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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 January 31, 2003
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
---------------------------------------------
(Address of principal executive offices) (Zip Code)
(617) 482-8260
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes[X] No[ ]
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 January 31, 2003:
Voting Common Stock - 154,880 shares
Non-Voting Common Stock - 69,115,168 shares
Page 1 of 35 pages
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PART I
FINANCIAL INFORMATION
2
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets (unaudited)
January 31, October 31,
2003 2002
---------------------------------------
ASSETS (in thousands)
CURRENT ASSETS:
Cash and cash equivalents $ 114,525 $ 144,078
Short-term investments 94,933 43,886
Investment adviser fees and other receivables 24,605 19,502
Other current assets 3,463 6,101
---------------------------------------
Total current assets 237,526 213,567
---------------------------------------
OTHER ASSETS:
Deferred sales commissions 228,038 239,048
Goodwill 69,467 69,467
Other intangible assets, net 37,110 37,296
Long-term investments 31,312 39,982
Equipment and leasehold improvements, net 13,352 13,897
Other assets 3,277 3,362
---------------------------------------
Total other assets 382,556 403,052
---------------------------------------
Total assets $ 620,082 $ 616,619
=======================================
See notes to consolidated financial statements.
3
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Consolidated Balance Sheets (unaudited) (continued)
January 31, October 31,
2003 2002
------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY (in thousands, except share figures)
CURRENT LIABILITIES:
Accrued compensation $ 9,474 $ 31,899
Accounts payable and accrued expenses 17,293 16,324
Current portion of long-term debt 7,143 7,143
Dividend payable 5,528 5,522
Other current liabilities 22,807 7,382
------------------------------------------
Total current liabilities 62,245 68,270
------------------------------------------
LONG-TERM LIABILITIES:
Long-term debt 124,555 124,118
Deferred income taxes 43,993 50,531
------------------------------------------
Total long-term liabilities 168,548 174,649
------------------------------------------
Total liabilities 230,793 242,919
------------------------------------------
Minority interest 1,483 1,398
------------------------------------------
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 540 540
Issued, 69,115,168 and 69,102,459 shares, respectively
Notes receivable from stock option exercises (3,290) (3,530)
Deferred compensation (1,825) (2,100)
Accumulated other comprehensive income 886 2,585
Retained earnings 391,494 374,806
------------------------------------------
Total shareholders' equity 387,806 372,302
------------------------------------------
Total liabilities and shareholders' equity $ 620,082 $ 616,619
==========================================
See notes to consolidated financial statements.
4
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Consolidated Statements of Income (unaudited)
Three Months Ended
January 31,
2003 2002
--------------------------------------------
(in thousands, except per share figures)
REVENUE:
Investment adviser and administration fees $ 69,074 $ 71,867
Distribution and underwriter fees 37,005 43,242
Service fees 17,925 20,062
Other income 930 499
--------------------------------------------
Total revenue 124,934 135,670
--------------------------------------------
EXPENSES:
Compensation of officers and employees 26,403 28,060
Amortization of deferred sales commissions 21,394 21,403
Service fee expense 15,753 16,352
Distribution fee expense 7,683 7,890
Other expenses 15,313 12,447
--------------------------------------------
Total expenses 86,546 86,152
--------------------------------------------
OPERATING INCOME 38,388 49,518
OTHER INCOME (EXPENSE):
Interest income 1,531 1,689
Interest expense (1,433) (1,087)
Gain on investments 1,874 1,383
Foreign currency loss (95) -
Equity in net loss of affiliates (226) (131)
--------------------------------------------
INCOME BEFORE MINORITY INTEREST IN
EARNINGS AND INCOME TAXES 40,039 51,372
MINORITY INTEREST IN EARNINGS (180) (306)
--------------------------------------------
INCOME BEFORE INCOME TAXES 39,859 51,066
INCOME TAXES 13,950 17,873
--------------------------------------------
NET INCOME $ 25,909 $ 33,193
============================================
EARNINGS PER SHARE:
Basic $ 0.37 $ 0.48
============================================
Diluted $ 0.37 $ 0.46
============================================
DIVIDENDS DECLARED, PER SHARE $ 0.0800 $ 0.0725
============================================
Weighted average common shares outstanding 69,163 69,042
============================================
Weighted average common shares outstanding assuming dilution 70,495 71,813
============================================
See notes to consolidated financial statements.
5
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Consolidated Statements of Cash Flows (unaudited)
Three Months Ended
January 31,
2003 2002
--------------------------------------
(in thousands)
Cash and cash equivalents, beginning of period $ 144,078 $ 115,681
--------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income 25,909 33,193
Adjustments to reconcile net income to net cash provided
by (used for) operating activities:
Gain on investments (1,874) (1,383)
Equity in net loss of affiliate 226 131
Minority interest in earnings 180 306
Translation adjustment 23 -
Interest on long-term debt 522 748
Deferred income taxes (5,690) (4,773)
Tax benefit of stock option exercises 228 4,192
Compensation related to restricted stock issuance 275 275
Depreciation and other amortization 1,323 1,268
Amortization of deferred sales commissions 21,394 21,403
Payment of capitalized sales commissions (17,287) (24,632)
Contingent deferred sales charges received 6,903 6,930
Proceeds from the sale of trading investments - 1,043
Changes in other assets and liabilities:
Investment adviser fees and other receivables (5,103) (1,191)
Other current assets 2,754 (300)
Other assets 73 (254)
Accrued compensation (22,425) (21,885)
Accounts payable and accrued expenses 969 (317)
Other current liabilities 15,425 11,232
--------------------------------------
Net cash provided by operating activities 23,825 25,986
--------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to equipment and leasehold improvements (280) (333)
Net decrease in notes receivable from affiliates 240 145
Proceeds from sale of available-for-sale investments 9,241 50,252
Purchase of available-for-sale investments (52,731) (52,337)
Purchase of management contracts (312) -
--------------------------------------
Net cash used for investing activities (43,842) (2,273)
--------------------------------------
See notes to consolidated financial statements.
