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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 quarterly period ended July 31, 2000 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, 2000:
Voting Common Stock - 77,440 shares
Non-Voting Common Stock - 35,167,196 shares
Page 1 of 21 pages
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<PAGE>
PART I
FINANCIAL INFORMATION
<PAGE>
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets (unaudited)
<TABLE>
July 31, October 31,
2000 1999
----------------------------------------------
<S> <C> <C>
ASSETS (in thousands)
CURRENT ASSETS:
Cash and equivalents $ 52,620 $ 77,395
Short-term investments 45,811 -
Investment adviser fees and other receivables 7,915 9,101
Real estate assets held for sale 1,451 1,451
Other current assets 16,124 2,541
----------------------------------------------
Total current assets 123,921 90,488
----------------------------------------------
OTHER ASSETS:
Investments:
Investment in affiliate 7,295 7,235
Investment companies 18,588 15,106
Other investments 16,873 6,326
Other receivables 5,832 5,836
Deferred sales commissions 233,576 219,201
Equipment and leasehold improvements, net of
accumulated depreciation and amortization
of $4,631 and $3,425, respectively 12,878 12,459
Goodwill and other intangibles, net of accumulated
amortization of $522 and $422, respectively 1,478 1,578
----------------------------------------------
Total other assets 296,520 267,741
----------------------------------------------
Total assets $ 420,441 $ 358,229
==============================================
</TABLE>
See notes to the consolidated financial statements.
3
<PAGE>
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Consolidated Balance Sheets (unaudited) (continued)
<TABLE>
July 31, October 31,
2000 1999
----------------------------------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY (in thousands, except share figures)
CURRENT LIABILITIES:
Accrued compensation $ 22,902 $ 20,947
Accounts payable and accrued expenses 15,745 14,938
Dividend payable 3,356 3,357
Current portion of long-term debt 7,143 7,143
Other current liabilities 3,605 2,505
----------------------------------------------
Total current liabilities 52,751 48,890
----------------------------------------------
OTHER LIABILITIES:
6.22% Senior Note 21,429 28,571
----------------------------------------------
Deferred income taxes 93,155 86,500
----------------------------------------------
Commitments and contingencies - -
SHAREHOLDERS' EQUITY:
Common stock, par value $.015625 per share:
Authorized, 320,000 shares
Issued, 35,167,196 and 35,182,355 shares, respectively 1 1
Non-voting common stock, par value $.015625 per share:
Authorized, 47,680,000 shares
Issued, 35,167,196 and 35,182,355 shares, respectively 549 550
Accumulated other comprehensive income 5,262 4,040
Notes receivable from stock option exercises (2,345) (2,231)
Retained earnings 249,639 191,908
----------------------------------------------
Total shareholders' equity 253,106 194,268
----------------------------------------------
Total liabilities and shareholders' equity $ 420,441 $ 358,229
==============================================
</TABLE>
See notes to the consolidated financial statements.
4
<PAGE>
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Consolidated Statements of Income (unaudited) (continued)
<TABLE>
Three Months Ended Nine Months Ended
July 31, July 31,
2000 1999 2000 1999
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
(in thousands, except per share figures)
REVENUE:
Investment adviser and administration fees $ 57,706 $ 46,289 $ 165,215 $ 148,927
Distribution income 49,197 44,023 147,237 98,928
Income from real estate activities 20 526 20 1,859
Other income 1,060 211 2,591 1,128
-------------------------------------------------------------------
Total revenue 107,983 91,049 315,063 250,842
-------------------------------------------------------------------
EXPENSES:
Compensation of officers and employees 20,087 16,816 56,539 52,119
Amortization of deferred sales commissions 20,894 19,906 61,363 43,963
Sales commission expense - - - 71,282
Other expenses 22,977 18,099 62,819 47,999
-------------------------------------------------------------------
Total expenses 63,958 54,821 180,721 215,363
-------------------------------------------------------------------
OPERATING INCOME 44,025 36,228 134,342 35,479
OTHER INCOME (EXPENSE):
Interest income 915 703 4,301 2,676
Interest expense (462) (661) (1,554) (2,379)
Gain on sale of investments 4 6,992 230 7,779
Equity in net income (loss) of affiliates 241 24 612 (117)
-------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND
CUMULATIVE EFFECT ON CHANGE IN
ACCOUNTING PRINCIPLE 44,723 43,286 137,931 43,438
INCOME TAXES 16,995 16,881 52,413 16,941
-------------------------------------------------------------------
INCOME BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING
PRINCIPLE 27,728 26,405 85,518 26,497
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE, NET OF
INCOME TAXES - - - (36,607)
-------------------------------------------------------------------
NET INCOME (LOSS) $ 27,728 $ 26,405 $ 85,518 $ (10,110)
===================================================================
</TABLE>
See notes to the consolidated financial statements.
