Item 2. Managements 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
The Companys principal business is managing investment
funds and separate accounts for retail investors and providing investment management and counseling services to high-net-worth individuals and
institutions. The Companys long-term strategy is to develop 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, the Company has developed a
broadly diversified product line and a powerful marketing, distribution and customer service capability.
The Company is a market leader in a number of investment areas,
including tax-managed equity, value equity, equity income, floating-rate bank loan, municipal bond, investment grade and high-yield bond investing. The
diversified offerings of Eaton Vance and its affiliates offer 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.
The Companys principal marketing strategy is to distribute
its retail products (including funds and retail managed accounts) primarily through financial intermediaries in the advice channel. The Company has 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. The Company supports these distribution partners with a team of more than 150 regional and
Boston-based sales professionals serving the needs of the Companys partners and clients across the United States, Latin America and Europe.
Specialized sales and marketing teams provide the increasingly sophisticated information required for distributing the Companys privately placed
funds, retail managed accounts, retirement products and charitable giving vehicles.
The Company is also committed to serving institutional and
high-net-worth clients who access investment advice outside of traditional retail broker/dealer channels. The Company and its majority-owned
subsidiaries, including Atlanta Capital Management Company, LLC (Atlanta Capital), Fox Asset Management LLC (Fox Asset
Management) and Parametric Portfolio Associates LLC (Parametric Portfolio Associates), have a broad range of clients in the
institutional and high-net-worth marketplace, including corporations, endowments, foundations, family offices and public and private employee
retirement plans. Specialized sales teams at each of the Companys affiliates focus on developing relationships in this market and deal directly
with these clients, often on the basis of independent referrals.
19
The Companys 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.
Fees paid to the Company are based primarily on the value of the investment portfolios managed by the Company and fluctuate with changes in the total
value of the assets under management. Such fees are recognized over the period that the Company manages these assets. The Companys major expenses
are employee compensation, amortization of deferred sales commissions and distribution-related expenses.
The discussion and analysis of the Companys financial
condition and results of operations are based upon the Companys consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company 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, the Company evaluates its estimates, including those related to deferred sales commissions, goodwill and intangible
assets, income taxes, investments, stock-based compensation and litigation. The Company bases its estimates on historical experience and on various
other assumptions that it believes 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 $152.3 billion on July 31, 2007 were
26 percent higher than the $120.4 billion reported a year earlier. Long-term fund net inflows contributed $20.6 billion to growth in assets under
management over the last twelve months, including $10.6 billion of open-end and private fund net inflows and $10.0 billion of closed-end fund net
inflows. Separate account net inflows totaled $2.2 billion, reflecting $3.6 billion of retail managed account net inflows offset by $1.4 billion of
institutional and high-net-worth net outflows. Market price appreciation, reflecting favorable equity markets, contributed $9.9 billion and a decrease
in cash management assets reduced assets under management by $0.9 billion.
Ending Assets Under Management by Investment
Objective(1)
|
|
|
|
July 31,
|
|
(in billions)
|
|
|
|
2007
|
|
2006
|
|
% Change
|
Equity
assets |
|
|
|
$ |
98.8 |
|
|
$ |
71.5 |
|
|
|
38 |
% |
Fixed income
assets |
|
|
|
|
31.5 |
|
|
|
27.3 |
|
|
|
15 |
% |
Floating-rate bank loan assets |
|
|
|
|
22.0 |
|
|
|
21.6 |
|
|
|
2 |
% |
Total |
|
|
|
$ |
152.3 |
|
|
$ |
120.4 |
|
|
|
26 |
% |
(1) Includes funds and separate
accounts.
Equity assets represented 65 percent of total assets under
management on July 31, 2007, up from 59 percent on July 31, 2006. Assets in equity funds managed for after-tax returns totaled $52.2 billion and $37.1
billion on July 31, 2007 and 2006, respectively. Fixed income assets, including cash management funds, represented 21 percent of total assets under
management on July 31, 2007, compared to 23 percent on July 31, 2006. Fixed income assets included $17.6 billion and $13.4 billion of tax-exempt
municipal bond funds and $1.6 billion and $2.5 billion of cash management fund assets on July 31, 2007 and 2006, respectively. Floating-rate bank loan
assets represented 14 percent of total assets under management on July 31, 2007, compared to 18 percent on July 31, 2006.
20
Long-Term Fund and Separate Account Net
Flows
|
|
|
|
For the Three Months Ended July 31,
|
|
|
|
For the Nine Months Ended July 31,
|
|
(in billions)
|
|
|
|
2007
|
|
2006
|
|
% Change
|
|
2007
|
|
2006
|
|
% Change
|
Long-term funds: |
Closed-end
funds |
|
|
|
$ |
1.3 |
|
|
$ |
0.2 |
|
|
|
550 |
% |
|
$ |
9.9 |
|
|
$ |
0.3 |
|
|
|
NM |
|
Open-end
funds |
|
|
|
|
2.1 |
|
|
|
1.5 |
|
|
|
40 |
% |
|
|
7.2 |
|
|
|
3.8 |
|
|
|
89 |
% |
Private funds |
|
|
|
|
(0.2 |
) |
|
|
1.5 |
|
|
|
NM |
(2) |
|
|
1.2 |
|
|
|
1.8 |
|
|
|
33 |
% |
Total long-term fund net inflows |
|
|
|
|
3.2 |
|
|
|
3.2 |
|
|
|
|
|
|
|
18.3 |
|
|
|
5.9 |
|
|
|
210 |
% |
Institutional/HNW(1) accounts |
|
|
|
|
(0.2 |
) |
|
|
(0.5 |
) |
|
|
60 |
% |
|
|
(0.6 |
) |
|
|
(1.3 |
) |
|
|
54 |
% |
Retail managed accounts |
|
|
|
|
1.2 |
|
|
|
|
|
|
|
NM |
|
|
|
3.0 |
|
|
|
0.7 |
|
|
|
329 |
% |
Total separate account net inflows |
|
|
|
|
1.0 |
|
|
|
(0.5 |
) |
|
|
NM |
|
|
|
2.4 |
|
|
|
(0.6 |
) |
|
|
NM |
|
Total net inflows |
|
|
|
$ |
4.2 |
|
|
$ |
2.7 |
|
|
|
56 |
% |
|
$ |
20.7 |
|
|
$ |
5.3 |
|
|
|
291 |
% |
(1) |
|
High-net-worth (HNW) |
(2) |
|
Not meaningful (NM) |
Long-term fund net inflows totaled $3.2 billion in both the third
quarter of fiscal 2007 and in the third quarter of fiscal 2006. Closed-end fund offerings contributed significantly to net inflows in the third quarter
of fiscal 2007, with $1.3 billion in closed-end fund assets added. Open-end fund net inflows of $2.1 billion and $1.5 billion in the third quarters of
fiscal 2007 and 2006, respectively, reflect gross inflows of $6.0 billion and $3.9 billion, respectively, an increase of 54 percent year-over-year.
Open-end fund redemptions totaled $3.9 billion and $2.4 billion for the third quarter of fiscal 2007 and 2006, respectively, an increase of 63 percent
year over year. Private funds, which include privately offered equity and bank loan funds as well as collateralized debt obligation entities, had net
outflows of $0.2 billion in the third quarter of fiscal 2007 compared to net inflows of $1.5 billion in the third quarter of fiscal
2006.
Separate accounts contributed net inflows of $1.0 billion in the
third quarter of fiscal 2007, compared to net outflows of $0.5 billion in the third quarter of fiscal 2006. Retail managed account net inflows totaled
$1.2 billion in the third quarter of fiscal 2007, compared to $36 million in the third quarter of fiscal 2006. Retail managed account net inflows in
fiscal 2007 reflect strong net sales of Parametric Portfolio Associates tax efficient overlay and core equity products and Eaton Vance
Managements (EVMs) large cap value product. Institutional and high-net-worth separate account net outflows totaled $0.2 billion
in the third quarter of fiscal 2007 compared to net outflows of $0.5 billion in the third quarter of fiscal 2006.
