10-Q 1 edg33105.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 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