UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): June 2, 2004
J Net Enterprises, Inc.
__________________________________________________________________________
(Exact name of registrant as specified in its charter)
Nevada 1-9728 88-0169922
____________________________ ________________________ ___________________
(State or other jurisdiction (Commission File Number) (IRS Employer
of incorporation or Identification No.)
organization)
4020 Lake Creek Drive, #100
Wilson, Wyoming 83014
________________________________________ __________
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (307) 739-8603
___________________________________________________________
(Former name or former address, if changed since last report)
Item 1. Changes in Control of Registrant
Item 2. Acquisition or Disposition of Assets
This report contains forward-looking statements, which are subject to
inherent uncertainties which are difficult to predict, and may be beyond
the ability of the Company to control.
Certain statements in this Report on Form 8-K constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, that are not historical facts but rather
reflect the Company's current expectations concerning future results and
events. The words "believes," "expects," "intends," "plans," "anticipates,"
"hopes," "likely," "will," and similar expressions identify such
forward-looking statements. Such forward-looking statements involve known
and unknown risks, uncertainties and other important factors that could
cause the actual results, performance or achievements of the Company (or
entities in which the Company has interests), or industry results, to
differ materially from future results, performance or achievements
expressed or implied by such forward-looking statements.
Readers are cautioned not to place undue reliance on these
forward-looking statements which reflect management's view only as of the
date of this Form 8-K. The Company undertakes no obligation to publicly
release the result of any revisions to these forward-looking statements
which may be made to reflect events or circumstance after the date hereof
or to reflect the occurrence of unanticipated events, conditions or
circumstances.
The Epoch Acquisition.
On June 2, 2004, J Net Enterprises, Inc. acquired Epoch Investment
Partners, Inc. ("Epoch"), an investment advisory and investment management
business (the "Acquisition"). Epoch was formed in April 2004 and
co-founded by Mr. William W. Priest. Epoch has registered as an investment
adviser with the SEC. Mr. Priest has over 30 years experience in the
investment advisory business. CI Mutual Funds Inc. ("CI"), a client of Mr.
Priest at his former firm, has agreed to transfer its contract for
sub-advisory services to Epoch, representing assets under management of
approximately $645 million as of April 30, 2004, and other clients of Mr.
Priest at his former firm will be asked to transfer their accounts to Epoch
shortly (representing up to approximately another $195 million of assets
under management as of April 30, 2004).
The Merger Agreement
The Acquisition was effected pursuant to the merger of Epoch
Acquisition Corp., a Delaware corporation and newly-created, wholly-owned
subsidiary of J Net ("Acquisition Sub"), with and into Epoch, with Epoch
surviving as a wholly-owned subsidiary of J Net and Epoch's former
stockholders acquiring the right, upon the satisfaction of certain
conditions, to be issued shares constituting a majority of the outstanding
shares of common stock of J Net, as further discussed below. The merger
was consummated under Delaware law and pursuant to an Agreement of Merger
and Plan of Reorganization, dated June 2, 2004 (the "Merger Agreement"), as
discussed below. J Net intends to carry on Epoch's investment advisory and
investment management business as J Net's primary line of business.
Under Nevada law, J Net did not need the approval of its stockholders
to complete the merger, as the constituent corporations in the merger were
Acquisition Sub and Epoch. J Net was not a constituent corporation in the
merger. The merger and its related transactions were approved by the
unanimous written consent of Epoch stockholders.
The Acquisition Consideration
Initial Stock Consideration
In consideration for the Acquisition, we issued 6,426,153 shares of
our common stock to the former stockholders of Epoch, representing
approximately 42% of our common stock issued and outstanding (the "Initial
Stock Consideration"). See "-Stockholders Agreement," below, for a
description of certain vesting provisions concerning the Initial Stock
Consideration.
Escrow Consideration
At the closing of the Acquisition, we issued and placed into escrow on
behalf of the former stockholders of Epoch an additional 2,669,563 shares
of our common stock, representing an additional 9% of our common stock
issued and outstanding (the "Escrow Consideration"). Such stockholders are
entitled to the Escrow Consideration if in at least 45 calendar days but
not more than 120 calendar days following the effective date of the
Acquisition, Epoch has received consents from clients to the transfer of
assets under management to Epoch of 92.5% of Epoch's target of $842 million
($779 million) based on the market value of such assets as of April 30,
2004 plus (or less) net additions (or net withdrawals) thereafter. Each
such stockholder has the right to vote and receive dividends in respect of
the shares held in escrow by J Net. The Escrow Consideration will be
reduced, and shares included therein will be cancelled, proportionately to
the extent such 92.5% of Epoch's target is not achieved.
Contingent Stock Consideration
Additional shares of our common stock will be issued to the former
stockholders of Epoch if we in the future incur costs relating to taxes for
periods prior to the effective time of the Acquisition of greater than $2
million (the "Contingent Stock Consideration"). For illustration purposes
only, the maximum number of additional shares that may be issued to the
former stockholders of Epoch pursuant to the relevant provisions of the
Merger Agreement (assuming that our shares are trading at $1.50 per share
at the time of issuance) is approximately 7.7 million shares, which would
occur if we incur an amount of such costs equal to or in excess of $8
million. If our shares are trading at a price that is lesser than or
greater than $1.50 per share, we will be required to issue a greater or
lesser amount of shares, respectively.
The foregoing description of the Acquisition is qualified in its
entirety by reference to the full text of the Merger Agreement, a copy of
which is attached as Exhibit 2.1, and which is incorporated herein in its
entirety by reference.
Stockholders Agreement
J Net, the Epoch stockholders and certain trusts formed by them (their
"Family Affiliates") and David R. Markin and Allan R. Tessler (the
"Existing Stockholders") have entered into a Stockholders Agreement (the
"Stockholders Agreement"). The Stockholders Agreement governs vesting,
transfers and voting of the shares of J Net common stock received by the
Epoch stockholders and Family Affiliates in the Acquisition and the J Net
shares held by the Existing Stockholders (the "Initial Shares").
