10-Q 1 form10q.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 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