5
<PAGE>
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Consolidated Statements of Income (unaudited) (continued)
<TABLE>
Three Months Ended Nine Months Ended
July 31, July 31,
2000 1999 2000 1999
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
EARNINGS PER SHARE BEFORE
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE:
Basic $ 0.79 $ 0.74 $ 2.42 $ 0.74
===================================================================
Diluted $ 0.75 $ 0.70 $ 2.32 $ 0.71
===================================================================
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE, PER SHARE:
Basic $ - $ - $ - $ (1.02)
===================================================================
Diluted $ - $ - $ - $ (0.98)
===================================================================
EARNINGS (LOSS) PER SHARE:
Basic $ 0.79 $ 0.74 $ 2.42 $ (0.28)
===================================================================
Diluted $ 0.75 $ 0.70 $ 2.32 $ (0.27)
===================================================================
DIVIDENDS DECLARED, PER SHARE $ 0.10 $ 0.08 $ 0.29 $ 0.23
===================================================================
Weighted average common shares outstanding 35,184 35,892 35,290 35,896
===================================================================
Weighted average common shares outstanding
assuming dilution 36,916 37,686 36,865 37,247
===================================================================
</TABLE>
See notes to the consolidated financial statements.
6
<PAGE>
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Consolidated Statements of Cash Flows (unaudited) (continued)
<TABLE>
Nine Months Ended
July 31,
2000 1999
----------------------------------------------
<S> <C> <C>
(in thousands)
Cash and equivalents, beginning of period $ 77,395 $ 54,386
----------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) 85,516 (10,110)
Adjustments to reconcile net income to net cash used for
operating activities:
Cumulative effect of change in accounting principle,
net of otax - 36,607
Equity in net (income) loss of affiliates (612) 117
Dividend received from affiliate 552 368
Deferred income taxes 6,038 20,082
Amortization of deferred sales commissions 61,363 43,963
Depreciation and other amortization 1,566 1,165
Payment of capitalized sales commissions (96,614) (103,439)
Capitalized sales charges received 20,886 12,974
Gain on sale of investments (230) (7,779)
Changes in other assets and liabilities (9,273) 10,072
----------------------------------------------
Net cash provided by operating activities 69,192 4,020
----------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to real estate, equipment and
leasehold improvements (1,846) (10,568)
Net increase in notes and receivables from affiliates (111) (400)
Proceeds from sale of real estate - 25,170
Proceeds from sale of investments 25,330 34,417
Purchase of investments (81,903) (5,244)
----------------------------------------------
Net cash provided by (used for) investing activities (58,530) 43,375
----------------------------------------------
</TABLE>
See notes to the consolidated financial statements.
7
<PAGE>
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Consolidated Statements of Cash Flows (unaudited)
<TABLE>
Nine Months Ended
July 31,
2000 1999
----------------------------------------------
<S> <C> <C>
(in thousands)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on notes payable $ (7,143) $ (27,138)
Revolving credit facility borrowings - 12,000
Proceeds from the issuance of non-voting
common stock 7,029 6,807
Dividends paid (10,104) (8,087)
Repurchase of non-voting common stock (25,219) (10,790)
----------------------------------------------
Net cash used for financing activities (35,437) (27,208)
----------------------------------------------
Net increase (decrease) in cash and equivalents (24,775) 20,187
----------------------------------------------
Cash and equivalents, end of period $ 52,620 $ 74,573
==============================================
SUPPLEMENTAL INFORMATION:
Interest paid $ 1,161 $ 1,877
==============================================
Income taxes paid $ 60,219 $ 5,162
==============================================
</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 (SEC). Certain information
and footnote disclosures have been omitted pursuant to such rules and
regulations. As a result, these financial statements should be read in
conjunction with the audited consolidated financial statements and related notes
included in the Company's latest annual report on Form 10-K.
