2008, the remaining unamortized loss on this transaction was $4.1
million. During the remaining three months of fiscal 2008, the Company expects to reclassify approximately $0.1 million of the loss on the Treasury
lock transaction into interest expense.
(14) Commitments and Contingencies
In the normal course of business, the Company enters into
agreements that include indemnities in favor of third parties, such as engagement letters with advisors and consultants, information technology
agreements, distribution agreements and service agreements. The Company has also agreed to indemnify its directors, officers and employees in
accordance with the Company’s Articles of Incorporation, as amended. Certain agreements do not contain any limits on the Company’s liability
and, therefore, it is not possible to estimate the Company’s potential liability under these indemnities. In certain cases, the Company has
recourse against third parties with respect to these indemnities. Further, the Company maintains insurance policies that may provide coverage against
certain claims under these indemnities.
The Company and its subsidiaries are subject to various legal
proceedings. In the opinion of management, after discussions with legal counsel, the ultimate resolution of these matters will not have a material
adverse effect on the consolidated financial condition or results of operations of the Company.
In July 2006, the Company committed to invest $15.0 million in a
private equity partnership that invests in companies in the financial services industry. The Company had invested $10.6 million of the total $15.0
million of committed capital at July 31, 2008. The Company anticipates investing the remaining $4.4 million by September 2010.
(15) Recent Accounting Developments
In June 2008, the FASB issued Financial Statement Position
(“FSP”) Emerging Issues Task Force (“EITF”) 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment
Transactions are Participating Securities.” FSP EITF 03-6-1 addresses whether instruments granted in share-based payment transactions are
participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share under the
two-class method described in SFAS No. 128, “Earnings per Share.” It affects entities that accrue or pay nonforfeitable cash dividends on
share-based payment awards during the awards’ service period. FSP EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008 and
interim periods within those fiscal years, and will require a retrospective adjustment to all prior period earnings per share. FSP EITF 03-6-1 is
effective for the Company’s fiscal year that begins on November 1, 2009. Management is currently evaluating the potential impact, if any, on the
Company’s consolidated financial statements.
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of
Generally Accepted Accounting Principles.” SFAS No. 162 is intended to improve financial reporting by identifying a consistent framework, or
hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally
accepted accounting principles (“GAAP”) for nongovernmental entities. SFAS No. 162 is effective 60 days following the SEC’s approval of
the Public Company Accounting Oversight Board Auditing amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally
Accepted Accounting Principles. Management does not anticipate that the provisions of SFAS No. 162 will have an impact on the Company’s
consolidated results of operations or consolidated financial position.
In April 2008, the FASB issued FSP SFAS No. 142-3,
“Determination of the Useful Life of Intangible Assets.” FSP SFAS 142-3 amends the factors that should be considered in developing renewal or
extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible
Assets.” FSP SFAS No. 142-3 is effective for fiscal years beginning
17
after December 15, 2008. FSP SFAS No. 142-3 is effective for the
Company’s fiscal year that begins on November 1, 2009 and interim periods within those fiscal years. Management does not anticipate that the
provisions of FSP SFAS No. 142-3 will have an impact on the Company’s consolidated results of operations or consolidated financial
position.
In March 2008, the FASB issued SFAS No. 161, “Disclosures
about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133.” SFAS No. 161 requires enhanced disclosures
about an entity’s derivative and hedging activities to improve the transparency of financial reporting. SFAS No. 161 is effective for financial
statements issued for periods beginning after November 15, 2008. SFAS No. 161 is effective for the Company’s fiscal quarter that begins on
February 1, 2009. Management is currently evaluating the potential impact, if any, on the Company’s disclosures in its consolidated financial
statements.
In December 2007, the FASB issued SFAS No. 160,
“Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51.” SFAS No. 160 amends ARB No. 51 to establish
accounting and reporting standards for noncontrolling interests in subsidiaries and for the deconsolidation of subsidiaries. It clarifies that a
noncontrolling interest in a subsidiary is an ownership interest that should be reported as equity in the consolidated financial statements. The
provisions of SFAS No. 160 are effective for fiscal years beginning on or after December 15, 2008, and interim periods within those fiscal years on a
prospective basis except for the presentation and disclosure requirements which apply retrospectively. Earlier application of SFAS No. 160 is
prohibited. SFAS No. 160 is effective for the Company’s fiscal year that begins on November 1, 2009. Management is currently evaluating the
potential impact, if any, on the Company’s consolidated financial statements.
In December 2007, the FASB amended SFAS No. 141 (revised 2007),
“Business Combinations.” SFAS No. 141R, establishes principles and requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. SFAS No. 141R applies
prospectively to business combinations for which the acquisition date is on or after the beginning of the first reporting period for fiscal years
beginning on or after December 15, 2008. Earlier application of SFAS 141R is prohibited. SFAS No. 141R is effective for the Company’s fiscal year
that begins on November 1, 2009 and will be applied to future acquisitions.
In June 2007, the FASB ratified the consensus reached by the EITF
in EITF Issue No. 06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards.” Under the provisions of EITF 06-11,
a realized income tax benefit from dividends or dividend equivalents that are charged to retained earnings and are paid to employees for equity
classified nonvested equity shares, nonvested equity share units, and outstanding equity share options should be recognized as an increase to
additional paid-in capital. The amount recognized in additional paid-in capital for the realized income tax benefit from dividends on those awards
should be included in the pool of excess tax benefits available to absorb tax deficiencies on share-based payment awards. EITF 06-11 should be applied
prospectively to the income tax benefits that result from dividends on equity-classified employee share-based payment awards that are declared in
fiscal years beginning after December 15, 2007, and interim periods within those fiscal years. EITF 06-11 is effective for the Company’s fiscal
year that begins on November 1, 2008. Management is currently evaluating the potential impact of EITF 06-11, if any, on the Company’s consolidated
financial statements.
In February 2007, the FASB issued SFAS No. 159, “The Fair
Value Option for Financial Assets and Financial Liabilities.” SFAS No. 159 permits entities to choose to measure many financial instruments and
certain other items at fair value. The objective of the statement is to improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge
accounting provisions. The provisions of SFAS No. 159 are effective for fiscal years beginning after November 15, 2007. SFAS
18
No. 159 is effective for the Company’s fiscal year that
begins on November 1, 2008. Management is currently evaluating this standard and its impact, if any, on the Company’s consolidated financial
statements.
In September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and expands disclosure requirements about fair
value measurements. SFAS No. 157 applies to other accounting pronouncements that require or permit fair value measurements but does not in itself
require any new fair value measurements. The provisions of SFAS No. 157 are effective for fiscal years beginning after November 15, 2007 and interim
periods within those fiscal years. On February 6, 2008 the FASB agreed to partially defer the effective date of SFAS No. 157 for one year for all
nonfinancial assets and nonfinancial liabilities except those items recognized or disclosed at fair value on an annual or more frequently occurring
basis, until November 15, 2008 and remove certain leasing transactions from the scope of SFAS No. 157. SFAS No. 157 is effective for the Company’s
fiscal year that begins on November 1, 2008. Management is currently evaluating this standard and its impact, if any, on the Company’s
consolidated financial statements.
(16) Subsequent Event
An Eaton Vance sponsored closed-end fund is currently offering on
a private basis $100.0 million of Liquidity Protected Preferred Shares (“LPP shares”), which are a new type of variable-rate preferred equity
security that are backed by the unconditional purchase obligation of a designated liquidity provider. In conjunction with the initial offering of LPP
shares, the Company expects to enter into an agreement with the liquidity provider that grants the liquidity provider the right to put LPP shares that
it holds to the Company under certain specified circumstances. In support of the put agreement, the Company expects to enter into an escrow agreement
pursuant to which the Company would deposit $101.0 million invested in short-term U.S. government securities to provide an assured source of funds to
meet the Company’s potential purchase obligations. The escrow agreement would lapse upon termination of the put agreement or the earlier agreement
of the Company and the liquidity provider. The liquidity provider’s put right generally will terminate upon the earlier of (1) the termination of
the LPP share liquidity agreement and (2) the expiration of the 364-day term of the liquidity agreement. Based on current indications, the Company
believes the offering will likely be completed in September or October.
The Company believes that if it were required to purchase LPP
shares from the liquidity provider it would likely only be required to hold such shares for a short period and would earn returns that exceed its cost
of short-term funding. The Company does not believe that there should be an ongoing requirement to offer a put right to liquidity providers once an
active market develops for LPP shares, and does not expect a put agreement to be an ongoing feature of future LPP share arrangements.
19
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
This Item includes statements that are
“forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, including statements regarding our expectations, intentions or strategies regarding the future. All statements, other
than statements of historical facts, included in this Form 10-Q regarding our financial position, business strategy and other plans and objectives for
future operations are forward-looking statements. Although we believe that the assumptions and expectations reflected in such forward-looking
statements are reasonable, we can give no assurance that such expectations reflected in such forward-looking statements will prove to have been correct
or that we will take any actions that may presently be planned. Certain important factors that could cause actual results to differ materially from our
expectations are disclosed in the “Risk Factors” section of this Form 10-Q. All subsequent written or oral forward-looking statements
attributable to us or persons acting on our behalf are expressly qualified in their entirety by such factors.
General
Our principal business is managing investment funds and providing
investment management and counseling services to high-net-worth individuals and institutions. Our long-term strategy is to develop and sustain
value-added core competencies in a range of investment disciplines and to offer industry-leading investment products and services across multiple
distribution channels. In executing this strategy, we have developed a broadly diversified product line and a powerful marketing, distribution and
customer service capability.
We are a market leader in a number of investment areas, including
tax-managed equity, value equity, equity income, emerging market equity, floating-rate bank loan, municipal bond, investment grade and high-yield bond
investing. Our diversified product line offers fund shareholders, retail managed account investors, institutional investors and high-net-worth clients
a wide range of products and services designed and managed to generate attractive risk-adjusted returns over the long term.
Our principal retail marketing strategy is to distribute funds
and separately managed accounts through financial intermediaries in the advice channel. We have a broad reach in this marketplace, with distribution
partners including national and regional broker/dealers, independent broker/dealers, independent financial advisory firms, banks and insurance
companies. We support these distribution partners with a team of more than 140 Boston-based and regional sales professionals across the U.S. and
internationally. Specialized sales and marketing professionals in our Wealth Management Solutions Group serve as a resource to financial advisors
seeking to help high-net-worth clients address wealth management issues and support the marketing of our products and services tailored to this
marketplace.
We also commit significant resources to serving institutional and
high-net-worth clients who access investment advice outside of traditional retail broker/dealer channels. Through our wholly owned affiliates and
consolidated subsidiaries Atlanta Capital Management Company, LLC (“Atlanta Capital”), Fox Asset Management LLC (“Fox Asset
Management”), Parametric Portfolio Associates LLC (“Parametric Portfolio Associates”) and Parametric Risk Advisors LLC (“Parametric
Risk Advisors”), we manage investments for a broad range of institutional and high-net-worth clients, including corporations, endowments,
foundations, family offices and public and private employee retirement plans. Specialized sales teams at our affiliates develop relationships in this
market and deal directly with these clients.
20
Our revenue is derived primarily from investment advisory,
administration, distribution and service fees received from Eaton Vance funds and investment advisory fees received from separate accounts. Our fees
are based primarily on the value of the investment portfolios we manage and fluctuate with changes in the total value and mix of assets under
management. Such fees are recognized over the period that we manage these assets. Our major expenses are employee compensation, distribution-related
expenses and the amortization of deferred sales commissions.
Our discussion and analysis of our financial condition and
results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally
accepted in the United States of America (“GAAP”). The preparation of these financial statements requires us to make estimates and judgments
that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosures of contingent assets and liabilities. On an
ongoing basis, we evaluate our estimates, including those related to deferred sales commissions, goodwill and intangible assets, income taxes,
investments and stock-based compensation. We base our estimates on historical experience and on various assumptions that we believe to be reasonable
under current circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not
readily available from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Assets Under Management
Assets under management of $155.8 billion on July 31, 2008 were 2
percent higher than the $152.3 billion reported a year earlier. Long-term fund net inflows contributed $8.0 billion to the growth in assets under
management over the last twelve months, including $7.7 billion of open-end and private fund net inflows and $0.3 billion of closed-end fund net
inflows. Retail managed account net inflows contributed $5.3 billion to the growth in assets under management, while institutional and high-net-worth
net inflows contributed an additional $3.3 billion. Net price declines of managed assets, reflecting equity and credit market weakness, reduced assets
under management by $13.0 billion, while an increase in cash management assets contributed $0.1 billion.
