EATON VANCE CORP - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


(Mark One)
[X]		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended January 31, 2005
or

[ ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________

Commission file number 1-8100

EATON VANCE CORP.

(Exact name of registrant as specified in its charter)


Maryland (State or other jurisdiction of incorporation or organization)		04-2718215 (I.R.S. Employer Identification No.)

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 (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 [ ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [X] No [ ]

Shares outstanding as of January 31, 2005:

Voting Common Stock – 309,760 shares
Non-Voting Common Stock – 132,872,824 shares

Eaton Vance Corp.
Form 10-Q
For the Three Months Ended January 31, 2005
Index


Required Information		Page Number Reference


Part I	Financial Information
Item 1.	Consolidated Financial Statements		3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		30
Item 4.	Controls and Procedures		30

Part II	Other Information
Item 1.	Legal Proceedings		32
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		32
Item 4.	Submission of Matters to a Vote of Security Holders		32
Item 6.	Exhibits		33

Signatures			34

Part I - Financial Information

Item 1. Consolidated Financial Statements

Eaton Vance Corp.
Consolidated Balance Sheets (unaudited)


(in thousands)	January 31, 2005		October 31, 2004

Assets

Current Assets:
Cash and cash equivalents	$	147,872	$	147,137
Short-term investments		178,884		210,429
Investment adviser fees and other receivables		34,246		32,249
Other current assets		4,744		4,861

Total current assets		365,746		394,676

Other Assets:
Deferred sales commissions		151,961		162,259
Goodwill		89,281		89,281
Other intangible assets, net		43,181		43,965
Long-term investments		42,944		36,895
Equipment and leasehold improvements, net		12,051		12,413
Other assets		4,410		4,077

Total other assets		343,828		348,890

Total assets	$	709,574	$	743,566

See notes to consolidated financial statements.

Eaton Vance Corp.

Consolidated Balance Sheets (unaudited) (continued)


(in thousands, except share figures)	January 31, 2005			October 31, 2004

Liabilities and Shareholders’ Equity

Current Liabilities:
Accrued compensation	$	20,029		$	52,299
Accounts payable and accrued expenses		26,164			23,789
Dividend payable		10,638			10,660
Other current liabilities		24,587			7,451

Total current liabilities		81,418			94,199

Long-term Liabilities:
Long-term debt		74,625			74,347
Deferred income taxes		55,528			57,644

Total long-term liabilities		130,153			131,991

Total liabilities		211,571			226,190

Minority interest		38,506			67,870

Commitments and contingencies		—			—

Shareholders’ Equity:
Common stock, par value $0.00390625 per share:
Authorized, 1,280,000 shares
Issued, 309,760 shares		1			1
Non-voting common stock, par value $0.00390625 per share:
Authorized, 190,720,000 shares
Issued, 132,872,824 and 133,271,560 shares, respectively		519			521
Notes receivable from stock option exercises		(2,693	)		(2,718	)
Deferred compensation		(3,200	)		(2,400	)
Accumulated other comprehensive income		2,272			1,854
Retained earnings		462,598			452,248

Total shareholders’ equity		459,497			449,506

Total liabilities and shareholders’ equity	$	709,574		$	743,566

See notes to consolidated financial statements.

Eaton Vance Corp.
Consolidated Statements of Income (unaudited)


	Three Months Ended January 31,
(in thousands, except per share figures)	2005			2004

Revenue:
Investment adviser and administration fees	$	118,918		$	93,750
Distribution and underwriter fees		35,060			39,876
Service fees		25,477			21,909
Other revenue		2,326			1,438

Total revenue		181,781			156,973

Expenses:
Compensation of officers and employees		42,204			37,499
Amortization of deferred sales commissions		18,040			20,763
Service fee expense		21,172			18,632
Distribution expense		22,919			18,779
Other expenses		14,587			11,197

Total expenses		118,922			106,870

Operating income		62,859			50,103

Other income (expense):
Interest income		709			788
Interest expense		(361	)		(1,651	)
Gain on investments		10			5
Foreign currency gain (loss)		22			(18	)

Income before income taxes, equity in net income (loss) of affiliates and minority interest		63,239			49,227
Income taxes		23,368			17,721
Equity in net income (loss) of affiliates, net of tax		(577	)		9
Minority interest, net of tax		885			702

Net income	$	38,409		$	30,813

Earnings per share:
Basic	$	0.29		$	0.23

Diluted	$	0.27		$	0.22

Weighted average shares outstanding:
Basic		133,522			136,392

Diluted		143,711			145,840

See notes to consolidated financial statements.

Eaton Vance Corp.
Consolidated Statements of Cash Flows (unaudited)


	Three Months Ended January 31,
(in thousands)	2005			2004

Cash and cash equivalents, beginning of period	$	147,137		$	138,328

Cash Flows from Operating Activities:
Net income		38,409			30,813
Adjustments to reconcile net income to net cash provided by operating activities:
(Gain) loss on investments		21			(158	)
Equity in net (income) loss of affiliate		915			(15	)
Minority interest		1,400			1,097
Interest on long-term debt		331			529
Deferred income taxes		(2,396	)		33,964
Tax benefit of stock option exercises		2,515			733
Compensation related to restricted stock issuance		200			400
Depreciation and other amortization		1,595			1,639
Amortization of deferred sales commissions		18,040			20,763
Payment of capitalized sales commissions		(12,879	)		(17,915	)
Contingent deferred sales charges received		5,147			5,246
Proceeds from the sale of trading securities		65,098			14,799
Purchase of trading securities		(34,996	)		(40,702	)
Changes in other assets and liabilities:
Investment adviser fees and other receivables		(1,997	)		(4,193	)
Other current assets		172			(20,351	)
Other assets		456			115
Accrued compensation		(32,270	)		(19,447	)
Accounts payable and accrued expenses		2,375			(3,105	)
Other current liabilities		17,136			(1,442	)

Net cash provided by operating activities		69,272			2,770

Cash Flows From Investing Activities:
Additions to equipment and leasehold improvements		(449	)		(414	)
Net (increase) decrease in notes receivable from affiliates		25			(39	)
Proceeds from sale of available-for-sale investments		509			365
Purchase of available-for-sale investments		(5,849	)		(1,157	)
Purchase of management contracts		—			(225	)

Net cash used for investing activities		(5,764	)		(1,470	)

See notes to consolidated financial statements.