6
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Consolidated Statements of Cash Flows (unaudited) (continued)
Three Months Ended
January 31,
2003 2002
---------------------------------------
(in thousands)
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt issuance costs - (523)
Distributions to minority shareholders (95) -
Proceeds from the issuance of non-voting
common stock 5,491 11,554
Repurchase of non-voting common stock (9,410) (16,093)
Dividend paid (5,522) (4,954)
-------------------------------------
Net cash used for financing activities (9,536) (10,016)
-------------------------------------
Net increase (decrease) in cash and cash equivalents (29,553) 13,697
-------------------------------------
Cash and cash equivalents, end of period $ 114,525 $ 129,378
=====================================
SUPPLEMENTAL INFORMATION:
Interest paid $ 79 $ 6
=====================================
Income taxes paid (refunded) $ (140) $ 7,650
=====================================
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 August 2001, the FASB issued Statement of Financial Accounting Standards
(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. SFAS No. 144 is effective for the
Company's fiscal year that began November 1, 2002. The adoption of SFAS No. 144
did not have a material effect on the results of operations or the consolidated
financial position of the Company.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statement Nos.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS No. 145 addresses the classification of gains and losses from the early
extinguishment of debt and the accounting for certain lease arrangements. The
Company elected to adopt the provisions of SFAS No. 145 on August 1, 2002, prior
to the Company's required adoption date of November 1, 2002. The adoption of
SFAS No. 145 did not have a material effect on the results of operations or the
consolidated financial position of the Company.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure." SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value method of accounting for
stock-based employee compensation. SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures about the method
of accounting for stock-based employee compensation and the effect of the method
used on reported results. The Company continues to use the intrinsic value
method as described in APB Opinion No. 25, "Accounting for Stock Issued to
Employees." Accordingly, the transition provision of SFAS No. 148 will not apply
to the Company. The disclosure requirements are effective for interim periods
starting after December 15, 2002. The Company elected to adopt the disclosure
requirements of SFAS No. 148 on November 1, 2002, prior to the Company's
required adoption date of February 1, 2003. The adoption of SFAS No. 148 did not
have a material effect on the results of operations or the consolidated
financial position of the Company.
8
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(2) ACCOUNTING DEVELOPMENTS (CONTINUED)
In November 2002, the FASB issued Financial Accounting Standards Board
Interpretation (FIN) No. 45 "Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness to Others." This
Interpretation addresses obligations and disclosures required for certain
guarantees. This Interpretation applies to guarantees issued or modified after
December 31, 2002. The disclosure requirements are effective for financial
statements of interim or annual periods ending after December 15, 2002. The
adoption of FIN No. 45 did not have a material effect on the results of
operations or the consolidated financial position of the Company.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities." FIN No. 46 addresses reporting and disclosure requirements for
Variable Interest Entities (VIE) and defines a VIE as an entity that either does
not have equity investors with voting rights or has equity investors that do not
provide sufficient financial resources for the entity to support its activities.
The Company acts as an investment adviser regarding collateral for
collateralized debt obligations (CDOs) by certain entities (CDO entities). These
CDO entities might qualify as VIEs. FIN No. 46 requires consolidation of a VIE
by the enterprise that has the majority of the risks and rewards of ownership,
referred to as the "primary beneficiary." It also requires additional
disclosures for an enterprise that holds a significant variable interest in a
VIE, but is not the primary beneficiary. The consolidation and disclosure
provisions of FIN No. 46 are effective immediately for VIEs created after
January 31, 2003, and for interim or annual reporting periods beginning after
June 15, 2003 for VIEs created before February 1, 2003. FIN 46 also requires
interim disclosures in all financial statements issued after January 31, 2003,
regardless of the date on which the VIE was created. The provisions of FIN No.
46 are complex and new. The Company and its advisers are studying whether or not
these CDO entities are VIEs and whether FIN No. 46 would apply to such entities.
If the Company determines that FIN No. 46 is applicable, it would either
consolidate or disclose additional information about these CDO entities when FIN
No. 46 becomes effective. The Company has provided the necessary disclosure
information regarding such CDO issuers in footnote 5.
