|
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
|
Set forth on the following pages is management’s discussion and analysis of our financial condition and results of operations for the
three and six months ended December 31, 2012 and 2011. Such information should be read in conjunction with our unaudited condensed consolidated financial statements together with the notes to the unaudited condensed consolidated financial
statements. When we use the terms “Company,” “Firm,” “management,” “we,” “us,” and “our,” we mean Epoch Holding Corporation, a Delaware corporation, and its consolidated subsidiaries.
Forward-Looking Statements
Certain information included or incorporated by reference in this Quarterly Report on Form 10-Q and other materials filed or to be filed by Epoch Holding Corporation (“Epoch” or the
“Company”) with the United States Securities and Exchange Commission (the “SEC”) contain statements that may be considered forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. In some cases,
you can identify these statements by forward-looking words such as “may,” “might,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,”
“predict,” “potential,” or “continue” and the negative of these terms and other comparable terminology. These forward-looking statements, which are subject to known and unknown risks, uncertainties and assumptions about
our Company, may include projections of our future financial performance based on our anticipated growth strategies and trends in our business. These statements are only predictions based on our current expectations and projections about future
events. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by our forward-looking
statements. In particular, you should consider the risks and uncertainties outlined in “Factors Which May Affect Future Results.”
These risks and uncertainties are not exhaustive. Other sections of this Quarterly Report on Form 10-Q may include additional factors which could adversely impact our business and financial
performance. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties, nor can we assess the impact of all
factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results,
level of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy or completeness of any of these forward-looking statements. You should not rely upon forward-looking statements as
predictions of future events. We are under no duty to update any of these forward-looking statements after the date of this Quarterly Report on Form 10-Q, nor to conform our prior statements to actual results or revised expectations, and we do
not intend to do so.
Forward-looking statements include, but are not limited to, statements about our:
|
|
•
|
|
pending proposed Merger with The Toronto-Dominion Bank (“TD”),
|
|
|
•
|
|
expectations with respect to the economy, securities markets, the market for asset management activity and other industry trends,
|
|
|
•
|
|
strategic relationships,
|
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|
•
|
|
recruitment and retention of employees,
|
18
|
|
•
|
|
possible or assumed future results of operations and operating cash flows,
|
|
|
•
|
|
potential operating performance, achievements, technological changes,
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|
|
•
|
|
expected tax rates, and
|
|
|
•
|
|
the effect of future legislation and regulation.
|
Available Information
Reports we file electronically with the SEC via the
SEC’s Electronic Data Gathering, Analysis and Retrieval system (“EDGAR”) may be accessed through the internet. The SEC maintains a website that contains reports, proxy and information statements, and other information regarding
issuers that file electronically with the SEC, at
www.sec.gov
. In addition, the public may read and copy any material that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Information
on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.
We maintain a website
which contains current information on operations and other matters. Our website address is
www.eipny.com
. Through the Investor Relations section of our website, and the “Financial Information” tab therein, we make available, free of
charge, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, our Annual Proxy Statement, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”) as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. In addition, we post on our website within the Investor
Relations section, and the “Corporate Governance” tab therein, our Code of Ethics and Business Conduct, as well as charters for the Audit, Nominating/Corporate Governance, and the Compensation Committees of our Board of Directors. We also
make our financial statement information from our periodic SEC filings available on our website in the form of XBRL data files that may be used to facilitate computer-assisted investor analysis. The information on our website is not, and shall not
be deemed to be a part hereof or incorporated into this or any other filings with the SEC.
Factors Which May Affect Future Results
There are numerous factors which may affect our future results of operations. These include, but are not limited to, the
ability to attract and retain clients, performance of the financial markets and invested assets we manage, retention of key employees and members of management, and significant changes in regulations.
In addition, our ability to expand or alter our investment strategy offerings and distribution network, whether through acquisitions or
internal development, is critical to our long-term success and has inherent risks. This success is dependent on the ability to identify and fund those developments or acquisitions on terms which are favorable to us. There can be no assurance that
any of these operating factors or acquisitions can be achieved or, if undertaken, will be successful.
Other risks and
uncertainties that we do not presently consider to be material or of which we are not presently aware may become important factors that affect us in the future.
These and other risks related to our Company are discussed in detail under Part I, Item 1A., “Risk Factors” beginning on page 13 in our Annual Report on Form 10-K for the fiscal
year ended June 30, 2012 and herein in Part II, Item 1A., “Risk Factors.”
Critical Accounting Estimates
Our significant accounting estimates are described in Note 2 of the Notes to the Consolidated Financial Statements,
as well as Management’s Discussion and Analysis of Financial Condition and Results of Operations, in our Annual Report on Form 10-K for the fiscal year ended June 30, 2012, and have not changed from those described therein.
19
Overview
We are a global asset management firm with accomplished and experienced professionals. Our professional investment staff averages over 20 years of industry experience. Headquartered in New York City,
we had approximately $24.5 billion in assets under management (“AUM”) as of December 31, 2012. We remain debt-free and continue to have substantial capital resources available to fund current operations and implement our
long-term growth strategy.
Merger Agreement
On December 6, 2012, Epoch Holding Corporation (“Epoch”), The Toronto-Dominion Bank (“TD”) and Empire Merger Sub, Inc. (“Merger Sub”), a wholly owned subsidiary of TD,
entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which, subject to the satisfaction or waiver of certain conditions, Merger Sub will be merged with and into Epoch, with Epoch surviving the merger as a
wholly owned subsidiary of TD (the “Merger”). The Merger Agreement was unanimously approved by Epoch’s Board of Directors and is expected to be completed during the first half of calendar year 2013.
At the effective time of the Merger, each share of Epoch common stock (other than treasury shares held by Epoch and any shares of Epoch
common stock held by TD or any wholly-owned subsidiary of TD or Epoch or any person who properly demands statutory appraisal of their shares) will be converted into the right to receive an amount in cash equal to $28.00, without interest (the
“Merger Consideration”). Each option to acquire Epoch common stock that is outstanding, whether vested or unvested, at the effective time of the Merger will be canceled in exchange for the right to receive the Merger Consideration minus
the exercise price per share of the option. Each share of restricted Epoch common stock that is outstanding at the effective time of the Merger will convert into the right to receive the Merger Consideration per share of restricted stock. Under the
terms of the Merger Agreement, the Company may continue to declare or pay quarterly dividends to its common stockholders not in excess of $0.10 per share. No adjustment to the Merger Consideration was made on account of the previously announced
$0.75 per share special dividend declared on November 12, 2012 and paid on December 14, 2012, or any ordinary quarterly dividends payable prior to the consummation of the Merger.
The consummation of the Merger is subject to customary closing conditions, including, among others, approval by Epoch’s
stockholders, the receipt of consents from Epoch clients representing at least 80% of Epoch’s management fee revenues, the absence of certain legal impediments to the consummation of the Merger, the receipt of required governmental consents and
approvals, the early termination or expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act (which has been satisfied) and, subject to materiality exceptions, the accuracy of representations and warranties made by
Epoch and TD, respectively, and material compliance by Epoch and TD with their respective obligations under the Merger Agreement. The Merger is not subject to any financing condition.
The Merger Agreement requires Epoch to convene a stockholders meeting for purposes of obtaining the necessary stockholder approval and,
subject to certain exceptions, Epoch has agreed (i) not to solicit alternative transactions or enter into discussions concerning, or provide confidential information in connection with, any alternative transaction and (ii) that
Epoch’s Board of Directors will recommend that Epoch’s stockholders adopt the Merger Agreement.
Prior to adoption
of the Merger Agreement by Epoch’s stockholders, Epoch’s Board of Directors may, in certain circumstances, change its recommendation that Epoch’s stockholders adopt the Merger Agreement, subject to complying with certain notice and
other specified procedures set forth in the Merger Agreement, including giving TD the opportunity to propose changes to the Merger Agreement.
The Merger Agreement may be terminated under certain circumstances, including by Epoch, prior to the adoption of the Merger Agreement by Epoch’s stockholders, in the event that Epoch receives an
unsolicited proposal that Epoch’s Board of Directors concludes, after following certain procedures, is a Superior Proposal (as defined in the Merger Agreement). In addition, TD may terminate the Merger Agreement under certain circumstances,
including if Epoch breaches its non-solicitation obligations under the Merger Agreement or if Epoch’s Board of Directors changes, withholds, or fails to reaffirm its recommendation that Epoch’s stockholders adopt the Merger Agreement, or
approves a proposal for an alternative transaction. In the foregoing circumstances, Epoch would be required to pay TD a termination fee of $20 million.
For terms of the Merger Agreement, including circumstances under which the Merger Agreement can be terminated and the ramifications of such termination, as well as other terms and conditions, please refer
to the Merger Agreement filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on December 6, 2012. Additional information regarding the proposed Merger transaction will be
contained in a definitive proxy statement to be filed by Epoch with the SEC.
20
If completed, the Merger will result in the Company becoming a wholly-owned subsidiary of TD
and its shares will no longer be listed on any public market. No assurance can be given that the Merger will be completed.
During the three months ended December 31, 2012, merger related transaction costs totaled approximately $2.8 million, primarily for
legal and investment banking fees. These costs are included in professional fees and services in the Condensed Consolidated Statements of Income.
Voting Agreements
In connection with the execution of the Merger
Agreement, TD and Merger Sub have entered into voting and support agreements (each, a “Voting Agreement”) with certain of Epoch’s directors and certain members of Epoch’s senior management and the trustees of certain trusts for
their benefit (the “Stockholders”) holding, as of the date of the Merger Agreement, in the aggregate approximately 28% of Epoch’s total voting power. Pursuant to the terms of the Voting Agreement, the Stockholders have agreed in their
capacities as Epoch stockholders, among other things: (i) to vote their shares in favor of the adoption of the Merger Agreement and against any alternative proposal; and (ii) not to transfer any shares of Epoch subject to the Voting
Agreement, subject to certain exceptions.
