================================================================================
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 July 31, 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 July 31, 1999:
Voting Common Stock - 77,440 shares
Non-Voting Common Stock - 35,797,554 shares
Page 1 of 24 pages
================================================================================
<PAGE>
PART I
FINANCIAL INFORMATION
2
<PAGE>
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
Consolidated Balance Sheets (unaudited)
July 31, October 31,
1999 1998
----------------------------------------------
ASSETS (in thousands)
CURRENT ASSETS:
<S> <C> <C>
Cash and equivalents $ 74,573 $ 54,386
Short-term investments 11,911 42,049
Investment adviser fees and other receivables 5,090 5,331
Real estate assets held for sale 1,451 16,551
Other current assets 15,464 12,116
----------------------------------------------
Total current assets 108,489 130,433
----------------------------------------------
OTHER ASSETS:
Investments:
Investment in affiliates 7,108 7,593
Investment companies 18,738 15,815
Other investments 1,193 2,242
Other receivables 5,838 5,844
Deferred sales commissions 199,901 213,819
Equipment and leasehold improvements, net of
accumulated depreciation and amortization of $3,174
and $5,793 respectively 11,697 2,696
Goodwill and other intangibles, net of accumulated
amortization of $4,316 and $4,197, respectively 1,611 1,818
----------------------------------------------
Total other assets 246,086 249,827
----------------------------------------------
Total assets $ 354,575 $ 380,260
==============================================
</TABLE>
See notes to the consolidated financial statements.
3
<PAGE>
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
Consolidated Balance Sheets (unaudited) (continued)
July 31, October 31,
1999 1998
----------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY (in thousands, except share figures)
CURRENT LIABILITIES:
<S> <C> <C>
Accrued compensation $ 16,809 $ 17,013
Accounts payable and accrued expenses 21,143 9,882
Dividend payable 2,698 2,681
Current portion of long-term debt 9,319 17,314
Other current liabilities 3,257 2,067
----------------------------------------------
Total current liabilities 53,226 48,957
----------------------------------------------
OTHER LIABILITIES:
6.22% Senior Note 28,571 35,714
----------------------------------------------
Deferred income taxes 80,358 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, 35,797,554 and 35,588,373 shares, respectively
Accumulated other comprehensive income 4,159 1,120
Notes receivable from stock option exercises (3,363) (2,957)
Retained earnings 191,064 213,089
----------------------------------------------
Total shareholders' equity 192,420 211,809
----------------------------------------------
Total liabilities and shareholders' equity $ 354,575 $ 380,260
==============================================
</TABLE>
See notes to the consolidated financial statements.
4
<PAGE>
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
Consolidated Statements of Income (unaudited)
Three Months Ended Nine Months Ended
July 31, July 31,
1999 1998 1999 1998
-------------------------------------------------------------------
(in thousands, except per share figures)
REVENUE:
<S> <C> <C> <C> <C>
Investment adviser and administration fees $ 46,289 $ 40,359 $ 148,927 $ 110,186
Distribution income 44,023 24,849 98,928 67,032
Income from real estate activities 526 1,098 1,859 3,482
Other income 211 709 1,128 1,564
-------------------------------------------------------------------
Total revenue 91,049 67,015 250,842 182,264
-------------------------------------------------------------------
EXPENSES:
Compensation of officers and employees 16,816 15,662 52,119 42,863
Amortization of deferred sales commissions 19,906 17,012 43,963 47,082
Sales commission expense - - 71,282 -
Other expenses 18,099 12,845 47,999 34,968
-------------------------------------------------------------------
Total expenses 54,821 45,519 215,363 124,913
-------------------------------------------------------------------
OPERATING INCOME 36,228 21,496 35,479 57,351
OTHER INCOME (EXPENSE):
Interest income 703 1,384 2,676 4,052
Interest expense (661) (941) (2,379) (2,938)
Gain on sale of investments 6,992 91 7,779 3,057
Equity in net income (loss) of affiliates 24 173 (117) 107
Impairment loss on real estate - - - (2,636)
-------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 43,286 22,203 43,438 58,993
INCOME TAXES 16,881 8,555 16,941 23,008
-------------------------------------------------------------------
INCOME BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING
PRINCIPLE 26,405 13,648 26,497 35,985
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE - - (36,607) -
-------------------------------------------------------------------
NET INCOME (LOSS) $ 26,405 $ 13,648 $ (10,110)$ 35,985
===================================================================
</TABLE>
See notes to the consolidated financial statements.