Eaton Vance Corp.
Consolidated Statements of Cash Flows (unaudited) (continued)


	Three Months Ended January 31,
(in thousands)	2005			2004

Cash Flows From Financing Activities:
Credit facility debt issuance costs		(412	)		—
Distributions to minority shareholders		(1,380	)		(611	)
Proceeds from issuance of non-voting common stock		9,882			5,487
Repurchase of non-voting common stock		(30,819	)		(22,265	)
Dividend paid		(10,660	)		(8,197	)
Proceeds from the issuance of mutual fund subsidiaries’ capital stock		34,000			32,018
Redemption of mutual fund subsidiaries’ capital stock		(63,384	)		(14,030	)

Net cash used for financing activities		(62,773	)		(7,598	)

Foreign currency translation adjustment		—			75

Net increase (decrease) in cash and cash equivalents		735			(6,223	)

Cash and cash equivalents, end of period	$	147,872		$	132,105

Supplemental Cash Flow Information:
Interest paid	$	30		$	79

Income taxes paid	$	3,540		$	2,023

See notes to consolidated financial statements.

Eaton Vance Corp.
Notes to Consolidated Financial Statements

(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 only 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 period amounts have been reclassified to conform to the current period presentation.

The number of shares used for purposes of calculating earnings per share and all other share and per share data have been adjusted for all periods presented to reflect a two-for-one stock split effective January 14, 2005.

(2) Principles of Consolidation

The accompanying financial statements include the accounts of Eaton Vance Corp. and its wholly and majority owned subsidiaries. The equity method of accounting is used for investments in affiliates in which the Company’s ownership ranges from 20 to 50 percent. The Company consolidates all investments in affiliates in which the Company’s ownership exceeds 50 percent. The Company provides for minority interests in consolidated companies for which the Company’s ownership is less than 100 percent. All material intercompany accounts and transactions have been eliminated.

(3) Earnings Per Share

In October 2004, the Financial Accounting Standards Board ratified the consensus of the Emerging Issues Task Force (EITF) regarding the effect of contingently convertible debt on diluted earnings per share. EITF 04-08 states that any shares of common stock that may be issued to settle contingently convertible securities must be considered issued in the calculation of diluted earnings per share, regardless of whether the market price trigger (or other contingent feature) has been met. The consensus requires the restatement of diluted earnings per share for all prior periods presented. The implementation of EITF 04-08, as indicated in the table below, reduced diluted earnings per share by less than $0.01 in each of the fiscal quarters ended January 31, 2005 and 2004.

The following table provides a reconciliation of net income and common shares used in the basic and diluted earnings per share computations for the three months ended January 31, 2005 and 2004:

	For the Three Months Ended January 31,

(in thousands, except per share data)	2005		2004

Net income – basic	$	38,409	$	30,813
Interest adjustment related to contingently convertible debt, net of tax		185		768

Net income – diluted	$	38,594	$	31,581

Weighted-average shares outstanding – basic		133,522		136,392
Incremental common shares from stock options and restricted stock awards		7,001		4,280
Incremental common shares related to contingently convertible debt		3,188		5,168

Weighted-average shares outstanding – diluted		143,711		145,840

Earnings per share:
Basic	$	0.29	$	0.23

Diluted	$	0.27	$	0.22

The Company uses the treasury stock method to account for the dilutive effect of unexercised stock options and unvested restricted stock on diluted earnings per share. Antidilutive incremental common shares related to stock options excluded from the computation of earnings per share were 62,700 and 96,408 for the three months ended January 31, 2005 and 2004, respectively.

(4) Other Intangible Assets

The following is a summary of other intangible assets at January 31, 2005:

January 31, 2005


(dollars in thousands)	Weighted- average amortization period (in years)		Gross carrying amount		Accumulated amortization

Amortizing intangible assets:
Client relationships acquired		15.8	$	49,986	$	8,116
Non-amortizing intangible assets:
Mutual fund management contract acquired				1,311		—

Total			$	51,297	$	8,116

(5) Investments

The following is a summary of investments at January 31, 2005:


(in thousands)	January 31, 2005

Short-term investments:
Short-term debt securities	$	178,884

Total	$	178,884

Long-term investments:
Sponsored funds	$	20,570
Collateralized debt obligation entities		13,946
Investment in affiliates		7,509
Other investments		919

Total	$	42,944

(6) Debt

The Company’s long-term debt balance at January 31, 2005 is comprised entirely of its 1.5% zero-coupon exchangeable senior notes due in 2031.

(7) Stock-Based Compensation Plans

Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation, as amended by SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” encourages entities to use a fair value-based method in accounting for employee stock-based compensation plans but allows entities to apply the intrinsic value-based method prescribed by Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees.” Entities that elect the intrinsic value-based method must disclose pro forma net income and earnings per share as if the fair value-based method had been applied for all awards in measuring compensation costs.

The Company continues to apply the intrinsic value method as described in APB No. 25. 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 month periods ended January 31, 2005 and 2004 would have been reduced to the following pro forma amounts:


	For the Three Months Ended January 31,
(in thousands, except per share figures)	2005			2004

Net income as reported	$	38,409		$	30,813
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects		126			256
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(5,815	)		(4,790	)

Pro forma net income	$	32,720		$	26,279

Earnings per share:
Basic – as reported	$	0.29		$	0.23

Basic – pro forma	$	0.25		$	0.19

Diluted – as reported	$	0.27		$	0.22

Diluted – pro forma	$	0.23		$	0.18

In the first three months of fiscal 2005 and 2004, 45,546 and 171,330 shares, respectively, were issued pursuant to the Company’s Restricted Stock Plan. Because these shares are contingently forfeitable, compensation expense is recorded over the forfeiture period. The Company recorded compensation expense of $0.2 million and $0.4 million for the three months ended January 31, 2005 and 2004, respectively.

(8) Common Stock Repurchases

The Company’s share repurchase program was announced on October 22, 2003. The Board authorized management to repurchase 8.0 million shares of its non-voting common stock on the open market and in private transactions in accordance with applicable securities laws. The Company’s stock repurchase plan is not subject to an expiration date.

In the first three months of fiscal 2005, the Company purchased approximately 1.2 million shares of its non-voting common stock under this share repurchase authorization. Approximately 2.0 million additional shares may be repurchased 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 $23.1 million, which exceeded its minimum net capital requirement of $1.3 million at January 31, 2005. The ratio of aggregate indebtedness to net capital at January 31, 2005 was .86 to 1.

