Open-end funds represented 38 percent of the Company’s total
assets under management on October 31, 2006, while closed-end and private funds represented 17 percent and 20 percent, respectively. High-net-worth and
institutional separate account assets and retail managed account assets represented 16 percent and 7 percent of total assets under management,
respectively, on October 31, 2006. As noted in the table above, the Company’s asset base is broadly diversified, with 60 percent of the
Company’s total assets under management in equity assets, 24 percent in fixed income assets and 16 percent in floating-rate income assets on
October 31, 2006. This diversification provides the Company with the opportunity to address a wide range of investor needs and to offer products and
services suited for all market environments.
Open-end Funds
As of October 31, 2006, the Company offered 106 open-end funds,
including 12 tax-managed equity funds, 41 state and national municipals funds, 9 bank loan funds (including 6 continuously offered interval funds), 29
non-tax-managed equity funds, 10 taxable fixed income funds and 5 money market funds.
The Company is a leading manager of equity funds designed to
minimize the impact of taxes on investment returns, with $39.1 billion in tax-managed fund assets under management on October 31, 2006. The
Company’s open-end tax-managed fund offerings, which represent $8.7 billion of the total $39.1 billion in tax-managed equity fund assets under
management, capitalize on the combined investment management strengths of the Company, its majority owned subsidiaries and its strategic partners. The
Company began building its tax-managed equity fund family in fiscal 1996 with the introduction of Eaton Vance Tax-Managed Growth Fund 1.1, and has
since diversified its tax-managed open-end fund offerings to include funds in a variety of equity styles and market caps, including large-cap value,
multi-cap growth, mid-cap core, small-cap value, small-cap growth, international, emerging markets, equity asset allocation and dividend
income.
In addition to its tax-managed equity funds, the Company offers a
family of municipal bond funds that are an important part of the Company’s tax-advantaged fund lineup. At October 31, 2006, the Company’s
open-end municipal bond funds included four national and 37 state-specific municipal bond funds in 29 different states. Assets under management in
these funds totaled $10.3 billion on October 31, 2006.
The Company also offers a variety of floating-rate bank loan
funds, taxable fixed-income funds and equity funds for qualified retirement plan assets and other tax-insensitive investors. The Company, which introduced
its first bank loan fund in 1989, is now an industry leader in bank loan funds with a long track record of generating attractive risk-adjusted returns
over multiple credit cycles. As noted below, the Company has been able to capitalize on its leading reputation and long-term track record managing
retail bank loan funds to develop a substantial business managing collateralized loan obligation entities, other private bank loan funds and bank loan
separate accounts for institutional clients. The Company’s non-tax-managed equity fund offerings include large, mid and small-cap funds in value,
core and growth styles, dividend income funds, international and global funds, and sector-specific funds. The Company’s taxable income fund
offerings utilize the Company’s investment management capabilities in a broad range of fixed income asset classes, including mortgage-backed
securities, global currency and income investments, high grade bonds and high yield bonds.
In fiscal 2000, the company introduced The U.S. Charitable Gift
Trust (“Trust”) and its Pooled Income Funds, designed to simplify the process of donating to qualified charities and to provide professional
management of pools of donated assets. The Trust was one of the first charities to use professional investment advisers to assist individuals with
their philanthropic, estate and tax planning needs. The Pooled Income Funds sponsored by the Trust are similar to charitable remainder trusts,
providing donors with income during their lifetimes and leaving the principal to the Trust and designated charities upon their deaths. The Trust and
its Pooled Income Funds encourage long-term philanthropy by allowing contributors to avoid the high costs associated with setting up their own
charitable foundations and charitable remainder trusts. Assets under management in the Trust and its Pooled Income Funds totaled $337 million at
October 31, 2006.
5
Private Funds
The private fund category includes privately offered equity funds
designed to meet the diversification and tax-management needs of qualifying high-net-worth investors and floating-rate bank loan funds, including
collateralized debt obligation (“CDO”) entities, offered to institutional investors. The Company is recognized as a market leader in the
types of privately offered equity funds in which it specializes, with $21.0 billion in assets under management as of October 31, 2006. Assets in
private bank loan funds managed by the Company totaled $5.4 billion as of October 31, 2006, including $2.9 billion of CDO entity
assets.
Closed-end Funds
Since entering the closed-end fund market in 1998, Eaton Vance
has expanded its lineup to include 35 closed-end funds, including three bank loan funds, three diversified income funds, eight equity income funds and
21 municipal income funds. The Company is now the third largest manager of closed-end fund assets, with $22.5 billion of assets under management at
October 31, 2006.
The Company followed the launch of its first closed-end
floating-rate bank loan fund in October 1998 with municipal bond closed-end fund offerings in fiscal 1999, 2002 and 2003. The Company expanded its
closed-end fund product line in fiscal 2003 with the introduction of Eaton Vance Limited Duration Income Fund, a multi-sector low duration income fund,
and Eaton Vance Tax-Advantaged Dividend Income Fund, an equity income fund designed to take advantage of the lower tax rate on qualified dividends
enacted in May 2003. In fiscal 2004, the Company offered five new closed-end funds: Eaton Vance Senior Floating-Rate Trust and Eaton Vance
Floating-Rate Income Trust (investing in floating-rate bank loans); Eaton Vance Tax-Advantaged Global Dividend Income Fund and Eaton Vance
Tax-Advantaged Global Dividend Opportunities Fund (investing globally for tax-advantaged dividend income); and Eaton Vance Enhanced Equity Income Fund
(combining equity investing with a systematic program of writing call options on stocks held). Fiscal 2005 brought an additional five closed-end fund
offerings: Eaton Vance Short Duration Diversified Income Fund (a low duration multi-sector income fund); Eaton Vance Enhanced Equity Income Fund II (an
equity income fund writing call options on stocks held); and Eaton Vance Tax-Managed Buy-Write Income Fund, Eaton Vance Tax-Managed Buy-Write
Opportunities Fund and Eaton Vance Tax-Managed Global Buy-Write Opportunities Fund (tax-managed equity income funds writing index call
options).
The Company’s activity in the closed-end fund market slowed
considerably in fiscal 2006 due to a flattening of the yield curve, tight credit spreads and widening discounts for closed-end funds trading in the
secondary market. In May 2006, the Company offered Eaton Vance Credit Opportunities Fund, a new closed-end fund that employs an opportunistic approach
to investing in a wide spectrum of fixed and floating-rate income instruments.
Retail Managed Accounts
The Company has developed its retail managed accounts business by
capitalizing on the management capabilities of EVM, Atlanta Capital, Fox Asset Management, Parametric Portfolio Associates and strategic partners,
leveraging the strengths of the Company’s retail marketing organization and its relationships with major distributors. The Company now
participates in more than 40 retail managed account broker/dealer programs and continues to expand distribution of Eaton Vance, affiliate and strategic
partner portfolios across key platforms. Retail managed account assets totaled $9.5 billion at October 31, 2006.
Institutional Separate Accounts
The Company serves a broad range of clients in the institutional
marketplace, including foundations, endowments and retirement plans for individuals, corporations and municipalities. The distinct investment styles
and philosophies of the Company and its affiliates allow it to offer institutional investors products across a broad spectrum of equity and fixed and
floating-rate income management styles. Product offerings on the equity side fill out style boxes from value to growth and from small-cap to large-cap,
while income offerings include high grade and high yield fixed income and floating-rate bank loans.
6
In fiscal 2005, the Company expanded its institutional product
offerings to include a liability-based solutions strategy, providing customized investment management portfolios to institutional clients seeking to
hedge and outperform their future liabilities. During fiscal 2005, the Company also chartered a non-depository trust company, Eaton Vance Trust Company
(“EVTC”), and used this as a platform to launch a series of commingled investment vehicles tailored to meet the needs of smaller
institutional clients. Establishing the trust company also enables the Company to expand its presence in the retirement market through participation in
qualified plan commingled investment platforms offered in the broker/dealer channel.
In fiscal 2005 and 2006, the Company committed to building a
full-function institutional marketing and service organization at EVM. In support of this effort, EVM hired a head of institutional sales and created
dedicated consultant relations, marketing, sales and client service teams to support the institutional effort. Specialized institutional sales teams
within EVM, Atlanta Capital and Fox Asset Management focus on developing relationships in this market and deal directly with these clients. The
build-out of EVM’s institutional sales team is now substantially complete. Institutional separate account assets under management totaled $12.1
billion at October 31, 2006.
High-Net-Worth Separate Accounts
The Company offers high-net-worth clients and family offices
personalized investment counseling services. Private investment counselors assist the Company’s clients in establishing long-term financial
programs and implementing a strategy for achieving them. In fiscal 2004, the Company acquired the management contracts of Deutsche Bank’s private
investment counsel group in Boston and hired many of its investment professionals. The acquisition added $1.9 billion to the Company’s investment
counsel assets under management. In fiscal 2005, the Company acquired the management contracts of Weston Asset Management, which added $105 million to
the Company’s investment counsel assets under management, and in fiscal 2006 the Company acquired the management contracts of Voyageur Asset
Management (MA) Inc., which added an additional $449 million to the Company’s investment counsel assets under management. High net-worth assets
totaled $8.8 billion at October 31, 2006.
Investment Management and Administrative
Activities
The Company’s wholly owned subsidiaries, EVM and BMR, are
investment advisers for all but five of the Eaton Vance funds. Lloyd George Management (“LGM”), an independent investment management company
based in Hong Kong in which the Company owns a 20 percent equity position, is the investment adviser for four international equity funds.(1) OrbiMed Advisors LLC. (“OrbiMed”), an independent investment management company
based in New York, is the investment adviser for Eaton Vance Worldwide Health Sciences Fund and Eaton Vance VT Worldwide Health Sciences Fund. Some
Eaton Vance funds use investment sub-advisers under agreements between the adviser and the sub-adviser approved by the fund trustees. Eagle Global
Advisors L.L.C., an independent investment management company based in Houston, Texas, acts as a sub-adviser to Eaton Vance Tax-Managed International
Equity Fund, Eaton Vance International Equity Fund, and Eaton Vance Global Growth Fund. Rampart Investment Management, a Boston-based independent
investment manager, acts as sub-adviser responsible for options program management for Eaton Vance Enhanced Equity Income Fund, Eaton Vance Enhanced
Equity Income Fund II, Eaton Vance Tax-Managed Buy-Write Income Fund, Eaton Vance Tax-Managed Buy-Write Opportunities Fund, and Eaton Vance Tax-Managed
Global Buy-Write Opportunities Fund. Atlanta Capital, Fox Asset Management and Parametric Portfolio Associates also act as sub-advisers to EVM and BMR
for 10 funds.
(1) |
|
LGM acts as the investment adviser to Eaton Vance Asian Small
Companies Fund, Eaton Vance Emerging Markets Fund, Eaton Vance Greater China Growth Fund and Eaton Vance Greater India Fund. |
7
EVM provides administrative services, including personnel and
facilities, necessary for the operation of all Eaton Vance funds. These services are provided either through a management agreement with the funds that
includes investment advisory services, or through a separate administrative services agreement with the funds, as discussed below.
The Company’s portfolio management staff has, on average,
more than 20 years of experience in the securities industry. The Company’s investment advisory agreements with each of the funds provide for fees
ranging from 10 to 100 basis points of average assets annually. For funds that are registered under the Investment Company Act of 1940 (“1940
Act”) (“Registered Funds”), a majority of the independent trustees (i.e., those unaffiliated with the Company or any adviser and deemed
“non-interested” under the 1940 Act) review and approve the investment advisory agreements annually. The fund trustees generally may
terminate these agreements upon 30 to 60 days’ notice without penalty. Shareholders of Registered Funds must approve any material amendments to
the investment advisory agreements.
Investment counselors and separate account portfolio managers
employed by the Company’s wholly owned and majority owned subsidiaries make investment decisions for the Company’s separate accounts. The
Company’s investment counselors and separate account portfolio managers generally use the same research information as fund portfolio managers,
but tailor investment decisions to the needs of particular clients. The Company receives investment advisory fees for separate accounts quarterly,
based on the value of the assets managed on a particular date, such as the first or last calendar day of a quarter, or, in some instances, on the
average assets for the period. These fees generally range from 20 to 100 basis points annually of assets under management and are generally terminable
upon 30 to 60 days’ notice without penalty.