The Voting Agreements will terminate on the earlier of the effective time of the
Merger and the date that the Merger Agreement is terminated.
Investment Philosophy
Our investment philosophy is focused on achieving superior long-term, total and risk-adjusted returns by investing in companies that
generate free cash flow, appropriately allocate cash to create returns for shareholders, have understandable business models, possess transparent financial statements, and are undervalued relative to our investment team’s value determinations.
Risk management is integrated into each step of our investment process. Our portfolio construction process is designed to minimize stock-specific risk and manage volatility.
Distribution Channels
Our operating subsidiary, Epoch Investment
Partners, Inc. (“EIP”), is a registered investment adviser under the Investment Advisers Act of 1940, as amended (the “Investment Advisers Act”). Our sole line of business is to provide investment advisory and investment
management services to our clients including corporations, public pension funds, retirement plans, foundations, endowments, financial institutions, and high net worth individuals. These services are provided through both separately managed accounts
and commingled vehicles, such as sub-advised mutual funds and our proprietary private investment funds. Our investment strategies are primarily distributed through three distribution channels. These channels and the relative percentage of managed
assets at December 31, 2012 are: institutional (53%), sub-advisory (46%) and high net worth (1%).
All of the assets
we manage are invested utilizing our investment strategies. We do not invest assets of our clients in any investment strategies of third parties.
Nearly all the assets we manage for our institutional and high net worth clients are managed as separate accounts. To the extent that any of our institutional or high net worth clients are invested in
mutual funds for which we serve as sub-advisor or proprietary investment funds for which we serve as investment advisor, the assets are included in the reported AUM of the respective fund. In particular, mutual funds for which we serve as investment
sub-advisor are reported as ‘Sub-advisory’ and our proprietary funds are reported as ‘Institutional’. For those assets that are invested in funds that we manage, the fees are assessed strictly at the fund level, as part of the
contractual management fee or related sub-advisory fee of the respective fund. There is no additional management fee.
Revenue
We earn revenues from managing client accounts under investment advisory and sub-advisory agreements. These agreements
specify, among other things, the investment strategy for the account and the management fees to be paid, and are generally terminable by either party on relatively short notice. Fees vary by investment strategy, account size and servicing
requirements. Fees are generally higher for international or global equity investment strategies than for U.S. investment strategies. Agreements remain in effect indefinitely, with the exception of sub-advised funds which are typically subject to
annual approval by the respective fund’s board of directors.
21
Revenues are generally derived as a percentage of AUM. The majority of accounts pay us
management fees pursuant to a tiered fee schedule in which the fee rate declines as the amount of AUM increases. The fees we earn on institutional and high net worth separate accounts are typically based on the value of AUM at the end of the
quarter. Our institutional separate account investment advisory agreements generally provide for fees ranging from 45 to 100 basis points of AUM annually, and our high net worth investment advisory agreements generally provide for fees ranging from
100 to 125 basis points of AUM annually. Fees earned from services to mutual funds under sub-advisory agreements are typically calculated based on the average of the daily net asset value of the fund. Due to the generally reduced client distribution
and servicing requirements and the typically larger account size, the average advisory fees we earn on sub-advisory accounts as a percentage of AUM are lower than the advisory fees we earn on our institutional accounts, and generally range from 35
to 85 basis points of AUM annually. Fees earned for services provided to our proprietary funds (i.e. limited liability companies) are calculated based upon net asset values at the end of the month, and range from 80 to 150 basis points of AUM
annually. Accordingly, notwithstanding an increase or decrease in AUM from quarter-end to quarter-end, significant fluctuations in asset values within a given quarter may have a more pronounced impact on revenues generated from sub-advised mutual
funds than on revenues generated from separate accounts or our proprietary funds. Under some circumstances, particularly in connection with the introduction of a new proprietary fund, we may waive a portion of a fund’s management fee and/or pay
some expenses of the fund. Our proprietary funds currently represent approximately 1% of our AUM.
Some of the institutional
client accounts and proprietary funds we manage provide for performance fees according to the performance of the account or fund relative to certain agreed-upon benchmarks, which typically results in a lower base fee, but may permit us to earn
higher fees if the relevant investment strategy outperforms the agreed-upon benchmark. Generally, if an agreement includes a performance fee, the performance fee ranges from 10% to 20% of the investment performance in excess of the relative
benchmark. Several of our accounts with performance fees include a high-watermark provision which generally provides that if the account underperforms relative to its performance target, it must gain back such underperformance before we can collect
future performance-based fees. The period in which performance fees are recognized may vary by account, based upon the particular client arrangement (i.e. quarterly or annual measurement period), commencement date of the agreement, and performance
criteria.
Typically, investment advisory agreements may not be assigned (including as a result of transactions, such as a
direct or indirect change of control of the asset manager that would constitute an assignment under the Investment Advisers Act or other applicable regulatory requirements) without the prior consent of the client. When the asset management client is
a U.S. registered mutual fund or closed end fund, the fund’s board of directors generally must annually approve the investment management contract, and any material changes to the contract, and the board and fund shareholders must approve any
assignment of the contract (including as a result of transactions that would constitute an assignment under the Investment Company Act of 1940).
Investment advisory agreements are generally terminable upon thirty or fewer days’ notice. Our clients may elect to terminate their relationships with us, reduce the aggregate amount of assets under
our management, or shift their funds to other types of investment strategies with different fee structures.
As revenues are
derived as a percentage of AUM, among other factors, they are dependent upon:
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•
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performance of financial markets,
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•
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performance of our investment strategies,
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•
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|
our ability to retain existing clients and attract new ones, and
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•
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|
changes in the composition of AUM.
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22
Expenses
Our most significant operating expense is employee compensation and benefits, comprising fixed salaries, variable incentive compensation, share-based compensation, and employee benefits. Variable
incentive compensation is based upon our operating results, including AUM growth, investment performance, and operating income. Our level of compensation reflects our plan to maintain competitive compensation levels to retain key personnel. Other
operating expenses include professional fees and services, occupancy and technology costs, general and administrative costs, and distribution and servicing fees.
AUM Fair Value Measurement
AUM consists of actively traded securities. The
fair value of these securities that comprise our AUM, and materially impacts the determination of revenue, is measured using Level 1 inputs as defined by the
Fair Value Topic
in the Financial Accounting Standards Board Accounting Standards
Codification (“FASB ASC”), which are publicly available, unadjusted, quoted prices in active markets. These prices are obtained from an independent pricing service. We substantiate the values obtained with another independent pricing
service to confirm that all prices are valid. There is no estimation involved in the calculation of AUM that materially impacts our revenue recognition.
23
Key Performance Indicators
We monitor a variety of key performance indicators when evaluating our business results. The charts that follow depict our quarterly results in certain key financial performance measures over the past
five quarters:
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(3)
|
Operating Revenues vs. Operating Expenses
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|
*
|
Defined as operating income divided by total operating revenues.
|
24
Financial and Business Highlights
Highlights from the three months ended December 31, 2012 were as follows:
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•
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On December 6, 2012, we agreed to enter into a Merger Agreement with The Toronto-Dominion Bank (“TD”), wherein TD will acquire our
common stock for $28.00 per share.
|
|
|
•
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|
Our AUM was $24.5 billion at December 31, 2012, an increase of approximately $0.3 billion, from the previous quarter ended September 30,
2012. Net AUM inflows were approximately $0.1 billion.
|
|
|
•
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|
AUM increased by $5.3 billion, or 28%, from the period ended December 31, 2011. Net AUM inflows were approximately $2.7 billion and market
appreciation was approximately $2.6 billion during this twelve-month period.
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|
|
•
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|
Most of our investment strategies met or exceeded their respective benchmarks since investment strategy inception. For the three-month, one-year,
three-year and five-year periods, less than half of our investment strategies outperformed their respective benchmarks.
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•
|
|
Total operating revenues increased by $6.1 million, or 28% during the three months ended December 31, 2012 when compared with the same period a
year ago.
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|
|
•
|
|
Our operating margin was approximately 35%, compared with 46% for the comparable period a year ago. Costs associated with the pending Merger were the
primary reason for the decline.
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|
|
•
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|
Basic earnings per share decreased to $0.24 for the three months ended December 31, 2012, compared to $0.25 for the same period a year ago.
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|
•
|
|
Our balance sheet remains strong. At December 31, 2012, working capital was $41.2 million, while cash and cash equivalents and accounts receivable
were $45.3 million. We remain debt-free.
