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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 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
---------------------------------------------
(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 July 31, 2003:
Voting Common Stock - 154,880 shares
Non-Voting Common Stock - 68,813,555 shares
Page 1 of 40 pages
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PART I
FINANCIAL INFORMATION
2
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets (unaudited)
July 31, October 31,
2003 2002
---------------------------------------
ASSETS (in thousands)
CURRENT ASSETS:
Cash and cash equivalents $ 130,726 $ 144,078
Short-term investments 139,980 43,886
Investment adviser fees and other receivables 22,911 19,502
Other current assets 4,405 6,101
---------------------------------------
Total current assets 298,022 213,567
---------------------------------------
OTHER ASSETS:
Deferred sales commissions 210,068 239,048
Goodwill 69,467 69,467
Other intangible assets, net 37,120 37,296
Long-term investments 32,353 39,982
Equipment and leasehold improvements, net 12,153 13,897
Other assets 3,105 3,362
---------------------------------------
Total other assets 364,266 403,052
---------------------------------------
Total assets $ 662,288 $ 616,619
=======================================
See notes to consolidated financial statements.
3
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Consolidated Balance Sheets (unaudited) (continued)
July 31, October 31,
2003 2002
------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY (in thousands, except share figures)
CURRENT LIABILITIES:
Accrued compensation $ 23,793 $ 31,899
Accounts payable and accrued expenses 21,959 16,324
Dividend payable 8,257 5,522
Current portion of long-term debt 7,143 7,143
Other current liabilities 8,291 7,382
------------------------------------------
Total current liabilities 69,443 68,270
------------------------------------------
LONG-TERM LIABILITIES:
Long-term debt 118,291 124,118
Deferred income taxes 35,479 50,531
------------------------------------------
Total long-term liabilities 153,770 174,649
------------------------------------------
Total liabilities 223,213 242,919
------------------------------------------
Minority interest 23,426 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
Issued, 68,813,555 and 69,102,459 shares, respectively 538 540
Notes receivable from stock option exercises (3,059) (3,530)
Deferred compensation (1,275) (2,100)
Accumulated other comprehensive income 814 2,585
Retained earnings 418,630 374,806
------------------------------------------
Total shareholders' equity 415,649 372,302
------------------------------------------
Total liabilities and shareholders' equity $ 662,288 $ 616,619
==========================================
See notes to consolidated financial statements.
4
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Consolidated Statements of Income (unaudited)
Three Months Ended Nine Months Ended
July 31, July 31,
2003 2002 2003 2002
-------------------------------------------------------------------
(in thousands, except per share figures)
REVENUE:
Investment adviser and administration fees $ 75,687 $ 70,518 $ 212,696 $ 213,896
Distribution and underwriter fees 37,605 40,168 108,833 124,132
Service fees 19,179 19,522 54,458 59,809
Other revenue 1,433 465 3,727 1,330
-------------- --------------- -------------- --------------
Total revenue 133,904 130,673 379,714 399,167
-------------- --------------- -------------- --------------
EXPENSES:
Compensation of officers and employees 30,735 25,546 81,256 77,335
Amortization of deferred sales commissions 21,139 20,328 64,168 62,765
Service fee expense 17,518 16,722 48,748 49,840
Distribution fee expense 8,552 7,824 23,878 23,608
Other expenses 15,088 13,847 43,788 39,769
-------------- --------------- -------------- --------------
Total expenses 93,032 84,267 261,838 253,317
-------------- --------------- -------------- --------------
OPERATING INCOME 40,872 46,406 117,876 145,850
OTHER INCOME (EXPENSE):
Interest income 1,252 3,447 4,189 6,951
Interest expense (1,430) (1,336) (4,334) (3,514)
Gain (loss) on investments 353 (107) 2,303 1,276
Foreign currency gain 2 - 42 -
Equity in net income (loss) of affiliates 160 207 (51) 226
-------------- --------------- -------------- --------------
INCOME BEFORE MINORITY INTEREST
AND INCOME TAXES 41,209 48,617 120,025 150,789
MINORITY INTEREST IN INCOME (398) (648) (871) (1,237)
-------------- --------------- -------------- --------------
INCOME BEFORE INCOME TAXES 40,811 47,969 119,154 149,552
INCOME TAXES 14,284 16,788 41,704 52,343
-------------- --------------- -------------- --------------
NET INCOME $ 26,527 $ 31,181 $ 77,450 $ 97,209
============== =============== ============== ==============
EARNINGS PER SHARE:
Basic $ 0.39 $ 0.45 $ 1.12 $ 1.40
============== ============== ============== ==============
Diluted $ 0.38 $ 0.44 $ 1.10 $ 1.35
============== ============== ============== ==============
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 68,876 69,161 69,041 69,226
============== ============== ============== ==============
Diluted 70,465 71,194 70,303 71,759
============== ============== ============== ==============
See notes to consolidated financial statements.
5
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Consolidated Statements of Cash Flows (unaudited)
Nine Months Ended
July 31,
2003 2002
--------------------------------------
(in thousands)
Cash and cash equivalents, beginning of period $144,078 $115,681
--------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income 77,450 97,209
Adjustments to reconcile net income to net cash provided
by (used for) operating activities:
Gain on sale of investments (1,909) (1,276)
Equity in net income (loss) of affiliate 51 (226)
Dividends received from affiliate 375 375
Minority interest in earnings 871 1,237
Translation adjustment (5) -
Interest on long-term debt 1,571 2,549
Deferred income taxes (13,860) (13,248)
Tax benefit of stock option exercises 442 4,192
Compensation related to restricted stock issuance 825 825
Depreciation and other amortization 3,981 3,771
Amortization of deferred sales commissions 64,168 62,765
Payment of capitalized sales commissions (53,968) (70,301)
Contingent deferred sales charges received 18,780 23,818
Bad debt expense 147 -
Proceeds from the sale of trading investments 224 1,043
Mutual fund subsidiary's investment in short-term securities (124,975) -
Changes in other assets and liabilities:
Investment adviser fees and other receivables (3,556) 2,648
Other current assets 1,532 1,268
Other assets 791 5,041
Accrued compensation (8,106) (13,513)
Accounts payable and accrued expenses 5,635 (3,507)
Other current liabilities 893 (7,597)
--------------------------------------
Net cash provided by (used for) operating activities (28,643) 97,073
--------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to equipment and leasehold improvements (718) (1,590)
Net decrease in notes receivable from affiliates 471 (617)
Proceeds from sale of available-for-sale investments 39,704 51,284
Purchase of available-for-sale investments (5,501) (55,884)
Purchase of management contracts (1,343) -
--------------------------------------
Net cash provided by (used for) investing activities 32,613 (6,807)
--------------------------------------
See notes to consolidated financial statements.