The following table shows investment advisory and administration
fees earned for the past five years ended October 31, 2006:
|
|
|
|
Investment Advisory and
Administration Fees
Year Ended October 31,
|
|
(in thousands)
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
Investment
advisory fees —
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds |
|
|
|
$ |
459,749 |
|
|
$ |
385,523 |
|
|
$ |
318,276 |
|
|
$ |
237,309 |
|
|
$ |
225,783 |
|
Separate
accounts |
|
|
|
|
99,081 |
|
|
|
89,031 |
|
|
|
72,776 |
|
|
|
44,311 |
|
|
|
40,798 |
|
Administration fees — funds |
|
|
|
|
35,802 |
|
|
|
28,531 |
|
|
|
22,050 |
|
|
|
14,724 |
|
|
|
14,213 |
|
Total |
|
|
|
$ |
594,632 |
|
|
$ |
503,085 |
|
|
$ |
413,102 |
|
|
$ |
296,344 |
|
|
$ |
280,794 |
|
Investment Management Agreements and Distribution
Plans
The Eaton Vance funds have entered into agreements with EVM or
BMR for investment advisory and/or administrative services. Although the specific terms of these agreements vary, the basic terms are similar. Pursuant
to the agreements, EVM or BMR provides overall investment management services to each of the funds, subject, in the case of Registered Funds, to the
supervision of each fund’s board of trustees in accordance with each fund’s fundamental investment objectives and policies. The agreements
are of three types: an investment advisory agreement, an administrative services agreement, or a management agreement for both advisory and
administrative services. Atlanta Capital, Fox Asset Management, Parametric Portfolio Associates or an unaffiliated advisory firm acts as a sub-adviser
to EVM and BMR for certain funds.
EVM provides administrative services to all Eaton Vance funds,
including those advised by LGM and OrbiMed. As administrator, EVM is responsible for managing the business affairs of these funds, subject to the
oversight of each fund’s board of trustees. Administrative services include recordkeeping, preparing and filing documents required to comply with
federal and state securities laws, supervising the activities of the funds’ custodians and transfer agents, providing assistance in connection
with the funds’ shareholder
8
meetings and other administrative services, including
providing office space and office facilities, equipment and personnel that may be necessary for managing and administering the business affairs of the
funds. For the services provided under the agreements, certain funds pay EVM a monthly fee calculated at an annual rate of up to 0.35% of average daily
net assets. Each agreement remains in effect indefinitely, subject, in the case of Registered Funds, to annual approval by the fund’s board of
trustees.
In addition, certain funds have adopted distribution plans, as
permitted by the 1940 Act, which provide for payments to the Company of an ongoing distribution fee (i.e., a Rule 12b-1 fee) to reimburse the Company
for sales commissions paid to retail distribution firms and for distribution services provided. These distribution plans are implemented through
distribution agreements between EVD and the funds. Each distribution plan and agreement for the Registered Funds is initially approved and its
subsequent continuance must be approved annually by the trustees of the respective funds, including a majority of the independent
trustees.
Each fund bears all expenses associated with its operation and
the issuance and redemption or repurchase of its securities, except for the compensation of trustees and officers of the fund who are employed by the
Company. Under some circumstances, particularly in connection with the introduction of new funds, EVM or BMR may waive a portion of its management fee
and/or pay some expenses of the fund.
Either EVM, BMR, EVIC, Atlanta Capital, Fox Asset Management or
Parametric Portfolio Associates has entered into an investment advisory agreement for each separately managed account and retail managed account
program, which sets forth the account’s investment objectives and fee schedule, and provides for management of assets in the account in accordance
with the stated investment objectives. The Company’s separate account portfolio managers may assist clients in formulating investment
strategies.
EVTC has entered into agreements with each collective investment
trust for which EVTC serves as trustee and is responsible for designing and implementing the trust’s investment program, including day-to-day
management of the trust’s investment portfolio. As trustee, EVTC also provides certain administrative and accounting services to the trust. For
services provided under the agreement, EVTC receives a monthly fee calculated at an annual rate of up to 0.65% of average daily net assets of the
trust.
EVM has entered into an investment advisory and administrative
agreement with The U.S. Charitable Gift Trust. In addition, the Trust and its Pooled Income Funds have entered into distribution agreements with EVD
that provide for reimbursement of the costs of fundraising and servicing donor accounts. EVD does not profit from the raising of contributions to the
Trust.
Marketing and Distribution of Fund
Shares
The Company markets and distributes shares of Eaton Vance funds
through EVD. EVD sells fund shares through a network of national and regional broker/dealers, banks, insurance companies and financial planning firms.
Although the firms in the Company’s retail distribution network have each entered into selling agreements with EVD, such agreements (which
generally are terminable by either party) do not legally obligate the firms to sell any specific amount of the Company’s investment products. For
the 2006, 2005 and 2004 calendar years, the five dealer firms responsible for the largest volume of fund sales accounted for approximately 35 percent,
34 percent, and 42 percent, respectively, of the Company’s fund sales volume. EVD currently maintains a sales force of 52 external wholesalers and
52 internal wholesalers. External and internal wholesalers work closely with investment professionals in the retail distribution network to assist in
marketing Eaton Vance funds.
9
EVD currently sells Eaton Vance mutual funds under four primary
pricing structures: front-end load commission (“Class A”); spread-load commission (“Class B”); level-load commission (“Class
C”); and institutional no-load (“Class I”). For Class A shares, the shareholder generally pays a sales charge to the selling
broker-dealer and an underwriting commission to EVD of up to 75 basis points of the dollar value of the shares sold. Under certain conditions, the
Company waives the sales load on Class A shares and the shares are sold at net asset value. EVD receives (and then pays to authorized firms after one
year) a service fee not to exceed 25 basis points of average net assets, and may also receive and pay to authorized firms a Rule 12b-1 fee not to
exceed 50 basis points of average daily net assets. In recent years, a growing percentage of the Company’s sales of Class A shares have been made
on a load-waived basis through various fee-based programs. EVD does not receive underwriting commissions on such sales.
Class B shares are offered at net asset value, with EVD paying a
commission to the dealer at the time of sale from its own funds, which may be borrowed. Such payments are capitalized and amortized over the period
during which the shareholder is subject to a contingent deferred sales charge, which does not exceed six years. EVD recovers the dealer commissions
paid on behalf of the shareholder through distribution plan payments limited to an annual rate of 75 basis points of the average net assets of the fund
or class of shares in accordance with a distribution plan adopted by the fund pursuant to Rule 12b-1 under the 1940 Act. Like investment advisory
agreements, distribution plan and related agreements must be approved annually by a vote of the fund trustees, including a majority of the independent
trustees. The SEC has taken the position that Rule 12b-1 would not permit a fund to continue making compensation payments to EVD after termination of
the plan and that any continuance of such payments may subject the fund to legal action. Distribution plans are terminable at any time without notice
or penalty. In addition, EVD receives (and then pays to authorized firms after one year) a service fee not to exceed 25 basis points of average net
assets. In fiscal 2004, Eaton Vance implemented an automatic conversion of Class B to Class A shares after 8 years of ownership for certain of the
Company’s mutual funds, so that all Eaton Vance fund Class B shares now have this conversion feature.
For Class C shares, the shareholder pays no front-end commissions
and no contingent deferred sales charges on redemptions after the first year. EVD pays a commission and the first year’s service fees to the
dealer at the time of sale. The fund makes monthly distribution plan payments to EVD similar to those for Class B shares, equal to 75 basis points of
average net assets of the Class. EVD pays a service fee to the dealer after one year not to exceed 25 basis points of average net assets and a
distribution fee to the dealer after one year not to exceed 75 basis points of average net assets. Offering level-load Class C shares is consistent
with the efforts of many broker/dealers to rely less on transaction fees and more on continuing asset-based revenues.
Class I shares are offered at net asset value and are not subject
to any sales charges, underwriter commissions, 12b-1 fees or service fees. For Class I shares, a minimum investment of $250,000 or higher is normally
required. The introduction of Class I shares has made a number of funds available to a broader group of financial intermediaries.
From time to time the Company sponsors unregistered equity funds
that are privately placed by EVD, as placement agent, and by various sub-agents to whom EVD and the subscribing shareholders make sales commission
payments. The privately placed equity funds are managed by EVM and BMR.
EVM and BMR also manage the Eaton Vance Emerald Funds, a family
of funds for non-U.S. investors. The Emerald Funds are Undertakings for Collective Investments in Transferable Securities (“UCITS”) funds
domiciled in Dublin, Ireland and are sold by certain dealer firms through EVMI to investors who are citizens of European Union and other countries. The
Company earns distribution, administration and advisory fees directly or indirectly from the Emerald Funds.
Reference is made to Note 16 of the Notes to Consolidated
Financial Statements contained in Item 8 of this document for a description of the major customers that provided over 10 percent of the total revenue
of the Company.
10
Regulation
EVM, BMR, EVIC, Atlanta Capital, Fox Asset Management and
Parametric Portfolio Associates are each registered with the SEC under the Advisers Act. The Advisers Act imposes numerous obligations on registered
investment advisers, including fiduciary duties, recordkeeping requirements, operational requirements and disclosure obligations. Most Eaton Vance
funds are registered with the SEC under the 1940 Act. Except for privately offered funds exempt from registration, each U.S. fund is also
required to make notice filings with all states where it is offered for sale. Virtually all aspects of the Company’s investment management
business are subject to various federal and state laws and regulations. These laws and regulations are primarily intended to benefit shareholders of
the funds and separate account investment clients and generally grant supervisory agencies and bodies broad administrative powers, including the power
to limit or restrict the Company from carrying on its investment management business in the event that it fails to comply with such laws and
regulations. In such event, the possible sanctions that may be imposed include the suspension of individual employees, limitations on EVM,
BMR, EVIC, Atlanta Capital, Fox Asset Management or Parametric Portfolio Associates engaging in the investment management business for specified
periods of time, the revocation of any such company’s registration as an investment adviser, and other censures or fines.
EVD is registered as a broker/dealer under the Securities
Exchange Act of 1934 and is subject to regulation by the SEC, the NASD and other federal and state agencies. EVD is subject to the SEC’s net
capital rule designed to enforce minimum standards regarding the general financial condition and liquidity of a broker/dealer. Under certain
circumstances, this rule limits the ability of the Company to make withdrawals of capital and receive dividends from EVD. EVD’s regulatory net
capital consistently exceeded such minimum net capital requirements during fiscal 2006. The securities industry is one of the most highly regulated in
the United States, and failure to comply with related laws and regulations can result in the revocation of broker/dealer licenses, the imposition of
censures or fines and the suspension or expulsion from the securities business of a firm, its officers or employees.
EVMI has the permission of the Financial Services Authority
(“FSA”) to conduct a regulated business in the United Kingdom. EVMI’s primary business purpose is to distribute the Company’s
investment products in Europe and certain other international markets. Under the FSA’s Financial Services and Markets Act, EVMI is subject to
certain liquidity and capital requirements. Such capital requirements may limit the Company’s ability to make withdrawals of capital from EVMI. In
addition, failure to comply with such capital requirements could jeopardize EVMI’s approval to conduct business in the United Kingdom. There were
no violations of the capital requirements in fiscal 2006 or in prior years.
The Company’s officers, directors and employees may from
time to time own securities that are held by one or more of the funds. The Company’s internal policies with respect to individual investments by
investment professionals and other employees with access to investment information require prior clearance of most types of transactions and reporting
of all securities transactions, and restrict certain transactions to avoid the possibility of conflicts of interest. All employees are required to
comply with all prospectus restrictions and limitations on purchases, sales or exchanges of the Company’s mutual fund shares and to pre-clear
purchases and sales of shares of the Company’s exchange-listed closed-end funds.
Employees
On October 31, 2006, the Company and its majority-owned
subsidiaries had 869 full-time and part-time employees. On October 31, 2005, the comparable number was 757.
11
Available information
The Company makes available free of charge its annual reports on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports filed or furnished pursuant to Section 12(a) and
15(d) of the Exchange Act as soon as reasonably practicable after such filing has been made with the SEC. Reports may be viewed and obtained on the
Company’s website, www.eatonvance.com, or by calling Investor Relations at 617-482-8260.
