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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2002
Commission file no. 1-8100
EATON VANCE CORP.
(Exact name of registrant as specified in its charter)
MARYLAND 04-2718215
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
255 STATE STREET, BOSTON, MASSACHUSETTS 02109
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(Address of principal executive offices) (Zip Code)
(617) 482-8260
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(Registrant's telephone number, including area code)
Indicate by check-mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Shares outstanding as of July 31, 2002:
Voting Common Stock - 154,880 shares
Non-Voting Common Stock - 69,220,824 shares
Page 1 of 28 pages
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PART I
FINANCIAL INFORMATION
2
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets (unaudited)
July 31, October 31,
2002 2001
---------------------------------------
(in thousands)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 160,845 $ 115,681
Short-term investments 95,024 95,028
Investment adviser fees and other
receivables 19,911 22,559
Other current assets 2,237 4,212
---------------------------------------
Total current assets 278,017 237,480
---------------------------------------
OTHER ASSETS:
Investments:
Investment in affiliate 6,846 6,995
Investment companies 17,122 15,565
Other investments 14,789 14,144
Other receivables 10 5,829
Deferred sales commissions 250,454 266,738
Other deferred assets 5,580 5,131
Equipment and leasehold improvements,
net of accumulated depreciation and
amortization of $10,582 and $8,956,
respectively 14,233 14,938
Goodwill 69,464 69,212
Other intangible assets, net of
accumulated amortization of $2,347 and
$871, respectively 37,793 39,269
---------------------------------------
Total other assets 416,291 437,821
---------------------------------------
Total assets $ 694,308 $ 675,301
=======================================
See notes to consolidated financial statements.
3
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Consolidated Balance Sheets (unaudited) (continued)
July 31, October 31,
2002 2001
---------------------------------------
(in thousands, except share figures)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accrued compensation $ 24,845 $ 38,358
Accounts payable and accrued expenses 17,372 20,879
Dividend payable 5,013 4,955
Current portion of long-term debt 94,115 7,143
Other current liabilities 4,912 12,509
---------------------------------------
Total current liabilities 146,257 83,844
---------------------------------------
LONG-TERM LIABILITIES:
6.22% senior notes due 2004 7,143 14,286
1.5% zero-coupon exchangeable senior
notes due 2031 116,490 201,202
Deferred income taxes 59,210 73,878
---------------------------------------
Total long-term liabilities 182,843 289,366
---------------------------------------
Total liabilities 329,100 373,210
---------------------------------------
Minority interest 1,485 965
---------------------------------------
Commitments and contingencies - -
SHAREHOLDERS' EQUITY:
Common stock, par value $0.0078125
per share:
Authorized, 640,000 shares
Issued, 154,880 shares 1 1
Non-voting common stock, par value
$0.0078125 per share:
Authorized, 95,360,000 shares
Issued, 69,220,824 and 68,462,051
shares, respectively 541 535
Accumulated other comprehensive income 2,963 4,898
Notes receivable from stock option exercises (3,258) (2,641)
Deferred compensation (2,375) (3,200)
Retained earnings 365,851 301,533
---------------------------------------
Total shareholders' equity 363,723 301,126
---------------------------------------
Total liabilities and shareholders' equity $ 694,308 $ 675,301
=======================================
See notes to consolidated financial statements.
4
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Consolidated Statements of Income (unaudited)
Three Months Ended Nine Months Ended
July 31, July 31,
2002 2001 2002 2001
-------------------------------------------------------------------
(in thousands, except per share figures)
REVENUE:
Investment adviser and administration fees $ 70,518 $ 64,571 $ 213,896 $ 184,971
Distribution and underwriter fees 40,168 43,579 124,132 127,975
Service fees 19,522 20,450 59,809 57,880
Other revenue 465 366 1,330 993
--------- --------- --------- ----------
Total revenue 130,673 128,966 399,167 371,819
--------- --------- --------- ----------
EXPENSES:
Compensation of officers and employees 25,546 24,527 77,335 68,314
Amortization of deferred sales commissions 20,328 20,913 62,765 59,059
Service fee expense 16,722 15,971 49,840 46,031
Distribution fee expense 7,824 7,563 23,608 21,937
Other expenses 13,847 12,603 39,769 37,079
--------- --------- --------- ----------
Total expenses 84,267 81,577 253,317 232,420
--------- --------- --------- ----------
OPERATING INCOME 46,406 47,389 145,850 139,399
OTHER INCOME (EXPENSE):
Interest income 3,447 1,563 6,951 4,785
Interest expense (1,336) (349) (3,514) (1,224)
Gain (loss) on sale of investments (107) 28 1,276 (158)
Equity in net income of affiliates 207 66 226 982
Impairment loss on investments - - - (13,794)
---------- --------- ---------- ----------
INCOME BEFORE MINORITY INTEREST AND INCOME TAXES 48,617 48,697 150,789 129,990
MINORITY INTEREST (648) - (1,237) -
---------- --------- ---------- ---------
INCOME BEFORE INCOME TAXES 47,969 48,697 149,552 129,990
INCOME TAXES 16,788 17,043 52,343 45,497
---------- --------- ---------- ---------
NET INCOME $ 31,181 $ 31,654 $ 97,209 $ 84,493
========== ========= ========= =========
EARNINGS PER SHARE:
Basic $ 0.45 $ 0.46 $ 1.40 $ 1.22
========= ========= ========= =========
Diluted $ 0.44 $ 0.44 $ 1.35 $ 1.17
========= ========= ========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 69,161 68,912 69,226 69,036
========= ========= ========= =========
Diluted 71,194 72,614 71,759 72,269
========= ========== ========= =========
See notes to consolidated financial statements.