6
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Consolidated Statements of Cash Flows (unaudited) (continued)
Nine Months Ended
July,
2003 2002
---------------------------------------
(in thousands)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt (7,143) (7,143)
Long-term debt issuance costs - (720)
Distributions to minority shareholders (843) (717)
Proceeds from the issuance of non-voting
common stock 8,585 15,712
Repurchase of non-voting common stock (23,349) (37,181)
Dividend paid (16,572) (15,053)
Proceeds from the issuance of mutual fund subsidiary's
capital stock 22,000 -
-------------------------------------
Net cash used for financing activities (17,322) (45,102)
-------------------------------------
Net increase (decrease) in cash and cash equivalents (13,352) 45,164
-------------------------------------
Cash and cash equivalents, end of period $130,726 $160,845
=====================================
SUPPLEMENTAL INFORMATION:
Interest paid $ 1,361 $ 797
=====================================
Income taxes paid $ 52,358 $ 68,639
=====================================
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) 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 and provides for minority
interests in consolidated companies for which the Company's ownership is less
than 100 percent. All intercompany accounts and transactions have been
eliminated.
(3) ACCOUNTING DEVELOPMENTS
In December 2002, the FASB issued Statement of Financial Accounting Standards
(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 disclosure 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
provisions of SFAS No. 148 do not apply to the Company. The disclosure
requirements became effective for interim periods starting after December 15,
2002 and are presented in footnote 7. 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.
In May 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including derivative instruments embedded in other contracts and for hedging
activities under SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." SFAS No. 149 is effective for the Company's fiscal quarter
beginning August 1, 2003. The adoption of SFAS No. 149 will not have a material
effect on the results of operations or the consolidated financial position of
the Company.
8
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) ACCOUNTING DEVELOPMENTS (CONTINUED)
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
addresses the standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity and
requires the issuer to classify a financial instrument that is within the scope
of a liability (or asset in some circumstances). SFAS No. 150 is effective for
the Company's fiscal quarter beginning August 1, 2003. The adoption of SFAS No.
150 will not have a material effect on the results of operations or the
consolidated financial position of the Company.
In November 2002, the FASB issued FASB 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 adoption of FIN No.
45 in the first quarter 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 (VIEs) 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. FIN No. 46 requires consolidation of a VIE by the enterprise that
absorbs a majority of the VIE's expected losses. If no enterprise absorbs a
majority of the expected losses, FIN No. 46 requires consolidation by the
enterprise that receives a majority of the expected residual returns. The
calculation of expected residual returns includes the expected variability in
the entity's net income or loss as well as all fees earned by the entity's
decision maker. The enterprise that is required to consolidate a VIE is referred
to as the entity's 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.
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. The CDO entities are alternative investment
products that meet the definition of a VIE under FIN No. 46. At July 31, 2003,
combined assets under management in the collateral pools of these CDO entities
were approximately $1.6 billion. The Company has minority equity investments in
four of these entities totaling $12.4 million at July 31, 2003, which represents
the Company's maximum exposure to loss over the remaining lives of the CDO
entities.
On September 3, 2003, the FASB exposed further interpretative guidance on FIN
No. 46 relating to fees earned by the CDO entity's decision maker with a comment
period ending October 3, 2003. The interpretative guidance specifically
addressed the impact of "kick-out" rights associated with the decision maker on
the computation of expected residual returns. "Kick-out" rights refer to the
ability of the CDO entity's debt and equity holders to terminate the decision
maker (collateral manager) without cause. Management has concluded that it is
reasonably possible that if the interpretative guidance is issued as exposed,
FIN No. 46 would require the Company to consolidate three of the CDO entities in
which it has minority equity investments as of and for the three month period
ended October 31, 2003. At August 1, 2003, aggregate assets in the three CDO
entities totaled approximately $0.8 billion and aggregate liabilities totaled
approximately $1.0 billion. The Company has not yet determined the impact, if
any, that consolidation of these entities will have on its consolidated results
of operations. The Company has no claim to the assets of these entities and the
9
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) ACCOUNTING DEVELOPMENTS (CONTINUED)
liabilities of these entities are without recourse to the Company. The Company's
maximum exposure to loss over the remaining lives of these three entities
totaled $5.0 million at July 31, 2003, representing the Company's minority
equity investments in these entities at that date.
(4) GOODWILL AND OTHER INTANGIBLES
The following is a summary of other intangible assets at July 31, 2003 and
October 31, 2002:
JULY 31, 2003 WEIGHTED-AVERAGE
AMORTIZATION
PERIOD GROSS
(IN YEARS) CARRYING ACCUMULATED
(dollars in thousands) AMOUNT AMORTIZATION
- ---------------------------------------------------------------------------------------------------
AMORTIZED INTANGIBLE ASSETS:
Client relationships acquired 17.4 $39,483 $3,674
NON-AMORTIZED INTANGIBLE ASSETS:
Mutual fund management
contract acquired - 1,311 -
- ---------------------------------------------------------------------------------------------------
Total $40,794 $3,674
===================================================================================================
OCTOBER 31, 2002 WEIGHTED-AVERAGE
AMORTIZATION
PERIOD GROSS
(IN YEARS) CARRYING ACCUMULATED
(dollars in thousands) 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 $1,343,000 during the nine months
ended July 31, 2003 represent management contracts acquired by one of the
Company's majority owned subsidiaries.
