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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 April 30, 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 April 30, 2000:
Voting Common Stock - 77,440 shares
Non-Voting Common Stock - 35,265,093 shares
Page 1 of 21 pages
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<PAGE>
PART I
FINANCIAL INFORMATION
2
<PAGE>
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets (unaudited)
<TABLE>
April 30, October 31,
2000 1999
----------------------------------------------
<S> <C> <C>
ASSETS (in thousands)
CURRENT ASSETS:
Cash and equivalents $ 47,409 $ 77,395
Short-term investments 45,608 -
Investment adviser fees and other receivables 7,446 9,101
Real estate assets held for sale 1,451 1,451
Other current assets 12,315 2,541
----------------------------------------------
Total current assets 114,229 90,488
----------------------------------------------
OTHER ASSETS:
Investments:
Investment in affiliate 7,054 7,235
Investment companies 17,620 15,106
Other investments 6,292 6,326
Other receivables 5,833 5,836
Deferred sales commissions 223,639 219,201
Equipment and leasehold improvements, net of
accumulated depreciation and amortization
of $4,146 and $3,425, respectively 12,245 12,459
Goodwill and other intangibles, net of accumulated
amortization of $488 and $422, respectively 1,511 1,578
----------------------------------------------
Total other assets 274,194 267,741
----------------------------------------------
Total assets $ 388,423 $ 358,229
==============================================
</TABLE>
See notes to the consolidated financial statements.
3
<PAGE>
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Consolidated Balance Sheets (unaudited) (continued)
<TABLE>
April 30, October 31,
2000 1999
----------------------------------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY (in thousands, except share figures)
CURRENT LIABILITIES:
Accrued compensation $ 14,784 $ 20,947
Accounts payable and accrued expenses 14,816 14,938
Dividend payable 3,365 3,357
Current portion of long-term debt 7,143 7,143
Other current liabilities 2,836 2,505
----------------------------------------------
Total current liabilities 42,944 48,890
----------------------------------------------
OTHER LIABILITIES:
6.22% Senior Note 21,429 28,571
----------------------------------------------
Deferred income taxes 89,655 86,500
----------------------------------------------
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 $.015625 per share:
Authorized, 47,680,000
Issued, 35,265,093 and 35,182,355 shares, respectively 551 550
Accumulated other comprehensive income 5,352 4,040
Notes receivable from stock option exercises (2,344) (2,231)
Retained earnings 230,835 191,908
----------------------------------------------
Total shareholders' equity 234,395 194,268
----------------------------------------------
Total liabilities and shareholders' equity $ 388,423 $ 358,229
==============================================
</TABLE>
See notes to the consolidated financial statements.
4
<PAGE>
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Consolidated Statements of Income (unaudited)
<TABLE>
Three Months Ended Six Months Ended
April 30, April 30,
2000 1999 2000 1999
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
(in thousands, except per share figures)
REVENUE:
Investment adviser and administration fees $ 54,573 $ 55,333 $ 107,509 $ 102,638
Distribution income 49,375 27,852 98,039 54,904
Income from real estate activities - 667 - 1,333
Other income 883 463 1,531 917
-------------------------------------------------------------------
Total revenue 104,831 84,315 207,079 159,792
-------------------------------------------------------------------
EXPENSES:
Compensation of officers and employees 18,879 17,859 36,453 35,303
Amortization of deferred sales commissions 20,226 12,037 40,469 24,057
Sales commission expense - 23,803 - 71,281
Other expenses 20,655 15,163 39,842 29,901
-------------------------------------------------------------------
Total expenses 59,760 68,862 116,764 160,542
-------------------------------------------------------------------
OPERATING INCOME (LOSS) 45,071 15,453 90,315 (750)
OTHER INCOME (EXPENSE):
Interest income 2,403 658 3,386 1,973
Interest expense (520) (829) (1,092) (1,718)
Gain on sale of investments 176 885 226 787
Equity in net income (loss) of affiliates 367 (25) 371 (141)
-------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 47,497 16,142 93,206 151
INCOME TAXES 18,050 6,295 35,418 59
-------------------------------------------------------------------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 29,447 9,847 57,788 92
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE,
NET OF INCOME TAXES - - - (36,607)
-------------------------------------------------------------------
NET INCOME (LOSS) $ 29,447 $ 9,847 $ 57,788 $ (36,515)
===================================================================
</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 Six Months Ended
April 30, April 30,
2000 1999 2000 1999
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
EARNINGS PER SHARE BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE:
Basic $ 0.83 $ 0.27 $ 1.63 $ -
===================================================================
Diluted $ 0.79 $ 0.27 $ 1.56 $ -