The public may read and copy any materials the Company files with
the SEC at the SEC’s Public Reference Room at 100 F Street, NE., Washington, DC 20549. Information on the operation of the Public Reference Room
may be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxies and information
statements, and other information regarding issuers that file electronically with the SEC at http://www.sec.gov.
Item 1A. Risk Factors
The Company is subject to substantial competition in all
aspects of its investment management business and there are few barriers to entry. The Company’s funds and separate accounts compete
against an ever-increasing number of investment products and services sold to the public by investment management companies, investment dealers, banks,
insurance companies and others. Many institutions competing with the Company have greater resources than the Company. The Company competes with other
providers of investment products on the basis of the products offered, the investment performance of such products, quality of service, fees charged,
the level and type of financial intermediary compensation, the manner in which such products are marketed and distributed, the reputation of the
Company and the services provided to investors. In addition, the Company’s ability to market investment products is highly dependent on access to
the various distribution systems of national and regional securities dealer firms, which generally offer competing internally and externally managed
investment products which could limit the distribution of the Company’s investment products. There can be no assurance that the Company will be
able to retain access to these channels. The inability to have such access could have a material adverse effect on the Company’s business. To the
extent that existing or potential customers, including securities broker/dealers, decide to invest in or broaden distribution relationships with the
Company’s competitors, the sales of the Company’s products as well as the Company’s market share, revenues and net income could
decline.
The Company derives almost all of its revenue from
investment adviser and administration fees and distribution income received from the Eaton Vance funds and separate accounts. As a result, the
Company is dependent upon management contracts, administration contracts, distribution contracts, underwriting contracts or service contracts under
which these fees and income are paid. Generally, these contracts are terminable upon 30 to 60 days’ notice without penalty. If any of these
contracts are terminated, not renewed, or amended to reduce fees, the Company’s financial results could be adversely affected.
The Company’s assets under management, which impact
revenue, are subject to significant fluctuations. The major sources of revenue for the Company (i.e., investment adviser, administration,
distribution, and service fees) are calculated as percentages of assets under management. A decline in securities prices or in the sale of investment
products or an increase in fund redemptions or client withdrawals generally would reduce fee income. Financial market declines or adverse changes in
interest rates would generally negatively impact the level of the Company’s assets under management and consequently its revenue and net income. A
recession or other economic or political events could also adversely impact the Company’s revenue if it led to a decreased demand for products, a
higher redemption rate, or a decline in securities prices. Any decrease in the level of assets under management resulting from price declines, interest
rate volatility or uncertainty or other factors could negatively impact the Company’s revenue and net income.
12
Poor investment performance of the Company’s products
could affect the Company’s sales or reduce the amount of assets under management, potentially negatively impacting revenue and net income.
Investment performance, along with achieving and maintaining superior distribution and client service, is critical to the Company’s success. While
strong investment performance could stimulate sales of the Company’s investment products, poor investment performance as compared to third-party
benchmarks or competitive products could lead to a decrease in sales and stimulate higher redemptions, thereby lowering the amount of assets under
management and reducing the investment adviser fees the Company earns. Past or present investment performance in the investment products the Company
manages is not indicative of future performance.
The Company’s success depends on key personnel and the
Company’s financial performance could be negatively affected by the loss of their services. The Company’s success depends upon the
Company’s ability to attract, retain and motivate qualified portfolio managers, analysts, investment counselors, sales and management personnel
and other key professionals including the Company’s executive officers. Financial services professionals are in high demand, and the Company faces
strong competition for qualified personnel. The Company’s key employees do not have employment contracts and may voluntarily terminate their
employment with the Company at any time. Certain senior executives and directors are subject to the Company’s mandatory retirement policy. The
loss of the services of key personnel or the Company’s failure to attract replacement or additional qualified personnel could negatively affect
the Company’s financial performance. Any increase in compensation made by the Company in order to attract or retain key personnel could result in
a decrease in net income.
The Company’s expenses are subject to fluctuations
that could materially affect the Company’s operating results. The Company’s results of operations are dependent on the level of
expenses, which can vary significantly. The Company’s expenses may fluctuate as a result of variations in the level of total compensation expense,
future impairments of intangible assets or goodwill, expenses incurred to enhance the Company’s infrastructure (including technology and
compliance) and other expenses incurred to support distribution of the Company’s investment products.
The Company’s reputation could be damaged.
Eaton Vance Corp. has spent over 80 years building a reputation based on strong investment performance, a high level of integrity and superior client
service. The Company’s reputation is extremely important to its success. Any damage to the Company’s reputation could result in client
withdrawals from funds or separate accounts that are advised by the Company and ultimately impede the Company’s ability to attract and retain key
personnel. The loss of either client relationships or key personnel could reduce the amount of assets under management and cause the Company to suffer
a loss in revenue or net income.
The Company is subject to federal securities laws, state
laws regarding securities fraud, other federal and state laws and rules and regulations of certain regulatory and self-regulatory organizations,
including, among others, the Securities and Exchange Commission, the NASD and the New York Stock Exchange. In addition, financial reporting
requirements are comprehensive and complex. While the Company has focused significant attention and resources on the development and implementation of
compliance policies, procedures and practices, non-compliance with applicable laws, rules or regulations, either in the United States or abroad, or the
Company’s inability to adapt to a complex and ever-changing regulatory environment could result in sanctions against the Company, which could
adversely affect the Company’s reputation, prospects, revenue, and earnings.
Item 1B. Unresolved Staff Comments
None.
13
Item 2. Properties
The Company conducts its principal operations through leased
offices located in Boston, Massachusetts. The leased offices of its subsidiaries are in Atlanta, Georgia; Red Bank, New Jersey; Seattle, Washington and
London, England. In September 2006, the Company signed a long-term lease to move the Company’s corporate headquarters to a new location in Boston.
The lease will commence in May 2009.
Item 3. Legal Proceedings
As previously disclosed in SEC filings, in 2004 a lawsuit,
captioned In Re Eaton Vance Mutual Funds Fee Litigation (the “Lawsuit”), was filed in the United States District Court for the
Southern District of New York (the “Court”), against Eaton Vance Corp.; Eaton Vance Management; Boston Management and Research; Eaton Vance,
Inc.; Eaton Vance Distributors, Inc.; Lloyd George Investment Management (Bermuda) Limited; OrbiMed Advisors LLC; Lloyd George Investment Management
(B.V.I.) Limited; nine current or past trustees of 81 Eaton Vance funds named as nominal defendants (the “Funds”); and twelve current or past
officers and portfolio managers of the Funds. The plaintiffs were seven alleged shareholders of four of the 81 Funds. The Lawsuit, a purported class
action, alleged violations of the Investment Company Act of 1940, the Investment Advisers Act of 1940, New York law and the common law, and breaches of
fiduciary duties to the Funds and their shareholders.
On July 29, 2005, the Court issued an Opinion and Order
dismissing the Lawsuit in its entirety and rejecting the plaintiffs’ request to amend their complaint. On December 6, 2005, the Court issued an
Opinion and Order in response to plaintiffs’ motion for reconsideration and motion to file a new amended compliant. The Court adhered to its July
Order and denied the motion to amend. The plaintiffs have appealed. Oral argument was heard by the appellate court on November 20, 2006, and the
Company is awaiting a decision.
Item 4. Submission of Matters to a Vote of Security
Holders
On October 25, 2006, the holders of all of the outstanding Voting
Common Stock, by unanimous written consent, approved the following matters:
1) |
|
The renewal of the Voting Trust Agreement for an additional term
until October 31, 2010. |
2) |
|
The 1986 Employee Stock Purchase Plan — Restatement No. 11
to extend the Plan until November 1, 2026. |
3) |
|
The 1998 Stock Option Plan — Restatement No. 8 to increase
the shares reserved under the Plan from 35.0 million to 40.0 million. |
(The remainder of this page is left intentionally
blank.)
14
PART II
Item 5. Market Price for Registrant’s Common Equity and
Related Stockholder Matters
The Company’s Voting Common Stock, $0.00390625 par value, is
not publicly traded and is held by 16 Voting Trustees pursuant to the Voting Trust described in paragraph (A) of Item 12 hereof, which paragraph (A) is
incorporated herein by reference. Dividends on the Company’s Voting Common Stock are paid quarterly and are equal to the dividends paid on the
Company’s Non-Voting Common Stock (see below.)
The Company’s Non-Voting Common Stock, $0.00390625 par
value, is traded on the New York Stock Exchange under the symbol EV. The approximate number of registered holders of record of the Company’s
Non-Voting Common Stock at October 31, 2006 was 1,600. The high and low common stock prices and dividends per share were as follows:
|
|
|
|
Fiscal
2006
|
|
Fiscal
2005
|
|
|
|
|
|
High
Price
|
|
Low
Price
|
|
Dividend
Per Share
|
|
High
Price
|
|
Low
Price
|
|
Dividend
Per Share
|
|
Quarter
Ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January
31 |
|
|
|
$ |
28.83 |
|
|
$ |
24.15 |
|
|
|
$0.10 |
|
|
$ |
26.20 |
|
|
$ |
21.75 |
|
|
|
$0.08 |
|
|
April
30 |
|
|
|
$ |
30.55 |
|
|
$ |
26.48 |
|
|
|
$0.10 |
|
|
$ |
27.66 |
|
|
$ |
21.90 |
|
|
|
$0.08 |
|
|
July
31 |
|
|
|
$ |
28.50 |
|
|
$ |
23.83 |
|
|
|
$0.10 |
|
|
$ |
24.98 |
|
|
$ |
22.93 |
|
|
|
$0.08 |
|
|
October
31 |
|
|
|
$ |
31.32 |
|
|
$ |
24.13 |
|
|
|
$0.12 |
|
|
$ |
26.37 |
|
|
$ |
23.44 |
|
|
|
$0.10 |
|
The following table sets forth certain information concerning
equity compensation plans at October 31, 2006:
Equity
Compensation Plan Information
|
|
|
|
|
|
|
|
|
Plan
category
|
|
|
|
(a)
(1)
Number of
securities
to be issued
upon
the exercise of
outstanding
options, warrants
and rights
|
|
(b)
Weighted-average
exercise price of
outstanding
options, warrants
and rights
|
|
(c)
(2)
Number of
securities
remaining
available
for future issuance
under equity
compensation plans
(excluding
securities reflected
in column (a))
|
|
Equity
compensation plans approved
by security holders |
|
|
|
|
25,640,000 |
|
|
|
$17.84 |
|
|
|
7,922,000 |
|
|
Equity
compensation plans not
approved by security holders |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Total |
|
|
|
|
25,640,000 |
|
|
|
$17.84 |
|
|
|
7,922,000 |
|
(1) |
|
The amounts appearing under the “Number of securities to
be issued upon the exercise of outstanding options, warrants and rights” represents 25,640,000 shares related to the Company’s 1998 Stock
Option Plan. |
(2) |
|
The amounts appearing under “Number of securities
remaining available for future issuance under equity compensation plans” includes 6,785,000 shares related to the Company’s 1998 Stock Option
Plan and 1,137,000 shares related to the Company’s Restricted Stock Plan. |
15
Issuer Repurchases of Equity
Securities
The following table sets forth information regarding the