10
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) INVESTMENTS
The following is a summary of investments at July 31, 2003, and October 31,
2002:
JULY 31, OCTOBER 31,
(in thousands) 2003 2002
- --------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS:
Sponsored funds:
Available-for-sale $ 15,624 $ 43,886
Trading 124,356 -
- --------------------------------------------------------------------------------------
Total $139,980 $ 43,886
======================================================================================
LONG-TERM INVESTMENTS:
Sponsored funds:
Available-for-sale $ 12,409 $ 18,826
Collateralized debt obligation entities 12,442 13,228
Investment in affiliates 6,583 7,009
Other investments 919 919
- --------------------------------------------------------------------------------------
Total $ 32,353 $ 39,982
======================================================================================
Investments classified as trading consist primarily of investments in sponsored
funds and short-term debt securities and are carried at fair value. They include
investments held by the Company's mutual fund subsidiary and investments held in
connection with the Company's activities as principal underwriter. Net
unrealized holding gains or losses on these investments, as well as realized
gains or losses, are reflected as a component of Other revenue in the
Consolidated Statements of Income. Interest income earned by the Company's
mutual fund subsidiary is also reflected as a component of Other revenue. The
average cost method is used to determine the cost of securities sold for all
investments except those held by the Company's mutual fund subsidiary, which
uses the first-in-first-out method to determine the cost of securities sold.
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 collateralized debt
obligations (CDO entities). The Company's minority equity ownership interests in
the CDO entities are reported at lower of cost or 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 July 31, 2003, combined
assets under management in the collateral pools of these CDO entities were
approximately $1.6 billion, and the Company's maximum exposure to loss as a
result of its investments in the equity of CDO entities was approximately $12.4
million, which is reflected in the Company's Consolidated Balance Sheet at July
31, 2003. Investors in CDOs have no recourse against the Company for any losses
sustained in any CDO structure. As noted in footnote 3, management has concluded
that it is reasonably possible that the Company will have to consolidate three
CDO entities in which it has minority equity investments as of and for the three
months ended October 31, 2003.
11
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) DEBT
The following is a summary of the carrying value of long-term debt at July 31,
2003 and October 31, 2002:
JULY 31, OCTOBER 31,
(in thousands) 2003 2002
- ------------------------------------------------------------------------------------------
6.22% senior notes due 2004 $ 7,143 $ 14,286
1.5% zero-coupon exchangeable senior
notes due 2031 118,291 116,975
- ------------------------------------------------------------------------------------------
Total 125,434 131,261
Less: current maturities (7,143) (7,143)
- ------------------------------------------------------------------------------------------
Total long-term debt $ 118,291 $ 124,118
==========================================================================================
(7) STOCK-BASED COMPENSATION PLANS
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 and nine months ended July 31, 2003 and 2002 would have been reduced
to the following pro forma amounts:
- ----------------------------------------------------------------------------------------------------------------------
For the three months ended For the nine months ended
July 31, July 31,
2003 2002 2003 2002
- ----------------------------------------------------------------------------------------------------------------------
(in thousands, except per share figures)
Net income as reported $26,527 $31,181 $77,450 $97,209
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of tax 2,820 2,973 8,302 7,434
----------------------------------------------------------------------
Pro forma net income $23,707 $28,208 $69,148 $89,775
======================================================================
Earnings per share:
Basic - as reported $ 0.39 $ 0.45 $ 1.12 $ 1.40
======================================================================
Basic - pro forma $ 0.34 $ 0.41 $ 1.00 $ 1.30
======================================================================
Diluted - as reported $ 0.38 $ 0.44 $ 1.10 $ 1.35
======================================================================
Diluted - pro forma $ 0.34 $ 0.40 $ 0.98 $ 1.25
======================================================================
12
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) STOCK-BASED COMPENSATION PLAN (CONTINUED)
The fair value of each option grant included in the pro forma net income shown
above is estimated on the date of grant using the Black-Scholes option pricing
model with the following weighted average assumptions used for grants for the
nine months ended July 31, 2003 and 2002:
- --------------------------------------------------------------------------
JULY 31,
2003 2002
- --------------------------------------------------------------------------
Dividend yield 1.44% 1.11%
Volatility 30% 30%
Risk-free interest rate 4.5% 4.0%
Expected life of options 8 years 8 years
RESTRICTED STOCK PLAN
The Company recorded compensation expense of $0.8 million for the nine months
ended July 31, 2003 and 2002 relating to shares of restricted stock granted in
2001 and 2000.
(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 nine months of fiscal 2003, the Company purchased 793,000 shares of
its non-voting common stock under this share repurchase authorization.
Approximately 1,455,000 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 $54.4 million,
which exceeded its minimum net capital requirement of $1.4 million at July 31,
2003. The ratio of aggregate indebtedness to net capital at July 31, 2003 was
..37 to 1.
(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 nine months ended July 31, 2003 and
2002.
In addition, the exercise of non-qualified stock options resulted in a reduction
of taxes payable of approximately $0.4 million and $3.7 million for the nine
months ended July 31, 2003 and 2002. Such benefit has been reflected in
shareholders' equity.
13
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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 July 31,
2003 and 2002 are as follows:
- --------------------------------------------------------------------------------------------------------------------
JULY 31,
(IN THOUSANDS) 2003 2002
- ---------------------------------------------------------------------------------------------------------------------
Net income $ 77,450 $ 97,209
Net unrealized loss on available-for-sale securities, net of
income tax benefit of ($1,027) and ($1,211), respectively (1,767) (1,935)
Foreign currency translation adjustments, net of income
taxes of ($1) and ($0) (4) -
--------------------------------------------
Comprehensive income $ 75,679 $ 95,274
============================================
(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.
(13) SUBSEQUENT EVENT
On September 10, 2003 the Company acquired 80 percent of Parametric Portfolio
Associates (Parametric) for an initial payment of $28.0 million in cash.