5
<PAGE>
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
Consolidated Statements of Income (unaudited) (continued)
Three Months Ended Nine Months Ended
July 31, July 31,
1999 1998 1999 1998
-------------------------------------------------------------------
EARNINGS PER SHARE BEFORE
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE:
<S> <C> <C> <C> <C>
Basic $ 0.74 $ 0.38 $ 0.74 $ 0.99
===================================================================
Diluted $ 0.70 $ 0.36 $ 0.71 $ 0.95
===================================================================
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE, PER SHARE:
Basic $ - $ - $ (1.02) $ -
===================================================================
Diluted $ - $ - $ (0.98) $ -
===================================================================
EARNINGS (LOSS) PER SHARE:
Basic $ 0.74 $ 0.38 $ (0.28) $ 0.99
===================================================================
Diluted $ 0.70 $ 0.36 $ (0.27) $ 0.95
===================================================================
DIVIDENDS DECLARED, PER SHARE $ 0.08 $ 0.06 $ 0.23 $ 0.18
===================================================================
Weighted average common shares outstanding 35,892 35,946 35,896 36,419
===================================================================
Weighted average common shares outstanding
assuming dilution 37,686 37,462 37,247 37,877
===================================================================
</TABLE>
See notes to the consolidated financial statements.
6
<PAGE>
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
Consolidated Statements of Cash Flows (unaudited)
Nine Months Ended
July 31,
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) (10,110) 35,985
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 (income) loss of affiliates 117 (107)
Dividend received from affiliate 368 430
Impairment loss on real estate - 2,636
Deferred income taxes 20,082 19,272
Amortization of deferred sales commissions 43,963 47,082
Depreciation and other amortization 1,165 1,642
Payment of capitalized sales commissions (103,439) (111,480)
Capitalized sales charges received 12,974 16,907
Gain on sale of investments (7,779) (3,044)
Changes in other assets and liabilities 10,072 (4,776)
----------------------------------------------
Net cash provided by operating activities 4,020 4,547
----------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to real estate, equipment and
leasehold improvements (10,568) (1,127)
Net decrease in notes and receivables from affiliates (400) 702
Proceeds from sale of real estate 25,170 -
Proceeds from sale of investments 34,417 159,154
Purchase of investments (5,244) (133,066)
----------------------------------------------
Net cash provided by investing activities 43,375 25,663
----------------------------------------------
</TABLE>
See notes to the consolidated financial statements.
7
<PAGE>
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
Consolidated Statements of Cash Flows (unaudited) (continued)
Nine Months Ended
July 31,
1999 1998
----------------------------------------------
(in thousands)
CASH FLOWS FROM FINANCING ACTIVITIES:
<S> <C> <C>
Payments on notes payable $ (27,138) $ (14,332)
Revolving credit facility borrowings 12,000 7,000
Proceeds from the issuance of non-voting
common stock 6,807 4,974
Dividends paid (8,087) (6,597)
Repurchase of non-voting common stock (10,790) (35,383)
----------------------------------------------
Net cash used for financing activities (27,208) (44,338)
----------------------------------------------
Net increase (decrease) in cash and equivalents 20,187 (14,128)
----------------------------------------------
Cash and equivalents, end of period $ 74,573 $ 47,800
==============================================
SUPPLEMENTAL INFORMATION:
Interest paid $ 1,877 $ 2,311
==============================================
Income taxes paid $ 5,162 $ 7,811
==============================================
</TABLE>
See notes to the consolidated financial statements.
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.
(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 funds when the adviser does not receive both 12b-1 fees and
contingent deferred sales charges. In its announcement, the FASB staff concluded
that such offering costs, including sales commissions paid, were 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, the FASB staff concluded that subsequent
to July 23, 1998, the effective date of the announcement, these offering costs
should be expensed as incurred. Prior to the FASB staff announcement, it had
been the Company's policy to capitalize and amortize these costs over a period
not to exceed five years.
In order to comply with the requirements of both the FASB staff announcement and
SOP 98-5, the Company expensed all offering costs incurred subsequent to July
23, 1998 in connection with the distribution of its closed-end funds and bank
loan interval funds which did not have both 12b-1 fees and contingent deferred
sales charges. Closed-end, interval and private 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 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 fiscal quarter of 1999 was $36.6 million,
net of income taxes of $23.4 million.