5
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Consolidated Statements of Cash Flows (unaudited)
Nine Months Ended
July 31,
2002 2001
-----------------------------------
(in thousands)
Cash and cash equivalents,
beginning of period $ 115,681 $ 60,479
-----------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income 97,209 84,493
Adjustments to reconcile net income to
net cash provided by (used for) operating
activities:
Impairment loss on investment - 13,794
(Gain) loss on sale of investments (1,276) 421
Equity in net income of affiliate (226) (982)
Dividend received from affiliate 375 1,688
Minority interest 1,237 -
Interest on long-term debt 2,549 30
Deferred income taxes (13,248) (12,813)
Compensation related to restricted stock
issuance 825 825
Depreciation and other amortization 3,771 1,746
Amortization of deferred sales commissions 62,765 59,059
Payment of capitalized sales commissions (70,301) (110,674)
Capitalized sales charges received 23,820 19,388
Proceeds from the sale of trading investments 1,051 40,900
Purchase of trading investments - (1,333)
Changes in other assets and liabilities (11,548) 2,678
-----------------------------------
Net cash provided by operating activities 97,003 99,220
-----------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to equipment and leasehold
improvements (1,610) (1,678)
Net (increase) decrease in notes and receivables
from affiliates (617) 623
Proceeds from sale of real estate - 1,196
Proceeds from sale of available-for-sale
investments 50,770 1,447
Purchase of available-for-sale investments (55,882) (35,739)
-----------------------------------
Net cash used for investing activities (7,339) (34,151)
-----------------------------------
See notes to consolidated financial statements.
6
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Consolidated Statements of Cash Flows (unaudited) (continued)
Nine Months Ended
July 31,
2002 2001
-----------------------------------
(in thousands)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt (7,143) (7,143)
Long-term debt issuance costs (118) -
Distributions to minority interest holders (717) -
Proceeds from the issuance of non-voting
common stock 15,712 6,776
Repurchase of non-voting common stock (37,181) (28,944)
Dividend paid (15,053) (12,475)
-----------------------------------
Net cash used for financing activities (44,500) (41,786)
-----------------------------------
Net increase in cash and cash equivalents 45,164 23,283
-----------------------------------
Cash and cash equivalents, end of period $ 160,845 $ 83,762
===================================
SUPPLEMENTAL INFORMATION:
Interest paid $ 797 $ 939
===================================
Income taxes paid $ 68,639 $ 51,640
===================================
See notes to consolidated financial statements.
7
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(1) BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited interim consolidated
financial statements of Eaton Vance Corp. (the "Company") include all
adjustments, consisting of normal recurring adjustments, necessary to present
fairly the results for the interim periods in accordance with accounting
principles generally accepted in the United States of America. Such financial
statements have been prepared in accordance with the instructions to Form 10-Q
pursuant to the rules and regulations of the Securities and Exchange Commission
("SEC"). Certain information and footnote disclosures have been omitted pursuant
to such rules and regulations. As a result, these financial statements should be
read in conjunction with the audited consolidated financial statements and
related notes included in the Company's latest annual report on Form 10-K.
Certain prior year amounts have been reclassified to conform to the current year
presentation.
(2) ACCOUNTING DEVELOPMENTS
In July 2001, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 141 requires business combinations entered into
after June 30, 2001 to be accounted for using the purchase method of accounting.
Under SFAS No. 142, goodwill and identifiable intangible assets with indefinite
lives will no longer be amortized, but will be reviewed at least annually for
impairment. Identifiable intangible assets with discrete useful lives will be
amortized over their useful lives. Goodwill and intangible assets acquired after
June 30, 2001 will be subject immediately to the non-amortization and
amortization provisions of SFAS No. 142.
The Company adopted the provisions of SFAS No. 141 for its two acquisitions
completed September 30, 2001. Management adopted the provisions of SFAS No. 142
for intangibles and equity investments purchased prior to June 30, 2001
effective November 1, 2001. The adoption of this standard did not have a
material impact on the results of operations or the consolidated financial
position of the Company.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 addresses the financial accounting
and reporting for the impairment or disposal of long-lived assets and supersedes
SFAS No. 121. SFAS No. 144 is effective for the Company's fiscal year beginning
November 1, 2002. Management is currently assessing the impact SFAS No. 144 will
have upon adoption.
In April 2002, the FASB issued SFAS No. 145, "Recission of FASB Statements No.
4, 44, and 62, Amendment of FASB Statement No. 13 and Technical Corrections."
SFAS No. 145 eliminates the requirement to report gains and losses from the
extinguishment of debt as extraordinary items in the income statement unless the
extinguishment meets the criteria under Accounting Principles Board Opinion No.
30, "Reporting the Results of Operations- Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." SFAS No. 145 is effective for the Company's fiscal
year beginning November 1, 2002 with early application encouraged. SFAS No.145
also modifies the accounting treatment of certain lease arrangements. The
Company does not expect the adoption of this standard to have a material impact
on the results of operations or the consolidated financial position of the
Company.
8
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(3) COMMON STOCK REPURCHASES
On October 17, 2001, the Company's Board of Directors authorized the purchase by
the Company of up to 4,000,000 shares of the Company's non-voting common stock.
In the first nine months of fiscal 2002, the Company purchased 1,086,700 shares
of its non-voting common stock under this share repurchase authorization.
Approximately 2,867,800 shares remain under the current authorization.
(4) REGULATORY REQUIREMENTS
Eaton Vance Distributors, Inc. ("EVD"), a wholly owned subsidiary of the Company
and principal underwriter of the Eaton Vance Funds, is subject to the SEC
Uniform Net Capital Rule (Rule 15c3-1) which requires the maintenance of minimum
net capital. For purposes of this rule, EVD had net capital of $53.0 million,
which exceeded its minimum net capital requirement of $2.5 million at July 31,
2002. The ratio of aggregate indebtedness to net capital at July 31, 2002 was
..71 to 1.