(10) Income Taxes

The provision for income taxes for the three months ended January 31, 2005 and 2004 consists of the following:


	For the Three Months Ended January 31,
(in thousands)	2005			2004

Current:
Federal	$	23,775		$	(15,381	)
State		1,642			(865	)
Deferred:
Federal		(2,019	)		31,573
State		(49	)		2,395

Total	$	23,368		$	17,721


(in thousands)	January 31, 2005			October 31, 2004

Deferred tax assets:
Capital loss carryforward	$	2,840		$	2,844
Deferred rent		787			829
Differences between book and tax bases of investments		728			437
Differences between book and tax bases of accruals		2,009			2,011
Other		756			871

Total deferred tax asset	$	7,120		$	6,992

Deferred tax liabilities:
Deferred sales commissions	$	(49,090	)	$	(51,874	)
Accretion on zero-coupon exchangeable notes		(4,082	)		(3,746	)
Differences between book and tax bases of goodwill and intangibles		(7,196	)		(6,630	)
Differences between book and tax bases of property		(846	)		(1,231	)
Unrealized net holding gains on investments		(1,317	)		(1,092	)

Total deferred tax liability	$	(62,531	)	$	(64,573	)

Net deferred tax liability	$	(55,411	)	$	(57,581	)

Deferred tax assets and liabilities reflected on the Company’s Consolidated Balance Sheets (unaudited) at January 31, 2005 and October 31, 2004 are as follows:


(in thousands)	January 31, 2005			October 31, 2004

Net current deferred tax asset	$	117		$	63
Net non-current deferred tax liability		(55,528	)		(57,644	)

Net deferred tax liability	$	(55,411	)	$	(57,581	)

The exercise of non-qualified stock options resulted in a reduction of taxes payable of approximately $2.5 million and $0.7 million for the three months ended January 31, 2005 and 2004, respectively. Such benefit has been reflected in shareholders’ equity.

(11) Comprehensive Income

Total comprehensive income includes net income and other comprehensive income, net of tax. The components of comprehensive income for the three months ended January 31, 2005 and 2004 are as follows:


	For the Three Months Ended January 31,
(in thousands)	2005		2004

Net income	$	38,409	$	30,813
Net unrealized gains on available-for-sale securities, net of income taxes of $226 and $273, respectively		418		521
Foreign currency translation adjustments, net of income taxes of $0 and $28, respectively		—		47

Comprehensive income	$	38,827	$	31,381

(12) Contingencies

In the normal course of business, the Company enters into agreements that include indemnities in favor of third parties, such as engagement letters with advisors and consultants, information technology agreements, distribution agreements and service agreements. The Company has also agreed to indemnify its directors 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.

(13) Recent Accounting Developments

In March 2004, the FASB ratified the consensus of the EITF regarding the recognition and measurement of other-than-temporary impairments of certain investments. The effective date of the recognition and measurement guidance in EITF 03-01 has been delayed until the implementation guidance provided by a FASB staff position on the issue has been finalized. The disclosure guidance was unaffected by the delay and is effective for fiscal years ending after June 15, 2004. The Company implemented the disclosure provisions of EITF 03-01 in its annual financial statements for the fiscal year ended October 31, 2004 and does not anticipate that the implementation of the recognition and measurement guidance, when released, will have a material effect on the Company’s consolidated financial statements.

In December 2004, the FASB revised SFAS No. 123, requiring public companies to recognize the cost resulting from all share-based payment

transactions in their financial statements based on the grant-date fair value of those awards. The Company intends to apply the modified version of retrospective application for periods prior to the required effective date and will adjust results on a basis consistent with the pro forma disclosures previously made under SFAS No. 123. The revised statement is effective for the Company’s fourth fiscal quarter beginning August 1, 2005. Had the Company implemented the provisions of SFAS No. 123 as revised for the fiscal quarters ended January 31, 2005 and 2004, diluted earnings per share would have been reduced to $0.23 and $0.18, respectively.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Item includes statements that are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding our expectations, intentions or strategies regarding the future. All statements, other than statements of historical facts included in this Form 10-Q regarding our financial position, business strategy and other plans and objectives for future operations, are forward-looking statements. Although we believe that the assumptions and expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations reflected in such forward-looking statements will prove to have been correct or that we will take any actions that may presently be planned. Certain important factors that could cause actual results to differ materially from our expectations are disclosed in the “Competitive Conditions and Risk Factors” section of this Form 10-Q. All subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by such factors.

General

The Company’s principal business is creating, marketing and managing investment companies (“funds”) and providing investment management and counseling services to high-net-worth individuals and institutions. The Company’s long-term strategy is to develop value-added core competencies in a range of investment disciplines and to offer industry-leading investment products and services across multiple distribution channels. In executing this strategy, the Company has developed a broadly diversified product line and a powerful distribution model.

The Company is a market leader in a number of investment areas, including tax-managed equity, value equity, equity income, floating-rate bank loan, municipal bond and high-yield bond investing. The diversified offerings of Eaton Vance and its affiliates offer fund shareholders, institutional investors and private investment counsel clients a wide range of products and services designed and managed to generate attractive risk-adjusted returns over the long term.

The Company’s fund distribution strategy is to distribute its funds primarily through financial intermediaries in the advice channel. The Company has a broad reach in this marketplace, with distribution partners including national wirehouses, regional broker/dealers, independent broker/dealers, independent financial advisory firms, banks and insurance companies. Eaton Vance supports these distribution partners with a team of more than 146 regional and Boston-based representatives who are dedicated to meeting the needs of our partners and clients across the country. Specialized sales and marketing teams provide the increasingly sophisticated information required for distributing privately placed funds, retirement products and charitable giving vehicles.

The Company is also committed to a strategy of expanding distribution to reach institutional and high-net-worth clients who access investment advice outside of traditional retail broker/dealer channels. The

Company and its subsidiaries, including Atlanta Capital Management Company, LLC, Fox Asset Management LLC and Parametric Portfolio Associates LLC, serve a broad range of clients in the institutional marketplace, including Taft-Hartley plans, foundations, endowments and defined contribution plans for individuals, corporations and municipalities. Specialized sales teams at each of the Company’s affiliates focus exclusively on developing relationships in this market and deal directly with these clients, often on the basis of independent referrals.

The Company’s revenue is primarily derived from investment adviser, administration, distribution and service fees received from the Eaton Vance funds and investment adviser fees received from separate accounts. Fees paid to the Company are based primarily on the value of the investment portfolios managed by the Company and fluctuate with changes in the total value of the assets under management. Such fees are recognized over the period that the Company manages these assets. The Company’s major expenses are employee compensation, the amortization of deferred sales commissions and distribution-related 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, revenue 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 available from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Assets Under Management

Assets under management of $98.0 billion on January 31, 2005 were 17 percent higher than the $83.6 billion reported a year earlier. The Company experienced asset growth in both the equity and floating-rate asset categories over the last twelve-month period, reflecting strong long-term fund and retail managed account net inflows.

Ending Assets Under Management by Investment Objective


	January 31,

(in billions)	2005		2004		% Change

Equity assets	$	58.6	$	49.5		18	%
Fixed income assets		21.9		22.1		-1	%
Floating-rate income assets		17.5		12.0		46	%

Total	$	98.0	$	83.6		17	%

Equity assets represented 60 percent of total assets under management at January 31, 2005, up from 59 percent at January 31, 2004. Equity funds managed for tax efficiency totaled $30.1 billion and $26.6 billion at January 31, 2005 and 2004, respectively. Fixed income assets, including money market funds, represented 22 percent of total assets under management at January 31, 2005, down from 26 percent at January 31, 2004. Fixed income assets include $11.0 billion and $10.9 billion at tax-exempt municipal bond funds at January 31, 2005 and 2004, respectively. Floating-rate income assets represented 18 percent of total assets under management at January 31, 2005, up from 15 percent at January 31, 2004. The shift in asset mix from fixed income to equity and floating-

rate income reflects investor response to the recent improvements in equity markets and a rise in short-term interest rates.