In April of 1999, the bank loan interval funds received shareholder approvals
and a Securities and Exchange Commission ("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 permitted
the Company to resume the capitalization and amortization of sales commissions
associated with the distribution of these funds. Accordingly, the Company
resumed capitalizing and amortizing sales commissions paid to broker-dealers for
sales of its bank loan interval funds effective May 1, 1999, the beginning of
the third fiscal quarter. Closed-end and bank loan interval fund sales
commissions expensed from November 1, 1998 to April 30, 1999 totaled $71.3
million.
The change in accounting treatment has not had, nor will have, any effect on the
Company's cash flow or cash position.
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 July 31, 1999
and October 31, 1998, respectively. At July 31, 1999, the Company's investment
exceeded its share of the underlying net assets of LGM by $5.3 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
Shares Exercise 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 706 23.01
Exercised (537) 7.52
Forfeited/Expired (23) 20.33
-------------------------------------------------------------
Balance, July 31, 1999 2,752 $ 14.47
=============================================================
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 7/31/99 Life Price of 7/31/99
- ----------------------------------------------------------------------------------- ----------------------------------
(SHARE FIGURES IN THOUSANDS)
<C> <C> <C> <C> <C> <C> <C>
$5.74 - $7.06 538 0.9 $ 6.54 536 $ 6.54
$7.77 - $10.72 908 2.4 10.43 655 10.41
$11.22 - $11.48 27 2.5 11.42 1 11.48
$17.84 - $18.03 544 3.2 17.85 211 17.85
$19.63 - $20.82 42 4.8 19.88 6 19.63
$22.94 - $25.23 689 7.1 22.99 8 23.08
$36.50 4 8.0 36.50 - -
=================================================================================== ==================================
2,752 3.5 $ 14.47 1,417 $ 10.16
=================================================================================== ==================================
</TABLE>
(5) COMMON STOCK REPURCHASES
In the first nine months of fiscal 1999, the Company purchased 458,200 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 underwriter 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 $14.7 million, which exceeds its minimum net capital
requirement of $1.3 million at July 31, 1999. The ratio of aggregate
indebtedness to net capital at July 31, 1999 was 1.28 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) JULY 31, 1999 OCTOBER 31, 1998
----------------------------------------------------------------------
Shopping center:
Troy, NY $ - $ 2,179
Warehouses:
Springfield, MA 1,451 1,451
Colonie, NY - 1,579
Office buildings:
Boston, MA - 6,151
Boston, MA - 3,775
Troy, NY - 1,416
----------------------------------------------
$ 1,451 $ 16,551
==============================================
On March 30, 1999, the Company, through a wholly-owned subsidiary, sold the
warehouse in Colonie, New York and recognized a pretax gain of $ 1.3 million
based on an aggregate carrying value of $1.6 million.
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.
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 July 31,
1999, the Company, through a wholly-owned subsidiary, sold the shopping center
and office building in Troy, New York. The purchaser agreed to acquire the
property for fifty thousand dollars and the related indebtedness. At July 31,
1999, the Company had not yet received the required approvals releasing the
Company as the obligor under the debt. At July 31, 1999, the outstanding portion
of the debt, $2.2 million, has been included in the current portion of long-term
debt. The Company recognized a pre-tax loss of $1.6 million based upon an
aggregate carrying value of $3.7 million.
12
<PAGE>
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) UNREALIZED SECURITIES HOLDING GAINS AND LOSSES
The Company has classified as available-for-sale securities having an aggregate
fair value of approximately $19.1 million and $59.2 million at July 31, 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 $6.7 million and $4.7 million at July 31, 1999 and October 31,
1998, respectively, and gross unrealized losses of approximately $2.9 million at
October 31, 1998, have been excluded from earnings and reported as a separate
component of shareholders' equity, "Accumulated other comprehensive income," net
of deferred taxes.
The Company has classified as trading securities having an aggregate fair value
of $11.9 million at July 31, 1999. On February 28, 1999, the Company included in
earnings a pre-tax loss of approximately $0.4 million related to the transfer of
these securities from the available for sale category to the trading category.
Gross unrealized losses related to securities classified as trading of
approximately $0.4 million have been included in earnings at July 31, 1999.
(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 $1.9 million of deferred tax liabilities and $0.5
million of deferred tax assets at July 31, 1999 and 1998, respectively.