The following table summarizes the asset flows by investment
objective for the three and nine month periods ended July 31, 2007 and 2006:
21
Asset Flows
|
|
|
|
For the Three Months Ended July 31,
|
|
|
|
For the Nine Months Ended July 31,
|
|
(in billions)
|
|
|
|
2007
|
|
2006
|
|
% Change
|
|
2007
|
|
2006
|
|
% Change
|
Equity fund
assets beginning |
|
|
|
$ |
68.2 |
|
|
$ |
50.1 |
|
|
|
36 |
% |
|
$ |
53.2 |
|
|
$ |
45.1 |
|
|
|
18 |
% |
Sales/inflows |
|
|
|
|
4.2 |
|
|
|
2.1 |
|
|
|
100 |
% |
|
|
18.7 |
|
|
|
5.8 |
|
|
|
222 |
% |
Redemptions/outflows |
|
|
|
|
(1.7 |
) |
|
|
(1.4 |
) |
|
|
21 |
% |
|
|
(5.1 |
) |
|
|
(4.1 |
) |
|
|
24 |
% |
Exchanges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market value change |
|
|
|
|
(1.0 |
) |
|
|
(1.2 |
) |
|
|
17 |
% |
|
|
2.9 |
|
|
|
2.8 |
|
|
|
4 |
% |
Equity fund assets ending |
|
|
|
|
69.7 |
|
|
|
49.6 |
|
|
|
41 |
% |
|
|
69.7 |
|
|
|
49.6 |
|
|
|
41 |
% |
|
Fixed income
fund assets beginning |
|
|
|
|
24.5 |
|
|
|
19.1 |
|
|
|
28 |
% |
|
|
21.5 |
|
|
|
18.2 |
|
|
|
18 |
% |
Sales/inflows |
|
|
|
|
1.9 |
|
|
|
1.3 |
|
|
|
46 |
% |
|
|
6.1 |
|
|
|
3.4 |
|
|
|
79 |
% |
Redemptions/outflows |
|
|
|
|
(1.1 |
) |
|
|
(0.5 |
) |
|
|
120 |
% |
|
|
(2.4 |
) |
|
|
(1.6 |
) |
|
|
50 |
% |
Exchanges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.1 |
) |
|
|
|
|
|
|
NM |
|
Market value change |
|
|
|
|
(0.9 |
) |
|
|
|
|
|
|
NM |
|
|
|
(0.7 |
) |
|
|
(0.1 |
) |
|
|
NM |
|
Fixed income fund assets ending |
|
|
|
|
24.4 |
|
|
|
19.9 |
|
|
|
23 |
% |
|
|
24.4 |
|
|
|
19.9 |
|
|
|
23 |
% |
|
Floating-rate
bank loan fund assets beginning |
|
|
|
|
21.4 |
|
|
|
17.8 |
|
|
|
20 |
% |
|
|
20.0 |
|
|
|
16.8 |
|
|
|
19 |
% |
Sales/inflows |
|
|
|
|
2.0 |
|
|
|
2.5 |
|
|
|
20 |
% |
|
|
5.6 |
|
|
|
5.5 |
|
|
|
2 |
% |
Redemptions/outflows |
|
|
|
|
(2.1 |
) |
|
|
(0.8 |
) |
|
|
163 |
% |
|
|
(4.6 |
) |
|
|
(3.1 |
) |
|
|
48 |
% |
Exchanges |
|
|
|
|
(0.1 |
) |
|
|
|
|
|
|
NM |
|
|
|
(0.1 |
) |
|
|
|
|
|
|
NM |
|
Market value change |
|
|
|
|
(0.2 |
) |
|
|
|
|
|
|
NM |
|
|
|
0.1 |
|
|
|
0.3 |
|
|
|
67 |
% |
Floating-rate bank loan fund assets ending |
|
|
|
|
21.0 |
|
|
|
19.5 |
|
|
|
8 |
% |
|
|
21.0 |
|
|
|
19.5 |
|
|
|
8 |
% |
|
Total long-term fund assets beginning |
|
|
|
|
114.1 |
|
|
|
87.0 |
|
|
|
31 |
% |
|
|
94.7 |
|
|
|
80.1 |
|
|
|
18 |
% |
Sales/inflows |
|
|
|
|
8.1 |
|
|
|
5.9 |
|
|
|
37 |
% |
|
|
30.4 |
|
|
|
14.7 |
|
|
|
107 |
% |
Redemptions/outflows |
|
|
|
|
(4.9 |
) |
|
|
(2.7 |
) |
|
|
81 |
% |
|
|
(12.1 |
) |
|
|
(8.8 |
) |
|
|
38 |
% |
Exchanges |
|
|
|
|
(0.1 |
) |
|
|
|
|
|
|
NM |
|
|
|
(0.2 |
) |
|
|
|
|
|
|
NM |
|
Market value change |
|
|
|
|
(2.1 |
) |
|
|
(1.2 |
) |
|
|
75 |
% |
|
|
2.3 |
|
|
|
3.0 |
|
|
|
23 |
% |
Total long-term fund assets ending |
|
|
|
|
115.1 |
|
|
|
89.0 |
|
|
|
29 |
% |
|
|
115.1 |
|
|
|
89.0 |
|
|
|
29 |
% |
|
Separate
accounts beginning |
|
|
|
|
34.1 |
|
|
|
30.2 |
|
|
|
13 |
% |
|
|
30.5 |
|
|
|
27.6 |
|
|
|
11 |
% |
Inflows
HNW and institutional |
|
|
|
|
1.4 |
|
|
|
0.4 |
|
|
|
250 |
% |
|
|
3.1 |
|
|
|
1.7 |
|
|
|
82 |
% |
Outflows
HNW and institutional |
|
|
|
|
(1.6 |
) |
|
|
(0.9 |
) |
|
|
78 |
% |
|
|
(3.7 |
) |
|
|
(3.0 |
) |
|
|
23 |
% |
Inflows
retail managed accounts |
|
|
|
|
1.9 |
|
|
|
0.8 |
|
|
|
138 |
% |
|
|
4.6 |
|
|
|
2.5 |
|
|
|
84 |
% |
Outflows
retail managed accounts |
|
|
|
|
(0.7 |
) |
|
|
(0.8 |
) |
|
|
13 |
% |
|
|
(1.6 |
) |
|
|
(1.8 |
) |
|
|
11 |
% |
Market value
change |
|
|
|
|
0.2 |
|
|
|
(0.8 |
) |
|
|
NM |
|
|
|
2.4 |
|
|
|
1.5 |
|
|
|
60 |
% |
Assets acquired |
|
|
|
|
0.3 |
|
|
|
|
|
|
|
NM |
|
|
|
0.3 |
|
|
|
0.4 |
|
|
|
25 |
% |
Separate accounts ending |
|
|
|
|
35.6 |
|
|
|
28.9 |
|
|
|
23 |
% |
|
|
35.6 |
|
|
|
28.9 |
|
|
|
23 |
% |
|
Cash management fund assets ending |
|
|
|
|
1.6 |
|
|
|
2.5 |
|
|
|
36 |
% |
|
|
1.6 |
|
|
|
2.5 |
|
|
|
36 |
% |
Assets under management ending |
|
|
|
$ |
152.3 |
|
|
$ |
120.4 |
|
|
|
26 |
% |
|
$ |
152.3 |
|
|
$ |
120.4 |
|
|
|
26 |
% |
22
Ending Assets Under Management by Asset
Class
|
|
|
|
July 31,
|
|
(in billions)
|
|
|
|
2007
|
|
2006
|
|
% Change
|
Open-end
funds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
(1) |
|
|
|
$ |
33.6 |
|
|
$ |
24.4 |
|
|
|
38 |
% |
Class B
(1) |
|
|
|
|
6.1 |
|
|
|
6.9 |
|
|
|
12 |
% |
Class C
(1) |
|
|
|
|
9.7 |
|
|
|
7.9 |
|
|
|
23 |
% |
Class I
(1) |
|
|
|
|
3.3 |
|
|
|
3.0 |
|
|
|
10 |
% |
Other
(2) |
|
|
|
|
2.9 |
|
|
|
2.6 |
|
|
|
12 |
% |
Total
open-end funds |
|
|
|
|
55.6 |
|
|
|
44.8 |
|
|
|
24 |
% |
Private funds
(3) |
|
|
|
|
28.7 |
|
|
|
24.9 |
|
|
|
15 |
% |
Closed-end
funds |
|
|
|
|
32.4 |
|
|
|
21.8 |
|
|
|
49 |
% |
Total fund assets |
|
|
|
|
116.7 |
|
|
|
91.5 |
|
|
|
28 |
% |
HNW and
institutional account assets |
|
|
|
|
22.4 |
|
|
|
20.6 |
|
|
|
9 |
% |
Retail
managed account assets |
|
|
|
|
13.2 |
|
|
|
8.3 |
|
|
|
59 |
% |
Total
separate account assets |
|
|
|
|
35.6 |
|
|
|
28.9 |
|
|
|
23 |
% |
Total |
|
|
|
$ |
152.3 |
|
|
$ |
120.4 |
|
|
|
26 |
% |
(1) |
|
Includes bank loan interval funds with similar pricing
structures. |
(2) |
|
Includes other classes of Eaton Vance open-end funds and
non-Eaton Vance funds subadvised by Atlanta Capital, Fox Asset Management and Parametric Portfolio Associates. |
(3) |
|
Includes privately offered equity and bank loan funds and
CDO entities. |
The Company currently sells its sponsored 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). The Company waives the sales load on Class A shares under certain
circumstances. In such cases, the shares are sold at net asset value.