The Company had positive long-term fund net inflows in both the first quarter of fiscal 2005 and the first quarter of fiscal 2004. Long-term fund net inflows in the first quarter of fiscal 2005 were $1.6 billion compared to $4.5 billion in the same period last year. Closed-end fund offerings contributed significantly to net inflows in both periods, with $0.9 billion in closed-end fund assets added in the first quarter of fiscal 2005 and $3.2 billion added in the first quarter of fiscal 2004.

Excluding closed-end fund offerings, other long-term fund net inflows totaled $0.7 billion and $1.3 billion in the first quarters of fiscal 2005 and fiscal 2004. Other long-term fund net inflows reflect open-end, interval and private fund gross inflows of $3.1 billion and $3.0 billion in the first three months of fiscal 2005 and 2004, respectively, net of redemptions of $2.3 billion and $1.6 billion, respectively. Long-term fund redemptions increased to 13 percent of average long-term fund assets under management in the first quarter of fiscal 2005 compared to 11 percent in the first quarter of fiscal 2004, reflecting increases in both equity and floating-rate income fund redemptions. The industry average, by comparison, exceeded 20 percent of average long-term fund assets under management for each of the last two years.

Net outflows of separate account assets under management were $0.3 billion in the first quarter of fiscal 2005, compared to net inflows of $1.1 billion in the first quarter of fiscal 2004. Retail managed account net inflows increased by 33 percent to $0.4 billion from $0.3 billion a year ago; however, the Company’s institutional and high-net worth accounts experienced net outflows of $0.7 billion compared to net inflows of $0.8 billion a year ago, reflecting an increase in client withdrawals due to management turnover at a majority-owned subsidiary and calendar 2004 year-end investment portfolio rebalancing.

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Asset Flows


	For the Three Months Ended January 31,

(in billions)	2005			2004			% Change

Equity fund assets – beginning	$	36.9		$	28.9			28	%
Sales/inflows		2.0			3.4			-41	%
Redemptions/outflows		(1.0	)		(0.7	)		43	%
Exchanges		—			0.1			-100	%
Market value change		1.4			1.5			-7	%

Equity fund assets – ending	$	39.3		$	33.2			18	%

Fixed income fund assets – beginning	$	17.6		$	17.8			-1	%
Sales/inflows		0.7			0.7			NM	⁽²⁾
Redemptions/outflows		(0.6	)		(0.5	)		20	%
Exchanges		—			(0.1	)		NM
Market value change		—			0.4			NM

Fixed income fund assets – ending	$	17.7		$	18.3			-3	%

Floating-rate income fund assets – beginning	$	15.0		$	9.5			58	%
Sales/inflows		1.2			2.0			-40	%
Redemptions/outflows		(0.7	)		(0.4	)		75	%
Exchanges		—			—			NM
Market value change		0.1			—			NM

Floating-rate income fund assets – ending	$	15.6		$	11.1			41	%

Total long-term fund assets – beginning	$	69.5		$	56.2			24	%
Sales/inflows		3.9			6.1			-36	%
Redemptions/outflows		(2.3	)		(1.6	)		44	%
Exchanges		—			—			NM
Market value change		1.5			1.9			-21	%

Total long-term fund assets – ending	$	72.6		$	62.6			16	%

Separate accounts – beginning	$	24.4		$	18.4			33	%
Inflows – HNW and institutional ⁽¹⁾		0.7			1.1			-36	%
Outflows – HNW and institutional		(1.4	)		(0.3	)		NM
Inflows – retail managed account		0.8			0.5			60	%
Outflows – retail managed account		(0.4	)		(0.2	)		100	%
Market value change		1.0			1.0			0	%

Separate accounts – ending	$	25.1		$	20.5			22	%

Money market fund assets – ending		0.3			0.5			-40	%

Assets under management – ending	$	98.0		$	83.6			17	%

⁽¹⁾ High-net-worth (“HNW”)
⁽²⁾ Not meaningful (“NM”)

Ending Assets Under Management by Asset Class


	January 31,

(in billions)	2005		2004		% Change

Class A ⁽¹⁾	$	16.3	$	9.5		72	%
Class B ⁽²⁾		8.6		13.3		-35	%
Class C⁽³⁾		7.3		6.6		11	%
Class I ⁽⁴⁾		2.1		1.2		75	%
Private funds		19.3		18.1		7	%
Closed-end funds		16.9		12.5		35	%
Other		2.4		1.9		26	%

Total fund assets		72.9		63.1		16	%
Total separate account assets		25.1		20.5		22	%

Total	$	98.0	$	83.6		17	%

⁽¹⁾  Share class includes Eaton Vance Advisers Senior Floating-Rate Fund, an interval fund.
⁽²⁾  Share class includes Eaton Vance Prime Rate Reserves, an interval fund.
⁽³⁾  Share class includes Eaton Vance Classic Senior Floating-Rate Fund, an interval fund.
⁽⁴⁾  Share class includes Eaton Vance Institutional Senior Floating-Rate Fund, an interval fund.

The Company currently sells its sponsored mutual funds under four primary pricing structures: front-end load commission (“Class A”); spread-load commission (“Class B”); level-load commission (“Class C”); and institutional no-load (“Class I”). Under certain conditions, the Company waives the sales load on Class A shares. In such cases, the shares are sold at net asset value. The 16% percent increase in ending fund assets under management at January 31, 2005 compared to January 31, 2004 was primarily the result of significant closed-end fund offerings over the last twelve-month period and strong Class A share sales. Class B share assets under management declined by 35 percent because of lower Class B share sales and the implementation in the second quarter of fiscal 2004 of an automatic conversion of Class B shares to Class A shares after 8 years of ownership for certain of the Company’s mutual funds.

The Company experienced a significant shift in asset mix from an asset class perspective in fiscal 2005. Class A share assets, which represented 15 percent of total fund assets under management at January 31, 2004, increased to 22 percent of total fund assets under management at January 31, 2005. The increase in Class A share assets as a percentage of total fund assets under management reflects the increasing popularity of Class A shares as an asset class, the declining popularity of Class B shares as an asset class and the conversion of certain Class B share assets to Class A share assets. Private funds and closed-end funds grew to 50 percent of the Company’s fund assets under management at January 31, 2005, up from 48 percent at January 31, 2004.

The growth in separate account assets under management can be primarily attributed to the acquisition of $1.9 billion of Deutsche Bank assets in the third quarter of fiscal 2004, net inflows of $1.2 billion and market price appreciation of $1.4 billion in the last twelve months.

