| EPOCH HOLDING CORP ITEM 1A RISK FACTORS In addition to factors mentioned elsewhere in this Form 10-K or previously disclosed in our SEC filings, including our reports on Form 10-Q and Form 8-K, the factors discussed below, among others, could cause actual results to differ materially from those contemplated by the forward-looking statements, and future results could differ materially from historical performance |
| Epoch undertakes no obligation to revise the forward-looking statements contained in this Form 10-K to reflect events after the date of this Form 10-K Risks Related to Our Business The Company has limited operating history as an asset management business and, therefore, most of the historical financial information presented may not be indicative of our future performance |
| Business operations in the investment advisory and investment management line of business began on April 14, 2004, and revenues were not earned until June 2004 |
| Prior to such date, the Companyapstas business was focused on enterprise software and technology infrastructure |
| The enterprise software business was sold in September 2004 and the technology infrastructure investment activities were suspended |
| Investment advisory and investment management remains the sole line of business of the Company |
| Although the Company is confident the management and employees of EIP have experience, good reputations and good prospects in the asset management business, and the Company is permitted under applicable rules promulgated by the SEC to report such experience and reputations to prospective clients, the acquisition of clients and generation of revenue cannot be assured |
| The Company could lose clients and suffer a decline in the Companyapstas asset management and advisory revenue and earnings if the investments the Company chooses in the Companyapstas asset management business perform poorly, regardless of overall trends in the prices of securities |
| Investment performance affects the Companyapstas AUM relating to existing clients and is one of the most important factors in retaining clients and competing for new asset management business |
| Poor investment performance could impair the Companyapstas revenue and growth because: |
| existing clients might withdraw funds from the Companyapstas asset management business in favor of better performing products, which would result in lower investment advisory fees; |
| third-party financial intermediaries, advisers or consultants may rate the Companyapstas products poorly, which may result in client withdrawals and reduced asset flows from these third parties or their clients, or |
| firms with which the Company has strategic alliances may terminate such relationships with the Company, and future strategic alliances may be unavailable |
| Some members of management are critical to the Companyapstas success, and the inability to attract and retain key employees could compromise the Companyapstas future success |
| If key employees were to leave, whether to join a competitor or otherwise, the Company may suffer a decline in revenue or earnings and suffer an adverse effect on the Companyapstas financial position |
| Loss of key employees may occur due to perceived opportunity for promotion, increased compensation, work environment or other individual reasons, some of which may be beyond the Companyapstas control |
| 9 _________________________________________________________________ Future success will depend to a significant extent upon the services and efforts of the Companyapstas executive officers, particularly William W Priest, our Chief Executive Officer and Chief Investment Officer, Timothy T Taussig, our President and Chief Operating Officer, and Executive Vice Presidents, J Philip Clark and David N Pearl |
| These executives are responsible for determining the strategic direction of our business, and are integral to our brand and our reputation |
| There are no employment agreements with any key employees, including Mr |
| However, pursuant to certain agreements pertinent to the business combination with EIP, shares of common stock held by Mr |
| Priest and Messrs |
| Taussig, Clark, and Pearl are subject to vesting and forfeiture provisions as well as transfer and sale restrictions |
| The loss of the services of one or more these key employees, or failure to attract, retain and motivate qualified personnel could negatively impact the business, financial condition, results of operations and future prospects |
| As with other asset management businesses, future performance depends to a significant degree upon the continued contributions of certain officers, portfolio managers and other key marketing, client service and management personnel |
| There is substantial competition for these types of skilled personnel |
| The Company is effectively controlled by William W Priest, the Companyapstas Chief Executive Officer |
| For at least three years following the June 2, 2004 business combination, William W Priest has the right to set the number of directors on the Companyapstas Board of Directors (the "e Board "e ) at seven, as done in August of 2006, and to designate four people for appointment to the Board, provided such designees meet the criteria established by our Nominating/Corporate Governance Committee |
| Moreover, Mr |
| Priest will have the right to remove and/or replace any of these directors at any time |
| Priest will control the Board and, therefore, its business policies and affairs, including determinations with respect to acquisitions, dispositions, borrowings, issuances of common stock or other securities of the Company, and the declaration and payment of dividends on the common stock |
| Negative performance of the securities markets could reduce revenues |
| The Companyapstas investment management and investment advisory business also would be expected to generate lower revenues in a market or general economic downturn |
| Under the Companyapstas asset management business arrangements, investment advisory fees the Company receives typically are based on the market value of AUM Accordingly, a decline in the prices of securities would be expected to cause the Companyapstas revenue and income to decline by: |