Parametric is an investment management firm in Seattle, Washington, with
approximately $5.0 billion in assets under management. Under the agreement,
Parametric will become a subsidiary of Eaton Vance Corp. and will operate as a
distinct business unit.
Under the terms of the acquisition agreement, Parametric's shareholders will
continue to hold 20 percent of the equity of Parametric through 2006. Beginning
in 2006, Parametric's shareholders will have annual rights to sell and the
Company will also have certain rights to purchase the remaining 20 percent of
Parametric stock over an eight-year period. The price for acquiring the
remaining 20 percent of Parametric will be based on a multiple of prior year's
earnings before interest and taxes in those years.
14
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 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 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 adjustments to the assets' useful
lives as required.
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 at least annually for
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 entity 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 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, totaling approximately
$12.4 million at July 31, 2003.
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. No losses of this nature have been recorded in the
financial statements included in this report.
RESULTS OF OPERATIONS FOR QUARTER ENDED JULY 31, 2003 COMPARED TO QUARTER ENDED
JULY 31, 2002
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company reported earnings of $26.5 million or $0.38 per diluted share in the
third quarter of fiscal 2003 compared to $31.2 million or $0.44 per diluted
share in the third quarter of fiscal 2002. ASSET HIGHLIGHTS Assets under
management of $64.3 billion on July 31, 2003 were 17 percent higher than the
$54.8 billion reported a year earlier. The Company's assets under management
were affected by strong net inflows and $2.4 billion of market appreciation over
the past 12 months. Average assets under management were $61.7 billion in the
third quarter of fiscal 2003, 7 percent higher than the $57.5 billion in the
third quarter of last year.
The Company had positive net inflows in both the third quarter of fiscal 2003
and 2002. Net inflows of long-term fund assets in the third quarter of fiscal
2003 were $3.8 billion compared to $0.1 billion in the third quarter of last
year. Net inflows of long-term fund assets increased in the third quarter of
2003 compared to the third quarter of fiscal 2002 primarily as a result of the
record setting $3.1 billion offering of the closed-end Eaton Vance Limited
Duration Income Fund in May of 2003 and an increase in overall fund sales
compared to a year earlier. Net inflows of separate account assets were $0.4
billion in the third quarter of fiscal 2003 compared to net inflows of $0.5
billion in the third quarter of fiscal 2002. The following table summarizes the
asset flows for each of the quarters ended July 31, 2003 and 2002:
ASSET FLOWS
THREE MONTHS ENDED
(IN BILLIONS) JULY 31, 2003 JULY 31, 2002
- --------------------------------------------------------- --------------------- --------------------
Long-term fund assets - beginning of period $ 46.1 $ 46.8
Sales/inflows 5.4 2.1
Redemptions/outflows (1.6) (2.0)
Exchanges - (0.1)
Market value change 1.5 (4.1)
--------------------- --------------------
Long-term fund assets - end of period $ 51.4 $ 42.7
--------------------- --------------------
Separate accounts - beginning of period $ 11.4 $ 11.4
Net flows - Institutional and high net worth 0.3 0.3
Net flows - Retail managed accounts 0.1 0.2
Market value change 0.7 (1.3)
--------------------- --------------------
Separate accounts - end of period $ 12.5 $ 10.6
--------------------- --------------------
Money market fund assets - end of period 0.4 1.5
--------------------- --------------------
Total assets under management - end of period $ 64.3 $ 54.8
===================== ====================
Equity assets under management comprised 53 percent of total assets under
management on July 31, 2003 compared to 57 percent on July 31, 2002. Fixed
income assets under management increased to 33 percent of total assets under
management from 27 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
(IN BILLIONS) JULY 31, 2003 JULY 31, 2002
- -----------------------------------------------------------------------------
Equity $ 34.0 $ 31.0
Fixed income 21.2 15.1
Floating-rate income 9.1 8.7
------------------------------------------
Total $64.3 $ 54.8
==========================================
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company currently sells its sponsored funds that are registered as
investment companies (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 earned. The Company continues
to experience a gradual shift in asset mix from Class B shares to other asset
classes that have lower or no distribution fees. The growth in ending assets
under management year-over-year was primarily a result of growth in Class A,
closed-end fund and separate account assets. The Company does not earn
distribution fees on closed-end fund or separate account assets.
ASSETS UNDER MANAGEMENT BY ASSET CLASS
(IN BILLIONS) JULY 31, 2003 JULY 31, 2002
- --------------------------------------------------------------------------------
Class A $ 7.4 $ 6.2
Class B 12.8 13.2
Class C 5.8 5.5
Private equity funds 14.6 13.7
Closed-end funds 7.6 1.6
Other 3.6 4.0
---------------------------------------
Total fund assets 51.8 44.2
Total separate account assets 12.5 10.6
---------------------------------------
Total $ 64.3 $54.8
=======================================
While ending Class B share assets declined by 3 percent year-over-year, average
Class B share assets declined by 7 percent year-over-year, consistent with the 6
percent decrease in distribution income described below.
REVENUE
The Company reported revenue of $133.9 million in the third quarter of fiscal
2003 compared to $130.7 million in the third quarter of fiscal 2002, an increase
of 2 percent.
Investment adviser and administration fees are generally calculated under
contractual agreements with the Company's sponsored funds and separate accounts
and are based primarily 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 increased by 7 percent to $75.7
million in the third quarter of fiscal 2003 from $70.5 million in the third
quarter of fiscal 2002, consistent with the 7 percent increase in average assets
under management.
For the quarter ended July 31, 2003, distribution and underwriting fees
decreased by $2.6 million, or 6 percent, to $37.6 million from $40.2 million a
year earlier. 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 the Company earns higher distribution
fees from spread-load commission (Class B) assets than front-end load (Class A)
assets. The decrease in distribution income also reflects a decrease in the
average market value of the Company's spread-load (Class B) and level-load
(Class C) share assets under management compared to a year earlier and a
decrease in early withdrawal charges earned from bank loan interval fund
redemptions.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Service fee revenue, which is also based upon a percentage of the market value
of certain fund assets under management, decreased to $19.2 million for the
quarter ended July 31, 2003 from $19.5 million for the quarter ended July 31,
2002. The decrease in service fee revenue is consistent with the decrease in
average assets under management that are subject to service fees.