Average Assets Under Management by Asset Class


	For the Three Months Ended January 31,

(in billions)	2005		2004		% Change

Class A ⁽¹⁾	$	15.9	$	8.8		81	%
Class B ⁽²⁾		8.7		13.2		-34	%
Class C ⁽³⁾		7.2		6.3		14	%
Class I ⁽⁴⁾		2.0		1.1		82	%
Private funds		19.4		17.7		10	%
Closed-end funds		16.2		10.5		54	%
Other		2.3		1.9		21	%

Total fund assets		71.7		59.5		21	%
Total separate account assets		25.1		19.4		29	%

Total	$	96.8	$	78.9		23	%

The average assets under management presented in the table above represent a monthly average by asset class. This table is intended to provide useful information in the analysis of the Company’s revenue and asset-based distribution expenses. With the exception of the Company’s separate account investment adviser fees, which are generally calculated as a percentage of either beginning or ending quarterly assets, the Company’s investment adviser, administration, distribution and service fees are calculated primarily as a percentage of average daily assets.

Results of Operations


	For the Three Months Ended January 31,

(in thousands)	2005			2004			% Change

Net income	$	38,409		$	30,813			25	%
Earnings per share:
Basic	$	0.29		$	0.23			26	%
Diluted	$	0.27		$	0.22			23	%
Operating margin		35	%		32	%

Net income increased by 25 percent in the first quarter of fiscal 2005 compared to the first quarter of fiscal 2004, primarily as a result of a 23 percent increase in average assets under management year over year. The Company’s operating margin improved to 35 percent in the first quarter of fiscal 2005 compared to 32 percent in the same quarter a year ago, reflecting disciplined cost control in a period of significant growth.

Revenue


	For the Three Months Ended January 31,

(in thousands)	2005		2004		% Change

Investment adviser and administration fees	$	118,918	$	93,750		27	%
Distribution and underwriter fees		35,060		39,876		-12	%
Service fees		25,477		21,909		16	%
Other revenue		2,326		1,438		62	%

Total revenue	$	181,781	$	156,973		16	%

The Company’s effective fee rate (total revenue as a percentage of average assets under management) decreased to 0.75 percent in the first quarter of fiscal 2005 from 0.80 percent in the first quarter of fiscal 2004, largely as a result of the change in the Company’s long-term fund asset mix. As Class B shares have decreased as a percentage of total long-term fund assets under management, distribution and underwriter fees have decreased as a percentage of total revenue. Distribution and underwriter fees as a percentage of total revenue decreased to 19 percent in the first quarter of fiscal 2005 from 25 percent in the first quarter of fiscal 2004. Any further decline in the Company’s future effective fee rate will be offset in part by a reduction in deferred sales commission amortization expense as deferred sales commissions paid on Class B share sales will also decline with the anticipated change in asset mix.

Investment adviser and administration fees

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. Changes in the market value of managed assets affect the amount of investment adviser and administration fees earned, while shifts in asset mix affect the Company’s effective fee rate.

The increase in investment adviser and administration fees of 27 percent in the first quarter of fiscal 2005 over the same period a year ago can be attributed to the 23 percent increase in average assets under management and a modest increase in the Company’s effective advisory fee rate due to a shift in asset mix.

Distribution and underwriter fees

Distribution plan payments, which are made under contractual agreements with the Company’s sponsored funds, are calculated as a percentage of average assets under management in specific share classes of the Company’s mutual funds (principally Class B and Class C, as well as certain private funds). These fees fluctuate with both the level of average assets under management and the relative mix of assets between share classes. Underwriter commissions are earned on the sale of shares of the Company’s sponsored funds on which investors pay a sales charge at the time of purchase (Class A share sales). Sales charges, and therefore underwriter commissions, are waived or reduced on sales to shareholders or intermediaries that exceed specified minimum amounts and waived on shares that are purchased as part of a fee-based account. Underwriter commissions fluctuate with both the level of Class A share sales and the mix of Class A shares offered with and without sales charges.

Distribution and underwriter fees decreased by 12 percent in the first quarter of fiscal 2005 over the same period a year ago, primarily reflecting a decrease in Class B share assets under management. As noted in

the table “Ending Assets Under Management,” ending Class B share assets under management declined 35 percent year-over-year as a result of lower Class B share sales and the implementation of an 8-year Class B to Class A share conversion feature for certain of the Company’s mutual funds in the second quarter of fiscal 2004.

Service fees

Service plan payments, which are made under contractual agreements with the Company’s sponsored funds, are calculated as a percent of average assets under management in specific share classes of the Company’s mutual funds (principally Classes A, B and C) as well as certain private funds. Service fees represent payments made by sponsored funds to the principal underwriter (Eaton Vance Distributors, Inc., a wholly owned subsidiary of Eaton Vance Management) for personal service and/or the maintenance of shareholder accounts.

Service fees increased by 16 percent in the first quarter of fiscal 2005 over the same period a year ago, primarily reflecting a 14 percent increase in average Class A, B, C and private fund assets under management that are subject to service fees.

Other revenue

Other revenue increased by 62 percent in the first quarter of fiscal 2005 over the same period a year ago, primarily reflecting investment income earned by two majority-owned investment companies consolidated by the Company. The first of the two funds was consolidated in the second quarter of fiscal 2003; the second was consolidated in the first quarter of fiscal 2004. The Company consolidated each fund at the point in time at which the Company’s investment in the fund exceeded 50 percent of the total net asset value of the fund.

Expenses


	For the Three Months Ended January 31,

(in thousands)	2005		2004		% Change

Compensation of officers and employees	$	42,204	$	37,499		13	%
Amortization of deferred sales commissions		18,040		20,763		-13	%
Service fee expense		21,172		18,632		14	%
Distribution expense		22,919		18,779		22	%
Other expenses		14,587		11,197		30	%

Total expenses	$	118,922	$	106,870		11	%

Compensation of officers and employees

Compensation expense increased by 13 percent in the first quarter of fiscal 2005 over a year ago, principally due to a 12 percent increase in headcount, higher operating income-based bonus accruals and higher marketing incentives associated with the Company’s separately managed account business, offset by a decrease in marketing incentives associated with a 25 percent decrease in compensatable fund sales. The decrease in compensatable fund sales can be primarily attributed to the decrease in closed-end funds offered in the first quarter of fiscal 2005 compared to the first quarter of fiscal 2004.

Amortization of deferred sales commissions

Amortization of deferred sales commissions decreased by 13 percent in the three month period ending January 31, 2005 over the same period a year ago. Amortization expense is affected by ongoing sales and redemptions of mutual fund Class B shares, Class C shares and certain private funds. In the first quarter of fiscal 2005, increases noted in Class C share and private fund sales were offset by a decrease in Class B share sales. As amortization expense is a function of the Company’s product mix, a continuing shift from Class B sales to Class A sales over time will likely result in a further reduction in amortization expense.