Company’s purchases of its non-voting common stock on a monthly basis during the fourth quarter of fiscal 2006:
Period
|
|
|
|
(a)
Total
Number of
Shares
Purchased
|
|
(b)
Average
Price Paid
Per Share
|
|
(c)
Total
Number of
Shares
Purchased as
Part of
Publicly
Announced
Plans or
Programs(1)
|
|
(d)
Maximum
Number of
Shares that
May Yet Be
Purchased
under the
Plans or
Programs
|
|
August
1, 2006 through
August 31, 2006 |
|
|
|
|
139,409 |
|
|
|
$26.47 |
|
|
|
139,409 |
|
|
|
7,794,136 |
|
|
September
1, 2006 through
September 30, 2006 |
|
|
|
|
1,022,513 |
|
|
|
$27.85 |
|
|
|
1,022,513 |
|
|
|
6,771,623 |
|
|
October
1, 2006 through
October 31, 2006 |
|
|
|
|
491,318 |
|
|
|
$29.98 |
|
|
|
491,318 |
|
|
|
6,280,305 |
|
|
Total |
|
|
|
|
1,653,240 |
|
|
|
$28.37 |
|
|
|
1,653,240 |
|
|
|
6,280,305 |
|
(1) |
|
The Company’s share repurchase program was announced on
July 12, 2006. The Board authorized management to repurchase 8,000,000 shares of its non-voting common stock in the open market and in private
transactions in accordance with applicable securities laws. The Company’s stock repurchase plan is not subject to an expiration
date. |
Item 6. Selected Financial
Data
Financial Highlights(1)
|
|
|
|
For the Years Ended October 31,
|
|
(in
thousands, except per share figures)
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
Income
Statement Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
|
|
$ |
862,194 |
|
|
$ |
753,175 |
|
|
$ |
661,813 |
|
|
$ |
523,133 |
|
|
$ |
522,985 |
|
|
Net
income(2) |
|
|
|
|
159,377 |
|
|
|
138,706 |
|
|
|
121,962 |
|
|
|
94,810 |
|
|
|
110,957 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets |
|
|
|
$ |
668,195 |
|
|
$ |
702,544 |
|
|
$ |
743,566 |
|
|
$ |
658,702 |
|
|
$ |
616,619 |
|
|
Long-term
debt(3) |
|
|
|
|
— |
|
|
|
75,467 |
|
|
|
74,347 |
|
|
|
118,736 |
|
|
|
124,118 |
|
|
Shareholders’ equity |
|
|
|
|
496,485 |
|
|
|
476,296 |
|
|
|
464,328 |
|
|
|
426,511 |
|
|
|
379,417 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share
Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earning per
share before cumulative effect of change in accounting principle: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings |
|
|
|
|
$1.25 |
|
|
|
$1.05 |
|
|
|
$0.90 |
|
|
|
$0.69 |
|
|
|
$0.80 |
|
|
Diluted
earnings |
|
|
|
|
1.18 |
|
|
|
0.99 |
|
|
|
0.87 |
|
|
|
0.67 |
|
|
|
0.76 |
|
|
Earnings per
share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings |
|
|
|
|
1.25 |
|
|
|
1.05 |
|
|
|
0.90 |
|
|
|
0.69 |
|
|
|
0.80 |
|
|
Diluted
earnings |
|
|
|
|
1.17 |
|
|
|
0.99 |
|
|
|
0.87 |
|
|
|
0.67 |
|
|
|
0.76 |
|
|
Cash
dividends declared |
|
|
|
|
0.42 |
|
|
|
0.34 |
|
|
|
0.28 |
|
|
|
0.20 |
|
|
|
0.15 |
|
|
Shareholders’ equity |
|
|
|
|
3.93 |
|
|
|
3.68 |
|
|
|
3.48 |
|
|
|
3.12 |
|
|
|
2.74 |
|
16
(1) |
|
In fiscal 2006, the Company adopted SFAS No. 123(R),
“Share-Based Payment,” using the modified version of retrospective application and adjusted its financial statements for all periods
presented on a basis consistent with the pro forma disclosures previously made under SFAS No. 123. Please see Note 8 in Item 8 for further discussion
of this change. |
(2) |
|
In fiscal 2006 and 2005, the Company recognized impairment
losses totaling $0.6 million and $2.1 million, respectively, related to the Company’s minority equity investments in collateralized debt
obligation entities whose collateral assets are managed by the Company. |
(3) |
|
In fiscal 2006, EVM retired its zero-coupon exchangeable
notes. Please see Note 6 in Item 8 for a further discussion of this transaction. |
Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations
This Item includes statements that are
“forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, including statements regarding our expectations, intentions or strategies regarding the future. All statements, other
than statements of historical facts, included in this Form 10-K regarding our financial position, business strategy and other plans and objectives for
future operations are forward-looking statements. Although we believe that the assumptions and expectations reflected in such forward-looking
statements are reasonable, we can give no assurance that such expectations reflected in such forward-looking statements will prove to have been correct
or that we will take any actions that may presently be planned. Certain important factors that could cause actual results to differ materially from our
expectations are disclosed in Item 1A, “Risk Factors.” All subsequent written or oral forward-looking statements attributable to us or
persons acting on our behalf are expressly qualified in their entirety by such factors.
General
The Company’s principal business is managing investment
funds and providing investment management and counseling services to high-net-worth individuals and institutions. The Company’s long-term strategy
is to develop value-added core competencies in a range of investment disciplines and to offer industry-leading investment products and services across
multiple distribution channels. In executing this strategy, the Company has developed a broadly diversified product line and a powerful marketing,
distribution and customer service capability.
The Company is a market leader in a number of investment areas,
including tax-managed equity, value equity, equity income, floating-rate bank loan, municipal bond, investment grade and high-yield bond investing. The
diversified offerings of Eaton Vance and its affiliates offer fund shareholders, retail managed account investors, institutional investors and
high-net-worth clients a wide range of products and services designed and managed to generate attractive risk-adjusted returns over the long
term.
The Company’s principal marketing strategy is to distribute
its retail products (including funds and retail managed accounts) primarily through financial intermediaries in the advice channel. The Company has a
broad reach in this marketplace, with distribution partners including national and regional broker/dealers, independent broker/dealers, independent
financial advisory firms, banks and insurance companies. Eaton Vance supports these distribution partners with a team of 154 regional and Boston-based
sales professionals serving the needs of the Company’s partners and clients across the country. Specialized sales and marketing teams provide the
increasingly sophisticated information required for distributing the Company’s privately placed funds, retail managed accounts, retirement
products and charitable giving vehicles.
The Company is also committed to serving institutional and
high-net-worth clients who access investment advice outside of traditional retail broker/dealer channels. The Company and its majority-owned
subsidiaries, including Atlanta Capital Management Company, LLC (“Atlanta Capital”), Fox Asset
17
Management LLC (“Fox Asset Management”) and
Parametric Portfolio Associates LLC (“Parametric Portfolio Associates”), have a broad range of clients in the institutional and
high-net-worth marketplace, including corporations, endowments, foundations, family offices and public and private employee retirement plans.
Specialized sales teams at each of the Company’s affiliates focus on developing relationships in this market and deal directly with these clients,
often on the basis of independent referrals.
The Company’s revenue is derived primarily from investment
adviser, administration, distribution and service fees received from Eaton Vance funds and investment adviser fees received from separate accounts.
Fees paid to the Company are based primarily on the value of the investment portfolios managed by the Company and fluctuate with changes in the total
value of the assets under management. Such fees are recognized over the period that the Company manages these assets. The Company’s major expenses
are employee compensation, amortization of deferred sales commissions and distribution-related expenses.
The discussion and analysis of the Company’s financial
condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make
estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosures of contingent assets and
liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to deferred sales commissions, goodwill and intangible
assets, income taxes, investments, stock-based compensation and litigation. The Company bases its estimates on historical experience and on various
other assumptions that it believes to be reasonable under current circumstances, the results of which form the basis for making judgments about the
carrying values of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates under
different assumptions or conditions.
Assets Under Management
Assets under management of $128.9 billion on October 31, 2006
were 19 percent higher than the $108.5 billion reported a year earlier. Long-term fund net inflows contributed $7.8 billion to growth in assets under
management over the last twelve months, including $7.5 billion of open-end and private fund net inflows and $0.3 billion of closed-end fund assets
raised. Separate account net outflows totaled $0.7 billion, reflecting $1.4 billion of retail managed account net inflows offset by $2.1 billion of
institutional and high-net-worth net outflows. Market price appreciation, reflecting favorable equity markets, contributed $9.6 billion to the increase
in assets under management.
Ending Assets Under Management by Investment Objective(1)
|
|
|
|
October 31,
|
|
(in billions)
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
2006 vs.
2005
|
|
2005 vs.
2004
|
Equity
assets |
|
|
|
$ |
76.8 |
|
|
$ |
66.2 |
|
|
$ |
55.8 |
|
|
|
16% |
|
|
|
19% |
|
Fixed income
assets |
|
|
|
|
30.8 |
|
|
|
23.2 |
|
|
|
21.7 |
|
|
|
33% |
|
|
|
7% |
|
Floating-rate
bank loan assets |
|
|
|
|
21.3 |
|
|
|
19.1 |
|
|
|
16.8 |
|
|
|
12% |
|
|
|
14% |
|
Total |
|
|
|
$ |
128.9 |
|
|
$ |
108.5 |
|
|
$ |
94.3 |
|
|
|
19% |
|
|
|
15% |
|
(1) |
|
Includes funds and separate accounts. |
Equity assets represented 60 percent of total assets under
management on October 31, 2006, compared to 61 percent on October 31, 2005 and 59 percent on October 31, 2004. Assets in equity funds managed for
after-tax returns totaled $39.1 billion, $34.6 billion and $29.1 billion on October 31, 2006, 2005 and 2004, respectively. Fixed income assets,
including money market funds, represented 24 percent of total assets under management on October 31, 2006, compared to 21 percent on October 31, 2005
and 23 percent on October 31, 2004. Fixed income assets included $14.8 billion, $11.7 billion and $10.7 billion of tax-exempt municipal bond funds and
$3.6 billion, $0.3 billion and $0.4 billion of money market fund assets on October 31, 2006,
18
2005 and 2004, respectively. Floating-rate bank loan assets
represented 16 percent of total assets under management on October 31, 2006, compared to 18 percent on both October 31, 2005 and October 31,
2004.
Long-Term Fund and Separate Account Net
Flows
|
|
|
|
For the Years Ended October 31,
|
|
(in billions)
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
2006 vs.
2005
|
|
2005 vs.
2004
|
Long-term
funds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed-end
funds |
|
|
|
$ |
0.3 |
|
|
$ |
5.0 |
|
|
$ |
6.3 |
|
|
|
–94 |
% |
|
|
–21 |
% |
Open-end
funds |
|
|
|
|
5.3 |
|
|
|
2.4 |
|
|
|
3.7 |
|
|
|
121 |
% |
|
|
–35 |
% |
Private
funds |
|
|
|
|
2.2 |
|
|
|
1.2 |
|
|
|
1.2 |
|
|
|
83 |
% |
|
|
0 |
% |
Total
long-term fund net inflows |
|
|
|
|
7.8 |
|
|
|
8.6 |
|
|
|
11.2 |
|
|
|
–9 |
% |
|
|
–23 |
% |
Institutional/HNW(1) accounts |
|
|
|
|
(2.1 |
) |
|
|
(0.6 |
) |
|
|
1.7 |
|
|
|
–250 |
% |
|
|
–135 |
% |
Retail
managed accounts |
|
|
|
|
1.4 |
|
|
|
1.6 |
|
|
|
0.9 |
|
|
|
–13 |
% |
|
|
78 |
% |
Total
separate account net inflows (outflows) |
|
|
|
|
(0.7 |
) |
|
|
1.0 |
|
|
|
2.6 |
|
|
|
–170 |
% |
|
|
–62 |
% |
Total net
inflows |
|
|
|
$ |
7.1 |
|
|
$ |
9.6 |
|
|
$ |
13.8 |
|
|
|
–26 |
% |
|
|
–30 |
% |
(1) |
|
High-net-worth (“HNW”) |
Long-term fund net inflows totaled $7.8 billion in fiscal 2006
compared to $8.6 billion in fiscal 2005 and $11.2 billion in fiscal 2004. The decrease in fund net inflows in fiscal 2006 can be attributed primarily
to lower closed-end fund sales. Closed-end fund offerings contributed $0.3 billion to net inflows in fiscal 2006 compared to contributions of $5.0
billion and $6.3 billion in fiscal 2005 and fiscal 2004, respectively. Open-end fund net inflows of $5.3 billion, $2.4 billion and $3.7 billion for
fiscal 2006, 2005 and 2004, respectively, reflect gross inflows of $16.3 billion, $10.9 billion and $10.1 billion, respectively, net of redemptions of
$11.0 billion, $8.5 billion and $6.4 billion, respectively. Open-end gross inflows increased by 49 percent in fiscal 2006, while open-end fund
redemptions increased by 29 percent. Private fund net inflows of $2.2 billion in fiscal 2006 include $1.1 billion in assets raised in conjunction with
the private offering of debt securities by two collateralized debt obligation (“CDO”) entities for which the Company acts as collateral
manager, $0.9 billion in other private bank loan fund net inflows, and $0.2 billion of other private fund net inflows.