| causing the value of the Companyapstas AUM to decrease, which would result in lower investment advisory fees, and/or |
| causing some of the Companyapstas clients to withdraw funds from the Companyapstas asset management business in favor of investments they perceive as offering greater opportunity or lower risk, which also would result in lower investment advisory fees |
| If the Companyapstas revenue declines without a commensurate reduction in the Companyapstas expenses, the Companyapstas net income will be reduced |
| In particular, a considerable portion of AUM is expected to be invested in equity securities of companies with market capitalizations between dlra200 million and dlra10 billion, often characterized as small or mid-sized companies |
| As a consequence, the Company is susceptible to the volatility associated with changes in the market for stocks that fall within this capitalization range |
| The Companyapstas investment style in the asset management business may underperform other investment approaches, which may result in significant client or asset departures or a reduction in AUM 10 _________________________________________________________________ Even when securities prices are rising, performance can be affected by investment style |
| Many of the equity investment strategies in the Companyapstas asset management business share a common investment orientation towards fundamental security selection |
| The Company believes this style tends to outperform the market in some market environments and underperform it in others |
| In particular, a prolonged "e growth "e environment (ie, a prolonged period whereby growth stocks outperform value stocks) may cause the Companyapstas investment strategy to go out of favor with some clients, consultants or third-party intermediaries |
| In combination with poor performance relative to peers, any changes in personnel, extensive periods in particular market environments, or other difficulties, may result in significant client or asset departures or a reduction in AUM The Companyapstas business is dependent on investment advisory and sub-advisory agreements that are subject to termination or non-renewal; therefore, clients could be lost on very short notice |
| Substantially all anticipated revenues are to be derived pursuant to investment advisory and sub-advisory agreements with clients |
| In general, either party may terminate these agreements upon 30 days &apos notice |
| Any termination of, or failure to renew, these agreements could have a material adverse impact, particularly because many of the costs are relatively fixed |
| Because the Companyapstas clients can remove the assets the Company manages on short notice, the Company may experience unexpected declines in revenue and profitability |
| The Companyapstas investment advisory contracts are generally cancellable upon very short notice |
| Institutional and individual clients, and firms with which the Company has strategic alliances, can terminate their relationship with the Company, reduce the aggregate amount of AUM or shift their funds to other types of accounts with different rate structures for a number of reasons - including investment performance, changes in prevailing interest rates and financial market performance |
| Poor performance relative to other investment management firms may result in decreased inflows into the Companyapstas investment products, increased withdrawals from the Companyapstas investment products, and the loss of institutional or individual accounts or strategic alliances |
| In addition, the ability to terminate relationships may allow clients to renegotiate for lower fees paid for asset management services |
| In addition, in the US, as required by the Investment Advisers Act, each of the Companyapstas investment advisory contracts with the mutual funds the Company advises or sub-advises automatically terminates upon its "e assignment "e , or transfer of the Companyapstas responsibility for fund management |
| Each of the Companyapstas other investment advisory contracts subject to the provisions of the Investment Advisers Act, as required by this act, provides that the contract may not be "e assigned "e without the consent of the customer |
| A sale of a sufficiently large block of shares of the Companyapstas voting securities or other transactions could be deemed an "e assignment "e in certain circumstances |
| An assignment, actual or constructive, will trigger these termination provisions and could adversely affect the Companyapstas ability to continue managing these client accounts |
| To the extent that a technical "e assignment "e of investment advisory contracts arises, the Company will take the necessary steps to provide clients an opportunity to consent to the continuation of their advisory agreements |
| Such new agreements may need approval by the stockholders of the respective funds |
| In the event that any of these clients do not consent to a renewal of their agreement, the Company could lose AUM, which would result in a loss of revenue |
| There may not be a consistent pattern in the Companyapstas financial results from period to period, which may make it difficult for the Company to achieve steady earnings growth on a quarterly basis and may cause the price of the Companyapstas common stock and, similarly, the Companyapstas equity security units, to decline |
| 11 _________________________________________________________________ The Company may experience significant fluctuations in revenue and profits |
| The Companyapstas revenue is particularly sensitive to fluctuations in the Companyapstas AUM Asset management fees are often based on AUM as of the end of a quarter or month |
| As a result, a reduction in assets at the end of a quarter or month (as a result of market depreciation, withdrawals or otherwise) will result in a decrease in management fees |
| As a result of quarterly fluctuations, it may be difficult for the Company to achieve steady earnings growth on a quarterly basis, which could lead to large adverse movements in the price of the Companyapstas common stock or increased volatility in the Companyapstas stock price and, in turn, cause the value of the Companyapstas equity security units to decline |