Ending Assets Under Management by Investment
Objective(1)
|
|
|
|
July 31,
|
|
(in billions)
|
|
|
|
2008
|
|
% of
Total
|
|
2007
|
|
% of
Total
|
|
%
Change
|
Equity
assets |
|
|
|
$ |
104.9 |
|
|
|
67 |
% |
|
$ |
98.8 |
|
|
|
65 |
% |
|
|
6 |
% |
Fixed income
assets |
|
|
|
|
31.9 |
|
|
|
21 |
% |
|
|
31.5 |
|
|
|
21 |
% |
|
|
1 |
% |
Floating-rate bank loan assets |
|
|
|
|
19.0 |
|
|
|
12 |
% |
|
|
22.0 |
|
|
|
14 |
% |
|
|
–14 |
% |
Total |
|
|
|
$ |
155.8 |
|
|
|
100 |
% |
|
$ |
152.3 |
|
|
|
100 |
% |
|
|
2 |
% |
(1) Includes funds and separate
accounts. |
Equity assets increased to 67 percent of total assets under
management on July 31, 2008 from 65 percent on July 31, 2007. Assets in equity funds managed for after-tax returns totaled $46.3 billion and $52.2
billion on July 31, 2008 and 2007, respectively. Fixed income assets, including cash management funds, represented 21 percent of total assets under
management on both July 31, 2008 and 2007. Fixed income assets included $16.8 billion and $17.6 billion of tax-exempt municipal bond assets and $1.7
billion and $1.6 billion of cash management fund assets on July 31, 2008 and 2007, respectively. Floating-rate bank loan assets decreased to 12 percent
of total assets under management on July 31, 2008 from 14 percent on July 31, 2007.
21
Long-Term Fund and Separate Account Net
Flows
|
|
|
|
For the Three
Months Ended
July 31,
|
|
|
|
For the Nine
Months Ended
July 31,
|
|
(in billions)
|
|
|
|
2008
|
|
2007
|
|
%
Change
|
|
2008
|
|
2007
|
|
%
Change
|
Long-term
funds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Open-end
funds (1) |
|
|
|
$ |
3.1 |
|
|
$ |
2.0 |
|
|
|
55 |
% |
|
$ |
7.3 |
|
|
$ |
7.3 |
|
|
|
0 |
% |
Closed-end funds |
|
|
|
|
— |
|
|
|
1.3 |
|
|
|
N |
M(3) |
|
|
0.1 |
|
|
|
9.9 |
|
|
|
–99 |
% |
Private funds |
|
|
|
|
(0.1 |
) |
|
|
(0.2 |
) |
|
|
50 |
% |
|
|
(0.3 |
) |
|
|
1.2 |
|
|
|
N |
M |
Total long-term fund net inflows |
|
|
|
|
3.0 |
|
|
|
3.1 |
|
|
|
–3 |
% |
|
|
7.1 |
|
|
|
18.4 |
|
|
|
–61 |
% |
HNW and
institutional accounts (1) (2) |
|
|
|
|
1.2 |
|
|
|
(0.2 |
) |
|
|
N |
M |
|
|
2.8 |
|
|
|
(0.7 |
) |
|
|
N |
M |
Retail managed accounts |
|
|
|
|
1.6 |
|
|
|
1.3 |
|
|
|
23 |
% |
|
|
4.5 |
|
|
|
3.0 |
|
|
|
50 |
% |
Total separate account net inflows |
|
|
|
|
2.8 |
|
|
|
1.1 |
|
|
|
155 |
% |
|
|
7.3 |
|
|
|
2.3 |
|
|
|
217 |
% |
Total net inflows |
|
|
|
$ |
5.8 |
|
|
$ |
4.2 |
|
|
|
38 |
% |
|
$ |
14.4 |
|
|
$ |
20.7 |
|
|
|
–30 |
% |
(1) |
|
Non-Eaton Vance funds subadvised by Atlanta Capital, Fox
Asset Management and Parametric Portfolio Associates, which were previously reported in the “Open-end funds” category, have been reclassified
to the “HNW and institutional accounts” category for all periods presented. |
(2) |
|
High-net-worth (“HNW”) |
(3) |
|
Not meaningful (“NM”) |
Net inflows totaled $5.8 billion in the third quarter of fiscal
2008 compared to $4.2 billion, or $2.9 billion excluding closed-end fund flows, in the third quarter of fiscal 2007. Open-end fund net inflows of $3.1
billion and $2.0 billion in the third quarter of fiscal 2008 and 2007, respectively, reflect gross inflows of $6.5 billion and $5.8 billion and
redemptions of $3.4 billion and $3.8 billion, respectively. Private funds, which include privately offered equity and bank loan funds as well as
collateralized debt obligation entities, had net outflows of $0.1 billion in the third quarter of fiscal 2008, compared to $0.2 billion in the third
quarter of fiscal 2007.
Separate accounts contributed net inflows of $2.8 billion in the
third quarter of fiscal 2008, compared to $1.1 billion in the third quarter of fiscal 2007. Retail managed account net inflows increased to $1.6
billion in the third quarter of fiscal 2008 from $1.3 billion in the third quarter of fiscal 2007, reflecting strong net sales of Parametric Portfolio
Associates’ overlay and tax-efficient core equity products and Eaton Vance Management’s (“EVM’s”) large cap value and
municipal bond products. Institutional and high-net-worth separate accounts had net inflows of $1.2 billion in the third quarter of fiscal 2008
compared to net outflows of $0.2 billion in the third quarter of fiscal 2007, primarily reflecting strong institutional inflows at both Parametric
Portfolio Associates and EVM.
Cash management fund assets, which are not included in long-term
net flows because of their short-term characteristics, increased to $1.7 billion on July 31, 2008 from $1.6 billion on July 31, 2007.
The following table summarizes the asset flows by investment
category for the three and nine month periods ended July 31, 2008 and 2007:
22
Asset Flows (1)
|
|
|
|
For the Three
Months Ended
July 31,
|
|
|
|
For the Nine
Months Ended
July 31,
|
|
(in billions)
|
|
|
|
2008
|
|
2007
|
|
%
Change
|
|
2008
|
|
2007
|
|
%
Change
|
Equity fund
assets — beginning |
|
|
|
$ |
70.5 |
|
|
$ |
65.8 |
|
|
|
7 |
% |
|
$ |
72.9 |
|
|
$ |
50.7 |
|
|
|
44 |
% |
Sales/inflows |
|
|
|
|
4.7 |
|
|
|
4.1 |
|
|
|
15 |
% |
|
|
13.8 |
|
|
|
18.3 |
|
|
|
–25 |
% |
Redemptions/outflows |
|
|
|
|
(2.3 |
) |
|
|
(1.6 |
) |
|
|
44 |
% |
|
|
(6.7 |
) |
|
|
(4.6 |
) |
|
|
46 |
% |
Exchanges |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(0.1 |
) |
|
|
— |
|
|
|
N |
M |
Market value change |
|
|
|
|
(5.7 |
) |
|
|
(1.0 |
) |
|
|
–470 |
% |
|
|
(12.7 |
) |
|
|
2.9 |
|
|
|
N |
M |
Equity fund assets — ending |
|
|
|
|
67.2 |
|
|
|
67.3 |
|
|
|
0 |
% |
|
|
67.2 |
|
|
|
67.3 |
|
|
|
0 |
% |
| |
Fixed income
fund assets — beginning |
|
|
|
|
24.2 |
|
|
|
24.5 |
|
|
|
–1 |
% |
|
|
24.6 |
|
|
|
21.5 |
|
|
|
14 |
% |
Sales/inflows |
|
|
|
|
1.4 |
|
|
|
1.9 |
|
|
|
–26 |
% |
|
|
4.6 |
|
|
|
6.1 |
|
|
|
–25 |
% |
Redemptions/outflows |
|
|
|
|
(1.1 |
) |
|
|
(1.1 |
) |
|
|
0 |
% |
|
|
(3.8 |
) |
|
|
(2.4 |
) |
|
|
58 |
% |
Exchanges |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
0.1 |
|
|
|
(0.1 |
) |
|
|
N |
M |
Market value change |
|
|
|
|
(0.7 |
) |
|
|
(0.9 |
) |
|
|
–22 |
% |
|
|
(1.7 |
) |
|
|
(0.7 |
) |
|
|
143 |
% |
Fixed income fund assets — ending |
|
|
|
|
23.8 |
|
|
|
24.4 |
|
|
|
–2 |
% |
|
|
23.8 |
|
|
|
24.4 |
|
|
|
–2 |
% |
| |
Floating-rate
bank loan fund assets —
beginning |
|
|
|
|
18.0 |
|
|
|
21.4 |
|
|
|
–16 |
% |
|
|
20.4 |
|
|
|
20.0 |
|
|
|
2 |
% |
Sales/inflows |
|
|
|
|
0.9 |
|
|
|
2.0 |
|
|
|
–55 |
% |
|
|
3.1 |
|
|
|
5.6 |
|
|
|
–45 |
% |
Redemptions/outflows |
|
|
|
|
(0.7 |
) |
|
|
(2.1 |
) |
|
|
–67 |
% |
|
|
(3.9 |
) |
|
|
(4.6 |
) |
|
|
–15 |
% |
Exchanges |
|
|
|
|
— |
|
|
|
(0.1 |
) |
|
|
N |
M |
|
|
(0.3 |
) |
|
|
(0.1 |
) |
|
|
200 |
% |
Market value change |
|
|
|
|
(0.2 |
) |
|
|
(0.2 |
) |
|
|
0 |
% |
|
|
(1.3 |
) |
|
|
0.1 |
|
|
|
N |
M |
Floating-rate bank loan fund assets —
ending |
|
|
|
|
18.0 |
|
|
|
21.0 |
|
|
|
–14 |
% |
|
|
18.0 |
|
|
|
21.0 |
|
|
|
–14 |
% |
| |
Total
long-term fund assets — beginning |
|
|
|
|
112.7 |
|
|
|
111.7 |
|
|
|
1 |
% |
|
|
117.9 |
|
|
|
92.2 |
|
|
|
28 |
% |
Sales/inflows |
|
|
|
|
7.0 |
|
|
|
8.0 |
|
|
|
–13 |
% |
|
|
21.5 |
|
|
|
30.0 |
|
|
|
–28 |
% |
Redemptions/outflows |
|
|
|
|
(4.1 |
) |
|
|
(4.8 |
) |
|
|
–15 |
% |
|
|
(14.4 |
) |
|
|
(11.6 |
) |
|
|
24 |
% |
Exchanges |
|
|
|
|
— |
|
|
|
(0.1 |
) |
|
|
N |
M |
|
|
(0.3 |
) |
|
|
(0.2 |
) |
|
|
50 |
% |
Market value change |
|
|
|
|
(6.6 |
) |
|
|
(2.1 |
) |
|
|
–214 |
% |
|
|
(15.7 |
) |
|
|
2.3 |
|
|
|
N |
M |
Total long-term fund assets — ending |
|
|
|
|
109.0 |
|
|
|
112.7 |
|
|
|
–3 |
% |
|
|
109.0 |
|
|
|
112.7 |
|
|
|
–3 |
% |
| |
Separate
accounts — beginning |
|
|
|
|
44.4 |
|
|
|
36.5 |
|
|
|
22 |
% |
|
|
42.2 |
|
|
|
33.0 |
|
|
|
28 |
% |
Inflows
— HNW and institutional |
|
|
|
|
2.0 |
|
|
|
1.5 |
|
|
|
33 |
% |
|
|
6.3 |
|
|
|
3.5 |
|
|
|
80 |
% |
Outflows
— HNW and institutional |
|
|
|
|
(0.8 |
) |
|
|
(1.7 |
) |
|
|
–53 |
% |
|
|
(3.5 |
) |
|
|
(4.2 |
) |
|
|
–17 |
% |
Inflows
— retail managed accounts |
|
|
|
|
2.7 |
|
|
|
1.9 |
|
|
|
42 |
% |
|
|
7.3 |
|
|
|
4.6 |
|
|
|
59 |
% |
Outflows
— retail managed accounts |
|
|
|
|
(1.1 |
) |
|
|
(0.6 |
) |
|
|
83 |
% |
|
|
(2.8 |
) |
|
|
(1.7 |
) |
|
|
65 |
% |
Market value
change |
|
|
|
|
(2.1 |
) |
|
|
0.1 |
|
|
|
N |
M |
|
|
(4.4 |
) |
|
|
2.5 |
|
|
|
N |
M |
Assets acquired |
|
|
|
|
— |
|
|
|
0.3 |
|
|
|
N |
M |
|
|
— |
|
|
|
0.3 |
|
|
|
N |
M |
Separate accounts — ending |
|
|
|
|
45.1 |
|
|
|
38.0 |
|
|
|
19 |
% |
|
|
45.1 |
|
|
|
38.0 |
|
|
|
19 |
% |
| |
Cash management fund assets — ending |
|
|
|
|
1.7 |
|
|
|
1.6 |
|
|
|
6 |
% |
|
|
1.7 |
|
|
|
1.6 |
|
|
|
6 |
% |
Assets under management — ending |
|
|
|
$ |
155.8 |
|
|
$ |
152.3 |
|
|
|
2 |
% |
|
$ |
155.8 |
|
|
$ |
152.3 |
|
|
|
2 |
% |
(1) |
|
Non-Eaton Vance funds subadvised by Atlanta Capital, Fox
Asset Management and Parametric Portfolio Associates, which were previously reported in the “Long-term fund” category, have been reclassified
to the “HNW and institutional” category for all periods presented. |
23
Ending Assets Under Management by Asset
Class
|
|
|
|
July 31,
|
|
(in billions)
|
|
|
|
2008
|
|
% of
Total
|
|
2007
|
|
% of
Total
|
|
%
Change
|
Open-end
funds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class
A |
|
|
|
$ |
36.6 |
|
|
|
23 |
% |
|
$ |
33.6 |
|
|
|
22 |
% |
|
|
9 |
% |
Class
B |
|
|
|
|
3.9 |
|
|
|
3 |
% |
|
|
6.1 |
|
|
|
4 |
% |
|
|
–36 |
% |
Class
C |
|
|
|
|
9.0 |
|
|
|
6 |
% |
|
|
9.7 |
|
|
|
6 |
% |
|
|
–7 |
% |
Class
I |
|
|
|
|
4.3 |
|
|
|
3 |
% |
|
|
3.3 |
|
|
|
2 |
% |
|
|
30 |
% |
Other (1)(2) |
|
|
|
|
1.6 |
|
|
|
1 |
% |
|
|
0.5 |
|
|
|
1 |
% |
|
|
220 |
% |
Total open-end funds |
|
|
|
|
55.4 |
|
|
|
36 |
% |
|
|
53.2 |
|
|
|
35 |
% |
|
|
4 |
% |
Private funds
(3) |
|
|
|
|
26.2 |
|
|
|
17 |
% |
|
|
28.7 |
|
|
|
19 |
% |
|
|
–9 |
% |
Closed-end funds |
|
|
|
|
29.1 |
|
|
|
18 |
% |
|
|
32.4 |
|
|
|
21 |
% |
|
|
–10 |
% |
Total fund assets |
|
|
|
|
110.7 |
|
|
|
71 |
% |
|
|
114.3 |
|
|
|
75 |
% |
|
|
–3 |
% |
HNW and
institutional account assets (2) |
|
|
|
|
27.8 |
|
|
|
18 |
% |
|
|
24.8 |
|
|
|
16 |
% |
|
|
12 |
% |
Retail managed account assets |
|
|
|
|
17.3 |
|
|
|
11 |
% |
|
|
13.2 |
|
|
|
9 |
% |
|
|
31 |
% |
Total separate account assets |
|
|
|
|
45.1 |
|
|
|
29 |
% |
|
|
38.0 |
|
|
|
25 |
% |
|
|
19 |
% |
Total |
|
|
|
$ |
155.8 |
|
|
|
100 |
% |
|
$ |
152.3 |
|
|
|
100 |
% |
|
|
2 |
% |
(1) |
|
Includes other classes of Eaton Vance open-end
funds. |
(2) |
|
Non-Eaton Vance funds subadvised by Atlanta Capital, Fox
Asset Management and Parametric Portfolio Associates, which were previously reported in the “Other” category, have been reclassified to the
“HNW and institutional” category for all periods presented. |
(3) |
|
Includes privately offered equity and bank loan funds and
CDO entities. |
We currently sell our sponsored open-end mutual funds under four
primary pricing structures: front-end load commission (“Class A”); spread-load commission (“Class B”); level-load commission
(“Class C”); and institutional no-load (“Class I”). We waive the sales load on Class A shares under certain circumstances. In such
cases, the shares are sold at net asset value.