(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 sponsor 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 Accounting Principles Board (APB) Opinion No. 20,
"Accounting Changes," upon adoption of SOP 98-5 by the Company effective
November 1, 1998. The cumulative effect of adoption on November 1, 1998 was
$36.6 million, net of income taxes of $23.4 million.
In April of 1999, the bank loan interval funds received shareholder approval and
a Securities and Exchange Commission exemptive order permitting them, beginning
May 1, 1999, to implement Rule 12b-1 equivalent distribution plans. With the
implementation of these distribution plans, 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 changes in accounting treatment have 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 20 percent investment in Lloyd George Management (BVI) Limited
(LGM), an independent investment management company based in Hong Kong that
manages five emerging market equity mutual funds sponsored by the Company. The
Company's investment in LGM, which is accounted for under the equity method, was
$7.2 million at July 31, 2000 and October 31, 1999. At July 31, 2000, the
Company's investment exceeded its share of the underlying net assets of LGM by
$4.9 million. This excess is being amortized over a twenty-year period.
(4) Stock Plans
Stock Option Plan
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- or five-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, 1998 2,606 $ 10.78
Granted 706 23.01
Exercised (718) 7.33
Forfeited/Expired (29) 17.03
--------------------------------------------------------------------------------
Balance, October 31, 1999 2,565 $ 15.04
--------------------------------------------------------------------------------
Granted 620 34.79
Exercised (367) 11.37
Forfeited/Expired (38) 27.21
--------------------------------------------------------------------------------
Balance, July 31, 2000 2,780 $ 19.76
================================================================================
10
<PAGE>
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(4) Stock 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
Range of Exercise Prices at 7/31/00 Life Price of 7/31/00 Price
---------------------------------------------------------------------------------- ------------------------------------
<S> <C> <C> <C> <C> <C>
(share figures in thousands)
$7.06-$7.77 196 0.4 $ 7.09 196 $ 7.09
$10.44-$11.48 847 1.4 10.50 721 10.50
$17.84-$18.03 465 2.2 17.85 384 17.85
$19.63-$23.13 656 6.1 22.82 135 22.87
$25.23 9 3.3 25.23 - -
$34.38-$37.81 582 9.2 34.44 1 36.50
$42.31-$43.06 23 9.5 43.02 - -
$48.06 2 9.9 48.06 - -
---------------------------------------------------------------------------------- ----------------------------------
2,780 4.3 $ 19.76 1,437 $ 13.18
================================================================================== ==================================
</TABLE>
Restricted Stock Plan
The Company has a Restricted Stock Plan administered by the Compensation
Committee of the Board of Directors under which certain employees may receive
restricted stock. A total of 500,000 shares have been reserved for issuance
under the plan. Through July 31, 2000, 145,455 shares have been issued pursuant
to the plan. The Company has recorded compensation expense of $0.8 million for
the nine months ended July 31, 2000 related to restricted stock awards.
(5) Common Stock Repurchases
On October 13, 1999, the Company's Board of Directors authorized the purchase by
the Company of up to 2.0 million shares of the Company's non-voting common
stock. In the first nine months of fiscal 2000, the Company purchased 626,000 of
its non-voting common stock under this 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 $54.9 million, which exceeds its minimum net capital
requirement of $0.9 million at July 31, 2000. The ratio of aggregate
indebtedness to net capital at July 31, 2000 was .24 to 1.
11
<PAGE>
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(7) Real Estate Asset Held for Sale
The real estate asset held for sale consists of a warehouse located in
Springfield, Massachusetts at both July 31, 2000 and October 31, 1999. The
Company expects the sale of the Springfield, Massachusetts property to be
completed in fiscal 2000. The estimated fair value less the cost to sell of the
Springfield property exceeds its carrying value at July 31, 2000.