Other revenue increased 180 percent to $1.4 million from $0.5 million a year
earlier primarily as a result of the reimbursement of shareholder services now
performed by the Company, and interest income earned by the Company's mutual
fund subsidiary.
EXPENSES
Compensation expense increased 20 percent to $30.7 million in the third quarter
of fiscal 2003 from $25.5 million in the third quarter of fiscal 2002 primarily
as a result of increases in incentive compensation associated with the $3.1
billion offering of the Eaton Vance Limited Duration Income Fund and the
increase in core fund sales year-over-year.
Amortization of deferred sales commissions increased 4 percent to $21.1 million
in the third quarter of 2003 from $20.3 million for the quarter ended July 31,
2002. Amortization is impacted by ongoing sales of mutual fund Class B shares,
Class C 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 to broker/dealers after the first year. Service fee
expense increased 5 percent to $17.5 million in the third quarter of fiscal 2003
from $16.7 million a year earlier. The increase in service fee expense can be
attributed to the increase in average long-term fund assets retained more than
one year that are subject to service fees.
Distribution fee expense primarily represents additional costs associated with
the distribution of Class C shares which are calculated as a percentage of the
market value of Class C assets under management and commission expenses related
to the sales of Class A shares at net asset value. Distribution fee expense
increased 9 percent to $8.6 million in the third quarter of fiscal 2003 from
$7.8 million a year earlier primarily as a result of an increase in Class A
share commission expenses.
Other operating expenses increased 9 percent to $15.1 million in the third
quarter of fiscal 2003 from $13.8 million a year ago, primarily as a result of
higher travel, promotion and consulting fees.
OTHER INCOME AND EXPENSE
Interest income decreased 64 percent to $1.3 million in the third quarter of
fiscal 2003 from $3.4 million a year ago primarily as a result of lower
short-term interest rates year-over-year.
Interest expense increased to $1.4 million in the third quarter of 2003 from
$1.3 million a year ago, primarily as a result of additional interest expense
related to the Company's 1.5% zero-coupon exchangeable senior notes issued by a
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
wholly owned subsidiary of the Company, Eaton Vance Management. Note holders
will receive an incremental cash interest payment of 1.672 percent per year from
November 13, 2002 to August 13, 2004.
INCOME TAXES
The Company's effective tax rate was 35 percent during the third quarter of
fiscal 2003 and 2002.
RESULTS OF OPERATIONS NINE MONTHS ENDED JULY 31, 2003 COMPARED TO THE NINE
MONTHS ENDED JULY 31, 2002
The Company reported earnings of $77.5 million or $1.10 per diluted share in the
first nine months of fiscal 2003 compared to $97.2 million or $1.35 per diluted
share in the first nine months of fiscal 2002.
ASSET HIGHLIGHTS
The Company had positive net inflows in both the first nine months of fiscal
2003 and 2002. Net inflows of long-term fund assets in the first nine months of
fiscal 2003 were $5.1 billion compared to $1.2 billion in the first nine months
of last year. Net inflows in the first nine months of 2003 benefited from the
record setting $3.1 billion offering of the closed-end Eaton Vance Limited
Duration Income Fund in May of 2003 and the $0.7 billion offering of nine
closed-end municipal bond funds in November of 2002. Net inflows of separate
account assets were $0.6 billion in the first nine months of fiscal 2003
compared to net inflows of $1.0 billion in the first nine months of fiscal 2002.
Average assets under management were $58.3 billion in the first nine-months of
fiscal 2003 and 2002. The following table summarizes the asset flows for each of
the nine months ended July 31, 2003 and 2002:
ASSET FLOWS
NINE MONTHS ENDED
(IN BILLIONS) JULY 31, 2003 JULY 31, 2002
- ----------------------------------------------------------------------------------------------------
Long-term fund assets - beginning of period $ 43.9 $ 45.0
Sales/inflows 9.7 6.3
Redemptions/outflows (4.6) (5.1)
Exchanges (0.1) -
Market value change 2.5 (3.5)
--------------------- --------------------
Long-term fund assets - end of period $ 51.4 $ 42.7
--------------------- --------------------
Separate accounts - beginning of period 10.8 $ 10.5
Net flows - Institutional and high net worth 0.2 0.5
Net flows - Retail managed accounts 0.4 0.5
Market value change 1.1 (0.9)
--------------------- --------------------
Separate accounts - end of period $ 12.5 $ 10.6
--------------------- --------------------
Money market fund assets - end of period $ 0.4 $ 1.5
--------------------- --------------------
Total assets under management - end of period $ 64.3 $ 54.8
===================== ====================
REVENUE
The Company reported revenue of $379.7 million in the first nine months of
fiscal 2003 compared to $399.2 million in the first nine months of fiscal 2002,
a decrease of 5 percent.
Investment adviser and administration fees decreased by less than 1 percent to
$212.7 million in the first nine months of fiscal 2003 from $213.9 million in
the first nine months of fiscal 2002, consistent with average assets under
management that were flat year-over-year.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
For the nine months ended July 31, 2003, distribution and underwriting fees
decreased by $15.3 million, or 12 percent, to $108.8 million from $124.1 million
a year earlier. The decrease in distribution income reflects the gradual shift
in the Company's registered fund asset mix from spread-load commission (Class B)
assets under management to front-end load (Class A) assets under management, a
decrease in the market value of the Company's average Class B and C share assets
under management compared to a year earlier and a decrease in early withdrawal
charges earned from bank loan interval fund redemptions.
Service fee revenue, which is also based upon a percentage of the market value
of certain fund assets under management, decreased to $54.5 million for the nine
months ended July 31, 2003 from $59.8 million for the nine months ended July 31,
2002, consistent with the decrease in average long-term fund assets under
management that are subject to service fees.
