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, 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
EPOCH HOLDING CORPORATION
__________________________________________________________________________
(Exact name of registrant as specified in its charter)
Delaware 20-1938886
_____________________________________________ __________________
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
640 5th Avenue, 18th Floor, New York, NY 10019
________________________________________ _________
(Address of principal executive offices) (Zip Code)
212-303-7200
___________________________________________________
(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 18,184,423 shares of the Registrant's common stock outstanding
as of February 11, 2005.
EPOCH HOLDING CORPORATION AND SUBSIDIARIES
INDEX
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited) -
December 31, 2004 and June 30, 2004
Condensed Consolidated Statements of Operations (Unaudited) -
Three and Six Months Ended December 31, 2004
Condensed Consolidated Statement of Stockholders' Equity
(Unaudited) - Six Months Ended December 31, 2004
Condensed Consolidated Statement of Cash Flows
(Unaudited) - Six Months Ended December 31, 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 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
EPOCH HOLDING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
December 31, June 30,
2004 2004
____________ ________
ASSETS
______
Current assets:
Cash and cash equivalents $ 9,471 $10,801
Short-term investments - 4,967
Accounts receivable, net 1,071 70
Prepaid expenses 143 76
Current assets of discontinued operations - 266
_______ _______
Total current assets 10,685 16,180
_______ _______
Investments in technology-related businesses 157 157
Property and equipment, net of accumulated
depreciation 894 329
Notes receivable 200 -
Other non-current assets 952 449
Non-current assets of discontinued operations - 37
_______ _______
Total assets $12,888 $17,152
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
____________________________________
Current liabilities:
Accounts payable and other current
liabilities $ 1,215 $ 1,941
Federal income taxes payable - 1,373
Accrued interest payable - 110
Liabilities of discontinued operations - 657
_______ _______
Total current liabilities 1,215 4,081
_______ _______
Deferred rent 161 172
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; 17,904,913
and 19,529,186 shares issued,
respectively 179 195
Additional paid-in capital 22,858 38,696
Retained earnings (deficit) (3,934) (992)
Unearned compensation (7,803) (9,157)
Less 0 and 1,694,449 shares of common
stock in treasury, at cost,
respectively - (16,055)
_______ _______
Total stockholders' equity 11,300 12,687
_______ _______
Total liabilities and stockholders' equity $12,888 $17,152
======= =======
See Notes to Condensed Consolidated Financial Statements.
EPOCH HOLDING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND SIX MONTHS ENDED DECEMBER 31, 2004
(Dollars in thousands, except per share data)
(Unaudited)
Three Months Six Months
____________ __________
Revenues, net:
Investment advisory and management fees $ 1,065 $ 1,852
_______ _______
Operating expenses:
Employee related costs 1,242 2,807
Professional fees and services 264 544
General and administrative 404 850
Stock-based compensation 792 1,554
_______ _______
Total operating expenses 2,702 5,755
_______ _______
Operating loss from continuing operations (1,637) (3,903)
_______ _______
Other income:
Interest and other income 195 390
_______ _______
Total other income 195 390
_______ _______
Loss from continuing operations before
income taxes (1,442) (3,513)
_______ _______
Provision (benefit) for income taxes - -
_______ _______
Loss from continuing operations (1,442) (3,513)
_______ _______
Loss from discontinued operations, net of
$0 taxes - (1)
Gain from sale of discontinued operations,
net of $0 taxes - 572
_______ _______
Net loss $(1,442) $(2,942)
======= =======
Basic and diluted loss per share:
Loss from continuing operations $ (.08) $ (.20)
Income from discontinued operations - .03
_______ _______
Basic and diluted loss per share $ (.08) $ (.17)
======= =======
See Notes to Condensed Consolidated Financial Statements.
EPOCH HOLDING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED DECEMBER 31, 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
Issuance of
restricted stock 70 1 200 (200) 1
Amortization of
stock-based
compensation 1,554 1,554
Recapitalization:
Retirement of
treasury stock (1,694) (17) (16,038) 1,694 16,055 -
Retirement of
outstanding
J Net stock (17,905) (179) (179)
Issuance of
Epoch Holding
Corporation
shares 17,905 179 179
Net loss (2,942) (2,942)
______ _____ ________ _______ _______ _______ ________ _______
Balance
December 31,
2004 17,905 $ 179 $ 22,858 $(7,803) $(3,934) - $ - $11,300
====== ===== ======== ======= ======= ======= ======== =======
See Notes to Condensed Consolidated Financial Statements.