Fund assets decreased to 71 percent of total assets under
management at July 31, 2008, from 75 percent at July 31, 2007, while separate account assets, which include high-net-worth, institutional and retail
managed account assets, increased to 29 percent of total assets under management from 25 percent over the same period. The increase in separate account
assets in the last twelve months reflects strong net inflows in all three separate account categories. In the nine months ended July 31, 2008,
high-net-worth, institutional and retail managed account net inflows totaled $1.1 billion, $1.7 billion and $4.5 billion, respectively. Net price
declines reduced separate account assets under management by $4.4 billion over the same period.
Average assets under management presented in the following table
represent a monthly average by asset class. This table is intended to provide information useful in the analysis of our asset-based revenues and
expenses. With the exception of our separate account investment advisory fees, which are generally calculated as a percentage of either beginning,
average or ending quarterly assets, our investment advisory, administration, distribution and service fees, as well as certain expenses, are generally
calculated as a percentage of average daily assets.
24
Average Assets Under Management by
Asset Class (1)
|
|
|
|
For the Three
Months Ended
July 31,
|
|
|
|
For the Nine
Months Ended
July 31,
|
|
(in billions)
|
|
|
|
2008
|
|
2007
|
|
%
Change
|
|
2008
|
|
2007
|
|
%
Change
|
Open-end
funds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class
A |
|
|
|
$ |
37.1 |
|
|
$ |
33.6 |
|
|
|
10 |
% |
|
$ |
35.6 |
|
|
$ |
31.0 |
|
|
|
15 |
% |
Class
B |
|
|
|
|
4.1 |
|
|
|
6.3 |
|
|
|
–35 |
% |
|
|
4.9 |
|
|
|
6.5 |
|
|
|
–25 |
% |
Class
C |
|
|
|
|
9.3 |
|
|
|
9.8 |
|
|
|
–5 |
% |
|
|
9.4 |
|
|
|
9.2 |
|
|
|
2 |
% |
Class
I |
|
|
|
|
4.2 |
|
|
|
3.2 |
|
|
|
31 |
% |
|
|
3.7 |
|
|
|
2.9 |
|
|
|
28 |
% |
Other (2)(3) |
|
|
|
|
1.5 |
|
|
|
0.5 |
|
|
|
200 |
% |
|
|
1.1 |
|
|
|
0.3 |
|
|
|
267 |
% |
Total open-end funds |
|
|
|
|
56.2 |
|
|
|
53.4 |
|
|
|
5 |
% |
|
|
54.7 |
|
|
|
49.9 |
|
|
|
10 |
% |
Private funds
(4) |
|
|
|
|
27.1 |
|
|
|
29.3 |
|
|
|
–8 |
% |
|
|
27.9 |
|
|
|
28.1 |
|
|
|
–1 |
% |
Closed-end funds |
|
|
|
|
30.3 |
|
|
|
32.3 |
|
|
|
–6 |
% |
|
|
31.1 |
|
|
|
29.0 |
|
|
|
7 |
% |
Total fund assets |
|
|
|
|
113.6 |
|
|
|
115.0 |
|
|
|
–1 |
% |
|
|
113.7 |
|
|
|
107.0 |
|
|
|
6 |
% |
HNW and
institutional account assets (3) |
|
|
|
|
28.0 |
|
|
|
24.8 |
|
|
|
13 |
% |
|
|
27.2 |
|
|
|
24.0 |
|
|
|
13 |
% |
Retail managed account assets |
|
|
|
|
17.2 |
|
|
|
12.8 |
|
|
|
34 |
% |
|
|
15.8 |
|
|
|
11.4 |
|
|
|
39 |
% |
Total separate account assets |
|
|
|
|
45.2 |
|
|
|
37.6 |
|
|
|
20 |
% |
|
|
43.0 |
|
|
|
35.4 |
|
|
|
21 |
% |
Total |
|
|
|
$ |
158.8 |
|
|
$ |
152.6 |
|
|
|
4 |
% |
|
$ |
156.7 |
|
|
$ |
142.4 |
|
|
|
10 |
% |
(1) |
|
Assets under management attributable to acquisitions that
closed during the relevant periods are included on a weighted average basis for the period from their respective closing dates. |
(2) |
|
Includes other classes of Eaton Vance open-end
funds. |
(3) |
|
Non-Eaton Vance funds subadvised by Atlanta Capital, Fox
Asset Management and Parametric Portfolio Associates, which were previously reported in the “Other” category, have been reclassified to the
“HNW and institutional” category for all periods presented. |
(4) |
|
Includes privately offered equity and bank loan funds and
CDO entities. |
Results of Operations
|
|
|
|
For the Three
Months Ended
July 31,
|
|
|
|
For the Nine
Months Ended
July 31,
|
|
(in thousands, except per share data)
|
|
|
|
2008
|
|
2007
|
|
%
Change
|
|
2008
|
|
2007
|
|
%
Change
|
Net
income |
|
|
|
$ |
49,621 |
|
|
$ |
55,776 |
|
|
|
–11 |
% |
|
$ |
160,711 |
|
|
$ |
81,428 |
|
|
|
97 |
% |
Earnings per
share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
|
$ |
0.43 |
|
|
$ |
0.45 |
|
|
|
–4 |
% |
|
$ |
1.39 |
|
|
$ |
0.65 |
|
|
|
114 |
% |
Diluted |
|
|
|
$ |
0.40 |
|
|
$ |
0.41 |
|
|
|
–2 |
% |
|
$ |
1.28 |
|
|
$ |
0.60 |
|
|
|
113 |
% |
Operating
margin |
|
|
|
|
32.6% |
|
|
|
31.0% |
|
|
|
|
|
|
|
34.0% |
|
|
|
16.1% |
|
|
|
|
|
We reported net income of $49.6 million, or $0.40 per diluted
share, in the third quarter of fiscal 2008 compared to $55.8 million, or $0.41 per diluted share, in the third quarter of fiscal 2007. The decrease in
net income of $6.2 million, or $0.01 per diluted share, can be primarily attributed to the following:
• |
|
A decrease in revenue of $4.1 million, or 1 percent, due to
decreases in distribution and underwriter fees, service fees and other revenue, partially offset by an increase in investment advisory and
administration fees. The decreases in distribution and underwriter fees and service fees can be attributed to the decrease in average assets under
management in share classes subject |
25
|
|
to those fees. The decrease in other revenue can be attributed
to realized and unrealized losses recognized on seed investments in consolidated funds. The increase in investment advisory fees can be attributed to
the increase in average assets under management. |
• |
|
A decrease in expenses of $7.3 million, or 4 percent, due to
decreases in distribution expense and the amortization of deferred sales commissions, partially offset by increases in service fee expense, fund
expenses and other expenses. The decrease in distribution expense can be primarily attributed to the payment of $12.6 million in one-time structuring
fees related to a closed-end fund offered in the third quarter of fiscal 2007. Compensation expense was flat year over year, reflecting an increase in
base salaries and employee benefits offset by decreases in adjusted operating income-based bonus accruals and incentives paid on sales of closed-end
funds. |
• |
|
An increase in interest expense of $8.4 million due to our
$500.0 million debt offering that funded on October 2, 2007. |
• |
|
An increase in realized and unrealized losses of $1.7 million
associated with seed investments in separately managed accounts. |
• |
|
A decrease in income taxes of $1.2 million, reflecting the
decrease in taxable income offset by an increase in our effective tax rate. Our effective tax rate increased to 40.5 percent in the third quarter of
fiscal 2008 from 38.8 percent in the third quarter of fiscal 2007 due to an increase in our projected state tax rate. |
• |
|
A decrease in diluted weighted average shares outstanding of
10.5 million shares, reflecting share repurchases over the last twelve months funded primarily by our $500.0 million debt offering that funded on
October 2, 2007. |
We reported net income of $160.7 million, or $1.28 per diluted
share, in the first nine months of fiscal 2008 compared to $81.4 million, or $0.60 per diluted share, in the first nine months of fiscal 2007. The
increase in net income of $79.3 million, or $0.68 per diluted share, can be primarily attributed to the following:
• |
|
An increase in revenue of $55.7 million, or 7 percent, due to
increases in investment advisory and administration fees and service fees, partially offset by decreases in distribution and underwriter fees and other
revenue. The increase in investment advisory fees and service fees can be attributed to the increase in average assets under management. The decreases
in distribution and underwriter fees can be attributed to the decrease in average assets under management in share classes subject to those fees. The
decrease in other revenue can be attributed to realized and unrealized losses recognized on seed investments in consolidated funds. |
• |
|
A decrease in expenses of $104.5 million, or 16 percent, due to
decreases in distribution expense and the amortization of deferred sales commissions, partially offset by increases in service fee expense, fund
expenses and other expenses. The decrease in distribution expense can be primarily attributed to the payment of $76.0 million in one-time structuring
fees related to closed-end funds offered in the first nine months of fiscal 2007 and payments totaling $52.2 million to terminate compensation
agreements in respect of certain of our previously offered closed-end funds. Compensation expense was flat year over year, reflecting an increase in
base salaries, employee benefits and adjusted operating income-based bonus accruals offset by a decrease in incentives paid on sales of closed-end
funds. |
• |
|
An increase in interest expense of $25.1 million due to our
$500.0 million debt offering that funded on October 2, 2007. |
• |
|
An increase in realized and unrealized losses of $3.6 million
associated with seed investments in separately managed accounts. |
26
• |
|
An increase in income taxes of $52.7 million, reflecting the
increase in taxable income along with an increase in our effective tax rate. Our effective tax rate increased to 39.0 percent in the first nine months
of fiscal 2008 from 38.7 percent in the first nine months of fiscal 2007 due to an increase in our projected state tax rate. |
• |
|
A decrease in diluted weighted average shares outstanding of
10.8 million shares, reflecting share repurchases over the last twelve months funded primarily by our $500.0 million debt offering that funded on
October 2, 2007. |
In evaluating operating performance we consider operating income
and net income, which are calculated on a basis consistent with GAAP, as well as adjusted operating income, an internally derived non-GAAP performance
measure. We define adjusted operating income as operating income plus closed-end fund structuring fees and one-time payments, stock-based compensation
and any write-off of intangible assets or goodwill. We believe that adjusted operating income is a key indicator of our ongoing profitability and
therefore use this measure as the basis for calculating performance-based management incentives. Adjusted operating income is not, and should not be
construed to be, a substitute for operating income computed in accordance with GAAP. However, in assessing the performance of the business, our
management and the Board of Directors look at adjusted operating income as a measure of underlying performance, since amounts resulting from one-time
events (e.g., the offering of a closed-end fund) can have a material short-term impact on GAAP earnings. In addition, when assessing performance,
management and the Board of Directors look at performance both with and without stock-based compensation.
