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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the period ended April 30, 1999 Commission File No. 1-8100
EATON VANCE CORP.
(Exact name of registrant as specified in its charter)
MARYLAND 04-2718215
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
255 STATE STREET, BOSTON, MASSACHUSETTS 02109
- --------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(617) 482-8260
--------------
(Registrant's telephone number, including area code)
NONE
----
(Former name, address and former fiscal year,
if changed since last record)
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 April 30, 1999:
Voting Common Stock - 77,440 shares
Non-Voting Common Stock - 35,788,042 shares
Page 1 of 22 pages
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PART I
FINANCIAL INFORMATION
2
<PAGE>
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
Consolidated Balance Sheets (unaudited)
April 30, October 31,
1999 1998
----------------------------------------------
ASSETS (in thousands)
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents $ 38,613 $ 54,386
Short-term investments 12,066 42,049
Investment adviser fees and other receivables 6,020 5,331
Real estate assets held for sale 14,971 16,551
Other current assets 17,105 12,116
----------------------------------------------
Total current assets 88,775 130,433
----------------------------------------------
OTHER ASSETS:
Investments:
Investment in affiliates 7,085 7,593
Investment companies 18,431 15,815
Other investments 2,344 2,242
Other receivables 5,839 5,844
Deferred sales commissions 179,099 213,819
Equipment and leasehold improvements, net of
accumulated depreciation and amortization of $6,309
and $5,793 respectively 9,853 2,696
Goodwill and other intangibles, net of accumulated
amortization of $4,292 and $4,197, respectively 1,723 1,818
----------------------------------------------
Total other assets 224,374 249,827
----------------------------------------------
Total assets $ 313,149 $ 380,260
==============================================
See notes to the consolidated financial statements.
</TABLE>
3
<PAGE>
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
Consolidated Balance Sheets (unaudited) (continued)
April 30, October 31,
1999 1998
----------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY (in thousands, except share figures)
<S> <C> <C>
CURRENT LIABILITIES:
Accrued compensation $ 11,921 $ 17,013
Accounts payable and accrued expenses 11,657 9,882
Dividend payable 2,693 2,681
Current portion of long-term debt 15,155 17,314
Other current liabilities 3,275 2,067
----------------------------------------------
Total current liabilities 44,701 48,957
----------------------------------------------
OTHER LIABILITIES:
6.22% Senior Note 28,571 35,714
----------------------------------------------
Deferred income taxes 70,208 83,780
----------------------------------------------
Commitments and contingencies - -
SHAREHOLDERS' EQUITY:
Common stock, par value $.015625 per share:
Authorized, 320,000 shares,
Issued, 77,440 shares 1 1
Non-voting common stock, par value $.015625per share:
Authorized, 47,680,000
shares, 559 556
Issued, 35,788,042 and 35,588,373 shares, respectively
Accumulated other comprehensive income 2,446 1,120
Notes receivable from stock option exercises (3,287) (2,957)
Retained earnings 169,950 213,089
----------------------------------------------
Total shareholders' equity 169,669 211,809
----------------------------------------------
Total liabilities and shareholders' equity $ 313,149 $ 380,260
==============================================
See notes to the consolidated financial statements.
</TABLE>
4
<PAGE>
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
Consolidated Statements of Income (unaudited)
Three Months Ended Six Months Ended
April 30, April 30,
1999 1998 1999 1998
-------------------------------------------------------------------
(in thousands, except per share figures)
<S> <C> <C> <C> <C>
REVENUE:
Investment adviser and administration fees $ 55,333 $ 36,523 $ 102,638 $ 69,828
Distribution income 27,852 21,769 54,904 42,183
Income from real estate activities 667 1,275 1,333 2,384
Other income 463 410 917 855
-------------------------------------------------------------------
Total revenue 84,315 59,977 159,792 115,250
-------------------------------------------------------------------
EXPENSES:
Compensation of officers and employees 17,859 14,808 35,303 27,201
Amortization of deferred sales commissions 12,037 15,501 24,057 30,070
Sales commission expense 23,803 - 71,281 -
Other expenses 15,163 11,624 29,901 22,123
-------------------------------------------------------------------
Total expenses 68,862 41,933 160,542 79,394
-------------------------------------------------------------------
OPERATING INCOME (LOSS) 15,453 18,044 (750) 35,856
OTHER INCOME (EXPENSE):
Interest income 658 1,499 1,973 2,669
Interest expense (829) (987) (1,718) (1,997)
Gain on sale of investments 885 248 787 2,966
Equity in net income (loss) of affiliates (25) 34 (141) (66)
Impairment loss on real estate - - - (2,636)
-------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 16,142 18,838 151 36,792
INCOME TAXES 6,295 7,452 59 14,453
-------------------------------------------------------------------
INCOME BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING
PRINCIPLE 9,847 11,386 92 22,339
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE - - (36,607) -
-------------------------------------------------------------------
NET INCOME (LOSS) $ 9,847 $ 11,386 $ (36,515)$ 22,339
===================================================================
See notes to the consolidated financial statements.