The Company experienced net outflows of separate account assets
of $0.7 billion in fiscal 2006, compared to net inflows of $1.0 billion and $2.6 billion in fiscal 2005 and 2004, respectively. Retail managed account
net inflows totaled $1.4 billion in fiscal 2006, compared to $1.6 billion and $0.9 billion in fiscal 2005 and 2004, respectively. Retail managed
account net inflows in fiscal 2006 reflect strong net sales of Parametric Portfolio Associates’ tax efficient overlay and core equity products and
Eaton Vance Management’s (“EVM’s”) large cap value and municipal bond products. Institutional and high-net-worth net outflows
totaled $2.1 billion in fiscal 2006 compared to net outflows of $0.6 billion in fiscal 2005 and net inflows of $1.7 billion in fiscal 2004.
Institutional and high-net-worth account net outflows in fiscal 2006 reflect withdrawals of assets by two EVM bank loan institutional accounts and
withdrawals by certain Atlanta Capital institutional clients.
Money market fund assets, which are not included in long-term
fund net flows because of their short-term characteristics, increased to $3.6 billion on October 31, 2006 from $0.3 billion on October 31, 2005 and
$0.4 billion on October 31, 2004. The increase in money market fund assets in fiscal 2006 can be primarily attributed to investments by institutional
clients in one of the Company’s sponsored short-term treasury funds and the introduction of a cash collateral fund managed by the Company in
fiscal 2006. The cash collateral fund was introduced in conjunction with a securities lending program in which certain of the Company’s sponsored
funds participate.
The following table summarizes the asset flows by investment
objective for fiscal years ended October 31, 2006, 2005 and 2004:
19
Asset Flows
|
|
|
|
For the Years Ended
October 31,
|
|
(in billions)
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
2006 vs.
2005
|
2005 vs.
2004
|
Equity fund
assets — beginning |
|
|
|
$ |
45.2 |
|
|
$ |
36.9 |
|
|
$ |
28.9 |
|
|
|
22 |
% |
|
|
28 |
% |
Sales/inflows |
|
|
|
|
7.8 |
|
|
|
9.7 |
|
|
|
9.8 |
|
|
|
–20 |
% |
|
|
–1 |
% |
Redemptions/outflows |
|
|
|
|
(5.4 |
) |
|
|
(4.3 |
) |
|
|
(4.1 |
) |
|
|
26 |
% |
|
|
5 |
% |
Exchanges |
|
|
|
|
— |
|
|
|
— |
|
|
|
0.1 |
|
|
|
N |
M |
(1) |
|
–100 |
% |
Market value change |
|
|
|
|
5.6 |
|
|
|
2.9 |
|
|
|
2.2 |
|
|
|
93 |
% |
|
|
32 |
% |
Equity fund assets — ending |
|
|
|
|
53.2 |
|
|
|
45.2 |
|
|
|
36.9 |
|
|
|
18 |
% |
|
|
22 |
% |
| |
Fixed income
fund assets — beginning |
|
|
|
|
18.6 |
|
|
|
17.6 |
|
|
|
17.8 |
|
|
|
6 |
% |
|
|
–1 |
% |
Sales/inflows |
|
|
|
|
6.4 |
|
|
|
3.7 |
|
|
|
2.4 |
|
|
|
73 |
% |
|
|
54 |
% |
Redemptions/outflows |
|
|
|
|
(3.8 |
) |
|
|
(2.4 |
) |
|
|
(2.3 |
) |
|
|
58 |
% |
|
|
4 |
% |
Exchanges |
|
|
|
|
— |
|
|
|
(0.1 |
) |
|
|
(0.2 |
) |
|
|
–100 |
% |
|
|
–50 |
% |
Market value change |
|
|
|
|
0.4 |
|
|
|
(0.2 |
) |
|
|
(0.1 |
) |
|
|
N |
M |
|
|
100 |
% |
Fixed income fund assets — ending |
|
|
|
|
21.6 |
|
|
|
18.6 |
|
|
|
17.6 |
|
|
|
16 |
% |
|
|
6 |
% |
| |
Floating-rate
bank loan fund assets —
beginning |
|
|
|
|
16.8 |
|
|
|
15.0 |
|
|
|
9.5 |
|
|
|
12 |
% |
|
|
58 |
% |
Sales/inflows |
|
|
|
|
7.0 |
|
|
|
5.2 |
|
|
|
7.6 |
|
|
|
35 |
% |
|
|
–32 |
% |
Redemptions/outflows |
|
|
|
|
(4.2 |
) |
|
|
(3.3 |
) |
|
|
(2.2 |
) |
|
|
27 |
% |
|
|
50 |
% |
Exchanges |
|
|
|
|
(0.1 |
) |
|
|
— |
|
|
|
0.1 |
|
|
|
N |
M |
|
|
–100 |
% |
Market value change |
|
|
|
|
0.5 |
|
|
|
(0.1 |
) |
|
|
— |
|
|
|
N |
M |
|
|
N |
M |
Floating-rate bank loan fund assets —
ending |
|
|
|
|
20.0 |
|
|
|
16.8 |
|
|
|
15.0 |
|
|
|
19 |
% |
|
|
12 |
% |
| |
Total
long-term fund assets — beginning |
|
|
|
|
80.6 |
|
|
|
69.5 |
|
|
|
56.2 |
|
|
|
16 |
% |
|
|
24 |
% |
Sales/inflows |
|
|
|
|
21.2 |
|
|
|
18.6 |
|
|
|
19.8 |
|
|
|
14 |
% |
|
|
–6 |
% |
Redemptions/outflows |
|
|
|
|
(13.4 |
) |
|
|
(10.0 |
) |
|
|
(8.6 |
) |
|
|
34 |
% |
|
|
16 |
% |
Exchanges |
|
|
|
|
(0.1 |
) |
|
|
(0.1 |
) |
|
|
— |
|
|
|
0 |
% |
|
|
N |
M |
Market value change |
|
|
|
|
6.5 |
|
|
|
2.6 |
|
|
|
2.1 |
|
|
|
150 |
% |
|
|
24 |
% |
Total long-term fund assets — ending |
|
|
|
|
94.8 |
|
|
|
80.6 |
|
|
|
69.5 |
|
|
|
18 |
% |
|
|
16 |
% |
| |
Separate
accounts — beginning |
|
|
|
|
27.6 |
|
|
|
24.4 |
|
|
|
18.4 |
|
|
|
13 |
% |
|
|
33 |
% |
Inflows
— HNW and institutional |
|
|
|
|
2.3 |
|
|
|
2.9 |
|
|
|
3.7 |
|
|
|
–21 |
% |
|
|
–22 |
% |
Outflows
— HNW and institutional |
|
|
|
|
(4.4 |
) |
|
|
(3.5 |
) |
|
|
(2.0 |
) |
|
|
26 |
% |
|
|
75 |
% |
Inflows
— retail managed accounts |
|
|
|
|
3.6 |
|
|
|
3.2 |
|
|
|
2.0 |
|
|
|
13 |
% |
|
|
60 |
% |
Outflows
— retail managed accounts |
|
|
|
|
(2.2 |
) |
|
|
(1.6 |
) |
|
|
(1.1 |
) |
|
|
38 |
% |
|
|
45 |
% |
Market value
change |
|
|
|
|
3.1 |
|
|
|
2.1 |
|
|
|
1.5 |
|
|
|
48 |
% |
|
|
40 |
% |
Assets acquired |
|
|
|
|
0.5 |
|
|
|
0.1 |
|
|
|
1.9 |
|
|
|
400 |
% |
|
|
–95 |
% |
Separate accounts — ending |
|
|
|
|
30.5 |
|
|
|
27.6 |
|
|
|
24.4 |
|
|
|
11 |
% |
|
|
13 |
% |
| |
Money market fund assets — ending |
|
|
|
|
3.6 |
|
|
|
0.3 |
|
|
|
0.4 |
|
|
|
N |
M |
|
|
–25 |
% |
Assets under management — ending |
|
|
|
$ |
128.9 |
|
|
$ |
108.5 |
|
|
$ |
94.3 |
|
|
|
19 |
% |
|
|
15 |
% |
(1) |
|
Not meaningful (“NM”) |
20
Ending Assets Under Management by Asset
Class
|
|
|
|
October 31,
|
|
(in billions)
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
2006 vs.
2005
|
|
2005 vs.
2004
|
Class A
(1) |
|
|
|
$ |
27.0 |
|
|
$ |
18.8 |
|
|
$ |
15.4 |
|
|
|
44 |
% |
|
|
22 |
% |
Class B
(2) |
|
|
|
|
6.8 |
|
|
|
7.7 |
|
|
|
8.7 |
|
|
|
–12 |
% |
|
|
–11 |
% |
Class C
(3) |
|
|
|
|
8.4 |
|
|
|
7.4 |
|
|
|
7.1 |
|
|
|
14 |
% |
|
|
4 |
% |
Class I
(4) |
|
|
|
|
4.5 |
|
|
|
1.5 |
|
|
|
1.1 |
|
|
|
200 |
% |
|
|
36 |
% |
Private funds
(5) |
|
|
|
|
26.4 |
|
|
|
21.8 |
|
|
|
19.6 |
|
|
|
21 |
% |
|
|
11 |
% |
Closed-end
funds |
|
|
|
|
22.5 |
|
|
|
21.1 |
|
|
|
15.8 |
|
|
|
7 |
% |
|
|
34 |
% |
Other (6) |
|
|
|
|
2.8 |
|
|
|
2.6 |
|
|
|
2.2 |
|
|
|
8 |
% |
|
|
18 |
% |
Total fund
assets |
|
|
|
|
98.4 |
|
|
|
80.9 |
|
|
|
69.9 |
|
|
|
22 |
% |
|
|
16 |
% |
HNW and
institutional account assets |
|
|
|
|
21.0 |
|
|
|
20.5 |
|
|
|
19.5 |
|
|
|
2 |
% |
|
|
5 |
% |
Retail
managed account assets |
|
|
|
|
9.5 |
|
|
|
7.1 |
|
|
|
4.9 |
|
|
|
34 |
% |
|
|
45 |
% |
Total
separate account assets |
|
|
|
|
30.5 |
|
|
|
27.6 |
|
|
|
24.4 |
|
|
|
11 |
% |
|
|
13 |
% |
Total |
|
|
|
$ |
128.9 |
|
|
$ |
108.5 |
|
|
$ |
94.3 |
|
|
|
19 |
% |
|
|
15 |
% |
(1) |
|
Includes Eaton Vance Advisers Senior Floating-Rate Fund, an
interval fund.
|
(2) |
|
Includes Eaton Vance Prime Rate Reserves, an interval
fund.
|
(3) |
|
Includes Eaton Vance Senior Floating-Rate Fund, an interval
fund.
|
(4) |
|
Includes Eaton Vance Institutional Senior Floating-Rate Fund,
an interval fund.
|
(5) |
|
Includes privately offered equity and bank loan funds and CDO
entities. |
(6) |
|
Includes other classes of open-end funds and non-Eaton Vance funds subadvised
by Atlanta Capital, Fox Asset Management and Parametric Portfolio Associates. |
The Company currently sells its sponsored mutual funds under four
primary pricing structures: front-end load commission (“Class A”); spread-load commission (“Class B”); level-load commission
(“Class C”); and institutional no-load (“Class I”). The Company waives the sales load on Class A shares when sold under a fee-based
broker/dealer program. In such cases, the shares are sold at net asset value.
