J NET ENTERPRISES, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS, SUPPLEMENTARY DATA AND FINANCIAL STATEMENT SCHEDULESForbearance Agreement |
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EXHIBIT 10.42
J NET ENTERPRISES, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS, SUPPLEMENTARY DATA
AND FINANCIAL STATEMENT SCHEDULES
[ITEMS 8 AND 15(a)]
(1) FINANCIAL STATEMENTS:
Report of Independent Auditors
Consolidated Balance Sheet
June 1, 2004
Consolidated Statement of Operations
Eleven Months Ended June 1, 2004
Consolidated Statement of Stockholders' Equity
Eleven Months Ended June 1, 2004
Consolidated Statement of Cash Flows
Eleven Months Ended June 1, 2004
Notes to Consolidated Financial Statements
(2) SUPPLEMENTARY DATA:
Summarized Quarterly Financial Information (Unaudited)
Eleven Months Ended June 1, 2004
Certain financial statement schedules are omitted because the required
information is provided in the Consolidated Financial Statements or the
notes thereto.
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and therefore
have been omitted.
Report of Independent Registered Public Accounting Firm
_______________________________________________________
We have audited the accompanying consolidated balance sheet of J Net
Enterprises, Inc. and Subsidiaries as of June 1, 2004, and the related
consolidated statements of operations, stockholders' equity, and cash flows
for the eleven months then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of J Net
Enterprises, Inc. and Subsidiaries as of June 1, 2004, and the consolidated
results of their operations and their cash flows for the eleven months then
ended, in conformity with U.S. generally accepted accounting principles.
CF & Co., L.L.P.
Dallas, Texas
September 24, 2004
J NET ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 1, 2004
(Dollars in thousands)
ASSETS
______
Current assets:
Cash and cash equivalents $ 11,564
Short-term investments 4,954
Accounts receivable 147
Prepaid expenses 41
Other current assets 266
________
Total current assets 16,972
Investments in technology-related businesses 2,000
Property and equipment, net of accumulated
depreciation 61
Other non-current assets 684
________
Total assets $ 19,717
========
LIABILITIES AND STOCKHOLDERS' EQUITY
____________________________________
Current liabilities:
Accounts payable and accrued expenses $ 3,132
Federal income taxes payable 1,373
Deferred revenue and customer deposits 712
________
Total current liabilities 5,217
________
Deferred rent 174
Other non-current liabilities 212
Commitments and contingencies (Note 9)
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
Additional paid-in capital 75,250
Accumulated deficit (45,183)
Less 1,694,449 shares of common stock in
treasury at cost (16,055)
________
Total stockholders' equity 14,114
________
Total liabilities and stockholders' equity $ 19,717
========
See Notes to Consolidated Financial Statements.
J NET ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
ELEVEN MONTHS ENDED JUNE 1, 2004
(Dollars in thousands, except per share data)
Revenues, net:
Product licenses $ 48
Maintenance 1,537
Services 662
_______
Total revenues, net 2,247
_______
Cost of revenues:
Product licenses -
Maintenance 169
Services 480
Total cost of revenues 649
_______
Gross profit 1,598
Operating expenses:
Research and development 620
General and administrative 2,920
_______
Total operating expenses 3,540
_______
Operating loss (1,942)
_______
Other income (expense):
Interest and other income 1,181
Interest expense (100)
_______
Total other income (expense) 1,081
_______
Loss before income taxes (861)
Provision (benefit) for income taxes (5,537)
Net income $ 4,676
=======
Basic and diluted earnings per share $ .55
=======
See Notes to Consolidated Financial Statements.
<TABLE>
J NET ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
ELEVEN MONTHS ENDED JUNE 1, 2004
(Dollars and shares in thousands)
Common Stock Additional Retained Treasury Stock
_____________ Paid-In Earnings __________________
Shares Amount Capital (Deficit) Shares Amount Totals
______ ______ __________ _________ _______ ________ ______
<S> <C> <C> <C> <C> <C> <C> <C>
Balance June 30, 2003 10,233 $102 $75,250 $(49,859) (1,709) $(16,054) $ 9,439
Treasury Stock
adjustment (a) 15
Repurchases of common
stock - (1) (1)
Net income 4,676 4,676
______ ____ _______ ________ ______ ________ _______
Balance June 1, 2004 10,233 $102 $75,250 $(45,183) (1,694) $(16,055) $14,114
========= ====== ========= ========== ======== =========== ==========
(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 Consolidated Financial Statements.
</TABLE>
J NET ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
ELEVEN MONTHS ENDED JUNE 1, 2004
(Dollars in thousands)
Operating activities:
Net income $ 4,676
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation 18
Deferred income taxes (6,910)
Changes in assets and liabilities:
Short-term investments (629)
Prepaid expenses and other current assets (289)
Other non-current assets 51
Income taxes payable 1,373
Accounts payable and other current liabilities (267)
Deferred revenue and customer deposits 23
Deferred rent (19)
________
Net cash used in operating activities (1,973)
________
Investing activities:
Redemption of short-term investments 8,000
________
Net cash provided by investing activities 8,000
________
Financing activities:
Net cash provided by financing activities -
________
Net increase in cash and cash equivalents 6,027
Cash and cash equivalents at beginning of year 5,537
________
Cash and cash equivalents at end of year $ 11,564
========
Supplemental disclosures of cash flow data:
None
Non-cash investing and financing activities:
None
See Notes to Consolidated Financial Statements.