Other revenue increased 180 percent to $3.7 million from $1.3 million a year
earlier primarily as a result of the reimbursement of shareholder services now
performed by the Company, and interest income earned by the Company's mutual
fund subsidiary.
EXPENSES
Compensation expense increased 5 percent to $81.3 million in the first nine
months of fiscal 2003 from $77.3 million in the first nine months of fiscal 2002
primarily as a result of incentive compensation associated with the $3.1 billion
offering of the closed-end Eaton Vance Limited Duration Income Fund in May of
2003 and the offering of nine closed-end municipal bond funds in November of
2002.
Amortization of deferred sales commissions increased 2 percent to $64.2 million
in the first nine months of fiscal 2003 from $62.8 million a year earlier,
primarily due to on-going sales of Class B shares, Class C shares and equity
private placements and the residual effect of accounting changes mandated by the
SEC in fiscal 1998 and 1999. Amortization of deferred sales commissions was
increased by approximately $0.5 million in the first nine months of fiscal 2003
to better match the amortization expense of deferred sales commissions with the
projected distribution fee revenue the deferred sales commission assets generate
over their estimated useful lives.
Service fee expense decreased 2 percent to $48.7 million in the first nine
months of fiscal 2003 from $49.8 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 that are subject to service fees.
Distribution fee expense increased 1 percent to $23.9 million in the first nine
months of fiscal 2003 from $23.6 million a year earlier primarily as a result of
an increase in commission expenses offset by a decrease in Class C share
distribution expenses.
Other operating expenses increased 10 percent to $43.8 million in the first nine
months of fiscal 2003 from $39.8 million a year ago, primarily as a result of
$1.8 million of offering expenses relating to the closed-end municipal bond
funds offered in November of 2002, as well as increases in travel, consulting
and fund expenses.
OTHER INCOME AND EXPENSE
Interest income decreased 40 percent to $4.2 million in the first nine months of
fiscal 2003 from $7.0 million a year ago primarily as a result of lower
short-term interest rates year-over-year.
Interest expense increased to $4.3 million in the first nine months of fiscal
2003 from $3.5 million a year ago, primarily as a result of additional interest
expense related to the 1.5% zero-coupon exchangeable senior notes issued by
Eaton Vance Management. Note holders will receive an incremental cash interest
payment of 1.672 percent per year from November 13, 2002 to August 13, 2004.
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INCOME TAXES
The Company's effective tax rate was 35 percent during the first nine months of
fiscal 2003 and 2002.
CHANGES IN FINANCIAL CONDITION AND LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments aggregated $270.7 million at
July 31, 2003, an increase of $82.7 million from October 31, 2002.
The Company has met its cash requirements primarily through cash generated by
operating activities. The Company's principal uses of cash have been to pay
sales commissions, operating expenses and 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 cash for the foreseeable future will
include those uses listed above as well as the purchase of additional ownership
interests in majority-owned subsidiaries. The Company is scheduled to repay
approximately $7.1 million in principal related to its 6.22 percent senior notes
upon their maturity in March 2004. The Company does not expect to repurchase any
of its zero-coupon exchangeable senior notes (Notes) during the fiscal year
ending October 31, 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 a significant percentage
of the Company's assets represented by cash and short-term investments. The
Company's receivables and payables represent transactions that arise and settle
in the normal course of business. Short-term investments increased to $140.0
million at July 31, 2003 as a result of the Company acquiring a controlling
financial interest in a newly created Company-sponsored mutual fund. Deferred
sales commissions paid to broker/dealers in connection with the sale of open-end
and bank loan interval funds decreased $28.9 million to $210.1 million at July
31, 2003 from $239.0 million at October 31, 2002 primarily as a result of a
decrease in Class B share sales. For further discussion of the components of the
Company's deferred sales commissions please see the "Operating Cash Flows"
section below. Long-term investments decreased to $32.4 million at July 31, 2003
from $40.0 million at October 31, 2002 as a result of the sale of
available-for-sale securities. Accrued compensation decreased to $23.8 million
at July 31, 2003 from $31.9 million at October 31, 2002 as a result of the
payment of fiscal year-end bonuses in November 2002.
OPERATING CASH FLOWS
Operating activities reduced cash and cash equivalents by $28.6 million in the
first nine months of fiscal 2003. The Company generated $97.1 million of cash
from operations in the first nine-month of fiscal 2002. The decrease in cash
provided by operations is primarily a result of the consolidation of the
Company's investment in a sponsored mutual fund. The Company was required to
consolidate its investment in Eaton Vance Short-term Income Fund (EVSI) when it
became the fund's majority investor. The purchase of $125.0 million of
investments included in operating cash flows primarily represents EVSI's
purchase of short-term securities. Capitalized sales commissions paid to
financial intermediaries for 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 $16.3 million due to a decline in Class B fund sales and equity
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
fund private placements. Although these commission payments decreased to $54.0
million in the first nine months of 2003 from $70.3 million in the first nine
months of 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, increased cash and cash equivalents by $32.6
million in the first nine months of fiscal 2003. Investing activities reduced
cash and cash equivalents by $6.8 million in the first nine months of fiscal
2002. Cash generated from investing activities in the first nine months of
fiscal 2003 reflects the purchase of $5.5 million of available-for-sale
investments and $39.7 million of proceeds received from the sale of
available-for-sale investments.
FINANCING CASH FLOWS
Financing activities reduced cash and cash equivalents by $17.3 million in the
first nine months of fiscal 2003 compared to $45.1 million in the first nine
months of fiscal 2002. The decrease in cash used for financing activities is
primarily a result of proceeds received from the issuance of EVSI's capital
stock. The Company repurchased a total of 793,000 shares of its non-voting
common stock for $23.3 million in the first nine month of fiscal 2003 under its
authorized repurchase program and issued 504,300 shares or $8.6 million of
non-voting common stock in connection with the exercise of stock options and
employee stock purchases in the first nine months of fiscal 2003. The Company
has authorization to purchase approximately 1.5 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 $0.28
per share in the first nine months of fiscal 2003 compared to $0.2175 in the
first nine months of fiscal 2002. The Company increased its third quarter
dividend by 50 percent to $0.12 over the previous $0.08 per share quarterly
dividend as a result of the Company's strong cash position and in response to a
decrease in the federal income tax rate on ordinary dividends that the Company's
shareholders pay on dividends they receive from the Company.