Fund assets represented 76 percent of total assets under
management at October 31, 2006, compared to 75 percent and 74 percent at October 31, 2005 and 2004, respectively. Class A share assets increased to 21
percent of total assets under management at October 31, 2006 from 17 percent and 16 percent at October 31, 2005 and 2004, respectively, while Class B
shares dropped to 5 percent at October 31, 2006 from 7 percent and 9 percent at October 31, 2005 and 2004, respectively. The shift from Class B share
assets to Class A share assets reflects the overall increasing popularity of Class A shares in the industry and the declining popularity of Class B
shares in broker/dealer distribution systems. Class C share assets remained stable at 7 percent of total assets under management on October 31, 2006,
2005 and 2004 while Class I share assets increased to 3 percent of total assets under management from 1 percent on both October 31, 2005 and 2004,
primarily as a result of significant inflows into one of the Company’s short-term income funds utilized by institutional investors. Private funds
and closed-end funds collectively represented 38 percent of the Company’s total assets under management at October 31, 2006 compared to 40 percent
and 38 percent at October 31, 2005 and 2004, respectively.
The shift in fund asset mix from Class B share assets to Class A
share assets experienced by the Company has impacted the Company’s revenue and expense structure. The decline in Class B share sales and assets
under management resulted in a reduction in both distribution income (distribution plan payments received) and amortization of deferred sales
commissions. As a result of the decline in distribution plan payments received, the Company’s overall effective fee rate, defined as total revenue
as a percentage of average assets under management, declined to 73 basis points in fiscal 2006 from 74 basis points and 77 basis points in fiscal 2005
and 2004, respectively. The 3 percent decrease in distribution plan payments in fiscal 2006 was offset by an 18 percent decrease in the amortization of
deferred sales commissions over the same period.
21
Separate account assets, including high-net-worth, institutional
and retail managed account assets, totaled $30.5 billion at October 31, 2006, up from $27.6 billion and $24.4 billion at October 31, 2005 and 2004,
respectively. High-net-worth and institutional account assets increased by 2 percent and 5 percent in fiscal 2006 and 2005, respectively, while retail
managed account assets increased by 34 percent and 45 percent in the same periods. As noted above, high-net-worth and institutional net inflows were
negatively impacted in fiscal 2006 by the withdrawal of assets by two EVM bank loan institutional accounts and withdrawals by certain Atlanta Capital
institutional clients. Fiscal 2005 high-net-worth and institutional net inflows were negatively impacted by client withdrawals at both Fox Asset
Management and Atlanta Capital. Retail managed account assets were positively impacted in both fiscal 2006 and 2005 by strong net sales of Parametric
Portfolio Associates’ tax-efficient overlay and core equity products and EVM’s large-cap value and municipal bond products.
The average assets under management presented in the following
table represent a monthly average by asset class. This table is intended to provide useful information in the analysis of the Company’s revenue
and asset-based distribution expenses. With the exception of the Company’s separate account investment adviser fees, which are generally
calculated as a percentage of either beginning, average or ending quarterly assets, the Company’s investment adviser, administration, distribution
and service fees are calculated as a percentage of average daily assets.
Average Assets Under Management by Asset Class (1)
|
|
|
|
For the Years Ended
October 31,
|
|
(in billions)
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
2006 vs.
2005
|
|
2005 vs.
2004
|
Class A
(2) |
|
|
|
$ |
22.7 |
|
|
$ |
17.2 |
|
|
$ |
12.2 |
|
|
|
32 |
% |
|
|
41 |
% |
Class B
(3) |
|
|
|
|
7.3 |
|
|
|
8.3 |
|
|
|
10.8 |
|
|
|
–12 |
% |
|
|
–23 |
% |
Class C
(4) |
|
|
|
|
7.8 |
|
|
|
7.3 |
|
|
|
6.7 |
|
|
|
7 |
% |
|
|
9 |
% |
Class I
(5) |
|
|
|
|
2.4 |
|
|
|
1.2 |
|
|
|
0.8 |
|
|
|
100 |
% |
|
|
50 |
% |
Private funds
(6) |
|
|
|
|
23.7 |
|
|
|
20.9 |
|
|
|
18.8 |
|
|
|
13 |
% |
|
|
11 |
% |
Closed-end
funds |
|
|
|
|
21.8 |
|
|
|
18.2 |
|
|
|
12.9 |
|
|
|
20 |
% |
|
|
41 |
% |
Other (7) |
|
|
|
|
2.5 |
|
|
|
2.3 |
|
|
|
2.0 |
|
|
|
9 |
% |
|
|
15 |
% |
Total fund
assets |
|
|
|
|
88.2 |
|
|
|
75.4 |
|
|
|
64.2 |
|
|
|
17 |
% |
|
|
17 |
% |
HNW and
institutional account assets |
|
|
|
|
21.0 |
|
|
|
20.0 |
|
|
|
17.1 |
|
|
|
5 |
% |
|
|
17 |
% |
Retail
managed account assets |
|
|
|
|
8.2 |
|
|
|
6.1 |
|
|
|
4.3 |
|
|
|
34 |
% |
|
|
42 |
% |
Total
separate account assets |
|
|
|
|
29.2 |
|
|
|
26.1 |
|
|
|
21.4 |
|
|
|
12 |
% |
|
|
22 |
% |
Total |
|
|
|
$ |
117.4 |
|
|
$ |
101.5 |
|
|
$ |
85.6 |
|
|
|
16 |
% |
|
|
19 |
% |
(1) |
|
Assets under management attributable to acquisitions that
closed during the relevant periods are included on a weighted average basis for the period from their respective closing dates. |
(2) |
|
Includes Eaton Vance Advisers Senior Floating-Rate Fund, an
interval fund. |
(3) |
|
Includes Eaton Vance Prime Rate Reserves, an interval
fund. |
(4) |
|
Includes Eaton Vance Senior Floating-Rate Fund, an interval
fund. |
(5) |
|
Includes Eaton Vance Institutional Senior Floating-Rate Fund,
an interval fund. |
(6) |
|
Includes privately offered equity and bank loan funds and CDO
entities. |
(7) |
|
Includes other classes of open-end funds and non-Eaton Vance funds subadvised
by Atlanta Capital, Fox Asset Management and Parametric Portfolio Associates. |
22
Results of Operations
Net income increased by 15 percent in fiscal 2006 and by 14
percent in fiscal 2005. The increases in net income in both fiscal 2006 and 2005 can be attributed primarily to increases in average assets under
management of 16 percent and 19 percent, respectively. Operating results in fiscal 2006 include the acceleration of non-cash amortization of $8.9
million or $0.04 per diluted share to write off intangible assets relating to the termination of certain institutional and high-net-worth asset
management contracts at Fox Asset Management. The write-off is included in other expenses in the Company’s Consolidated Statement of Income for
the year ended October 31, 2006. Fiscal 2006 results also include the recognition of $9.8 million in interest expense and the write-off of $1.5 million
of deferred financing fees associated with the retirement of EVM’s zero-coupon exchangeable notes in August 2006. The additional interest expense
plus the write-off of the deferred financing fees reduced diluted earnings per share by $0.06 per share.
Effective November 1, 2005, the Company adopted the provisions of
Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-Based Payment.” The Company elected to apply the modified
version of retrospective application for all periods prior to the required effective date and adjusted its financial statements for all periods
presented on a basis consistent with the pro forma disclosures previously made under SFAS No. 123, “Accounting for Stock-Based Compensation.”
The Company’s adoption of SFAS No. 123R using the modified retrospective method resulted in the recognition of $36.3 million of stock-based
compensation in fiscal 2006 compared to $28.6 million and $23.5 million in fiscal 2005 and 2004, respectively. In fiscal 2006, stock-based compensation
reduced after-tax earnings by $26.4 million, or $0.19 per diluted share. In fiscal 2005 and fiscal 2004, stock-based compensation reduced after-tax
earnings by $21.7 million and $18.0 million, respectively, or $0.15 and $0.12 per diluted share, respectively.
In conjunction with the adoption of SFAS No. 123R in the first
quarter of fiscal 2006, the Company also recognized a cumulative effect of change in accounting principle. In its calculations of stock option expense
for the purposes of pro forma disclosure in previous filings, the Company chose to recognize forfeitures when they occurred rather than estimate them
at grant date. Upon implementation, the Company was required to recognize the difference between actual forfeitures of awards granted prior to the
adoption of SFAS No. 123R and the calculation of expected forfeitures for these awards as an adjustment to compensation cost. The cumulative effect,
net of tax, was $0.6 million.
Results of Operations
|
|
|
|
For the Years Ended
October 31,
|
|
(in
thousands)
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
2006 vs.
2005
|
|
2005 vs.
2004
|
Net
income |
|
|
|
$ |
159,377 |
|
|
$ |
138,706 |
|
|
$ |
121,962 |
|
|
|
15 |
% |
|
|
14 |
% |
Earnings per
share before cumulative
effect of change in accounting
principle: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
|
|
$1.25 |
|
|
|
$1.05 |
|
|
|
$0.90 |
|
|
|
19 |
% |
|
|
17 |
% |
Diluted |
|
|
|
|
$1.18 |
|
|
|
$0.99 |
|
|
|
$0.87 |
|
|
|
19 |
% |
|
|
14 |
% |
Earnings per
share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
|
|
$1.25 |
|
|
|
$1.05 |
|
|
|
$0.90 |
|
|
|
19 |
% |
|
|
17 |
% |
Diluted |
|
|
|
|
$1.17 |
|
|
|
$0.99 |
|
|
|
$0.87 |
|
|
|
18 |
% |
|
|
14 |
% |
Operating
margin |
|
|
|
|
31 |
% |
|
|
31 |
% |
|
|
30 |
% |
|
|
N |
M |
|
|
N |
M |
23
Revenue
The Company’s effective fee rate (total revenue as a
percentage of average assets under management) decreased to 73 basis points in fiscal 2006 from 74 basis points in fiscal 2005 and 77 basis points in
fiscal 2004, largely as a result of the change in the Company’s fund asset mix. As Class B shares have decreased as a percentage of total fund
assets under management, distribution fees have decreased in both absolute dollars and as a percentage of total revenue. Distribution fees as a
percentage of total revenue decreased to 16 percent in 2006 from 18 percent in fiscal 2005 and 23 percent in fiscal 2004. The impact of the decline in
the Company’s effective fee rate was offset in part by a reduction in deferred sales commissions amortization expense, as capitalized sales
commissions paid on Class B share sales also declined with the change in asset mix.
Revenue
|
|
|
|
For the Years Ended
October 31,
|
|
(in
thousands)
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
2006 vs.
2005
|
|
2005 vs.
2004
|
Investment
adviser and
administration fees |
|
|
|
$ |
594,632 |
|
|
$ |
503,085 |
|
|
$ |
413,102 |
|
|
|
18 |
% |
|
|
22 |
% |
Distribution
and underwriter fees |
|
|
|
|
140,331 |
|
|
|
139,043 |
|
|
|
150,018 |
|
|
|
1 |
% |
|
|
–7 |
% |
Service
fees |
|
|
|
|
122,805 |
|
|
|
104,644 |
|
|
|
92,087 |
|
|
|
17 |
% |
|
|
14 |
% |
Other
revenue |
|
|
|
|
4,426 |
|
|
|
6,403 |
|
|
|
6,606 |
|
|
|
–31 |
% |
|
|
–3 |
% |
Total
revenue |
|
|
|
$ |
862,194 |
|
|
$ |
753,175 |
|
|
$ |
661,813 |
|
|
|
14 |
% |
|
|
14 |
% |
Investment adviser and administration
fees
Investment adviser and administration fees are generally
determined by contractual agreements with the Company’s sponsored funds and separate accounts and are generally based upon a percentage of the
market value of assets under management. Net asset flows and changes in the market value of managed assets affect the amount of investment adviser and
administration fees earned, while shifts in asset mix affect the Company’s effective fee rate.
The increase in investment adviser and administration fees of 18
percent and 22 percent in fiscal 2006 and 2005, respectively, over the same periods a year earlier can be attributed primarily to an increase in
average assets under management and a modest increase in the Company’s effective investment adviser and administration fee rates. While separately
managed account effective fee rates remained stable at 34 basis points for all three years, fund effective fee rates increased to 56 basis points in
fiscal 2006 from 55 basis points and 53 basis points in fiscal 2005 and 2004, respectively. Average assets under management increased by 16 percent and
19 percent in fiscal 2006 and 2005, respectively, over the prior year periods.