(3) GOODWILL AND OTHER INTANGIBLES
The following is a summary of other intangible assets at January 31, 2003 and
October 31, 2002:
January 31, 2003 Weighted-
average
amortization Gross
period carrying Accumulated
(dollars in thousands) (in years) amount amortization
- ----------------------------------------------------------------------------------------------------
Amortized intangible assets:
Client relationships acquired 17.9 $38,452 $2,653
Non-amortized intangible assets:
Mutual fund management
contract acquired - 1,311 -
- ----------------------------------------------------------------------------------------------------
Total $39,763 $2,653
====================================================================================================
9
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(3) GOODWILL AND OTHER INTANGIBLES (CONTINUED)
OCTOBER 31, 2002 WEIGHTED-AVERAGE
AMORTIZATION GROSS
PERIOD CARRYING ACCUMULATED
(dollars in thousands) (IN YEARS) AMOUNT AMORTIZATION
- --------------------------------------------------------------------------------------------------
AMORTIZED INTANGIBLE ASSETS:
Client relationships acquired 18.2 $38,140 $2,155
NON-AMORTIZED INTANGIBLE ASSETS:
Mutual fund management
contract acquired - 1,311 -
- --------------------------------------------------------------------------------------------------
Total $39,451 $2,155
==================================================================================================
Additions to amortized intangible assets of $312,000 represent management
contracts acquired by one of the Company's majority owned subsidiaries.
(4) EQUIPMENT AND LEASEHOLD IMPROVEMENTS
The following is a summary of equipment and leasehold improvements at January
31, 2003 and October 31, 2002:
JANUARY 31, OCTOBER 31,
(in thousands) 2003 2002
- -----------------------------------------------------------------------------------------
Equipment $16,025 $15,756
Leasehold improvements 9,508 9,508
- -----------------------------------------------------------------------------------------
25,533 25,264
Less: Accumulated depreciation
and amortization 12,181 11,367
- -----------------------------------------------------------------------------------------
Equipment and leasehold improvements, net $13,352 $13,897
=========================================================================================
10
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(5) INVESTMENTS
The following is a summary of investments at January 31, 2003, and October 31,
2002:
JANUARY 31, OCTOBER 31,
(in thousands) 2003 2002
- ------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS:
Sponsored funds:
Available-for-sale $94,933 $43,886
- ------------------------------------------------------------------------------------
Total $94,933 $43,886
====================================================================================
LONG-TERM INVESTMENTS:
Sponsored funds:
Available-for-sale $10,455 $18,826
Collateralized debt obligation entities 13,155 13,228
Investment in affiliates 6,783 7,009
Other investments 919 919
- ------------------------------------------------------------------------------------
Total $31,312 $39,982
====================================================================================
INVESTMENTS IN COLLATERALIZED DEBT OBLIGATION ISSUERS
The Company provides investment management services for, and has made
investments in, a number of entities that have issued CDOs (CDO entities.) The
Company's minority equity ownership interests in the CDO entities are reported
at fair value. The Company earns investment management fees, including
subordinated management fees in some cases, for managing the collateral for the
CDOs, as well as incentive fees that are contingent on certain performance
conditions. At January 31, 2003, combined assets under management in the
collateral pools of these CDO entities was approximately $1.6 billion, and the
Company's maximum exposure to loss as a result of these investments was
approximately $13.2 million, which is reflected in the Company's Consolidated
Balance Sheet at January 31, 2003. Investors in CDOs have no recourse against
the Company for any losses sustained in any CDO structure. As noted in footnote
1, the Company and its advisers are studying whether or not these CDO entities
are VIEs and whether FIN No. 46 would apply to such entities. If the Company
determines that FIN No. 46 is applicable, it would either consolidate or
disclose additional information about these CDO entities when FIN No. 46 becomes
effective.
11
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(6) DEBT
The following is a summary of the carrying value of long-term debt at January
31, 2003 and October 31, 2002:
(in thousands) JANUARY 31, 2003 OCTOBER 31, 2002
- ----------------------------------------------------------------------------------------
6.22% senior notes due 2004 $14,286 $14,286
1.5% zero-coupon exchangeable senior
notes due 2031 117,412 116,975
- ----------------------------------------------------------------------------------------
Total 131,698 131,261
Less: current maturities (7,143) (7,143)
- ----------------------------------------------------------------------------------------
Total long-term debt $124,555 $124,118
========================================================================================
(7) STOCK PLANS
The Company has a Stock Option Plan (the 1998 Plan) administered by the Option
Committee of the Board of Directors under which options to purchase shares of
the Company's non-voting common stock may be granted to all eligible employees
of the Company. The 1998 Plan has been approved by the Company's voting
stockholders. No stock options may be granted under the plan with an exercise
price of less than the fair market value of the stock at the time the stock
option is granted. The options expire five to ten years from the date of grant
and vest over a five-year period as stipulated in each grant. The 1998 Plan
contains provisions which, in the event of a change in control of the Company,
may accelerate the vesting of awards. A total of 12.0 million shares has been
reserved for issuance under the 1998 Plan. Through January 31, 2003, 9.0 million
shares have been issued pursuant to this plan.