Service fee expense

Service fees the Company receives from sponsored funds are generally retained by the Company in the first year and paid to broker/dealers after the first year pursuant to third-party service arrangements. These fees are calculated as a percent of average assets under management in specific share classes of the Company’s mutual funds (principally Classes A, B and C) as well as certain private funds. Service fee expense increased by 14 percent in the first quarter of fiscal 2005 over the same period a year ago, reflecting increases in average long-term fund assets retained more than one year that are subject to service fees.

Distribution expense

Distribution expense consists primarily of payments made to distribution partners pursuant to third-party distribution arrangements (calculated as a percentage of average Class C share and closed-end fund assets under management), commissions paid to broker/dealers on the sale of Class A shares at net asset value and other marketing expenses, including marketing expenses associated with revenue sharing arrangements with the Company’s distribution partners. Distribution expense increased by 22 percent in the first quarter of fiscal 2005 over the same period a year ago, largely as a result of increases in average closed-end fund assets and in average other assets under management subject to third-party distribution and revenue sharing arrangements.

Other expenses

Other expenses consist primarily of travel, facilities, information technology, consulting, fund expenses assumed by the Company, communications and other corporate expenses, including the amortization of intangible assets.

Other expenses increased by 30 percent in the first quarter of fiscal 2005 over the same period a year ago, primarily reflecting increases in fund-related expenses, consulting fees and registration fees associated with the Company’s two-for-one stock split in December 2004.

Other Income and Expense


	For the Three Months Ended January 31,

(in thousands)	2005			2004			% Change

Interest income	$	709		$	788			-10	%
Interest expense		(361	)		(1,651	)		-78	%
Gain on investments		10			5			100	%
Foreign currency gain (loss)		22			(18	)		NM

Total other income (expense)	$	380		$	(876	)		NM

Interest income decreased by 10 percent in the first quarter of fiscal 2005 over the same period a year ago, primarily due to a decrease in interest income earned on the Company’s minority equity investments in three collateralized debt obligation entities. Investment income on investments classified as available-for-sale is included in interest income; interest and dividend income earned by two consolidated funds, which invest in short-term debt instruments, is recorded in other revenue.

Interest expense decreased by 78 percent in the first quarter of fiscal 2005, primarily reflecting a decrease in average long-term debt balances. The decrease in average long-term debt balances is attributed to the retirement of Eaton Vance Management’s (“EVM’s”) 6.22 percent senior notes in March 2004 and the repurchase of $46.0 million of EVM’s zero-coupon exchangeable senior notes in August 2004.

Income Taxes

The Company’s effective tax rate increased to 37 percent in the first quarter of fiscal 2005 from 36 percent in the first quarter of fiscal 2004.

Equity in Net Income (Loss) of Affiliates, Net of Tax

Equity in net income (loss) of affiliates, net of tax, decreased to $(0.6) million in the first quarter of fiscal 2005 from $9,000 in the first quarter of fiscal 2004, largely as a result of calendar year-end bonuses the affiliate elected to pay in December 2004.

Minority Interest, Net of Tax

Minority interest, net of tax, increased by 26 percent in the first quarter of fiscal 2005 over the same period a year ago due to the increased profitability of two of the the Company’s majority-owned subsidiaries, Atlanta Capital and Parametric Portfolio Associates.

Changes in Financial Condition and Liquidity and Capital Resources

The following table summarizes certain key financial data relating to the Company’s liquidity and capital resources as of January 31, 2005 and October 31, 2004:


(in thousands)	January 31, 2005		October 31, 2004		% Change

Balance sheet data:
Cash and cash equivalents	$	147,872	$	147,137		0	%
Short-term investments		178,884		210,429		-15	%
Long-term investments		42,944		36,895		16	%
Deferred sales commissions		151,961		162,259		-6	%

Long-term debt		74,625		74,347		0	%
Deferred income taxes		55,528		57,644		-4	%


	For the Three Months Ended January 31,

(in thousands)	2005			2004			% Change

Cash flow data:
Operating cash flows	$	69,272		$	2,770			NM
Investing cash flows		(5,764	)		(1,470	)		NM
Financing cash flows		(62,773	)		(7,598	)		NM

The Company’s financial condition is highly liquid, with a significant percentage of the Company’s assets represented by cash, cash equivalents and short-term investments. Short-term investments consist principally of short-term debt instruments and investments in the Company’s sponsored money market mutual funds. Long-term investments consist principally of seed investments in certain of the Company’s other sponsored mutual funds and minority equity investments in collateralized debt obligation entities.

Deferred sales commissions paid to broker/dealers in connection with the distribution of the Company’s Class B and Class C fund shares, as well as certain private funds, decreased by 6 percent in the first three months of fiscal 2005, primarily reflecting a decrease in Class B share assets over the last two fiscal years. Deferred income taxes, which relate principally to deferred sales commissions, increased by 4 percent in the first three months of fiscal 2005.

The following table details the Company’s future contractual obligations under its operating lease arrangements:

Contractual Obligation


		Payments Due

(in millions)	Total		Less than 1 year		1-3 years		4-5 years		After 5 years

Operating leases	$	27.0	$	6.9	$	12.1	$	7.9	$	0.1

Excluded from the table above are any future payments to be made by the Company to purchase the minority interests retained by the sellers of Atlanta Capital, Fox Asset Management and Parametric Portfolio Associates at the time of acquisition. The Company’s acquisition agreements provide the minority owners the right to require the Company to purchase these retained equity interests at specific intervals over time. These agreements also provide the Company with the right to require the principals to sell their retained equity interests to the Company at specific intervals over time, as well as upon certain events such as death and permanent disability. These purchases and/or sales will occur at varying times at varying amounts over the next 11 years and will generally be based upon a multiple of earnings before interest and taxes, a measure which is intended to represent fair market value. The timing and amounts of these purchases cannot be predicted with any certainty. However, the Company anticipates that the purchase of the remaining minority interests in its majority-owned subsidiaries may be a significant use of cash in the future.

Also excluded from the table above are EVM’s zero-coupon exchangeable senior notes (“Notes”). On August 13, 2001, EVM issued the Notes at a principal amount of $314.0 million due August 13, 2031, resulting in net proceeds of approximately $195.5 million. The discounted price reflects a yield to maturity of 1.5 percent per year. Upon certain events, each Note is exchangeable into 28.7314 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 August 13, 2006 and at five-year intervals thereafter until maturity. 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, shares of the Company’s non-voting common stock, or a combination of both, as elected by the Company.