The following table provides a reconciliation of operating income
to adjusted operating income:
|
|
|
|
For the Three
Months Ended
July 31,
|
|
|
|
For the Nine
Months Ended
July 31,
|
|
(in thousands)
|
|
|
|
2008
|
|
2007
|
|
%
Change
|
|
2008
|
|
2007
|
|
%
Change
|
Operating
income |
|
|
|
$ |
92,085 |
|
|
$ |
88,858 |
|
|
|
4 |
% |
|
$ |
287,397 |
|
|
$ |
127,147 |
|
|
|
126 |
% |
Closed-end
fund structuring
fees |
|
|
|
|
— |
|
|
|
12,562 |
|
|
|
N |
M |
|
|
— |
|
|
|
75,998 |
|
|
|
N |
M |
Payments to
terminate
closed-end fund
compensation agreements |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
52,178 |
|
|
|
N |
M |
Stock-based compensation |
|
|
|
|
9,707 |
|
|
|
10,914 |
|
|
|
–11 |
% |
|
|
30,374 |
|
|
|
33,390 |
|
|
|
–9 |
% |
Adjusted operating income |
|
|
|
$ |
101,792 |
|
|
$ |
112,334 |
|
|
|
–9 |
% |
|
$ |
317,771 |
|
|
$ |
288,713 |
|
|
|
10 |
% |
Adjusted operating margin |
|
|
|
|
36.0% |
|
|
|
39.2% |
|
|
|
|
|
|
|
37.6% |
|
|
|
36.5% |
|
|
|
|
|
Revenue
Our average effective fee rate (total revenue as a percentage of
average assets under management) was 71 basis points and 72 basis points in the third quarter and first nine months of fiscal 2008, respectively
compared to 75 basis points and 74 basis points in the third quarter and first nine months of fiscal 2007, respectively. The decrease in the effective
fee rate for both the three and nine month periods ended July 31, 2008 can be attributed to the decrease in distribution and underwriter fees due to
the decrease in average assets under management in share classes subject to those fees.
27
|
|
|
|
For the Three
Months Ended
July 31,
|
|
|
|
For the Nine
Months Ended
July 31,
|
|
(in thousands)
|
|
|
|
2008
|
|
2007
|
|
%
Change
|
|
2008
|
|
2007
|
|
%
Change
|
Investment
advisory and
administration fees |
|
|
|
$ |
211,311 |
|
|
$ |
205,892 |
|
|
|
3 |
% |
|
$ |
623,735 |
|
|
$ |
560,726 |
|
|
|
11 |
% |
Distribution
and underwriter
fees (1) |
|
|
|
|
31,305 |
|
|
|
38,738 |
|
|
|
–19 |
% |
|
|
100,841 |
|
|
|
110,703 |
|
|
|
–9 |
% |
Service fees
(1) |
|
|
|
|
40,348 |
|
|
|
40,880 |
|
|
|
–1 |
% |
|
|
119,208 |
|
|
|
114,120 |
|
|
|
4 |
% |
Other revenue |
|
|
|
|
(152 |
) |
|
|
1,422 |
|
|
|
N |
M |
|
|
2,250 |
|
|
|
4,743 |
|
|
|
–53 |
% |
Total revenue |
|
|
|
$ |
282,812 |
|
|
$ |
286,932 |
|
|
|
–1 |
% |
|
$ |
846,034 |
|
|
$ |
790,292 |
|
|
|
7 |
% |
(1) |
|
Certain amounts from prior years have been reclassified to
conform to the current year presentation. See footnote 3 in Item 1 for further discussion of this change. |
Investment advisory and administration fees
Investment advisory and administration fees are determined by
contractual agreements with our sponsored funds and separate accounts and are generally based upon a percentage of the market value of assets under
management. Net asset flows and changes in the market value of managed assets affect the amount of managed assets on which investment advisory and
administration fees are earned, while changes in asset mix among different investment disciplines and products affect our average effective fee rate.
Investment advisory and administration fees increased to 75 percent of total revenue in the third quarter of fiscal 2008 from 72 percent in the third
quarter of fiscal 2007.
The 3 percent increase in investment advisory and administration
fees in the third quarter of fiscal 2008 over the same period a year earlier can be attributed primarily to an increase in separately managed account
advisory fees of $5.9 million, or 20 percent, reflecting a 20 percent increase in average separately managed account assets under management, offset by
a decline in fund investment advisory and administration fees of $0.5 million, or less than 1 percent, reflecting a 1 percent decline in average fund
assets under management. Average separately managed account effective fee rates remained flat at 31 basis points for both periods, while average fund
effective fee rates increased to 62 basis points in the third quarter of fiscal 2008 from 61 basis points in the third quarter of fiscal
2007.
The 11 percent increase in investment advisory and administration
fees in the first nine months of fiscal 2008 over the same period a year earlier can be attributed to an increase in separately managed account
advisory fees of $17.8 million, or 22 percent, reflecting a 22 percent increase in average separately managed account assets under management, and an
increase in fund investment advisory and administration fees of $45.2 million, or 9 percent, reflecting a 6 percent increase in average fund assets
under management. Average separately managed account effective fee rates remained flat at 31 basis points for both periods, while average fund
effective fee rates increased to 61 basis points in the first nine months of fiscal 2008 from 60 basis points in the first nine months of fiscal
2007.
Distribution and underwriter fees
Distribution plan payments received by the Company are made under
contractual agreements with our sponsored funds and are calculated as a percentage of average assets under management in specific share classes of our
mutual funds, as well as certain private funds. These fees fluctuate with both the level of average assets under management and the relative mix of
assets. Underwriter commissions are earned on the sale of shares of our sponsored mutual funds on which investors pay a sales charge at the time of
purchase (Class A share sales). Sales charges and underwriter commissions are waived or reduced on sales that exceed specified minimum amounts and on
certain categories of sales. Underwriter
28
commissions fluctuate with the level of Class A share sales and
the mix of Class A shares sold with and without sales charges. Distribution and underwriter fees decreased to 11 percent of total revenue in the third
quarter of fiscal 2008 from 14 percent of total revenue in the third quarter of fiscal 2007.
Distribution fee payments received decreased 18 percent, or $6.3
million, to $28.3 million in the third quarter of fiscal 2008 over the same period a year earlier, reflecting a decrease in average Class A assets of
certain funds and Class B, Class C and certain private fund assets subject to distribution fees. Class A share distribution fees decreased by 29
percent, or $0.2 million, to $0.5 million, reflecting a 25 percent decrease in average Class A share assets that are subject to distribution fees
(primarily in funds advised by Lloyd George Management). Class B share distribution fees received decreased by 34 percent, or $4.2 million, to $8.2
million, reflecting a decrease in average Class B share assets under management of 35 percent year-over-year. Class C share distribution fees decreased
by 7 percent, or $1.3 million, to $16.6 million, reflecting a decrease in average Class C share assets under management of 6 percent. Private fund
distribution fees decreased by 17 percent, or $0.6 million, to $2.9 million, reflecting a decrease in average private fund assets under management of
16 percent. Underwriter fees and other distribution income decreased 29 percent, or $1.2 million, to $3.0 million in the third quarter of fiscal 2008,
primarily reflecting decreases of $0.8 million in underwriter fees on Class A share sales and a $0.2 million reduction in contingent deferred sales
charges received on certain Class A share redemptions.
Distribution fee payments received decreased 9 percent, or $9.2
million, to $90.4 million in the first nine months of fiscal 2008 over the same period a year earlier, reflecting a decrease in average Class B and
certain private fund assets subject to distribution fees, partially offset by an increase in Class A and Class C share distribution fees received.
Class B share distribution fees decreased by 24 percent, or $9.0 million, to $28.9 million, reflecting a decrease in average Class B share assets under
management of 24 percent year-over-year. Private fund distribution fees decreased by 10 percent, or $1.0 million, to $9.3 million, reflecting a
decrease in average private fund assets subject to distribution fees of 8 percent. Class A share distribution fees increased by 13 percent, or $0.2
million, to $1.8 million, reflecting a 12 percent increase in average Class A share assets that are subject to distribution fees (primarily in funds
advised by Lloyd George Management). Class C share distribution fees increased by 1 percent, or $0.4 million, to $50.2 million, reflecting an increase
in average assets subject to distribution fees of 2 percent. Underwriter fees and other distribution income decreased 5 percent, or $0.6 million, to
$10.5 million in the first nine months of fiscal 2008, primarily reflecting a decrease of $1.8 million in underwriter fees received on Class A share
sales, offset by an increase of $1.2 million in contingent deferred sales charges received on certain Class A share redemptions.
Service fees
As used herein, the term “service fees” refers to the
distribution and service fee payable pursuant to Class A distribution plans, as well as to service fees payable pursuant to other plans or
agreements.
Service fee payments received by the Company are made under
contractual agreements with our sponsored funds and are calculated as a percent of average assets under management in specific share classes of our
mutual funds (principally Classes A, B and C) as well as certain private funds. Service fees are paid to Eaton Vance Distributors, Inc. as principal
underwriter for service and/or the maintenance of shareholder accounts and, in most cases, the sale and distribution of Class A shares. Service fees
represented 14 percent of total revenue for both third quarters ended July 31, 2008 and 2007.
Service fee revenue decreased by 1 percent in the third quarter
of fiscal 2008 over the same period a year ago, primarily reflecting a 1 percent decrease in average assets under management in funds subject to those
fees. Service fee revenue increased by 4 percent in the first nine months fiscal 2008 over the same period a year ago, primarily reflecting a 5 percent
increase in average assets under management subject to those fees.
29
Other revenue
Other revenue, which consists primarily of shareholder service
fees, miscellaneous dealer income, custody fees, and investment income earned by consolidated funds and certain limited partnerships, decreased by $1.6
million in the third quarter of fiscal 2008 compared to the same period a year earlier. The decrease in other revenue in the third quarter of fiscal
2008 can be attributed primarily to realized and unrealized losses on securities classified as trading held in the portfolios of consolidated funds and
certain limited partnerships. Other revenue for the third quarter of fiscal 2008 includes $1.2 million of investment losses related to consolidated
funds and certain limited partnerships for the period during which they were consolidated, compared to $0.4 million of investment income for the same
period a year ago.
Other revenue decreased by 53 percent, or $2.5 million, in the
first nine months of fiscal 2008 over the same period a year earlier, primarily due to an increase in realized and unrealized losses on securities
classified as trading. Other revenue for the first nine months of fiscal 2008 includes investment losses of $1.0 million related to consolidated funds
and certain limited partnerships for the periods during which they were consolidated, compared to $1.2 million of investment income for the same period
a year ago.