Stock option transactions under the 1998 Plan and predecessor plans are
summarized as follows:
- --------------------------------------------------------------------------------
WEIGHTED
AVERAGE EXERCISE
SHARES PRICE
- --------------------------------------------------------------------------------
(share figures in thousands)
Balance, October 31, 2001 6,453 $15.42
Granted 1,881 28.88
Exercised (2,109) 7.43
Forfeited/Expired (98) 22.81
- --------------------------------------------------------------------------------
Balance, October 31, 2002 6,127 22.18
- --------------------------------------------------------------------------------
Granted 2,479 29.13
Exercised (250) 13.01
Forfeited/Expired (59) 26.14
- --------------------------------------------------------------------------------
Balance, January 31, 2003 8,297 $24.51
================================================================================
12
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(7) STOCK PLANS (CONTINUED)
Outstanding options to purchase shares of non-voting common stock issued under
the 1998 Plan and predecessor plans are summarized as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------------------------------------ ---------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE WEIGHTED
OUTSTANDING AT REMAINING EXERCISE EXERCISABLE AS AVERAGE
RANGE OF EXERCISE PRICES 1/31/03 CONTRACTUAL LIFE PRICE OF 01/31/03 EXERCISE PRICE
- ----------------------------------- ---------------- ----------------- ------------- ---------------- ----------------
(share figures in thousands)
$10.06 - $11.56 1,030 3.7 $11.43 945 $11.43
$12.62 18 0.8 12.62 18 12.62
$17.19 - $18.91 1,018 6.7 17.22 548 17.21
$21.16 - $24.03 50 7.0 21.67 28 21.59
$24.53 - $28.13 1,605 7.7 24.63 626 24.57
$28.67 - $32.01 4,522 9.3 29.02 398 28.83
$33.16 - $35.65 38 8.7 35.13 9 35.21
$37.09 - $40.32 16 9.0 37.91 3 37.09
- ----------------------------------- ---------------- ----------------- ------------- ---------------- ----------------
8,297 7.9 $24.51 2,575 $18.78
=================================== ================ ================= ============= ================ ================
PRO FORMA DISCLOSURE
The Company continues to apply APB Opinion No. 25 in accounting for stock-based
compensation arrangements. Had compensation cost for the Company's stock-based
compensation plans been determined consistent with the fair value method as
described in SFAS No. 123, the Company's net income and earnings per share for
the three months ended January 31, 2003 and 2002 would have been reduced to the
following pro forma amounts:
- -----------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED
JANUARY 31,
2003 2002
- -----------------------------------------------------------------------------------------------
(net income figures in thousands)
Net income as reported $25,909 $33,193
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of tax 2,968 2,275
-------------------------------------
Pro forma net income $22,941 $30,918
=====================================
Earnings per share:
Basic - as reported $0.37 $0.48
=====================================
Basic - pro forma $0.33 $0.45
=====================================
Diluted - as reported $0.37 $0.46
=====================================
Diluted - pro forma $0.33 $0.43
=====================================
13
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(7) STOCK OPTION PLAN (CONTINUED)
The weighted average fair value of options granted on the date of grant using
the Black-Scholes option pricing model was as follows:
- ---------------------------------------------------------------------------
JANUARY 31,
2003 2002
- ---------------------------------------------------------------------------
Weighted average fair value of
options granted per share $29.12 $28.85
ASSUMPTIONS:
Dividend yield 1.53% 1.11%
Volatility 31% 30%
Risk-free interest rate 4.2% 4.0%
Expected life of options 8 years 8 years
For purposes of pro forma disclosure, the estimated fair value of each option
grant is amortized to expense ratably over the option-vesting period.
RESTRICTED STOCK PLAN
The Company has a Restricted Stock Plan administered by the Compensation
Committee of the Board of Directors under which restricted stock may be granted
to key employees. Shares of the Company's non-voting common stock granted under
the plan are subject to restrictions on transferability and carry the risk of
forfeiture, based in each case on such considerations as the Compensation
Committee shall determine. Unless the Compensation Committee determines
otherwise, restricted stock that is still subject to restrictions upon
termination of employment shall be forfeited. Restrictions on shares granted
lapse in three to seven years from date of grant. A total of 1,000,000 shares
have been reserved under the plan. No such shares were issued in the quarter
ended January 31, 2003 or 2002.
The Company recorded compensation expense of $0.3 million for the three months
ended January 31, 2003 and 2002 relating to those shares.
(8) 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 three months of fiscal 2003, the Company purchased 324,600 shares
of its non-voting common stock under this share repurchase authorization.
Approximately 2,024,000 shares remain under the current authorization.
(9) 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 $51.2 million,
which exceeded its minimum net capital requirement of $0.6 million at January
31, 2003. The ratio of aggregate indebtedness to net capital at January 31, 2003
was .19 to 1.
14
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(10) 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 three months ended January 31, 2003
and 2002.
In addition, the exercise of non-qualified stock options resulted in a reduction
of taxes payable of approximately $0.2 million and $3.3 million for the three
months ended January 31, 2003 and 2002. Such benefit has been reflected in
shareholders' equity.
(11) COMPREHENSIVE INCOME
Total comprehensive income includes net income and other comprehensive income or
(loss), net of tax. The components of comprehensive income (loss) at January 31,
2003 and 2002 are as follows:
- --------------------------------------------------------------------------------------------------------------------
JANUARY 31,
(IN THOUSANDS) 2003 2002
- --------------------------------------------------------------------------------------------------------------------
Net income $ 25,909 $ 33,193
Net unrealized loss on available-for-sale securities, net of
income tax benefit of ($976) and ($632), respectively (1,713) (1,000)
Foreign currency translation adjustments, net of income
taxes of ($9) and ($0) 14 -
-------------------------------------------
Comprehensive income $ 24,210 $ 32,193
===========================================
(12) COMMITMENTS AND CONTINGENCIES
In the normal course of its business, the Company enters into agreements that
include indemnities in favor of third parties, such as engagement letters with
advisors and consultants, information technology agreements, distribution
agreements and service agreements. The Company has also agreed to indemnify its
directors and certain of its officers and employees in accordance with the
Company's by-laws. Certain agreements do not contain any limits on the Company's
liability and therefore, it is not possible to estimate the Company's potential
liability under these indemnities. In certain cases, the Company has recourse
against third parties with respect to these indemnities. Further, the Company
maintains insurance policies that may provide coverage against certain claims
under these indemnities.