</TABLE>
5
<PAGE>
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
Consolidated Statements of Income (unaudited) (continued)
Three Months Ended Six Months Ended
April 30, April 30,
1999 1998 1999 1998
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
EARNINGS PER SHARE BEFORE
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE:
Basic $ 0.27 $ 0.31 $ - $ 0.61
===================================================================
Diluted $ 0.27 $ 0.30 $ - $ 0.59
===================================================================
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE, PER SHARE:
Basic $ - $ - $ (1.02) $ -
===================================================================
Diluted $ - $ - $ (1.02) $ -
===================================================================
EARNINGS (LOSS) PER SHARE:
Basic $ 0.27 $ 0.31 $ (1.02) $ 0.61
===================================================================
Diluted $ 0.27 $ 0.30 $ (1.02) $ 0.59
===================================================================
DIVIDENDS DECLARED, PER SHARE $ 0.08 $ 0.06 $ 0.15 $ 0.12
===================================================================
Weighted average common shares outstanding 35,915 36,414 35,898 36,716
===================================================================
Weighted average common shares outstanding
assuming dilution 36,917 37,916 35,898 38,164
===================================================================
See notes to the consolidated financial statements.
</TABLE>
6
<PAGE>
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
Consolidated Statements of Cash Flows (unaudited)
Six Months Ended
April 30,
1999 1998
----------------------------------------------
(in thousands)
<S> <C> <C>
Cash and equivalents, beginning of period $ 54,386 $ 61,928
----------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) (36,515) 22,339
Adjustments to reconcile net income to net cash used for
operating activities:
Cumulative effect of change in accounting principle,
net of tax 36,607 -
Equity in net loss of affiliates 141 66
Dividend received from affiliate 368 430
Impairment loss on real estate - 2,636
Deferred income taxes 9,554 11,223
Amortization of deferred sales commissions 24,057 30,070
Depreciation and other amortization 700 1,074
Payment of capitalized sales commissions (58,319) (68,490)
Capitalized sales charges received 8,884 11,298
Gain on sale of investments (787) (2,965)
Changes in other assets and liabilities (9,440) (10,124)
----------------------------------------------
Net cash used for operating activities (24,750) (2,443)
----------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to real estate, equipment and
leasehold improvements (7,672) (654)
Net decrease in notes and receivables from affiliates 833 144
Proceeds from sale of real estate 2,921 -
Proceeds from sale of investments 33,755 122,253
Purchase of investments (4,839) (123,118)
----------------------------------------------
Net cash provided by (used for) investing activities 24,998 (1,375)
----------------------------------------------
See notes to the consolidated financial statements.
</TABLE>
7
<PAGE>
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
Consolidated Statements of Cash Flows (unaudited) (continued)
Six Months Ended
April 30,
1999 1998
----------------------------------------------
(in thousands)
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on notes payable $ (21,302) $ (7,270)
Revolving credit facility borrowings 12,000 7,000
Proceeds from the issuance of non-voting
common stock 4,630 3,698
Dividends paid (5,388) (4,438)
Repurchase of non-voting common stock (5,961) (33,108)
----------------------------------------------
Net cash used for financing activities (16,021) (34,118)
----------------------------------------------
Net decrease in cash and equivalents (15,773) (37,936)
----------------------------------------------
Cash and equivalents, end of period $ 38,613 $ 23,992
==============================================
SUPPLEMENTAL INFORMATION:
Interest paid $ 1,718 $ 1,988
==============================================
Income taxes paid $ 67 $ 6,794
==============================================
See notes to the consolidated financial statements.