Fund assets represented 77 percent of total assets under
management on July 31, 2007, compared to 76 percent on July 31, 2006. Class A share assets increased to 22 percent of total assets under management on
July 31, 2007 from 20 percent on July 31, 2006, while Class B share assets dropped to 4 percent on July 31, 2007 from 6 percent on July 31, 2006. The
shift from Class B share assets to Class A share assets reflects the overall increasing popularity of Class A shares in the industry and the declining
popularity of Class B shares in broker/dealer distribution systems. Class C share assets represented 6 percent and 7 percent of total assets under
management on July 31, 2007 and 2006, respectively, while Class I share assets represented 2 percent of total assets under management on both July 31,
2007 and 2006. Private funds represented 19 percent and 21 percent of the Companys total assets under management on July 31, 2007 and 2006,
respectively. Closed-end funds increased to 21 percent of the Companys total assets under management on July 31, 2007, up from 18 percent on July
31, 2006.
Separate account assets, including high-net-worth, institutional
and retail managed account assets, totaled $35.6 billion on July 31, 2007, up from $28.9 billion on July 31, 2006. High-net-worth and institutional
account assets increased by 9 percent year over year, while retail managed account assets increased by 59 percent. Retail managed account assets were
positively impacted over the last twelve months by strong net sales of Parametric Portfolio Associates tax-efficient overlay and core equity
products and EVMs large-cap value product.
23
The average assets under management presented in the following
table represent a monthly average by asset class. This table is intended to provide useful information in the analysis of the Companys revenue
and asset-based distribution expenses. With the exception of the Companys separate account investment advisory fees, which are generally
calculated as a percentage of either beginning, average or ending quarterly assets, the Companys investment advisory, administration,
distribution and service fees are calculated as a percentage of average daily assets.
Average Assets Under Management by Asset Class
(1)
|
|
|
|
For the Three Months Ended July 31,
|
|
|
|
For the Nine Months Ended July 31,
|
|
(in billions)
|
|
|
|
2007
|
|
2006
|
|
% Change
|
|
2007
|
|
2006
|
|
% Change
|
Open-end
funds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
(2) |
|
|
|
$ |
33.6 |
|
|
$ |
23.6 |
|
|
|
42 |
% |
|
$ |
31.0 |
|
|
$ |
21.6 |
|
|
|
44 |
% |
Class B
(2) |
|
|
|
|
6.3 |
|
|
|
7.1 |
|
|
|
11 |
% |
|
|
6.4 |
|
|
|
7.4 |
|
|
|
14 |
% |
Class C
(2) |
|
|
|
|
9.8 |
|
|
|
7.8 |
|
|
|
26 |
% |
|
|
9.1 |
|
|
|
7.7 |
|
|
|
18 |
% |
Class I
(2) |
|
|
|
|
3.2 |
|
|
|
2.6 |
|
|
|
23 |
% |
|
|
3.0 |
|
|
|
2.3 |
|
|
|
30 |
% |
Other (3) |
|
|
|
|
2.9 |
|
|
|
2.6 |
|
|
|
12 |
% |
|
|
2.8 |
|
|
|
2.6 |
|
|
|
8 |
% |
Total open-end funds |
|
|
|
|
55.8 |
|
|
|
43.7 |
|
|
|
28 |
% |
|
|
52.3 |
|
|
|
41.6 |
|
|
|
20 |
% |
Private funds
(4) |
|
|
|
|
29.3 |
|
|
|
24.0 |
|
|
|
22 |
% |
|
|
28.1 |
|
|
|
23.0 |
|
|
|
22 |
% |
Closed-end funds |
|
|
|
|
32.3 |
|
|
|
21.8 |
|
|
|
48 |
% |
|
|
29.0 |
|
|
|
21.6 |
|
|
|
34 |
% |
Total fund assets |
|
|
|
|
117.4 |
|
|
|
89.5 |
|
|
|
31 |
% |
|
|
109.4 |
|
|
|
86.2 |
|
|
|
27 |
% |
HNW and
institutional account assets |
|
|
|
|
22.4 |
|
|
|
21.1 |
|
|
|
6 |
% |
|
|
21.6 |
|
|
|
21.1 |
|
|
|
2 |
% |
Retail managed account assets |
|
|
|
|
12.8 |
|
|
|
8.3 |
|
|
|
54 |
% |
|
|
11.4 |
|
|
|
7.9 |
|
|
|
44 |
% |
Total separate account assets |
|
|
|
|
35.2 |
|
|
|
29.4 |
|
|
|
20 |
% |
|
|
33.0 |
|
|
|
29.0 |
|
|
|
14 |
% |
Total |
|
|
|
$ |
152.6 |
|
|
$ |
118.9 |
|
|
|
28 |
% |
|
$ |
142.4 |
|
|
$ |
115.2 |
|
|
|
24 |
% |
(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 bank loan interval funds with similar pricing
structures. |
(3) |
|
Includes other classes of Eaton Vance open-end funds and
non-Eaton Vance funds subadvised by Atlanta Capital, Fox Asset Management and Parametric Portfolio Associates. |
(4) |
|
Includes privately offered equity and bank loan funds and
CDO entities. |
Results of Operations
The Company reported net income of $55.8 million or $0.41 per
diluted share in the third quarter of fiscal 2007 compared to $41.8 million or $0.31 per diluted share in the third quarter of fiscal 2006. Operating
results for the third quarter of fiscal 2007 include the payment of $12.6 million in one-time structuring fees and $2.2 million in marketing incentives
related to the offering of Eaton Vance Risk-Managed Diversified Equity Income Fund, a $1.2 billion closed-end fund. These payments, which are included
in distribution expense and compensation expense, respectively, reduced diluted earnings per share for the third quarter and first nine months of 2007
by $0.07 per share.
24
Operating results for the first nine months of fiscal 2007 also
include the payment of $46.3 million in one-time structuring fees and $8.1 million in marketing incentives related to the second quarter offering of
Eaton Vance Tax-Managed Global Diversified Equity Income fund and $17.1 million in one-time structuring fees and $4.7 million in marketing incentives
related to the first quarter offering of Eaton Vance Tax-Managed Diversified Equity Income Fund. These one-time structuring fees and marketing
incentives, which are included in distribution expense and compensation expense, respectively, reduced earnings for the first nine months of fiscal
2007 by $0.35 per diluted share.
In the first quarter of fiscal 2007, the Company made payments
totaling $52.2 million to Merrill Lynch, Pierce, Fenner & Smith and A.G. Edwards & Sons, Inc. to terminate compensation agreements in respect
of certain of the Companys previously offered closed-end funds under which the Company was obligated to make payments over time based on the
assets of the respective closed-end funds. These one-time termination payments, which are included in distribution expense, reduced diluted earnings
for the first nine months of fiscal 2007 by $0.24 per share. The termination of those agreements by a one-time payment will have the result of reducing
the Companys distribution expense in future years by approximately $9.0 million annually, the amount of the compensation that it would otherwise
have paid to the two parties under those agreements.
Results of Operations
|
|
|
|
For the Three Months Ended July 31,
|
|
|
|
For the Nine Months Ended July 31,
|
|
(in thousands, except per share data)
|
|
|
|
2007
|
|
2006
|
|
% Change
|
|
2007
|
|
2006
|
|
% Change
|
Operating
income |
|
|
|
$ |
88,858 |
|
|
$ |
67,885 |
|
|
|
31 |
% |
|
$ |
127,147 |
|
|
$ |
192,581 |
|
|
|
34 |
% |
Net
income |
|
|
|
$ |
55,776 |
|
|
$ |
41,819 |
|
|
|
33 |
% |
|
$ |
81,428 |
|
|
$ |
120,850 |
|
|
|
33 |
% |
Earnings per
share before cumulative effect of change in accounting principle: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
|
$ |
0.45 |
|
|
$ |
0.33 |
|
|
|
36 |
% |
|
$ |
0.65 |
|
|
$ |
0.95 |
|
|
|
32 |
% |
Diluted |
|
|
|
$ |
0.41 |
|
|
$ |
0.31 |
|
|
|
32 |
% |
|
$ |
0.60 |
|
|
$ |
0.88 |
|
|
|
32 |
% |
Earnings per
share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
|
$ |
0.45 |
|
|
$ |
0.33 |
|
|
|
36 |
% |
|
$ |
0.65 |
|
|
$ |
0.94 |
|
|
|
31 |
% |
Diluted |
|
|
|
$ |
0.41 |
|
|
$ |
0.31 |
|
|
|
32 |
% |
|
$ |
0.60 |
|
|
$ |
0.88 |
|
|
|
32 |
% |
In evaluating operating performance, the Company considers
operating income and net income, which are calculated on a basis consistent with accounting principles generally accepted in the United States
(GAAP), as well as adjusted operating income, a non-GAAP performance measure. Adjusted operating income is defined as operating income plus
closed-end fund structuring fees and one-time payments, stock-based compensation and the write-off of any intangible assets associated with the
Companys acquisitions. The Company believes that adjusted operating income is a key indicator of the Companys ongoing profitability and
therefore uses 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, 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) do not necessarily represent normal results of operations. In addition, when assessing performance,
Management and the Board look at performance both with and without stock-based compensation.
