UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
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 (I.R.S. Employer Identification No.)
incorporation or organization)
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 18,184,424 shares of the Registrant's common stock outstanding
as of May 9, 2005.
EPOCH HOLDING CORPORATION AND SUBSIDIARIES
INDEX
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited) -
March 31, 2005 and June 30, 2004
Condensed Consolidated Statements of Operations (Unaudited) -
Three and Nine Months Ended March 31, 2005
Condensed Consolidated Statement of Stockholders' Equity
(Unaudited) - Nine Months Ended March 31, 2005
Condensed Consolidated Statement of Cash Flows
(Unaudited) - Nine Months Ended March 31, 2005
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 6. Exhibits and Reports on Form 8-K
EPOCH HOLDING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
March 31, June 30,
2005 2004
________ _______
ASSETS
______
Current assets:
Cash and cash equivalents $ 7,943 $10,801
Short-term investments - 4,967
Accounts receivable, net 1,127 70
Receivable from landlord 615 -
Prepaid expenses 79 76
Current assets of discontinued operations - 266
_______ _______
Total current assets 9,764 16,180
_______ _______
Investments in technology-related businesses 157 157
Property and equipment, net of accumulated
depreciation 2,117 329
Notes receivable 200 -
Other non-current assets 952 449
Non-current assets of discontinued operations - 37
_______ _______
Total assets $13,190 $17,152
======= =======
See Notes to Condensed Consolidated Financial Statements.
EPOCH HOLDING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
(Concluded)
March 31, June 30,
2005 2004
_________ _________
LIABILITIES AND STOCKHOLDERS' EQUITY
____________________________________
Current liabilities:
Accounts payable and other current liabilities $ 1,812 $ 1,941
Federal income taxes payable - 1,373
Accrued interest payable - 110
Liabilities of discontinued operations - 657
________ ________
Total current liabilities 1,812 4,081
________ ________
Deferred rent 845 172
Other non-current liabilities 211 212
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; 18,184,323 and 19,529,186
shares issued, respectively 182 195
Additional paid-in capital 24,084 38,696
Retained earnings (deficit) (5,904) (992)
Unearned stock compensation (8,040) (9,157)
Less 0 and 1,694,449 shares of common
stock in treasury, at cost, respectively - (16,055)
________ ________
Total stockholders' equity 10,322 12,687
________ ________
Total liabilities and stockholders' equity $ 13,190 $ 17,152
======== ========
See Notes to Condensed Consolidated Financial Statements.
EPOCH HOLDING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED MARCH 31, 2005
(Dollars in thousands, except per share data)
(Unaudited)
Three Months Nine Months
____________ ___________
Revenues, net:
Investment advisory and management fees $ 1,090 $ 2,942
_______ _______
Operating expenses:
Employee related costs 1,488 4,295
Professional fees and services 302 846
General and administrative 479 1,329
Stock-based compensation 993 2,547
_______ _______
Total operating expenses 3,262 9,017
_______ _______
Operating loss from continuing operations (2,172) (6,075)
_______ _______
Other income:
Interest and other income 202 592
_______ _______
Total other income 202 592
_______ _______
Loss from continuing operations before
income taxes (1,970) (5,483)
_______ _______
Provision (benefit) for income taxes - -
_______ _______
Loss from continuing operations (1,970) (5,483)
_______ _______
Gain from sale of discontinued operations,
net of $0 taxes - 571
_______ _______
Net loss $(1,970) $(4,912)
======= =======
Basic and diluted loss per share:
Loss from continuing operations $ (.11) $ (.31)
Income from discontinued operations - .03
_______ _______
Basic and diluted loss per share $ (.11) $ (.28)
======= =======
See Notes to Condensed Consolidated Financial Statements.
EPOCH HOLDING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED MARCH 31, 2005
(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 349 4 1,426 (1,276) 154
Amortization of
stock-based
compensation 2,393 2,393
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 (4,912) (4,912)
______ _____ ________ _______ _______ _____ ________ _______
Balance March 31,
2005 18,184 $ 182 $ 24,084 $(8,040) $(5,904) - $ - $10,322
====== ===== ======== ======= ======= ===== ======== =======
See Notes to Condensed Consolidated Financial Statements.
EPOCH HOLDING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED MARCH 31, 2005
(Dollars in thousands)
(Unaudited)
Operating activities:
Net loss $ (4,912)
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 2,547
Depreciation 113
Changes in assets and liabilities:
Accounts receivable (1,652)
Federal income taxes payable (1,373)
Prepaid expenses and other current assets (3)
Accounts payable and other current liabilities (239)
Deferred rent 673
Other, net (4)
________
Net cash provided by (used in) operating
activities (5,421)
________
Investing activities:
Redemption of short-term investments 4,967
Security deposits paid (503)
Purchases of property and equipment (1,901)
________
Net cash provided by (used in) investing
activities 2,563
Net decrease in cash and cash equivalents (2,858)
Cash and cash equivalents at beginning of period 10,801
________
Cash and cash equivalents at end of period $ 7,943
========
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
NOTES TO 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 adviser under the Investment Advisors Act of 1940 (the "1940
Act"). Its clients include retirement plans, mutual fund clients,
endowments, foundations and high net worth individuals. Revenues generally
are 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 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 was treated as the acquiring entity
and the transaction was treated as a recapitalization of the Company.