</TABLE>
8
<PAGE>
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 generally accepted
accounting principles. 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. 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.
The number of shares used for purposes of calculating earnings per share and all
other per share data has been adjusted for all periods presented to reflect a
two-for-one stock split effective August 14, 1998.
(2) SIGNIFICANT ACCOUNTING CHANGE
In September 1998, the Financial Accounting Standards Board ("FASB") staff
addressed the accounting for offering costs incurred in connection with the
distribution of closed-end funds. The FASB staff concluded that such offering
costs, including sales commissions paid, are to be considered start-up costs in
accordance with American Institute of Certified Public Accountants Statement of
Position ("SOP") 98-5, "Reporting on the Costs of Start-Up Activities."
Accordingly, sales commissions paid in connection with the distribution of
shares of the Company's closed-end funds subsequent to the effective date of the
FASB staff announcement (July 23, 1998) have been expensed as incurred. For the
period November 1, 1999 through April 30, 1999, these commissions totaled $71.3
million. Previously, sales commissions paid in connection with the sale of
shares of closed-end funds were capitalized and amortized over five years.
Closed-end fund sales commissions paid and capitalized prior to and including
the July 23, 1998 effective date of the FASB staff announcement were expensed as
a cumulative effect of a change in accounting principle, as described in APB
Opinion No. 20, "Accounting Changes," upon adoption of SOP 98-5 by the Company
effective November 1, 1998. The cumulative effect of the adoption in the first
quarter of 1999 was $36.6 million, net of income taxes of $23.4 million.
In April of 1999, the bank loan funds received shareholder approvals and a SEC
exemptive order permitting them, beginning May 1, 1999, to implement Rule 12b-1
equivalent distribution plans. With the implementation of these distribution
plans, the SEC agreed that Eaton Vance may resume capitalizing and amortizing
sales commissions for these funds. Effective May 1, 1999, the start of third
fiscal quarter, the Company resumed capitalizing and amortizing sales
commissions paid to broker-dealers for sales of its continuously offered
closed-end bank loan funds.
9
<PAGE>
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(3) INVESTMENT IN AFFILIATE
The Company has a 21 percent investment in Lloyd George Management (BVI) Limited
(LGM), an independent investment management company based in Hong Kong that
manages a series of emerging market mutual funds sponsored by the Company. The
Company's investment in LGM was $7.1 million and $7.6 million at April 30, 1999
and October 31, 1998, respectively. At April 30, 1999, the Company's investment
exceeded its share of the underlying net assets of LGM by $5.4 million. This
excess is being amortized over a twenty-year period.
(4) STOCK OPTION PLANS
The Company has a Stock Option Plan (the "1998 Plan") administered by the Option
Committee of the Board of Directors under which stock options may be granted to
key employees of the Company. No stock options may be granted under the plan
with an exercise price of less than the fair market value of the stock at the
time the stock option is granted. The options expire five to eight years from
the date of grant and vest over a four-year period.
Stock option transactions under the current plan and predecessor plans are
summarized as follows:
---------------------------------------------------------------
Weighted
Average Exercise
Shares Price
---------------------------------------------------------------
(SHARE FIGURES IN THOUSANDS)
Balance, October 31, 1997 2,642 $ 7.95
Granted 654 18.08
Exercised (641) 6.32
Forfeited/Expired (49) 14.12
---------------------------------------------------------------
Balance, October 31, 1998 2,606 $ 10.78
---------------------------------------------------------------
Granted 702 22.93
Exercised (415) 7.10
Forfeited/Expired (12) 19.54
---------------------------------------------------------------
Balance, April 30, 1999 2,881 $ 14.23
===============================================================
10
<PAGE>
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(4) STOCK OPTION PLANS (CONTINUED)
Outstanding options to subscribe to shares of non-voting common stock issued
under the current plan and predecessor plans are summarized as follows:
<TABLE>
Options Outstanding Options Exercisable
- ----------------------------------------------------------------------------------- ----------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Outstanding Contractual Exercise Exercisable as Exercise Price
Range of Exercise Prices at 4/30/99 Life Price of 4/30/99
- ----------------------------------------------------------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C>
(SHARE FIGURES IN THOUSANDS)
$5.74 - $7.06 630 1.1 6.48 629 $ 6.48
$7.77 15 1.6 7.77 15 7.77
$10.44 - $11.48 926 2.6 10.50 647 10.47
$17.84 - $20.12 607 3.5 18.00 236 17.96
$20.81 - $22.63 16 7.9 22.17 - -
$22.94 - $23.13 687 7.3 23.00 9 23.06
=================================================================================== =================================
2,881 3.6 $ 14.23 1,536 $ 10.04
=================================================================================== =================================
</TABLE>
(5) COMMON STOCK REPURCHASES
In the first six months of fiscal 1999, the Company purchased 298,000 shares of
its non-voting common stock under its current share repurchase authorization.
