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 September 30, 2004
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
incorporation 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 17,904,913 shares of the Registrant's common stock outstanding
as of November 12, 2004.
J NET ENTERPRISES, INC. AND SUBSIDIARIES
INDEX
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited) -
September 30, 2004 and June 30, 2004
Condensed Consolidated Statement of Operations (Unaudited) -
Three Months Ended September 30, 2004
Condensed Consolidated Statement of Stockholders' Equity
(Unaudited) - Three Months Ended September 30, 2004
Condensed Consolidated Statement of Cash Flows (Unaudited) -
Three Months Ended September 30, 2004
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 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)
September 30, June 30,
2004 2004
____________ _________
ASSETS
______
Current assets:
Cash and cash equivalents $11,824 $10,801
Short-term investments - 4,967
Accounts receivable, net 809 70
Prepaid expenses 47 76
Current assets of discontinued operations - 266
_______ _______
Total current assets 12,680 16,180
_______ _______
Investments in technology-related businesses 157 157
Property and equipment, net of accumulated
depreciation 337 329
Notes receivable 200 -
Other non-current assets 949 449
Non-current assets of discontinued operations - 37
_______ _______
Total assets $14,323 $17,152
======= =======
September 30, June 30,
2004 2004
____________ _________
LIABILITIES AND STOCKHOLDERS' EQUITY
____________________________________
Current liabilities:
Accounts payable and other current liabilities $ 1,995 $ 1,941
Federal income taxes payable - 1,373
Accrued interest payable - 110
Liabilities of discontinued operations - 657
_______ _______
Total current liabilities 1,995 4,081
_______ _______
Deferred rent 167 172
Other non-current liabilities 212 212
Commitments and contingencies (Note 4)
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; 19,529,186 shares issued 195 195
Additional paid-in capital 38,696 38,696
Retained earnings (deficit) (2,492) (992)
Unearned compensation (8,395) (9,157)
Less 1,694,449 shares of common stock in
treasury, at cost (16,055) (16,055)
_______ _______
Total stockholders' equity 11,949 12,687
_______ _______
Total liabilities and stockholders'
equity $14,323 $17,152
======= =======
See Notes to Condensed Consolidated Financial Statements.
J NET ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2004
(Dollars in thousands, except per share data)
(Unaudited)
Revenues, net:
Investment advisory and management fees $ 787
Operating expenses:
Employee related costs 1,551
Professional fees and services 294
General and administrative 446
Stock-based compensation 762
________
Total operating expenses 3,053
________
Operating loss from continuing operations (2,266)
________
Other income
Interest and other income 195
________
Total other income 195
________
Loss from continuing operations before
income tax (2,071)
________
Provision (benefit) for income taxes -
________
Loss from continuing operations (2,071)
________
Gain from discontinued operations (including
gain on disposal of $572), net of income
taxes of $0 571
________
Net loss $ (1,500)
========
Basic and diluted loss per share
Loss from continuing operations $ (.12)
Income from discontinued operations .03
________
Basic and diluted loss per share $ (.09)
========
See Notes to Condensed Consolidated Financial Statements.
J NET ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED SEPTEMBER 30, 2004
(Dollars and shares in thousands)
(Unaudited)
Common Stock Additional Unearned Retained Treasury Stock
______________ Paid-in Stock Earnings _______________
Shares Amount Capital Compensation Deficit Shares Amount Totals
______ _______ _________ _____________ ________ ______ ________ _______
Balance June 30, 2004 19,529 $195 $38,696 $(9,157) $ (992) (1,694) $(16,055)$12,687
Amortization of
stock-based
compensation 762 762
Net loss (1,500) (1,500)
Balance
September 30, 2004 ______ ____ _______ _______ ________ ______ ________ _______
19,529 $195 $38,696 $(8,395) $ (2,492) (1,694) $(16,055) $11,949
====== ==== ======= ======= ======== ====== ======== =======
See Notes to Condensed Consolidated Financial Statements.