Expenses
Operating expenses decreased by 4 percent and 16 percent in the
third quarter and first nine months of fiscal 2008, respectively, over the same periods a year earlier, primarily reflecting a decrease in distribution
expense associated with the offering of closed-end funds in the first nine months of fiscal 2007, offset by an increase in other operating
expenses.
|
|
|
|
For the Three
Months Ended
July 31,
|
|
|
|
For the Nine
Months Ended
July 31,
|
|
(in thousands)
|
|
|
|
2008
|
|
2007
|
|
%
Change
|
|
2008
|
|
2007
|
|
%
Change
|
Compensation
of officers
and employees: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
compensation |
|
|
|
$ |
69,788 |
|
|
$ |
68,948 |
|
|
|
1 |
% |
|
$ |
206,292 |
|
|
$ |
203,615 |
|
|
|
1 |
% |
Stock-based compensation |
|
|
|
|
9,707 |
|
|
|
10,914 |
|
|
|
–11 |
% |
|
|
30,374 |
|
|
|
33,390 |
|
|
|
–9 |
% |
Total compensation of officers
and employees |
|
|
|
|
79,495 |
|
|
|
79,862 |
|
|
|
0 |
% |
|
|
236,666 |
|
|
|
237,005 |
|
|
|
0 |
% |
Distribution
expense (1) |
|
|
|
|
30,661 |
|
|
|
44,788 |
|
|
|
–32 |
% |
|
|
92,021 |
|
|
|
221,325 |
|
|
|
–58 |
% |
Service fee
expense (1) |
|
|
|
|
33,923 |
|
|
|
32,113 |
|
|
|
6 |
% |
|
|
98,821 |
|
|
|
88,797 |
|
|
|
11 |
% |
Amortization
of deferred sales
commissions |
|
|
|
|
11,391 |
|
|
|
13,931 |
|
|
|
–18 |
% |
|
|
37,009 |
|
|
|
40,902 |
|
|
|
–10 |
% |
Fund
expenses |
|
|
|
|
6,521 |
|
|
|
5,490 |
|
|
|
19 |
% |
|
|
18,947 |
|
|
|
14,164 |
|
|
|
34 |
% |
Other expenses |
|
|
|
|
28,736 |
|
|
|
21,890 |
|
|
|
31 |
% |
|
|
75,173 |
|
|
|
60,952 |
|
|
|
23 |
% |
Total expenses |
|
|
|
$ |
190,727 |
|
|
$ |
198,074 |
|
|
|
–4 |
% |
|
$ |
558,637 |
|
|
$ |
663,145 |
|
|
|
–16 |
% |
(1) |
|
Certain amounts from prior years have been reclassified to
conform to the current year presentation. See footnote 3 in Item 1 for further discussion of this change. |
Compensation of officers and employees
Compensation expense in the third quarter of fiscal 2008 remained
flat as increases in employee headcount, base salaries and other compensation were offset by lower sales-based incentives, adjusted operating income
based incentives and stock-based compensation. Base
30
compensation, payroll taxes and employee benefits increased by $5.1 million, or 18 percent,
reflecting a 13 percent increase in average headcount and year-end salary adjustments. Other compensation expense increased by $1.3 million, reflecting
severance accruals recognized in the third quarter of fiscal 2008. Sales incentives decreased by $2.2 million, or 14 percent, primarily reflecting the
$2.2 million in closed-end fund sales incentives paid out in the third quarter of fiscal 2007. Adjusted operating
income based incentives decreased by $3.3 million, or 14 percent, reflecting the decrease in adjusted operating income year over year. Stock-based
compensation expense decreased by $1.2 million, or 11 percent, reflecting higher stock-based compensation expense recognized in the third quarter of
fiscal 2007 relating to retirement eligible employees.
Compensation expense in the first nine months of fiscal 2008
remained flat as increases in employee headcount, base salaries, adjusted operating income based incentives and other compensation were offset by lower
sales-based incentives and stock-based compensation. Base compensation, payroll taxes and employee benefits increased by $13.6 million, or 16 percent,
reflecting an 11 percent increase in average headcount and year-end salary adjustments. Adjusted operating income based incentives increased by $4.3
million, or 7 percent, reflecting the increase in adjusted operating income year over year. Other compensation expense increased by $2.1 million,
reflecting severance accruals recognized in the first nine months of fiscal 2008. Sales incentives decreased by $17.3 million, or 32 percent, primarily
reflecting the $14.8 million in closed-end fund sales incentives paid out in the first nine months of fiscal 2007. Stock-based compensation expense
decreased by $3.0 million, or 9 percent, reflecting higher stock-based compensation expense recognized in the third quarter of fiscal 2007 relating to
retirement eligible employees and a decrease in option grants to retirement eligible employees in the first quarter of fiscal 2008.
Our retirement policy provides that an employee is eligible for
retirement at age 65, or for early retirement when the employee reaches age 55 and has a combined age plus years of service of at least 75 years or
with our consent. Stock-based compensation expense recognized on options granted to employees approaching retirement eligibility is recognized on a
straight-line basis over the period from the grant date through the retirement eligibility date. Stock-based compensation expense for options granted
to employees who will not become retirement eligible during the vesting period of the options (five years) is recognized on a straight-line
basis.
The accelerated recognition of compensation cost for options
granted to employees who are retirement-eligible or are nearing retirement eligibility under our retirement policy is applicable for all grants made on
or after our adoption of Statement of Financial Accounting Standards (“SFAS”) No. 123R (November 1, 2005). The accelerated recognition of
compensation expense associated with stock option grants to retirement-eligible employees in the quarter when the options are granted (the first
quarter of each fiscal year) reduces the associated stock-based compensation expense that would otherwise be recognized in subsequent
quarters.
Distribution expense
Distribution expense consists primarily of ongoing payments made
to distribution partners pursuant to third-party distribution arrangements for Class C and certain closed-end fund assets, which are calculated as a
percentage of average assets under management, commissions paid to broker/dealers on the sale of Class A shares at net asset value, structuring fees
paid on new closed-end fund offerings and other marketing expenses, including marketing expenses associated with revenue sharing arrangements with our
distribution partners.
Distribution expense decreased by 32 percent, or $14.1 million,
in the third quarter of fiscal 2008 versus the same period a year earlier, primarily reflecting the payment of $12.6 million in one-time structuring
fees associated with the offering of a closed-end fund in the third
31
quarter of fiscal 2007. Class C distribution fees increased by $0.7 million to
$12.3 million in the third quarter of fiscal 2008, reflecting an increase in Class C share assets older than one year. Payments made under certain
closed-end fund compensation agreements decreased by $0.8 million to $5.6 million, reflecting a decrease in average closed-end fund assets under
management. Class A commissions decreased by $1.9 million to $2.5 million, reflecting a decrease in Class A sales subject to commissions and a change
in the Class A commission structure. Marketing expenses associated with revenue
sharing arrangements with our distribution partners increased by $0.3 million to $7.4 million in the third quarter of fiscal 2008, reflecting the
increase in sales and assets under management that are subject to these arrangements. Other marketing expenses increased $0.1 million to $2.9 million
in the third quarter of fiscal 2008.
Distribution expense decreased by 58 percent, or $129.3 million,
in the first nine months of fiscal 2008 versus the same period a year earlier, primarily reflecting the payment of $76.0 million in one-time
structuring fees associated with the offering of closed-end funds in the first nine months of fiscal 2007 as well as $52.2 million in payments in the
prior period made to Merrill Lynch, Pierce, Fenner & Smith and A.G. Edwards & Sons, Inc. to terminate certain closed-end fund compensation
agreements under which we were obligated to make recurring payments over time based on the assets of the respective closed-end funds. Class C
distribution fees increased by $3.5 million to $36.8 million in the first nine months of fiscal 2008, reflecting an increase in Class C share assets
older than one year. Payments made under certain closed-end fund compensation agreements increased by $0.1 million to $17.2 million, reflecting an
increase in average closed-end fund assets under management offset by the termination of certain compensation agreements as referenced above. Class A
commissions decreased by $5.9 million to $8.5 million, reflecting a decrease in Class A sales subject to commissions and a change in the Class A
commission structure. Marketing expenses associated with revenue sharing arrangements with our distribution partners increased by $2.5 million to $21.7
million in the first nine months of fiscal 2008, reflecting the increase in sales and assets under management that are subject to these arrangements.
Other marketing expenses decreased $0.7 million to $7.7 million in the first nine months of fiscal 2008.
Service fee expense
Service fees we receive from sponsored funds are generally
retained in the first year and paid to broker/dealers after the first year pursuant to third-party service arrangements. These fees are calculated as a
percent of average assets under management in specific share classes of our mutual funds (principally Classes A, B, and C) as well as certain private
funds. Service fee expense increased by 6 percent and 11 percent in the third quarter and first nine months of fiscal 2008 over the same periods a year
earlier, reflecting an increase in average fund assets retained more than one year in funds and share classes that are subject to service
fees.
Amortization of deferred sales
commissions
Amortization expense is affected by ongoing sales and redemptions
of mutual fund Class B shares, Class C shares and certain private funds. Amortization of deferred sales commissions decreased by 18 percent and 10
percent in the third quarter and first nine months of fiscal 2008 compared to the same periods a year earlier, primarily reflecting the ongoing decline
in Class B share sales and assets. As amortization expense is a function of the Company’s fund asset mix, a continuing shift away from Class B
shares to other classes over time will likely result in a reduction in amortization expense over time.
Fund expenses
Fund expenses consist primarily of fees paid to subadvisors,
compliance costs and other fund-related expenses we incur. Fund expenses increased by 19 percent and 34 percent in the third quarter and first nine
months of fiscal 2008, respectively, over the same periods a year earlier, primarily reflecting increases in subadvisory fees and other fund-related
expenses. The increase in subadvisory fees can be attributed to the increase in average assets under management in funds for which external investment
advisors act as subadvisors. The increase in other fund-related expenses can be attributed to an increase in expenses for certain institutional funds
for which we are paid an all-in management fee and are obligated to pay the funds’ operating expenses.
32
Other expenses
Other expenses consist primarily of travel, facilities,
information technology, consulting, communications and other corporate expenses, including the amortization of intangible assets.
Other expenses increased by 31 percent, or $6.8 million, in the
third quarter of fiscal 2008 over the same period a year earlier, primarily reflecting increases in facilities-related expenses of $2.8 million,
information technology expense of $2.3 million, and consulting expenses of $0.6 million. The increase in facilities-related expenses can be attributed
to an increase in rent and insurance associated with additional office space leased to support the growth in headcount, accelerated amortization of
leasehold improvements in anticipation of our move to new corporate headquarters in Boston in fiscal 2009, and additional rent expense incurred as we
begin the build out of our new office space. The increase in information technology expense can be attributed to an increase in outside data services
and consulting costs incurred in conjunction with several significant system implementations. The increase in consulting expenses can be primarily
attributed to an increase in legal expense.
Other expenses increased by 23 percent, or $14.2 million, in the
first nine months of fiscal 2008 over the same period a year earlier, primarily reflecting increases in facilities-related expenses of $5.2 million,
information technology expense of $6.1 million, consulting expenses of $0.8 million, communications expense of $0.5 million and other corporate
expenses of $2.0 million, offset by a decrease in travel expense of $0.3 million. The increase in facilities-related expenses can be attributed to an
increase in rent and insurance associated with additional office space leased to support the growth in headcount, accelerated amortization of leasehold
improvements in anticipation of our move to new corporate headquarters in Boston in fiscal 2009, and additional rent expense incurred as we begin the
build out of our new office space. The increase in information technology expense can be attributed to an increase in outside data services and
consulting costs incurred in conjunction with several significant system implementations. The increase in consulting expenses can be primarily
attributed to an increase in legal expense. The increase in communications expense can be attributed to increases in telephone and cable costs, while
the increase in other corporate expenses can be primarily attributed to increases in charitable giving, the amortization of intangible assets and
professional development costs. The decrease in travel expense can be attributed to travel costs incurred in the first nine months of fiscal 2007 in
support of three closed-end fund initial public offerings.
Other Income and Expense
|
|
|
|
For the Three
Months Ended
July 31,
|
|
|
|
For the Nine
Months Ended
July 31,
|
|
(in thousands)
|
|
|
|
2008
|
|
2007
|
|
%
Change
|
|
2008
|
|
2007
|
|
%
Change
|
Interest
income |
|
|
|
$ |
2,376 |
|
|
$ |
2,667 |
|
|
|
–11 |
% |
|
$ |
9,501 |
|
|
$ |
7,002 |
|
|
|
36 |
% |
Interest
expense |
|
|
|
|
(8,411 |
) |
|
|
(58 |
) |
|
|
N |
M |
|
|
(25,230 |
) |
|
|
(142 |
) |
|
|
N |
M |
Gains/(losses) on investments |
|
|
|
|
(332 |
) |
|
|
1,106 |
|
|
|
N |
M |
|
|
(97 |
) |
|
|
2,779 |
|
|
|
N |
M |
Unrealized
gains/(losses) on
investments |
|
|
|
|
(259 |
) |
|
|
— |
|
|
|
N |
M |
|
|
(696 |
) |
|
|
— |
|
|
|
N |
M |
Foreign currency losses |
|
|
|
|
(58 |
) |
|
|
(95 |
) |
|
|
–39 |
% |
|
|
(90 |
) |
|
|
(228 |
) |
|
|
–61 |
% |
Total other income (expense) |
|
|
|
$ |
(6,684 |
) |
|
$ |
3,620 |
|
|
|
N |
M |
|
$ |
(16,612 |
) |
|
$ |
9,411 |
|
|
|
N |
M |
33
Interest income decreased by $0.3 million, or 11 percent, in the
third quarter of fiscal 2008 over the same period a year earlier, primarily reflecting the lower effective interest rate earned on cash and short-term
investments offset by higher average cash and short-term investment balances. Interest income increased by $2.5 million, or 36 percent, in the first
nine months of fiscal 2008 over the same period a year earlier, primarily reflecting additional interest income earned on proceeds from our $500.0
million senior notes offering that funded on October 2, 2007.
Interest expense increased by $8.4 million and $25.1 million in
the third quarter and first nine months of fiscal 2008, respectively, over the same periods a year earlier, primarily due to interest accrued on our
senior notes that funded on October 2, 2007.
In the third quarter and first nine months of fiscal 2008 we
incurred net realized losses on investments totaling $0.3 million and $0.1 million, respectively, compared to net realized gains of $1.1 million and
$2.8 million in the third quarter and first nine months of fiscal 2007, respectively. Net realized losses in the first nine months of fiscal 2008
represent primarily losses incurred on investments in separately managed accounts seeded for new product development purposes. Net realized gains in
first nine months of fiscal 2007 include $1.1 million of gains realized upon the disposition of certain investments in sponsored funds and $1.2 million
of gains realized on the liquidation of an investment in a collateralized debt obligation (“CDO”) entity.