(5) FINANCIAL INSTRUMENTS
UNREALIZED SECURITIES HOLDING GAINS AND LOSSES
The Company has classified as available-for-sale investments in sponsored mutual
funds included as "Short-term investments," "Investments in investment
companies" and "Other investments" on the Company's Consolidated Balance Sheets.
Gross unrealized gains and gross unrealized losses have been excluded from
earnings and reported in accumulated other comprehensive income as a separate
component of shareholders' equity, net of deferred taxes.
(in thousands) July 31, 2002 October 31, 2001
----------------------------------------------------------------------------
Investments in sponsored mutual funds $112,750 $111,058
Gross unrealized gains $5,690 $8,364
Gross unrealized losses $1,162 $690
Gross unrealized losses related to securities classified as trading were
immaterial for nine months ended July 31, 2002 and 2001.
(6) INCOME TAXES
The Company, for interim reporting purposes, estimates its effective tax rate
for the year and applies this rate to its reported pre-tax income. The Company's
effective tax rate was 35 percent for the nine months ended July 31, 2002 and
2001.
In addition, the exercise of non-qualified stock options resulted in a reduction
of taxes payable of approximately $3.7 million and $0.2 million for the nine
months ended July 31, 2002 and 2001. Such benefit has been reflected in
shareholders' equity.
9
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(7) COMPREHENSIVE INCOME
Total comprehensive income includes net income and net unrealized gains and
losses on investments. Accumulated other comprehensive income, a component of
shareholders' equity, consists of net unrealized holding gains and losses.
The following table shows comprehensive income for the nine months ended July
31, 2002 and 2001.
(in thousands) 2002 2001
- -------------------------------------------------------------------------
Net income $ 97,209 $ 84,493
Net unrealized loss on available-for-sale
securities, net of income tax benefit of
($1,211) and ($758), respectively (1,935) (1,002)
----------------------------
Comprehensive income $ 95,274 $ 83,491
============================
(8) SUBSEQUENT EVENT
On August 13, 2002, Eaton Vance Management ("EVM"), the Company's principal
operating subsidiary, repurchased for cash $87.0 million ($134.1 million
principal amount at maturity) of its 30-year zero-coupon senior exchangeable
notes ("Notes"). Accordingly, this amount was classified as a short-term
liability on the July 31, 2002 Consolidated Balance Sheet. In conjunction with
the repurchase, the Company expects to expense approximately $2.1 million of
offering costs of the Notes in the fourth quarter of 2002. These costs are
included in "Other deferred assets" in the Consolidated Balance Sheet at July
31, 2002 and will be reflected as a component of "Other income (expense)" on the
Consolidated Income Statement.
The Notes remaining outstanding after the repurchase had an accreted value of
$116.5 million on July 31, 2002 ($179.9 million principal amount at maturity).
Each Note holder that did not tender its Notes for purchase received a one-time
cash interest payment on August 13, 2002 equal to approximately 0.50 percent of
each Note's accreted value. Such payment will result in a charge to the
Consolidated Income Statement of $0.6 million in the fourth quarter of 2002. EVM
also provided the holders of the remaining Notes the option to require their
repurchase on November 13, 2002.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company's principal business is creating, marketing and managing investment
companies ("funds") and providing investment management and counseling services
to institutions and individuals. The Company distributes its funds through
third-party broker/dealers, independent financial institutions and investment
advisers.
The Company's revenue is primarily derived from investment adviser,
administration, distribution and service fees received from the Eaton Vance
funds and adviser fees received from separately managed accounts. Generally,
these fees are based on the net asset 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 as earned. The Company's major expenses are
the amortization of deferred sales commissions and other marketing costs,
employee compensation, occupancy costs and service fees.
The Company's discussion and analysis of its financial condition and results of
operations are based upon the Company's 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, revenues and expenses and related disclosures of
contingent assets and liabilities. On an on-going basis, the Company evaluates
its estimates, including those related to investments, deferred sales
commissions, intangible assets, income taxes and litigation. The Company bases
its estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
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.
Sales commissions paid to broker/dealers in connection with the sale of shares
of open-end and bank loan interval funds are capitalized and amortized over
various periods, none of which exceeds six years. Distribution plan payments
received from these funds are recorded in income as earned. Contingent deferred
sales charges and early withdrawal charges received by the Company from
redeeming shareholders of open-end and bank loan interval funds reduce
unamortized deferred sales commissions first, with any remaining amount recorded
in income. 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 flow. The
Company periodically reviews the amortization period for deferred sales
commission assets as events or changes in circumstances indicate that the
carrying amount of deferred sales commission assets may not be recoverable over
their amortization period.
Identifiable intangibles generally represent the cost of management contracts
acquired. 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. Goodwill represents the excess of
the cost of the Company's investment in the net assets of acquired companies
over the fair value of the underlying identifiable net assets at the dates of
acquisition. Goodwill is not amortized but will be tested annually for
impairment.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
Deferred income taxes reflect the expected future tax consequences of temporary
differences between the carrying amounts and tax bases of the Company's assets
and liabilities. Such deferred taxes relate principally to capitalized sales
commissions paid to broker/dealers. Prior to January 1, 2001, these commissions
were currently deducted for tax purposes. Since January 1, 2001, sales
commissions are deducted for income tax purposes over their estimated useful
lives rather than at the time of payment. While the Company has considered
future taxable income and ongoing prudent and feasible tax planning strategies
in assessing its taxes, changes in tax laws and the inability of the Company to
meet the criteria for mutual fund state tax incentives may result in a change to
the Company's tax position and effective tax rate.
Equity investments in companies that issue collateralized debt obligations
("CDOs") are accounted for 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
fund to determine if an impairment charge regarding its equity investments is
required to be taken through current earnings. 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. In periods of rising
default rates and declining recovery rates, the carrying value of the Company's
investments in these equity interests may be adversely affected by unfavorable
changes in cash flow estimates and higher expected returns.