===================================================================
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE, PER SHARE:
Basic $ - $ - $ - $ (1.02)
===================================================================
Diluted $ - $ - $ - $ (1.02)
===================================================================
EARNINGS (LOSS) PER SHARE:
Basic $ 0.83 $ 0.27 $ 1.63 $ (1.02)
===================================================================
Diluted $ 0.79 $ 0.27 $ 1.56 $ (1.02)
===================================================================
DIVIDENDS DECLARED, PER SHARE $ 0.10 $ 0.08 $ 0.20 $ 0.15
===================================================================
Weighted average common shares outstanding 35,350 35,915 35,353 35,898
===================================================================
Weighted average common shares outstanding
assuming dilution 37,073 36,917 36,997 35,898
===================================================================
</TABLE>
See notes to the consolidated financial statements.
6
<PAGE>
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Consolidated Statements of Cash Flows (unaudited)
<TABLE>
Six Months Ended
April 30,
2000 1999
----------------------------------------------
(in thousands)
<S> <C> <C>
Cash and equivalents, beginning of period $ 77,395 $ 54,386
----------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) 57,788 (36,515)
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 (371) 141
Dividend received from affiliate 552 368
Deferred income taxes 1,882 9,554
Amortization of deferred sales commissions 40,469 24,057
Depreciation and other amortization 1,023 700
Payment of capitalized sales commissions (60,030) (58,319)
Capitalized sales charges received 15,104 8,884
Gain on sale of investments (226) (787)
Changes in other assets and liabilities (13,586) (9,440)
----------------------------------------------
Net cash provided by (used for) operating activities 42,605 (24,750)
----------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to real estate, equipment and
leasehold improvements (726) (7,672)
Net (increase) decrease in notes and receivables
from affiliates (111) 833
Proceeds from sale of real estate - 2,921
Proceeds from sale of investments 25,102 33,755
Purchase of investments (70,353) (4,839)
----------------------------------------------
Net cash provided by (used for) investing activities (46,088) 24,998
----------------------------------------------
</TABLE>
See notes to the consolidated financial statements.
7
<PAGE>
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Consolidated Statements of Cash Flows (unaudited) (continued)
<TABLE>
Six Months Ended
April 30,
2000 1999
----------------------------------------------
(in thousands)
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on notes payable $ (7,143) $ (21,302)
Revolving credit facility borrowings - 12,000
Proceeds from the issuance of non-voting
common stock 5,967 4,630
Dividends paid (6,739) (5,388)
Repurchase of non-voting common stock (18,588) (5,961)
----------------------------------------------
Net cash used for financing activities (26,503) (16,021)
----------------------------------------------
Net decrease in cash and equivalents (29,986) (15,773)
----------------------------------------------
Cash and equivalents, end of period $ 47,409 $ 38,613
==============================================
SUPPLEMENTAL INFORMATION:
Interest paid $ 1,092 $ 1,718
==============================================
Income taxes paid $ 42,944 $ 67
==============================================
</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 21 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
$7.0 million and $7.2 million at April 30, 2000 and October 31, 1999,
respectively. At April 30, 2000, the Company's investment exceeded its share of
the underlying net assets of LGM by $5.0 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 616 34.72
Exercised (351) 11.27
Forfeited/Expired (38) 27.20
--------------------------------------------------------------------------------
Balance, April 30, 2000 2,792 $ 19.68
================================================================================
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
Remaining Average Weighted
Outstanding Contractual Exercise Exercisable as Average
Range of Exercise Prices at 4/30/00 Life Price of 4/30/00 Exercise Price
----------------------------------- --------------- -------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
(SHARE FIGURES IN THOUSANDS)
$7.06-$7.77 200 0.6 $ 7.09 200 $ 7.09
$10.44-$11.48 850 1.6 10.50 725 10.50
$17.84-$20.81 501 2.6 17.96 396 17.87
$22.63-$25.23 638 6.4 22.97 131 22.95
$34.38 566 9.5 34.38 - -
$35.56-$37.81 16 7.2 36.58 - -
$42.31-$43.06 21 9.7 43.01 - -
----------------------------------- --------------- -------------- ---------------- ----------------- ----------------
2,792 4.5 $ 19.68 1,452 $ 13.16
=================================== =============== ============== ================ ================= ================
</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 April 30, 2000, 145,455 shares have been issued pursuant
to the plan. The Company has recorded compensation expense of $0.5 million for
the six months ended April 30, 2000 related to restricted stock awards.