Unrealized losses on investments of $0.3 million and $0.7 million
in the third quarter and first nine months of fiscal 2008, respectively, relate to investments in separately managed accounts seeded for new product
development purposes.
Income Taxes
Our effective tax rate (income taxes as a percentage of income
before income taxes, minority interest and equity in net income of affiliates) was 40.5 percent and 39.0 percent in the third quarter and first nine
months of fiscal 2008, respectively, compared to 38.8 percent and 38.7 percent in the third quarter and first nine months of fiscal 2007, respectively.
The increase in our effective tax rate in the third quarter of fiscal 2008 can be attributed to an increase in our estimated effective state tax
rate.
Our policy for accounting for income taxes includes monitoring
our business activities and tax policies to ensure that we are in compliance with federal, state and foreign tax laws. In the ordinary course of
business, various taxing authorities may not agree with certain tax positions we have taken, or applicable law may not be clear. We periodically review
these tax positions and provide for and adjust as necessary estimated liabilities relating to such positions as part of our overall tax
provision.
Minority Interest
Minority interest in the third quarter of fiscal 2008 remained
flat in comparison with the same period a year ago. Minority interest increased by $2.5 million in the first nine months of fiscal 2008 over the same
period a year earlier, primarily due to a $2.8 million adjustment recorded in the second quarter of fiscal 2008 to reverse stock-based compensation
previously allocated to minority shareholders of our majority-owned subsidiaries. We have determined that the allocation of stock-based compensation
expense to minority shareholders reduces our liability to minority shareholders in a manner that is not consistent with the agreements governing
partnership distributions to those individuals. The $2.8 million adjustment recognized in the second quarter of fiscal 2008 represents the reversal of
accumulated stock-based compensation expense allocated to minority shareholders from the date of acquisition. Stock-based compensation expense
allocated to minority shareholders in prior periods was neither quantitatively nor qualitatively material to our consolidated financial statements in
any of our previously reported fiscal years or periods.
34
Minority interest is not adjusted for taxes due to the underlying
tax status of our consolidated subsidiaries. Atlanta Capital, Fox Asset Management, Parametric Portfolio Associates and Parametric Risk Advisors are
limited liability companies that are treated as partnerships for tax purposes. Funds we consolidate are registered investment companies or private
funds that are treated as pass-through entities for tax purposes.
Equity in Net Income of Affiliates, Net of
Tax
Equity in net income of affiliates, net of tax, at July 31, 2008
reflects our 20 percent minority equity interest in Lloyd George Management and a 7 percent minority equity interest in a private equity partnership.
Equity in net income of affiliates, net of tax, decreased by $0.3 million, or 53 percent, in the third quarter of fiscal 2008 and increased by $0.3
million, or 15 percent, in the first nine months of fiscal 2008 over the same periods a year earlier. The decrease in the third quarter of fiscal 2008
can be primarily attributed to the Company’s sale of certain investments in sponsored mutual funds that were accounted for under the equity method
in prior periods. The increase in the first nine months of fiscal 2008 can be attributed to an increase in net income of both Lloyd George Management
and the private equity partnership.
Changes in Financial Condition and Liquidity and Capital
Resources
The following table summarizes certain key financial data
relating to our liquidity and capital resources on July 31, 2008 and October 31, 2007 and for the nine month periods ended July 31, 2008 and
2007:
Balance Sheet and Cash Flow Data
(in thousands)
|
|
|
|
July 31,
2008
|
|
October 31,
2007
|
|
% Change
|
Balance
sheet data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents |
|
|
|
$ |
329,881 |
|
|
$ |
434,957 |
|
|
|
–24 |
% |
Short-term
investments |
|
|
|
|
50,627 |
|
|
|
50,183 |
|
|
|
1 |
% |
Long-term
investments |
|
|
|
|
106,161 |
|
|
|
86,111 |
|
|
|
23 |
% |
Deferred
sales commissions |
|
|
|
|
80,264 |
|
|
|
99,670 |
|
|
|
–19 |
% |
Deferred
income taxes — long-term |
|
|
|
|
40,369 |
|
|
|
— |
|
|
|
N |
M |
| |
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes payable
— current |
|
|
|
|
— |
|
|
|
21,107 |
|
|
|
N |
M |
Taxes payable
— long term |
|
|
|
|
1,039 |
|
|
|
— |
|
|
|
N |
M |
Deferred
income taxes — current |
|
|
|
|
17,492 |
|
|
|
— |
|
|
|
N |
M |
Deferred
income taxes — long-term |
|
|
|
|
— |
|
|
|
11,740 |
|
|
|
N |
M |
Long-term
debt |
|
|
|
|
500,000 |
|
|
|
500,000 |
|
|
|
0 |
% |
35
|
|
|
|
For the Nine Months Ended
July 31,
|
|
(in thousands)
|
|
|
|
2008
|
|
2007
|
|
% Change
|
Cash flow
data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
cash flows |
|
|
|
$ |
113,742 |
|
|
$ |
162,058 |
|
|
|
–30 |
% |
Investing
cash flows |
|
|
|
|
(28,761 |
) |
|
|
(24,788 |
) |
|
|
16 |
% |
Financing
cash flows |
|
|
|
|
(190,009 |
) |
|
|
(207,982 |
) |
|
|
–9 |
% |
Liquidity and Capital Resources
Our financial condition is highly liquid, with a significant
percentage of our assets, 36 percent and 45 percent at July 31, 2008 and October 31, 2007, respectively, represented by cash and cash equivalents. The
decrease in cash and cash equivalents in the first nine months of fiscal 2008 reflects the Company’s repurchase of approximately 4.0 million
shares of its Non-Voting Common Stock for a total of $173.1 million. Repurchases of Non-Voting Common Stock over the last twelve months reduced diluted
shares outstanding to 125.3 million and 125.1 million for the third quarter and first nine months of fiscal 2008, respectively, compared to 135.8 and
135.9 million for the third quarter and first nine months of fiscal 2007, respectively. Short-term investments include short-term debt and equity
securities held in the portfolio of a consolidated cash management fund. Long-term investments consist principally of investments in certain of our
sponsored mutual funds, seed investments in separately managed accounts, investments in affiliates and investments in CDO entities.
Deferred sales commissions, which represent commissions paid to
broker/dealers in connection with the distribution of the Company’s Class B and Class C fund shares, as well as certain private funds, decreased
by 19 percent in the first nine months of fiscal 2008, primarily reflecting the ongoing decline in Class B share sales and assets. Deferred sales
commissions are recovered over time from distribution plan payments and contingent deferred sales charges received. The Company periodically reviews
the recoverability of deferred sales commission assets as events or changes in circumstances indicate that the carrying amount of deferred sales
commission assets may not be recoverable and adjusts the deferred sales commission assets accordingly.
Long-term deferred income taxes, which in previous periods
related principally to the deferred income tax liability associated with deferred sales commissions offset by the deferred income tax benefit
associated with stock-based compensation, changed from a net long-term deferred tax liability to a net long-term deferred tax benefit as a result of a
change in tax accounting method for certain closed-end fund expenses. The Company filed the change in tax accounting method with the Internal Revenue
Service in the first quarter of fiscal 2008 for expenses associated with the launch of new closed-end funds, which were historically deducted for tax
purposes as incurred and are now capitalized and amortized over a 15 year period. Upon filing the change in tax accounting method, the Company recorded
a deferred tax benefit of $84.9 million, the majority of which will amortize over a 15 year period, and a corresponding deferred tax liability in the
amount of $84.9 million, which will reverse over a four year period ending October 31, 2011. The net current deferred tax liability of $17.5 million as
of July 31, 2008, principally represents the current portion of the remaining $70.0 million deferred tax liability associated with the change in
accounting method.
Current and long-term taxes payable decreased by $20.1 million in
the first nine months of fiscal 2008, primarily reflecting a current tax provision for the period totaling $136.8 million and the recognition of a $5.0
million liability related to uncertain state tax positions in connection with the adoption of Interpretation No. 48, “Accounting for Uncertainty
in Income Taxes — an interpretation of FASB
36
Statement No. 109” (“FIN 48”) on November 1, 2007,
offset by $154.8 million of income taxes paid during the period.
In October 2007, we issued $500.0 million in aggregate principal
amount of 6.5% ten-year senior notes due 2017. We also maintain a revolving credit facility with several banks, which expires on August 13, 2012. The
facility, which was extended in August 2007, provides that we may borrow up to $200.0 million at LIBOR-based rates of interest that vary depending on
the level of usage of the facility and our credit ratings. The agreement contains financial covenants with respect to leverage and interest coverage
and requires us to pay an annual commitment fee on any unused portion. On July 31, 2008, we had no outstanding borrowings under our revolving credit
facility.
An Eaton Vance sponsored closed-end fund is currently offering on
a private basis $100.0 million of Liquidity Protected Preferred Shares (“LPP shares”), which are a new type of variable-rate preferred equity
security that are backed by the unconditional purchase obligation of a designated liquidity provider. In conjunction with the initial offering of LPP
shares, the Company expects to enter into an agreement with the liquidity provider that grants the liquidity provider the right to put LPP shares that
it holds to the Company under certain specified circumstances. In support of the put agreement, the Company expects to enter into an escrow agreement
pursuant to which the Company would deposit $101.0 million invested in short-term U.S. government securities to provide an assured source of funds to
meet the Company’s potential purchase obligations. The escrow agreement would lapse upon termination of the put agreement or the earlier agreement
of the Company and the liquidity provider. The liquidity provider’s put right generally will terminate upon the earlier of (1) the termination of
the LPP share liquidity agreement and (2) the expiration of the 364-day term of the liquidity agreement. Based on current indications, the Company
believes the offering will likely be completed in September or October.
The Company believes that if it were required to purchase LPP
shares from the liquidity provider it would likely only be required to hold such shares for a short period and would earn returns that exceed its cost
of short-term funding. The Company does not believe that there should be an ongoing requirement to offer a put right to liquidity providers once an
active market develops for LPP shares, and does not expect a put agreement to be an ongoing feature of future LPP share arrangements.
Contractual Obligations
The following table details our future contractual
obligations:
|
|
|
|
Payments due
|
|
(in millions)
|
|
|
|
Total
|
|
Less than 1
Year
|
|
1-3
Years
|
|
4-5
Years
|
|
After 5
Years
|
Operating
leases — facilities
and equipment |
|
|
|
$ |
266.7 |
|
|
$ |
11.1 |
|
|
$ |
35.1 |
|
|
$ |
35.5 |
|
|
$ |
185.0 |
|
Senior
notes |
|
|
|
|
500.0 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
500.0 |
|
Interest
payments on senior
notes |
|
|
|
|
312.5 |
|
|
|
32.5 |
|
|
|
97.5 |
|
|
|
65.0 |
|
|
|
117.5 |
|
Investment in
private equity
partnership |
|
|
|
|
4.4 |
|
|
|
— |
|
|
|
4.4 |
|
|
|
— |
|
|
|
— |
|
Unrecognized tax benefits |
|
|
|
|
20.9 |
|
|
|
19.9 |
|
|
|
1.0 |
|
|
|
— |
|
|
|
— |
|
Total |
|
|
|
$ |
1,104.5 |
|
|
$ |
63.5 |
|
|
$ |
138.0 |
|
|
$ |
100.5 |
|
|
$ |
802.5 |
|
37
In July 2006, we committed to invest $15.0 million in a private
equity partnership that invests in companies in the financial services industry. As of July 31, 2008, we had invested $10.6 million of the total $15.0
million of committed capital.
In September 2006, we signed a long-term lease to move the
Company’s corporate headquarters to a new location in Boston. The lease will commence in May 2009. Build out of the space commenced in May
2008.
Excluded from the table above are future payments to be made by
us to purchase the interests retained by minority investors in Atlanta Capital, Fox Asset Management, Parametric Portfolio Associates and Parametric
Risk Advisors. Interests held by minority unit holders are not subject to mandatory redemption. The purchase of minority interests is predicated, for
each subsidiary, on the exercise of a complex series of puts held by minority unit holders and calls held by us. The puts provide the minority
shareholders the right to require us to purchase these retained interests at specific intervals over time, while the calls provide us with the right to
require the minority shareholders to sell their retained equity interests to us at specific intervals over time, as well as upon the occurrence of
certain events such as death or permanent disability. As a result, there is significant uncertainty as to the timing of any minority interest purchase
in the future. The value assigned to the purchase of a minority interest is based, in each case, on a multiple of earnings before interest and taxes of
the subsidiary, which is a measure that is intended to represent fair market value. There is no discrete floor or ceiling on any minority interest
purchase. As a result, there is significant uncertainty as to the amount of any minority interest purchase in the future. Although the timing and
amounts of these purchases cannot be predicted with certainty, we anticipate that the purchase of minority interests in our consolidated subsidiaries
may be a significant use of cash in future years.