The following table shows comprehensive income for the nine months ended July
31, 1999 and 1998.
<TABLE>
(IN THOUSANDS) 1999 1998
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net income (loss) $ (10,110) $ 35,985
Net unrealized gain (loss) on available for sale securities 3,039 (2,378)
---------------------------------------
Comprehensive income (loss) $ (7,071) $ 33,607
=======================================
</TABLE>
(10) RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to current year
presentation.
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 JULY 31, 1999 COMPARED TO QUARTER ENDED JULY 31, 1998
The Company reported earnings of $26.4 million or $0.70 per share (diluted) in
the third quarter of fiscal 1999 compared to earnings of $13.6 million or $0.36
per share (diluted) in the third quarter of fiscal 1998.
Assets under management of $39.0 billion on July 31, 1999 were 42 percent higher
than the $27.5 billion reported a year earlier as a result of net sales of new
fund shares and appreciation of the market value of managed assets. As a result
of continuous sales growth and private placements, equity fund assets increased
to 41 percent of total assets under management on July 31, 1999 from 36 percent
on July 31, 1998, and bank loan fund assets increased to 24 percent of total
assets under management on July 31, 1999 from 19 percent on July 31, 1998. As a
result of the growth in equity and bank loan funds, taxable and non-taxable
fixed income funds decreased to 28 percent of total assets under management on
July 31, 1999 from 36 percent on July 31, 1998.
In September 1998, the Financial Accounting Standards Board ("FASB") staff
addressed the accounting for offering costs incurred in connection with the
distribution of funds when the adviser does not receive both 12b-1 fees and
contingent deferred sales charges. In its announcement, 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, the FASB staff concluded that subsequent to
July 23, 1998, the effective date of the announcement, these offering costs
should be expensed as incurred. Prior to the FASB staff announcement, it had
been the Company's policy to capitalize and amortize these costs over a period
not to exceed five years.
In April of 1999, the bank loan interval funds received shareholder approvals
and a Securities and Exchange Commission ("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 permitted
the Company to resume the capitalization and amortization of sales commissions
associated with the distribution of these funds. Accordingly, the Company
resumed capitalizing and amortizing sales commissions paid to broker-dealers for
sales of its bank loan interval funds effective May 1, 1999, the beginning of
the third fiscal quarter. The change in accounting treatment has not had, nor
will have, any effect on the Company's cash flow or cash position.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
The Company reported revenue of $91.0 million in the third quarter of 1999
compared to $67.0 million in the third quarter of 1998, an increase of $24.0
million or 36 percent. Investment adviser and administration fees increased by
15 percent to $46.3 million in the third quarter of 1999 from $40.4 million in
the third quarter of fiscal 1998, primarily as a result of the growth in total
assets under management. The increase was offset by a reduction in the
investment adviser and administration fees earned on the Company's bank loan
interval funds resulting from the implementation of the distribution plans and
the corresponding change in the fee structure of these funds. Distribution
income increased 77 percent to $44.0 million in the third quarter of 1999 from
$24.8 million a year earlier as a result of the growth in total assets under
management and the implementation of the distribution plans on the Company's
bank loan interval funds.
Total operating expenses increased 20 percent to $54.8 million in the third
quarter of fiscal 1999 from $45.5 million in the third quarter of fiscal 1998.
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 private placements. Amortization of deferred sales commissions
increased to $19.9 million in the third quarter of 1999 from $17.0 million in
the third quarter of 1998. In the third quarter of 1999, the Company adjusted
the amortization period of its deferred sales commission assets for certain of
its mutual funds in order to better match amortization expense with projected
distribution fee income. This adjustment resulted in an increase in amortization
expense of $6.8 million in the third quarter of fiscal 1999. This increase was
offset by a decrease in closed-end and interval fund deferred sales commission
amortization resulting from the change in the accounting treatment of closed-end
and interval fund commissions from November 1, 1998 to April 30, 1999. As noted
above, the Company resumed capitalizing and amortizing sales commissions paid to
broker-dealers for sales of its bank loan interval funds effective May 1, 1999,
the beginning of the third fiscal quarter.