J NET ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED SEPTEMBER 30, 2004
(Dollars in thousands)
(Unaudited)
Operating activities:
Net loss $ (1,500)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Gain on sale of discontinued operations (572)
Loss from discontinued operations 1
Amortization of stock-based compensation 762
Depreciation 29
Changes in assets and liabilities:
Accounts receivable (719)
Federal income taxes payable (1,373)
Prepaid expenses and other current assets 29
Accounts payable and other current liabilities (55)
Deferred rent (5)
________
Net cash used in continuing operations (3,403)
Net cash used in discontinued operations (4)
________
Net cash used in operating activities (3,407)
________
Investing activities:
Redemption of short-term investments 4,967
Restricted cash (500)
Purchase of property and equipment (37)
________
Net cash provided by investing activities 4,430
________
Financing activities:
Net cash provided by financing activities -
________
Net increase in cash and cash equivalents 1,023
Cash and cash equivalents at beginning of period 10,801
________
Cash and cash equivalents at end of period $ 11,824
========
Supplemental disclosures of cash flow data:
Cash paid for:
Federal income taxes $ 1,373
Interest $ 110
Non-cash investing and financing activities:
Note receivable from sale of discontinued operations $ 200
See Notes to Condensed Consolidated Financial Statements.
J NET ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Significant accounting policies and business
Business:
J Net Enterprises, Inc. ("J Net" or the "Company") manages investment
assets and provides services to retirement plans, mutual fund clients,
endowments, foundations and high net-worth individuals. Operations are
conducted through a wholly-owned subsidiary, Epoch Investment Partners,
Inc. ("Epoch"), a registered investment advisor under the Investment
Advisors Act of 1940 (the "1940 Act"). Revenues are generally derived from
a percentage of Assets Under Management ("AUM"). As a result, fluctuations
in financial markets combined with changes in the composition of AUM can
significantly impact revenues and results of operations.
Epoch began business operations in April 2004, and became a subsidiary, and
the sole line of business of the Company, in June 2004. Prior to the
Company's entrance into Epoch's business, J Net was engaged in the e-
commerce software business. The e-commerce operations were sold in
September 2004 to the former management of those operations. Accordingly,
the e-commerce operations have been reported as discontinued operations.
In order to reflect the recent change in business direction, the Company
has submitted to its stockholders a proposal to change the name of the
Company from J Net to Epoch Holdings Corporation at its Annual Meeting of
Stockholders to be held on November 18, 2004. In addition to the name
change, the stockholders will be asked to approve a reincorporation from
Nevada to Delaware.
Business segments:
The Company's sole line of business is the investment advisory and
investment management business.
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 (the "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. 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 September 30, 2004 and June 30, 2004,
the results of its operations for the three months ended September 30, 2004
and its cash flows for the three months ended September 30, 2004. The
results for the three months ended September 30, 2004 are not necessarily
indicative of results for a full year. Information included in the
condensed consolidated balance sheet as of June 30, 2004 has been derived
from the Company's Annual Report to the SEC on Form 10-K for the fiscal
year ended June 30, 2004 (the "2004 Form 10-K"). These unaudited condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and disclosures included in the 2004
Form 10-K.
Use of estimates:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires Management to
make estimates and assumptions that affect the amounts reported in the
accompanying unaudited condensed consolidated financial statements and
notes. Actual results could differ from those estimates.
Cash equivalents:
Cash equivalents are liquid investments comprised primarily of debt
instruments and money market accounts with maturities of three months or
less when acquired and are considered cash equivalents for purposes of the
unaudited condensed consolidated balance sheets and statements of cash
flows. Cash equivalents are stated at cost which approximates fair value
due to their short maturity.