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 $7.1 $7.1 - - -
- -----------------------------------------------------------------------------------------------------------
Operating leases $33.3 $5.2 $10.5 $10.0 $7.6
- -----------------------------------------------------------------------------------------------------------
Excluded from the table above are Eaton Vance Management's (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
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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. EVM may be required to repurchase Notes
with an accreted value of up to $120.1 million on the next scheduled repurchase
date, August 13, 2004.
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, was paid 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.
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 July 31, 2003, EVM
had no borrowings outstanding under its revolving credit facility.
On September 10, 2003 the Company acquired 80 percent of Parametric Portfolio
Associates (Parametric) for an initial payment of $28.0 million in cash.
Parametric is a leading investment management firm in Seattle, Washington, with
$5.0 billion in assets under management. Under the agreement, Parametric will
become a subsidiary of Eaton Vance Corp. and will operate as a distinct business
unit.
Under the terms of the acquisition agreement, Parametric's shareholders will
continue to hold 20 percent of the equity of Parametric through 2006. Beginning
in 2006, Parametric's shareholders will have annual rights to sell and the
Company will also have certain rights to purchase the remaining 20 percent of
Parametric stock over an eight-year period. The price for acquiring the
remaining 20 percent of Parametric will be based on a multiple of prior year's
earnings before interest and taxes in those years.
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.
ACCOUNTING CHANGES
In December 2002, the FASB issued Statement of Financial Accounting Standards
(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 adoption of SFAS No. 148 did not have a material effect on the results of
operations or the consolidated financial position of the Company.
24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In May 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including derivative instruments embedded in other contracts and for hedging
activities under SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." SFAS No. 149 is effective for the Company's fiscal quarter
beginning August 1, 2003. The adoption of SFAS No. 149 will not have a material
effect on the results of operations or the consolidated financial position of
the Company.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
addresses the standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity and
requires the issuer to classify a financial instrument that is within the scope
of a liability (or asset in some circumstances). SFAS No. 150 is effective for
the Company's fiscal quarter beginning August 1, 2003. The adoption of SFAS No.
150 will not have a material effect on the results of operations or the
consolidated financial position of the Company.
In November 2002, the FASB issued FASB 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 (VIEs) 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. FIN No. 46 requires consolidation of a VIE by the enterprise that
absorbs a majority of the VIE's expected losses. If no enterprise absorbs a
majority of the expected losses, FIN No. 46 requires consolidation by the
enterprise that receives a majority of the expected residual returns. The
calculation of expected residual returns includes the expected variability in
the entity's net income or loss as well as all fees earned by the entity's
decision maker. The enterprise that is required to consolidate a VIE is referred
to as the entity's 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.
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. The CDO entities are alternative investment
products that meet the definition of a VIE under FIN No. 46. At July 31, 2003,
combined assets under management in the collateral pools of these CDO entities
were approximately $1.6 billion. The Company has minority equity investments in
four of these entities totaling $12.4 million at July 31, 2003, which represents
the Company's maximum exposure to loss over the remaining lives of the CDO
entities.
On September 3, 2003, the FASB exposed further interpretative guidance on FIN
No. 46 relating to fees earned by the CDO entity's decision maker with a comment
period ending October 3, 2003. The interpretative guidance specifically
addressed the impact of "kick-out" rights associated with the decision maker on
the computation of expected residual returns. "Kick-out" rights refer to the
25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
ability of the CDO entity's debt and equity holders to terminate the decision
maker (collateral manager) without cause. Management has concluded that it is
reasonably possible that if the interpretative guidance is issued as exposed,
FIN No. 46 would require the Company to consolidate three of the CDO entities in
which it has minority equity investments as of and for the three month period
ended October 31, 2003. At August 1, 2003, aggregate assets in the three CDO
entities totaled approximately $0.8 billion and aggregate liabilities totaled
approximately $1.0 billion. The Company has not yet determined the impact, if
any, that consolidation of these entities will have on its consolidated results
of operations. The Company has no claim to the assets of these entities and the
liabilities of these entities are without recourse to the Company. The Company's
maximum exposure to loss over the remaining lives of these three entities
totaled $5.0 million at July 31, 2003, representing the Company's minority
equity investments in these entities at that date.
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.
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
26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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.
27
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 $9.6 million at July 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 $0.7 million based on fixed-income and
floating-rate income investments of $141.0 million as of July 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 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 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
$12.4 million at July 31, 2003, and represents the total value at risk as of
July 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 most 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.
28
ITEM 4. DISCLOSURE CONTROLS AND PROCEDURES
EVALUATION OF CONTROLS AND PROCEDURES
As of July 31, 2003, 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, Director 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.
29
PART II
OTHER INFORMATION
30
ITEM 1. LEGAL PROCEEDINGS
On October 15, 2001, a consolidated complaint was filed in the United States
District Court for the District of Massachusetts against Eaton Vance Classic
Senior Floating-Rate Fund, Eaton Vance Prime Rate Reserves, Eaton Vance
Institutional Senior Floating-Rate Fund, Eaton Vance Advisers Senior
Floating-Rate Fund (collectively, the "Funds"), their trustees and certain
officers of the Funds; Eaton Vance Management (EVM), the Funds' administrator;
Boston Management and Research (BMR), the Funds' investment adviser; and the
Company, the parent of EVM and BMR. The complaint, framed as a class action,
alleges that for the period between May 25, 1998 and March 5, 2001, the Funds'
assets were incorrectly valued and certain matters were not properly disclosed,
in violation of the federal securities laws. The complaint seeks unspecified
damages. The Company and the other named defendants believe that the complaint
is without merit and are vigorously contesting the lawsuit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
No items were submitted to a vote in the third quarter of fiscal 2003.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit No. Description
10.1 Copy of the Eaton Vance Employee Loan Program relating to
the financing of options by employees revised by the
Company's Directors on July 9, 2003.