EPOCH HOLDING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED DECEMBER 31, 2004
(Dollars in thousands)
(Unaudited)
Operating activities:
Net loss $ (2,942)
Adjustments to reconcile net loss to net
cash used by operating activities:
Gain on disposal of discontinued operations (572)
Loss from discontinued operations 1
Amortization of stock-based compensation 1,554
Depreciation 60
Changes in assets and liabilities:
Accounts receivable (981)
Federal income taxes payable (1,373)
Prepaid expenses and other current assets (67)
Other non-current assets (3)
Accounts payable and other current liabilities (835)
Deferred rent (11)
Other, net (3)
________
Net cash used by operating activities (5,172)
________
Investing activities:
Redemption of short-term investments 4,967
Security deposits paid (500)
Purchases of property and equipment (625)
________
Net cash provided by investing activities 3,842
________
Net decrease in cash and cash equivalents (1,330)
Cash and cash equivalents at beginning of period 10,801
________
Cash and cash equivalents at end of period $ 9,471
========
Supplemental disclosures of cash flow data:
Cash paid for:
Federal income taxes $ 1,373
Interest $ 110
Non-cash investing and financing activities:
Note receivable for sale of discontinued operations $ 200
See Notes to Condensed Consolidated Financial Statements.
EPOCH HOLDING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
Note 1 - Significant accounting policies and business structure
Business:
Epoch Holding Corporation ("Epoch" or the "Company") is a holding company,
whose business operations are conducted through its wholly-owned subsidiary,
Epoch Investment Partners, Inc. ("EIP"). EIP is a registered
investment advisor under the Investment Advisers Act of 1940 (the "1940
Act"). Its clients include retirement plans, mutual fund clients,
endowments, foundations and high net worth individuals. 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.
EIP began investment services operations in April 2004, and became a
subsidiary in June 2004. Prior to the Company's combination with EIP, the
Company was engaged in the e-commerce software business. The Company's
acquisition of EIP was accounted for as a reverse merger. Under generally
accepted accounting principles in the United States, EIP is treated as the
acquiring entity and the transaction is treated as a recapitalization of
the Company. Because EIP did not commence with business operations until
April 2004, the operating history is limited.
The e-commerce operations were sold on September 9, 2004 to the former
management of those operations. Accordingly, the e-commerce operations
have been reported as discontinued operations.
In order to reflect the Company's business direction, the Company proposed,
and the stockholders approved, a change in the Company's name from J Net
Enterprises, Inc. to Epoch Holding Corporation at its Annual Meeting of
Stockholders on November 18, 2004.
In addition to the name change, the stockholders approved a reincorporation
from Nevada to Delaware at the November 18, 2004 meeting. The
reincorporation and name change were completed December 3, 2004 and the
Company continued trading on the Over-the-Counter Bulletin Board under its
new ticker symbol "EPHC".
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 December 31, 2004 and June 30, 2004, the
results of its operations for the three and six months ended December 31,
2004 and its cash flows for the six months ended December 31, 2004. The
results for the three and six months ended December 31, 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.
Reclassifications:
Certain reclassifications have been made to prior financial statements to
more accurately reflect the nature of the transactions.
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:
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 liquidation, 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 Condensed Consolidated Statements 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
secured promissory note (the "Note") to the Company. The Note is due 5
years from the date of issuance and bears interest at 6.5% per annum and is
secured by all of the assets that were purchased in the transaction.
Payments of principal on the Note are at a rate of 50% of the annual cash
flows from operations, as defined in the agreement, in excess of $300
thousand. The Company recorded the Note at its estimated fair value of
approximately $200 thousand. Factors affecting the estimate were the non-
marketable status of the Note 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 pursuant to contracts with each client and are generally based on
a percentage of AUM and may include performance based incentive fees. 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 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 restricted stock issued to the
Company's employees and directors, 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 six months ended December 31,
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 and six months ended
December 31, 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, and exclude option periods, if any. 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 in February 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 leasehold improvements being
amortized as of December 31, 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.
The Company is under current audit by the Internal Revenue Service (the
"IRS") with respect to its fiscal years ended June 30, 2001 and June 30, 2002
(the "Audit Period"). In July 2004, the Company paid $1.5 million for tax
items associated with the IRS audit. The statute of limitations for the
Audit Period, unless extended by the Company, will expire in November, 2005.