Restricted cash:
The Company has $.5 million of restricted cash related to the issuance of a
letter of credit obtained on September 15, 2004 to secure the Company's
deposit on the office lease at 640 5th Avenue, New York, New York. The
letter of credit renews annually and expires September 15, 2010. After an
initial two-year period, subject to consent from the landlord, the value of
the letter of credit and the related cash security deposit may be reduced
by annual $.1 million increments. The restricted amount is classified as a
component of other non-current assets on the accompanying Condensed
Consolidated Balance Sheet as of September 30, 2004.
Short-term investments:
The Company owned short-term investments in Mariner Partners, L.P.
("Mariner"), a private investment fund until July 2004, when the
investments were liquidated. Prior to the redemption, the Company
classified those securities as short-term investments and recorded changes
in the value of the accounts in the item captioned interest and other
income in the 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.
In September 2004, the Company completed the sale of its e-commerce
software operations. Consideration to the Company came in the form of a
19.9% membership interest in the buyer's entity, the assumption by the
buyer of liabilities of $466 thousand, and the issuance of a $534 thousand
note to the Company. The note is due in 5 years and bears interest at 6.5%
per annum. Payments on the note are due when cash flows from operations
exceed $300 thousand. The Company recorded the note at its estimated fair
value of approximately $200 thousand. Factors affecting the estimate were
the note's non-marketable status and certain risks in reaching cash flow
targets for payment.
Financial instruments with concentration of credit risk:
The financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and cash
equivalents. The Company invests its cash and cash equivalents with
financial institutions in amounts which, at times, may be in excess of the
FDIC insurance limits. Cash is also invested in several high-grade
securities with a minimum research rating of A, as defined by Standard &
Poor's and Moody's Investor Service, which limits exposure to
concentrations of credit risk.
Revenue recognition:
Investment advisory and management fees are recognized as services are
provided. Fees are determined pursuant to contracts with each client and
are generally based on a percentage of AUM. The fees are billed quarterly,
in arrears.
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 and qualifying director stock-based 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.
Stock-based compensation costs related to equity instruments are charged
against income ratably over the fixed vesting period of the related equity
instruments, with the initial charge recorded in the first full month
following the grant.
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.
There were no stock options issued during the three months ended September
30, 2004. All stock options previously granted under a stock option plan
which expired on September 30, 2002, are fully vested. Therefore, there is
no difference between the reported net loss for the three months ended
September 30, 2004, as reported, and the potential effects of any stock-
based compensation using SFAS 123. Additionally, there is no difference
between compensation costs recognized for restricted stock awards under APB
25 and the potential effects of stock-based compensation costs under SFAS
123.
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.
Generally, the useful lives are 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. Software used to conduct
the investment advisory and investment management services is amortized
using a three-year estimated useful life. The Company entered into a ten
year office space lease on September 15, 2004 and expects to relocate its
operation to that location early in 2005. Leasehold improvements at that
location will be amortized over the shorter of the useful life or the ten
year life of the lease. There are no lease improvements being amortized as
of September 30, 2004.
Income taxes:
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standard No. 109, "Accounting for Income Taxes" ("SFAS
109"). SFAS 109 requires that deferred tax assets and liabilities arising
from temporary differences between book and tax basis will be recognized
using enacted rates at the time such temporary differences reverse. In the
case of deferred tax assets, SFAS 109 requires a reduction in deferred tax
assets if it is more likely than not that some portion or all of the
deferred tax will not be realized.
Recently issued accounting standards:
There have been no new accounting standards which have not been previously
disclosed by the Company. However, on October 13, 2004, the Financial
Accounting Standards Board (the "FASB") delayed the effective date of its
proposed standard, "Share-Based Payment", a proposed amendment to SFAS 123.
The adoption of the proposed standard now calls for public companies to
implement the standard for stock awards that are granted, modified, or
settled in cash for interim or annual periods beginning after June 15,
2005. The FASB is expected to issue its final standard before December 31,
2004.