|
The following table presents key operating and financial
indicators for the three and six months ended December 31, 2012 and 2011, respectively:
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Three Months Ended
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Six Months Ended
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December 31,
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Change
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December 31,
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Change
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|
2012
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|
|
2011
|
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Amt
|
|
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%
|
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|
2012
|
|
|
2011
|
|
|
Amt
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%
|
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|
Operating Indicators (
$ in millions
):
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AUM at end of period
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$
|
24,534
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|
|
$
|
19,217
|
|
|
$
|
5,317
|
|
|
|
28
|
%
|
|
$
|
24,534
|
|
|
$
|
19,217
|
|
|
$
|
5,317
|
|
|
|
28
|
%
|
|
Average AUM for the period
|
|
$
|
24,185
|
|
|
$
|
17,925
|
|
|
$
|
6,260
|
|
|
|
35
|
%
|
|
$
|
24,025
|
|
|
$
|
17,042
|
|
|
$
|
6,983
|
|
|
|
41
|
%
|
|
Net client flows
|
|
$
|
74
|
|
|
$
|
1,588
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|
$
|
(1,514
|
)
|
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|
(95
|
%)
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|
$
|
4
|
|
|
$
|
3,143
|
|
|
$
|
(3,139
|
)
|
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|
(100
|
%)
|
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|
|
|
|
|
|
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|
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|
Financial Indicators
($ in thousands, except share data)
:
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Operating Revenue
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|
$
|
27,803
|
|
|
$
|
21,734
|
|
|
$
|
6,069
|
|
|
|
28
|
%
|
|
$
|
55,427
|
|
|
$
|
40,743
|
|
|
$
|
14,684
|
|
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|
36
|
%
|
|
Operating Income
|
|
$
|
9,836
|
|
|
$
|
10,059
|
|
|
$
|
(223
|
)
|
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|
(2
|
%)
|
|
$
|
23,350
|
|
|
$
|
18,157
|
|
|
$
|
5,193
|
|
|
|
29
|
%
|
|
Net Income
|
|
$
|
5,738
|
|
|
$
|
5,863
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|
|
$
|
(125
|
)
|
|
|
(2
|
%)
|
|
$
|
13,632
|
|
|
$
|
10,281
|
|
|
$
|
3,351
|
|
|
|
33
|
%
|
|
Earnings Per Share:
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|
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|
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|
|
|
|
|
|
|
|
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|
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Basic
|
|
$
|
0.24
|
|
|
$
|
0.25
|
|
|
$
|
(0.01
|
)
|
|
|
(4
|
%)
|
|
$
|
0.58
|
|
|
$
|
0.44
|
|
|
$
|
0.14
|
|
|
|
32
|
%
|
|
Diluted
|
|
$
|
0.24
|
|
|
$
|
0.25
|
|
|
$
|
(0.01
|
)
|
|
|
(4
|
%)
|
|
$
|
0.57
|
|
|
$
|
0.44
|
|
|
$
|
0.13
|
|
|
|
30
|
%
|
|
Operating Margin
(1)
|
|
|
35
|
%
|
|
|
46
|
%
|
|
|
(11
|
%)
|
|
|
N
|
M
|
|
|
42
|
%
|
|
|
45
|
%
|
|
|
(3
|
%)
|
|
|
N
|
M
|
|
(1)
|
Defined as operating income divided by total operating revenues.
|
25
Business Environment
As an investment management and advisory firm, our results are impacted by the prevailing global economic climate, including such factors as corporate profitability, investor confidence, and interest
rates. These factors can directly affect investor sentiment and global equity markets, and accordingly, our investment returns and AUM.
During the three months ended December 31, 2012, uncertainty about the November elections and U.S. fiscal policy afterwards caused domestic markets to decline. Non-U.S. markets experienced slight
gains. Investors remained generally confident about the European Central Bank’s (ECB) bond-buying program, which has reduced borrowing costs for the most distressed eurozone countries. The economic environment in which we operate continues to
be challenging.
Investment returns for select broad market indices were as follows:
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|
|
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|
|
|
|
|
|
Period Ended
December 31, 2012
|
|
|
Index
(1)
|
|
3 Months
|
|
|
12 Months
|
|
|
Dow Jones Industrial Average
(
2
)
|
|
|
(1.7
|
%)
|
|
|
10.2
|
%
|
|
NASDAQ Composite
(
2
)
|
|
|
(3.1
|
%)
|
|
|
15.9
|
%
|
|
S&P 500
(2)
|
|
|
(0.4
|
%)
|
|
|
16.0
|
%
|
|
MSCI World (net)
(2)
|
|
|
2.5
|
%
|
|
|
15.8
|
%
|
|
(1)
|
Assumes dividend re-investment.
|
|
(2)
|
Indices are trademarks of Dow Jones & Company, NASDAQ Stock Market, Inc., McGraw-Hill Companies, Inc. and MSCI Inc., respectively, which are not affiliated with Epoch.
|
26
Assets under Management (“AUM”)
The graph below depicts our quarterly AUM and operating revenue over the past eight quarters.
27
AUM and Flows
The following table sets forth the changes in our AUM for the periods presented (
dollars in millions
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
December 31,
|
|
|
Six Months Ended
December 31,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
Institutional
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period AUM
|
|
$
|
12,616
|
|
|
$
|
7,759
|
|
|
$
|
12,096
|
|
|
$
|
8,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inflows
|
|
|
422
|
|
|
|
352
|
|
|
|
888
|
|
|
|
1,332
|
|
|
Outflows
|
|
|
(189
|
)
|
|
|
(169
|
)
|
|
|
(671
|
)
|
|
|
(217
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net inflows/(outflows)
|
|
|
233
|
|
|
|
183
|
|
|
|
217
|
|
|
|
1,115
|
|
|
Market appreciation/(depreciation)
|
|
|
148
|
|
|
|
774
|
|
|
|
684
|
|
|
|
(539
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change
|
|
|
381
|
|
|
|
957
|
|
|
|
901
|
|
|
|
576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period AUM
|
|
|
12,997
|
|
|
|
8,716
|
|
|
|
12,997
|
|
|
|
8,716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-advisory
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period AUM
|
|
|
11,282
|
|
|
|
7,977
|
|
|
|
10,848
|
|
|
|
8,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inflows
|
|
|
616
|
|
|
|
1,630
|
|
|
|
1,026
|
|
|
|
2,530
|
|
|
Outflows
|
|
|
(768
|
)
|
|
|
(224
|
)
|
|
|
(1,232
|
)
|
|
|
(492
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net inflows/(outflows)
|
|
|
(152
|
)
|
|
|
1,406
|
|
|
|
(206
|
)
|
|
|
2,038
|
|
|
Market appreciation/(depreciation)
|
|
|
139
|
|
|
|
867
|
|
|
|
627
|
|
|
|
(468
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change
|
|
|
(13
|
)
|
|
|
2,273
|
|
|
|
421
|
|
|
|
1,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period AUM
|
|
|
11,269
|
|
|
|
10,250
|
|
|
|
11,269
|
|
|
|
10,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High net worth
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period AUM
|
|
|
275
|
|
|
|
236
|
|
|
|
264
|
|
|
|
267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inflows
|
|
|
—
|
|
|
|
—
|
|
|
|
2
|
|
|
|
—
|
|
|
Outflows
|
|
|
(7
|
)
|
|
|
(1
|
)
|
|
|
(9
|
)
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net inflows/(outflows)
|
|
|
(7
|
)
|
|
|
(1
|
)
|
|
|
(7
|
)
|
|
|
(10
|
)
|
|
Market appreciation/(depreciation)
|
|
|
—
|
|
|
|
16
|
|
|
|
11
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change
|
|
|
(7
|
)
|
|
|
15
|
|
|
|
4
|
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period AUM
|
|
|
268
|
|
|
|
251
|
|
|
|
268
|
|
|
|
251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period AUM
|
|
|
24,173
|
|
|
|
15,972
|
|
|
|
23,208
|
|
|
|
17,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inflows
(1)
|
|
|
1,038
|
|
|
|
1,982
|
|
|
|
1,916
|
|
|
|
3,862
|
|
|
Outflows
(1)
|
|
|
(964
|
)
|
|
|
(394
|
)
|
|
|
(1,912
|
)
|
|
|
(719
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net inflows/(outflows)
|
|
|
74
|
|
|
|
1,588
|
|
|
|
4
|
|
|
|
3,143
|
|
|
Market appreciation/(depreciation)
(2)
|
|
|
287
|
|
|
|
1,657
|
|
|
|
1,322
|
|
|
|
(1,013
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change
|
|
|
361
|
|
|
|
3,245
|
|
|
|
1,326
|
|
|
|
2,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period AUM
|
|
$
|
24,534
|
|
|
$
|
19,217
|
|
|
$
|
24,534
|
|
|
$
|
19,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent change in total AUM
|
|
|
1.5
|
%
|
|
|
20.3
|
%
|
|
|
5.7
|
%
|
|
|
12.5
|
%
|
|
Net inflows/Beginning of period AUM
|
|
|
0.3
|
%
|
|
|
9.9
|
%
|
|
|
0.0
|
%
|
|
|
18.4
|
%
|
|
(1)
|
Inflows include new client accounts and additional assets into existing client accounts. Outflows
include closed accounts and withdrawals of assets from existing client accounts. For the Sub-advisory channel, inflows also include mutual fund distributions which are reinvested and outflows include mutual fund distributions which are not
reinvested. Such mutual fund distributions are not a material portion of the gross flows.
|
|
(2)
|
Market appreciation/(depreciation) includes the impact of foreign currency fluctuations.
|
Our revenues are correlated with the levels of our AUM. Our AUM fluctuates based on changes in
the market value of accounts advised and managed by us, and on our fund flows. As a long-only equity manager, a general or prolonged decline in equity markets may cause our revenues and net income to decline due to the value of our AUM decreasing,
and/or clients withdrawing funds in favor of investments they perceive as offering greater opportunity or lower risk.
28
We believe that market conditions and our investment performance are critical elements in
our attempts to grow our AUM and business. Since we are long-term fundamental investors, we believe that our investment strategies yield the most benefits, and are best evaluated, over a long-term timeframe. We believe that our investment strategies
are generally evaluated by our clients and our potential future clients based on their relative performance since inception, and the previous 1-year, 3-year, and 5-year periods. There has typically been a correlation between our strategies’
investment performance and the size and direction of asset flows. To the extent that our returns for these periods outperform client benchmarks or peers, we would generally anticipate increased asset flows. Correspondingly, negative returns relative
to client benchmarks or peers could cause existing clients to reduce their exposure to our products and hinder new client acquisitions.
For the Three Months Ended December 31, 2012
AUM increased to $24.5 billion at December 31, 2012 from $24.2 billion at September 30, 2012. This increase was primarily attributable to market appreciation. Client flows also contributed to
the increase, with AUM inflows slightly outpacing outflows by $74 million.
For the three months ended December 31, 2012,
gross inflows into our Institutional distribution channel were approximately $0.4 billion and gross outflows were approximately $0.2 billion. Market appreciation on assets in our Institutional channel was approximately $0.1 billion. Inflows into the
Institutional channel included approximately $0.2 billion of new accounts in our Global Equity Shareholder Yield and Global Choice strategies.