The Company and its subsidiaries are subject to various legal proceedings. In
the opinion of management, after discussions with legal counsel, the ultimate
resolution of these matters will not have a material adverse effect on the
consolidated financial condition or results of operations of the Company.
15
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 separate 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 over the period such assets are under
management. The Company's major expenses are the amortization of deferred sales
commissions, employee compensation, and distribution and service fee expenses.
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 ongoing 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 current 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 the
period during which the shareholder is subject to a contingent deferred sales
charge, none of which exceeds six years. Distribution plan payments received
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 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 flows. 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 and makes periodic accounting adjustments as required.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Identifiable intangible assets 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 is tested annually for impairment by
comparing the fair values of the companies acquired to their carrying amounts,
including goodwill. If the carrying amounts of the companies exceed their
respective fair values, additional impairment tests will be performed to measure
the amount of the impairment loss, if any.
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 deducted as paid for tax purposes. Since January 1, 2001, sales commissions
are deducted for income tax purposes over their estimated useful lives,
consistent with guidelines established by the Internal Revenue Service, 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 or 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.
The Company accounts for its investments in collateralized debt obligation (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 loss relating to its equity 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 Company's 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. In periods of rising credit default rates and lower debt recovery
rates, the carrying value of the Company's investments in these CDO entities may
be adversely affected by unfavorable changes in cash flow estimates and expected
returns.
A CDO entity issues 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 issued by the CDO are secured by collateral in the form of
high-yield bonds and/or floating-rate income instruments that the CDO entity
purchases with proceeds from its issuance of non-recourse debt securities. The
Company manages the collateral securities for a fee and, in most cases, is a
minority investor in the equity interests of the CDO entity. An equity interest
in a CDO entity is subordinated to all other interests in the CDO entity and
entitles the investor to receive the residual cash flows, if any, from the CDO
entity. As a result, the Company's equity investment in a CDO entity is
extremely 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 Company's financial exposure to the
CDOs it manages is limited to its equity interests in the CDO entities as
reflected in the Company's Consolidated Balance Sheets, totaling approximately
$13.2 million at January 31, 2003.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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,"
with legal counsel 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 JANUARY 31, 2003 COMPARED TO QUARTER ENDED
JANUARY 31, 2002
The Company reported earnings of $25.9 million or $0.37 per diluted share in the
first quarter of fiscal 2003 compared to $33.2 million or $0.46 per diluted
share in the first quarter of fiscal 2002.
ASSET HIGHLIGHTS
Assets under management of $55.8 billion on January 31, 2003 were 6 percent
lower than the $59.3 billion reported a year earlier. The Company's assets under
management were negatively affected by $8.1 billion of market depreciation
resulting from weak equity markets.
Despite difficult market conditions, the Company had positive net inflows in
both the first quarter of fiscal 2003 and 2002. Net inflows of long-term fund
assets in the first quarter of fiscal 2003 were $0.9 billion compared to $0.6
billion in the first quarter of last year. Net inflows increased in the first
quarter of 2003 compared to the first quarter of fiscal 2002 as a result of the
offering of nine closed-end municipal bond funds that added $0.7 billion of new
assets. The successful offering of the closed-end municipal bond funds offset a
reduction in core mutual fund sales year-over-year. Net inflows of separate
account assets were $0.4 billion in the first quarter of fiscal 2003 compared to
$0.5 billion in the first quarter of fiscal 2002. The following table summarizes
the asset flows for each of the quarters ended January 31, 2003 and 2002:
ASSET FLOWS
THREE MONTHS ENDED
JANUARY 31, 2003 JANUARY 31, 2002
(IN BILLIONS)
- ----------------------------------------------------------------------------------------------------
Long-term fund assets - beginning of period $ 43.9 $ 45.0
Sales/inflows 2.5 2.1
Redemptions/outflows (1.6) (1.5)
Exchanges - 0.1
Appreciation (depreciation) (0.5) 1.3
------------------------------------------
Long-term fund assets - end of period 44.3 47.0
------------------------------------------
Separate accounts - beginning of period 10.8 10.4
Net flows - Institutional and high net worth 0.1 0.4
Net flows - Managed accounts 0.3 0.1
Appreciation (depreciation) (0.3) 0.4
------------------------------------------
Separate accounts - end of period 10.9 11.3
------------------------------------------
Money market fund assets - end of period 0.6 1.0
------------------------------------------
Total assets under management - end of period $ 55.8 $59.3
==========================================
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Equity assets under management comprised 53 percent of total assets under
management on January 31, 2003 compared to 59 percent on January 31, 2002. Fixed
income assets under management increased to 33 percent of total assets under
management from 25 percent a year ago and floating-rate income assets decreased
to 14 percent of total assets under management from 16 percent a year ago.