J NET ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Significant Accounting Policies and Business
Business:
J Net Enterprises, Inc. ("J Net" or the "Company") is a holding company
with concentrated investments in enterprise software ("E-Commerce
Operations") and technology infrastructure companies (the "Technology-
Related Businesses").
E-Commerce Operations are conducted through IW Holdings, Inc. ("IWH"), a
wholly owned subsidiary of the Company and the successor to the business
formerly conducted by InterWorld Corporation ("InterWorld"), a 95.3% owned
inactive subsidiary of the Company.
J Net also holds minority investments in other technology companies
including, but not limited to, systems development and software companies.
These investments are held directly by the Company, or by J Net Ventures I,
LLC (the "Fund" or "Ventures I"), a fund which is 100% owned and managed by
the Company.
On June 2, 2004, the Company issued 9,095,716 shares of its common stock to
acquire the stock of Epoch Investment Partners, Inc. ("Epoch"), a firm that
is engaged in the investment management and investment advisory services.
The shares issued by the Company represent 51% of the issued and
outstanding common stock of J Net. Therefore, the transaction is being
accounted for as a reverse merger. Beginning June 2, 2004, the historical
financial statements of the Company will become those of Epoch. The
Company intends for investment management and investment advisory services
to become its sole line of business.
Business segments:
The Company has two reportable business segments: E-Commerce Operations and
Technology-Related Businesses. Segment results reported exclude the effect
of transactions between the Company and its subsidiaries. Assets are the
owned assets used by each operating segment. After June 1, 2004,
investment management and investment advisory services will become the sole
business segment of the Company. The Management of J Net has adopted a
plan to dispose of the E-Commerce Operations and will no longer pursue
Technology-Related Businesses.
Principles of consolidation and basis of presentation:
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries. All material intercompany accounts and
transactions are eliminated. The Company's fiscal year ends on June 30.
Unless the context indicates otherwise, references to "2004" are for the
eleven months ended June 1, 2004, the period of time prior to the business
combination with Epoch.
Use of estimates:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the amounts reported in the
accompanying consolidated financial statements and notes. Actual results
could differ from those estimates.
Cash equivalents:
Cash equivalents are liquid investments comprised primarily of debt
instruments and money market accounts with maturities of three months or
less when acquired. Cash equivalents are stated at cost which approximates
fair value due to their short maturity.
Short-term investments:
The Company owns short-term investments in Mariner Partners, L.P.
("Mariner"), a private investment fund. J Net can withdraw all or a
portion of its investment upon 45 days prior written notice. The Company
classifies those securities as short-term investments and records changes
in the value of the accounts in the item captioned interest and other
income in the accompanying Consolidated Statement of Operations.
Fair value of financial instruments:
The carrying value of certain of the Company's financial instruments,
including accounts receivable, accounts payable and accrued expenses
approximates fair value due to their short maturities.
The consolidated balance sheet as of June 1, 2004 contains approximately
$1.7 million of unsecured creditor liabilities of InterWorld. On May 25,
2004, InterWorld, which is insolvent by nature of foreclosure on loans made
to InterWorld by J Net, filed a voluntary Chapter 7 Bankruptcy petition in
the Southern District of New York. Management expects, but cannot provide
assurance, that the liabilities will be discharged as a result of the
bankruptcy.
Financial instruments with concentration of credit risk:
The financial instruments that potentially subject J Net to concentrations
of credit risk consist principally of cash and cash equivalents. J Net
maintains cash and certain cash equivalents with financial institutions in
amounts which, at times, may be in excess of the FDIC insurance limits. J
Net's cash equivalents are invested in several high-grade securities which
limit J Net's exposure to concentrations of credit risk.
The Company owns short-term investments which are managed by Mariner.
Investments in Technology-Related Businesses:
The various interests that the Company has acquired in Technology-Related
Businesses are accounted for under the cost method.
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.
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 96-18, "Accounting for Equity Instruments that are
Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services" ("EITF 96-18").
The Company measures the fair value of equity instruments for employee and
non-employee grants using the Black-Scholes option pricing model.
In 2002, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure" ("SFAS 148"). This statement
amended certain disclosure provisions in SFAS 123 and Accounting Principles
Board Opinion No. 28, "Interim Financial Reporting". The Company adopted
the provisions of SFAS 148 beginning March 31, 2003.
The following table discloses pro forma amounts for net loss and basic and
diluted loss per share for 2004 assuming compensation cost for employee and
director stock options had been determined using the fair value-based
method prescribed by SFAS 123. The pro forma results may not be
representative of the effects of options on net income in future years.
The model assumes no expected future dividend payments on the Company's
Common Stock for the options granted (dollars in thousands, except per
share data):
Net income (loss):
As reported $4,676