Gross inflows into our Sub-advisory distribution channel were approximately $0.6 billion and gross outflows were approximately $0.8 billion. Market appreciation on assets in our Sub-advisory channel was
approximately $0.1 billion. Inflows primarily into our Global Shareholder Yield strategy were offset by outflows from our U.S. Value strategy.
For the three month period ended December 31, 2012, our investment strategies had net returns ranging from (0.1) % in U.S. Choice to 3.6% in International Small Cap. Global Equity Shareholder Yield
comprised the majority of the total market appreciation as a result of its proportionate share of total AUM during the period. For further information regarding the performance of our investment strategies and their applicable benchmarks, please see
“Investment Strategy Performance.”
For the Six Months Ended December 31, 2012
AUM increased to $24.5 billion at December 31, 2012 from $23.2 billion at June 30, 2012. This increase was primarily
attributable to market appreciation.
For the six months ended December 31, 2012, gross inflows into our Institutional
distribution channel were approximately $0.9 billion and gross outflows were approximately $0.7 billion. Market appreciation on assets in our Institutional channel was approximately $0.7 billion. Inflows into our Institutional channel included
approximately $0.5 billion of new accounts, including approximately $0.3 billion into our U.S. All Cap strategy and $0.1 billion into our Global Equity Shareholder Yield strategy. Additional flows into existing accounts, particularly in our Global
Choice and U.S. Value strategies accounted for the balance of the gross inflows for the six months ended December 31, 2012.
Gross inflows into our Sub-advisory distribution channel were approximately $1.0 billion and gross outflows were approximately $1.2 billion. Market appreciation on assets in our Sub-advisory channel was
approximately $0.6 billion. Inflows into our Sub-advisory channel included $0.1 billion of new accounts into our U.S. Choice Strategy. Inflows into our Global Shareholder Yield and U.S. Choice strategies were primarily offset by a large outflow from
our U.S. Value strategy.
29
For the Three Months Ended December 31, 2011
AUM increased to $19.2 billion at December 31, 2011 from $16.0 billion at September 30, 2011. This increase was attributable to
both market appreciation and net client flows. Market appreciation was $1.7 billion and net inflows were $1.6 billion.
Gross
inflows into our Institutional distribution channel were approximately $0.4 billion, and gross outflows were approximately $0.2 billion. Market appreciation on assets in our Institutional channel was $0.8 billion. Inflows into our Institutional
channel were primarily into our Global Choice strategy, including new accounts totaling $0.3 billion.
Gross inflows into our
Sub-advisory distribution channel were approximately $1.6 billion and gross outflows were approximately $0.2 billion. Market appreciation on assets in our Sub-advisory channel was $0.9 billion. Inflows into our Sub-advisory channel were primarily
into our Global Shareholder Yield strategy.
For the Six Months Ended December 31, 2011
AUM increased to $19.2 billion at December 31, 2011 from $17.1 billion at June 30, 2011. This increase was attributable to net
client inflows, partially offset by market depreciation. Net inflows of $3.1 billion were offset by market depreciation of $1.0 billion.
Gross inflows into our Institutional distribution channel were approximately $1.3 billion, and gross outflows were approximately $0.2 billion. Market depreciation on assets in our Institutional channel
was $0.5 billion. Inflows into our Institutional channel were primarily into our Global Choice and Global Shareholder Yield strategies.
Gross inflows into our Sub-advisory distribution channel were approximately $2.5 billion and gross outflows were approximately $0.5 billion. Market depreciation on assets in our Sub-advisory channel was
$0.5 billion. Inflows into our Sub-advisory channel were primarily into our Global Shareholder Yield strategy.
30
Investment Strategies
The table below depicts the AUM in our investment strategies as of December 31, 2012, September 30, 2012 and December 31, 2011, respectively, as well as the 3-month and 1-year changes
(
dollars in millions
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dec. 31,
|
|
|
Sept. 30,
|
|
|
Dec. 31,
|
|
|
3-Month Change
|
|
|
1-Year Change
|
|
|
Strategy
|
|
2012
|
|
|
2012
|
|
|
2011
|
|
|
Amt
|
|
|
%
|
|
|
Amt
|
|
|
%
|
|
|
Global Equity Shareholder Yield
|
|
$
|
10,387
|
|
|
$
|
9,588
|
|
|
$
|
6,464
|
|
|
$
|
799
|
|
|
|
8
|
%
|
|
$
|
3,923
|
|
|
|
61
|
%
|
|
U.S. Value
|
|
|
4,402
|
|
|
|
4,859
|
|
|
|
4,404
|
|
|
|
(457
|
)
|
|
|
(9
|
%)
|
|
|
(2
|
)
|
|
|
(0
|
%)
|
|
U.S. All Cap Value
|
|
|
3,429
|
|
|
|
3,494
|
|
|
|
3,526
|
|
|
|
(65
|
)
|
|
|
(2
|
%)
|
|
|
(97
|
)
|
|
|
(3
|
%)
|
|
Global Choice
(2)
|
|
|
3,096
|
|
|
|
2,934
|
|
|
|
1,920
|
|
|
|
162
|
|
|
|
6
|
%
|
|
|
1,176
|
|
|
|
61
|
%
|
|
U.S. Smid Cap Value
|
|
|
1,012
|
|
|
|
1,030
|
|
|
|
895
|
|
|
|
(18
|
)
|
|
|
(2
|
%)
|
|
|
117
|
|
|
|
13
|
%
|
|
Int’l Small Cap
|
|
|
845
|
|
|
|
836
|
|
|
|
703
|
|
|
|
9
|
|
|
|
1
|
%
|
|
|
142
|
|
|
|
20
|
%
|
|
U.S. Small Cap Value
|
|
|
377
|
|
|
|
370
|
|
|
|
359
|
|
|
|
7
|
|
|
|
2
|
%
|
|
|
18
|
|
|
|
5
|
%
|
|
Global Small Cap
|
|
|
206
|
|
|
|
258
|
|
|
|
249
|
|
|
|
(52
|
)
|
|
|
(20
|
%)
|
|
|
(43
|
)
|
|
|
(17
|
%)
|
|
Other
(1)(2)
|
|
|
780
|
|
|
|
804
|
|
|
|
697
|
|
|
|
(24
|
)
|
|
|
(3
|
%)
|
|
|
83
|
|
|
|
12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total AUM
|
|
$
|
24,534
|
|
|
$
|
24,173
|
|
|
$
|
19,217
|
|
|
$
|
361
|
|
|
|
1
|
%
|
|
$
|
5,317
|
|
|
|
28
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Primarily includes U.S. Choice and Global Absolute Return strategies.
|
|
(2)
|
In the year ended June 30, 2012, approximately $170 million of AUM transferred from the
Global Absolute Return investment strategy to the Global Choice investment strategy.
|
The charts
below show our investment strategies as a percentage of AUM as of December 31, 2012 and 2011, respectively:
31
Investment Strategy Performance
We measure relative investment performance by comparing our investment strategy returns to competing investment strategies, industry
benchmarks and client investment objectives. As long-term fundamental investors, we believe that our investment strategies yield the most benefits, and are best evaluated, over a long-term time horizon. The following table displays our investment
strategies’ composite returns, net of management fees, for the three months, as well as the 1-year, 3-year and 5-year periods ended December 31, 2012 and since investment strategy inception, compared to their applicable benchmarks:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Returns (%)
(1)(3)
|
|
|
|
Inception
|
|
|
|
|
|
|
|
|
|
Since
|
|
Strategy
|
|
Date
(2)
|
|
3 Months
|
|
1 Year
|
|
3 Years
|
|
5 Years
|
|
Inception
|
|
|
|
|
|
|
|
|
|
U.S. Value
|
|
7/31/01
|
|
0.2
|
|
12.5
|
|
8.8
|
|
1.2
|
|
5.6
|
|
Russell 1000
|
|
|
|
0.1
|
|
16.4
|
|
11.1
|
|
1.9
|
|
3.9
|
|
Russell 1000 Value
|
|
|
|
1.5
|
|
17.5
|
|
10.9
|
|
0.6
|
|
4.5
|
|
S&P 500
|
|
|
|
(0.4)
|
|
16.0
|
|
10.9
|
|
1.7
|
|
3.5
|
|
|
|
|
|
|
|
|
|
U.S. All Cap Value
|
|
7/31/94
|
|
0.7
|
|
11.4
|
|
9.4
|
|
1.5
|
|
10.3
|
|
Russell 3000
|
|
|
|
0.2
|
|
16.4
|
|
11.2
|
|
2.0
|
|
8.5
|
|
Russell 3000 Value
|
|
|
|
1.6
|
|
17.5
|
|
10.9
|
|
0.8
|
|
8.9
|
|
|
|
|
|
|
|
|
|
U.S. Small Cap Value
|
|
12/31/02
|
|
2.3
|
|
14.4
|
|
12.8
|
|
3.7
|
|
9.1
|
|
Russell 2000
|
|
|
|
1.9
|
|
16.3
|
|
12.2
|
|
3.6
|
|
9.7
|
|
Russell 2000 Value
|
|
|
|
3.2
|
|
18.1
|
|
11.6
|
|
3.5
|
|
9.5
|
|
|
|
|
|
|
|
|
|
U.S. Smid Cap Value
|
|
8/31/06
|
|
3.4
|
|
13.6
|
|
11.8
|
|
3.5
|
|
5.2
|
|
Russell 2500
|
|
|
|
3.1
|
|
17.9
|
|
13.3
|
|
4.3
|
|
5.2
|
|
Russell 2500 Value
|
|
|
|
4.1
|
|
19.2
|
|
12.9
|
|
4.5
|
|
3.9
|
|
|
|
|
|
|
|
|
|
U.S. Choice
|
|
4/30/05
|
|
(0.1)
|
|
12.3
|
|
10.3
|
|
2.8
|
|
6.1
|
|
Russell 3000
|
|
|
|
0.2
|
|
16.4
|
|
11.2
|
|
2.0
|
|
5.4
|
|
|
|
|
|
|
|
|
|
Global Equity Shareholder Yield
|
|
12/31/05
|
|
1.0
|
|
11.1
|
|
10.2
|
|
2.6
|
|
6.6
|
|
MSCI World (Net)
|
|
|
|
2.5
|
|
15.8
|
|
6.9
|
|
(1.2)
|
|
3.0
|
|
|
|
|
|
|
|
|
|
Global Choice
|
|
9/30/05
|
|
2.7
|
|
14.9
|
|
6.6
|
|
1.0
|
|
7.3
|
|
MSCI World (Net)
|
|
|
|
2.5
|
|
15.8
|
|
6.9
|
|
(1.2)
|
|
3.4
|
|
|
|
|
|
|
|
|
|
Global Absolute Return
|
|
12/31/01
|
|
1.9
|
|
13.5
|
|
5.4
|
|
2.2
|
|
8.9
|
|
MSCI World (Net)
|
|
|
|
2.5
|
|
15.8
|
|
6.9
|
|
(1.2)
|
|
4.7
|
|
S&P 500
|
|
|
|
(0.4)
|
|
16.0
|
|
10.9
|
|
1.7
|
|
4.0
|
|
Barclays Capital U.S. Aggregate
|
|
|
|
0.2
|
|
4.2
|
|
6.2
|
|
5.9
|
|
5.6
|
|
|
|
|
|
|
|
|
|
International Small Cap
|
|
1/31/05
|
|
3.6
|
|
19.7
|
|
6.8
|
|
(1.8)
|
|
7.6
|
|
MSCI World ex USA Small Cap (Net)
|
|
|
|
4.8
|
|
17.5
|
|
7.2
|
|
(0.7)
|
|
5.0
|
|
|
|
|
|
|
|
|
|
Global Small Cap
|
|
12/31/02
|
|
2.9
|
|
15.3
|
|
9.9
|
|
2.4
|
|
11.0
|
|
MSCI World Small Cap (Net)
|
|
|
|
3.6
|
|
17.5
|
|
10.5
|
|
2.5
|
|
11.7
|
|
(1)
|
Index and investment strategy returns assume dividend reinvestment. Investment strategy returns
are net of management fees.