(6) REGULATORY REQUIREMENTS
Eaton Vance Distributors, Inc., a wholly owned subsidiary of the Company and
principal under-writer of the Eaton Vance Funds, is subject to the Securities
and Exchange Commission uniform net capital rule (Rule 15c3-1) which requires
the maintenance of minimum net capital. For purposes of this rule, the
subsidiary had net capital of $11.4 million, which exceeds its respective
minimum net capital requirement of $639,000 at April 30, 1999. The ratio of
aggregate indebtedness to net capital at April 30, 1999 was .84 to 1.
11
<PAGE>
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(7) REAL ESTATE ASSETS HELD FOR SALE
Real estate assets held for sale are as follows:
(in thousands) APRIL 30, 1999 OCTOBER 31, 1998
--------------------------------------------------------------------
Shopping center:
Troy, NY $ 2,179 $ 2,179
Warehouses:
Springfield, MA 1,451 1,451
Colonie, NY - 1,579
Office buildings:
Boston, MA 6,150 6,151
Boston, MA 3,775 3,775
Troy, NY 1,416 1,416
---------------------------------------------
$ 14,971 $ 16,551
=============================================
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets to Be Disposed Of," requires that the
carrying value of assets held for sale be reported at the lower of carrying
value or fair value less cost to sell. In accordance with the provisions of SFAS
No. 121, the Company recognized a pre-tax impairment loss of $2.6 million in the
first quarter of 1998 based on the estimated fair values, less cost to sell, of
the shopping center and office building located in Troy, New York.
On March 30, 1999, the Company sold the warehouse in Colonie, New York and
recognized a pretax gain of $ 1.3 million based on a carrying value of $1.6
million at the time of the sale.
(8) UNREALIZED SECURITIES HOLDING GAINS AND LOSSES
The Company has classified as available-for-sale securities having an aggregate
fair value of approximately $19.9 million and $59.2 million at April 30, 1999
and October 31, 1998, respectively. These securities are classified as
"Short-term investments," "Investments in investment companies," and "Other
investments" on the Company's consolidated balance sheets. Gross unrealized
gains of approximately $6.5 million and $4.7 million at April 30, 1999 and
October 31, 1998, respectively, and gross unrealized losses of approximately
$2.6 million and $2.9 million at April 30, 1999 and October 31, 1998,
respectively, have been excluded from earnings and reported as a separate
component of shareholders' equity, "accumulated other comprehensive income," net
of deferred taxes.
12
<PAGE>
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(9) COMPREHENSIVE INCOME
Effective November 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes the disclosure requirements for
reporting comprehensive income in an entity's financial statements. Total
comprehensive income includes net income and net unrealized gains and losses on
investments. Accumulated other comprehensive income, a component of
shareholders' equity, consists of the net unrealized holding gains and losses on
securities. There was no impact on previously reported net income arising from
the adoption of SFAS No. 130. The net unrealized holding gains and losses
disclosed below are net of $0.8 million of deferred tax liabilities and $0.4
million of deferred tax assets at April 30, 1999 and 1998, respectively.
The following table shows comprehensive income for the six months ended April
30, 1999 and 1998.