A CDO fund involves the issuance by a CDO company of non-recourse debt
securities, which are sold in a private offering by an underwriter to
institutional and high net-worth investors. The CDO debt securities are secured
by collateral in the form of high yield bonds and/or floating-rate income
instruments. The Company manages the collateral securities for a fee and, in
most cases, is a minority investor in the equity interests of the CDO company.
Thus, the Company's financial exposure to the CDO funds it manages is limited to
its equity interests in the CDO companies as reflected in the Company's
Consolidated Balance Sheets, totaling $13.3 million at July 31, 2002.
The Company continuously reviews any complaints and pending or threatened
litigation. The likelihood that a loss contingency exists is evaluated under the
criteria of SFAS No. 5 and a loss contingency is recorded if the contingency is
probable and reasonably estimable at the date of the financial statements. No
losses of this nature have been recorded in the financial statements included in
this report.
RESULTS OF OPERATIONS QUARTER ENDED JULY 31, 2002 COMPARED TO QUARTER ENDED JULY
31, 2001
The Company reported earnings of $31.2 million or $0.44 per diluted share in the
third quarter of fiscal 2002 compared to $31.7 million or $0.44 per diluted
share in the third quarter of fiscal 2001.
ASSET HIGHLIGHTS
Assets under management of $54.8 billion on July 31, 2002 were 9 percent higher
than the $50.4 billion reported a year earlier. Asset growth in the past twelve
months benefited from the acquisitions of Atlanta Capital Management Company,
LLC ("Atlanta Capital") and Fox Asset Management LLC, which added $7.9 billion
of assets under management on September 30, 2001, and mutual fund, institutional
and separate account net inflows.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
Net inflows of long-term fund assets in the third quarter of fiscal 2002 were
$0.1 billion compared to $1.5 billion in the third quarter of last year. Net
inflows decreased in the third quarter of 2002 compared to the third quarter of
fiscal 2001 as a result of a decrease in core mutual fund sales combined with an
increase in redemptions. Sales of equity and floating-rate funds declined while
sales of fixed income products increased. Net inflows of separate account assets
were $0.5 billion in the third quarter of fiscal 2002 compared to net outflows
of $0.1 billion in the third quarter of fiscal 2001. Results for the three
months ended July 31, 2002 reflect the momentum gained in the Company's managed
account initiative as a direct result of the acquisitions of Atlanta Capital and
Fox Asset Management.
Asset Flows
Three Months Ended
(in billions) July 31, 2002 July 31, 2001
- --------------------------------------------------------------------------------
Long-term fund assets - beginning $ 46.8 $ 45.2
Sales/inflows 2.1 2.7
Redemptions/outflows (2.0) (1.2)
Exchanges (0.1) -
Appreciation (depreciation) (4.1) (0.4)
-------------------------------------
Long-term fund assets - ending 42.7 46.3
-------------------------------------
Separate accounts - beginning 11.4 3.0
Net flows - Institutional and High Net Worth 0.3 (0.1)
Net flows - Managed accounts 0.2 -
Appreciation (depreciation) (1.3) 0.1
-------------------------------------
Separate accounts - ending 10.6 3.0
-------------------------------------
Money market fund assets - ending 1.5 1.1
-------------------------------------
Total assets under management - ending $ 54.8 $50.4
=====================================
Equity assets under management comprised 57 percent of total assets under
management on July 31, 2002 compared to 56 percent on July 31, 2001. Fixed
income assets under management increased to 27 percent of total assets under
management from 25 percent a year ago and floating-rate income assets decreased
to 16 percent from 19 percent a year ago.
ASSETS UNDER MANAGEMENT BY INVESTMENT OBJECTIVE
July 31, 2002 July 31, 2001
(in billions)
----------------------------------------------------------------------------
Equity $ 31.0 $ 28.1
Fixed income 15.1 12.6
Floating-rate income 8.7 9.7
------------- ---------------
Total $ 54.8 $ 50.4
============= ===============
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
REVENUE
The Company reported revenue of $130.7 million in the third quarter of fiscal
2002 compared to $129.0 million in the third quarter of fiscal 2001, an increase
of 1 percent.
Investment adviser and administration fees are generally calculated under
contractual agreements with the Company's sponsored mutual funds and separately
managed accounts and are based upon a percentage of the market value of assets
under management. Shifts in the asset mix and changes in the market value affect
the composition and amount of investment adviser and administration fees.
Investment adviser and administration fees increased by 9 percent to $70.5
million in the third quarter of fiscal 2002 from $64.6 million in the third
quarter of fiscal 2001, consistent with the 9 percent growth in total assets
under management.
Distribution and underwriting fees decreased $3.4 million or 8 percent in
comparison with the third quarter last year to $40.2 million for the three
months ended July 31, 2002. The Company currently sells its registered funds
under 5 primary pricing structures: 1) front-end load commission (Class A); 2)
spread-load commission (Class B); 3) level-load commission (Class C); 4)
modified spread-load commission (Class D); and 5) institutional no-load (Class
I). As the Company's mix of assets under management changes, the composition and
amount of distribution income is affected. Over the past year, the Company has
experienced a gradual shift in its registered fund asset mix from spread-load
commission (Class B) assets under management to front-end load (Class A) assets
under management, resulting in a reduction in distribution income. The decrease
in distribution income also reflects a decrease in the Company's Class B and C
share assets under management compared to a year earlier.
Service fee income, which is also based upon a percentage of the market value of
assets under management, decreased 4 percent to $19.5 million in the third
quarter of fiscal 2002 from $20.5 million a year earlier. The decrease in
service fee income can be primarily attributed to the decrease in average
long-term fund assets under management.
EXPENSES
Compensation expense increased 4 percent in the third quarter of fiscal 2002
compared to the third quarter of 2001, primarily due to the acquisitions of
Atlanta Capital and Fox Asset Management and the build up of the sales
infrastructure of the managed account business, which was completed in the third
quarter of fiscal 2002.