Vesting. The Stockholders Agreement provides that the Initial Shares
held by the Epoch stockholders who are to be employees of J Net going
forward (the "Employee Owners") and their Family Affiliates will be subject
to vesting over a three year period on the following schedule: 12.5% vested
as of the date of the Stockholders Agreement, 25% vested as of the first
anniversary thereof, 50% vested as of the second anniversary thereof and
100% vested as of the third anniversary thereof. If an Employee Owner's
employment with J Net is terminated within three years of the date of the
Stockholders Agreement, the unvested Initial Shares held by such Employee
Owner and his or her Family Affiliates will be subject to purchase by J Net
at a price of $0.01 per share.
Transfer Restrictions. The Stockholders Agreement prohibits any
transfers of Initial Shares by the Epoch stockholders or their Family
Affiliates or the Existing Stockholders (together, the "Stockholder
Parties") prior to June 2, 2007, except in those circumstances noted below.
Thereafter, the Stockholder Parties may transfer their Initial Shares only
as follows:
. Each Employee Owner together with his or her Family Affiliates
may in the aggregate transfer (1) on and after June 2, 2007 and
prior to June 2, 2008, a number of Initial Shares not to exceed
12.5% of the aggregate number of Initial Shares received in the
Acquisition by such Employee Owner and Family Affiliates, (2)
on and after June 2, 2008 and prior to June 2, 2009, a number
of Initial Shares not to exceed 12.5% of the aggregate number
of Initial Shares received in the Acquisition by such Employee
Owner and Family Affiliates, (3) on and after June 2, 2009 and
prior to June 2, 2010, a number of Initial Shares not to exceed
25% of the aggregate number of Initial Shares received in the
Acquisition by such Employee Owner and Family Affiliates and
(4) on and after June 2, 2010, any number of Initial Shares,
provided that, in all cases, prior to the first anniversary of
the termination of employment of any Employee Owner, neither
such Employee Owner nor his or her Family Affiliates may
transfer Initial Shares if, as a result of such transfer, such
Employee Owner and Family Affiliates would in the aggregate own
less than 30% of the aggregate number of Initial Shares
received in the Acquisition by such Employee Owner and Family
Affiliates. The number of Initial Shares eligible for transfer
in any one calendar year but not transferred may be added to
the number otherwise eligible to be transferred in any future
year.
. Each Stockholder Party other than the Employee Owners and their
Family Affiliates may transfer any Initial Shares on and after
the third anniversary of the date of the Stockholders
Agreement.
Notwithstanding the foregoing, if an Employee Owner's employment with
J Net terminates due to disability or death, the Employee Owner (or his or
her estate) and his or her Family Affiliates may transfer any vested
Initial Shares without restriction. In addition, our board of directors or
a body designated by our board of directors has the authority to make
exceptions to any or all of the transfer restrictions applicable to vested
Initial Shares contained in the Stockholders Agreement and may permit or
cause other persons to become party to the agreement.
Voting. Each of the Stockholder Parties has agreed to vote their
shares and take any other actions necessary to effectuate the following
agreements:
1. The J Net board of directors will have seven members;
2. four of those directors will be designated by William W.
Priest (of which at least two will not be current or former
shareholders or officers of Epoch), who will also have the
right to cause the removal and/or replacement of those
directors in the future;
3. three of the directors on the board prior to the effective
time of the Acquisition (Allan R. Tessler, David R. Markin
and Eugene M. Freedman) shall continue to serve as members
of the board; and
4. the bylaws of J Net shall be amended to provide that the
following decisions of the board of directors must be made
by a two-third majority: (i) compensation of Mr. Priest
except as described below under "CEO Agreement," (ii)
issuance of additional shares of J Net to any Employee Owner
(other than pursuant to the Merger Agreement) and (iii) any
amendment of the Stockholders Agreement.
The Stockholders Agreement provides that the agreement of the
Stockholder Parties to vote in accordance with these provisions will expire
on June 2, 2007, provided that the obligation of each Employee Owner and
his or her Family Affiliates shall continue thereafter with respect to
provisions 1 and 2 above as long as any of them holds any Initial Shares
and Priest is employed by J Net.
CEO Agreement. The Stockholders Agreement provides that prior to the
third anniversary thereof, J Net will enter into an employment arrangement
with William W. Priest customary for chief executive officers of peer group
companies. Such agreement need only be approved by a simple majority of J
Net's directors.
Call Right. The Stockholders Agreement provides that J Net may
repurchase 30% of the Initial Shares received in the Acquisition of an
Employee Owner and his or her Family Affiliates at a purchase price of
$0.01 per share if at any time during employment or the one year after
leaving such Employee Owner engages in:
. soliciting or accepting business from any person or institution
who was a client or prospective client of J Net or its
subsidiaries during the year prior to the departure of the
Employee Owner (or, in the case of an action taken during
employment, during the prior year); and
. employing or soliciting for employment employees of J Net or
its subsidiaries.
Registration Rights Agreement
Pursuant to the Acquisition, we entered into a registration rights
agreement with those of our stockholders who are receiving shares of our
common stock in the Acquisition (the "Registration Rights Agreement"). The
Registration Rights Agreement requires us, on demand of either of William
W. Priest or Berenson Epoch LLC on up to two occasions for each such
stockholder, to prepare and file a registration statement that covers the
resale of those shares, and the shares of any other holders of registration
rights electing to participate in the registration. In addition, we must
give the holders of registration rights notice at least 15 days prior to
the proposed date of filing a registration statement for the offer and sale
of common shares for us or for any other selling stockholder, and provide
these holders with the opportunity to participate and have their common
shares included in the registration statement, subject to customary
underwriter cutback provisions. This participation right does not apply to
registration statements related to an employee benefit plan, a dividend
reinvestment plan or on Form S-4 or Form S-8 under the Securities Act of
1933, as amended. We will bear all expenses incident to our obligations
under the Registration Rights Agreement, other than any underwriting fees,
discounts or commissions, or any out-of-pocket expenses of the persons
exercising the registration rights, or any transfer taxes relating to the
resale of their shares.