(8) Financial Instruments
Forward Exchange Contract
At July 31, 2000, the Company had an open forward exchange contract to sell
European Currency Units (Euros) for an underlying principal amount of $4.7
million. The contract was entered into to hedge a Euro denominated investment
thereby limiting the risk that would otherwise result from changes in exchange
rates. The Company does not enter into foreign currency transactions for trading
or speculative purposes.
Unrealized Securities Holding Gains and Losses
The Company has classified as available-for-sale securities having an aggregate
fair value of approximately $40.0 million and $15.5 million at July 31, 2000 and
October 31, 1999, 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 $9.4 million and $6.8 million at July 31, 2000 and October 31,
1999, respectively, and gross unrealized losses of approximately $1.1 million
and $0.2 million at July 31, 2000 and October 31, 1999, respectively, have been
excluded from earnings and reported as a 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 $40.2 million at July 31, 2000. Gross unrealized gains related to securities
classified as trading of approximately $1.2 million have been included in
earnings for the nine months ended July 31, 2000.
12
<PAGE>
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(9) Comprehensive Income
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.
The following table shows comprehensive income for the nine months ended July
31, 2000 and 1999.
<TABLE>
(in thousands) 2000 1999
----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net income (loss) $ 85,518 $ (10,110)
Net unrealized gain on available-for-sale securities, net of
income taxes of $600 and $1,894, respectively 1,222 3,039
----------------------------------------
Comprehensive income (loss) $ 86,740 $ (7,071)
========================================
</TABLE>
(10) Accounting Developments
In June of 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The Statement (as amended by SFAS No. 138)
establishes new accounting and reporting requirements for derivative
instruments. The Company has not yet determined the effect, if any, of this
announcement on the consolidated financial statements. The Company intends to
adopt the provisions of SFAS No. 133 as amended by SFAS No. 137 in fiscal 2001.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company's principal business is creating, marketing and managing mutual
funds and other pooled investment vehicles and providing investment management
and counseling services to institutions and individuals. The Company distributes
its funds through third party broker-dealers, independent financial institutions
and investment advisers.
The Company's revenue is primarily derived from investment adviser,
administration 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 the amortization of deferred sales
commissions and other marketing costs, employee compensation, occupancy costs
and service fees.
Results of Operations
Quarter Ended July 31, 2000 Compared to Quarter Ended July 31, 1999
The Company reported earnings of $27.7 million or $0.75 per share diluted in the
third quarter of fiscal 2000 compared to $26.4 million or $0.70 per share
diluted in the third quarter of 1999.
Assets under management of $47.3 billion on July 31, 2000 were 21 percent higher
than the $39.0 billion reported a year earlier. Asset growth resulted from
strong sales of the Company's stock funds, bank loan funds, taxable bond funds,
a $1.7 billion private placement of an equity fund, a $400 million
collateralized debt obligation and equity market appreciation. Fund sales in the
third quarter of fiscal 2000 were $3.1 billion compared to $2.9 billion in the
third quarter of fiscal 1999. Redemptions were $1.4 billion in the third quarter
of fiscal 2000 and $0.9 billion in the third quarter of fiscal 1999. The higher
level of redemptions in the third quarter of fiscal 2000 was primarily in the
Company's bank loan and domestic equity funds. As a result of equity market
appreciation and private placements, equity fund assets increased to 50 percent
of total assets under management on July 31, 2000 from 41 percent on July 31,
1999. Bank loan fund assets decreased to 21 percent of total assets under
management on July 31, 2000 from 24 percent at July 31, 1999 as a result of net
redemptions of bank loan funds in the third quarter of fiscal 2000 compared to
net sales in the third quarter of fiscal 1999. As a result of the growth in
equity funds, taxable and non-taxable fixed income funds decreased to 22 percent
of total assets under management on July 31, 2000 from 27 percent on July 31,
1999.