| Access to clients through intermediaries is important to the Companyapstas asset management business, and reductions in referrals from such intermediaries or poor reviews of the Companyapstas products or the Companyapstas organization by such intermediaries could materially reduce the Companyapstas revenue and impair the Companyapstas ability to attract new clients |
| The Companyapstas ability to market its services relies, in part, on receiving mandates from the client base of national and regional securities firms, banks, insurance companies, defined contribution plan administrators, investment consultants and other intermediaries |
| To an increasing extent, the Companyapstas business uses referrals from accountants, lawyers, financial planners and other professional advisers |
| The inability to have this access could materially adversely affect the Companyapstas business |
| In addition, many of these intermediaries review and evaluate the Companyapstas products and the Companyapstas organization |
| Poor reviews or evaluations of either the particular products or of the Company may result in client withdrawals or an inability to attract new assets through such intermediaries |
| The Company derives a substantial percentage of its revenues from two significant clients |
| CI and Genworth accounted for approximately 22prca and 20prca, respectively, of revenues for FY 2006 and 23prca and 25prca, respectively, of revenues for the quarter ended June 30, 2006 |
| A loss of either one of these clients could negatively impact results of operations and liquidity of the Company |
| Employee misconduct could harm the Company by impairing the Companyapstas ability to attract and retain clients and subjecting the Company to significant legal liability and reputational harm, and this type of misconduct is difficult to detect and deter |
| Recently, there have been a number of highly publicized cases involving fraud or other misconduct by employees in the financial services industry, and the Company runs the risk that employee misconduct could occur in the Companyapstas business, as well |
| For example, misconduct by employees could involve the improper use or disclosure of confidential information, which could result in regulatory sanctions and serious reputational or financial harm |
| In the Companyapstas business, the Company has discretion to trade client assets on the clientapstas behalf and must do so acting in the best interest of the client |
| As a result, the Company is subject to a number of obligations and standards, and the violation of those obligations or standards may adversely affect the Companyapstas clients and the Company |
| The Company has adopted and implemented a number of insider trading, code of ethics, and other related policies and procedures to address such obligations and standards |
| It is not always possible to deter employee misconduct, and the precautions the Company takes to detect and prevent this activity may not be effective in all cases |
| 12 _________________________________________________________________ The Company may pursue acquisitions or joint ventures that could present unforeseen integration obstacles or costs and could dilute the stock ownership of the Companyapstas stockholders and holders of the Companyapstas equity securities |
| As part of the Companyapstas long-term business strategy, the Company may pursue joint ventures and other transactions aimed at expanding the geography and scope of the Companyapstas operations |
| The Company expects to explore partnership opportunities that the Company believes to be attractive |
| While the Company is not currently in negotiations with respect to material acquisitions or joint ventures, the Company routinely assesses its strategic position and may in the future seek acquisitions or other transactions to further enhance the Companyapstas competitive position |
| If the Company is not correct when it assesses the value, strengths and weaknesses, liabilities and potential profitability of acquisition candidates or is not successful in integrating the operations of the acquired business, the success of the combined business could be compromised |
| Acquisitions and joint ventures involve a number of risks and present financial, managerial and operational challenges, including potential disruption of the Companyapstas ongoing business and distraction of management, difficulty with integrating personnel and financial and other systems, hiring additional management and other critical personnel and increasing the scope, geographic diversity and complexity of the Companyapstas operations |
| The Companyapstas clients may react unfavorably to the Companyapstas acquisition and joint venture strategy, the Company may not realize any anticipated benefits from acquisitions, and the Company may be exposed to additional liabilities of any acquired business or joint venture, any of which could materially adversely affect the Companyapstas revenue and results of operations |
| In addition, future acquisitions or joint ventures may involve the issuance of additional shares of the Companyapstas common stock, which may dilute existing ownership of the Company |
| Other operational risks may disrupt the Companyapstas business, result in regulatory action against the Company, or limit the Companyapstas growth |
| The Companyapstas business is dependent on communications and information systems, including those of the Companyapstas vendors |
| Any failure or interruption of these systems, whether caused by fire, other natural disaster, power or telecommunications failure, act of terrorism or war or otherwise, could materially adversely affect the Companyapstas operating results |
| Although the Company has back-up systems in place, the Companyapstas back-up procedures and capabilities in the event of a failure or interruption may not be adequate |
| The Company relies heavily on its financial, accounting, trading, compliance and other data processing systems |