Board of Directors; Change of Control
Pursuant to the Stockholders Agreement, the total number of members of
the board of directors will be increased from five to seven. William W.
Priest has the right to nominate four members of J Net's board of directors
at any meeting of stockholders. Both Mr. Priest and Jeffrey Berenson were
appointed to the board of directors at the closing of the Acquisition, with
Messrs. Alan J. Hirschfield and Robert L. McDonald, Sr. resigning at such
time.
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information regarding the number of
shares of common stock of J Net beneficially owned on June 2, 2004
following the consummation of the Acquisition, by:
. each person who is known by J Net to beneficially own 5% or
more of the common stock of J Net;
. each of the directors and executive officers of J Net; and
. all of J Net's directors and executive officers, as a group.
Except as otherwise set forth below, the address of each of the
persons listed below is c/o J Net Enterprises, Inc., 4020 Lake Creek Drive,
#100, Wilson, Wyoming 83014.
Percentage of
Number of Shares Shares
Name and Address of Beneficially Owned Beneficially
Beneficial Owner (1)(2) Owned (3)
_________________________________ __________________ _____________
Gabelli Asset Management, Inc.(4) 1,760,600 9.8%
William W. Priest 3,138,022 17.6%
Berenson Epoch LLC 2,774,194 15.6%
Timothy T. Taussig 1,136,964 6.4%
J. Philip Clark(5) 1,136,964 6.4%
David Pearl 909,572 5.1%
Allan R. Tessler(6) 673,557 3.8%
Eugene M. Freedman(7) 87,500 *
David R. Markin(8) 510,320 2.8%
Jeffrey Berenson(9) 2,774,194 15.6%
Mark E. Wilson(10) 40,000 *
Directors and executive officers as a
group (8 persons)(11) 9,497,521 52.0%
________________________
* Less than 1% of outstanding shares
(1) Unless otherwise indicated, includes shares owned by a spouse, minor
children, by relatives sharing the same home, and entities owned or
controlled by the named person. Also includes shares if the named
person has the right to acquire such shares within 60 days after June
2, 2004, by the exercise of any warrant, stock option or other right.
Unless otherwise noted, shares are owned of record and beneficially
by the named person.
(2) Includes the Initial Consideration and the Escrow Consideration
payable to the former stockholders of Epoch pursuant to the Merger
Agreement but excludes the Contingent Stock Consideration.
(3) Based upon 17,834,737 shares of common stock outstanding as of June
2, 2004.
(4) Based solely upon a Schedule 13D/A filed by Gabelli Asset Management
on May 4, 2004.
(5) Includes 1,136,964 shares held by the J Philip/Deborah K Clark Trust
u/a 10/06/1994.
(6) Includes 112,500 shares issuable upon the exercise of vested options.
(7) Includes 27,500 shares issuable upon the exercise of vested options.
(8) Includes 262,500 shares issuable upon the exercise of vested options.
(9) Includes 2,774,194 shares held by Berenson Epoch LLC. Berenson &
Company, as to which Mr. Berenson is the President and Chief
Executive Officer, is the managing member of Berenson Epoch LLC.
(10) Includes 40,000 shares issuable upon the exercise of vested options.
(11) Includes an aggregate of 442,500 shares issuable upon the exercise of
vested options.
Description of Business
A description of J Net's existing enterprise software and technology
infrastructure business is more fully set forth in J Net's Annual Report on
Form 10-K for the year ended June 30, 2003, filed with the SEC on September
29, 2003. Set forth below is information solely concerning the
recently-acquired asset management business of Epoch.
Unless the context otherwise requires, the term "we," "us," "our" or
"J Net" when used in this Form 8-K ("Report") refers to J Net Enterprises,
Inc. a Nevada corporation, and its consolidated subsidiaries and
predecessors, including Epoch Investment Partners, Inc.
General
Epoch was formed in April 2004 and co-founded by Mr. William W.
Priest. Epoch has registered as an investment adviser with the SEC. Mr.
Priest has over 30 years experience in the investment advisory business.
CI, a client of Mr. Priest at his former firm, has agreed to transfer its
contract for sub-advisory services to Epoch, representing assets under
management of approximately $645 million as of April 30, 2004, and other
clients of Mr. Priest at his former firm will be asked to transfer their
accounts to Epoch shortly (representing up to approximately another $195
million of assets under management as of April 30, 2004).
Mr. Priest is resigning his position as a Senior Partner and Portfolio
Manager at Steinberg, Priest & Sloane Capital Management, LLC ("SPSCM") and
joining Epoch. SPSCM currently manages approximately $2 billion in assets
for large retirement funds, endowments, foundations, family offices, and
wealthy individuals. Mr. Priest joined SPSCM in 2001, and was instrumental
in increasing the assets under management from approximately $800 million
to $2 billion, broadening SPSCM's product offering and enhancing the
professional staff through recruitment and general management. Prior to
joining SPSCM, Mr. Priest was a member of the Global Executive Committee of
Credit Suisse Asset Management, Chairman and CEO of Credit Suisse Asset
Management Americas ("CSAM-Americas") and CEO of its predecessor firm BEA
Associates, which he co-founded in 1972. During his tenure at BEA
Associates and CSAM-Americas, Mr. Priest developed the firm into a
well-recognized investment manager with over $100 billion in assets under
management. Mr. Priest has agreed to join J Net as our Chief Executive
Officer on or about June 17, 2004.
We will manage investment assets and provide services for our clients
through our subsidiary, Epoch. Epoch will provide investment advisory
services to high net worth individuals and institutions including corporate
retirement accounts, public retirement accounts, endowments, foundations,
and mutual funds. Our overall investment philosophy will be determined by
William W. Priest, and, with respect to the bulk of assets under
management, will be focused in the near-term on achieving a superior
risk-adjusted return by investing in companies that are undervalued
relative to the investment team's determination of fair value. The
security selection and portfolio construction processes will be designed to
protect capital in declining markets and participate fully in rising
markets.