Because EIP did not commence with business operations until April 2004, its
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 United States 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 have been 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 March 31, 2005 and June 30, 2004, the
results of its operations for the three and nine months ended March 31,
2005 and its cash flows for the nine months ended March 31, 2005. The
results for the three and nine months ended March 31, 2005 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, 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.
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.
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 nine months ended March 31,
2005. All stock options previously granted under a separate 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 nine
months ended March 31, 2005, 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 relocated its operation to that location in February
2005. Leasehold improvements at that location are being amortized over the
ten-year life of the lease.
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 currently is under 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 if any additional
taxes are due.
Recently issued accounting standards:
On December 16, 2004, the FASB issued Statement of Financial Accounting
Standards No. 123 (Revised 2004), "Share-Based Payment" ("SFAS 123R").
SFAS 123R requires companies to expense share-based payments, including
stock options, as compensation. Adoption of SFAS 123R is required for
annual periods beginning after June 15, 2005. Presently, the Company's
restricted stock awards fall under the scope of SFAS 123R, and the
accounting treatment for those awards is consistent with SFAS 123R.
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
nine months ended March 31, 2005 excluded 1,377,500 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 nine
months ended March 31, 2005 (dollars and shares in thousands, except per
share data):
Three Months Nine Months
Ended Ended
____________ ___________
Loss from continuing operations $(1,970) $(5,483)
======= =======
Income from discontinued operations $ - $ 571
======= =======
Shares:
Weighted average number of common
shares outstanding 18,175 17,968
======= =======
Basic and diluted loss per share from
continuing operations $ (.11) $ (.31)
======= =======
Basic and diluted earnings per share from
discontinued operations $ - $ .03
======= =======
Note 3 - Related Party Transactions
The Company paid rent and other related occupancy expenses to Berenson &
Company of approximately $187 thousand for the period beginning July 1,
2004 through February 15, 2005. The Chief Executive Officer of Berenson &
Company is a Director and stockholder of the Company. Epoch entered into a
long-term lease on September 15, 2004 with an unrelated party and relocated
to this facility on February 14, 2005. There have been no related party
transactions with Berenson & Company since February 11, 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 advances on
future sales commissions. Such obligations, under the various agreements,
total approximately $1.2 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 71% of total AUM and 38% of total revenues for
the three months ended March 31, 2005. The contract has been in place
since 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. In January 2005, this
client transferred 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
March 31, 2005. Following are the summary operating results of the
discontinued operations for the nine months ended March 31, 2005 (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 May 16, 2005, the Company collected the $534 thousand Note from
InterWorld Holdings, LLC, the entity that purchased the Company's e-
commerce software operations in September 2004. As discussed in Note 1
under the caption of "Fair Value of Financial Instruments", the Note was
recorded at its estimated fair value of approximately $200 thousand. The
May 16, 2005 receipt fully discharged the Note. As a result, the Company
will record a gain in the amount of $334 thousand in its fiscal fourth
quarter.
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 71% of total AUM and 37% 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, Epoch Holding Corporation, formerly known as J Net
Enterprises, Inc. 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 deemed 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 adviser
under the Investment Advisors 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 nine months of fiscal 2005,
which ended March 31, 2005, AUM increased to $1.24 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 typically 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 $1.24 billion as of March 31, 2005 from $1.01 billion on
December 31, 2004. The following table sets forth the AUM by client type
currently managed, or advised, by Epoch (in millions):
As of As of
March 31, 2005 June 30, 2004
______________ _____________
Subadvisory $ 886.1 $663
Private Clients 236.2 185
Institutional 58.0 -
Mutual Funds 64.3 -
________ ____
Total AUM $1,244.6 $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. The mutual fund
designation represents the assets of Epoch International Small Cap Fund
(symbol "EPIEX"), a publicly traded mutual fund for which EIP is the
adviser.
Results of operations - three months ended March 31, 2005
The three months ended March 31, 2005 represent the third 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.
Revenues
Total revenue from investment management and advisory services were $1.1
million for each of the quarters ended March 31, 2005 and December 31,
2004. The subadvisory contract with CI accounted for approximately 71% of
total AUM and 38% of revenues for the three months ended March 31, 2005.
Revenues for the quarter ended December 31, 2004 included $.2 million of
incentive fees. The incentive fees included in the December 31, 2004
quarter, which are calculated at the end of each calendar year, were based
on performance criteria, which may or may not occur in future years.
Recurring revenues increased by approximately 22% for the current quarter.
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 March 31, 2005, these expenses were $1.5 million. The
total costs include $.3 million of performance and guaranteed bonuses or
advances on sales commissions which are non-refundable but can be applied
against future sales.
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 March 31, 2005, such fees totaled $.3 million.
Approximately $.1 million represents payments for income tax review and
assistance and consultant services to an investment management group
General and administrative expenses
These costs consist primarily of office rentals, information technology-
related expenses, utilities, insurance, and other office-related costs.