Note 2 - Earnings (loss) Per Share
Basic earnings (loss) per share is computed by dividing net earnings (loss)
by the weighted average number of shares outstanding during the period.
Diluted earnings (loss) per share is computed by dividing net earnings
(loss) by the weighted average number of common and common equivalent
shares outstanding during the period. The calculation of earnings (loss)
per share at September 30, 2004 excluded 1,405,000 issued and outstanding
stock options as their effect was antidilutive. There were no dilutive
stock options.
The following is the amount of loss and number of shares used in the basic
and diluted earnings (loss) per share computations at September 30, 2004
(dollars and shares in thousands, except per share data):
Loss from continuing operations $(2,071)
=======
Income from discontinued operations $ 571
=======
Shares:
Weighted average number of common shares
outstanding 17,835
=======
Basic and diluted loss per share from continuing
operations $ (.12)
=======
Basic and diluted earnings per share from
discontinued operations $ .03
=======
Note 3 - Related Party Transactions
Epoch is conducting its principal business operations in New York, New York
through a month-to-month space use agreement with Berenson & Company. The
Chief Executive Officer of Berenson & Company is a Director and stockholder
of the Company. The space use agreement includes rent of $25 thousand per
month plus other occupancy-related fees, including telephones and general
office services. The agreement may be cancelled by either party with 30
days notice. The Company paid rent and other related occupancy expenses of
approximately $85 thousand for the period ended September 30, 2004. Epoch
entered into a long-term lease on September 15, 2004 with an unrelated
party and expects to relocate to those facilities in calendar 2005.
Note 4 - Commitments And Contingencies
Employment agreements:
There are no employment agreements with officers of the Company. There are
agreements, subject to the attainment of certain performance criteria, or
in certain cases termination of employment, to pay bonuses or severance
payments. Such obligations, under the various agreements, total
approximately $1.5 million.
The Company is obligated to enter into an agreement with its Chief
Executive Officer, William W. Priest prior to the third anniversary of the
business combination with Epoch. Terms of the contract are to be customary
for Chief Executive Officers of peer group companies.
Legal matters:
From time to time, the Company or its subsidiaries may become parties to
claims, legal actions and complaints arising in the ordinary course of
business. Management does not believe that any such action would have a
material adverse effect on its consolidated financial position.
Significant customers and contracts:
Epoch is the beneficiary of a subadvisory contract with one customer that
constitutes approximately 70% of total AUM and 40% of total revenues. The
contract was transferred on June 2, 2004 and the customer committed to use
Epoch's services for a two-year period from that date.
Revenues from this client represent an important source of operating funds
to the Company, and the Company is dependent to a significant degree on the
ability to maintain its existing relationship. While the Company expects
to receive additional funds to subadvise from this client, there can be no
assurance this existing relationship will be maintained or that new clients
can be obtained to replace revenues if significant clients are lost.
Note 5 - Discontinued operations:
On September 9, 2004, the Company completed the sale of the assets of its
e-commerce software subsidiary to the former management of the e-commerce
operations. Consideration from the sale included the assumption of $466
thousand of liabilities, a $534 thousand secured promissory note (the
"Note") and a 19.9% membership in the entity that purchased the assets.
The Note is due in five years and bears interest of 6.5% per annum.
Payments on the Note are due when cash flows, as defined in the asset
purchase agreement, from the discontinued operations exceed $300 thousand.
The Company recorded the carrying value of the Note at $200 thousand, the
estimated fair value based on historical results of operations. Factors
affecting the estimated fair value of the Note were its non-marketable
status and certain risks in reaching cash flows which cause obligations to
make principal payments. As a result of the reduced carrying value of the
secured debt, the Company did not assign any value to its equity
investments.
The Company is performing certain administrative transitional services for
the buyer of the discontinued operations. The Company is being reimbursed
fair market value for these services. Such services will continue through
December 31, 2004.