| If any of these systems do not operate properly or are disabled, the Company could suffer financial loss, a disruption of the Companyapstas business, liability to clients, regulatory intervention or reputational damage |
| The inability of the Companyapstas systems to accommodate an increasing volume of transactions also could constrain the Companyapstas ability to expand its businesses |
| The Company expects that it will need to continue to upgrade and expand these capabilities in the future to avoid disruption of, or constraints on, the Companyapstas operations |
| Fluctuations in foreign currency exchange rates could lower the Companyapstas net income or negatively impact the portfolios of the Companyapstas clients and may affect the levels of the Companyapstas AUM Although most portfolios are in US dollar base currency, certain client portfolios are invested in securities denominated in foreign currencies |
| Foreign currency fluctuations can adversely impact investment performance for a clientapstas portfolio |
| Accordingly, foreign currency fluctuations may affect the levels of the Companyapstas AUM As the Companyapstas AUM includes assets that are denominated in currencies other than US dollars, an increase in the value of the US dollar relative to those non-US currencies may result in a decrease in the dollar value of the Companyapstas AUM, which, in turn, would result in lower US dollar denominated revenue in the Companyapstas business |
| Additionally, while this risk may be limited by foreign currency hedging, some risks cannot be hedged and there is no guarantee that the Companyapstas hedging activity will be successful |
| Poor performance may result in decreased AUM, stemming from withdrawal of client assets or a decrease in new assets being raised in the relevant product |
| 13 _________________________________________________________________ The Company may not be able to fund future capital requirements on favorable terms, if at all |
| The Company cannot be certain that financing to fund working capital or other cash requirements, if needed, will be available on favorable terms, if at all |
| Capital requirements will vary greatly from quarter to quarter depending on, among other things, capital expenditures, fluctuations in operating results and financing activities |
| We believe that current cash and cash equivalents and cash flows from operations will be sufficient to satisfy the Companyapstas cash requirements for the foreseeable future |
| However, if future financing is necessary, the Company may or may not be able to obtain financing on favorable terms, if at all |
| Further, any future equity financings could dilute the relative percentage ownership of the then existing holders of common stock, and any future debt financings could involve restrictive covenants that limit our ability to take certain actions |
| Risks Related to Our Industry The Company faces strong competition from financial services firms, many of whom have the ability to offer clients a wider range of products and services than the Company can offer, which could lead to pricing pressures that could materially adversely affect the Companyapstas revenue and profitability |
| The financial services industry is intensely competitive and the Company expects it to remain so |
| In addition to performance, the Company competes on the basis of a number of factors including the quality of the Companyapstas employees, transaction execution, the Companyapstas products and services, innovation, reputation and price |
| The Company believes that it will experience pricing pressures in the future as some of the Companyapstas competitors seek to obtain increased market share by reducing fees |
| The Company faces increased competition due to a trend toward consolidation |
| In recent years, there has been substantial consolidation and convergence among companies in the financial services industry |
| In particular, a number of large commercial banks, insurance companies and other broad-based financial services firms have established or acquired broker-dealers or have merged with other financial institutions |
| Many of these firms have the ability to offer a wide range of products, from loans, deposit-taking and insurance to brokerage, asset management and investment banking services, which may enhance their competitive position |
| They also have the ability to support investment banking, including financial advisory services, with commercial banking, insurance and other financial services revenue in an effort to gain market share, which could result in pricing pressure in the Companyapstas business |
| Any event that negatively affects the asset management industry could have a material adverse effect |
| Any event affecting the asset management industry that results in a general decrease in AUM or a significant general decline in the number of advisory clients or accounts could negatively impact revenues |
| Future growth and success depends, in part, upon the growth of the asset management industry |
| 14 _________________________________________________________________ The financial services industry faces substantial litigation and regulatory risks, and the Company may face damage to the Companyapstas professional reputation and legal liability if the Companyapstas services are not regarded as satisfactory or for other reasons |
| As a financial services firm, the Company depends, to a large extent, on the Companyapstas relationships with the Companyapstas clients and the Companyapstas reputation for integrity and high-caliber professional services to attract and retain clients |
| As a result, if a client is not satisfied with the Companyapstas services, such dissatisfaction may be more damaging to the Companyapstas business than to other types of businesses |
| In recent years, the volume of claims and amount of damages claimed in litigation and regulatory proceedings against financial advisers has been increasing |
| In the Companyapstas business, the Company makes investment decisions on behalf of the Companyapstas clients which could result in substantial losses |