The Company reported revenue of $108.0 million in the third quarter of fiscal
2000 compared to $91.0 million in the third quarter of fiscal 1999, an increase
of $17 million or 19 percent. Investment adviser and administration fees
increased $11.4 million to $57.7 million from $46.3 million a year earlier
primarily as a result of the growth in total assets under management and the
change in the Company's product mix. Distribution income increased 12 percent or
$5.2 million to $49.2 million in the third quarter of fiscal 2000 from $44.0
million in the third quarter of fiscal 1999 as a result of the increase in sales
and overall asset growth of the Company's domestic and international equity
funds.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
Total operating expenses increased $9.2 million or 17 percent to $64.0 million
in the third quarter of fiscal 2000 from $54.8 million in the third quarter of
fiscal 1999. Compensation expense increased $3.3 million or 20 percent to $20.1
million in the third quarter of fiscal 2000 compared to the third quarter of
fiscal 1999 primarily as a result of maintaining competitive salary and benefit
packages in a low unemployment job market. Amortization of deferred sales
commissions increased to $20.9 million in the third quarter of fiscal 2000 from
$19.9 million in the third quarter of fiscal 1999 as a result of an increase in
gross sales of the Company's spread commission funds. The increase noted in
other expenses reflects the increase in marketing expenses and sales incentives
associated with asset growth and occupancy costs.
Gain on sale of investments decreased $7.0 million from the third quarter of
fiscal 1999 to the third quarter of fiscal 2000 primarily as a result of net
gains on the sale of real estate in the third quarter of fiscal 1999.
The Company reduced its effective tax rate to 38 percent during fiscal 2000 from
39 percent at July 31, 1999 as a result of favorable state tax developments.
Nine Months ended July 31, 2000 Compared to the Nine Months Ended July 31, 1999
The Company reported earnings of $85.5 million or $2.32 per share diluted in the
first nine months of fiscal 2000 compared to a loss of $10.1 million or $0.27
per share diluted in the first nine months of fiscal 1999.
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 sponsor does not receive both 12b-1 distribution
fees and contingent deferred sales charges and concluded that such 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, notably
sales commissions paid to brokers, over a period not to exceed five years.
Closed-end fund, bank loan interval fund and private placement sales commissions
paid and capitalized prior to and including the July 23, 1998 effective date of
the FASB staff announcement were written off as a cumulative effect of a change
in accounting principle on November 1, 1998. The cumulative effect of adoption,
net of tax, was $36.6 million or $0.98 per diluted share.
In April of 1999, the bank loan interval funds received shareholder approval and
a SEC exemptive order permitting them 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 effective May 1,
1999, the beginning of the Company's third fiscal quarter. For the period
November 1, 1998 through April 30, 1999, these commissions totaled $71.3 million
and have been recorded in "Sales commission expense" in the Company's
consolidated statement of income for the nine months ended July 31, 1999.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
Total revenue increased by $64.3 million or 26 percent to $315.1 million in the
first nine months of fiscal 2000 from $250.8 million in the first nine months of
fiscal 1999 as a result of greater average assets under management. Investment
adviser and administration fees increased to $165.2 million from $148.9 million
primarily as a result of the growth in total assets under management. As noted
above, the Company's bank loan interval funds changed their fee structures by
adopting 12b-1 equivalent distribution plans effective May 1, 1999. This change
reduced significantly the investment advisory fees from these funds, but
increased the distribution fees from these funds by the same amount.
Distribution income increased to $147.2 million in the first nine months of
fiscal 2000 from $98.9 million a year earlier primarily as a result of the
implementation of the 12b-1 distribution plans on bank loan interval funds and
increased service fee income resulting from greater assets under management.
Total operating expenses decreased $34.7 million or 16 percent to $180.7 million
in the first nine months of fiscal 2000 from $215.4 million in the first nine
months of fiscal 1999. The decrease in operating expenses can primarily be
attributed to the expensing of $71.3 million of sales commissions in the first
nine months of fiscal 1999 offset by an increase in compensation, amortization
of deferred sales commissions and other expenses in the first nine months of
fiscal 2000. Compensation expense increased $4.4 million or 8% to $56.5 million
in the first nine months of fiscal 2000 compared to the first nine months of
fiscal 1999 primarily as a result of maintaining competitive salary and benefit
packages in a low unemployment job market. Amortization of deferred sales
commissions increased to $61.4 million in the first nine months of fiscal 2000
from $44.0 million in the first nine months of fiscal 1999 as a result of the
change in accounting treatment of bank loan interval fund offering costs and the
adjustment of the amortization period of certain deferred sales commission
assets in order to better match amortization expense with projected distribution
fee income. The increase noted in other expenses reflects the increase in
service fee expense, marketing expenses and sales incentives associated with
asset growth and occupancy costs.