Managed Asset Classes
We expect to provide clients with a range of investment asset classes
designed to meet varying investment objectives. Our intention is to offer
portfolios in the following asset classes: All Cap Equity, Small Cap
Equity, Global Small Cap Equity and Balanced. Each equity portfolio will
be diversified with respect to sectors, industries and security weightings,
with the Global Small Cap Equity portfolios additionally being diversified
among countries. Balanced portfolios will consist of an equity portfolio
similar to our All Cap Equity portfolio and a fixed income portfolio that
includes municipal bonds, U.S. Treasuries and corporate bonds.
Investment Strategy
Our investment process will build upon two concepts - return seeking
strategies and risk reducing tactics. Security selection drives returns and
portfolio construction processes control risk exposure.
Return Strategy: Security selection involves a business analysis, a
cash flow financial analysis, and a valuation process. We analyze a
business in the same manner a private investor would if he were purchasing
the entire company. We will invest only in those businesses we believe we
can understand and only in those businesses where we have confidence in the
financial statements from which to build our financial perspectives. We
seek those businesses that generate excess or ''free" cash flow. As a
generality, we seek those securities that have unrecognized potential yet
posses a combination of above average yield, above average free cash flow
growth and/or a below average valuation.
Risk Control Strategy: At the heart of portfolio construction is
diversification. One wants to neutralize or diversify away the risks one
does not want to take. We accomplish that end by diversifying across
attractive sectors, limiting individual holding sizes, and possessing a
sell discipline based on a risk/reward analysis of the security price
relative to the fundamental business outlook and pre-established sell
criteria. Our goal is to produce an efficient portfolio with respect to the
risk/return relationship. In other words, in light of our expectations for
returns, we want to create the least volatile portfolio consistent with
those expectations.
Advisory and Subadvisory Service Agreements
Epoch will manage accounts of its clients under investment advisory
and subadvisory agreements. Such agreements are usually terminable upon
short notice and provide for compensation based on the market value of the
client's assets under management. Fees generally are payable in arrears on
a quarterly basis. Epoch will provide overall investment management
services including providing advice and recommendations concerning
investments and reinvestments. Unless directed otherwise by clients, Epoch
will have the authority to vote all proxies with respect to a client's
assets.
CI has agreed to transfer its contract for sub-advisory services to
Epoch, under which it will perform substantially the same service as it
does under an advisory agreement. Subadvisory fees are computed upon the
daily net assets of the client and are payable on a monthly basis.
Distribution Channels
We will market our services through a variety of channels that allow
us to expand the reach of our investment advisory services. These channels
will provide us the ability to leverage the existing distribution
infrastructure and capabilities of other financial services firms and
intermediaries and focus on our core competency of developing outstanding
investment asset classes.
Institutional Investment Consultants
Investment management consulting firms serve as gatekeepers to an
overwhelming percentage of corporate pension plans, endowments and
foundations, which represent a key Epoch client market. Consultants
provide guidance and expertise in setting a client's asset allocation
strategy, as well as the establishment of an investment policy. In
addition, consultants make recommendations of best in class investment
firms that they believe will allow their client's investment objectives to
best be met. Epoch will seek consulting firm relationships, and create
services to increase the awareness of our products in both the consultant
community and the potential institutional client base.
Subadvisory Relationships
Subadvisory relationships will allow us to extend the reach of our
investment management services to the clients of another investment company
that has far reaching distribution capabilities. In a sub-advisory
arrangement, our client would be the investment company through which our
services will be offered to investors. In our subadvisory arrangement with
CI, our investment advisory services are made available through
retail-based mutual fund offerings. CI sponsors the mutual funds and is
responsible for marketing, distribution, operations and accounting related
to these funds.
Managed Accounts
Managed accounts are typically high net worth individuals or small
institutions. Many of these prospective clients have been clients of
William W. Priest for periods of time ranging from one year to, in a few
cases, nearly thirty years. Services to be provided include asset
allocation recommendations as well as portfolio management services.
Growth Strategy
We believe that we will establish a strong platform to support future
growth, deriving our strength in large part from the experience and
capabilities of our management team and skilled investment professionals.
We believe that assembling this focused, stable team will contribute to our
investment performance results, provide quality customer service and a
growing array of asset classes under management. Opportunities for our
future growth are expected to come from clients our principals have
existing relationships with and new clients, strategic acquisition and
alliances, and strengthening of our brand name.
Generate growth from clients our principals have existing
relationships with and consultant relationships. As its primary business
objective, Epoch intends to create, maintain and enhance relationships with
clients our principals have existing relationships with and investment
consultants by providing solid investment performance and a high level of
quality service to these relationships. Additionally, Epoch will pursue
growth through targeted sales and marketing efforts that emphasize our
performance results and client service. New institutional client accounts
are generally derived via investment consultants. Epoch intends to
establish a dedicated sales effort to this distribution channel.
Attract and retain key employees. In order to achieve Epoch's
performance and client relationship objectives, we must be able to retain
and attract talented investment professionals. We believe that Epoch is
creating a workplace environment in which motivated, performance-driven,
and client-oriented individuals thrive. As a public company, we will offer
to our employees a compensation program that includes strong equity
incentives so that the success of our employees will be closely tied to the
success of our business. We believe this is a critical ingredient to
continuing to build a stable, client-focused environment.
Pursue strategic acquisitions and alliances. We will evaluate
strategic acquisition, joint venture and alliance opportunities carefully.
We may, in time, have an interest in pursuing asset management firms or
trust companies that have assets with respect to which we have expertise or
those that appear appropriate as a means of expanding the range of our
asset classes. By acquiring investment firms that successfully manage
asset classes in which we do not specialize, we could attract new clients
and provide our existing clients with a more diversified range of asset
classes. We may also consider entering into alliances with other financial
services firms that would allow us to leverage our core competency of
developing superior investment products in combination with alliance
partners that provide world-class distribution capabilities.