Selected financial data - discontinued operations
Following are the summary operating results of the discontinued operations
for the three months ended September 30, 2004 (dollars in thousands):
Revenues $ 293
Costs and expenses (294)
_____
Loss from discontinued
operations before income taxes (1)
Provision for income taxes -
_____
Loss from discontinued operations $ (1)
=====
Gain from sale of discontinued operations $ 572
Provision for income taxes (a) -
_____
After tax gain $ 572
=====
(a) There are no income taxes due to utilization of available net
operating loss carryforwards.
Note 6 - Subsequent events:
On October 14, 2004, four non-employee members of the Company's Board of
Directors received restricted stock compensation totaling 70,176 shares
(17,544 shares each) for their service on the Board of Directors for the
fiscal year ending June 30, 2005. The shares have a three year vesting
period.
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 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.
There are numerous risks which may affect the results of operations of the
Company. Factors which could affect the Company's success include, but are
not limited to, the Company's limited operating history in the investment
management and investment advisory business, the ability to attract and
retain clients, performance of the financial markets and invested assets
managed by the Company, retention of key employees, misuse of assets and
information by employees, system failures, significant changes in
regulations, the costs of compliance associated with existing regulations
and the penalties associated with non-compliance, and the risks associated
with loss of key members of the management team. The Company presently has
one client which represents approximately 70% of total AUM and 40% of
current revenues. Loss of this client could have a significant negative
impact on the results of operation and capital resources and liquidity of
the Company and its growth plans.
In addition, the Company's ability to expand or alter its product
offerings, whether through acquisitions or internal development is critical
to its long-term success and has inherent risks. This success is dependent
on the ability to identify and fund those products or acquisitions on terms
which are favorable to the Company. There can be no assurance that any of
these operating factors or acquisitions can be achieved, or that, if
undertaken, they will be successful.
Overview
In June 2004, J Net Enterprises, Inc. ("J Net" or the "Company") completed
a reverse acquisition of Epoch Investment Partners, Inc. ("Epoch"). When
the merger was completed, J Net discontinued its e-commerce software line
of business and Epoch, who is engaged in the investment management and
advisory services business, became the Company's sole line of business.
For accounting purposes, Epoch was the acquiror in the June 2004 merger and
the transaction was treated as a recapitalization of J Net. Due to Epoch's
limited operating history, there are no prior period statements of
operations.
The Company has submitted a proposal to the shareholders of J Net to change
the name of the Company from J Net to Epoch Holdings Corporation and to
change its state of incorporation from Nevada to Delaware. These matters,
along with the election of directors and the implementation of an omnibus
stock incentive plan, will be voted on at the Annual Meeting of
Stockholders to be held on November 18, 2004. In anticipation of the
approval of the proposals, references to Epoch or the Company are intended
to refer to our consolidated operations.
Epoch was formed in April 2004 and is registered as an investment advisor
under the Investment Advisors Act of 1940 (the "1940 Act"). When the
merger with J Net occurred, there were approximately $645 million of assets
under management ("AUM") under subadvisory agreements that were transferred
to Epoch from one of Epoch's co-founder's prior firm. During the month of
June 2004, additional AUM of approximately $160 million were transferred to
Epoch. As of June 30, 2004, total AUM were $848 million. During the first
full quarter of operations, which ended September 30, 2004, AUM have
increased to $908 million.
Revenues
The Company's primary source of revenues are from investment advisory fees
which are generally derived from a percentage of AUM. Billings for these
fees are done on a quarterly basis, in arrears.
The Company also earns interest on its free cash which is invested in money
market funds or high-grade securities with short maturities (generally 30
days, but no longer than three months).
Assets Under Management
Assets under management increased to $908 million as of September 30, 2004
from $848 million on June 30, 2004. The following table sets forth the AUM
by product line currently offered by Epoch (in millions):
As of As of
September 30, 2004 June 30, 2004
__________________ _____________
Subadvisory $664 $663
Private Clients 216 185
Institutional 28 -
____ ____
Total AUM $908 $848
==== ====
In the preceding table, the subadvisory classification includes accounts
managed for CI Funds, a Canadian mutual fund company ("CI"). The caption
titled private clients include individuals' investment and IRA accounts.