25
The following table provides a reconciliation of operating income
to adjusted operating income:
Reconciliation of Operating Income to Adjusted Operating
Income
|
|
|
|
For the Three Months Ended July 31,
|
|
|
|
For the Nine Months Ended July 31,
|
|
(in thousands)
|
|
|
|
2007
|
|
2006
|
|
% Change
|
|
2007
|
|
2006
|
|
% Change
|
Operating
income |
|
|
|
$ |
88,858 |
|
|
$ |
67,885 |
|
|
|
31 |
% |
|
$ |
127,147 |
|
|
$ |
192,581 |
|
|
|
34 |
% |
Closed-end
fund structuring fees |
|
|
|
|
12,562 |
|
|
|
1,486 |
|
|
|
745 |
% |
|
|
75,998 |
|
|
|
1,486 |
|
|
|
NM |
|
Payments to
terminate closed-end fund compensation agreements |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52,178 |
|
|
|
|
|
|
|
NM |
|
Write-off of
intangible assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,876 |
|
|
|
NM |
|
Stock-based
compensation |
|
|
|
|
10,914 |
|
|
|
8,271 |
|
|
|
32 |
% |
|
|
33,390 |
|
|
|
28,770 |
|
|
|
16 |
% |
Adjusted
operating income |
|
|
|
$ |
112,334 |
|
|
$ |
77,642 |
|
|
|
45 |
% |
|
$ |
288,713 |
|
|
$ |
231,713 |
|
|
|
25 |
%
|
Revenue
The Companys effective fee rate (total revenue as a
percentage of average assets under management) was 75 basis points and 74 basis points in the third quarter of fiscal 2007 and first nine months of
fiscal 2007, respectively, compared to 73 basis points and 74 basis points in the third quarter and first nine months of fiscal 2006,
respectively.
|
|
|
|
For the Three Months Ended July 31,
|
|
|
|
For the Nine Months Ended July 31,
|
|
(in thousands)
|
|
|
|
2007
|
|
2006
|
|
% Change
|
|
2007
|
|
2006
|
|
% Change
|
Investment
advisory and administration fees |
|
|
|
$ |
205,892 |
|
|
$ |
149,823 |
|
|
|
37 |
% |
|
$ |
560,726 |
|
|
$ |
437,176 |
|
|
|
28 |
% |
Distribution
and underwriter fees(1) |
|
|
|
|
40,021 |
|
|
|
34,598 |
|
|
|
16 |
% |
|
|
113,657 |
|
|
|
105,379 |
|
|
|
8 |
% |
Service
fees |
|
|
|
|
39,597 |
|
|
|
31,235 |
|
|
|
27 |
% |
|
|
111,166 |
|
|
|
89,238 |
|
|
|
25 |
% |
Other revenue |
|
|
|
|
1,422 |
|
|
|
919 |
|
|
|
55 |
% |
|
|
4,743 |
|
|
|
3,118 |
|
|
|
52 |
% |
Total revenue |
|
|
|
$ |
286,932 |
|
|
$ |
216,575 |
|
|
|
32 |
% |
|
$ |
790,292 |
|
|
$ |
634,911 |
|
|
|
24 |
% |
(1) |
|
Certain amounts from prior quarters have been reclassified
to conform to the current year presentation. |
Investment advisory and administration
fees
Investment advisory and administration fees are generally
determined by contractual agreements with the Companys 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 investment advisory and
administration fees earned, while shifts in asset mix affect the Companys effective fee rate.
26
The increase in investment advisory and administration fees of 37
percent and 28 percent in the third quarter and first nine months of fiscal 2007, respectively, over the same periods a year earlier can be attributed
primarily to an increase in average assets under management. Average assets under management increased by 28 percent and 24 percent in the third
quarter and first nine months of fiscal 2007, respectively, over the same periods a year ago. Fund effective investment advisory and administration fee
rates increased to 59 basis points for the first nine months of fiscal 2007 from 56 basis points for the first nine months of fiscal 2006, while
separately managed account effective advisory fee rates declined slightly to 31 basis points in the first nine months of fiscal 2007 from 32 basis
points in the first nine months of fiscal 2006.
Distribution and underwriter fees
Distribution plan payments, which are made under contractual
agreements with the Companys sponsored funds, are calculated as a percentage of average assets under management in specific share classes of the
Companys 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 the Companys 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 fee-based account sales. Underwriter commissions fluctuate with the level of Class A share sales and the mix of Class
A shares offered with and without sales charges.
Distribution plan payments increased 14 percent to $35.9 million
in the third quarter of fiscal 2007 from $31.4 million in the third quarter of fiscal 2006, reflecting an increase in average Class A, Class C and
certain private fund assets subject to distribution fees, partly offset by a decrease in average Class B share assets under management. As noted in the
table Average Assets Under Management by Asset Class, average Class B share assets under management declined 11 percent year-over-year in
the third quarter of fiscal 2007, while average Class C share and private fund assets under management subject to distribution fees increased by 26
percent and 22 percent, respectively. Class A share assets that are subject to distribution fees increased by 240 percent year-over-year and consist
primarily of the Class A shares of the Companys Emerald Funds, a family of funds for non-U.S. investors. Underwriter fees and other distribution
income increased 28 percent to $4.1 million in the third quarter of fiscal 2007 from $3.2 million in the third quarter of fiscal 2006, primarily
reflecting an increase in sales of Class A shares and an increase in other distribution income.
Distribution plan payments increased 7 percent to $102.6 million
in the first nine months of fiscal 2007 from $95.6 million in the first nine months of fiscal 2006, reflecting an increase in average Class A, Class C
and certain private fund assets subject to distribution fees partly offset by a decrease in average Class B share assets under management. As noted in
the table Average Assets Under Management by Asset Class, average Class B share assets under management declined 14 percent year-over-year
in the first nine months of fiscal 2007, while average Class C share and private fund assets under management subject to distribution fees increased by
18 percent and 22 percent, respectively. Class A share assets that are subject to distribution fees increased by 184 percent year-over-year and consist
primarily of the Class A shares of the Companys Emerald Funds. Underwriter fees and other distribution income increased by 16 percent to $11.1
million in the first nine months of fiscal 2007 from $9.6 million in the first nine months of fiscal 2006, primarily reflecting an increase in Class A
share sales and an increase in other distribution income.
27
Service fees
Service plan payments, which are made under contractual
agreements with the Companys sponsored funds, are calculated as a percent of average assets under management in specific share classes of the
Companys mutual funds (principally Classes A, B and C) as well as certain private funds. Service fees represent payments made by sponsored funds
to the principal underwriter (Eaton Vance Distributors, Inc., a wholly owned subsidiary of EVM) for service and/or the maintenance of shareholder
accounts.
Service fee revenue increased by 27 percent in the third quarter
and 25 percent in the first nine months of fiscal 2007 over the same periods a year ago, primarily reflecting a 25 percent and 24 percent increase in
average assets under management in Class A, B, and C shares and private funds subject to service fees for the three and nine month periods ended July
31, 2007, respectively.
Other revenue
Other revenue, which consists primarily of shareholder service
fees, miscellaneous dealer income, custody fees, and investment income earned by consolidated funds, increased by 55 percent or $0.5 million in the
third quarter of fiscal 2007 over the same period a year ago. The increase in other revenue can be primarily attributed to an increase in investment
income related to consolidated funds for the periods during which they were consolidated. Other revenue for the third quarter of fiscal 2007 includes
$0.4 million of investment income related to consolidated funds. There was no corresponding amount in the third quarter of fiscal
2006.
Other revenue increased by 52 percent in the first nine months of
fiscal 2007 over the same period a year ago, primarily due to increases in shareholder service fees and miscellaneous dealer income totaling $1.3
million. Other revenue for the first nine months of fiscal 2007 and 2006 includes $1.2 million and $0.9 million, respectively, of investment income
related to consolidated funds for the periods during which they were consolidated.
Expenses
Operating expenses increased by 33 percent in the third quarter
of fiscal 2007, primarily reflecting increases in compensation, service fees, and distribution expenses.