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 May 21, 2003, regarding the
Company's press release of its results of operations for the quarter ended April
30, 2003.
The Company filed a Form 8-K with the SEC on June 5, 2003, regarding the
Company's press release of its agreement to purchase 80 percent of the equity of
Parametric Portfolio Associates.
31
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EATON VANCE CORP.
(Registrant)
DATE: September 11, 2003 /s/William M. Steul
----------------------------------------------
(Signature)
William M. Steul
Chief Financial Officer
DATE: September 11, 2003 /s/Laurie G. Hylton
----------------------------------------------
(Signature)
Laurie G. Hylton
Chief Accounting Officer
32
EXHIBIT 10.1
EATON VANCE EMPLOYEE LOAN PROGRAM
(AS REVISED JULY 9, 2003)
1. Purpose. The purpose of the Eaton Vance Employee Loan Program (formerly
called the Eaton Vance Corp. 1998 Executive Loan Program)(the "Program") is to
benefit Eaton Vance Corp. and its present or future subsidiaries (together, or
separately, the "Company," as the context may require) by enhancing the
Company's ability to attract and retain those officers (other than executive
officers) and other key employees of the Company who are in a position to make
substantial contributions to the ongoing success of the Company. The Program is
intended to complement the incentives now offered by the Company to its
employees, which allow them to acquire shares of Eaton Vance Corp. Non-Voting
Common Stock ("Eaton Vance Stock"). To accomplish this purpose, the Program
provides loans to finance exercises of incentive stock options and non-qualified
stock options granted under various stock option plans maintained by the
Company, all as the Compensation Committee of the Board of Directors of Eaton
Vance Corp. (the "Committee") determines.
2. Participation. Participation in the Program shall be limited to those
officers (other than executive officers of Eaton Vance Corp.) and key employees
of the Company who are determined by the Committee as being eligible to so
participate (the "Participants"). For purposes of the Program, executive
officers of Eaton Vance Corp. include the President and Chief Executive Officer,
the Executive Vice President, and the following Vice Presidents: the Chief
Financial Officer, the Chief Legal Officer, the Chief Administrative Officer,
the Chief Accounting Officer, and the Chief Sales and Marketing Officer.
3. Administration. The Committee shall administer the Program and have
exclusive power to determine (a) which officers and key employees shall become
Participants, (b) the time or times at which such offer shall be made, and (c)
the amount to be loaned to any Participant. The interpretation and instruction
by the Committee of any provision of the Program or of any agreement or other
matter related to the Program shall be final unless otherwise determined by the
Committee or the Board of Directors of Eaton Vance Corp. The Committee may
delegate any of its powers and responsibilities under the Program to the
Treasurer of Eaton Vance Corp.
4. Amount Available for Loans. The aggregate amount of loans under the
Program and under the Company's 1997, 1995 and 1984 Executive Loan Programs
which may be outstanding at any one time shall not exceed $10,000,000. All loans
under the Program must be made on or before October 31, 2006.
5. Terms of Notes. Each loan made under the Program shall be evidenced by a
promissory note executed and delivered by the Participant to Eaton Vance
Management (the "Note"). Each Note shall be subject to the following terms and
conditions:
33
(a) The participant shall be personally liable on the Note.
(b) The maximum term to maturity of the Note shall be seven years;
provided, however, that the Note shall become immediately due and
payable as of the date a Participant ceases to be employed by the
Company for any reason other than age, disability or death.
(c) Each Note shall provide for the payment of interest at such annual
rate as may be set by the Committee, which rate shall not be less than
that necessary to avoid the loan being characterized as either (i)
carrying "unstated interest" within the meaning of ss.483 of the
Internal Revenue Code of 1986, as amended (the "Code") in the case of
loans the proceeds of which are used to acquire shares of Eaton Vance
Stock from the Company or (ii) a "below-market loan" within the
meaning of ss.7872 of the Code in all other cases.
(d) The Committee, in its discretion, may require that amounts payable
with respect to the Note be secured by collateral of such nature and
of such value as the Committee determines. Where the purpose of the
loan is to finance the purchase of Eaton Vance Stock, and where the
Note is secured, all or in part, by "margin securities" as defined in
Regulation G promulgated by the Board of Governors of the Federal
Reserve System, the Note shall contain such further terms and
conditions as are required by said Regulation G.
6. Effective Date. The effective date of the revised Program is July 9,
2003, the date on which it was approved by the Board. The revisions to the
Program approved on July 9, 2003, are designed to implement the provisions of
section 402 of the Sarbanes-Oxley Act of 2002, and do not affect any loans
existing under the Program on or prior to July 30, 2002; provided, that no
material modification shall be made to any term of any such loans outstanding to
any director or executive officer of the Company.
34
EXHIBIT 31.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION XXX,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
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 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
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, 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 report is being
prepared;
(b) Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonably likely
to materially affect, the registrant's internal control over financial
reporting; and
35
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.
DATE: September 11, 2003 /s/James B. Hawkes
----------------------------------------------
(Signature)
James B. Hawkes
Chief Executive Officer
36
EXHIBIT 31.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION XXX,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
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 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
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, 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 report is being
prepared;
(b) Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonably likely
to materially affect, the registrant's internal control over financial
reporting; and
37
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.
DATE: September 11, 2003 /s/William M. Steul
----------------------------------------------
(Signature)
William M. Steul
Chief Financial Officer
38
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Eaton Vance Corp. (the "Company") on
Form 10-Q for the period ending July 31, 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: September 11, 2003 /s/James B. Hawkes
----------------------------------------------
(Signature)
James B. Hawkes
Chairman, President and
Chief Executive Officer
39
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Eaton Vance Corp. (the "Company") on
Form 10-Q for the period ending July 31, 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: September 11, 2003 /s/William M. Steul
----------------------------------------------
(Signature)
William M. Steul
Chief Financial Officer
40