ASSETS UNDER MANAGEMENT BY INVESTMENT OBJECTIVE
JANUARY 31, 2003 JANUARY 31, 2002
(IN BILLIONS)
- ----------------------------------------------------------------------------------------------------
Equity $ 29.7 $ 35.2
Fixed income 18.3 14.8
Floating-rate income 7.8 9.3
------------------------------------------
Total $ 55.8 $ 59.3
==========================================
REVENUE
The Company reported revenue of $124.9 million in the first quarter of fiscal
2003 compared to $135.7 million in the first quarter of fiscal 2002, a decrease
of 8 percent.
Investment adviser and administration fees are generally calculated under
contractual agreements with the Company's sponsored funds and separate accounts
and are based upon a percentage of the market value of assets under management.
Shifts in the mix and changes in the market value of managed assets affect the
composition and amount of investment adviser and administration fees. Investment
adviser and administration fees decreased by 4 percent to $69.1 million in the
first quarter of fiscal 2003 from $71.9 million in the first quarter of fiscal
2002, consistent with the 4 percent decline in average long-term fund assets
under management.
For the quarter ended January 31, 2003, distribution and underwriting fees
decreased by $6.2 million, or 14 percent, from $43.2 million to $37.0 million
compared to the same period last year. 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). Under certain conditions, the Company waives
the sales load on Class A shares. In such cases, the shares are sold at net
asset value. Changes in the Company's mix of assets under management alter the
composition and amount of distribution income received. 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 since spread-load commission (Class B) assets have higher distribution
fees than a front-end load (Class A) assets. The decrease in distribution income
also reflects a decrease in the market value of the Company's Class B and C
share assets under management compared to a year earlier and a decrease in early
withdrawal charges received in conjunction with bank loan interval fund
redemptions.
Service fee revenue, which is also based upon a percentage of the market value
of fund assets under management, decreased to $17.9 million for the quarter
ended January 31, 2003 from $20.1 million for the quarter ended January 31,
2002, consistent with the decrease in average long-term fund assets under
management.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
EXPENSES
Compensation expense decreased 6 percent in the first quarter of fiscal 2003
compared to the first quarter of fiscal 2002 because of lower operating income
based bonus accruals.
Amortization of deferred sales commissions was $21.4 million for the quarters
ended January 31, 2003 and 2002. Amortization is impacted by ongoing sales of
mutual fund Class B shares and equity fund private placements, and the residual
effect of accounting changes mandated by the SEC in fiscal 1998 and 1999. For a
nine-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, commission payments on new sales of
these funds were once again capitalized and amortized. 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.
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 decreased 4 percent to $15.8 million in the first quarter of fiscal
2003 from $16.4 million a year earlier. The decrease in service fee expense can
be attributed to the decrease 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 decreased 3
percent to $7.7 million in the first quarter of fiscal 2003 from $7.9 million a
year earlier primarily as a result of a decrease in average Class C assets under
management.
Other operating expenses increased 23 percent to $15.3 million in the first
quarter of fiscal 2003 from $12.4 million a year ago, primarily as a result of
$1.8 million of offering expenses relating to new closed-end municipal bond
funds, as well as increases in marketing-related travel and promotional
expenses.
OTHER INCOME AND EXPENSE
Interest expense increased to $1.4 million in the first quarter of 2003 from
$1.1 million a year ago, primarily as a result of a decrease in the accretion of
interest related to the Company's 1.5% zero-coupon exchangeable senior notes
issued by a wholly owned subsidiary of the Company, Eaton Vance Management. This
decrease reflects the repurchase of $87.0 million of these notes on August 13,
2002 offset by the accrual of additional interest to be paid to the note holders
on February 13, 2003.
INCOME TAXES
The Company's effective tax rate was 35 percent during the first quarter of
fiscal 2003 and 2002.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
CHANGES IN FINANCIAL CONDITION AND LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments aggregated $209.5 million at
January 31, 2003, an increase of $21.5 million from October 31, 2002.
The Company has met its cash requirements primarily through cash generated by
operating activities and the issuance of debt securities. The Company's
principal uses of cash have been to pay sales commissions, operating expenses,
income taxes, enhance technology infrastructure, purchase investments, pay
shareholder dividends, repay and service debt and repurchase shares of the
Company's non-voting common stock. The Company expects the principal uses of
funds for the foreseeable future will be for sales commissions, operating
expenses, income taxes, enhancements to technology infrastructure, additional
investments, acquisitions, shareholder dividends, repayment and servicing of
debt and the repurchase shares of the Company's non-voting common stock. The
Company is scheduled to repay approximately $7.1 million in principal related to
its 6.22% Senior Notes in March 2003. EVM does not expect to repurchase any of
its zero-coupon exchangeable senior notes (Notes) in fiscal 2003.
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's financial condition is highly liquid with the significant
percentage of the Company's assets represented by cash and short-term
investments. The Company's receivables and payables represent transactions that
arise in the normal course of business and settle within a few days. Deferred
sales commissions paid to broker/dealers in connection with the sale of open-end
and bank loan interval funds decreased $11.0 million from $239.0 million at
October 31, 2002 to $228.0 million at January 31, 2003 primarily as a result of
a decrease in Class B share sales and ongoing amortization of the asset. For
further discussion of the components of the Company's deferred sales commission
please see the Operating Cash Flow section below. Long-term investments
decreased to $37.1 million at January 31, 2003 as a result of the sale of
available-for-sale securities. Accrued compensation decreased from $31.9 million
at October 31, 2002 to $9.5 million at January 31, 2002 as a result of the
payment of fiscal year-end bonuses in November 2002. Other current liabilities
increased primarily due to the timing of payments for accrued income taxes.