(5) COMMON STOCK REPURCHASES
In the first half of fiscal 2000, the Company purchased 487,000 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 $49.7 million, which exceeds its minimum net capital
requirement of $0.7 million at April 30, 2000. The ratio of aggregate
indebtedness to net capital at April 30, 2000 was .22 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 April 30, 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 April 30, 2000.
(8) FINANCIAL INSTRUMENTS
FORWARD EXCHANGE CONTRACT
At April 30, 2000, the Company had an open forward exchange contract to sell
European Currency Units (Euros) for an underlying principal amount of $4.9
million. The contract was entered into 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 $23.9 million and $15.5 million at April 30, 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 $9.2 million and $6.8 million at April 30, 2000 and
October 31, 1999, respectively, and gross unrealized losses of approximately
$0.7 million and $0.2 million at April 30, 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 $39.6 million at April 30, 2000. Gross unrealized gains related to securities
classified as trading of approximately $0.6 million have been included in
earnings for the six months ended April 30, 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 six months ended April
30, 2000 and 1999.
2000 1999
--------------------------------------------------------------------------------
Net income (loss) $ 57,788 $ (36,515)
Net unrealized gain on available-for-sale
securities, net of income taxes of
$652 and $797, respectively 1,312 1,326
--------------------------------------------------------------------------------
Comprehensive income (loss) $ 59,100 $ (35,189)
================================================================================
(10) ACCOUNTING DEVELOPMENTS
In June of 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The Statement establishes accounting and
reporting standards requiring that every derivative instrument be recorded on
the balance sheet as either an asset or a liability measured at its fair value.
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 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 APRIL 30, 2000 COMPARED TO QUARTER ENDED APRIL 30, 1999
The Company reported earnings of $29.4 million or $0.79 per share diluted in the
second quarter of fiscal 2000 compared to $9.8 million or $0.27 per share
diluted in the second quarter of 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 $1.02 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
February 1, 1999 through April 30, 1999, these commissions totaled $23.8 million
and have been recorded in "Sales commission expense" in the Company's
consolidated statement of income for the fiscal quarter ended April 30, 1999.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Assets under management of $44.3 billion on April 30, 2000 were 20 percent
higher than the $37.0 billion reported a year earlier. Asset growth resulted
from strong sales of the Company's stock funds, bank loan funds, taxable bond
funds and the private placement of two equity funds. Fund sales in the second
quarter of fiscal 2000 were $2.4 billion compared to $3.2 billion in the second
quarter of fiscal 1999. Fund sales in the second quarter of fiscal 2000 were
lower than fund sales in the same period last year because the Company had only
one private equity fund closing and slower fund sales during the second quarter
of fiscal 2000. Redemptions were $1.8 billion in the second quarter of fiscal
2000 and $0.9 billion in the second quarter of fiscal 1999. The higher level of
redemptions was primarily in the Company's municipal bond funds and bank loan
funds. As a result of equity market appreciation and private placements, equity
fund assets increased to 48 percent of total assets under management on April
30, 2000 from 39 percent on April 30, 1999. Bank loan fund assets remained at 23
percent of total assets under management on April 30, 2000 and 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 April 30, 2000 from
30 percent on April 30, 1999. In the second quarter of fiscal 2000, investors
generally redeemed shares of fixed-income and bank loan funds and invested in
high technology equity funds.