Amortization of deferred sales commissions decreased 3 percent to $20.3 million
in the third quarter of fiscal 2002 from $20.9 million in the third quarter of
fiscal 2001, primarily due to a decrease in Class B shares, Class C shares and
equity private placements assets and the residual effect of accounting changes
mandated by the SEC in fiscal 1998 and 1999. For a 9-month period ending April
30, 1999, deferred sales commissions for certain funds were required to be
expensed rather than capitalized, extinguishing future amortization charges.
Subsequent to April 30, 1999, and pursuant to the implementation of new
distribution plans, sales commission payments for these funds were once again
capitalized and amortized. Although the residual effect of these accounting
changes has resulted in an increase in amortization expense year over year, the
Company anticipates that the ongoing effect of these accounting changes will
diminish over time. As noted above, the Company has experienced an overall shift
in sales from Class B shares to Class A shares. As amortization expense is
ultimately a function of the Company's product mix, a shift from Class B sales
to Class A sales may result in a reduction in amortization expense in the
future.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
Service fees the Company receives from the funds are retained by the Company in
the first year and paid directly to broker/dealers after the first year. Service
fee expense increased 5 percent to $16.7 million in the third quarter of fiscal
2002 from $16.0 million a year earlier. The increase in service fee expense can
be attributed to the increase in average long-term fund assets retained more
than one year.
Distribution fee expense primarily represents additional costs associated with
the distribution of Class C shares and is calculated as a percentage of the
market value of assets under management. Distribution fee expense increased 3
percent to $7.8 million in the third quarter of fiscal 2002 from $7.6 million a
year earlier as a result of a shift in the Company's product mix within the
floating-rate income fund category. This increase was partially offset by a
decrease in average Class C assets under management within other fund
categories.
Other operating expenses increased 10 percent to $13.8 million in the third
quarter of fiscal 2002 from $12.6 million a year ago, primarily reflecting the
acquisitions of Atlanta Capital and Fox Asset Management.
OTHER INCOME AND EXPENSE
Interest income increased 120 percent to $3.5 million in the third quarter of
2002 from $1.6 million in the third quarter of 2001. This increase was primarily
attributed to the receipt of $2.1 million of interest in the third quarter of
fiscal 2002 resulting from the settlement of a Massachusetts income tax dispute
related to fiscal years 1993 to 1995.
Interest expense increased to $1.3 million in the third quarter of 2002 from
$0.3 million a year ago. The increase in interest expense can be attributed to
the issuance of the Company's 1.5% zero-coupon exchangeable senior notes in the
fourth quarter of fiscal 2001.
INCOME TAXES
The Company's effective tax rate was 35 percent during the third quarter of
fiscal 2002 and 2001.
RESULTS OF OPERATIONS NINE MONTHS ENDED JULY 31, 2002 COMPARED TO NINE MONTHS
ENDED JULY 31, 2001
The Company reported earnings of $97.2 million or $1.35 per diluted share in the
first nine months of fiscal 2002 compared to $84.5 million or $1.17 per diluted
share in the first nine months of fiscal 2001. Results for the first nine months
of fiscal 2001 include a $0.12 per share impairment loss on investments.
ASSET HIGHLIGHTS
Assets under management of $54.8 billion at the end of the third quarter were
$4.4 billion or 9 percent greater than the $50.4 billion under management at the
end of the third quarter last year. Net inflows of long-term fund assets in the
first nine months of fiscal 2002 were $1.2 billion compared to $4.9 billion in
the first nine months of last year. Net inflows decreased compared to a year
earlier as a result of a decrease in mutual fund sales and equity private
placements coupled with an increase in redemptions. The Company added $1.0
billion of separate account assets in the first nine months of 2002 primarily as
a result of the Company's managed account initiative.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
Asset Flows
Nine Months Ended
(in billions) July 31, 2002 July 31, 2001
- --------------------------------------------------------------------------------
Long-term fund assets - beginning $45.0 $45.0
Sales/inflows 6.3 9.2
Redemptions/outflows (5.1) (4.3)
Exchanges - (0.2)
Appreciation (depreciation) (3.5) (3.4)
-----------------------------------
Long-term fund assets - ending 42.7 46.3
-----------------------------------
Separate accounts - beginning 10.5 3.2
Net flows - Institutional and High Net Worth 0.5 (0.1)
Net flows - Managed accounts 0.5 0.1
Appreciation (depreciation) (0.9) (0.2)
-----------------------------------
Separate accounts - ending 10.6 3.0
-----------------------------------
Money market fund assets - ending 1.5 1.1
-----------------------------------
Total assets under management - ending $54.8 $50.4
===================================
REVENUE
The Company reported revenue of $399.2 million in the first nine months of
fiscal 2002 compared to $371.8 million in the first nine months of fiscal 2001,
an increase of 7 percent.
Investment adviser and administration fees increased by 16 percent to $213.9
million in the first nine months of fiscal 2002 from $185.0 million in the first
nine months of fiscal 2001, consistent with the 3 percent growth in total
average assets under management year-over-year and the acquisitions of Atlanta
Capital and Fox Asset Management.
Distribution and underwriting fees decreased 3 percent in comparison with the
prior period to $124.1 million for the nine months ended July 31, 2002. Over the
past year, the Company has experienced a gradual shift in its registered fund
asset mix from spread-load commission (Class B) assets under management to
front-end load (Class A) assets under management, resulting in a reduction in
distribution income. The decrease in distribution income is also the result of a
decrease in contingent deferred sales charges received in conjunction with
interval floating-rate bank loan fund redemptions.
Service fee income, which is also based upon a percentage of the market value of
assets under management, increased 3 percent to $59.8 million in the first nine
months of fiscal 2002 from $57.9 million a year earlier. The increase in service
fee income can be primarily attributed to the increase in long-term fund average
assets under management.