Interest income decreased 50 percent to $0.7 million in third quarter of fiscal
1999 from $1.4 million in the third quarter of fiscal 1998. This decrease in
interest income corresponds to the decrease in average cash and cash equivalents
and short-term investment balances. The decrease in short-term investments and
investment income is primarily due to increased commission payments resulting
from higher sales levels in 1999. Gain on sale of investments increased to $7.0
million in the third quarter of fiscal 1999 from $0.1 million in the third
quarter of fiscal 1998. The increase in gain sale of investments is primarily
the result of net gains on the sale of real estate offset by losses related to
the sale of certain marketable equity securities.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
NINE MONTHS ENDED JULY 31, 1999 COMPARED TO THE NINE MONTHS ENDED JULY 31, 1998
The Company reported a loss of $10.1 million or $0.27 per share (diluted) in the
first nine months of fiscal 1999 compared to earnings of $36.0 million or $0.95
per share (diluted) in the first nine months of fiscal 1998. Earnings for the
first nine months 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 and interval funds. Closed-end, interval and private 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 $0.98 per share
(diluted). On May 1, 1999, after shareholders adopted distribution plans for the
Company's bank loan interval funds and the Securities and Exchange Commission
provided certain regulatory approvals, the Company resumed capitalizing and
amortizing commissions for these funds. 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 $68.5 million or 38 percent to $250.8 million in the
first nine months of fiscal 1999 from $182.3 million in the first nine months of
fiscal 1998 primarily as a result of greater average assets under management.
Investment adviser and administration fees increased to $148.9 million from
$110.2 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 $98.9 million from $67.0 million due to an increase in
spread-commission fund assets under management and the implementation of the
distribution plans on the Company's bank loan interval funds.
Total operating expenses increased to $215.4 million in the first nine months of
fiscal 1999 from $124.9 million in the first nine months of fiscal 1998. The
change in accounting treatment of closed-end and bank loan interval fund
offering costs resulted in $71.3 million in sales commission expense in the
first six months of fiscal 1999, which represents 79 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 closed-end municipal bond funds in the first
quarter of 1999. Amortization expense of deferred sales commissions decreased to
$44.0 million in the first nine months of 1999 from $47.1 million in the first
nine months of 1998 as a result of the change in accounting treatment of
closed-end and bank loan interval fund offering costs. As noted above, the
Company resumed capitalizing and amortizing sales commissions paid to
broker-dealers for sales of its bank loan interval funds effective May 1, 1999,
the beginning of the third fiscal quarter.
Interest income decreased 34 percent to $2.7 million in third quarter of fiscal
1999 from $4.1 million in the third 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. Gain on sale of investments increased to $7.8 million in
the third quarter of fiscal 1999 from $3.1 million in the third quarter of
fiscal 1998. The increase in gain sale of investments is primarily the result of
net gains on the sale of real estate offset by losses related to the sale of
certain marketable equity securities.
16
<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 $86.5 million at
July 31, 1999, a decrease of $9.9 million from October 31, 1998.
Operating activities increased cash and cash equivalents by $4.0 million in the
first nine months of fiscal 1999 compared to $4.5 million in the first nine
months of fiscal 1998. The decrease in cash provided by operating activities fin
the first nine months of fiscal 1999 can be attributed primarily to the increase
in other expenses associated with increased fund sales and operating lease
payments related to the Company's new office space. In the first nine months of
fiscal 1999, the Company paid sales commissions to brokers totaling $174.7
million. The payments were comprised of $71.3 million of sales commissions
related to sales of the Company's closed-end and interval funds from November 1,
1998 to April 30, 1999, $85.7 million of sales commissions related to fiscal
1999 sales of the Company's open-end funds, and $17.7 million of sales
commissions related to sales of the Company's bank loan interval funds from May
1, 1999 to July 31, 1999. As described in Note 2 to the Company's unaudited
consolidated financial statements, the $71.3 million of closed-end and interval
fund sales commissions paid prior to April 30, 1999 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. Also as described in Note 2, effective
May 1, 1999, the Company resumed capitalizing and amortizing sales commissions
paid to brokers for sales of its bank loan interval funds. These commission
payments, totaling $17.7 million, along with $85.7 million in sales commissions
related to the sales of the Company's open-end funds for the nine months ended
July 31, 1999, were capitalized as paid and therefore included as an adjustment
to reconcile net loss to net cash provided by operating activities in the
Company's consolidated statement of cash flows.