Competition
Epoch will be subject to substantial and growing competition in all
aspects of its business. Barriers to entry to the asset management
business are relatively low, and our management anticipates that we will
face a growing number of competitors. Although no one company dominates
the asset management industry, many companies are larger, better known and
have greater resources than we do.
Further, Epoch will compete with other asset management firms on the
basis of asset classes offered, the investment performance of those asset
classes in absolute terms and relative to peer group performance, quality
of service, fees charged, the level and type of compensation offered to key
employees, and the manner in which asset classes are marketed. Many of our
competitors have more asset classes and services and may also have
substantially greater assets under management.
Epoch will compete against an ever-increasing number of investment
dealers, banks, insurance companies and others that sell equity funds,
taxable income funds, tax-free investments and other investment products.
Also, the allocation by many investors of assets away from active equity
investment to index funds, fixed income or similar asset classes has
enhanced the ability of firms offering non-equity asset classes and passive
equity management to effectively compete with us. In short, the
competitive landscape in which we operate is both intense and dynamic, and
there can be no assurance that we will be able to compete effectively in
the future as an independent company.
Additionally, most prospective clients perform a thorough review of an
investment manager's background, investment policies and performance before
committing assets to that manger. In many cases, prospective clients
invite a number of competing firms to make presentations. The process of
obtaining a new client typically takes twelve to eighteen months from the
time of the initial contact. While historically Epoch has achieved a
degree of success in competing successfully for new clients, it is a
process to which we must dedicate significant resources over an extended
period, with no certainty of success.
Regulation
Virtually all aspects of Epoch's proposed businesses are subject to
various federal and state laws and regulations. These laws and regulations
are primarily intended to protect investment advisory clients and
stockholders of registered investment companies. Under such laws and
regulations, agencies that regulate investment advisers, such as ourselves,
have broad administrative powers, including the power to limit, restrict or
prohibit such an adviser from carrying on its business in the event that it
fails to comply with such laws and regulations. In such an event, the
possible sanctions that may be imposed include the suspension of individual
employees, limitations on engaging in certain lines of business for a
specified period of time, revocation of investment adviser and other
registrations censures and fines. We believe that we are in substantial
compliance with all material laws and regulations.
Epoch's business is subject to regulation at both the federal and
state level by the SEC and other regulatory bodies. Epoch is registered
with the SEC under the Investment Advisers Act of 1940 and under the laws
of relevant states. As a registered investment adviser, Epoch is regulated
and subject to examination by the SEC. The Investment Advisers Act imposes
numerous obligations on registered investment advisers, including fiduciary
duties, record keeping requirements, operational requirements, marketing
requirements and disclosure obligations. Under the rules and regulations
of the SEC promulgated pursuant to the federal securities laws, Epoch is
subject to periodic examination by the SEC. The SEC is authorized to
institute proceedings and impose sanctions for violations of the Investment
Advisers Act, ranging from censure to termination of an investment
adviser's registration. The failure of Epoch to comply with the
requirements of the SEC could have a material adverse effect on us. We
believe that Epoch is in substantial compliance with the requirements of
the regulations under the Investment Advisers Act.
Employees
At June 2, 2004 Epoch had 3 full-time employees. Within two weeks
from the closing of the Acquisition, Epoch expects to employ 16 full-time
employees, consisting of portfolio managers, research and trading
professionals, marketing and client service professionals and operations
and business management personnel. None of Epoch's employees will be
represented by a labor union, and we believe our employee relations will be
good.
Description of Property
Epoch is conducting its principal operations through a space use
agreement with approximately 6,500 square feet located at 667 Madison
Avenue, New York City, New York. We anticipate moving Epoch to a larger
facility before year-end 2004 in New York City.
Epoch Financial Statements
Epoch has had limited financial activity since its formation in April
of 2004 and initial equity capitalization of $100,000. Since that time,
Epoch has entered into a small number of transactions to set up business
operations, including hiring of three employees, entering into the space
use agreement described above under "Properties," the license of a
portfolio management system and the lease of office equipment. In
addition, Epoch has incurred liabilities for legal fees relating to its
organization and the Acquisition. In order to finance some of these costs,
Epoch has borrowed $100,000 from William W. Priest pursuant to a demand
note.
Cautionary Statements
If any of the following material risks occur, Epoch's (and
consequently our) business, financial condition or results of operations
would likely suffer.
Neither we nor Epoch have any operating history as an asset management
business, and therefore most of our historical financial information may
not be indicative of our future performance.
Our acquisition of Epoch was completed on June 2, 2004. Prior to that
date, J Net's business was centered on enterprise software and technology
infrastructure. Therefore, our historical financial information for all
periods prior to the completion of the Acquisition may not be indicative of
our future performance as a company engaged in significant part in asset
management.
Epoch has limited operations and history as an asset management
business. It currently has no clients (although one significant client has
consented to the transfer of its account) and a small number of employees.
Although we are confident the former stockholders and employees of Epoch
have experience, good reputations and good prospects in the asset
management business, the acquisition of clients and generation of revenue
cannot be assured.
Some members of our management are critical to our success, and our
inability to attract and retain key employees could compromise our future
success.
We believe that Epoch's future success will depend to a significant
extent upon the services of its executive officers, particularly William W.
Priest. We do not have employment agreements with any of our key
employees, including Mr. Priest. However, pursuant to the Stockholders
Agreement, shares of our common stock held by Mr. Priest and other former
Epoch stockholders who are employees are subject to forfeiture. The loss
of the services of one or more of our key employees or our failure to
attract, retain and motivate qualified personnel could negatively impact
our business, financial condition, results of operations and future
prospects. As with other asset management businesses, our 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.
We will be effectively controlled by William W. Priest, our incoming
Chief Executive Officer.
For at least the first three years following the Acquisition, pursuant
to the Stockholders Agreement, William W. Priest will have the right to
cause stockholders of our company expected to hold a majority of our common
stock outstanding to set the number of directors on our board of directors
at seven and to vote for four persons selected by him for appointment to
the board. Moreover, he will have the right to cause such stockholders to
remove and/or replace any of these directors at any time. As a result
William W. Priest will control our board of directors, and, therefore, our
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.