EXPENSES
Compensation expense increased 13 percent to $77.3 million in the first nine
months of fiscal 2002 from $68.3 million in the first nine months of 2001,
primarily due to the acquisitions of Atlanta Capital and Fox Asset Management
and the build up of the sales infrastructure of the managed account business,
which was completed in the third quarter or fiscal 2002.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
Amortization of deferred sales commissions increased 6 percent to $62.8 million
in the first nine months of fiscal 2002 from $59.1 million in the first nine
months of fiscal 2001, primarily due to the on-going sales of Class B shares,
Class C shares and equity private placements and the residual effect of
accounting changes mandated by the SEC in fiscal 1998 and 1999.
Service fee expense increased 8 percent to $49.8 million in the first nine
months of fiscal 2002 from $46.0 million a year earlier. The increase in service
fee expense can be attributed to the increase in average long-term fund assets
retained more than one year.
Distribution fee expense increased 8 percent to $23.6 million in the first nine
months of fiscal 2002 from $21.9 million a year earlier, primarily due to the
increase in average long-term fund assets under management and a shift in the
Company's product mix within the floating-rate income fund category.
Other operating expenses increased 7 percent to $39.8 million in the first nine
months of fiscal 2002 from $37.1 million a year ago, primarily reflecting the
acquisitions of Atlanta Capital and Fox Asset Management.
OTHER INCOME AND EXPENSE
Interest income increased 45 percent to $7.0 million in the first nine months of
2002 from $4.8 million in the first nine months of 2001. This increase can be
primarily attributed to the receipt of $2.1 million of interest income related
to the settlement of a Massachusetts income tax dispute.
Interest expense increased to $3.5 million in the first nine months of 2002 from
$1.2 million a year ago. The increase noted in interest expense can be
attributed to the issuance of the Company's 1.5% zero-coupon exchangeable senior
notes in the fourth quarter of fiscal 2001.
In the second quarter of fiscal 2001 the Company recognized a $13.8 million
impairment loss related to the Company's minority equity investments in three
CDO companies where related collateral assets are managed by the Company. The
impairment loss resulted from higher than forecasted default rates in the high
yield bond market and the effects of the higher default rates on the value of
the Company's equity investments in these CDO companies. The Company anticipates
that it will continue to earn management fees on assets collateralizing the
CDOs.
INCOME TAXES
The Company's effective tax rate was 35 percent during the first nine months of
fiscal 2002 and 2001.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments aggregated $255.9 million at
July 31, 2002, an increase of $45.2 million from October 31, 2001.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
OPERATING CASH FLOWS
The Company generated $97.0 million of cash from operations in the first nine
months of fiscal 2002 compared to $99.2 million in the first nine months of
fiscal 2001. Cash generated from operations decreased in the first nine months
of fiscal 2002 from fiscal 2001 primarily as a result of $40.9 million of
proceeds received from the sale of trading investments in the first nine months
of fiscal 2001 offset by a decrease in sales commissions paid year-over-year.
Included in cash flows from operations are the payment of capitalized sales
commissions associated with the distribution of the Company's Class B and Class
C funds, as well as the Company's equity fund private placements. These
commission payments continue to be a significant use of cash, but decreased to
$70.3 million in the first nine months of fiscal 2002 from $110.7 million in the
first nine months of fiscal 2001 as a result of a decrease in equity fund
private placements and Class B share sales year-over-year. Effective January 1,
2001, sales commissions are required to be capitalized and deducted, for tax
purposes, over their estimated useful lives. Commission payments made prior to
January 1, 2001 were deducted for tax purposes at the time of payment. Although
this change in the timing of the deduction of commission payments has had the
effect of increasing current income tax payments and reducing deferred income
taxes, it has not and will not have an impact on the Company's effective tax
rate.
INVESTING CASH FLOWS
Investing activities, consisting primarily of the purchase and sale of
available-for-sale investments, reduced cash and cash equivalents by $7.3
million in the first nine months of fiscal 2002 compared to $34.2 million in the
first nine months of fiscal 2001. Cash used for investing activities in the
first nine months of fiscal 2002 reflects $50.8 million of proceeds received
from the sale of available-for-sale investments.
FINANCING CASH FLOWS
Financing activities, consisting primarily of the issuance and repurchase of the
Company's non-voting common stock, reduced cash and cash equivalents by $44.5
million in the first nine months of fiscal 2002 compared to $41.8 million in the
first nine months of fiscal 2001. The Company repurchased a total of 1,086,700
shares of its non-voting common stock for $37.2 million in the first nine months
of fiscal 2002 under its authorized repurchase program and issued 1,845,000
shares or $15.7 million of non-voting common stock in connection with the
exercise of stock options in the first nine months of fiscal 2002. The Company's
dividend was $0.2175 per share in the first nine months of fiscal 2002 compared
to $0.18 per share in the first nine months of fiscal 2001.
The following table details the Company's contractual obligations under its
senior notes and lease arrangements:
- --------------------------------------------------------------------------------
Contractual Obligation Payments due
- --------------------------------------------------------------------------------
Less than 1 1-3 4-5 After 5
(in millions) Total year years years years
- --------------------------------------------------------------------------------
6.22% senior notes due 2004 $14.2 $7.1 $ 7.1 - -
- --------------------------------------------------------------------------------
Operating leases $37.4 $4.7 $10.3 $10.1 $12.3
- --------------------------------------------------------------------------------
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
Excluded from the table above are the Company's zero-coupon exchangeable senior
notes ("Notes") at a principal amount at maturity of $314.0 million due August
13, 2031. The Company's operating subsidiary, Eaton Vance Management ("EVM"),
issued the Notes in August of 2001, resulting in gross proceeds of approximately
$200.6 million. The net proceeds of the offering were approximately $195.5
million after payment of debt issuance costs. The Notes were issued in a private
placement to qualified institutional buyers at an initial offering price of
$638.70 per $1,000 principal amount at maturity. The discounted price reflects a
yield to maturity of 1.5% per year. Upon certain events, each Note is
exchangeable into 14.3657 shares of the Company's non-voting common stock,
subject to adjustment. EVM may redeem the Notes for cash on or after August 13,
2006 at their accreted value. At the option of Note holders, EVM may be required
to repurchase the Notes at their accreted value on various dates beginning on
the first, third and fifth anniversaries of the issue date and at five-year
intervals thereafter until maturity. At the option of the Note holders, EVM may
also be required to repurchase the Notes at their accreted value if the credit
rating of the Notes is decreased by three or more rating subcategories below its
initial rating by either Moody's or Standard and Poor's. Such repurchases can be
paid in cash, shares of the Company's non-voting common stock or a combination
of both.