|
|
(2)
|
Epoch Investment Partners, Inc. became a registered investment adviser under the Investment
Advisers Act in June 2004. Performance from April 2001 through May 2004 is for our investment team and accounts while at Steinberg Priest & Sloane Capital Management, LLC. For the period July 1994 through March 2001, Co-Chief
Investment Officer William W. Priest managed the accounts while at Credit Suisse Asset Management, LLC.
|
|
(3)
|
The historical returns of these investment strategies are not necessarily indicative of their
future performance.
|
32
Distribution Channels
Our investment management services are distributed through multiple channels. Our institutional sales efforts include building strong relationships with institutional consultants and establishing direct
relationships with institutional clients.
We manage certain sub-advisory mandates that provide access to market segments that
we would not otherwise serve. For example, we currently serve as sub-advisor to mutual funds offered by major financial institutions in retail channels. These mandates are attractive to us because we have chosen not to build the large team of sales
professionals typically required to service those channels. We typically approach the servicing of those relationships in a manner similar to our approach with large institutional account clients.
We service the high net worth channel both directly and through third-party intermediaries, such as wealth advisers who utilize our
investment strategies in investment programs they construct for their clients. We maintain a limited direct sales effort in the high net worth channel.
The table and graphs below presents our AUM by distribution channel as of December 31, 2012 and December 31, 2011, as well as the three-month and one-year changes, respectively (
dollars in
millions
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dec. 31, 2012
|
|
|
Sept. 30, 2012
|
|
|
Dec. 31, 2011
|
|
|
3-Month Change
|
|
|
1-Year Change
|
|
|
Distribution Channel
|
|
|
|
|
Amt
|
|
|
%
|
|
|
Amt
|
|
|
%
|
|
|
Institutional
|
|
$
|
12,997
|
|
|
$
|
12,616
|
|
|
$
|
8,716
|
|
|
$
|
381
|
|
|
|
3
|
%
|
|
$
|
4,281
|
|
|
|
49
|
%
|
|
Sub-advisory
|
|
|
11,269
|
|
|
|
11,282
|
|
|
|
10,250
|
|
|
|
(13
|
)
|
|
|
(0
|
%)
|
|
|
1,019
|
|
|
|
10
|
%
|
|
High net worth
|
|
|
268
|
|
|
|
275
|
|
|
|
251
|
|
|
|
(7
|
)
|
|
|
(3
|
%)
|
|
|
17
|
|
|
|
7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total AUM
|
|
$
|
24,534
|
|
|
$
|
24,173
|
|
|
$
|
19,217
|
|
|
$
|
361
|
|
|
|
1
|
%
|
|
$
|
5,317
|
|
|
|
28
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Strategic Relationship
In July 2009, we entered into a strategic relationship with New York Life Investments, whereby the MainStay Group of Funds adopted our family of mutual funds (the “Epoch Funds”). The adoption
was completed in November 2009. We are responsible for the day-to-day investment management of the funds through a sub-advisory relationship, while MainStay Investments (“MainStay”), the retail distribution arm of New York Life
Investments, is responsible for the distribution and administration of the funds. Each former Epoch Fund is now co-branded as a “MainStay Epoch” Fund.
In addition to an existing sub-advisory relationship with New York Life Investments for certain funds, and the adoption of the Epoch Funds indicated above, EIP and New York Life Investments have entered
into an arrangement wherein, among other things, EIP and an affiliate of New York Life Investments have established a distribution and administration relationship with respect to certain separately managed account and unified managed account
strategies, and for a period of three years commencing November 2009 New York Life Investments agreed to pay certain additional base fees and meet minimum distribution targets. Final payment of additional base fees was received in November 2012.
Although there are no longer any additional base fees or minimum distribution targets, the relationship between EIP and New York Life Investments remains ongoing.
For the three and six months ended December 31, 2012 New York Life Investment Management accounted for approximately 13% and 14% of condensed consolidated operating revenues, respectively. For the
three and six months ended December 31, 2011, this relationship accounted for approximately 18% of condensed consolidated operating revenues. Our relationship and services with New York Life Investment Management are considered important to our
ongoing growth strategy.
33
Revenue by Client Domicile
The following charts show our operating revenue by client domicile as a percentage of total operating revenue for the six months ended December 31, 2012 and 2011:
Results of Operations
For The Three Months Ended December 31, 2012 and 2011
For the three
months ended December 31, 2012, net income was $5.7 million, a decrease of 2%, or $0.1 million, from the same period a year ago.
Basic earnings per share were $0.24 compared to $0.25 per share for the same period a year ago. Revenues increased by $6.1 million offset by increased operating expenses of $6.3 million. The increase in
operating expenses was driven by increases in employee compensation and benefits of $2.2 million, occupancy and technology costs of $1.0 million, and professional fees and services of $3.2 million. Included within the increase in professional fees
and services were merger related expenses of $2.8 million.
For The Six Months Ended December 31, 2012 and 2011
For the six months ended December 31, 2012, net income was $13.6 million, an increase of 33%, or $3.4 million, from the same
period a year ago.
Basic earnings per share were $0.58 compared to $0.44 per share for the same period a year ago. Revenues
increased by $14.7 million, offset by increased operating expenses of $9.5 million. The increase in operating expenses was driven by increases in employee compensation and benefits of $4.7 million, occupancy and technology costs of $1.6 million, and
professional fees and services of $3.3 million. Included within the increase in professional fees and services were merger related expenses of $2.8 million.
34
Operating Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
Dec. 31,
|
|
|
Dec. 31,
|
|
|
‘12 vs ‘11 Change
|
|
|
Dec. 31,
|
|
|
Dec. 31,
|
|
|
‘12 vs ‘11 Change
|
|
|
(Dollars in thousands)
|
|
2012
|
|
|
2011
|
|
|
$
|
|
|
%
|
|
|
2012
|
|
|
2011
|
|
|
$
|
|
|
%
|
|
|
Investment advisory and management fees
|
|
$
|
27,309
|
|
|
$
|
20,694
|
|
|
$
|
6,615
|
|
|
|
32
|
%
|
|
$
|
54,500
|
|
|
$
|
38,805
|
|
|
$
|
15,695
|
|
|
|
40
|
%
|
|
As a percent of total revenue
|
|
|
98
|
%
|
|
|
95
|
%
|
|
|
|
|
|
|
|
|
|
|
98
|
%
|
|
|
95
|
%
|
|
|
|
|
|
|
|
|
|
|
|
The increase in investment advisory and management fees for both the three and six months ended
December 31, 2012 was driven by increases in average AUM. The growth in AUM is a result of net inflows from new and existing clients and market appreciation. Net inflows for the past twelve months were approximately $2.7 billion and market
appreciation was approximately $2.6 million. Average AUM for the three months ended December 31, 2012 was approximately $24.2 billion compared to $17.9 billion for the prior year.
Our average effective fee rate (investment advisory and
management fees, excluding performance fees, as a percentage of average AUM) overall was approximately 45 basis points during both the three months ended December 31, 2012 and 2011.
Institutional separate accounts had an average effective fee
rate of approximately 52 and 53 basis points during the three months ended December 31, 2012 and 2011, respectively. During the six months ended December 31, 2012 and 2011, the average effective fees were 52 and 53 basis points.
Institutional separate accounts were approximately 53% and 46% of AUM during those periods, respectively.
Sub-advisory AUM had an average effective fee rate of approximately 38 and 40 basis points during the three months ended
December 31, 2012 and 2011 respectively. During the six months ended December 31, 2012 and 2011, the average effective fees were 38 and 40 basis points. Sub-advisory AUM was approximately 46% and 53% of AUM during those periods,
respectively.