|
|
|
|
For the Three Months Ended July 31,
|
|
|
|
For the Nine Months Ended July 31,
|
|
(in thousands)
|
|
|
|
2007
|
|
2006
|
|
% Change
|
|
2007
|
|
2006
|
|
% Change
|
Compensation
of officers and employees: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash-based
compensation |
|
|
|
$ |
68,948 |
|
|
$ |
53,718 |
|
|
|
28 |
% |
|
$ |
203,615 |
|
|
$ |
153,156 |
|
|
|
33 |
% |
Stock-based
compensation |
|
|
|
|
10,914 |
|
|
|
8,271 |
|
|
|
32 |
% |
|
|
33,390 |
|
|
|
28,770 |
|
|
|
16 |
% |
Total
compensation of officers and employees |
|
|
|
|
79,862 |
|
|
|
61,989 |
|
|
|
29 |
% |
|
|
237,005 |
|
|
|
181,926 |
|
|
|
30 |
% |
Amortization
of deferred sales commissions |
|
|
|
|
13,931 |
|
|
|
12,119 |
|
|
|
15 |
% |
|
|
40,902 |
|
|
|
39,168 |
|
|
|
4 |
% |
Service fee
expense |
|
|
|
|
31,420 |
|
|
|
24,063 |
|
|
|
31 |
% |
|
|
86,320 |
|
|
|
69,896 |
|
|
|
23 |
% |
Distribution
expense (1) |
|
|
|
|
45,481 |
|
|
|
30,861 |
|
|
|
47 |
% |
|
|
223,802 |
|
|
|
85,479 |
|
|
|
162 |
% |
Fund
expenses |
|
|
|
|
5,490 |
|
|
|
4,074 |
|
|
|
35 |
% |
|
|
14,164 |
|
|
|
11,873 |
|
|
|
19 |
% |
Other expenses |
|
|
|
|
21,890 |
|
|
|
15,584 |
|
|
|
40 |
% |
|
|
60,952 |
|
|
|
53,988 |
|
|
|
13 |
% |
Total expenses |
|
|
|
$ |
198,074 |
|
|
$ |
148,690 |
|
|
|
33 |
% |
|
$ |
663,145 |
|
|
$ |
442,330 |
|
|
|
50 |
% |
(1) |
|
Certain amounts from prior quarters have been reclassified
to conform to the current year presentation. |
28
Compensation of officers and employees
Compensation expense increased by 29 percent and 30 percent in
the third quarter and first nine months of fiscal 2007 compared to the same periods a year earlier. The increase in compensation expense in both
periods can be attributed to higher marketing incentive payments associated with sales of the Companys funds and separately managed accounts,
including the initial public offerings of closed-end funds, higher adjusted operating income-based bonus accruals, base compensation expense associated
with an 11 percent increase in headcount, and higher stock-based compensation expense. The increase in headcount over the last twelve months reflects
additions to the Companys investment management, marketing and operations teams required to support the significant growth in assets under
management.
Stock-based compensation included in Compensation of
officers and employees was $10.9 million and $33.4 million in the third quarter and first nine months of fiscal 2007, respectively, compared to
$8.3 million and $28.8 million in the third quarter and first nine months of fiscal 2006, respectively.
Amortization of deferred sales
commissions
Amortization of deferred sales commissions increased by 15
percent in the third quarter of fiscal 2007 and 4 percent in the first nine months of fiscal 2007 compared to the same periods a year earlier.
Amortization expense is affected by ongoing sales and redemptions of mutual fund Class B shares, Class C shares and certain private
funds.
Service fees
Service fees the Company receives from sponsored funds are
generally retained by the Company 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 the Companys mutual funds (principally Classes
A, B, and C) and certain private funds. Service fee expense increased by 31 percent and 23 percent in the third quarter and first nine months of fiscal
2007, respectively, over the same periods a year earlier, reflecting increases in average long-term fund assets retained more than one year in funds
and share classes that are subject to service fees.
Distribution expense
Distribution expense consists primarily of ongoing payments made
to distribution partners pursuant to third-party distribution arrangements (for certain Class C share and closed-end fund assets, 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 the
Companys distribution partners.
Distribution expense increased by $14.6 million, or 47 percent in
the third quarter of fiscal 2007 over the same period a year earlier, primarily due to the payment of $12.6 million in one-time structuring fees in the
third quarter of fiscal 2007 related to the July offering of Eaton Vance Risk-Managed Diversified Equity Income Fund, a $1.2 billion closed-end
fund.
Distribution expense
increased by $138.3 million or 162 percent in the first nine months of fiscal 2007 over the same period a year earlier, primarily reflecting the
payment of $12.6 million in one-time structuring fees related to the offering of Eaton Vance Risk-Managed Diversified Equity Income Fund in the third
quarter of fiscal 2007 as noted in the preceding paragraph, as well as the payment of one-time structuring fees of $46.3 million and $17.1 million
related to the offering of Eaton Vance Tax-Managed Global Diversified Equity Income Fund and Eaton Vance Tax-Managed Diversified Equity Income Fund in
the second quarter and first quarter of fiscal 2007, respectively. Distribution expense for the nine months ended July 31, 2007 also includes $52.2
million in payments made to Merrill Lynch, Pierce, Fenner & Smith and A.G. Edwards & Sons, Inc. in the first quarter of fiscal 2007 to
terminate certain closed-end fund compensation agreements under which the
29
Company was obligated to make recurring payments over time based
on the assets of the respective closed-end funds. The termination of those agreements by a one-time payment will have the effect of reducing the
Companys distribution expense in future years by approximately $9.0 million annually, the amount of the compensation that it would otherwise have
paid to the two parties under those agreements.
Fund expenses
Fund expenses consist primarily of fees paid to subadvisors,
compliance costs and other fund-related expenses incurred by the Company. Fund expenses increased by 35 percent and 19 percent in the third quarter and
first nine months of fiscal 2007 over the same periods a year earlier primarily as a result of 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
advisers act as subadvisors. The increase in other fund-related expenses can be attributed to an increase in fund expenses for certain institutional
funds for which the Company is paid an all-in management fee and bears the funds non-advisory expenses.
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 40 percent, or $6.3 million, in the
third quarter of fiscal 2007 over the third quarter of fiscal 2006, primarily reflecting increases in travel expense of $0.6 million,
facilities-related expenses of $1.9 million, information technology expense of $2.3 million and consulting costs of $1.1 million. The increase in
travel expense can be attributed primarily to additional travel costs incurred in the marketing of Eaton Vance Risk-Managed Diversified Equity Income
Fund in the third quarter of fiscal 2007. The increase in facilities-related expenses can be attributed to an increase in rent and insurance associated
with additional office space leased by the Company to support the growth in headcount and an increase in the amortization of leasehold improvements
associated with the acceleration of amortization schedules in anticipation of the Companys move to new corporate headquarters in Boston in fiscal
2009. The increase in information technology expense can be attributed to an overall increase in outside data services and consulting costs incurred in
conjunction with several significant system implementations over the last twelve months. The increase in consulting costs can be attributed primarily
to increases in legal, audit, recruiting and other general consulting costs in the third quarter of fiscal 2007.
Other expenses increased by 13 percent, or $7.0 million, in the
first nine months of fiscal 2007 over the same period a year earlier, primarily reflecting a decrease in the amortization of intangible assets of $9.0
million offset by increases in travel expense of $2.1 million, facilities-related expenses of $5.1 million, information technology expense of $6.5
million and consulting expense of $2.0 million. The decrease in the amortization of intangible assets can be attributed to the $8.9 million write-off
of intangible assets relating to the termination of certain institutional and high-net-worth asset management contracts at Fox Asset Management in the
second quarter of fiscal 2006. The increase in travel expense can be attributed primarily to additional travel costs incurred in the marketing of Eaton
Vance Tax-Managed Diversified Equity Income Fund, Eaton Vance Tax-Managed Global Diversified Equity Income Fund and Eaton Vance Risk-Managed
Diversified Equity Income Fund in the first, second and third quarters of fiscal 2007, respectively. The increase in facilities-related expenses can be
attributed to an increase in rent and insurance associated with additional office space leased by the Company to support the growth in headcount and an
increase in the amortization of leasehold improvements associated with the acceleration of amortization schedules in anticipation of the Companys
move to new corporate headquarters in Boston in fiscal 2009. The increase in information technology expense can be attributed to an overall increase in
outside data services and consulting costs incurred in conjunction with several significant system implementations over the last twelve months. The
increase in consulting costs can be
30
attributed primarily to increases in recruiting, other general
consulting and audit costs in the first nine months of fiscal 2007.
Other Income and Expense
|
|
|
|
For the Three Months Ended July 31,
|
|
|
|
For the Nine Months Ended July 31,
|
|
(in thousands)
|
|
|
|
2007
|
|
2006
|
|
% Change
|
|
2007
|
|
2006
|
|
% Change
|
Interest
income |
|
|
|
$ |
2,667 |
|
|
$ |
2,197 |
|
|
|
21 |
% |
|
$ |
7,002 |
|
|
$ |
5,938 |
|
|
|
18 |
% |
Interest
expense |
|
|
|
|
(58 |
) |
|
|
(655 |
) |
|
|
91 |
% |
|
|
(142 |
) |
|
|
(1,380 |
) |
|
|
90 |
% |
Gains on
investments |
|
|
|
|
1,106 |
|
|
|
41 |
|
|
|
NM |
|
|
|
2,779 |
|
|
|
3,589 |
|
|
|
23 |
% |
Foreign
currency losses |
|
|
|
|
(95 |
) |
|
|
(55 |
) |
|
|
73 |
% |
|
|
(228 |
) |
|
|
(182 |
) |
|
|
25 |
% |
Impairment loss on investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(592 |
) |
|
|
NM |
|
Total other income |
|
|
|
$ |
3,620 |
|
|
$ |
1,528 |
|
|
|
137 |
% |
|
$ |
9,411 |
|
|
$ |
7,373 |
|
|
|
28 |
% |
Interest income increased by 21 percent and 18 percent in the
third quarter and first nine months of fiscal 2007, respectively, over the same periods a year earlier, primarily due to higher returns on invested
cash.
Interest expense decreased by 91 percent and 90 percent in the
third quarter and first nine months of fiscal 2007, respectively, over the same periods a year earlier, primarily due to the retirement of all of the
Companys long-term debt in August 2006.