In April 2008, the minority investors in Parametric Portfolio
Associates exercised a put option, requiring us to purchase an additional interest in Parametric Portfolio Associates for $21.5 million. The
transaction settled on May 1, 2008 and increased the Company’s capital ownership interest from 84.3 percent to 89.3 percent and its profits
interest from 81.2 percent to 82.3 percent. The additional purchase price was allocated between intangible assets, goodwill and minority
interest.
In May 2008, the minority investors in Atlanta Capital exercised
a put option, requiring the Company to purchase an additional interest in Atlanta Capital for $5.0 million. The transaction settled on June 30, 2008
and increased the Company’s ownership interest from 80.4 percent to 85.5 percent. The additional purchase price was allocated between intangible
assets, goodwill and minority interest.
Operating Cash Flows
Our operating cash flows are calculated by adjusting net income
to reflect changes in assets and liabilities, deferred sales commissions, stock-based compensation, deferred income taxes and investments classified as
trading. Cash provided by operating activities totaled $113.7 million in the first nine months of fiscal 2008 compared to $162.1 million in the first
nine months of fiscal 2007. The decrease in operating cash flows in the first nine months of fiscal 2008 compared to the first nine months of fiscal
2007 of $48.4 million can be primarily attributed to an increase in the purchase of trading securities, a decrease in the proceeds received from the
sale of trading securities and an increase in taxes paid associated with the increase in taxable income for the period.
Investing Cash Flows
Investing activities consist primarily of the purchase of
equipment and leasehold improvements, the purchase of equity interests from minority investors in our majority owned subsidiaries, and the purchase and
sale of investments in our sponsored mutual funds and other sponsored investment products that we do not consolidate. Cash used for investing
activities totaled $28.8 million in the first nine months of fiscal 2008 compared to $24.8 million in the first nine months of fiscal
2007.
38
In the first nine months of fiscal 2008, additions to equipment
and leasehold improvements totaled $7.0 million, compared to $7.2 million in the first nine months of fiscal 2007. Fiscal 2008 and 2007 additions
reflect leasehold improvements made in conjunction with additional office space leased to accommodate an increase in headcount. The purchase of
minority members’ interests of $26.5 million and $9.1 million in the first nine months of fiscal 2008 and 2007, respectively, represents the
purchase of additional ownership interests in Atlanta Capital and Parametric Portfolio Associates as more fully described in “Contractual
Obligations” above. In the first nine months of fiscal 2008, the purchase and sale of available-for-sale investments resulted in a net source of
cash totaling $4.7 million. In the first nine months of fiscal 2007, the net purchases and sales of available-for-sale investments reduced investing
cash flows by $8.5 million.
Financing Cash Flows
Financing cash flows primarily reflect the issuance and repayment
of long-term debt, the issuance and repurchase of our Non-Voting Common Stock, excess tax benefits associated with stock option exercises and the
payment of dividends to our shareholders. Financing cash flows also include proceeds from the issuance of capital stock by consolidated investment
companies and cash paid to meet redemptions by minority shareholders of these funds. Cash used for financing activities totaled $190.0 million and
$208.0 million in the first nine months of fiscal 2008 and 2007, respectively.
In the first nine months of fiscal 2008, we repurchased a total
of 4.0 million shares of our Non-Voting Common Stock for $173.1 million under our authorized repurchase program and issued 1.8 million shares of
Non-Voting Common Stock in connection with the exercise of stock options and other employee stock purchases for total proceeds of $30.4 million. We
have authorization to purchase an additional 3.2 million shares under our current share repurchase authorization and anticipate that future repurchases
will continue to be a significant use of cash. Our dividends per share were $0.45 in the first nine months of fiscal 2008 and $0.36 in the first nine
months of fiscal 2007. Cash paid for dividends totaled $52.5 million and $45.5 million in the first nine months of fiscal 2008 and 2007, respectively.
We currently expect to declare and pay dividends on our Voting and Non-Voting Common Stock on a quarterly basis.
We believe that the remaining proceeds from our $500.0 million
senior note offering in fiscal 2007, cash provided by current operating activities and borrowings available to us under our $200.0 million credit
facility will provide us with sufficient liquidity to meet our short-term and long-term operating needs.
Off-Balance Sheet Arrangements
We do not invest in any off-balance sheet vehicles that provide
financing, liquidity, market or credit risk support or engage in any leasing activities that expose us to any liability that is not reflected in the
Consolidated Financial Statements.
Critical Accounting Policies
We believe the following critical accounting policies, among
others, affect our more significant judgments and estimates used in the preparation of our consolidated financial statements. Actual results may differ
from these estimates.
39
Deferred Sales Commissions
Sales commissions paid to broker/dealers in connection with the
sale of certain classes of shares of open-end funds and private funds are generally capitalized and amortized over the period during which redemptions
by the purchasing shareholder are subject to a contingent deferred sales charge, which does not exceed six years from purchase. Distribution plan
payments received from these funds are recorded in revenue as earned. Contingent deferred sales charges and early
withdrawal charges received from redeeming shareholders of these funds are generally applied to reduce the Company’s unamortized deferred sales
commission assets. Should we lose our ability to recover such sales commissions through distribution plan payments and contingent deferred sales
charges, the value of these assets would immediately decline, as would future cash flows. We periodically review the recoverability of deferred sales
commission assets as events or changes in circumstances indicate that the carrying amount of deferred sales commission assets may not be recoverable
and adjust the deferred sales commission assets accordingly.
Goodwill and Intangible Assets
Goodwill represents the excess of the cost of our investment in
the net assets of acquired companies over the fair value of the underlying identifiable net assets at the dates of acquisition. We attribute all
goodwill associated with the acquisitions of Atlanta Capital, Fox Asset Management and Parametric Portfolio Associates to a single reporting unit.
Goodwill is not amortized but is tested at least annually for impairment by comparing the fair value of the reporting unit to its carrying amount,
including goodwill. We establish fair value for the purpose of impairment testing using discounted cash flow analyses and appropriate market multiples.
In this process, we make assumptions related to projected future earnings and cash flow, market multiples and applicable discount rates. Changes in
these estimates could materially affect our impairment conclusion.
Identifiable intangible assets generally represent the cost of
client relationships and management contracts acquired. In valuing these assets, we make assumptions regarding useful lives and projected growth rates,
and significant judgment is required. We periodically review identifiable intangibles for impairment as events or changes in circumstances indicate
that the carrying amount of such assets may not be recoverable. If the carrying amounts of the assets exceed their respective fair values, additional
impairment tests are performed to measure the amount of the impairment loss, if any.
Accounting for Income Taxes
Our effective tax rate reflects the statutory tax rates of the
many jurisdictions in which we operate. Significant judgment is required in determining our effective tax rate and in evaluating our tax positions. In
the ordinary course of business, many transactions occur for which the ultimate tax outcome is uncertain, and we adjust our income tax provision in the
period in which we determine that actual outcomes will likely be different from our estimates. FIN 48 requires that the tax effects of a position be
recognized only if it is more likely than not to be sustained based solely on its technical merits as of the reporting date. The more-likely-than-not
threshold must continue to be met in each reporting period to support continued recognition of a benefit. The difference between the tax benefit
recognized in the financial statements for a tax position in accordance with FIN 48 and the tax benefit claimed in the income tax return is referred to
as an unrecognized tax benefit. These unrecognized tax benefits, as well as the related interest, are adjusted regularly to reflect changing facts and
circumstances. While we have considered future taxable income and ongoing tax planning in assessing our taxes, changes in tax laws may result in a
change to our tax position and effective tax rate. The Company classifies any interest or penalties incurred as a component of income tax expense.
40
Deferred income taxes reflect the expected future tax consequences of temporary differences between the carrying amounts and tax bases of our assets
and liabilities. Our deferred taxes relate principally to closed-end fund expenses, stock-based compensation expense and capitalized sales commissions
paid to broker/dealers. Expenses associated with the launch of closed-end funds are capitalized and amortized for tax purposes over a period of 15
years. Under IRS regulations, stock-based compensation is deductible for tax purposes at the time the employee recognizes the income (upon vesting of
restricted stock, exercise of non-qualified stock option grants and any
disqualifying dispositions of incentive stock options). Capitalized sales commission payments are deductible for tax purposes at the time of
payment.
Investments in CDO Entities
We act as collateral or investment manager for a number of CDO
entities pursuant to management agreements between us and each CDO entity. At July 31, 2008, combined assets under management in these CDO entities
upon which we earn a management fee were approximately $3.2 billion. We had combined investments of $17.6 million in five of these entities on July 31,
2008.
We account for our investments in CDO entities under Emerging
Issues Task Force (“EITF”) 99-20, “Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets.” The excess of future cash flows over the initial investment at the date of purchase is recognized as interest
income over the life of the investment using the effective yield method. We review cash flow estimates throughout the life of each CDO investment pool
to determine whether an impairment of its investments should be recognized. Cash flow estimates are based on the underlying pool of collateral
securities and take into account the overall credit quality of the issuers of the collateral securities, the forecasted default rate of the collateral
securities and our past experience in managing similar securities. If the updated estimate of future cash flows (taking into account both timing and
amounts) is less than the last revised estimate, an impairment loss is recognized based on the excess of the carrying amount of the investment over its
fair value. Fair value is determined using current information, notably market yields and projected cash flows based on forecasted default and recovery
rates that a market participant would use in determining the current fair value of the interest. Market yields, default rates and recovery rates used
in our estimate of fair value vary based on the nature of the investments in the underlying collateral pools. In periods of rising credit default rates
and lower debt recovery rates, the fair value, and therefore carrying value, of our investments in these CDO entities may be adversely affected. Our
risk of loss in the CDO entities is limited to the $17.6 million carrying value of the investments on our Consolidated Balance Sheet at July 31,
2008.
A CDO entity issues non-recourse debt and equity securities, which are sold in a private offering to institutional and high-net-worth
investors. The CDO debt securities issued by the CDO entity are secured by collateral in the form of floating-rate bank loans, high-yield bonds and/or
other types of approved securities that the CDO entity purchases. We manage the collateral securities for a fee and, in most cases, are a minority
investor in the equity interests of the CDO entity. An equity interest in a CDO entity is subordinated to all other interests in the CDO entity and
entitles the investor to receive the residual cash flows, if any, from the CDO entity. As a result, our equity investment in a CDO entity is highly
sensitive to changes in the credit quality of the issuers of the collateral securities, including changes in the forecasted default rates and any
declines in anticipated recovery rates. Our financial exposure to the CDO entities we manage is limited to our interests in the CDO entities as
reflected in our Consolidated Balance Sheets.
Stock-Based Compensation
Stock-based compensation expense reflects the fair value of
stock-based awards measured at grant date, is recognized over the relevant service period, and is adjusted each period for anticipated forfeitures. The
fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model. The Black-Scholes option valuation
model incorporates assumptions as to dividend yield, volatility, an
41
appropriate risk-free interest rate and the expected life of the option. Many of
these assumptions require management’s judgment. Management must also apply judgment in developing an expectation of awards that may be forfeited.
If actual experience differs significantly from these estimates, stock-based compensation expense and our results of operations could be materially
affected.
Accounting Developments
In June 2008, the Financial Accounting Standards Board
(“FASB”) issued FSP EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating
Securities.” FSP EITF 03-6-1 addresses whether instruments granted in share-based payment transactions are participating securities prior to
vesting and, therefore, need to be included in the earnings allocation in computing earnings per share under the two-class method described in SFAS No.
128, “Earnings per Share.” It affects entities that accrue or pay nonforfeitable cash dividends on share-based payment awards during the
awards’ service period. FSP EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008, and interim periods within those fiscal
years and will require a retrospective adjustment to all prior period earnings per share. FSP EITF 03-6-1 is effective for the Company’s fiscal
year that begins on November 1, 2009. We are currently evaluating the potential impact, if any, on our consolidated financial
statements.
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of
Generally Accepted Accounting Principles.” SFAS No. 162 is intended to improve financial reporting by identifying a consistent framework, or
hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally
accepted accounting principles (“GAAP”) for nongovernmental entities. SFAS No. 162 is effective 60 days following the SEC’s approval of
the Public Company Accounting Oversight Board Auditing amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally
Accepted Accounting Principles. We do not anticipate that the provisions of SFAS No. 162 will have an impact on our consolidated results of operations
or our consolidated financial position.
In April 2008, the FASB issued FSP SFAS No. 142-3,
“Determination of the Useful Life of Intangible Assets.” FSP SFAS 142-3 amends the factors that should be considered in developing renewal or
extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible
Assets.” FSP SFAS No. 142-3 is effective for fiscal years beginning after December 15, 2008. FSP SFAS No. 142-3 is effective for the
Company’s fiscal year that begins on November 1, 2009 and interim periods within those fiscal years. We do not anticipate that the provisions of
FSP SFAS No. 142-3 will have an impact on our consolidated results of operations or consolidated financial position.