The Company reported revenue of $104.8 million in the second quarter of fiscal
2000 compared to $84.3 million in the second quarter of fiscal 1999, an increase
of $20.5 million or 24.3 percent. Investment adviser and administration fees
decreased by 1 percent to $54.6 million in the second quarter of fiscal 2000
from $55.3 million in the second quarter of fiscal 1999, primarily as a result
of the Company's bank loan interval funds, which changed their fee structures by
adopting 12b-1 equivalent distribution plans. This change reduced significantly
the investment advisory fees from these funds, but increased the distribution
fees from these funds by a like amount. Distribution income increased 78 percent
to $49.4 million in the second quarter of 2000 from $27.8 million a year earlier
primarily as a result of the implementation of the 12b-1 equivalent distribution
plans on the bank loan interval funds.
Total operating expenses decreased $9.1 million or 13 percent to $59.8 million
in the second quarter of fiscal 2000 from $68.9 million in the second quarter of
fiscal 1999. The decrease in operating expenses can primarily be attributed to
the expensing of $23.8 million of sales commissions in the second quarter of
fiscal 1999 offset by an increase in amortization of deferred sales commissions
and other expenses in the second quarter of fiscal 2000. Amortization of
deferred sales commissions increased to $20.2 million in the second quarter of
fiscal 2000 from $12.0 million in the second quarter 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
commissions assets in order to better match amortization expense with projected
distribution fee income. The increase noted in other expenses reflects the
increase in marketing expenses and sales incentives associated with asset growth
and occupancy costs.
Interest income increased 243 percent to $2.4 million in second quarter of
fiscal 2000 from $0.7 million in the second quarter of fiscal 1999. The increase
in interest income is the result of a favorable settlement of a longstanding
Massachusetts income tax claim relating to tax years 1990, 1991 and 1992.
The Company reduced its effective tax rate to 38 percent during fiscal 2000 from
39 percent at April 30, 1999 as a result of favorable state tax developments.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
SIX MONTHS ENDED APRIL 30, 2000 COMPARED TO THE SIX MONTHS ENDED APRIL 30, 1999
The Company reported earnings of $57.8 million or $1.56 per share diluted in the
first half of fiscal 2000 compared to a loss of $36.5 million or $1.02 per share
diluted in the first half of fiscal 1999.
As discussed in the comparison of the quarter ended April 30, 2000 to the
quarter ended April 30, 1999 above, prior to May 1, 1999, the Company was
required to expense rather than capitalize and amortize sales commissions for
its bank loan interval funds and other closed-end funds and to take a one-time
charge for the cumulative effect of a change in accounting principle. 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 six months ended April 30, 1999.
Total revenue increased by $47.3 million or 30 percent to $207.1 million in the
first half of fiscal 2000 from $159.8 million in the first half of fiscal 1999
as a result of greater average assets under management. Investment adviser and
administration fees increased to $107.5 million from $102.6 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 $98.0 million in the first half of fiscal 2000 from $54.9 million a
year earlier primarily as a result of the implementation of the 12b-1
distribution plans on bank loan interval funds.
Total operating expenses decreased $16.5 million or 27 percent to $116.8 million
in the first half of fiscal 2000 from $160.5 million in the first half 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 half of fiscal 1999
offset by an increase in amortization of deferred sales commissions and other
expenses in the first half of fiscal 2000. Amortization of deferred sales
commissions increased to $40.5 million in the first half of fiscal 2000 from
$24.1 million in the first half of fiscal 2000 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 commissions
assets in order to better match amortization expense with projected distribution
fee income. The increase noted in other expenses reflects the increase in
marketing expenses and sales incentives associated with asset growth and
occupancy costs.