The Company has recently received an additional inquiry from the IRS with
respect to the calculation of the alternative minimum tax attributable to
operating loss carrybacks for the Audit Period. The Company is in the
process of reviewing the inquiry, and has not determined whether any
additional tax will be payable.
Recently issued accounting standards:
On December 16, 2004, the FASB amended Statement of Financial Accounting
Standards No. 123 "Share-Based Payment" ("SFAS 123"). The adoption of the
standard now calls for public companies to implement the amended cost
recognition methodology for stock options, awards and payments that are
granted, modified, or settled in cash for interim or annual periods beginning
after June 15, 2005. Only the Company's restricted stock awards fall under
the scope of the amendment. However, the Company's current accounting for
the awards is consistent with the revisions to SFAS 123. As a result, there
will be no effect to the Company's financial position or results of
operations when the revisions are adopted for the June 30, 2005 financial
statements.
Note 2 - Earnings (loss) Per Share
Basic earnings (loss) per share are computed by dividing net earnings (loss)
by the weighted average number of shares outstanding during the period. The
calculation of earnings (loss) per share for the three and six months ended
December 31, 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 for the three and six
months ended December 31, 2004 (dollars and shares in thousands, except per
share data):
Three Months Six Months
____________ __________
Loss from continuing operations $(1,442) $(3,513)
======= =======
Income from discontinued operations - $ 571
======= =======
Shares:
Weighted average number of common
shares outstanding 17,895 17,865
======= =======
Basic and diluted loss per share from
continuing operations $ (.08) $ (.20)
======= =======
Basic and diluted earnings per share
from discontinued operations $ - $ .03
======= =======
Note 3 - Related Party Transactions
EIP conducts 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 to
Berenson & Company of approximately $153 thousand for the six months ended
December 31, 2004. Epoch entered into a long-term lease on September 15,
2004 with an unrelated party and expects to relocate to its new facility in
February 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, advances on future
sales commissions, or severance payments. Such obligations, under the
various agreements, total approximately $1.3 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 EIP. 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:
EIP is the beneficiary of a subadvisory contract with one customer that
constitutes approximately 74% of total AUM and 37% of total revenues for the
six months ended December 31, 2004. The contract was transferred on June 2,
2004 and the customer committed to use EIP'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. A January 19, 2005 press
release from this client announced that it was transferring four additional
funds to EIP for subadvisory services. While the Company continues 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. Details
concerning the Note and its related valuation are presented in Note 1 under
the caption "Fair Value of Financial Investments".
Selected financial data - discontinued operations:
There was no activity in discontinued operations for the three months ended
December 31, 2004. Following are the summary operating results of the
discontinued operations for the six months ended December 31, 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 January 4, 2005 the Company issued 279,510 restricted stock awards to
employees of the Company. Recipients of the restricted awards were
immediately vested in 12.5% of the total shares received. The remaining
87.5% of unvested shares will vest over the next three years, subject to the
recipients remaining as employees of the Company or any of its subsidiaries.
Issuance of these awards will result in total stock compensation expense of
$1.2 million over the vesting period, assuming no forfeitures.
On January 19, 2005 the Company's largest client issued a press release
naming Epoch as portfolio advisor for four additional funds. The transfer of
approximately $140 million of AUM occurred in January 2005.
On January 25, 2005, the Company became the advisor to Epoch International
Small Cap Fund (ticker symbol: EPIEX), a publicly traded mutual fund. AUM in
EPIEX are expected to exceed $50 million by mid-February 2005.
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 74% of total AUM and 35% 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. (renamed Epoch Holding Corporation and
hereinafter referred to as "Epoch" or the "Company") completed a reverse
acquisition of Epoch Investment Partners, Inc. ("EIP") When the merger was
completed, the Company discontinued its e-commerce software line of business,
and investment management and advisory services became the Company's sole
line of business.
For accounting purposes, EIP was the acquiror in the June 2004 merger and the
transaction was treated as a recapitalization of the Company. Due to EIP's
limited operating history, there are no prior period statements of
operations.
In order to reflect the Company's business direction, the Company's
stockholders approved a change in the Company's name from J Net Enterprises,
Inc. to Epoch Holding Corporation at its Annual Meeting of Stockholders on
November 18, 2004.