The Company realized gains of $1.1 million upon the disposition
of certain investments in sponsored funds and $1.2 million on liquidation of an investment in a collateralized debt obligation entity in the first nine
months of fiscal 2007. The Company realized gains of $2.2 million upon the disposition of certain investments in sponsored funds and $1.4 million on
liquidation of an investment in a collateralized debt obligation entity in the first nine months of fiscal 2006.
The Company recognized an impairment loss of $0.6 million in the
first nine months of 2006 related to its investment in one collateralized debt obligation entity. The impairment loss resulted from the effect of
tightening credit spreads and higher than forecasted prepayment rates on the entitys investments.
Income Taxes
The Companys effective tax rate (income taxes as a
percentage of income before income taxes, minority interest, equity in net income of affiliates, and the cumulative effect of a change in accounting
principle) was 38.7 percent for the first nine months of fiscal 2007 and 2006.
The Companys policy for accounting for income taxes
includes monitoring its business activities and tax policies to ensure that the Company is 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 taken by the Company, or applicable law may not be
clear. The Company periodically reviews these tax positions and provides for and adjusts as necessary estimated liabilities relating to such positions
as part of its overall tax provision.
31
Minority Interest
Minority interest increased by 42 percent and 13 percent in the
third quarter and first nine months of fiscal 2007 over the same periods a year earlier, primarily due to an increase in the profitability of
Parametric Portfolio Associates. Minority interest is not adjusted for taxes due to the underlying tax status of the Companys majority-owned
subsidiaries. Atlanta Capital, Fox Asset Management and Parametric Portfolio Associates are limited liability companies that are treated as
partnerships for tax purposes. Funds consolidated by the Company 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, 2007
reflects the Companys 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 7 percent and 28 percent in the third quarter and first nine months of fiscal
2007, respectively, compared to the same periods a year earlier, primarily due to the Companys sale of certain investments in sponsored mutual
funds that were accounted for under the equity method in prior periods.
Changes in Financial Condition and Liquidity and Capital
Resources
The following table summarizes certain key financial data
relating to the Companys liquidity and capital resources on July 31, 2007 and October 31, 2006 and for the nine months ended July 31, 2007 and 2006:
Balance Sheet and Cash Flow Data
(in thousands)
|
|
|
|
July 31, 2007
|
|
October 31, 2006
|
|
% Change
|
Balance sheet data: |
Cash and cash
equivalents |
|
|
|
$ |
136,081 |
|
|
$ |
206,705 |
|
|
|
34 |
% |
Short-term
investments |
|
|
|
|
|
|
|
|
20,669 |
|
|
|
100 |
% |
Long-term
investments |
|
|
|
|
87,595 |
|
|
|
73,075 |
|
|
|
20 |
% |
Deferred
sales commissions |
|
|
|
|
105,821 |
|
|
|
112,314 |
|
|
|
6 |
% |
Deferred
income taxes |
|
|
|
|
17,490 |
|
|
|
22,520 |
|
|
|
22 |
% |
|
|
|
|
|
For the Nine Months Ended July 31,
|
|
(in thousands)
|
|
|
|
2007
|
|
2006
|
|
% Change
|
Cash flow
data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
cash flows |
|
|
|
$ |
162,058 |
|
|
$ |
84,665 |
|
|
|
91 |
% |
Investing
cash flows |
|
|
|
|
(24,788 |
) |
|
|
(12,390 |
) |
|
|
100 |
% |
Financing
cash flows |
|
|
|
|
(207,982 |
) |
|
|
(52,976 |
) |
|
|
293 |
% |
The Companys financial condition is highly liquid, with a
significant percentage of the Companys assets represented by cash and cash equivalents. Short-term investments include investments in the
Companys sponsored cash management funds. Long-term investments consist principally of investments in certain of the Companys sponsored
mutual funds, investments in affiliates and investments in CDO entities.
32
The Company had significant demands on its cash flow during the
first nine months of fiscal 2007. Cash outflows included $52.2 million in one-time payments made by the Company to terminate certain closed-end fund
compensation agreements, $76.0 million in structuring fee payments made by the Company related to new closed-end fund offerings and $14.8 million in
sales-based incentives related to new closed-end fund offerings.
Deferred sales commissions paid to broker/dealers in connection
with the distribution of the Companys Class B and Class C fund shares, as well as certain private funds, decreased by 6 percent in the first nine
months of fiscal 2007, primarily reflecting the ongoing decline in Class B share sales and assets. Deferred income taxes, which relate principally to
the deferred tax liability for deferred sales commissions offset by the deferred tax benefit for stock-based compensation, decreased by 22 percent in
the first nine months of fiscal 2007.
The following table details the Companys future contractual
obligations:
Contractual Obligations
|
|
|
|
Payments due
|
|
(in millions)
|
|
|
|
Total
|
|
Less than 1 Year
|
|
13 Years
|
|
45 Years
|
|
After 5 Years
|
Operating
leases facilities and equipment |
|
|
|
$ |
200.2 |
|
|
|
$10.2 |
|
|
$ |
24.0 |
|
|
$ |
25.9 |
|
|
$ |
140.1 |
|
Investment in
private equity partnership |
|
|
|
$ |
9.4 |
|
|
|
$ 9.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
In July 2006, the Company committed to invest up to $15.0 million
in a private equity partnership that invests in companies in the financial services industry. Through July 31, 2007, the Company has invested $5.6
million of the total $15.0 million of committed capital.
In September 2006, the Company signed a long-term lease to move
the Companys corporate headquarters to a new location in Boston. The lease will commence in May 2009.
Excluded from the table above are future payments to be made by
the Company to purchase the equity interests retained by minority investors in Atlanta Capital, Fox Asset Management and Parametric Portfolio
Associates. The Companys acquisition agreements provide the minority shareholders the right to require the Company to purchase these retained
interests at specific intervals over time. These agreements also provide the Company with the right to require the minority shareholders to sell their
retained equity interests to the Company at specific intervals over time, as well as upon certain events such as death and permanent disability. These
purchases and sales can occur at varying times at varying amounts over the next 6 years and will generally be based upon a multiple of earnings before
interest and taxes, a measure which is intended to represent fair market value. Although the timing and amounts of these purchases cannot be predicted
with certainty, the Company anticipates that the purchase of the remaining minority interests in its majority-owned subsidiaries may be a significant
use of cash in future years.
In the third quarter of fiscal 2007, minority shareholders of
Parametric Portfolio Associates exercised a put option whereby units representing a 2 percent capital interest in Parametric Portfolio Associates were
sold to the Company for $6.1 million, increasing the Companys capital ownership interest from 82 to 84 percent. In addition, the Company
purchased a 3 percent interest in Atlanta Capital from minority interest holders for $2.9 million upon exercise of a minority investor put option in
the third quarter of fiscal 2007, increasing the Companys ownership interest from 77 percent to 80 percent. The additional purchase price in each
case was allocated between intangible assets and goodwill in the third quarter based on an independent valuation.
33
In April 2007, Parametric Portfolio Associates announced the
signing of a definitive agreement with Managed Risk Advisors, LLC, an investment management and derivatives investment advisory firm based in Westport,
Connecticut, to merge with Parametric Risk Advisors LLC, a newly formed Parametric Portfolio Associates affiliate specializing in the use of
options and other derivatives in the management of client investment portfolios. Parametric Portfolio Associates holds a 40 percent interest in the
newly formed entity. Pursuant to the acquisition agreements, Parametric Portfolio Associates will have the right to require the minority shareholders
to sell their retained equity interests to Parametric Portfolio Associates at specific intervals over time at a price based upon a multiple of earnings
before interest and taxes, a measure which is intended to represent fair market value. The transaction was completed on May 1, 2007.
The Company maintains a revolving credit facility with several
banks, which expires on December 21, 2009. It provides that the Company may borrow up to $180 million at LIBOR-based rates of interest that vary
depending on the level of usage of the facility and the Companys credit ratings. The agreement contains financial covenants with respect to
leverage and interest coverage and requires the Company to pay an annual commitment fee on any unused portion. On July 31, 2007, the Company had no
outstanding borrowings under its revolving credit facility.
On August 13, 2007, the Company amended the terms of its credit
facility to increase the Companys borrowing capacity to $200 million, reduce its LIBOR-based borrowing rate and extend the expiration of the
facility to August 13, 2012. Neither financial covenants nor fee rates were affected by the amendment.