Long-term debt increased primarily as a result of accretion related to the
Company's zero-coupon exchangeable senior notes. Please see the Financing Cash
Flow section below, for further discussion of the Company's debt and liquidity.
OPERATING CASH FLOWS
The Company generated $23.8 million of cash from operations in the first quarter
of fiscal 2003 compared to $26.1 million in the first quarter of fiscal 2002.
Cash generated from operations decreased in the first quarter of 2003 from a
year earlier primarily due to a decrease in revenue year over year. Capitalized
sales commissions paid year over year associated with the distribution of the
Company's Class B and Class C fund shares, as well as the Company's equity fund
private placements decreased by $7.3 million due to a decline in Class B and
Class C fund sales. Although these commission payments decreased to $17.3
million in the first quarter of 2003 from $24.6 million in the first quarter of
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
2002, they continue to be a significant use of cash. Effective January 1, 2001,
the Company capitalizes sales commissions for tax purposes, and deducts them
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,
thereby increasing the use of current cash resources, 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 $43.8
million in the first three months of fiscal 2003 compared to $2.3 million in the
first three months of fiscal 2002. Cash used for investing activities in the
first three months of fiscal 2003 reflects $52.7 million of purchases of
available-for-sale investments and $9.2 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 $9.5
million in the first three months of fiscal 2003 compared to $10.2 million in
the first three months of fiscal 2002. The Company repurchased a total of
324,600 shares of its non-voting common stock for $9.4 million in the first
three month of fiscal 2003 under its authorized repurchase program and issued
250,200 shares or $5.5 million of non-voting common stock in connection with the
exercise of stock options and employee stock purchases in the first three months
of fiscal 2003. The Company has authorization to purchase approximately 2.0
million additional shares under its present share repurchase authorization
program and anticipates that future repurchases will be a principal use of cash.
The Company's dividend was $0.0800 per share in the first three months of fiscal
2003 compared to $0.0725 in the first three months of fiscal 2002.
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 $14.3 $7.1 $ 7.2 - -
- ------------------------------------------------------------------------------------------------------------
Operating leases $33.3 $5.2 $10.5 $10.0 $7.6
- ------------------------------------------------------------------------------------------------------------
Excluded from the table above are Eaton Vance Management (EVM's) Notes. On
August 13, 2001, EVM issued the Notes at a principal amount of $314.0 million
due August 13, 2031, 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 percent 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 & Poor's.
Such repurchases can be paid in cash or, shares of the Company's non-voting
common stock or a combination of both. The Company may be required to repurchase
up to $120.1 million, the accreted value of the Notes, on the next scheduled
repurchase date, August 13, 2004.
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
On November 12, 2002, EVM amended the terms of its Notes to provide that each
holder electing not to require EVM to repurchase the holder's Notes on November
13, 2002 would receive cash interest payments equal to 1.672 percent per year of
each Note's principal amount at maturity for a period of 21 months. The first
interest payment due on February 13, 2003, will be paid in arrears for the
three-month period ending on that date. The three remaining interest payments
will be made on a semiannual basis in arrears on their respective payment dates.
No Notes were tendered for repurchase on November 13, 2002. Holders of the Notes
may next require EVM to repurchase the Notes on August 13, 2004.
In December 2001, EVM executed a revolving credit facility with several banks.
This facility, which expires December 21, 2004, provides that EVM may borrow up
to $170 million at market rates of interest that vary depending on the level of
usage of the facility and credit ratings of the Notes. The agreement contains
financial covenants with respect to leverage and interest coverage and requires
EVM to pay an annual commitment fee on any unused portion. At January 31, 2003,
EVM had no borrowings outstanding under its revolving credit facility.
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.
ACCOUNTING CHANGES
In August 2001, the FASB issued Statement of Financial Accounting Standards
(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. SFAS No. 144 is effective for the
Company's fiscal year that began November 1, 2002. The adoption of SFAS No. 144
did not have a material effect on the results of operations or the consolidated
financial position of the Company.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statement Nos.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS No. 145 addresses the classification of gains and losses from the early
extinguishment of debt and the accounting for certain lease arrangements. The
Company elected to adopt the provisions of SFAS No. 145 on August 1, 2002, prior
to the Company's required adoption date of November 1, 2002. The adoption of
SFAS No. 145 did not have a material effect on the results of operations or the
consolidated financial position of the Company.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure." SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value method of accounting for
stock-based employee compensation. SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures about the method
of accounting for stock-based employee compensation and the effect of the method
used on reported results. The Company continues to use the intrinsic value
method as described in APB Opinion No. 25, "Accounting for Stock Issued to
Employees." Accordingly, the transition provision of SFAS No. 148 will not apply
to the Company. The disclosure requirements are effective for interim periods
starting after December 15, 2002. The Company elected to adopt the disclosure
requirements of SFAS No. 148 on November 1, 2002, prior to the Company's
required adoption date of February 1, 2003. The adoption of SFAS No. 148 did not
have a material effect on the results of operations or the consolidated
financial position of the Company.