In addition to the name change, the stockholders approved a reincorporation
of the Company from Nevada to Delaware, the election of directors and the
implementation of an omnibus stock incentive plan. The reincorporation and
name change was completed December 3, 2004.
EIP was formed in April 2004 and is registered as an investment advisor under
the Investment Advisers Act of 1940 (the "1940 Act"). Initially, there were
approximately $645 million of assets under management ("AUM") under
subadvisory agreements that were transferred to EIP from one of EIP's co-
founder's prior firm. During the month of June 2004, additional AUM of
approximately $160 million were transferred to EIP. As of June 30, 2004,
total AUM were $848 million. During the first six months of fiscal 2005,
which ended December 31, 2004, AUM increased to $1.01 billion.
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
and are done on a quarterly basis, in arrears. Some contracts include
performance based incentives in addition to advisory fees. These incentives
are typically billed annually.
The Company also earns interest on its 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
AUM increased to $1.01 billion as of December 31, 2004 from $908 million on
September 30, 2004 and $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
December 31, 2004 June 30, 2004
_________________ _____________
Subadvisory $ 743 $663
Private Clients 226 185
Institutional 40 -
______ ____
Total AUM $1,009 $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 December 31, 2004
The three months ended December 31, 2004 represent the second full quarter of
operations in the investment management and investment advisory line of
business. As previously stated, EIP did not commence business operations
until April 2004, and did not earn revenues from AUM until the latter part of
June 2004. As a result, there are no prior year results of operations for
comparative purposes. The results for the quarter include certain non-
recurring start up and post merger transaction costs and expenses.
Revenues
Total revenue from investment management and advisory services were $1.1
million for the quarter ended December 31, 2004 and includes $.2 million of
revenue attributable to incentive fees earned from investment performance in
calendar 2004, which exceeded certain thresholds contained in the contracts
with customers. The subadvisory contract with CI accounts for approximately
74% of total AUM and 35% of revenues for the three months ended December 31,
2004.
Employee related costs
Costs in this category include salaries, benefits, incentive compensation,
signing bonuses, commission expenses and travel and entertainment. For the
three months ended December 31, 2004, these expenses were $1.3 million. The
total costs include $.3 million of signing bonuses, advances on sales
commissions (which are non-refundable but can be applied against future
sales) and other related startup costs.
Professional fees and services
These expenses consist primarily of 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 December 31, 2004, such fees totaled $.3 million. Approximately $.1
million represents payments for marketing and corporate identity services.
In addition, approximately $.1 million of legal fees were also incurred
related to costs associated with the Company's annual stockholder meeting and
establishment of the long-term incentive compensation plan.
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 December 31, 2004.
Stock Compensation
Stock compensation of $.8 million represents 5.5 million shares of restricted
stock that was issued to employee owners associated with the acquisition of
EIP. The restrictions will be removed subject to continued employment
through June 2007. In addition, directors of the Company were awarded 70
thousand shares for their fiscal 2005 services. The directors' shares are
subject to a three-year vesting period and vest one third each year.
Compensation expense is being recognized ratably over the three year vesting
period of those awards.
Results of operations - six months ended December 31, 2004
The six months ended December 31, 2004 represent the first six full months of
operations in the investment management and investment advisory line of
business. As previously stated, EIP did not commence business operations
until April 2004, and did not earn revenues from AUM until the latter part of
June 2004. As a result, there are no prior year results of operations for
comparative purposes. The results for the six months include certain non-
recurring start up and post merger transactions.
Revenues
Total revenue from investment management and advisory services were $1.9
million for the six months ended December 31, 2004. The subadvisory contract
with CI accounts for approximately 74% of total AUM and 37% of revenues for
the six months ended December 31, 2004.
Employee related costs
Costs in this category include salaries, benefits, incentive compensation,
signing bonuses, commission expenses, travel and entertainment. For the six
months ended December 31, 2004, these expenses were $2.8 million. The total
costs include $.8 million of signing bonuses, advances on sales commissions
(which are non-refundable but can be applied against future sales) and other
startup related costs, some of which can be applied against commissions
earned from future sales.
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 six months
ended December 31, 2004, such fees totaled $.5 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. Another $.1 million represents payments for
marketing and corporate identity services. Other legal fees were also
incurred related to finalizing income tax reporting matters and income tax
audits during the six months ended December 31, 2004.
General and administrative expenses
These costs consist primarily of office rentals, information technology-
related expenses, utilities, insurance, and other office-related costs.