Operating Cash Flows
Operating cash flows of the Company are calculated by adjusting
the net income to reflect changes in current assets and liabilities, deferred sales commissions, stock-based compensation, deferred income taxes and
investments classified as trading. Cash provided by operating activities totaled $162.1 million and $84.7 million for the nine months ended July 31,
2007 and 2006, respectively. The increase in cash provided by operating activities in the first nine months of fiscal 2007 can be attributed primarily
to an increase in cash provided by the purchase and sale of trading securities by the Companys consolidated mutual funds, which regularly
purchase and sell securities. In the first nine months of fiscal 2007, the purchase and sale of trading securities by the Companys consolidated
funds increased cash by $20.9 million. In the first nine months of fiscal 2006 this activity reduced cash by $80.2 million. Operating cash flows in the
first nine months of fiscal 2007 were reduced by $52.2 million in payments made by the Company to terminate certain closed-end fund compensation
agreements and $76.0 million in structuring fee payments made by the Company related to the offering of Eaton Vance Tax-Managed Diversified Equity
Income Fund in the first quarter of fiscal 2007, Eaton Vance Tax-Managed Global Diversified Equity Income Fund in the second quarter of fiscal 2007 and
Eaton Vance Risk-Managed Diversified Equity Income Fund in the third quarter of fiscal 2007.
Capitalized sales commissions paid to financial intermediaries
for the distribution of the Companys Class B and Class C fund shares and certain private funds increased by $4.3 million in the first nine months
of fiscal 2007 compared to the same period a year earlier due primarily to a 65 percent increase in Class C share sales offset by a 23 percent decrease
in Class B share sales. The Company anticipates that the payment of capitalized sales commissions will continue to be a significant use of cash in the
future.
34
Investing Cash Flows
Investing activities consist primarily of the purchase of
equipment and leasehold improvements, the purchase of equity interests retained by minority investors in the Companys majority owned
subsidiaries, and the purchase and sale of investments in Company-sponsored mutual funds that the Company does not consolidate. Cash used for investing
activities totaled $24.8 million for the nine months ended July 31, 2007, compared to $12.4 million for the first nine months of fiscal 2006. Additions
to equipment and leasehold improvements in the first nine months of both fiscal 2007 and 2006 primarily reflect additional leasehold improvements made
in conjunction with additional office space leased to accommodate an increase in headcount. In the first nine months of fiscal 2007, the purchase and
sale of available-for-sale securities reduced cash by $8.5 million. In the first nine months of fiscal 2006, the same activity increased cash by $10.1
million.
Financing Cash Flows
Financing cash flows primarily reflect the issuance and
repurchase of the Companys non-voting common stock and the payment of dividends to the Companys shareholders. Financing cash flows for the
prior year also include proceeds from the issuance of capital stock by the Companys consolidated investment companies and cash paid to meet
redemptions by minority shareholders of these funds. Cash used for financing activities totaled $208.0 million and $53.0 million for the nine months
ended July 31, 2007 and 2006, respectively.
In the first nine months of fiscal 2007, the Company repurchased
a total of 5.1 million shares of its non-voting common stock for $204.5 million under its authorized repurchase program and issued 2.2 million shares
of non-voting common stock in connection with the exercise of stock options and employee stock purchases for total proceeds of $37.6 million. The
Company has authorization to purchase an additional 6.7 million shares under its current share repurchase authorization and anticipates that future
repurchases will continue to be a significant use of cash. The Companys dividends per share increased 20 percent to $0.36 in the first nine
months of fiscal 2007 from $0.30 in the first nine months of fiscal 2006.
The Company believes that cash provided by operating activities
and borrowings available under the Companys $200 million credit facility, as amended in August, will provide the Company with sufficient
liquidity to meet its short-term and long-term operating needs.
Off-Balance Sheet Arrangements
The Company does 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 the Company to any liability that is
not reflected in the Consolidated Financial Statements.
Critical Accounting Policies
Management believes the following critical accounting policies,
among others, affect its more significant judgments and estimates used in the preparation of its consolidated financial statements. Actual results may
differ from these estimates.
35
Deferred Sales Commissions
Sales commissions paid by the Company 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 by the Company from these funds are recorded in revenue as earned. Contingent deferred sales charges and
early withdrawal charges received by the Company from redeeming shareholders of open-end funds reduce unamortized deferred sales commissions. Should
the Company lose its 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. 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.
Goodwill and Intangible Assets
Goodwill represents the excess of the cost of the Companys
investment in the net assets of acquired companies over the fair value of the underlying identifiable net assets at the dates of acquisition. The
Company attributes 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. The Company establishes fair value for the purpose of impairment testing using discounted cash flow analyses
and appropriate market multiples. In this process, the Company makes assumptions related to projected future earnings and cash flow, market multiples
and applicable discount rates. Changes in these estimates could materially affect the Companys impairment conclusion.
Identifiable intangible assets generally represent the cost of
client relationships and management contracts acquired. In valuing these assets, the Company makes assumptions regarding useful lives and projected
growth rates and significant judgment is required. In most instances, the Company engages third party consultants to perform these valuations. The
Company periodically reviews 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.
Deferred Income Taxes
Deferred income taxes reflect the expected future tax
consequences of temporary differences between the carrying amounts and tax bases of the Companys assets and liabilities. The Companys
deferred taxes relate principally to stock-based compensation expense and capitalized sales commissions paid to broker/dealers. Under IRS regulations,
stock-based compensation is deductible for tax purposes at the time the employee recognizes the income (upon vesting in the case of restricted stock
grants and upon exercise in the case of non-qualifed stock option grants). Capitalized sales commission payments are deductible for tax purposes at the
time of payment. While the Company has considered future taxable income and ongoing tax planning in assessing its taxes, changes in tax laws may result
in a change to the Companys tax position and effective tax rate.
36
Investments in CDO Entities
The Company acts as collateral manager or investment manager for
a number of CDO entities pursuant to management agreements between the Company and each CDO entity. At July 31, 2007, combined assets under management
in these CDO entities upon which the Company earns a management fee were approximately $3.2 billion. The Company had combined investments of $19.5
million in five of these entities on July 31, 2007.
The Company accounts for its 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. The Company reviews 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 the Companys 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 the Companys 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 the Companys
investments in these CDO entities may be adversely affected. The Companys risk of loss in the CDO entities is limited to the $19.5 million
carrying value of the investments on the Companys Consolidated Balance Sheet at July 31, 2007.
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. The
Company manages the collateral securities for a fee and is subject to losses based upon the values and default rates of the underlying investments. As
a result, the Companys 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. The Companys financial exposure to
the CDO entities it manages is limited to its interests in the CDO entities as reflected in the Companys Consolidated Balance
Sheet.
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 appropriate risk-free interest rate and the expected life of the option. Many of
these assumptions require managements 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 the Companys results of operations could be
materially affected.
37
Loss Contingencies
The Company continuously reviews any investor, employee or vendor
complaints and pending or threatened litigation. The likelihood that a loss contingency exists is evaluated under the criteria of SFAS No. 5,
Accounting for Contingencies, through consultation with legal counsel and a loss contingency is recorded if the contingency is probable and
reasonably estimable at the date of the financial statements. There are no losses of this nature that are probable and reasonably estimable as of July
31, 2007 and thus none have been recorded in the financial statements included in this report.
Inflation
The Companys assets are, to a large extent, liquid in
nature and therefore the Company does not believe that inflation has a material impact on the Companys results of operations. To the extent that
inflation, or the expectation thereof, results in rising interest rates, it may adversely affect the Companys financial condition and results of
operations. A substantial decline in the value of fixed-income or equity investments could adversely affect the net asset value of funds and accounts
the Company manages, which in turn would result in a decline in investment advisory revenue.
Accounting Developments
In June 2007, the FASB ratified the consensus reached by the
Emerging Issues Task Force (EITF) in EITF Issue No. 06-11, Accounting for Income Tax Benefits of Dividends on Share-Based Payment
Awards (EITF 06-11). 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.
Management is currently evaluating the potential impact of EITF 06-11, if any, on the Companys 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. Management is currently
evaluating this standard and its impact, if any, on the Companys consolidated financial statements.
38
In September 2006, the FASB issued SFAS No. 158,
Employers Accounting for Defined Benefit Pension and Other Postretirement Plans an amendment of FASB Statements No. 87, 88, 106, and
132(R). SFAS No. 158 requires employers to recognize the overfunded or underfunded status of a defined benefit, pension or other postretirement
plan in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive
income. This statement also requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position.
The provisions of SFAS No. 158 are effective for fiscal years ending after December 15, 2006 for employers with publicly traded equity securities. The
Company does not anticipate that the provisions of SFAS No. 158 will have an impact on the Companys consolidated financial statements because the
Company does not maintain any defined benefit, pension or other post-retirement plans.
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. Management is currently evaluating this standard and its impact, if any, on the Companys consolidated
financial statements.
In June 2006, the FASB issued interpretation No. 48,
Accounting for the Uncertainty in Income Taxes an interpretation of FASB Statement No. 109. FIN 48 clarifies certain aspects of
accounting for uncertain tax positions, including issues related to the recognition and measurement of those tax positions. The provisions of FIN 48
are effective for the Companys fiscal year which begins on November 1, 2007. Management is currently evaluating the potential impact of the
adoption of this interpretation.
39
Item 3. Quantitative and Qualitative Disclosures About Market
Risk
The Company is subjected to different types of risk, including
market risk. Market risk is the risk that the Company will incur losses due to adverse changes in equity and bond prices, interest rates, credit
conditions, or currency exchange rates.