| This may subject the Company to the risk of legal liabilities or actions alleging negligent misconduct, breach of fiduciary duty or breach of contract |
| These risks often may be difficult to assess or quantify and their existence and magnitude often remain unknown for substantial periods of time |
| The Companyapstas engagements typically include broad indemnities from the Companyapstas clients and provisions designed to limit the Companyapstas exposure to legal claims relating to the Companyapstas services, but these provisions may not protect the Company or may not be adhered to in all cases |
| The Company also may be subject to claims arising from disputes with employees for alleged discrimination or harassment, among other things |
| These risks often may be difficult to assess or quantify, and their existence and magnitude often remain unknown for substantial periods of time |
| As a result, the Company may incur significant legal expenses in defending against litigation |
| Substantial legal liability or significant regulatory action against the Company could materially adversely affect the Companyapstas business, financial condition or results of operations or cause significant reputational harm to the Company, which could seriously harm the Companyapstas business |
| Due to the extensive laws and regulations to which the Company is subject, management is required to devote substantial time and effort to legal and regulatory compliance issues |
| In addition, the regulatory environment in which the Company operates is subject to change |
| The Company may be adversely affected as a result of new or revised legislation or regulations or by changes in the interpretation or enforcement of existing laws and regulations |
| Extensive regulation of the Companyapstas business limits the Companyapstas activities and results in ongoing exposure to the potential for significant penalties, including fines or limitations on the Companyapstas ability to conduct its business |
| The financial services industry is subject to extensive regulation |
| The Company is subject to regulation by governmental and self-regulatory organizations in the jurisdictions in which the Company operates around the world |
| Many of these regulators, including US and non-US government agencies and self-regulatory organizations, as well as state securities commissions in the US, are empowered to conduct administrative proceedings that can result in censure, fine, the issuance of cease-and-desist orders or the suspension or expulsion of an investment adviser |
| The requirements imposed by the Companyapstas regulators are designed to ensure the integrity of the financial markets and to protect customers and other third parties who deal with the Company and are not designed to protect the Companyapstas stockholders |
| Consequently, these regulations often serve to limit the Companyapstas activities, including through net capital, customer protection and market conduct requirements |
| 15 _________________________________________________________________ The Company faces the risk of significant intervention by regulatory authorities, including extended investigation and surveillance activity, adoption of costly or restrictive new regulations and judicial or administrative proceedings that may result in substantial penalties |
| Among other things, the Company could be fined or be prohibited from engaging in some of the Companyapstas business activities |
| In addition, the regulatory environment in which the Company operates is subject to modifications and further regulation |
| New laws or regulations or changes in the enforcement of existing laws or regulations applicable to the Company and the Companyapstas clients also may adversely affect the Companyapstas business, and the Companyapstas ability to function in this environment will depend on the Companyapstas ability to constantly monitor and react to these changes |
| In addition, the regulatory environment in which the Companyapstas clients operate may impact the Companyapstas business |
| For example, changes in antitrust laws or the enforcement of antitrust laws could affect the level of mergers and acquisitions activity and changes in state laws may limit investment activities of state pension plans |
| In particular, for asset management businesses in general, there have been a number of highly publicized regulatory inquiries that focus on the mutual funds industry |
| These inquiries already have resulted in increased scrutiny in the industry and new rules and regulations for mutual funds and their investment managers |
| This regulatory scrutiny, along with rulemaking initiatives may result in an increase in operational and compliance costs or the assessment of significant fines or penalties against the Company and may otherwise limit the Companyapstas ability to engage in certain activities |
| In addition, financial services firms are subject to numerous conflicts of interests or perceived conflicts |
| The Company has adopted various policies, controls and procedures to address or limit actual or perceived conflicts and regularly seeks to review and update the Companyapstas policies, controls and procedures |
| However, these policies and procedures may result in increased costs, additional operational personnel, and increased regulatory risk |
| Failure to adhere to these policies and procedures may result in regulatory sanctions or client litigation |
| Specific regulatory changes also may have a direct impact on the revenue of the Companyapstas asset management business |
| In addition to regulatory scrutiny and potential fines and sanctions, regulators continue to examine different aspects of the asset management industry |
| Other proposed rules that are currently under consideration include potential limitations on investment activities in which an adviser may engage, such as hedge funds and mutual funds, increased disclosure of adviser and fund activities, and changes in compensation for mutual fund sales |
| These regulatory changes and other proposed or potential changes may result in a reduction of revenue associated with these activities |