Note holders also have the right to surrender their Notes for exchange into shares of the Company’s non-voting common stock in any fiscal quarter if, as of the last day of the preceding fiscal quarter, the closing sales price of Eaton Vance Corp.’s non-voting common stock for at least 20 of the last 30 consecutive trading days is more than a specified percentage of the accreted exchange price per share on that date. On January 31, 2005, the contingent conversion price for the Company’s non-voting common stock was $27.75. EVM has the right to settle the exchange in cash, shares of the Company’s non-voting common stock, or a combination of both. In the event that the requirements for exchange are met, shareholders elect to execute the exchange and EVM elects to settle the exchange in cash, EVM will recognize a charge to interest expense equal to the difference between the accreted value of the debt and the market value of the non-voting common stock on that date. On January 31, 2005, 110,945 Notes remained outstanding.

On December 21, 2004, the Company executed a new revolving credit facility with several banks. The facility, which expires December 21, 2009, provides that the Company may borrow up to $180 million at LIBOR-based rates of interest that vary depending on the level of usage of the facility and credit ratings of the Notes. 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. The Company paid $0.4 million in costs related to securing the new facility during the three months ended January 31, 2005.

Operating Cash Flows

Operating cash flows consist primarily of the operating results of the Company adjusted to reflect changes in current assets and liabilities, deferred sales commissions, deferred income taxes and investments classified as trading. Cash provided by operating activities totaled $69.3 million and $2.8 million in the first three months of fiscal 2005 and 2004, respectively. The increase in cash provided by operating activities can be attributed primarily to an increase in cash provided by the purchase and sale of trading securities by the Company’s two consolidated short-term income funds, which regularly purchase and sell short-term debt instruments. Net cash provided by the purchase and sale of trading securities totaled $30.1 million in the first three months of fiscal 2005. Net cash used in the purchase and sale of trading securities totaled $25.9 million in the first three months of fiscal 2004.

Capitalized sales commissions paid to financial intermediaries for the distribution of the Company’s Class B and Class C fund shares, as well as certain of the Company’s private funds, decreased by $5.0 million in the first three months of fiscal 2005 over the same period a year ago, primarily due to a decrease in Class B share sales. Although the Company anticipates that the payment of capitalized sales commissions will continue to be a significant use of cash in the future, the payment of sales commissions will likely continue to decline if sales of Class B shares continue to decline. The amortization of deferred sales commissions and contingent deferred sales charges received will likely be similarly affected.

Deferred income taxes reduced operating cash flows by $2.4 million in the first three months of fiscal 2005 compared to a contribution of $34.0 million in the first three months of fiscal 2004, primarily as a result of the change in the tax treatment of deferred sales commissions in the first quarter of fiscal 2004. In January 2004, the Internal Revenue Service issued a new regulation that changed the tax treatment of

deferred sales commissions recoverable pursuant to Rule 12b-1 plans. The new tax regulation, which allows for the immediate deduction of these commissions when paid, was applied prospectively to such commissions paid in fiscal 2004 and retroactively to such commissions paid during fiscal years 2003 and 2002. Unamortized balances relating to fiscal years 2003 and 2002 were deducted for tax purposes in the first quarter of fiscal 2004. The change in tax accounting had no impact on the Company’s effective tax rate.

Investing Cash Flows

Investing activities consist primarily of the purchase and sale of investments in the Company’s sponsored mutual funds. Cash used for investing activities totaled $5.8 million and $1.5 million in the first three months of fiscal 2005 and 2004, respectively. The year-over-year increase in cash used for investing activities reflects the Company’s investment in certain sponsored funds in fiscal 2005.

Financing Cash Flows

Financing cash flows primarily reflect the issuance and repayment of long-term debt, the issuance and repurchase of the Company’s non-voting common stock and the payment of dividends to the Company’s shareholders. Financing cash flows also include proceeds from the issuance of capital stock by the Company’s two consolidated mutual fund subsidiaries and cash paid to fund redemptions by minority shareholders of these mutual fund subsidiaries. Cash used for financing activities totaled $62.8 million and $7.6 million in the first three months of fiscal 2005 and 2004, respectively, reflecting redemptions of mutual fund subsidiaries’ capital stock of $63.4 million and $14.0 million, respectively.

The Company repurchased and retired a total of 1.2 million shares of its non-voting common stock for $30.8 million in the first three months of fiscal 2005 under its authorized repurchase program and issued 0.8 million shares of non-voting common stock in connection with stock option exercises, employee stock purchases and restricted stock grants for total proceeds of $9.9 million. The Company has authorization to purchase an additional 2.0 million shares under its present share repurchase authorization and anticipates that future repurchases will continue to be a significant use of cash. The Company’s dividend was $0.08 per share in the first three months of fiscal 2005 compared to $0.06 per share in the first three months of fiscal 2004.

On December 15, 2004, the Company’s Board of Directors authorized, and the Company’s voting shareholders approved, a two-for-one stock split of the Company’s outstanding non-voting common stock. The split entitled each shareholder of record as of December 31, 2004 to receive two shares for every one share of non-voting stock held on the record date. The additional shares of non-voting common stock were distributed after the close of business on January 14, 2005.

Off-Balance Sheet Arrangements

The Company does not invest in any off-balance sheet vehicles that provide financing, liquidity, market or credit risk support or engage in any leasing activities that expose the Company to any liability that is not reflected in the Consolidated Financial Statements.

Critical Accounting Policies

Management believes the following critical accounting policies, among others, affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.

Deferred Sales Commissions

Sales commissions paid by the Company to broker/dealers in connection with the sale of certain classes of shares of open-end funds, bank loan interval funds and private funds are generally 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 by the Company from these funds are recorded in revenue as earned. Contingent deferred sales charges and early withdrawal charges received by the Company from redeeming shareholders of open-end and bank loan interval funds reduce unamortized deferred sales commissions. Should the Company lose its ability to recover such sales commissions through distribution plan payments and contingent deferred sales charges, the value of these assets would immediately decline, as would future cash flows. The Company periodically reviews the recoverability of deferred sales commission assets as events or changes in circumstances indicate that the carrying amount of deferred sales commission assets may not be recoverable and adjusts the deferred sales commissions assets accordingly.

Goodwill and Intangible Assets

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 at least annually for impairment by comparing the fair values of the companies acquired to their carrying amounts, including goodwill. Identifiable intangible assets generally represent the cost of client relationships and 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. 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

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. Deferred taxes relate principally to capitalized sales commissions paid to broker/dealers. As noted previously, new IRS regulations provide that commission payments made subsequent to November 1, 2003 are deductible for tax purposes 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 may result in a change to the Company’s tax position and effective tax rate.

Investments in Collateralized Debt Obligation Entities

The Company acts as collateral manager for five collateralized debt obligation entities (“CDO entities”) pursuant to collateral management agreements between the Company and each CDO entity. At January 31, 2005, combined assets under management in the collateral pools of all five of these CDO entities were approximately $1.6 billion. The Company had combined minority equity investments of $13.9 million in three of these entities on January 31, 2005.