The Companys primary direct exposure to equity price risk
arises from its investments in sponsored equity funds and equity securities held by sponsored funds the Company consolidates. The Companys
investments in sponsored equity funds and equity securities are carried at fair value on the Companys Consolidated Balance Sheets. Equity price
risk as it relates to these investments represents the potential future loss of value that would result from a decline in the fair values of the fund
shares or underlying equity securities. The following is a summary of the effect that a 10 percent increase or decrease in equity prices would have on
the Companys investments subject to equity price fluctuation at July 31, 2007:
(in thousands)
|
|
|
|
Carrying value
|
|
Carrying value assuming a 10%
increase
|
|
Carrying value assuming a 10%
decrease
|
Trading: |
Equity
securities |
|
|
|
$ |
14,899 |
|
|
$ |
16,389 |
|
|
$ |
13,409 |
|
Available for sale securities: |
Sponsored funds |
|
|
|
|
36,638 |
|
|
|
40,302 |
|
|
|
32,974 |
|
Total |
|
|
|
$ |
51,537 |
|
|
$ |
56,691 |
|
|
$ |
46,383 |
|
The Companys primary direct exposure to falling interest
rates arises from its investment in sponsored funds and debt securities held by sponsored funds the Company consolidates. The Company considered the
negative effect on pre-tax interest income of a 50 basis point (0.50%) decline in interest rates as of July 31, 2007. A 50 basis point decline in
interest rates is a hypothetical scenario used to demonstrate potential risk and does not represent managements view of future market changes.
The following is a summary of the effect that a 50 basis point (0.50%) decline in interest rates would have on the Companys pre-tax net income as
of July 31, 2007:
(in thousands)
|
|
|
|
Carrying value
|
|
Pre-tax interest income impact of a 50 basis
point decline in interest rates
|
Trading: |
Debt
securities |
|
|
|
$ |
756 |
|
|
|
$ 4 |
|
Available for sale securities: |
Sponsored
funds |
|
|
|
|
2,262 |
|
|
|
11 |
|
Total |
|
|
|
$ |
3,018 |
|
|
|
$15 |
|
The Companys primary direct exposure to credit risk arises
from its interests in five CDO entities that are included in long-term investments in the Companys Consolidated Balance Sheets. As an investor
in
40
a CDO entity, the Company is entitled to only a residual interest
in the CDO entity, making these investments highly sensitive to the default rates of the underlying issuers of the floating-rate bank loans or
high-yield bonds held by the CDO entity. The Companys investments are subject to an impairment loss in the event that the cash flows generated by
the collateral securities are not sufficient to allow equity holders to recover their investments. If there is deterioration in the credit quality of
the issuers underlying the collateral securities and a corresponding increase in the number of defaults, cash flows generated by the collateral
securities may be adversely impacted and the Company may be unable to recover its investment. The Companys total investment in interests in CDO
entities is approximately $19.5 million at July 31, 2007, which represents the total value at risk with respect to such entities as of July 31,
2007.
The Company does not enter into foreign currency transactions for
speculative purposes and currently has no material investments that would expose it to foreign currency exchange risk.
In evaluating market risk, it is also important to note that most
of the Companys revenue is based on the market value of assets under management. As noted in Risk Factors in Item 1A, declines of
financial market values will negatively impact the Companys revenue and net income.
Item 4. Controls and Procedures
As of July 31, 2007, the Company evaluated the effectiveness of
the design and operation of its disclosure controls and procedures. Disclosure controls and procedures are the controls and other procedures that the
Company designed to ensure that it records, processes, summarizes and reports in a timely manner the information it must disclose in reports that it
files with or submits to the SEC. The Companys Chief Executive Officer and Chief Financial Officer participated in this evaluation. Based on this
evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the date of their evaluation, the Companys disclosure
controls and procedures were effective.
There have been no changes in the Companys internal control
over financial reporting that occurred during the Companys third fiscal quarter that have materially affected, or are reasonably likely to
materially affect, the Companys internal control over financial reporting.
41
Part II Other Information
Item 1. Legal Proceedings
There has been no material developments in litigation previously
reported in the Companys SEC filings.
Item 1A. Risk Factors
The Company is subject to substantial competition in all
aspects of its investment management business and there are few barriers to entry. The Companys funds and separate accounts compete against a
large number of investment products and services sold to the public by investment management companies, investment dealers, banks, insurance companies
and others. Many institutions competing with the Company have greater resources than the Company. The Company competes 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, the reputation of the Company and the
services provided to investors. In addition, the Companys ability to market investment products is highly dependent on access to the various
distribution systems of national and regional securities dealer firms, which offer competing investment products and could elect to limit the
distribution of the Companys investment products. There can be no assurance that the Company will be able to retain access to these channels. The
inability to have such access could have a material adverse effect on the Companys business. To the extent that existing or potential customers,
including securities broker/dealers, decide to invest in or broaden distribution relationships with the Companys competitors, the sales of the
Companys products as well as the Companys market share, revenues and net income could decline.
The Company derives almost all of its revenue from
investment advisory and administration fees and distribution income received from the Eaton Vance funds and separate accounts. As a result, the
Company is 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, the Companys financial results could be adversely affected.
The Companys assets under management, which impact
revenue, are subject to significant fluctuations. The major sources of revenue for the Company (i.e., investment advisory, administration,
distribution, and service fees) are calculated as percentages of assets under management. A decline in securities prices or in the sale of 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 the Companys assets under management and consequently its revenue and net income. A
recession or other economic or political events could also adversely impact the Companys 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 or uncertainty or other factors would generally negatively impact the Companys revenue and net income.
42
Poor investment performance of the Companys products
could affect the Companys 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 the Companys success. While
strong investment performance could stimulate sales of the Companys 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 the Company earns. Past or present performance in the investment products the Company manages is
not indicative of future performance.
The Companys success depends on key personnel and the
Companys financial performance could be negatively affected by the loss of their services. The Companys success depends upon the
Companys ability to attract, retain and motivate qualified portfolio managers, analysts, investment counselors, sales and management personnel
and other key professionals including the Companys executive officers. Financial services professionals are in high demand, and the Company faces
strong competition for qualified personnel. The Companys key employees do not have employment contracts and may voluntarily terminate their
employment with the Company at any time. Certain senior executives and directors are subject to the Companys mandatory retirement policy. The
loss of the services of key personnel or the Companys failure to attract replacement or additional qualified personnel could negatively affect
the Companys financial performance. Any increase in compensation made by the Company in order to attract or retain key personnel could result in
a decrease in net income.
The Companys expenses are subject to fluctuations
that could materially affect the Companys operating results. The Companys results of operations are dependent on the level of
expenses, which can vary significantly. The Companys expenses may fluctuate as a result of variations in the level of total compensation expense,
future impairments of intangible assets or goodwill, expenses incurred to enhance the Companys infrastructure (including technology and
compliance) and other expenses incurred to support distribution of the Companys investment products.
The Companys reputation could be damaged.
Eaton Vance Corp. has spent over 80 years building a reputation based on strong investment performance, a high level of integrity and superior client
service. The Companys reputation is extremely important to its success. Any damage to the Companys reputation could result in client
withdrawals from funds or separate accounts that are advised by the Company and ultimately impede the Companys 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 the Company to suffer
a loss in revenue or net income.
The Company is 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 Securities and Exchange Commission, the NASD and the New York Stock Exchange. In addition, financial reporting
requirements are comprehensive and complex. While the Company has 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 the
Companys inability to adapt to a complex and ever-changing regulatory environment could result in sanctions against the Company, which could
adversely affect the Companys reputation, prospects, revenue, and earnings.
43
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds
The following table sets forth information regarding the
Companys purchases of its non-voting common stock on a monthly basis during the third quarter of fiscal 2007:
Issuer Repurchases of Equity Securities
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, 2007
through May 31, 2007 |
|
|
|
|
520,362 |
|
|
|
$39.35 |
|
|
|
520,362 |
|
|
|
3,586,238 |
|
June 1, 2007
through June 30, 2007 |
|
|
|
|
662,091 |
|
|
|
$44.26 |
|
|
|
662,091 |
|
|
|
2,924,147 |
|
July 1, 2007
through July 31, 2007 |
|
|
|
|
1,751,613 |
|
|
|
$45.57 |
|
|
|
1,751,613 |
|
|
|
6,749,747 |
|
Total |
|
|
|
|
2,934,066 |
|
|
|
$44.17 |
|
|
|
2,934,066 |
|
|
|
6,749,747 |
|
(1) The Companys current share repurchase program
was announced on July 11, 2007. The Board authorized management to repurchase up to 8,000,000 shares of its non-voting common stock in the open market and in
private transactions in accordance with applicable securities laws. The Companys stock repurchase program is not subject to an expiration
date.
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 |
44
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 7,
2007 |
|
/s/William M. Steul |
|
|
|
(Signature) William M. Steul Chief Financial Officer |
|
|
|
|
|
|
|
|
|
DATE: September 7,
2007 |
|
/s/Laurie G. Hylton |
|
|
|
(Signature) Laurie G. Hylton Chief Accounting Officer |
|
45