You may experience substantial dilution in the percentage of our
outstanding shares you own if we are required pursuant to certain
provisions in the Merger Agreement to issue additional shares of our common
stock to the Epoch stockholders.
Pursuant to the Merger Agreement, additional shares of our common
stock will be issued to the former stockholders of Epoch if we in the
future incur costs relating to taxes for periods prior to the effective
time of the Acquisition of greater than $2 million. The maximum number of
additional shares that may be issued to the former stockholders of Epoch
pursuant to the relevant provisions of the Merger Agreement (assuming that
our shares are trading at $1.50 per share at the time of issuance) is
approximately 7.6 million shares, which would occur if we incur an amount
of such costs equal to or in excess of $8 million. If our shares are
trading at a price that is lesser than or greater than $1.50 per share, we
will be required to issue a greater or lesser amount of shares,
respectively.
Negative performance of the securities markets could reduce our
revenues.
Epoch's results of operations will be affected by many economic
factors, including the performance of the securities markets. Negative
performance in the securities markets or certain segments of those markets
or short-term volatility in the securities markets or segments thereof
could result in investors withdrawing assets from the markets or decreasing
their rate of investment, either of which could reduce our revenues.
Because most of our anticipated revenues are to be based on the value of
assets under management, a decline in the value of those assets would also
adversely affect our revenues. In addition, in periods of slowing growth or
declining revenues, profits and profit margins are adversely affected
because certain expenses remain relatively fixed.
In particular, approximately fifty percent (possibly more) of our
assets under management are expected to be invested in equity securities of
companies with market capitalizations between $200 million and $10 billion,
often characterized as small or mid-sized companies. As a consequence, we
are susceptible to the volatility associated with changes in the market for
stocks that fall within these two capitalization classes.
Poor investment performance of the assets managed by us could
adversely affect our results of operations.
Because Epoch will compete with many other asset management firms on
the basis of asset classes offered and the investment performance of those
asset classes, our success is dependent to a significant extent on the
investment performance of the assets that we manage. Good performance
stimulates new client accounts, which results in higher revenues for us.
Conversely, poor performance tends to result in the loss or reduction of
client accounts, with corresponding decreases in revenues.
Epoch's business is dependent on investment advisory and subadvisory
agreements that are subject to termination or non-renewal; therefore, we
could lose any of our clients on very short notice.
Substantially all of our anticipated revenues are to be derived
pursuant to investment advisory and subadvisory agreements with our
clients. In general, either party may terminate these agreements upon 30
days' notice. Any termination of or failure to renew these agreements could
have a material adverse impact on us, particularly because many of our
costs are relatively fixed.
A single client is anticipated to account for a substantial portion of
Epoch's business. As such, the failure of this client to open an account
or the reduction or loss of business with this client could have an adverse
impact on our business, financial condition and results of operations.
Epoch's largest client is expected to account for more than 45% of
total revenues during the next year, and we are therefore dependent to a
significant degree on our ability to create and maintain a relationship
with this client. There can be no assurance that Epoch will be successful
in creating or maintaining client relationships. Any failure by Epoch to
retain one or more large clients or establish profitable relationships with
additional clients could have a material adverse effect on our business,
financial condition and results of operations.
Any event that negatively affects the asset management industry could
have a material adverse effect on us.
Any event affecting the asset management industry that results in a
general decrease in assets under management or a significant general
decline in the number of advisory clients or accounts could negatively
impact our revenues. Our future growth and success depends in part upon the
growth of the asset management industry.
Epoch's business is subject to pervasive regulation with attendant
costs of compliance and serious consequences for violations.
Virtually all aspects of Epoch's business are subject to various laws
and regulations. Violations of such laws or regulations could subject us
and/or our employees to disciplinary proceedings or civil or criminal
liability, including revocation of licenses, censures, fines or temporary
suspension, permanent bar from the conduct of business, conservatorship or
closure. Any such proceeding or liability could have a material adverse
effect upon our business, financial condition, results of operations and
business prospects. These laws and regulations generally grant regulatory
agencies and bodies broad administrative powers, including, in some cases,
the power to limit or restrict us from operating our business and, in other
cases, the powers to place us under conservatorship or closure, in the
event we fail to comply with such laws and regulations. Due to the
extensive regulations and laws to which Epoch is subject, our management is
required to devote substantial time and effort to legal and regulatory
compliance issues. In addition, the regulatory environment in which Epoch
operates is subject to change. Epoch 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. See " -
Regulation."
Potential misuse of assets and information in the possession of our
portfolio managers and employees could result in costly litigation and
liability for us and our clients.
Our portfolio managers will handle a significant amount of assets,
financial and personal information for our clients. Although we have
implemented a policies to minimize the risk of fraudulent taking or misuse
of assets and information, there can be no assurance that our policies will
be adequate to prevent taking or misuse by our portfolio managers or
employees. If our policies are ineffective in preventing the fraudulent
taking or misuse of assets and information, we could be subject to costly
litigation, which could consume a substantial amount of our resources and
distract our management from the operation of our company and could also
result in regulatory sanctions. Additionally, any such fraudulent actions
could adversely affect some of our clients in other ways, and these clients
could seek redress against us.
Acquisitions, which may be part of our long-term business strategy,
involve inherent risks that could compromise the success of the combined
business and dilute the holdings of current stockholders.
As part of our long-term business strategy, we may consider
acquisitions of similar or complementary businesses. See " - Growth
Strategy." If we are not correct when we assess the value, strengths,
weaknesses, liabilities and potential profitability of acquisition
candidates or if we are not successful in integrating the operations of the
acquired businesses, the success of the combined business could be
compromised. Any future acquisitions will be accompanied by the risks
commonly associated with acquisitions. These risks include, among others,
potential exposure to unknown liabilities of acquired companies and to
acquisition costs and expenses, the difficulty and expense of integrating
the operations and personnel of the acquired companies, the potential
disruption to the business of the combined company and potential diversion
of management's time and attention, the impairment of relationships with
and the possible loss of key employees and clients as a result of the
changes in management, potential future write-downs related to goodwill
impairment in connection with acquisitions, and dilution to the
stockholders of the combined company if the acquisition is made for stock
of the combined company. In addition, asset classes, technologies or
businesses of acquired companies may not be effectively assimilated into
our business or have a positive effect on the combined company's revenues
or earnings. The combined company may also incur significant expense to
complete acquisitions and to support the acquired asset classes and
businesses. Further, any such acquisitions may be funded with cash, debt or
equity, which could have the effect of diluting the holdings or limiting
the rights of stockholders. Finally, we may not be successful in
identifying attractive acquisition candidates or completing acquisitions on
favorable terms.