Institutional includes pension and endowment accounts.
Results of operations - three months ended September 30, 2004
The three months ended September 30, 2004 represent the first full quarter
of operations in the investment management and investment advisory line of
business. As previously stated, Epoch did not commence business operations
until April 2004, and did not earn revenues from AUM until the latter part
of June 2004. This first full quarter also includes certain non-recurring
start up and post merger transaction costs. As a result, there are no
prior year results of operations for comparative purposes.
Revenues
Total revenue from investment management and advisory services were $787
thousand for the first full quarter of operations. The subadvisory
contract with CI accounts for approximately 70% of total AUM and 40% of
revenues. The subadvisory contract was transferred to Epoch on June 2,
2004. Other accounts, while smaller in AUM, earn higher composite fees.
Employee related costs
Costs in this category include salaries, benefits, incentive compensation,
signing bonuses and commission expenses. For the three months ended
September 30, 2004, these expenses were $1.5 million. During the three
months ended September 30, 2004, the number of employees increased to 26
from 17 at June 30, 2004. The total costs include $.4 million of signing
bonuses, some of which can be applied against future commissions earned
from closing business with new clients.
Professional fees and services
These expenses relate to outside legal fees for Securities and Exchange
Commission compliance, general corporate legal affairs, independent
accountants fees, and other professional contractors. For the three months
ended September 30, 2004, such fees totaled $.3 million. Approximately $.1
million represented the combination of non-recurring fees related to
disposition of the discontinued operations and increased legal and
accountants' fees attributable to preparation of proxy materials for the
Annual Meeting of Stockholders. Substantial legal fees were also incurred
related to finalizing income tax reporting matters and income tax audits
during the quarter.
General and administrative expenses
These costs consist primarily of office rentals, information technology-
related expenses, utilities, insurance, and other office-related costs.
Expenses totaled $.4 million for the three months ended September 30, 2004.
There were approximately $50 thousand of non-recurring costs incurred
related to closing workers compensation issues in the state of Nevada.
Liquidity and Capital Resources
Sources of funds for the Company's operations are derived from investment
management and investment advisory fees and interest on the Company's cash
and cash equivalent investments. As of September 30, 2004, the Company had
$11.8 million of cash and $.8 million of receivables to fund its business
growth strategy. Trade payables, which consist primarily of professional
fees and unpaid merger costs were $2.0 million. There was no debt and
Management does not foresee any reason to incur debt.
For the three months ended September 30, 2004, net cash used in operating
activities was $3.4 million. Significant components of this use of cash
include payment of income taxes and interest related to fiscal year 2001
and 2002 audits of $1.5 million, start-up costs and signing bonuses of $.4
million, and $.5 million of cash to secure a letter of credit for the
Company's lease deposit at 640 5th Avenue, New York, New York. The
remaining use of funds was attributable to cash-based operating expenses
for the quarter.
Presently, the Company is not generating positive cash flows, and the
ability to achieve profitable operations and cash from operations depends
on several factors, including the ability to increase AUM, control
operating costs, and favorable investment market conditions. Management
believes its available cash resources are adequate to meet operational
requirements and fund growth strategies.
Contractual obligations
Leases:
The Company entered into a long-term office space lease in New York City on
September 15, 2004. Presently, plans are being developed to build-out the
facility for occupancy early in calendar 2005. The Company expects the
costs of the build-out and furnishing the office space to be approximately
$1.1 million.
Future minimum lease payments under the lease entered into on September 15,
2004 total $6.9 million and are presented on the table which follows
(fiscal years ending June 30, dollars in thousands). No cash payments are
due on the lease until October 2005.