Distribution and underwriter fees
Distribution plan payments, which are made under contractual
agreements with the Company’s sponsored funds, are calculated as a percentage of average assets under management in specific share classes of the
Company’s mutual funds (principally Class B and Class C), as well as certain private funds. These fees fluctuate with both the level of average
assets under management and the relative mix of assets. Underwriter commissions are earned on the sale of shares of the Company’s sponsored mutual
funds on which investors pay a sales charge at the time of purchase (Class A share sales). Sales charges and underwriter commissions are waived or
reduced on sales that exceed specified minimum amounts and on fee-based accounts. Underwriter commissions fluctuate with the level of Class A share
sales and the mix of Class A shares offered with and without sales charges.
Distribution and underwriter fees increased by 1 percent in
fiscal 2006 compared to the same period a year ago. Distribution plan payments decreased 3 percent to $127.5 million in fiscal 2006 from $131.1 million
in fiscal 2005, reflecting a decrease in average Class B share assets under management offset in part by an
24
increase in average Class C and certain private fund assets
also subject to distribution fees. As noted in the table “Average Assets Under Management by Asset Class,” average Class B share assets under
management declined 12 percent year-over-year in fiscal 2006, while average Class C share and private fund assets under management subject to
distribution fees increased by 7 percent each. Underwriter fees and other distribution income increased 62 percent to $12.8 million in fiscal 2006 from
$7.9 million in fiscal 2005, primarily reflecting a 56 percent increase in Class A share sales.
Distribution and underwriter fees decreased by 7 percent in
fiscal 2005 compared to the same period a year earlier, primarily reflecting a decrease in average Class B share assets under management. Average Class
B share assets under management declined 23 percent year-over-year in fiscal 2005, principally as a result of net redemptions in the asset class, while
average Class C share and private fund assets under management subject to distribution fees increased by 9 percent and 13 percent,
respectively.
Service fees
Service plan payments, which are made under contractual
agreements with the Company’s sponsored funds, are calculated as a percent of average assets under management in specific share classes of the
Company’s mutual funds (principally Classes A, B and C) as well as certain private funds. Service fees represent payments made by sponsored funds
to the principal underwriter (Eaton Vance Distributors, Inc., a wholly owned subsidiary of EVM) for personal service and/or the maintenance of
shareholder accounts.
Service fee revenue increased by 17 percent in fiscal 2006 over
the same period a year ago, primarily reflecting a 15 percent increase in average assets under management in Class A, B, and C shares and private funds
subject to distribution fees. Service fee revenue increased by 14 percent in fiscal 2005, reflecting an 11 percent increase in average Class A, B, C
and I and certain private fund assets under management.
Other revenue
Other revenue, which consists primarily of shareholder service
fees, miscellaneous dealer income, custody fees, and investment income earned by consolidated funds, declined by 31 percent and 3 percent in fiscal
2006 and 2005, respectively. The decrease in other revenue in fiscal 2006 can be attributed primarily to a decrease in investment income related to
Eaton Vance Short-Term Income Fund and Eaton Vance Short-Term Treasury Fund, which the Company stopped consolidating in April 2005 and April 2006,
respectively. Other revenue for fiscal 2006, 2005 and 2004 includes $1.2 million, $2.2 million and $2.0 million, respectively, of investment income
related to consolidated funds for the periods during which they were consolidated.
Expenses
Operating expenses increased by 15 percent in fiscal 2006 and 13
percent in fiscal 2005 because of increases in compensation, service fees, distribution and other expenses.
Expenses
|
|
|
|
For the Years Ended
October 31,
|
|
(in
thousands)
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
2006 vs.
2005
|
|
2005 vs.
2004
|
Compensation
of officers and employees |
|
|
|
$ |
244,620 |
|
|
$ |
205,663 |
|
|
$ |
172,411 |
|
|
|
19 |
% |
|
|
19 |
% |
Amortization
of deferred sales commissions |
|
|
|
|
52,048 |
|
|
|
63,535 |
|
|
|
81,202 |
|
|
|
–18 |
% |
|
|
–22 |
% |
Service fee
expense |
|
|
|
|
95,573 |
|
|
|
86,197 |
|
|
|
76,620 |
|
|
|
11 |
% |
|
|
12 |
% |
Distribution
expense |
|
|
|
|
116,741 |
|
|
|
103,447 |
|
|
|
81,559 |
|
|
|
13 |
% |
|
|
27 |
% |
Other
expenses |
|
|
|
|
88,246 |
|
|
|
61,726 |
|
|
|
49,381 |
|
|
|
43 |
% |
|
|
25 |
% |
Total
expenses |
|
|
|
$ |
597,228 |
|
|
$ |
520,568 |
|
|
$ |
461,173 |
|
|
|
15 |
% |
|
|
13 |
% |
25
Compensation of officers and employees
Compensation expense increased by 19 percent in both fiscal 2006
and fiscal 2005 over the same periods a year earlier. The increase in compensation expense in both periods can be primarily attributed to an increase
in headcount (up 15 percent in fiscal 2006 and 10 percent in fiscal 2005), higher stock-based compensation expense, higher operating income-based
employee bonus accruals, higher marketing incentives associated with the Company’s separately managed account business, and higher marketing
incentives associated with the increase in long-term fund sales. The increase in headcount in fiscal 2006 reflects additions to the Company’s
investment management, marketing and operations teams to support the significant growth in assets under management as well as the build-out of the
Company’s institutional sales team, which began in fiscal 2005.
The Company’s adoption of SFAS No. 123R resulted in the
recognition of $36.3 million of stock-based compensation in the fiscal 2006 ($26.4 million after tax or $0.19 per diluted share) compared to $28.6
million in fiscal 2005 ($21.7 million after tax or $0.15 per diluted share) and $23.5 million in fiscal 2004 ($18.0 million after tax or $0.12 per
diluted share). Approximately $4.0 million of the total $7.7 million increase in fiscal 2006 stock-based compensation expense can be attributed to the
acceleration in the recognition of stock-based compensation for retirement-eligible employees under SFAS No. 123R.
The Company’s current retirement policy provides that an
employee is eligible for retirement at age 65, or for early retirement with the Company’s consent when the employee reaches age 55 and has a
combined age plus years of service to the Company of at least 75 years. Because many of the Company’s outstanding stock options allow for
accelerated vesting of options upon retirement, the adoption of SFAS No. 123R resulted in the immediate recognition of compensation expense at grant
date for all awards granted to retirement-eligible employees on or after the adoption of SFAS No. 123R on November 1, 2005. For awards granted to
employees approaching retirement eligibility, the adoption of SFAS No. 123R resulted in compensation expense on a straight-line basis over the period
from the grant date through the retirement eligibility date. Stock-based compensation expense for employees who are not retirement eligible is
recognized on a straight-line basis over the service or vesting period of the option (generally five years). Prior to the implementation of SFAS No.
123R, and consistent with SFAS No. 123, it had been the Company’s policy to recognize all stock-based compensation expense over the vesting period
without regard to retirement eligibility.
The accelerated recognition of compensation cost for employees
who are retirement-eligible or are nearing retirement eligibility under the Company’s existing retirement policy is applicable for all grants made
on or after the Company’s adoption of SAFS No. 123R (November 1, 2005). The accelerated recognition of compensation expense associated with stock
option grants to retirement-eligible employees in the quarter when the options are granted will reduce the associated stock-based compensation expense
recognized in subsequent quarters.
Amortization of deferred sales
commissions
Amortization of deferred sales commissions decreased by 18
percent and 22 percent in fiscal 2006 and 2005, respectively, over the same periods a year earlier. Amortization expense is affected by ongoing sales
and redemptions of mutual fund Class B shares, Class C shares and certain private funds. As amortization expense is a function of the Company’s
fund asset mix, a continuing shift away from Class B shares to other classes over time, particularly Class A shares, will most likely result in further
reductions in amortization expense.
Service fees
Service fees the Company receives from sponsored funds are
generally retained by the Company in the first year and paid to broker/dealers after the first year pursuant to third-party service arrangements. These
fees are calculated as a percent of average assets under management in specific share classes of the Company’s mutual funds (principally Classes
A, B, and C) as well as certain private funds. Service fee expense increased by 11 percent in fiscal 2006 and 12 percent in fiscal 2005, reflecting
increases in average long-term fund assets retained more than one year in funds and share classes that are subject to service fees.
26
Distribution expense
Distribution expense consists primarily of payments made to
distribution partners pursuant to third-party distribution arrangements (for certain Class C share and closed-end fund assets, calculated as a
percentage of average assets under management), commissions paid to broker/dealers on the sale of Class A shares at net asset value and other marketing
expenses, including marketing expenses associated with revenue sharing arrangements with the Company’s distribution partners. Distribution expense
increased by 13 percent in fiscal 2006 and 27 percent in fiscal 2005, largely as a result of increases in closed-end fund assets and other assets
subject to third-party distribution and revenue-sharing arrangements.
Other expenses
Other expenses consist primarily of travel, facilities,
information technology, consulting, fund expenses assumed by the Company, communications and other corporate expenses, including the amortization of
intangible assets.
Other expenses increased by 43 percent, or $26.5 million, in
fiscal 2006 over the same period a year ago, primarily reflecting increases in fund-related expenses of $4.6 million, facilities-related expenses of
$3.7 million, information technology expense of $8.4 million and amortization of intangible assets of $7.7 million. The increase in fund-related
expenses can be attributed primarily to payments made to external investment advisers for subadvisory services provided and an increase in the
recognition of fund expenses for certain institutional funds for which the Company is paid an all-in management fee. The increase in facilities-related
expenses can be attributed to an increase in rent associated with additional office space leased by the Company to support the 15 percent increase in
headcount, additional building expenses associated with the build-out of that office space and related increases in insurance and depreciation. The
increase in information technology expense can be attributed to an overall increase in data services and costs incurred in fiscal 2006 in conjunction
with several significant system implementations.
The increase in the amortization of intangible assets in fiscal
2006 can be attributed to the acceleration of non-cash amortization to write-off intangible assets relating to the termination of certain institutional
and high-net-worth asset management contracts at Fox Asset Management. These contracts were identified and accounted for as intangible assets at the
time of the Fox Asset Management acquisition in September 2001. The Company periodically reviews identifiable intangibles for impairment as events or
changes in circumstances indicate that the carrying amount of such assets may not be recoverable. The write-off, which totaled $8.9 million or $0.04
per diluted share, was computed by comparing the net present value of the projected future client cash flows to the carrying value of the intangible
asset at April 30, 2006. Assets under management at Fox Asset Management have remained relatively stable despite the attrition of the original
contracts acquired as these contracts have been replaced over time by similar asset management contracts.
Other expenses increased by 25 percent or $12.3 million in fiscal
2005 over the same period a year earlier, primarily reflecting increases in fund-related expenses of $8.0 million, information technology expense of
$1.3 million, other consulting expense of $1.6 million and amortization of intangible assets of $0.8 million. The increase in fund-related expenses can
be attributed to costs borne by the Company to support product development prior to new product launch and payments made to external investment
advisers for subadvisory services provided. The increase in information technology can be attributed to an overall increase in data services. The
increase in the amortization of intangible assets can be attributed to a $0.9 million write-off of intangible assets recognized in the second quarter
of fiscal 2005 relating to terminations of management contracts acquired by Fox Asset Management in fiscal 2003.
27
Other Income and Expense
|
|
|
|
For the Years Ended
October 31,
|
|
(in
thousands)
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
2006 vs.
2005
|
|
2005 vs.
2004
|
Interest
income |
|
|
|
$ |
8,033 |
|
|
$ |
4,354 |
|
|
$ |
2,799 |
|
|
|
84 |
% |
|
|
56 |
% |
Interest
expense |
|
|
|
|
(12,850 |
) |
|
|
(1,464 |
) |
|
|
(5,898 |
) |
|
|
778 |
% |
|
|
–75 |
% |
Gain on
investments |
|
|
|
|
3,667 |
|
|
|
38 |
|
|
|
275 |
|
|
|
N |
M |
|
|
–86 |
% |
Foreign
currency loss |
|
|
|
|
(222 |
) |
|
|
(32 |
) |
|
|
(85 |
) |
|
|
594 |
% |
|
|
–62 |
% |
Impairment
loss on investments |
|
|
|
|
(592 |
) |
|
|
(2,120 |
) |
|
|
— |
|
|
|
–72 |
% |
|
|
N |
M |
Total other
income (expense) |
|
|
|
$ |
(1,964 |
) |
|
$ |
776 |
|
|
$ |
(2,909 |
) |
|
|
N |
M |
|
|
N |
M |
Interest income increased by 84 percent in fiscal 2006 over the
same period a year ago, primarily due to an increase in short-term interest rates and an increase in interest income earned on the Company’s
minority equity investments in CDO entities. Interest income increased by 56 percent in fiscal 2005, primarily due to an increase in short-term
interest rates offset by a decrease in interest income earned on the Company’s minority equity investments in CDO entities.