Expenses totaled $.5 million for the three months ended March 31, 2005.
Stock Compensation
Stock compensation totaled $1.0 million and 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. In January 2005, 279,510 shares of
restricted stock was issued to employees. A total of 34,939 shares of the
January award, representing 12.5% of the shares issued, were immediately
vested. The remaining 87.5% of the shares vest over the next three years.
Results of operations - nine months ended March 31, 2005
The nine months ended March 31, 2005 represent the first nine 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 nine months include certain
non-recurring start up and post merger transactions.
Revenues
Total revenue from investment management and advisory services were $2.9
million for the nine months ended March 31, 2005. The subadvisory contract
with CI accounts for approximately 71% of total AUM as of March 31, 2005
and 37% of year-to-date revenues.
Employee related costs
Costs in this category include salaries, benefits, incentive compensation,
signing bonuses, commission expenses, travel and entertainment. For the
nine months ended March 31, 2005, these expenses were $4.3 million. The
total costs include $1.1 million of bonuses and advances on sales
commissions which are non-refundable but can be applied against future
sales and other startup related costs.
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 nine months
ended March 31, 2005, such fees totaled $.9 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 $.2 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 nine months ended March 31, 2005.
General and administrative expenses
These costs consist primarily of office rentals, information technology-
related expenses, utilities, insurance, and other office-related costs.
Expenses totaled $1.3 million for the nine months ended March 31, 2005.
Stock compensation of $2.5 million represents restricted stock awards
issued to employees, employee-owners and directors of the Company. As of
March 31, 2005 there was a total of 5.8 million shares subject to
restrictions of continued employment or services to the Company. The
restrictions expire between June 2007 and January 2008. 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 March 31, 2005, the Company had
$7.9 million of cash and $1.7 million of receivables to fund its business
growth strategy. Trade payables, which consist primarily of professional
fees, trade vendors and accrued benefits were $1.8 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 nine months ended March 31, 2005, net cash used in operating
activities was $5.4 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 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 nine months ended March 31, 2005. For the three
months ended March 31, 2005, cash used in operations was $.3 million, which
reflects the improvement in operations and the passing of the higher start-
up costs incurred to commence operations.
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 relocated its New York operations on February 14, 2005 and a
$.5 million deposit was required to secure a letter of credit for the
Company's lease deposit at the new location. The Company spent $1.5
million, net of landlord build out contributions, for the construction and
furnishing of the space as of March 31, 2005. The Company expects to incur
approximately $.5 of build out costs.
Contractual obligations
Leases:
The Company has a long-term office space lease in New York City, where its
primary business operations are conducted.
Future minimum lease payments under this lease 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, and operating leases for office equipment. 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 these other lease commitments and the related sublease income
as of March 31, 2005 follows (fiscal years ending June 30, dollars in
thousands):
2006 - 2009 - 2011 and
2005 2008 2010 thereafter Total
____ ______ ______ __________ ______
Lease payments $ 140 $ 1,511 $ 988 $ 160 $ 2,799
Sublease income (125) (1,704) (1,163) (194) (3,186)
_____ _______ _______ _______ _______
Net commitments $ 15 $ (193) $ (175) $ (34) $ (387)
===== ======= ======= ======= =======
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 $1.2 million as of March 31,
2005. The Company had no accrued amounts for any of the severance-related
costs as of March 31, 2005. During calendar 2005, guaranteed bonuses and
sales commission advances are approximately $1 million, which are being
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 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"). 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 if any additional taxes are due.
Recently Issued Accounting Standards
On December 16, 2004, the FASB issued Statement of Financial Accounting
Standards No. 123 (Revised 2004), "Share-Based Payment" ("SFAS 123R").
SFAS 123R requires companies to expense share-based payments, including
stock options, as compensation. Adoption of SFAS 123R is required for
annual periods beginning after June 15, 2005. Presently, the Company's
restricted stock awards fall under the scope of SFAS 123R, and the
accounting treatment for those awards is consistent with SFAS 123R.
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 71% of total AUM as of March 31,
2005 and 37% of revenues for the nine months ended March 31, 2005. 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
Evaluation of Disclosure Controls and Procedures. Management, with the
_________________________________________________
participation of the Company's principal executive officer and principal
financial officer, has evaluated the effectiveness of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended (the "Exchange Act")), as
of the end of the period covered by this Quarterly Report on Form 10-Q.
Based on such evaluation, the Company's principal executive officer and
principal financial officer have concluded that as of such date, the
Company's disclosure controls and procedures were designed to ensure that
information required to be disclosed by us in reports that we file or
submit under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in applicable SEC rules and
forms and were effective.
Changes in Internal Control Over Financial Reporting. There was no change
_____________________________________________________
in our internal control over financial reporting (as defined in Rules 13a-
5(f) and 15d-15(f) under the Exchange Act) that occurred during the period
covered by this Quarterly Report on Form 10-Q that has materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting.
PART II. OTHER INFORMATION
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.
(b) Reports on Form 8-K:
None.
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: May 16, 2005