The Company accounts for its investments in CDO entities under Emerging Issues Task Force (“EITF”) 99-20, “Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets.” The excess of future cash flows over the initial investment at the date of purchase is recognized as interest income over the life of the investment using the effective yield method. The Company reviews cash flow estimates throughout the life of each CDO investment pool to determine whether an impairment 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. Fair value is determined using current information, notably market yields and projected cash flows based on forecasted default and recovery rates that a market participant would use in determining the current fair value of the equity interest. Market yields, default rates and recovery rates used in the Company’s estimate of fair value vary based on the nature of the investments in the underlying collateral pools. In periods of rising credit default rates and lower debt recovery rates, the fair value, and therefore carrying value, of the Company’s investments in these CDO entities may be adversely affected. The Company’s risk of loss in the CDO entities is limited to the $13.9 million carrying value of the minority equity investments on the Company’s Consolidated Balance Sheet at January 31, 2005.

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 entity are secured by collateral in the form of high-yield bonds and/or floating-rate income instruments that the CDO entity purchases. 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 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 Sheet.

Loss Contingencies

The Company continuously reviews any investor, employee or vendor complaints and pending or threatened litigation. The likelihood that a loss contingency exists is evaluated under the criteria of SFAS No. 5, “Accounting for Contingencies,” through consultation with legal counsel and a loss contingency is recorded if the contingency is probable and reasonably estimable at the date of the financial statements. There are no losses of this nature that are probable or reasonable estimable, and thus, no losses have been recorded in the financial statements included in this report.

Accounting Developments

In December 2004, the FASB revised Statement of Financial Accounting Standards No. 123 (“SFAS No. 123”), requiring public companies to recognize the cost resulting from all share-based payment transactions in their financial statements based on the grant-date fair value of those awards. The Company intends to apply the modified version of retrospective application for periods prior to the required effective date and will adjust results on a basis consistent with the pro forma disclosures previously made under SFAS No. 123. The revised statement is effective for the Company’s fourth fiscal quarter beginning August 1, 2005. Had the Company implemented the provisions of SFAS No. 123 as

revised for the fiscal quarters ended January 31, 2005 and 2004, diluted earnings per share would have been reduced to $0.23 and $0.18, respectively.

Competitive Conditions and Risk Factors

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.

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 and services sold to the public by investment dealers, banks, insurance companies and others. Many institutions competing with the Company have greater resources than the Company. The Company competes with other providers of investment products on the basis of the products offered, the investment performance of such products, quality of service, fees charged, the level and type of financial intermediary compensation, the manner in which such products are marketed and distributed, 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 Company’s assets under management, which impact revenue, are subject to significant fluctuations. 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 revenue 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 employees 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, 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.

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 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 $16.0 million at January 31, 2005, 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 and short-term debt securities. The negative effect on the Company’s pre-tax interest income of a 50 basis point decline in interest rates would be approximately $0.9 million based on fixed-income and floating-rate income investments of $181.4 million as of January 31, 2005. 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 three 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 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 deterioration in the credit quality of the issuers underlying the collateral securities and a corresponding increase in the number of defaults, cash flows generated by the collateral securities may be adversely impacted and the Company may be unable to recover its investment. The Company’s total investment in minority equity interests in CDO entities is approximately $13.9 million at January 31, 2005, which represents the total value at risk with respect to such entities as of January 31, 2005.

The Company does not enter into foreign currency transactions for speculative purposes and currently has no material investments that would expose it to foreign currency exchange risk.

In evaluating market risk, it is also important to note that most of the Company’s revenue is based on the market value of assets under management. As noted in “Competitive Conditions and Risk Factors” in Item 2, declines of financial market values will negatively impact revenue and net income.

Item 4. Controls and Procedures

As of January 31, 2005, the Company evaluated the effectiveness of the design and operation of its disclosure controls and procedures. Disclosure controls and procedures are the controls and other procedures that the Company designed to ensure that it records, processes, summarizes and reports in a timely manner the information it must disclose in reports that it files with or submits to the SEC. The Company’s Chief Executive Officer and Chief Financial Officer participated in this evaluation. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the date of their evaluation, the Company’s disclosure controls and procedures were effective.

There have been no changes in the Company’s internal control over financial reporting that occurred during the Company’s first fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II - Other Information

Item 1. Legal Proceedings

There have been no material developments in litigation previously reported in the Company’s SEC filings.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table sets forth information regarding the Company’s purchases of its non-voting common stock on a monthly basis during the first three months of fiscal 2005:

Issuer Repurchases of Equity Securities


Period	(a) Total Number of Shares Purchased		(b) Average price paid per share		(c) Total Number of Shares Purchased of Publicly Announced Plans or Programs¹		(d) Maximum Number of Shares that May Yet Be Purchased under the Plans or Programs

November 1, 2004 through November 30, 2004		217,486	$	22.90		217,486		3,038,236
December 1, 2004 through December 31, 2004		290,864	$	25.38		290,864		2,747,372
January 1, 2005 through January 31, 2005		739,336	$	24.96		739,336		2,008,036

Total		1,247,686	$	24.70		1,247,686		2,008,036

¹ The Company’s share repurchase program was announced on October 22, 2003. The Board authorized management to repurchase 8,000,000 shares of its non-voting common stock in the open market and in private transactions in accordance with applicable securities laws. No plans expired or terminated in the first three months of fiscal 2005. The Company’s stock repurchase plan is not subject to an expiration date.

Item 4. Submission of Matters to a Vote of Security 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 12, 2005. All of the outstanding Voting Common Stock, namely the 309,760 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, 2004.


	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.

Vincent M. O’Reilly

Winthrop H. Smith, Jr.

Ralph Z. Sorenson


	3)		The selection of the firm of Deloitte & Touche LLP as the independent registered public accounting firm of the Company for its fiscal year ended October 31, 2005.


	4)		The ratification of the acts of the Directors since the previous meeting of Shareholders held on January 14, 2004.

Item 6. Exhibits


(a)		Exhibits


	Exhibit No.		Description

	31.1		Certification of Chief Executive Officer

	31.2		Certification of Chief Financial Officer

	32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

	32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(b) Reports on Form 8-K

The Company filed a Form 8-K with the SEC on November 23, 2004, regarding the Company’s press release of its results of operations for the quarter ended October 31, 2004.

The Company filed a Form 8-K with the SEC on December 15, 2004, regarding a two-for-one stock split of the Company’s Non-Voting Common Stock.

The Company filed a Form 8-K with the SEC on December 23, 2004, regarding the Company’s execution of a Credit Agreement with JP Morgan Chase Bank.

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 9, 2005		/s/ William M. Steul

		(Signature)
		William M. Steul
		Chief Financial Officer

DATE: March 9, 2005		/s/ Laurie G. Hylton

		(Signature)
		Laurie G. Hylton
		Chief Accounting Officer