Epoch's proposed business is vulnerable to systems failures that could
have a material adverse effect on our business, financial condition and
results of operations.
Any delays or inaccuracies in securities pricing information or
information processing could give rise to claims against us, which could
have a material adverse effect on our business, financial condition and
results of operations. Epoch is highly dependent on communications and
information systems and on third party vendors for securities pricing
information and updates from certain software. Epoch may suffer a systems
failure or interruption, whether caused by an earthquake, fire, other
natural disaster, power or telecommunications failure, unauthorized access,
act of God, act of war or otherwise, and our back-up procedures and
capabilities may not be adequate or sufficient to eliminate the risk of
extended interruptions in operations.
We may not be able to fund future capital requirements on favorable
terms if at all.
We cannot be certain that financing to fund Epoch's working capital or
other cash requirements, if needed, will be available on favorable terms,
if at all. Epoch's capital requirements will vary greatly from quarter to
quarter depending on, among other things, capital expenditures,
fluctuations in our operating results and financing activities. We believe
that our current cash and cash equivalents and cash flows from operations
will be sufficient to satisfy Epoch's cash requirements for the foreseeable
future. However, if future financing is necessary, we 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 our common stock, and any future debt financings
could involve restrictive covenants that limit our ability to take certain
actions.
Special Note Regarding Forward-Looking Statements
Some of the statements under "Cautionary Statements," "Description of
Business" and elsewhere in this Report constitute forward-looking
statements. These statements involve known and unknown risks, uncertainties
and other factors that may cause our actual results, levels of activity,
performance or achievements to be materially different from any future
results, levels of activity, performance or achievements expressed or
implied by such forward-looking statements.
Such factors include, among other things, those described under
"Cautionary Statements" and elsewhere in this Report. In some cases, you
can identify forward-looking statements by terminology such as "may,"
"will," "should," "could," "expects," "plans," "intends," "anticipates,"
"believes," "estimates," "predicts," "potential" or "continue" or the
negative of such terms or other comparable terminology. Although we believe
that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity,
performance, or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of such
statements. We are under no duty to update any of the forward-looking
statements after the date of this Report.
Directors and Executive Officers After the Acquisition
The following table sets forth information regarding the members of J
Net's board of directors and its executive officers. The directors listed
below will serve until the next annual meeting of the J Net stockholders.
Name Age Position
_______________________ ___ ______________________________________
William W. Priest 62 Chief Executive Officer(1), Director
Allan R. Tessler 67 Chairman of the Board
Eugene M. Freedman 72 Director
David R. Markin 73 Director
Jeffrey L. Berenson 53 Director
Timothy T. Taussig 47 President & Chief Operating Officer
J. Philip Clark 51 Executive Vice President - Client
Management
Mark E. Wilson 45 Chief Financial Officer
Alan J. Hirschfield 68 Director(2)
Robert L. McDonald, Sr. 84 Director(2)
_____________________
(1) Mr. Priest has agreed to join J Net as our Chief Executive Officer
commencing on or about June 17, 2004.
(2) Messrs. Hirschfield and McDonald, Sr. each resigned as directors of J
Net effective at the closing of the Acquisition.
The principal occupations for the past five years (and, in some
instances, for prior years) of each of J Net's directors and officers other
than Messrs. Priest, Berenson and Taussig are set forth in J Net's Annual
Report on Form 10-K for the year ended June 30, 2003, filed with the SEC on
September 29, 2003. The principal occupations for the past five years of
Messrs. Priest, Berenson, Taussig and Clark are the following:
William W. Priest has agreed to join J Net as our Chief Executive
Officer on or about June 17, 2004. He was appointed as a member of our
board of directors at the closing of the Acquisition. Mr. Priest was a
member of the management committee and portfolio manager with Steinberg
Priest & Sloane Capital Management, LLC from March 2001 through May 2004.
Until February 2001 and for many prior years, Mr. Priest was chief
executive officer and ultimately chairman of Credit Suisse Asset Management
Americas. Mr. Priest currently serves on the board of directors of 62
mutual funds as part of the Credit Suisse Asset Management fund complex.
Jeffrey L. Berenson was appointed as member of our board of directors
at the closing of the Acquisition. Mr. Berenson is President and Chief
Executive Officer of Berenson & Company, a private investment banking firm
in New York City that he co-founded in 1990. From 1978 until founding
Berenson & Company, Mr. Berenson was an employee of Merrill Lynch &
Company, and served at various times as head of Merrill Lynch's Mergers and
Acquisitions Group and co-head of its Merchant Banking unit. Mr. Berenson
has been a director of Patina Oil & Gas Corporation since December 2002.
Mr. Berenson serves as a member of the National Council of Environmental
Defense and is also a member of the International Conservation Committee of
the Wildlife Conservation Society.
Timothy T. Taussig became J Net's President and Chief Operating
Officer at the closing of the Acquisition. Before joining Epoch, since
January 2003, Mr. Taussig was chief operating officer of Trident Investment
Management, responsible for the firm's business management, operations, and
marketing. Until February 2001 and for many prior years, Mr. Taussig was a
Managing Director and Member of the Global Executive Committee for Credit
Suisse Asset Management and Co-Head of Asset Gathering for Credit Suisse
Asset Management Americas, where his management responsibilities included
marketing, client services and e-commerce strategy across distribution
channels.