<TABLE>
(IN THOUSANDS) 1999 1998
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net income (loss) $ (36,515) $ 22,339
Net unrealized gain (loss) on available for sale securities 1,326 (1,736)
----------------------------------------
Comprehensive income (loss) $ (35,189) $ 20,603
========================================
</TABLE>
(10) RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to current year
presentation.
(11) SUBSEQUENT EVENTS
SALE OF REAL ESTATE
On June 1, 1999, the Company, through a wholly-owned subsidiary, sold two office
buildings located in Boston, Massachusetts. The Company recognized a pre-tax
gain of approximately $12.4 million based on an aggregate carrying value $9.9
million.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company's revenue is primarily derived from investment adviser,
administration and distribution fees received from the Eaton Vance funds and
adviser fees received from separately managed accounts. Generally, these fees
are based on the net asset value of the investment portfolios managed by the
Company and fluctuate with changes in the total value of the assets under
management. The Company's major expenses are sales commissions associated with
the offering of closed-end funds, the amortization of deferred sales commissions
and other marketing costs, employee compensation, occupancy costs and service
fees.
RESULTS OF OPERATIONS
QUARTER ENDED APRIL 30, 1999 COMPARED TO QUARTER ENDED APRIL 30, 1998
The Company reported earnings of $9.8 million or $.27 per share (diluted) in the
second quarter of fiscal 1999 compared to earnings of $11.4 million or $0.30 per
share (diluted) in the second quarter of fiscal 1998. Earnings for the second
quarter of fiscal 1999 reflect a change in the accounting treatment of sales
commissions paid in connection with the distribution of the Company's closed-end
funds.
In September of 1998, the FASB staff concluded that offering costs incurred in
connection with the distribution of closed-end funds, including sales
commissions paid, should be expensed as incurred. Previously, the Company had
capitalized and amortized these offering costs. For the period of February 1,
1999 through April 30, 1999, these commissions totaled $23.8 million and have
been recorded in "Sales commission expense" in the Company's consolidated
statement of income for the quarter ended April 30, 1999. On May 1, 1999, after
shareholders adopted distribution plans for the Company's continuously offered
closed-end bank loan funds and the Securities and Exchange Commission provided
certain regulatory approvals, the Company resumed capitalizing and amortizing
commissions for these funds.
The per share data for all periods presented reflects the two-for-one stock
split effective August 14, 1998.
Assets under management of $37.0 billion on April 30, 1999 were 45 percent
higher than the $25.5 billion reported a year earlier as a result of net sales
of new fund shares and appreciation of the market value of managed assets.
Mutual fund sales in the second quarter of 1999 were $3.6 billion compared to
$2.9 billion in the second quarter of 1998, an increase of 24 percent. As a
result of continuous sales growth and private placements, equity fund assets
increased to 39 percent of total assets under management on April 30, 1999 from
34 percent on April 30, 1998, and bank loan fund assets increased to 23 percent
of total assets under management on April 30, 1999 from 18 percent on April 30,
1998. As a result of the growth in equity and bank loan funds, taxable and
non-taxable fixed income funds decreased to 30 percent of total assets under
management on April 30, 1999 from 37 percent on April 30, 1998.
The Company reported revenue of $84.3 million in the second quarter of 1999
compared to $60.0 million in the second quarter of 1998, an increase of $24.3
million or 41 percent. Investment adviser and administration fees increased by
52 percent to $55.3 million in the second quarter of 1999 from $36.5 million in
the second quarter of fiscal 1998, primarily as a result of the growth in total
assets under management and the change in the Company's product mix.
Distribution income increased 28 percent to $27.9 million in the second quarter
of 1999 from $21.8 million a year earlier as a result of the increase in sales
and overall asset growth of the Company's domestic equity funds sold with a
contingent deferred sales charge in lieu of a front-end load.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Total operating expenses increased 64 percent to $68.9 million in the second
quarter of fiscal 1999 from $41.9 million in the second quarter of fiscal 1998.
The change in accounting treatment of closed-end fund offering costs resulted in
$23.8 million in sales commission expense in the second quarter of 1999 which
represents 88 percent of the net increase in operating expense year over year.
The increases noted in both compensation and other expenses reflect the increase
in marketing expenses and sales incentives associated with strong mutual fund
sales and a private placement. Amortization of deferred sales commissions
decreased to $12.0 million in the second quarter of 1999 from $15.5 million in
the second quarter of 1998 as a result of the change in accounting treatment of
closed-end fund offering costs.