Interest income increased 59 percent to $4.3 million in the first nine months of
fiscal 2000 from $2.7 million in the first nine months of fiscal 1999. The
increase in interest income is the result of interest earned on a favorable
settlement of a longstanding Massachusetts income tax claim relating to tax
years 1990, 1991 and 1992. Gain on sale of investments decreased $7.6 million
from the first nine months of fiscal 1999 to the first nine months of fiscal
2000 primarily as a result of net gains on the sale of real estate in the first
nine months of fiscal 1999.
The Company reduced its effective tax rate to 38 percent during the first nine
months of fiscal 2000 from 39 percent at July 31, 1999 as a result of favorable
state tax developments
Liquidity and Capital Resources
Cash, cash equivalents and short-term investments aggregated $98.4 million at
July 31, 2000, an increase of $21.0 million from October 31, 1999.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
Operating activities generated cash and cash equivalents of $69.2 million in the
first nine months of fiscal 2000 compared to $4.0 million in the first nine
months of fiscal 1999. The increase in cash provided by operating activities in
the first nine months of fiscal 2000 can be attributed primarily to the
significant decrease in sales commissions paid to brokers in connection with
fund sales. In the first nine months of fiscal 1999, the Company offered and
paid commissions related to a larger amount of private placements and the public
offering of nine closed-end municipal bond funds. The $174.7 million of sales
commissions paid in the first nine months of 1999 is comprised of $71.3 million
of sales commissions related to the sale of the Company's closed-end and
interval funds and $103.4 million of sales commissions related the sale of the
Company's open-end funds. Closed-end and bank loan interval fund sales
commissions of $71.3 million paid prior to July 31, 1999 were expensed as
incurred and therefore included as a component of net income in the Company's
consolidated statements of income and cash flows. The payment of sales
commissions associated with the distribution of the Company's spread-commission
and interval funds continues to be the primary use of cash and totaled $96.6
million in the first nine months of fiscal 2000.
Investing activities reduced cash and cash equivalents by $58.5 million in the
first nine months of fiscal 2000. In the first nine months of fiscal 1999,
investing activities provided cash of $43.4 million. Consistent with the
Company's policy to invest its excess cash efficiently, the primary use of cash
in the first nine months of fiscal 2000 related to investing activities was the
purchase of short-term treasury investments. The Company also purchased $10.5
million of other investments related to its offering of a collateralized debt
obligation in the first nine months of fiscal 2000. The Company sold several of
its real estate holdings resulting in proceeds of $25.2 million in the first
nine months of fiscal 1999.
Financing activities reduced cash and cash equivalents by $35.4 million in the
first nine months of fiscal 2000 compared to $27.2 million in the first nine
months of fiscal 1999. Significant financing activities during the first nine
months of fiscal 2000 included the repurchase of 626,000 shares of the Company's
non-voting common stock under its authorized repurchase program compared to
458,000 shares in the first nine months of fiscal 1999. The Company's dividend
was $0.29 per share in the first nine months of 2000 compared to $0.23 per share
in the first nine months of fiscal 1999.
At July 31, 2000, the Company had no borrowings outstanding under its $50.0
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 possible strategic
growth opportunities.
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.
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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,
other pooled investment vehicles and separately managed accounts. As a result,
the Company is dependent upon the contractual relationships it maintains with
these funds, other pooled investment vehicles, 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 or significant redemptions 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 and fluctuations in foreign currency exchange
rates. 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. The Company utilized a forward contract to limit foreign currency
exchange rate exposure related to an investment. At July 31, 2000, the Company
had an open forward exchange contract to sell European Currency Units for an
underlying principal amount of $4.7 million. The Company does not enter into
foreign currency transactions for trading or speculative purposes.
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PART II
OTHER INFORMATION
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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, 2000 (filed herewith
- electronic filing only).
(b) Reports on Form 8-K
None.
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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 12, 2000 /s/William M. Steul
--------------------------------
(Signature)
William M. Steul
Chief Financial Officer
DATE: September 12, 2000 /s/Laurie G. Hylton
--------------------------------
(Signature)
Laurie G. Russell
Chief Accounting Officer
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