2006 - 2009 - 2011 and
2005 2008 2010 thereafter Total
_____ ______ _____ __________ ______
Future minimum payments $ - $1,831 $1,332 $3,751 $6,914
===== ====== ====== ====== ======
The Company also has other office lease commitments in New York, California
and Texas. An office lease in New York is subleased to an unrelated third
party. While the Company remains the primary responsible party under that
lease, the tenant is performing its obligations under the sublease in a
timely fashion. A schedule of lease commitments as of September 30, 2004
follows (fiscal years ending June 30, dollars in thousands):
2006 - 2009 - 2011 and
2005 2008 2010 thereafter Total
_____ ______ _____ __________ _______
Lease payments $ 420 $ 306 $ 961 $1,307 $ 2,994
Sublease income (404) (1,122) (1,163) (775) (3,464)
_____ _______ _______ ______ _______
Net commitments $ 16 $ (816) $ (202) $ 532 $ (470)
===== ======= ======= ====== =======
Employment agreements
There are no employment agreements with officers of the Company. There are
certain agreements, subject to the attainment of certain performance
criteria, or in certain cases, termination of employment, to pay bonuses or
severance payments. Such obligations, under the various agreements, total
approximately $1.5 million.
The Company is obligated to enter into an agreement with William W. Priest
prior to the third anniversary of the Acquisition of the Company by Epoch.
Terms of the contract are to be customary for Chief Executive Officers of
peer group companies.
Legal matters
From time to time, the Company or its subsidiaries may become parties to
claims, legal actions and complaints arising in the ordinary course of
business. Management does not believe that any such action would have a
material adverse effect on its consolidated financial position.
Recently Issued Accounting Standards
There have been no new accounting standards which have not been previously
disclosed by the Company. However, on October 13, 2004, the Financial
Accounting Standards Board (the "FASB") delayed the effective date of its
proposed standard, "Share-Based Payment", a proposed amendment to FASB
Statement No. 123, "Accounting for Stock-Based Compensation." The adoption
of the proposed standard now calls for public companies to implement the
standard for stock awards that are granted, modified, or settled in cash
for interim or annual periods beginning after June 15, 2005. The FASB is
expected to issue its final standard before December 31, 2004.
Factors Which May Affect Future Results
There are numerous risks which may affect the results of operations of the
Company. Factors which could affect the Company's success include, but are
not limited to, the Company's limited operating history in the investment
management and investment advisory business, the ability to attract and
retain clients, performance of the financial markets and invested assets
managed by the Company, retention of key employees, misuse of assets and
information by employees, system failures, significant changes in
regulations, the costs of compliance associated with existing regulations
and the penalties associated with non-compliance, and the risks associated
with loss of key members of the management team. The Company presently has
one client which represents approximately 70% of total AUM and 40% of
current revenues. Loss of this client could have a significant negative
impact on the results of operation and capital resources and liquidity of
the Company and its growth plans.
In addition, the Company's ability to expand or alter its product
offerings, whether through acquisitions or internal development is critical
to its long-term success and has inherent risks. This success is dependent
on the ability to identify and fund those products or acquisitions on terms
which are favorable to the Company. There can be no assurance that any of
these operating factors or acquisitions can be achieved, or that, if
undertaken, they will be successful.
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). While a sudden
change in market interest rates would affect the Company's interest income,
we do not believe the impact would be material to the Company's financial
position.
The value of the Company's AUM is affected by movement in interest rates
and securities markets. Since the Company's management fees are based on
the value of AUM, revenues may be adversely affected by changes in interest
rates and security prices.
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 5. Other Information
The Company's Annual Meeting of Stockholders will be held November 18, 2004
at the Yale Club of New York City.
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:
August 17, 2004 on Form 8-K/A Amendment to June 3, 2004 Form 8-K
to include required Pro Forma
Financial Information.
September 14, 2004 Sale of assets of IW Holdings,
Inc.
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: November 15, 2004