or any future postretirement obligations. Therefore, the requirements contained within SFAS 132(R) have no impact to J Net or its subsidiaries. Factors Which May Affect Future Results The Company's financial and management resources have been concentrated on its E-Commerce Operations. For the past two years, the technology-related markets have experienced significant declines in sales, market value, and available capital resources to develop new products. In addition, the technology-related environment is extremely competitive. The combination of the above factors involves a number of risks and uncertainties. Even with the significant reductions to its cost structure, the Company's operations will require an increase in sales of e-commerce products to avoid further cost reductions. Increases in sales are dependent on several factors including (1) successfully closed deals from its channel partners and resellers, (2) an increase in information technology spending by businesses, (3) continued solvency of existing customers, (4) availability of capital, (5) preservation of existing patents and trademarks, and (6) the Company's ability to build and deliver products ahead of its competitors. There is no assurance that any of the events will occur, or be sustainable if they do occur. Item 3. Quantitative and Qualitative Disclosure About Market Risk The Company generally is exposed to market risk from adverse changes in interest rates and interest income is affected by changes in the general level of U.S. interest rates. Changes in U.S. interest rates could affect interest earned on the Company's cash equivalents, debt instruments and money market funds. A majority of the interest earning instruments earn a fixed rate of interest over short periods (7-35 days). The Company owns short-term investments in Mariner. Based upon the invested cash balances at December 31, 2003, a 10% drop in interest rates or historical returns from short-term investments at Mariner would not be material to the Company's financial statements. Item 4. Controls and Procedures Within the 90-day period prior to the filing of this Quarterly Report on Form 10-Q, an evaluation was carried out under the supervision and with the participation of the Company's management, including the Chief Executive Officer (the "CEO") and Chief Financial Officer ("CFO"), of the effectiveness and design of disclosure controls and procedures used to prepare consolidated financial statements. Based on that evaluation, the CEO and CFO have concluded the disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in reports filed or to be filed with the SEC are adequate and are operating in an effective manner. While the CEO and CFO believe that the Company's existing disclosure controls and procedures have been effective to accomplish its objectives, the CEO and CFO intend to examine, refine and formalize the Company's disclosure controls and procedures and monitor ongoing developments. There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of the most recent evaluation. Notwithstanding the foregoing, there can be no assurance that the Company's disclosure controls and procedures will detect or uncover all failures of persons within the Company and its consolidated subsidiaries to disclosure material information otherwise required to be set forth in the Company's periodic reports. PART II. OTHER INFORMATION ___________________________ Item 1. Legal Proceedings As of December 31, 2003, J Net did not have any litigation, pending or threatened, or other claims filed against the Company. However, InterWorld is subject to two claims. On March 8, 2001, as amended on May 29, 2001, InterWorld received notice that the SEC had commenced a formal order directing a private investigation by the SEC with respect to whether InterWorld engaged in violations of Federal Securities Laws as it relates to InterWorld's financial statements, as well as its accounting practices and policies. Also under review by the SEC is certain trading activity in InterWorld stock. All the above events are related to periods prior to the Company's common stock ownership in InterWorld. The investigation is confidential and the SEC has indicated that the investigation should not be construed as an indication by the SEC, or its Staff, that any violation of law has occurred nor should the investigation be construed as an adverse reflection on any person, entity or security. Although the Company is unaware of any activity with respect to the investigation for the past year, InterWorld intends to fully cooperate with the SEC. PBS Realty ("PBS"), a real estate broker conducting business in New York City filed a $1.2 million claim against InterWorld in April 2002. The claim alleges that PBS is owed commissions by InterWorld for services related to PBS's attempts to sublease office space previously occupied by InterWorld in New York City. InterWorld is vigorously contesting the claim and InterWorld management does not believe a liability exists at this time. J Net was not a party to the brokerage agreement and no claim against J Net has been asserted by PBS. From time to time, the Company or its subsidiaries are parties to claims, legal actions and complaints arising in the ordinary course of business. Management believes its defenses are substantial and that its legal position can be successfully defended without material adverse effect on its consolidated financial position. Item 5. Other Information On January 16, 2004, J Net terminated the engagement of Ernst & Young LLP ("E&Y") as the Company's independent auditors for the fiscal year ending June 30, 2004. The decision to terminate E&Y was approved by the Company's Audit Committee with the concurrence of Management. The Registrant has selected CF & Co., L.L.P. ("CF & Co.") as its new independent auditors as of January 16, 2004. On January 30, 2004, the Company executed Amendment No. 2 to its Rights Plan Agreement. Such amendment allows the Gabelli Group to increase its holdings in the Company's common stock to 30%. Presently, the Gabelli Group holds 19.9% of the Company's common stock. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 31.1 Principal Executive Officer Certification 31.2 Principal Financial Officer Certification 32.1 Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K: On January 20, 2004 the Company filed a Form 8-K reporting the change in the Company's auditors from Ernst & Young, LLP to CF & Co., L.L.P. 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/ Mark E. Wilson _______________________ Mark E. Wilson Chief Financial Officer Date: February 17, 2004