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
In November 2002, the FASB issued Financial Accounting Standards Board
Interpretation (FIN) No. 45 "Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness to Others." This
Interpretation addresses obligations and disclosures required for certain
guarantees. This interpretation applies to guarantees issued or modified after
December 31, 2002. The disclosure requirements are effective for financial
statements of interim or annual periods ending after December 15, 2002. The
adoption of FIN No. 45 did not have a material effect on the results of
operations or the consolidated financial position of the Company.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities." FIN No. 46 addresses reporting and disclosure requirements for
Variable Interest Entities (VIE) and defines a VIE as an entity that either does
not have equity investors with voting rights or has equity investors that do not
provide sufficient financial resources for the entity to support its activities.
The Company acts as an investment adviser regarding collateral for
collateralized debt obligations (CDOs) by certain entities (CDO entities). These
CDO entities might qualify as VIEs. FIN No. 46 requires consolidation of a VIE
by the enterprise that has the majority of the risks and rewards of ownership,
referred to as the "primary beneficiary." It also requires additional
disclosures for an enterprise that holds a significant variable interest in a
VIE, but is not the primary beneficiary. The consolidation and disclosure
provisions of FIN No. 46 are effective immediately for VIEs created after
January 31, 2003, and for interim or annual reporting periods beginning after
June 15, 2003 for VIEs created before February 1, 2003. FIN 46 also requires
interim disclosures in all financial statements issued after January 31, 2003,
regardless of the date on which the VIE was created. The provisions of FIN No.
46 are complex and new. The Company and its advisers are studying whether or not
these CDO entities are VIEs and whether FIN No. 46 would apply to such entities.
If the Company determines that FIN No. 46 is applicable, it would either
consolidate or disclose additional information about these CDO entities when FIN
No. 46 becomes effective. The Company has provided the necessary disclosure
information regarding such CDO issuers in footnote 5.
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.
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 maintaining 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.
24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
There are few barriers to entry in the investment management business. The
Company's funds and separate 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 separate 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,
fund transfer agency or 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 effect on the Company's operations and results, including but
not limited to increased expenses and reduced investor interest in certain 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.
25
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 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 fund shares. The Company's investments in sponsored
equity funds totaled $8.7 million at January 31, 2003, 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 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 $0.4 million based on fixed-income and
floating-rate income investments of $96.0 million as of January 31, 2003. 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 minority equity
interests in several CDO entities that are included in "Long-term investments"
in the Company's Consolidated Balance Sheets. As a minority equity investor in a
CDO entity, the Company is only entitled to a residual interest in the CDO
entity, making these investments extremely sensitive to the default rates of the
underlying issuers of the high-yield bonds or floating-rate income instruments
held by the CDO entity. The Company's minority equity 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 a 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 are adversely
impacted and the Company may be unable to recover its investment. The Company's
total investment in minority equity interests in CDO entities is approximately
$13.2 million at January 31, 2003, and represents the total value at risk as of
January 31, 2003.
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.
26
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days prior to filing this report, 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. James B. Hawkes, Chairman,
President and Chief Executive Officer, and William M. Steul, Treasurer and Chief
Financial Officer, reviewed and participated in this evaluation. Based on this
evaluation, Messrs. Hawkes and Steul concluded that, as of the date of their
evaluation, the Company's disclosure controls and procedures were effective.
Since the date of the evaluation described above, there have not been any
significant changes in the Company's internal accounting controls or in other
factors that could significantly affect those controls.
27
PART II
OTHER INFORMATION
28
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
An annual meeting of holders of Voting Common Stock of Eaton Vance Corp. was
held at the principal office of the Company on January 15, 2003. All of the
outstanding Voting Common Stock, namely the 154,880 shares, was represented in
person or by proxy at the meeting.
The following matters received the affirmative vote of all of the outstanding
Voting Common Stock and were approved:
1) The Annual Report to Shareholders of the Company for the fiscal year ended
October 31, 2002.
2) The election of the following individuals as directors for the ensuing
corporate year to hold office until the next annual meeting and until their
successors are elected and qualify:
John G.L. Cabot
Thomas E. Faust Jr.
James B. Hawkes
Leo I. Higdon, Jr.
John M. Nelson
Vincent M. O'Reilly
Ralph Z. Sorenson
3) The selection of the firm of Deloitte & Touche LLP as the auditors to audit
the books of the Company for its fiscal year ended October 31, 2003.
4) The ratification of the acts of the Directors since the previous meeting of
Shareholders held on January 16, 2002.
29
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 November 26, 2002, regarding the
Company's press release of its results of operations for the quarter ended
October 31, 2002.
30
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: March 11, 2003 /s/William M. Steul
------------------------------------
(Signature)
William M. Steul
Chief Financial Officer
DATE: March 11, 2003 /s/Laurie G. Hylton
---------------------------------
(Signature)
Laurie G. Hylton
Chief Accounting Officer
31
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;
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;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
DATE: March 11, 2003 /s/James B. Hawkes
---------------------------------
(Signature)
James B. Hawkes
Chief Executive Officer
32
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;
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;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
d) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
e) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
DATE: March 11, 2003 /s/William M. Steul
-------------------------------
(Signature)
William M. Steul
Chief Financial Officer
33
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 January 31, 2003 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: March 11, 2003 /s/James B. Hawkes
---------------------------------
(Signature)
James B. Hawkes
Chairman, President and
Chief Executive Officer
34
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 January 31, 2003 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:
(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: March 11, 2003 /s/William M. Steul
--------------------------------
(Signature)
William M. Steul
Chief Financial Officer
35