Interest income increased 70 percent to $3.4 million in the first half of fiscal
2000 from $2.0 million the first half of fiscal 1999. The increase in interest
income is the result of a favorable settlement of a longstanding Massachusetts
income tax claim relating to tax years 1990, 1991 and 1992.
The Company reduced its effective tax rate to 38 percent during the first half
of fiscal 2000 from 39 percent at April 30, 1999 as a result of favorable state
tax developments
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments aggregated $93.0 million at
April 30, 2000, an increase of $15.6 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 $42.6 million in the
first half of fiscal 2000. In the first half of fiscal 1999, operating
activities reduced cash by $24.7 million. The increase in cash provided by
operating activities in the fist half 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 six months of fiscal 1999, the Company offered and
paid commissions related to several private placements and the public offering
of nine closed-end municipal bond funds. The $129.6 million of sales commissions
paid in the first six 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 $58.3 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 April 30, 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 $60.0 million in the first
six months of fiscal 2000.
Investing activities, consisting primarily of the purchase and sale of
investments, reduced cash and cash equivalents by $46.1 million in the first
half of fiscal 2000 compared to $25.0 million in the first half of fiscal 1999.
The primary use of cash in the first half of fiscal 2000 was the purchase of
short-term investments.
Financing activities reduced cash and cash equivalents by $26.5 million in the
first half of fiscal 2000 compared to $16.0 million in the first half of fiscal
1999. Significant financing activities during the first half of 2000 included
the repurchase of 487,000 shares of the Company's non-voting common stock under
its authorized repurchase program compared to 298,000 shares in the first half
of fiscal 1999. The Company's dividend was $0.10 per share in the first half of
2000 compared to $0.08 per share in the first half of fiscal 1999.
At April 30, 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.
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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
There are few barriers to entry by new investment management firms. The
Company's funds compete against an ever increasing number of investment products
sold to the public by investment dealers, banks, insurance companies and others
that sell tax-free investments, taxable income funds, equity funds and other
investment products. Many institutions competing with the Company have greater
resources than the Company. The Company competes with other providers of
investment products offered, the investment performance of such products,
quality of service, fees charged, the level and type of sales representative
compensation, the manner in which such products are marketed and distributed and
the services provided to investors.
The Company derives almost all of its revenues from investment adviser and
administration fees and distribution income received from the Eaton Vance funds
and separately managed accounts. As a result, the Company is dependent upon the
contractual relationships it maintains with these funds and separately managed
accounts. In the event that any of the management contracts, administration
contracts, underwriting contracts or service agreements are not renewed pursuant
to the terms of these contracts or agreements, the Company's financial results
may be adversely affected.
The major sources of revenue for the Company (i.e., investment adviser fees and
distribution income) are calculated as percentages of assets under management. A
decline in securities prices 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 April 30, 2000, the Company
had an open forward exchange contract to sell European Currency Units for an
underlying principal amount of $4.9 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
On February 1, 2000, by unanimous written consent, the security holders of the
Voting Common Stock of Eaton Vance Corp. approved the election of Leo I. Higdon,
Jr. as a Director of the Corporation. As a Director, Mr. Higdon will hold such
office until the next annual meeting of stockholders and until his successor is
elected and qualified.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
Each Exhibit is listed in this index according to the number assigned to it
in the exhibit table set forth in Item 601 of Regulation S-K. The following
Exhibits are filed as a part of this Report or incorporated herein by
reference pursuant to Rule 12b-32 under the Securities Exchange Act of
1934:
Exhibit No. Description
27.1 Financial Data Schedule as of April 30, 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: June 13, 2000 /s/ William M. Steul
------------------------------
(Signature)
William M. Steul
Chief Financial Officer
DATE: June 13, 2000 /s/ Laurie G. Russell
------------------------------
(Signature)
Laurie G. Russell
Chief Accounting Officer