As our tiered fee schedules or
negotiated fees typically allow for lower fee rates as account size increases, additional inflows from existing institutional clients and from existing sub-advisory relationships, as well as a general increase in the size of new mandates, have
slightly reduced the effective fee rates. Additionally, the agreements on certain separate accounts which have a performance fee component, generally have a reduced base management fee. Although growth in our global and international product AUM has
been a key contributor to our overall increase in AUM and therefore management fees, effective fee rates have slightly declined due to the impact of larger mandates from new and existing clients in nearly all strategies, as well as the addition of
several accounts with performance fee arrangements.
For the three and six months ended December 31, 2012 New York Life Investment Management, through the MainStay Epoch Funds and
other funds sub-advised by EIP, accounted for approximately 13% and 14% of condensed consolidated operating revenues, respectively. For the three and six months ended December 31, 2011, New York Life Investment Management accounted for
approximately 18% of condensed consolidated operating revenues.
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
Dec. 31,
|
|
|
Dec. 31,
|
|
|
‘12 vs ‘11 Change
|
|
|
Dec. 31,
|
|
|
Dec. 31,
|
|
|
‘12 vs ‘11 Change
|
|
|
(Dollars in thousands)
|
|
2012
|
|
|
2011
|
|
|
$
|
|
|
%
|
|
|
2012
|
|
|
2011
|
|
|
$
|
|
|
%
|
|
|
Performance fees
|
|
$
|
494
|
|
|
$
|
1,040
|
|
|
$
|
(546
|
)
|
|
|
(53
|
%)
|
|
$
|
927
|
|
|
$
|
1,938
|
|
|
$
|
(1,011
|
)
|
|
|
(52
|
%)
|
|
As a percent of total revenue
|
|
|
2
|
%
|
|
|
5
|
%
|
|
|
|
|
|
|
|
|
|
|
2
|
%
|
|
|
5
|
%
|
|
|
|
|
|
|
|
|
We have certain fee agreements that allow us to earn performance fees in the event that investment
returns meet or exceed certain pre-established benchmarks specified in such agreements. Revenues for these incentives are recognized only when such performance targets are met or exceeded at the end of the respective measurement period.
The period in which performance fees are recognized may vary by account, based upon the particular client arrangement (i.e. quarterly or
annual measurement period), commencement date of the agreement, and performance criteria. Most of our performance fee agreements are based upon an annual measurement period. However, that period may vary across contracts (i.e. June 1 through
May 31 for a client that commences on June 1, and December 1 through November 30, for a client that commences on December 1). We have several performance fee arrangements with a quarterly measurement period, typically based
on three-year rolling cumulative performance through the end of the respective quarter.
35
Approximately 12% and 13% of AUM, had the ability to generate performance fees with varying
measurement periods and criteria at December 31, 2012 and 2011, respectively. The decrease in performance fees for the three and six months ended December 31, 2012 stems from fewer performance fee accounts outperforming their targets and a
reduction in relative performance, compared to the same period a year ago.
Operating Expenses:
We are continuously managing and reviewing our resource allocation. Our most significant operating expense is employee compensation. Our
ability to compete depends, in part, on our ability to attract and retain key employees while managing our compensation and other costs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
Dec. 31,
|
|
|
Dec. 31,
|
|
|
‘12 vs ‘11 Change
|
|
|
Dec. 31,
|
|
|
Dec. 31,
|
|
|
‘12 vs ‘11 Change
|
|
|
(Dollars in thousands)
|
|
2012
|
|
|
2011
|
|
|
$
|
|
|
%
|
|
|
2012
|
|
|
2011
|
|
|
$
|
|
|
%
|
|
|
Employee compensation and benefits
|
|
$
|
10,512
|
|
|
$
|
8,353
|
|
|
$
|
2,159
|
|
|
|
26
|
%
|
|
$
|
20,907
|
|
|
$
|
16,170
|
|
|
$
|
4,737
|
|
|
|
29
|
%
|
|
As a percent of total revenue
|
|
|
38
|
%
|
|
|
38
|
%
|
|
|
|
|
|
|
|
|
|
|
38
|
%
|
|
|
40
|
%
|
|
|
|
|
|
|
|
|
Employee compensation and benefits include salaries, share-based compensation, incentive compensation,
signing bonuses, commissions, severance, payroll taxes and benefits. Maintaining and recruiting high-caliber, experienced employees are critical to our growth strategy. We place a high emphasis on pay for performance. As such, changes in our
performance as well as changes in the underlying performance of our investment strategies have an impact on compensation and benefits.
Incentive compensation and share-based compensation are primarily based on our operating results, including AUM growth, net inflows, investment performance, operating income and margins. However, there
are no predetermined formulas or weighting factors used to determine compensation. We also review peer compensation surveys but do not specifically set any compensation elements or pay levels versus the survey results. Rather, we use the comparative
survey data as part of our decision-making process in the determination of the appropriate level and mix of each component of compensation in any given year.
We generally issue share awards to employees shortly following the calendar year and these awards facilitate employee retention through multi-year vesting. Commissions are paid to certain sales persons
and are based on a percentage of management fees earned on the respective AUM.
In conjunction with the pending Merger, we are
changing our share-based compensation policy and will no longer be issuing Company shares. Instead, deferred cash compensation will be awarded to employees and invested in Company-managed funds, subject to multi-year vesting. As of December 31,
2012, there was approximately $9.2 million of total unrecognized compensation costs related to outstanding restricted stock awards. In the normal course, that cost would be expected to be recognized over a weighted-average period of approximately
1.8 years. Upon consummation of the Merger, all unvested shares would become vested and we would recognize the full amount of any remaining unrecognized compensation costs.
For the three months ended December 31, 2012 and 2011, these expenses included salaries of $3.0 million and $2.6 million, incentive compensation of $4.7 million and $3.8 million, amortization of
share-based compensation of $1.6 million and $1.4 million, commissions of $0.5 million and $0.2 million, and benefits and payroll taxes of $0.7 million and $0.5 million, respectively. The increase during the current period was driven by
additions to professional staff, merit increases, and our operating results, including AUM growth. Average headcount increased by approximately 11% during the three months ended December 31, 2012 when compared with the prior year period,
respectively. Several additions were made to our investment and client relations teams to support our business expansion. As a percentage of total revenue, employee compensation and related benefits remained the same from the prior year three-month
period.
For the six months ended December 31, 2012 and 2011, these expenses included salaries of $5.9 million and $5.2
million, incentive compensation of $9.3 million and $6.9 million, amortization of share-based compensation of $3.5 million and $2.8 million, commissions of $1.0 million and $0.3 million, and benefits and payroll taxes of $1.3 million and
$0.9 million, respectively. The increase during the six month period was driven by additions to professional staff, merit increases, and our operating results, including AUM growth. Average headcount increased by approximately 11% during the six
months ended December 31, 2012 when compared with the prior year period, respectively. Several additions were made to our investment and client relations teams to support our business expansion. As a percentage of total revenue, employee
compensation and related benefits declined compared with the prior year six-month period.
36
We anticipate employee compensation and related benefit costs to increase during the current
fiscal year in conjunction with an increase in our professional staff to support the planned growth of our business.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
Dec. 31,
|
|
|
Dec. 31,
|
|
|
‘12 vs ‘11 Change
|
|
|
Dec. 31,
|
|
|
Dec. 31,
|
|
|
‘12 vs ‘11 Change
|
|
|
(Dollars in thousands)
|
|
2012
|
|
|
2011
|
|
|
$
|
|
|
%
|
|
|
2012
|
|
|
2011
|
|
|
$
|
|
|
%
|
|
|
Professional fees and services
|
|
$
|
3,926
|
|
|
$
|
756
|
|
|
$
|
3,170
|
|
|
|
419
|
%
|
|
$
|
4,768
|
|
|
$
|
1,467
|
|
|
$
|
3,301
|
|
|
|
225
|
%
|
|
As a percent of total revenue
|
|
|
14
|
%
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
9
|
%
|
|
|
4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
These expenses include outside legal fees, independent accountants’ fees, consulting fees,
employee placement fees and other professional services. Approximately $2.8 million, primarily in legal and investment banking fees, in connection with the pending Merger contributed to the increase from the comparable period in the prior year.
These expenses are expected to increase during the next quarter as a result of additional costs related to the closing of the pending Merger and the defense of litigation relating thereto.
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
Dec. 31,
|
|
|
Dec. 31,
|
|
|
‘12 vs ‘11 Change
|
|
|
Dec. 31,
|
|
|
Dec. 31,
|
|
|
‘12 vs ‘11 Change
|
|
|
(Dollars in thousands)
|
|
2012
|
|
|
2011
|
|
|
$
|
|
|
%
|
|
|
2012
|
|
|
2011
|
|
|
$
|
|
|
%
|
|
|
Occupancy and technology
|
|
$
|
2,333
|
|
|
$
|
1,330
|
|
|
$
|
1,003
|
|
|
|
75
|
%
|
|
$
|
4,069
|
|
|
$
|
2,515
|
|
|
$
|
1,554
|
|
|
|
62
|
%
|
|
As a percent of total revenue
|
|
|
8
|
%
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
7
|
%
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Occupancy and technology costs consist primarily of office rent and related costs, market data
services, information technology costs and depreciation. An increase in rent expense related to our new office lease was the primary reason for this increase.
In conjunction with anticipated growth, we entered into a lease agreement in June 2012 for expanded new headquarters. The lease
commenced on September 1, 2012. We expect to relocate all of our operations upon completion of construction in the new location, which is expected to be during the quarter ended March 31, 2013. As a result, rent expense is expected to
increase by approximately $3.1 million for the fiscal year ended June 30, 2013. The Company is currently searching for a sub-tenant for its present premises in conjunction with its planned relocation. As of December 31, 2012, the Company
had approximately $3.8 million of lease payments remaining on its present premises. Any loss in connection with the lease commitment on the present premises will be recognized in accordance with FASB ASC 420,
Exit or Disposal Cost
Obligations
.