Interest income decreased 53 percent to $0.7 million in second quarter of fiscal
1999 from $1.5 million in the second quarter of fiscal 1998. This decrease in
interest income corresponds to the decrease in cash and cash equivalents and
short-term investments. The decrease in short-term investments and investment
income is primarily due to increased commission payments resulting from higher
sales levels in 1999.
SIX MONTHS ENDED APRIL 30, 1999 COMPARED TO THE SIX MONTHS ENDED APRIL 30, 1998
The Company reported a loss of $36.5 million or $1.02 per share (diluted) in the
first half of fiscal 1999 compared to earnings of $22.3 million or $.59 per
share (diluted) in the first half of fiscal 1998. Earnings for the first half of
fiscal 1999 reflect the change in the accounting treatment of sales commissions
paid in connection with the distribution of the Company's closed-end funds.
Closed-end fund sales commissions paid and capitalized prior to and including
July 23, 1998, the effective date of the FASB staff announcement, were recorded
as a cumulative effect of a change in accounting principle in the first quarter
of 1999. The cumulative effect of adoption, net of tax, was $36.6 million or
$1.02 per share (diluted). The change in accounting treatment has not had, nor
will have, any effect on the Company's cash flow or cash position.
Total revenue increased $44.5 million or 39 percent to $159.8 million in the
first half of fiscal 1999 from $115.3 million in the first half of fiscal 1998
as a result of greater average assets under management. Investment adviser and
administration fees increased to $102.6 million from $69.8 million primarily as
a result of the growth in total assets under management and the change in the
Company's product mix. Distribution income increased to $54.9 million from $42.2
million due to an increase in spread-commission fund assets under management.
Total operating expenses increased to $160.5 million in the first half of fiscal
1999 from $79.4 million in the first half of fiscal 1998. The change in
accounting treatment of closed-end fund offering costs resulted in $71.3 million
in sales commission expense in the first half of fiscal 1999 which represents 88
percent of the net increase in operating expenses year over year. The increases
noted in both compensation and other expenses were primarily the result of an
increase in sales incentives and other marketing expenses associated with higher
mutual fund sales, private placements and the offering of nine new closed-end
municipal bond funds. Amortization expense of deferred sales commissions
decreased to $24.1 million in the first half of 1999 from $30.1 million in the
first half of 1998 as a result of the change in accounting treatment of
closed-end fund offering costs.
Interest income decreased 26 percent to $2.0 million from $2.7 million as a
result of the decrease in short term investments.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments aggregated $50.7 million at
April 30, 1999, a decrease of $45.8 million from October 31, 1998.
Operating activities reduced cash and cash equivalents by $24.8 million in the
first half of fiscal 1999. In the first half of fiscal 1998, operating
activities reduced cash by $2.4 million. The decrease in cash provided by
operating activities in the first half of fiscal 1999 can be attributed
primarily to the significant increase in sales commissions paid to brokers in
connection with increased fund sales, a private placement and the offering of
nine new closed-end municipal bond funds. The $129.6 million of sales
commissions paid in the first half of fiscal 1999 is comprised of $71.3 million
of sales commissions related to the sale of the Company's closed-end funds and
$58.3 million of sales commissions related to the sale of the Company's open-end
funds. As described in Note 2 to the Company's consolidated financial
statements, the $71.3 million of closed-end fund sales commissions were expensed
as paid and therefore included as a component of net income in the Company's
consolidated statements of net income and cash flows for the six months ended
April 30, 1999. The $58.3 million of open-end fund sales commissions were
capitalized as paid and therefore included as an adjustment to reconcile net
loss to net cash used for operating activities in the Company's consolidated
statement of cash flows for the six months ended April 30, 1999.
Investing activities, consisting primarily of the purchase and sale of
investments, increased cash and cash equivalents by $25.0 million in the first
six months of fiscal 1999 compared to a decrease of $1.4 million in the first
six months of fiscal 1998. The primary source of cash in the first six months of
fiscal 1999 was the sale of short-term investments of $33.8 million offset by
the purchase of $4.8 million in short-term investments and investments in
investment companies. In connection with the Company's move to its newly leased
space in May of fiscal 1999, the Company spent $7.7 million on equipment and
leasehold improvements.