In March 2008, the FASB issued SFAS No. 161, “Disclosures
about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133.” SFAS No. 161 requires enhanced disclosures
about an entity’s derivative and hedging activities to improve the transparency of financial reporting. SFAS No. 161 is effective for financial
statements issued for periods beginning after November 15, 2008. SFAS No. 161 is effective for the Company’s fiscal quarter that begins on
February 1, 2009. We are currently evaluating the potential impact, if any, on the Company’s disclosures in our consolidated financial
statements.
In December 2007, the FASB issued SFAS No. 160,
“Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51.” SFAS No. 160 amends ARB No. 51 to establish
accounting and reporting standards for noncontrolling interests in subsidiaries and for the deconsolidation of subsidiaries. It clarifies that a
noncontrolling interest in a subsidiary is an ownership interest that should be reported as
42
equity in the consolidated financial statements. The
provisions of SFAS No. 160 are effective for fiscal years beginning on or after December 15, 2008, and interim periods within those fiscal years on a
prospective basis except for the presentation and disclosure requirements which apply retrospectively. Earlier application of SFAS No. 160 is
prohibited. SFAS No. 160 is effective for the Company’s fiscal year that begins on November 1, 2009. We are currently evaluating the potential
impact, if any, on our consolidated financial statements.
In December 2007, the FASB amended SFAS No. 141 (revised 2007),
“Business Combinations.” SFAS No. 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. SFAS No. 141R applies
prospectively to business combinations for which the acquisition date is on or after the beginning of the first reporting period for fiscal years
beginning on or after December 15, 2008. Earlier application of SFAS No. 141R is prohibited. SFAS No. 141R is effective for the Company’s fiscal
year that begins on November 1, 2009 and will be applied to future acquisitions.
In June 2007, the FASB ratified the consensus reached by the EITF
in EITF Issue No. 06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards.” Under the provisions of EITF 06-11,
a realized income tax benefit from dividends or dividend equivalents that are charged to retained earnings and are paid to employees for equity
classified non-vested equity shares, non-vested equity share units, and outstanding equity share options should be recognized as an increase to
additional paid-in capital. The amount recognized in additional paid-in capital for the realized income tax benefit from dividends on those awards
should be included in the pool of excess tax benefits available to absorb tax deficiencies on share-based payment awards. EITF 06-11 should be applied
prospectively to the income tax benefits that result from dividends on equity-classified employee share-based payment awards that are declared in
fiscal years beginning after December 15, 2007, and interim periods within those fiscal years. EITF 06-11 is effective for the Company’s fiscal
year that begins on November 1, 2008. We are currently evaluating the potential impact of EITF 06-11, if any, on our consolidated financial
statements.
In February 2007, the FASB issued SFAS No. 159, “The Fair
Value Option for Financial Assets and Financial Liabilities.” SFAS No. 159 permits entities to choose to measure many financial instruments and
certain other items at fair value. The objective of the statement is to improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge
accounting provisions. The provisions of SFAS No. 159 are effective for fiscal years beginning after November 15, 2007. SFAS No. 159 is effective for
the Company’s fiscal year that begins on November 1, 2008. We are currently evaluating this standard and its impact, if any, on our consolidated
financial statements.
In September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and expands disclosure requirements about fair
value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements but does not in itself
require any new fair value measurements. The provisions of SFAS No. 157 are effective for fiscal years beginning after November 15, 2007 and interim
periods within those fiscal years. On February 6, 2008 the FASB agreed to partially defer the effective date of SFAS No. 157 for one year for all
nonfinancial assets and nonfinancial liabilities except those items recognized or disclosed at fair value on an annual or more frequently occurring
basis, until November 15, 2008 and remove certain leasing transactions from the scope of SFAS No. 157. SFAS No. 157 is effective for the Company’s
fiscal year that begins on November 1, 2008. We are currently evaluating this standard and its impact, if any, on our consolidated financial
statements.
43
Item 3. Quantitative and Qualitative Disclosures About Market
Risk
There have been no material changes in our Quantitative and
Qualitative Disclosures About Market Risk from those previously reported in our Form 10-K for the year ended October 31, 2007.
Item 4. Controls and Procedures
We evaluated the effectiveness of our disclosure controls and
procedures as of July 31, 2008. Disclosure controls and procedures as defined under the Securities Exchange
Act Rule 13a-15(e), are designed to ensure that the information we are required to disclose in the reports that we file or submit under the Exchange
Act is recorded, processed, summarized and reported within the time period specified in the SEC’s rule and forms. Disclosure controls and
procedures include, without limitation, controls and procedures accumulated and communicated to our management, including our Chief Executive Officer
(“CEO”) and Chief Financial Officer (“CFO”), to allow timely decisions regarding required disclosure. Our CEO and CFO participated
in this evaluation and concluded that, as of the date of their evaluation, our disclosure controls and procedures were effective.
In the ordinary course of business, the Company may routinely
modify, upgrade and enhance its internal controls and procedures for financial reporting. However, there have been no changes in our internal control
over financial reporting as defined by Rule 13a-15(f) under the Exchange Act that occurred during our most recently completed fiscal quarter that have
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
44
Part II — Other Information
Item 1. Legal Proceedings
There have been no material developments in litigation previously
reported in our SEC filings.
Item 1A. Risk Factors
We are subject to substantial competition in all aspects of
our investment management business and there are few barriers to entry. Our funds and separate accounts compete against an increasing number of
investment products and services sold to the public by investment management companies, investment dealers, banks, insurance companies and others. Many
institutions we compete with have greater financial resources than us. We compete with other providers of investment products on the basis of the
products offered, the investment performance of such products, quality of service, fees charged, the level and type of financial intermediary
compensation, the manner in which such products are marketed and distributed, reputation and the services provided to investors. In addition, our
ability to market investment products is highly dependent on access to the various distribution systems of national and regional securities dealer
firms, which generally offer competing affiliated and externally managed investment products that could limit the distribution of our investment
products. There can be no assurance that we will be able to retain access to these channels. The inability to have such access could have a material
adverse effect on our business. To the extent that existing or potential customers, including securities broker/dealers, decide to invest in or broaden
distribution relationships with our competitors, the sales of our products as well as our market share, revenue and net income could
decline.
We derive almost all of our revenue from investment
advisory and administration fees, distribution income and service fees received from the Eaton Vance funds and separate accounts. As a result,
we are dependent upon management contracts, administration contracts, distribution contracts, underwriting contracts or service contracts under which
these fees and income are paid. Generally, these contracts are terminable upon 30 to 60 days’ notice without penalty. If any of these contracts
are terminated, not renewed, or amended to reduce fees, our financial results could be adversely affected.
Our assets under management, which impact revenue, are
subject to significant fluctuations. Our major sources of revenue (i.e., investment advisory, administration, distribution, and service fees)
are calculated as percentages of assets under management. Any decrease in the level of our assets under management could negatively impact our revenue
and net income. For example, a decline in securities prices or in the sales of our investment products or an increase in fund redemptions or client
withdrawals generally would reduce fee income. Financial market declines or adverse changes in interest rates would generally negatively impact the
level of our assets under management and consequently our revenue and net income. To the extent that we receive income from assets under management
that are derived from financial leverage, any reduction in leverage used could adversely impact the level of assets under management. For example,
leverage could be reduced due to an adverse change in interest rates, a decrease in the availability of credit on favorable terms or a determination by
us to reduce or eliminate leverage on certain products when we determine that the use of leverage is no longer in our clients’ best interests. A
recession or other economic or political events could also adversely impact our revenue if it led to a decreased demand for products, a higher
redemption rate, or a decline in securities prices. Any decrease in the level of assets under management resulting from price declines, interest rate
volatility, reduction in leverage or other factors could negatively impact our revenue and net income.
Poor investment performance of our products could affect
our sales or reduce the amount of assets under management, potentially negatively impacting revenue and net income. Investment performance,
along with achieving and maintaining superior distribution and client service, is critical to our success.
45
While strong investment performance could stimulate sales of our
investment products, poor investment performance as compared to third-party benchmarks or competitive products could lead to a decrease in sales and
stimulate higher redemptions, thereby lowering the amount of assets under management and reducing the investment advisory fees we earn. Past or present
performance in the investment products we manage is not indicative of future performance.
Our success depends on key personnel and our financial
performance could be negatively affected by the loss of their services. Our success depends upon our ability to attract, retain and motivate
qualified portfolio managers, analysts, investment counselors, sales and management personnel and other key professionals including our executive
officers. Investment professionals are in high demand, and we face strong competition for qualified personnel. Our key employees do not have employment
contracts and may voluntarily terminate their employment at any time. Certain senior executives and directors are subject to our mandatory retirement
policy. The loss of the services of key personnel or our failure to attract replacement or additional qualified personnel could negatively affect our
financial performance. An increase in compensation made to attract or retain personnel could result in a decrease in net income.
Our expenses are subject to fluctuations that could
materially affect our operating results. Our results of operations are dependent on the level of expenses, which can vary significantly from
period to period. Our expenses may fluctuate as a result of variations in the level of total compensation expense, expenses incurred to support
distribution of our investment products, expenses incurred to enhance our infrastructure (including technology and compliance) and impairments of
intangible assets or goodwill.
Our reputation could be damaged. We have spent over
80 years building a reputation based on strong investment performance, a high level of integrity and superior client service. Our reputation is
extremely important to our success. Any damage to our reputation could result in client withdrawals from funds or separate accounts that are advised by
us and ultimately impede our ability to attract and retain key personnel. The loss of either client relationships or key personnel could reduce the
amount of assets under management and cause us to suffer a loss in revenue or net income.
We are subject to federal securities laws, state laws
regarding securities fraud, other federal and state laws and rules, and regulations of certain regulatory and self-regulatory organizations, including,
among others, the SEC, FINRA, the FSA and the New York Stock Exchange. In addition, financial reporting requirements are comprehensive and
complex. While we have focused significant attention and resources on the development and implementation of compliance policies, procedures and
practices, non-compliance with applicable laws, rules or regulations, either in the United States or abroad, or our inability to adapt to a complex and
ever-changing regulatory environment could result in sanctions against us, which could adversely affect our reputation, prospects, revenue, and
earnings.
We could be impacted by changes in tax policy due to our
tax-managed focus. Changes in U.S. tax policy may affect us to a greater degree than many of our competitors because we emphasize managing
funds and separate accounts with an after-tax return objective. We believe an increase in overall tax rates could have a positive impact on our
municipal income and tax-managed equity businesses that seek to minimize realized capital gains and/or maximize realized capital losses. An increase in
the tax rate on qualified dividends could have a negative impact on our tax-advantaged equity income business. Changes in tax policy could also affect
our ability to introduce new privately offered equity funds.
46
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds
The table below sets forth information regarding purchases of our
Non-Voting Common Stock on a monthly basis during the third quarter of fiscal 2008:
Purchases of Equity Securities by the Issue and Affiliated
Purchasers
Period
|
|
|
|
(a) Total
Number of
Shares
Purchased
|
|
(b) Average
price paid
per share
|
|
(c) Total
Number of
Shares
Purchased of
Publicly
Announced
Plans or
Programs(1)
|
|
(d) Maximum
Number of
Shares that
May Yet
Be
Purchased
under the
Plans or
Programs
|
May 1, 2008
through
May 31, 2008 |
|
|
|
|
2,791 |
|
|
$ |
39.50 |
|
|
|
2,791 |
|
|
|
3,511,573 |
|
June 1, 2008
through
June 30, 2008 |
|
|
|
|
15,862 |
|
|
$ |
40.09 |
|
|
|
15,862 |
|
|
|
3,495,711 |
|
July 1, 2008 through
July 31, 2008 |
|
|
|
|
316,827 |
|
|
$ |
35.57 |
|
|
|
316,827 |
|
|
|
3,178,884 |
|
Total |
|
|
|
|
335,480 |
|
|
$ |
35.82 |
|
|
|
335,480 |
|
|
|
3,178,884 |
|
(1) |
|
We announced a share repurchase program on October 24, 2007.
The Board authorized management to repurchase up to 8,000,000 shares of our Non-Voting Common Stock in the open market and in private transactions in
accordance with applicable securities laws. This repurchase plan is not subject to an expiration date. |
Item 4. Submission of Matters to a Vote of Security
Holders
None
Item 6. Exhibits
(a) Exhibits
| Exhibit No. |
|
|
|
Description |
| 31.1 |
|
|
|
Certification of Chief Executive Officer |
| 31.2 |
|
|
|
Certification of Chief Financial Officer |
| 32.1 |
|
|
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 |
| 32.2 |
|
|
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 |
47
Signatures
Pursuant to the requirements of the Securities and Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
|
|
|
|
EATON
VANCE CORP.
(Registrant) |
|
|
|
|
|
|
|
|
|
|
DATE: September
4, 2008 |
|
|
|
/s/Robert J. Whelan |
|
|
|
|
(Signature)
Robert J. Whelan
Chief Financial Officer |
|
|
|
|
|
|
|
|
|
|
DATE: September
4, 2008 |
|
|
|
/s/Laurie G. Hylton |
|
|
|
|
(Signature)
Laurie G. Hylton
Chief Accounting Officer |
48