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
Dec. 31,
|
|
|
Dec. 31,
|
|
|
‘12 vs ‘11 Change
|
|
|
Dec. 31,
|
|
|
Dec. 31,
|
|
|
‘12 vs ‘11 Change
|
|
|
(Dollars in thousands)
|
|
2012
|
|
|
2011
|
|
|
$
|
|
|
%
|
|
|
2012
|
|
|
2011
|
|
|
$
|
|
|
%
|
|
|
General and administrative
|
|
$
|
793
|
|
|
$
|
766
|
|
|
$
|
27
|
|
|
|
4
|
%
|
|
$
|
1,487
|
|
|
$
|
1,465
|
|
|
$
|
22
|
|
|
|
2
|
%
|
|
As a percent of total revenue
|
|
|
3
|
%
|
|
|
4
|
%
|
|
|
|
|
|
|
|
|
|
|
3
|
%
|
|
|
4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses consist primarily of expenses for travel and entertainment,
advertising and marketing, insurance, and other office related expenses. These expenses were virtually unchanged from the prior year comparable periods.
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
Dec. 31,
|
|
|
Dec. 31,
|
|
|
‘12 vs ‘11 Change
|
|
|
Dec. 31,
|
|
|
Dec. 31,
|
|
|
‘12 vs ‘11 Change
|
|
|
(Dollars in thousands)
|
|
2012
|
|
|
2011
|
|
|
$
|
|
|
%
|
|
|
2012
|
|
|
2011
|
|
|
$
|
|
|
%
|
|
|
Distribution and servicing fees
|
|
$
|
403
|
|
|
$
|
470
|
|
|
$
|
(67
|
)
|
|
|
(14
|
%)
|
|
$
|
846
|
|
|
$
|
969
|
|
|
$
|
(123
|
)
|
|
|
(13
|
%)
|
|
As a percent of total revenue
|
|
|
1
|
%
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
2
|
%
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
Distribution and servicing fees represent amounts paid to third-party distributors or administrators in
conjunction with the sale or administration of certain separate accounts. Distribution fees are generally a percentage of investment advisory and performance fees earned on the underlying accounts. A reduction in performance fees on certain separate
accounts was the reason for the current year declines.
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
Dec. 31,
|
|
|
Dec. 31,
|
|
|
‘12 vs ‘11 Change
|
|
|
Dec. 31,
|
|
|
Dec. 31,
|
|
|
‘12 vs ‘11 Change
|
|
|
(Dollars in thousands)
|
|
2012
|
|
|
2011
|
|
|
$
|
|
|
%
|
|
|
2012
|
|
|
2011
|
|
|
$
|
|
|
%
|
|
|
Other income
|
|
$
|
284
|
|
|
$
|
331
|
|
|
$
|
(47
|
)
|
|
|
(14
|
%)
|
|
$
|
693
|
|
|
$
|
137
|
|
|
$
|
556
|
|
|
|
406
|
%
|
|
As a percent of income before income taxes
|
|
|
3
|
%
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
3
|
%
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Other income includes investment gains and losses, dividends and interest income. The increase from the
prior year six-month comparable period primarily stems from gains associated with investments in several new Company-sponsored vehicles.
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
Dec. 31,
|
|
|
Dec. 31,
|
|
|
‘12 vs ‘11 Change
|
|
|
Dec. 31,
|
|
|
Dec. 31,
|
|
|
‘12 vs ‘11 Change
|
|
|
(Dollars in thousands)
|
|
2012
|
|
|
2011
|
|
|
$
|
|
|
%
|
|
|
2012
|
|
|
2011
|
|
|
$
|
|
|
%
|
|
|
Provision for income taxes
|
|
$
|
4,382
|
|
|
$
|
4,527
|
|
|
$
|
(145
|
)
|
|
|
(3
|
%)
|
|
$
|
10,411
|
|
|
$
|
8,013
|
|
|
$
|
2,398
|
|
|
|
30
|
%
|
|
Effective income tax rate
|
|
|
43
|
%
|
|
|
44
|
%
|
|
|
|
|
|
|
|
|
|
|
43
|
%
|
|
|
44
|
%
|
|
|
|
|
|
|
|
|
The increase in the six-month period is the result of higher pre-tax income levels when compared with the
same period a year ago.
At the end of each interim period, we estimate the annual effective income tax rate and apply that
rate to our ordinary quarterly earnings. The effect of changes in enacted tax laws or rates is recognized in the interim period in which the change occurs. The computation of the annual estimated effective tax rate at each interim period requires
certain estimates and judgments including, but not limited to, the expected operating income for the year, projections of the proportion of income earned and taxed in various jurisdictions, and permanent differences. The accounting estimates used to
compute the provision for income taxes may change as new events occur, additional information is obtained, or as the tax environment changes.
Three Months Ended December 31, 2012 and Prior Three Months Ended September 30, 2012
The table below presents key operating and financial indicators for the three months ended December 31, 2012 and the prior three
months ended September 30, 2012, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dec. 31,
|
|
|
Sept. 30,
|
|
|
Change
|
|
|
|
|
2012
|
|
|
2012
|
|
|
Amt
|
|
|
%
|
|
|
Operating Indicators (
$ in millions
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AUM at end of period
|
|
$
|
24,534
|
|
|
$
|
24,173
|
|
|
$
|
361
|
|
|
|
1
|
%
|
|
Average AUM for the period
|
|
$
|
24,185
|
|
|
$
|
23,900
|
|
|
$
|
285
|
|
|
|
1
|
%
|
|
Net client flows
|
|
$
|
74
|
|
|
$
|
(70
|
)
|
|
$
|
144
|
|
|
|
N
|
M
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Indicators
($ in thousands, except share data)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Revenue
|
|
$
|
27,803
|
|
|
$
|
27,623
|
|
|
$
|
180
|
|
|
|
1
|
%
|
|
Operating Income
|
|
$
|
9,836
|
|
|
$
|
13,513
|
|
|
$
|
(3,677
|
)
|
|
|
(27
|
%)
|
|
Net Income
|
|
$
|
5,738
|
|
|
$
|
7,894
|
|
|
$
|
(2,156
|
)
|
|
|
(27
|
%)
|
|
Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.24
|
|
|
$
|
0.33
|
|
|
$
|
(0.09
|
)
|
|
|
(27
|
%)
|
|
Diluted
|
|
$
|
0.24
|
|
|
$
|
0.33
|
|
|
$
|
(0.09
|
)
|
|
|
(27
|
%)
|
|
Operating Margin
(1)
|
|
|
35
|
%
|
|
|
49
|
%
|
|
|
(14
|
%)
|
|
|
N
|
M
|
|
(1)
|
Defined as operating income divided by total operating revenues.
|
AUM increased by approximately $0.4 billion from September 30, 2012 driven primarily by market appreciation. Quarterly inflows slightly outpaced outflows by $74 million. While management fees
increased, total operating income decreased primarily as a result of legal fees and investment banking fees incurred during the quarter in conjunction with the pending Merger.
38
Liquidity and Capital Resources
Sources of Liquidity
Our principal source of liquidity is cash flows from
operating activities, particularly investment management fees. Our current financial condition is highly liquid, with a significant amount of our assets comprised of cash and cash equivalents and accounts receivable. While it is currently our
intention to hold the held-to-maturity securities until maturity and our other investments long-term, we have the ability to convert these items into cash and cash equivalents during any fiscal year. Cash and cash equivalents, accounts receivable,
held-to-maturity securities and our other investments accounted for approximately 68% of total assets as of December 31, 2012.
The following table summarizes our principal and potential sources of liquidity as of December 31, 2012 and June 30, 2012 (
dollars in thousands
):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2012
|
|
|
June 30,
2012
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
21,866
|
|
|
$
|
24,528
|
|
|
Accounts receivable
|
|
|
23,428
|
|
|
|
20,718
|
|
|
Trading securities
|
|
|
2,638
|
|
|
|
5,040
|
|
|
Available-for-sale securities
|
|
|
6,645
|
|
|
|
8,448
|
|
|
Held-to-maturity securities
|
|
|
509
|
|
|
|
1,218
|
|
|
Equity method investments
|
|
|
3,188
|
|
|
|
2,580
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
58,274
|
|
|
$
|
62,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of total assets
|
|
|
68
|
%
|
|
|
81
|
%
|
|
|
|
|
|
|
|
|
|
|
We believe that the sources of liquidity described above as well as our continuing cash flows from
operations will be sufficient to meet our operating needs for the foreseeable future and will enable us to continue implementing our growth strategy. We do not anticipate a need for an external source of liquidity.
Uses of Liquidity
We
expect that our main uses of cash will be to pay operating expenses, recruit key personnel, enhance our operating and technology infrastructure, pay dividends, and repurchase shares of our common stock when appropriate.
Our philosophy regarding the maintenance of a balance sheet with a large component of cash and cash equivalents reflects our views on
potential future capital requirements relating to enhancement of our investment capabilities, creation and expansion of distribution channels, potential strategic acquisitions or transactions, support of our infrastructure growth, and possible
challenges to our business. If we believe that we have sufficient capital for the aforementioned needs and circumstances, our approach is to return a portion of our excess liquidity to our shareholders. Accordingly, we declared a special dividend of
$0.75 per share, or $17.8 million in aggregate, in November 2012 which was paid in December 2012.
In view of the pending
Merger transaction, the Company will not be issuing annual incentive stock awards to employees during the quarter ended March 31, 2013 for performance during the calendar year ended December 31, 2012. Instead, deferred cash compensation
will be awarded to employees and invested in Company-managed funds, subject to multi-year vesting. As a result of this funding, as well as the ongoing Merger expenses, such as legal fees and investment banking fees to complete the transaction, we
anticipate next quarter’s use of cash to be higher than historical norms.