Financing activities reduced cash and cash equivalents by $16.0 million and
$34.1 million in the first six months of fiscal 1999 and fiscal 1998,
respectively. Significant financing activities during the first six months of
fiscal 1999 included the repayment of $7.1 million on the Company's 6.22 percent
Senior Note and the repurchase of 298,000 shares of the Company's non-voting
common stock under its authorized repurchase program. The Company's dividend was
$0.15 per share in the first six months of fiscal 1999 compared to $0.12 per
share in the first six months of fiscal 1998.
At April 30, 1999, the Company had no borrowings outstanding under its $50
million senior unsecured revolving credit facility.
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.
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
YEAR 2000
The Company utilizes computer technologies throughout its business to
effectively carry out its day-to-day operations. Computer technologies utilized
by the Company include both information systems in the form of hardware and
software ("IT items"), as well as embedded technology in the Company's
facilities and equipment ("non-IT items"). Given its reliance on computer
technologies, the Company has established a firm-wide initiative managed by a
Year 2000 Steering Committee to ensure that these systems and those of the
Company's outside service providers are capable of properly recognizing and
processing date sensitive information on or after January 1, 2000. The Steering
Committee reports regularly to senior management, the Audit Committee of the
Board of Directors and the Independent Fund Trustees on the status of the
Company's Year 2000 initiative.
YEAR 2000 INITIATIVE
The Company has divided the initiative into five phases: Inventory and Analysis,
Risk Assessment, Remediation, Testing and Contingency Planning.
During the Inventory and Analysis phase of the initiative, the Company
identified all of the computer technologies that could be affected by the Year
2000 Problem. This inventory included items provided by third party service
providers. Also during this phase the Company organized it's Year 2000 Steering
Committee and related sub-committees and initiated an awareness campaign for all
employees. The Inventory and Analysis phase is complete.
The Risk Assessment phase has been ongoing since the initiative began and will
continue throughout 1999. The purpose of the Risk Assessment phase was to rate
the criticality of the inventoried IT and non-IT items based on comprehensive
guidelines set forth by the Year 2000 Steering Committee. These ratings
(mission-critical, critical and non-critical) take into account the impact that
a particular failure would have on the Company's ability to conduct day-to-day
operations. The Company outsources to key service providers most of its
mission-critical administrative functions relating to its funds, including but
not limited to its transfer agency and custodial functions. As a result, the
Risk Assessment and Remediation phases of the Company's initiative have focused
on the mission-critical systems of these key service providers. These key
providers, as well as all other third-party software and hardware vendors, have
certified to the Company that they are or will be Year 2000 compliant before
June 30, 1999.
The Testing phase includes internal testing of all mission-critical and other
critical systems, point-to-point testing with mission-critical service providers
and industry-wide testing sponsored by the Securities Industry Association. The
Company expects to complete internal testing of mission-critical systems by June
30, 1999 and other critical systems by July 31, 1999. Point-to-point testing
with mission-critical service providers is one hundred percent complete and
there are no outstanding issues. The Company participated in the Securities
Industry Association's industry-wide testing during the first and second
quarters of fiscal 1999. One hundred percent of the required transaction types
were processed successfully in the simulation conducted by the Company, its
testing partner, its transfer agent and the settlement clearinghouses used by
industry participants.
17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
The Company has developed contingency plans that address procedures to be
followed to minimize the impact of a particular Year 2000 failure on the
material day-to-day operations of the Company. These plans are expected to be
fully tested and in place by August 31, 1999 for mission-critical systems and by
September 30, 1999 for other critical items.
COSTS
The Company currently anticipates that the costs associated with its Year 2000
initiative will consist largely of software upgrades and consulting expenses to
coordinate testing with key third party service providers. Based on its current
estimates and information currently available the Company does not anticipate
that the costs associated with this initiative will have a material adverse
effect on the Company's consolidated financial position, results of operations
or cash flows in future periods.
The anticipated impact and costs of the Company's Year 2000 initiative, as well
as the anticipated completion dates for each phase, are based on management's
best estimates using information currently available and numerous assumptions
about future events. However, there can be no guarantee that these estimates
will be achieved and actual results could differ materially from those plans.