Investing activities, consisting of the purchase and sale of investments,
leasehold improvements and real estate sales, increased cash and cash
equivalents by $44.7 million in the first nine months of fiscal 1999 compared to
$25.7 million in the first nine months of fiscal 1998. The primary source of
cash in the first nine months of fiscal 1999 was the sale of short-term
investments of $34.4 million offset by the purchase of $5.2 million in
short-term investments and investments in investment companies. As described in
Note 7 to the Company's consolidated financial statements, the Company sold
several of its real estate holdings resulting in proceeds of $25.2 million for
the nine months ended July 31, 1999. In connection with the Company's move to
its newly leased space in May of fiscal 1999, the Company spent $10.6 million on
equipment and leasehold improvements.
Financing activities reduced cash and cash equivalents by $28.5 million and
$44.3 million in the first nine months of fiscal 1999 and fiscal 1998,
respectively. Significant financing activities during the first nine months of
fiscal 1999 included the repayment of $7.1 million on the Company's 6.22 percent
Senior Note and the repurchase of 458,200 shares of the Company's non-voting
common stock under its authorized repurchase program. The Company's dividend was
$0.23 per share in the first nine months of fiscal 1999 compared to $0.18 per
share in the first six months of fiscal 1998.
At July 31, 1999, the Company had no borrowings outstanding under its $50
million senior unsecured revolving credit facility.
17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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.
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 Year 2000 compliant.
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 has completed internal testing of mission-critical systems.
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.
18
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
In earlier filings, the Company reported that the testing of certain critical
systems would be completed by the end of the second quarter of fiscal 1999.
However, all testing was not completed until three months later, on July 31,
1999. This delay can be attributed to the fact that one vendor took longer than
expected to remediate the custom code of a critical system. This code has since
been modified and testing had been completed.
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 September 30, 1999 for all systems. A particular
Year 2000 failure may include, but not be limited to, infrastructure failures
that limit access to the Company's facilities, network system failures or
communication failures. The Company's contingency plans address these potential
failures by providing for redundant off-site network systems, alternative
communication capabilities and a back-up power supply. A Year 2000 failure may
also occur with a software application supporting a core business process. Each
business unit has developed contingency plans to address such a failure. The
plan includes detailed steps to be followed to prepare for, implement and
transition out of the contingency plan and may involve alternate systematic or
manual procedures to perform the core business process. Finally, the Company
relies on major third party service providers to provide contingency plans for
systems and services they provide to the Company.
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 total estimated cost of the Company's Year 2000 Project is expected to be
$728,000. The total amount expended on the project through July 31, 1999 was
approximately $557,000 of which $233,000 was expensed in the third quarter of
1999. Costs to date have primarily consisted of the oversight of testing
remediated software, project management, non-critical business software
application upgrades and participation in industry wide testing and conferences.
The significant costs of remediation and testing have been borne by the
company's vendors or third party service providers. These organizations have
invested significant resources to become Year 2000 compliant and the costs
associated with testing and planning, on behalf of the Company and the other
clients of these firms, has been borne by these organizations.
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.
19
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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.
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.
20
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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. Also, financial
market declines or adverse changes in interest rates will negatively impact the
Company's assets under management and consequently, its revenue and net 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 interest
rates on the Company's financial position would be material.
21
<PAGE>
PART II
OTHER INFORMATION
22
<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 July 31, 1999 (filed
herewith - electronic filing only).
(b) REPORTS ON FORM 8-K
None.
23
<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:
September 14, 1999 /s/William M. Steul
----------------------------------------------
(Signature)
William M. Steul
Chief Financial Officer
DATE:
September 14, 1999 /s/Laurie G. Russell
----------------------------------------------
(Signature)
Laurie G. Russell
Chief Accounting Officer
24
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000350797
<NAME> EATON VANCE CORP.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-END> JUL-31-1999
<CASH> 74573
<SECURITIES> 30649
<RECEIVABLES> 5090
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 108489
<PP&E> 11697
<DEPRECIATION> 0
<TOTAL-ASSETS> 354575
<CURRENT-LIABILITIES> 53226
<BONDS> 0
0
0
<COMMON> 560
<OTHER-SE> 191504
<TOTAL-LIABILITY-AND-EQUITY> 354575
<SALES> 0
<TOTAL-REVENUES> 91049
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 54821
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 661
<INCOME-PRETAX> 43286
<INCOME-TAX> 16881
<INCOME-CONTINUING> 26405
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26405
<EPS-BASIC> .74
<EPS-DILUTED> .70
</TABLE>