39
Cash Flows Analysis
A summary of the Statements of Cash Flows for the six months ended December 31, 2012 and 2011, respectively, is as follows (
in thousands
):
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
December 31,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
Cash flows provided by/(used in):
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
13,635
|
|
|
$
|
11,593
|
|
|
Investing activities
|
|
|
(1,569
|
)
|
|
|
1,673
|
|
|
Financing activities
|
|
|
(14,728
|
)
|
|
|
(2,703
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease)/increase in cash and cash equivalents
|
|
|
(2,662
|
)
|
|
|
10,563
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period
|
|
|
24,528
|
|
|
|
29,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
21,866
|
|
|
$
|
39,691
|
|
|
|
|
|
|
|
|
|
|
|
A more detailed analysis of cash flows for the six months is as follows:
Cash Flows from Operating Activities
Our cash flows from operating activities are calculated by adjusting net income to reflect other significant operating sources and uses of cash, certain significant non-cash items such as share-based
compensation and depreciation, and timing differences in the cash settlement of operating assets and liabilities. Significant operating sources and uses of cash that are not reflected in net income include net cash flows associated with the purchase
and sale of investments in Company-sponsored vehicles classified as trading securities.
For the six months ended
December 31, 2012, our net cash provided by operating activities totaled $13.6 million. The increase from the prior year period reflects the increase in revenues and related operating income as well as the timing differences in the cash
settlement of assets and liabilities.
Accrued compensation and benefits increased by $2.7 million from the June 30, 2012
balance and primarily reflects accruals for incentive compensation. A portion of incentive compensation was paid during the quarter ended December 31, 2012. The balance of this liability will be paid shortly after the calendar year end. Prior
year’s incentive compensation was paid in full during the quarter ended March 31, 2012.
Cash Flows from Investing Activities
Our cash flows from investing activities consist primarily of capital expenditures, the purchase and redemption of
held-to-maturity securities, and investments in Company-sponsored products and a non-affiliated limited partnership.
Cash
flows used in investing activities totaled $1.6 million for the six months ended December 31, 2012. During the period, we redeemed $3.7 million of existing investments, including $2.0 million from the non-affiliated investment limited
partnership. These inflows were partially offset by $5.2 million of capital expenditures, primarily for the construction of our new corporate headquarters which we anticipate occupying during the quarter ended March 31, 2013.
Cash Flows from Financing Activities
Our cash flows from financing activities primarily reflect the payment of common stock dividends, the repurchase of our common stock, and the recognition of excess tax benefits associated with share-based
compensation.
Net cash flows used in financing activities totaled $14.7 million. The primary cash flows used in financing
activities during the six months ended December 31, 2012, were $22.1 million for the payment of dividends, and $0.1 million for the repurchase of common stock in conjunction with employee tax withholding obligations on the vesting of common
shares. Excess tax benefits of $5.3 million offset the cash used in financing activities. Excess tax benefits arise in connection with our share-based compensation. When a restricted stock award vests, the market price on the date the stock vests to
the employee may be higher than the original grant date fair market value of the award. If so, the difference between the cumulative amount that has been recognized through the Statement of Income and the vesting amount results in an excess tax
benefit. Excess tax benefits reduce income taxes payable and increase additional paid-in capital in the period recognized. Proceeds from employee stock option exercises of $1.7 million also offset the cash outflows from financing
activities.
40
Working Capital
Our working capital at December 31, 2012 and June 30, 2012 is set forth in the table below (
in thousands
):
|
|
|
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December
31,
2012
|
|
|
June
30,
2012
|
|
|
Change
|
|
|
|
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
|
|
Current Assets
|
|
$
|
56,610
|
|
|
$
|
49,704
|
|
|
$
|
6,906
|
|
|
|
14
|
%
|
|
Current Liabilities
|
|
|
15,457
|
|
|
|
10,982
|
|
|
|
4,475
|
|
|
|
41
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working Capital
|
|
$
|
41,153
|
|
|
$
|
38,722
|
|
|
$
|
2,431
|
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
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|
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|
Deferred Tax Assets
As of December 31, 2012, we had $8.9 million in long-term deferred tax assets, primarily relating to acquired net operating losses and alternative minimum tax credits. We believe there is sufficient
positive evidence existing from earnings history, pre-tax income growth rates, current operating income levels, and the outlook for sustained profitability, to conclude that it is more likely than not that these deferred tax assets will be fully
realized in future operating periods.
Capital Expenditures
In June 2012, we entered into a lease agreement to relocate our operations to 399 Park Avenue, New York, NY. This lease commenced September 1, 2012 and we expect to occupy the new premises once
construction is completed, during the quarter ended March 31, 2013. The new lease is for approximately 39,500 rentable square feet. We anticipate leasehold improvements and the purchase of additional office equipment, net of the landlord’s
contribution, to be in the range of $6.5 million to $7.5 million. During the six months ended December 31, 2012, we incurred $5.2 million of capital expenditures related to the new space. Any related capital expenditures and obligations for
such office space will be paid from our cash flows from operations.
Quarterly Dividends on Common Stock
We have been paying regular quarterly dividends since the quarter ended December 31, 2007. During the three months ended
September 30, 2012, an aggregate quarterly dividend of $1.9 million was paid. On October 1, 2012, our Board of Directors increased the Company’s quarterly cash dividend rate from $0.08 to $0.10 per share. The dividend was paid in
November 2012. The aggregate quarterly dividend was approximately $2.4 million.
The Company typically pays dividends in
February, May, August and November of each fiscal year. However, the actual declaration of future cash dividends, and the establishment of record and payment dates, will be subject to final determination by the Board of Directors each quarter after
its review of the Company’s financial performance. Under the terms of the Merger Agreement, the Company may continue to declare or pay quarterly dividends to its common stockholders not in excess of $0.10 per share.
Special Dividends
In
November 2012 the Board of Directors declared a special cash dividend of $0.75 per share on the Company’s common stock. The dividend was paid in December 2012. The aggregate dividend payment totaled approximately $17.8 million.
In November 2011 the Board of Directors declared a special cash dividend of $0.75 per share on the Company’s common stock. The
dividend was paid in January 2012. The aggregate dividend payment totaled approximately $17.5 million.
41
Common Stock Repurchase Plan
We maintain a stock repurchase plan with the objective of maximizing shareholder value. Subject to applicable laws, shares may be purchased from time to time in the open market and/or in privately
negotiated transactions. Such purchases will be at times and in amounts as we deem appropriate, based on factors such as prevailing market conditions, legal requirements and other business considerations.
We did not repurchase any of our common stock during the three months ended December 31, 2012 under the repurchase plan. As of
December 31, 2012, we have repurchased a cumulative total of 659,516 shares at a cost of approximately $6.7 million and had 490,484 shares remaining available for repurchase. All shares repurchased are shown as Treasury Stock, at cost, in the
stockholders’ equity section of the Condensed Consolidated Balance Sheets.
Under the Merger Agreement, the Company has
agreed not to repurchase any shares of Common Stock without the prior written consent of TD.
Employee Tax Withholding
To satisfy statutory employee tax withholding requirements related to the vesting of common shares, employees may elect to have us
withhold shares and remit the necessary tax withholding on their behalf. We may promptly sell these shares in the open market on behalf of employees or acquire them as treasury shares. Any resulting gain or loss on sale is accounted for as an
adjustment to additional paid-in capital. During the three and six months ended December 31, 2012, respectively, a total of 221 and 5,721 employee relinquished shares related to employee tax withholding were acquired as treasury shares at a
weighted-average price of $21.32 and $23.40 per share.
Other Matters
The Company retained a financial advisor in connection with the proposed Merger. The financial advisor will receive a transaction fee
currently expected to be $5.0 million for its services, $1.0 million of which became payable upon the rendering of the financial advisor’s opinion and the principal portion of which is contingent upon completion of the Merger. In
addition, the Company has agreed to reimburse the financial advisor for expenses incurred in connection with its engagement.
Fair Value
Measurements
Investments classified as trading securities and available-for-sale securities are measured at fair value.
Fair value for these investments is measured using Level 1 inputs, as defined by the
Fair Value Topic
in the FASB ASC, which are publicly available, unadjusted quoted prices in active markets. We do not hold any derivative instruments or
financial liabilities. See Note 4 to the Condensed Consolidated Financial Statements for a further discussion on
Fair Value Measurements
.
Contractual Obligations
Our contractual obligations are summarized on page
50 in our Annual Report on Form 10-K for the fiscal year ended June 30, 2012. At December 31, 2012, there were no material changes in our contractual obligations from June 30, 2012.
Under the Merger Agreement, we are prohibited from making any material commitments of capital outside of the normal course of business or
assuming indebtedness in excess of certain limits. This prohibition includes, but is not limited to, issuing or granting new shares of stock; selling, leasing, or disposing of assets; and making acquisitions or investments in excess of certain
thresholds. For more information, as well as other terms and conditions, please refer to the Merger Agreement filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 6,
2012.
Off-Balance Sheet Arrangements
As of December 31, 2012, we had no off-balance sheet arrangements.
Recently Issued
Accounting Pronouncements
In December 2011, the FASB issued Accounting Standards Update (“ASU”)
No. 2011-11,
Disclosures About Offsetting Assets and Liabilities
. ASU No. 2011-11 provides new disclosure requirements regarding the nature of an entity’s rights of setoff and related arrangements associated with its derivative
and other financial instruments. The disclosure requirements are effective for annual reporting periods beginning on or after January 1, 2013, and interim periods therein, with retrospective application required. The new disclosures are
designed to make financial statements that are prepared under U.S. GAAP more comparable to those prepared under International Financial Reporting Standards (“IFRS”). We adopted this standard in January 2013. The adoption of this standard
did not have a material impact on our condensed consolidated financial position, results of operations, or cash flows.
42