There are many risks associated with Year 2000 issues, including the risk that
the Company's computer systems and applications will not operate as intended and
that the systems and applications of key service providers and other third
parties as described above will not be Year 2000 compliant. Likewise, there can
be no assurance that costs incurred will not exceed the Company's current cost
estimate. Should the Company's significant computer systems and applications or
systems of its key service providers be unable to process date-sensitive
information accurately after 1999, the Company may be unable to conduct its
normal business operations. In addition, the Company may incur unanticipated
expenses, regulatory actions, and legal liabilities. Ultimately, no assurance
can be given that factors outside the Company's control will not disrupt
day-to-day operations or reduce revenue.
Readers are cautioned that forward-looking statements contained above regarding
the Year 2000 issue should be read in conjunction with the Company's disclosures
under the heading "Certain Factors That May Affect Future Results" below.
To the fullest extent permitted by law, the foregoing Year 2000 discussion is a
"Year 2000 Readiness Disclosure" within the meaning of The Year 2000 Information
and Readiness Disclosure Act, 15 U.S.C.Sec. 1 (1998).
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 (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.
18
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
The Company is subject to substantial competition in all aspects of its
business. The Company's ability to market investment products is highly
dependent on access to the retail distribution systems of national and regional
securities dealer firms, which generally offer competing internally and
externally managed investment products. Although the Company has historically
been successful in gaining access to these channels, there can be no assurance
that it will continue to do so. The inability to have such access could have a
material adverse effect on the Company's business.
There are few barriers to entry by new investment management firms. The
Company's funds 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 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 offered, the investment performance of such products,
quality of service, fees charged, the level and type of sales representative
compensation, the manner in which such products are marketed and distributed and
the services provided to investors.
The Company derives almost all of its revenues from investment adviser and
administration fees and distribution income received from the Eaton Vance funds
and separately managed accounts. As a result, the Company is dependent upon the
contractual relationships it maintains with these funds and separately managed
accounts. In the event that any of the management contracts, administration
contracts, underwriting contracts or service agreements are not renewed pursuant
to the terms of these contracts or agreements, the Company's financial results
may be adversely affected.
The major sources of revenue for the Company (i.e., investment adviser fees and
distribution income) are calculated as percentages of assets under management. A
decline in securities prices in general would reduce fee income. If, as a result
of inflation, expenses rise and assets under management decline, lower fee
income and higher expenses will reduce or eliminate profits. If expenses rise
and assets rise, bringing increased fees to offset the increased expenses,
profits may not be affected by inflation. There is no predictable relationship
between changes in financial assets under management and the rate of inflation.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, the financial position of the Company is
routinely subjected to a variety of risks, including market risks associated
with interest rate movements. The Company is exposed to changes in the interest
rates primarily in its cash, investment and debt transactions. The Company does
not believe that the effect of reasonably possible near-term changes in the
interest rates on the Company's financial position, results of operations or
cash flow would be material.
19
<PAGE>
PART II
OTHER INFORMATION
20
<PAGE>
ITEM 1. LEGAL PROCEEDINGS
Neither the Company nor any of its subsidiaries is currently subject to any
material pending legal proceedings.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Each Exhibit is listed in this index according to the number assigned
to it in the exhibit table set forth in Item 601 of Regulation S-K. The
following Exhibits are filed as a part of this Report or incorporated
herein by reference pursuant to Rule 12b-32 under the Securities
Exchange Act of 1934:
Exhibit No. Description
27.1 Financial Data Schedule as of April 30, 1999 (filed herewith
- electronic filing only).
(b) REPORTS ON FORM 8-K
A Form 8-K was filed by the Company on May 3, 1999 for the express
purpose of disclosing an accounting change in the treatment of sales
commissions and other offering costs with respect to certain funds
sponsored by the Registrant.
21
<PAGE>
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: June 11, 1999 /s/William M. Steul
----------------------------------------------
(Signature)
William M. Steul
Chief Financial Officer
DATE: June 11, 1999 /s/Laurie G. Russell
----------------------------------------------
(Signature)
Laurie G. Russell
Chief Accounting Officer
22
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