On August 13, 2002, EVM repurchased for cash $87.0 million ($134.1 million
principal amount at maturity) of the Notes. Accordingly, this amount was
classified as a short-term liability on the July 31, 2002 Consolidated Balance
Sheet. In conjunction with the repurchase, the Company expects to expense
approximately $2.1 million of offering costs of the Notes in the fourth quarter
of 2002. These costs are included in "Other deferred assets" in the Consolidated
Balance Sheet at July 31, 2002.
The Notes remaining outstanding after the repurchase had an accreted value of
$116.5 million on July 31, 2002 ($179.9 million principal amount at maturity).
Each Note holder that did not tender its Notes for purchase received a one-time
cash payment on August 13, 2002 equal to approximately 0.50 percent of each
Note's accreted value. Such payment will result in a charge to the Consolidated
Income Statement of $0.6 million in the fourth quarter of 2002. EVM also
provided the holders of the remaining outstanding Notes the option to require
their repurchase on November 13, 2002.
In December 2001, the Company executed a revolving credit facility with several
banks. This facility, which expires December 2004, provides that the Company may
borrow up to $170 million at market rates of interest that vary depending on the
level of usage of the facility and the Company's 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. At
July 31, 2002, the Company had no borrowings outstanding under its revolving
credit facility.
The Company expects the principal uses of cash will be to increase assets under
management through expansion, pay operating expenses, enhance technology
infrastructure, purchase investments, make acquisitions, pay shareholder
dividends, repay and service debt and acquire shares of the Company. The Company
expects to generate cash through its short-term funding resources including
operating cash flows, and its line of credit. Operating cash flows are affected
by changes in securities markets. For a further discussion of market risk please
see the section regarding "Certain Factors That May Affect Future Results"
below. The Company anticipates that cash flows from operations and available
debt will be sufficient to meet the Company's foreseeable cash requirements and
provide the Company with the financial resources to take advantage of strategic
growth opportunities.
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.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
ACCOUNTING CHANGES
In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No.
142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires business
combinations entered into after June 30, 2001 to be accounted for using the
purchase method of accounting. Under SFAS No. 142, goodwill and identifiable
intangible assets with indefinite lives will no longer be amortized, but will be
reviewed at least annually for impairment. Identifiable intangible assets with
discrete useful lives will be amortized over their useful lives. Goodwill and
intangible assets acquired after June 30, 2001 will be subject immediately to
the non-amortization and amortization provisions of SFAS No. 142.
The Company has adopted the provisions of SFAS No. 141 for its two acquisitions
completed September 30, 2001. Management adopted the provisions of SFAS No. 142
for intangibles and equity investments purchased prior to June 30, 2001
effective November 1, 2001. The adoption of this standard did not have a
material impact on the results of operations or the consolidated financial
position of the Company.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 addresses the financial accounting
and reporting for the impairment or disposal of long-lived assets and supersedes
SFAS No. 121. SFAS No. 144 is effective for the Company's fiscal year beginning
November 1, 2002. Management is currently assessing the impact SFAS No. 144 will
have upon adoption.
In April 2002, the FASB issued SFAS No. 145, "Recission of FASB Statements No.
4, 44, and 62, Amendment of FASB Statement No. 13 and Technical Corrections."
SFAS No. 145 eliminates the requirement to report gains and losses from the
extinguishment of debt as extraordinary items in the income statement unless the
extinguishment meets the criteria under Accounting Principles Board Opinion No.
30, "Reporting the Results of Operations- Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." SFAS No. 145 is effective for the Company's fiscal
year beginning November 1, 2002 with early application encouraged. SFAS No. 145
also modifies the accounting treatment of certain lease arrangements. The
Company does not expect the adoption of this standard to have a material impact
on the results of operations or the consolidated financial position of the
Company.
Certain Factors That May Affect Future Results
From time to time, information provided by the Company or information included
in its filings with the Securities and Exchange Commission ("SEC") (including
this Quarterly Report on Form 10-Q) may contain statements which are not
historical facts, for this purpose referred to as "forward-looking statements."
The Company's actual future results may differ significantly from those stated
in any forward-looking statements. Important factors that could cause actual
results to differ materially from those indicated by such forward-looking
statements include, but are not limited to, the factors discussed below.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
The Company is subject to substantial competition in all aspects of its
business. The Company's 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 internally and
externally managed investment products. Although the Company has historically
been successful in gaining access to these channels, there can be no assurance
that it will continue to do so. The inability to have such access could have a
material adverse effect on the Company's business.
There are few barriers to entry by new investment management firms. The
Company's funds and separately managed accounts compete against an ever
increasing number of investment products sold to the public by investment
dealers, banks, insurance companies and others that sell tax-free or tax
advantaged investments, taxable income funds, equity funds and other investment
products. 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 and the services provided to investors.
The Company derives almost all of its revenue from investment adviser and
administration fees and distribution income received from the Eaton Vance funds,
other pooled investment vehicles and separately managed accounts. As a result,
the Company is dependent upon management contracts, administration contracts,
underwriting contracts or service contracts under which these fees and income
are paid. If any of these contracts are terminated, not renewed, or amended to
reduce fees, the Company's financial results may be adversely affected.