Expenses totaled $.9 million for the six months ended December 31, 2004.
Stock compensation of $1.6 million represents restricted stock awards issued
to employees, employee-owners and directors of the Company. As of December
31, 2004 there was a total of 5.5 million shares subject to restrictions of
continued employment or services to the Company. The restrictions expire
between June 2007 and July 2007. Compensation expense is being recognized
ratably over the three year vesting period of those awards.
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 December 31, 2004, the Company had
$9.5 million of cash and $1.1 million of receivables to fund its business
growth strategy. Trade payables, which consist primarily of professional
fees, trade vendors and accrued benefits were $1.2 million. There was no
debt and Management does not foresee any reason to incur debt unless a
significant business opportunity warrants such action.
For the six months ended December 31, 2004, net cash used in operating
activities was $5.2 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 and start-up costs and signing bonuses of $1.3
million. The remaining use of funds was attributable to cash-based operating
expenses for the six months.
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 to achieve cash positive results of operations.
The Company expects to relocate its New York operations in February 2005.
$.5 million of cash was required to secure a letter of credit for the
Company's lease deposit at the new location at 640 5th Avenue, New York, New
York. The Company has budgeted $1.2 million, net of landlord build out
contributions, for the construction and furnishing of the space. As of
December 31, 2005, the Company had spent $.7 million on this project.
Contractual obligations
Leases:
The Company entered into a long-term office space lease in New York City on
September 15, 2004. Presently, plans are to occupy the new facility in
February 2005. The Company expects the costs of the build-out and furnishing
the office space to be approximately $1.2 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 December 31, 2004
follows (fiscal years ending June 30, dollars in thousands):
2006 - 2009 - 2011 and
2005 2008 2010 thereafter Total
_____ _______ _______ __________ ______
Lease payments $ 270 $ 1,462 $ 961 $ 160 $ 2,853
Sublease income (271) (1,704) (1,163) (194) (3,332)
_____ _______ ______ _____ _______
Net commitments $ (1) $ (242) $ (202) $ (34) $ (479)
===== ======= ====== ===== =======
Employment agreements
There are no employment agreements with officers of the Company. There are
agreements pertaining to the attainment of certain performance criteria,
advances on future sales commissions, or, in certain cases, termination of
employment, to pay bonuses or severance payments. Such obligations, under
the various agreements, total approximately $1.3 million as of December 31,
2004. The Company had no accrued amounts for any of the costs as of December
31, 2004. During calendar 2005, guaranteed bonuses and sales commission
advances are approximately $1 million, and will be accrued ratably over the
periods covered by such agreements.
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.
Other matters
The Company has recently received an additional inquiry from the Internal
Revenue Service (the "IRS") with respect to the calculation of the
alternative minimum tax attributable to operating loss carrybacks for the
Audit Period. The Company is in the process of reviewing the inquiry, and
has not determined whether any additional tax will be payable.
Recently Issued Accounting Standards
On December 16, 2004, the Financial Accounting Standards Board (the "FASB")
amended Statement of Financial Accounting Standards No. 123 "Share-Based
Payment" ("SFAS 123"). The adoption of the standard now calls for public
companies to implement the amended cost recognition methodology for stock
options, awards and payments that are granted, modified, or settled in cash
for interim or annual periods beginning after June 15, 2005. Only the
Company's restricted stock awards fall under the scope of the amendment.
However, the Company's current accounting for the awards is consistent with
the revisions to SFAS 123. There will be no material effect to the Company's
financial position or results when the revisions are adopted for the June 30,
2005 financial statements.
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 74% of total AUM as of December 31,
2004 and 37% and 35% of revenues for the three and six months ended December
31, 2004, respectively. 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 4. Submission of Matters to a Vote of Security Holders.
This item is incorporated by reference to a Form 8-K filed by the Registrant
on November 19, 2004.
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:
Date Item(s) Description
_________________ __________ __________________________
November 19, 2004 1.01,7.01, The Company announced that
8.01 all proposals in the Proxy
Statement to Stockholders
were approved.
December 7, 2004 1.01, 5.03 The Company announced the
completion of its
reincorporation to Delaware.
December 9, 2004 8.01 The Company announced that
its trading symbol had
changed from JNEI to EPHC.
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.
EPOCH HOLDING CORPORATION
(Registrant)
By: /s/ Mark E. Wilson
_______________________
Mark E. Wilson
Chief Financial Officer
Date: February 14, 2005