J. Philip Clark became J Net's Executive Vice President - Client
Management at the closing of the Acquisition. Before joining Epoch, since
1986, Mr. Clark was employed by Sanford C. Bernstein & Co., now part of
Alliance Capital. His most recent responsibilities included being National
Managing Director of the private client business.
Board Composition and Committees
Pursuant to the Stockholders Agreement, the total number of members of
the board of directors will be increased from five to seven. William W.
Priest has the right to nominate four members of J Net's board of directors
at any annual meeting. Both Mr. Priest and Jeffrey L. Berenson were
appointed to the board of directors at the closing of the Acquisition, with
Messrs. Alan J. Hirschfield and Robert L. McDonald, Sr. resigning at such
time.
All directors hold office until the next annual meeting of
stockholders, which is expected to occur in late summer 2004, and the
election and qualification of their successors. A majority of the
directors are considered "independent" under the SEC's new independence
standards. Officers are elected annually by the board of directors and
serve at the discretion of the board.
Director Compensation
Directors who are not salaried employees of the Company receive annual
fees of $32,000. In addition, a director who serves as a member of the
Compensation Committee and/or Audit Committee is entitled to receive
$10,800 and $7,200, respectively, per year. In the future, the Company may
use a combination of cash, restricted stock grants and/or stock options to
compensate outside directors in lieu of cash compensation. Mr. Tessler has
not received any salary from the Company for his services as Chief
Executive Officer. In connection with identifying, structuring and
negotiating the Acquisition as well as his past performance as Chief
Executive Officer, on May 27, 2004 the Compensation Committee recommended
and the board granted Mr. Tessler a restricted stock grant of 200,000
shares of our common stock. The shares are subject to the transfer
restrictions described under "Stockholders Agreement - Transfer
Restrictions."
Executive Compensation
The executive compensation for J Net's most recently completed fiscal
year is set forth in J Net's Annual Report on Form 10-K for the year ended
June 30, 2003, filed with the SEC on September 29, 2003.
Indebtedness of Directors and Executive Officers
None of J Net's directors or officers or their respective associates
or affiliates is indebted to J Net.
Family Relationships
There are no family relationships among J Net's directors and
executive officers.
Legal Proceedings with Affiliates
As of the date of this Report, there is no material proceeding to
which any director, officer, affiliate or stockholder of J Net is a party
adverse to J Net.
Accounting Treatment of the Acquisition
The Company is evaluating the proper accounting treatment for the
Acquisition. It will be treated as either (i) an acquisition of a contract
and other intangibles, in which case the Company's financial statements
will be affected by the addition of intangible assets based upon the fair
market value of the stock issued in the Acquisition which amount will be
amortized over its anticipated useful life as prescribed by general
accepted accounting principles or (ii) as a "reverse merger" in which no
intangible assets would be recorded and the historical financial statements
of Epoch (as limited as they are) will become the historical financial
statements of the Company and the transaction would be recorded as if Epoch
issued its capital stock for the acquisition of J Net's assets.
Book Value Dilution
Our net tangible book value as of March 31, 2004, was $6,846,000, or
$.78 per share of common stock (as adjusted for certain subsequent events
prior to the Acquisition). Net tangible book value per share represents
the amount of total tangible assets less total liabilities, divided by the
number of shares of common stock outstanding. Assuming the issuance by us
of 9,095,716 shares of common stock in the Acquisition (representing the
Initial Consideration and the Escrow Consideration payable to the former
stockholders of Epoch pursuant to the Merger Agreement, but excluding the
Contingent Stock Consideration), our pro forma net tangible book value as
of March 31, 2004, would have been $6,846,000, or $.38 per share of common
stock. This represents an immediate dilution in pro forma net tangible
book value to our existing stockholders.
Item 7. Financial Statements and Exhibits
(a) Financial Statements of Businesses Acquired.*
(b) Pro Forma Financial Information.*
(c) Exhibits.
The exhibits listed in the following Exhibit Index are filed as part
of this Report.
Exhibit No. Description
2.1 Agreement of Merger and Plan of Reorganization, dated as
of June 2, 2004, among J Net Enterprises, Inc., Epoch
Acquisition Corp. and Epoch Investment Partners, Inc.
10.1 Stockholders Agreement, dated as of June 2, 2004, among J
Net Enterprises, Inc. and certain of its stockholders.
10.2 Registration Rights Agreement, dated as of June 2, 2004,
among J Net Enterprises, Inc. and certain of its
stockholders.
99 Press Release dated June 3, 2004.
* It is impracticable for the Company to provide the required financial
statements and pro forma financial information as of the date hereof.
The Company will file the required pro forma financial information no
later than 60 days after the date this Report is required to be filed.
Item 9. Regulation FD Disclosure
On June 3, 2004 J Net issued a press release relating to the
Acquisition.
The information included in Item 9 of this Form 8-K, including the
press release attached as Exhibit 99, is incorporated by reference into
this Item 9 in satisfaction of the public disclosure requirements of
Regulation FD. This information is "furnished" and not "filed" for purposes
of Section 18 of the Securities and Exchange Act of 1934, or otherwise
subject to the liabilities of that section. It may be incorporated by
reference in another filing under the Securities Exchange Act of 1934 or
the Securities Act of 1933 only if and to the extent such subsequent filing
specifically references the information incorporated by reference herein.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Date: June 3, 2004 J NET ENTERPRISES, INC.
/s/ Mark E. Wilson
______________________
Name: Mark E. Wilson
Title: Chief Financial Officer
INDEX TO EXHIBITS
Exhibit No. Description
2.1 Agreement of Merger and Plan of Reorganization, dated as
of June 2, 2004, among J Net Enterprises, Inc., Epoch
Acquisition Corp. and Epoch Investment Partners, Inc.
10.1 Stockholders Agreement, dated as of June 2, 2004, among
J Net Enterprises, Inc. and certain of its stockholders.
10.2 Registration Rights Agreement, dated as of June 2, 2004,
among J Net Enterprises, Inc. and certain of its
stockholders.
99 Press Release dated June 3, 2004.