The major sources of revenue for the Company (i.e., investment adviser,
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 generally would reduce
fee income. Financial market declines or adverse changes in interest rates would
generally negatively impact the level of the Company's assets under management
and consequently its revenue and net income. A recession or other economic or
political events could also adversely impact the Company's revenues if it led to
a decreased demand for products, a higher redemption rate, or a decline in
securities prices. Like other businesses, the Company's actual results could be
affected by the loss of key managerial personnel through competition or
retirement. The Company's operations and actual results could also be affected
by increased expenses due to such factors as greater competition for personnel,
higher costs for distribution of mutual funds and other investment products, or
costs for insurance and other services by outside providers, or by the
disruption of services such as power, communications, information technology,
mutual fund transfer agency or mutual fund administration.
The Company's business is subject to substantial governmental regulation.
Changes in legal, regulatory, accounting, tax and compliance requirements could
have a significant affect on the Company's operations and results, including but
not limited to increased expenses and reduced investor interest in certain
mutual funds and other investment products offered by the Company. The Company
continually monitors legislative, tax, regulatory, accounting, and compliance
developments that could impact its business.
21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is routinely 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 prices, interest rates, credit risk, or currency exchange
rates.
The Company's primary exposure to equity price risk arises from its investments
in sponsored equity mutual funds. 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 mutual fund shares. The Company's
investments in sponsored equity mutual funds totaled $13.1 million at July 31,
2002 and are carried at fair value on the Company's Consolidated Balance Sheets.
The Company's primary exposure to interest rate risk arises from its investment
in fixed and floating-rate income mutual funds sponsored by the Company. The
negative effect on the Company's pre-tax interest income of a 50 basis point
decline in interest rates would be approximately $0.5 million based on fixed and
floating-rate investments of $99.1 million as of July 31, 2002. A 50 basis point
decline in interest rates is a hypothetical scenario used to demonstrate
potential risk and does not represent management's view of future market
changes. The Company is not exposed to interest rate risk in its debt
instruments as all of the Company's funded debt instruments carry fixed interest
rates.
The Company's primary exposure to credit risk arises from its equity interests
in several collateralized debt obligation companies that are included in "Other
investments" in the Company's Consolidated Balance Sheets. In periods of rising
default rates and declining recovery rates, the carrying value of the Company's
investments in these securities may be adversely affected by unfavorable changes
in cash flow estimates and higher expected returns. The Company's equity
interests in collateralized debt obligation companies totaled $13.3 million at
July 31, 2002.
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 a significant
portion of the Company's revenue is based on the market value of assets under
management. As noted in "Certain Factors That May Affect Future Results,"
declines of financial market values will negatively impact revenue and net
income.
22
PART II
OTHER INFORMATION
23
ITEM 1. LEGAL PROCEEDINGS
On October 15, 2001, a consolidated complaint was filed in the United States
District Court for the District of Massachusetts against Eaton Vance Classic
Senior Floating-Rate Fund, Eaton Vance Prime Rate Reserves, Eaton Vance
Institutional Senior Floating-Rate Fund, Eaton Vance Advisers Senior
Floating-Rate Fund (collectively, the "Funds"), their trustees and certain
officers of the Funds; Eaton Vance Management ("EVM"), the Funds' administrator;
Boston Management and Research ("BMR"), the Funds' investment adviser; and the
Company, the parent of EVM and BMR. The complaint, framed as a class action,
alleges that for the period between May 25, 1998 and March 5, 2001, the Funds'
assets were incorrectly valued and certain matters were not properly disclosed,
in violation of the federal securities laws. The complaint seeks unspecified
damages. The Company and the other named defendants believe that the complaint
is without merit and are vigorously contesting the lawsuit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
No items were submitted to a vote in the third quarter of fiscal 2002.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
99.1 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
99.2 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
(b) Reports on Form 8-K
The Company filed a Form 8-K with the SEC on May 22, 2002, regarding the
Company's press release of its results of operations for the quarter ended April
30, 2002.
The Company filed a Form 8-K with the SEC on July 16, 2002, regarding the
repurchase of Eaton Vance Management's zero-coupon exchangeable senior notes due
in 2031 ("Notes").
The Company filed a Form 8-K with the SEC on August 9, 2002, regarding the
amendment of certain terms of the Notes.
The Company filed a Form 8-K with the SEC on August 14, 2002, regarding the
repurchase of $87.0 million of the Notes.
24
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 13, 2002 /s/ William M. Steul
------------------------------
(Signature)
William M. Steul
Chief Financial Officer
DATE: September 13, 2002 /s/ Laurie G. Hylton
-----------------------------
(Signature)
Laurie G. Hylton
Chief Accounting Officer
I, James B. Hawkes, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Eaton Vance
Corp.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report.
DATE: September 13, 2002 /s/ James B. Hawkes
-----------------------------
(Signature)
James B. Hawkes
Chairman, Director and
Principal Executive Officer
25
I, William M. Steul, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Eaton Vance
Corp.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report.
DATE: September 13, 2002 /s/ William M. Steul
------------------------------
(Signature)
William M. Steul
Chief Financial Officer
26
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Eaton Vance Corp. (the "Company") on
Form 10-Q for the period ending July 31, 2002 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, James B. Hawkes, Chief
Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as
adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
DATE: September 13, 2002 /s/ James B. Hawkes
-----------------------------
(Signature)
James B. Hawkes
Chairman, Director and
Principal Executive Officer
27
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Eaton Vance Corp. (the "Company") on
Form 10-Q for the period ending July 31, 2002 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, William M. Steul,
Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350,
as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:
(3) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(4) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
DATE: September 13, 2002 /s/ William M. Steul
-----------------------------
(Signature)
William M. Steul
Chief Financial Officer
28