Interest expense increased by $11.4 million in fiscal 2006 over
the same period a year ago, primarily due to the redemption of EVM’s zero-coupon exchangeable senior notes (“Notes”) in August 2006.
Upon receipt of EVM’s notice of its intent to redeem the Notes for cash, Noteholders had the option to exchange the Notes into Eaton Vance Corp.
non-voting common stock. EVM ultimately had the right to settle the exchange in cash in lieu of shares. As a result of the redemption and resultant
settlement in cash, EVM recognized $9.8 million in additional interest expense representing the premium value of the shares that would have been issued
upon exchange in excess of the accreted value of the Notes on the redemption date. In addition, EVM recognized an additional $1.5 million in interest
expense representing the write-off of related debt issuance costs.
Interest expense decreased by 75 percent in fiscal 2005,
primarily reflecting a decrease in average long-term debt balances. The decrease in average long-term debt balances is attributed to the retirement of
EVM’s 6.22 percent notes in March 2004 and the repurchase of $46.0 million of EVM’s zero-coupon exchangeable senior notes in August 2004. As
noted above, these Notes were ultimately redeemed in full in August 2006.
In fiscal 2006, the Company recognized net gains of $2.2 million
upon the disposition of certain investments in sponsored funds and $1.4 million on liquidation of investments in two CDO entities.
The Company recognized impairment losses of $0.6 million and $2.1
million in fiscal 2006 and 2005, respectively, related to its investments in two CDO entities. The impairment losses resulted from the effect of
tightening credit spreads and higher than forecasted prepayment rates on the entity’s investments. The Company continues to earn management fees
on both underlying collateral pools.
Income Taxes
The Company’s effective tax rate (income taxes as a
percentage of income before income taxes, minority interest, equity in net income of affiliates, and the cumulative effect of a change in accounting
principle) was 39 percent in both fiscal 2006 and 2005 and 37 percent in fiscal 2004.
28
The Company’s policy for accounting for income taxes
includes monitoring its business activities and tax policies to ensure that the Company is in compliance with federal, state and foreign tax laws. In
the ordinary course of business, various taxing authorities may not agree with certain tax positions taken by the Company, or applicable law may not be
clear. The Company periodically reviews these tax positions and provides for and adjusts as necessary estimated liabilities relating to such positions
as part of its overall tax provision. During the year ended October 31, 2005, the Company increased its provision for income taxes by $1.9 million
related to uncertain tax positions, which resulted in an increase in the Company’s effective tax rate.
Minority Interest
Minority interest increased by 1 percent and 10 percent in fiscal
2006 and 2005, respectively, primarily due to the increased profitability of two of the Company’s majority-owned subsidiaries, Atlanta Capital and
Parametric Portfolio Associates.
Minority interest is not adjusted for taxes due to the underlying
tax status of the Company’s majority-owned subsidiaries. Atlanta Capital, Fox Asset Management and Parametric Portfolio Associates are limited
liability companies that are treated as partnerships for tax purposes. Funds consolidated by the Company are registered investment companies or private
funds that are treated as pass-through entities for tax purposes.
Equity in Net Income of Affiliates, Net of
Tax
Equity in net income of affiliates, net of tax, at October 31,
2006 reflects the Company’s 20 percent minority equity interest in Lloyd George Management, a 20 percent minority equity interest in the Eaton
Vance Short-Term Income Fund, a 20 percent minority equity interest in the Eaton Vance Equity Research Fund and a 7 percent minority equity interest in
a private equity partnership. Equity in net income of affiliates, net of tax, increased by $3.1 million or 253 percent in fiscal 2006, primarily due to
a $2.8 million increase in net income (after tax) attributed to the Company’s minority equity investment in the Eaton Vance Short-Term Income
Fund.
Equity in net income of affiliates, net of tax, decreased by 4
percent in fiscal 2005, largely as a result of calendar year-end bonuses paid and expensed by Lloyd George Management in December 2004. Equity in net
income of affiliates in fiscal 2005 primarily reflects the Company’s 20 percent minority equity interest in Lloyd George Management as well as the
Company’s 30 percent minority equity interest in the Eaton Vance Short-Term Income Fund.
Changes in Financial Condition and Liquidity and Capital
Resources
The following table summarizes certain key financial data
relating to the Company’s liquidity and capital resources on October 31, 2006, 2005 and 2004 and for the years then ended:
29
Balance Sheet and Cash Flow
Data
|
|
|
|
For
the years ended
October 31,
|
|
(in
thousands)
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
2006
vs.
2005
|
|
2005
vs.
2004
|
|
Balance
sheet data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents |
|
|
|
$ |
206,705 |
|
|
$ |
146,389 |
|
|
$ |
147,137 |
|
|
|
41 |
% |
|
|
–1 |
% |
|
Short-term
investments |
|
|
|
|
20,669 |
|
|
|
127,858 |
|
|
|
210,429 |
|
|
|
–84 |
% |
|
|
–39 |
% |
Long-term
investments |
|
|
|
|
73,075 |
|
|
|
61,766 |
|
|
|
36,895 |
|
|
|
18 |
% |
|
|
67 |
% |
|
Deferred
sales commissions |
|
|
|
|
112,314 |
|
|
|
126,113 |
|
|
|
162,259 |
|
|
|
–11 |
% |
|
|
–22 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt |
|
|
|
|
— |
|
|
|
75,467 |
|
|
|
74,347 |
|
|
|
–100 |
% |
|
|
2 |
% |
Deferred
income taxes |
|
|
|
|
22,520 |
|
|
|
29,804 |
|
|
|
42,821 |
|
|
|
–24 |
% |
|
|
–30 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flow data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
cash flows |
|
|
|
$ |
262,851 |
|
|
$ |
104,052 |
|
|
$ |
115,220 |
|
|
|
153 |
% |
|
|
–10 |
% |
Investing
cash flows |
|
|
|
|
(26,197 |
) |
|
|
(30,868 |
) |
|
|
(3,489 |
) |
|
|
–15 |
% |
|
|
N |
M |
|
Financing
cash flows |
|
|
|
|
(176,407 |
) |
|
|
(73,856 |
) |
|
|
(103,004 |
) |
|
|
139 |
% |
|
|
–28 |
% |
The Company’s financial condition is highly liquid, with a
significant percentage of the Company’s assets represented by cash, cash equivalents and short-term investments. Short-term investments include
investments in the Company’s sponsored money market and short-term income funds. Long-term investments consist principally of investments in
certain of the Company’s sponsored mutual funds, investments in affiliates and minority equity investments in CDO entities.
Deferred sales commissions paid to broker/dealers in connection
with the distribution of the Company’s Class B and Class C fund shares, as well as certain private funds, decreased by 11 percent in fiscal 2006
and 22 percent in fiscal 2005, primarily reflecting the ongoing decline in Class B share sales and assets. Deferred income taxes, which relate
principally to the deferred tax liability for deferred sales commissions offset by the deferred tax benefit for stock-based compensation, decreased by
24 percent in fiscal 2006 and 30 percent in fiscal 2005. Upon adoption of SFAS No. 123R in the first quarter of fiscal 2006, the Company established a
deferred tax asset of $21.3 million.
The following table details the Company’s future contractual
obligations:
Contractual Obligations
|
|
|
|
Payments due
|
|
(in millions)
|
|
|
|
Total
|
|
Less than 1
Year
|
|
1–3
Years
|
|
4–5
Years
|
|
After 5
Years
|
Operating
leases — facilities
and equipment |
|
|
|
$ |
203.5 |
|
|
|
$9.6 |
|
|
|
$21.0 |
|
|
|
$25.5 |
|
|
|
$147.4 |
|
Investment in
private equity
partnership |
|
|
|
|
10.3 |
|
|
|
— |
|
|
|
10.3 |
|
|
|
— |
|
|
|
— |
|
In July 2006, the Company committed to invest $15.0 million in a
private equity partnership that invests in companies in the financial services industry. In August 2006, the Company invested $4.7 million of the total
$15.0 million of committed capital.
In September 2006, the Company signed a long-term lease to move
the Company’s corporate headquarters to a new location in Boston. The lease will commence in May 2009.
Excluded from the table above are future payments to be made by
the Company to purchase the minority interests retained by minority investors in Atlanta Capital, Fox Asset Management and Parametric
Portfolio
30
Associates. The Company’s acquisition agreements provide
the minority shareholders the right to require the Company to purchase these retained interests at specific intervals over time. These agreements also
provide the Company with the right to require the minority shareholders to sell their retained equity interests to the Company at specific intervals
over time, as well as upon certain events such as death and permanent disability. These purchases and sales will occur at varying times at varying
amounts over the next 7 years and will generally be based upon a multiple of earnings before interest and taxes, a measure which is intended to
represent fair market value. Although the timing and amounts of these purchases cannot be predicted with certainty, the Company anticipates that the
purchase of the remaining minority interests in its majority-owned subsidiaries may be a significant use of cash in future years.
In the third quarter of fiscal 2006, the Company exercised a call
option and purchased an additional 2 percent interest in Parametric Portfolio Associates from minority interest holders for $4.0 million, increasing
the Company’s capital ownership interest from 80 percent to 82 percent. In addition, the Company purchased an additional 7 percent interest in
Atlanta Capital from minority interest holders for $7.2 million upon exercise of a minority investor put option, increasing the Company’s
ownership from 70 to 77 percent. The additional purchase price in each case was allocated between intangible assets and goodwill based on independent
valuations obtained in the third quarter. Minority interest decreased by $0.3 million as a result of these transactions.
On July 28, 2006, EVM announced its intention to redeem for cash
all of its outstanding Notes ($110.9 million principal amount at maturity with an accreted value on redemption date of $76.4 million). Upon receipt of
EVM’s notice of its intent to redeem, holders of the Notes had the option to exchange the Notes into Eaton Vance Corp. non-voting common stock at
a rate of 28.7314 shares of common stock per $1,000 principal amount at maturity until the close of business on August 10, 2006. As of the close of
business on August 10, 2006, all but $6,000 principal amount at maturity of the Notes were tendered for exchange into the Company’s non-voting
common stock. EVM elected to pay the holders cash in lieu of delivering stock as provided for in the indenture agreement governing the Notes. As a
result, EVM paid $86.2 million to holders who presented their Notes for exchange. The remaining Notes with a principal amount at maturity of $6,000
were redeemed by the Company for cash in the aggregate amount of $4,130.
The redemption of the Notes resulted in the elimination of all of
the Company’s long-term debt and reduced its diluted shares outstanding on the redemption date by 3.2 million shares (approximately 0.7 million
shares on a weighted average basis in fiscal 2006). The $9.8 million premium value of the shares in excess of the accreted value of the Notes paid in
cash to Note holders was recorded as interest expense in the Company’s fiscal fourth quarter, in addition to the write-off of $1.5 million of
related debt issuance costs. Approximately $2.6 million of the total premium value was not deductible for tax purposes.
The Company maintains a revolving credit facility with several
banks, which expires on December 21, 2009. It provides that the Company may borrow up to $180 million at LIBOR-based rates of interest that vary
depending on the level of usage of the facility and credit ratings of the Notes. The agreement contains financial covenants with respect to leverage
and interest coverage and requires the Company to pay an annual commitment fee on any unused portion. On October 31, 2006, the Company had no
outstanding borrowings under its revolving credit facility.
Operating Cash Flows
Operating cash flows of the Company are calculated by adjusting
the net income to reflect changes in current assets and liabilities, deferred sales commissions, stock-based compensation, deferred income taxes and
investments classified as trading. Cash provided by operating activities totaled $262.9 million, $104.1 million and $115.2 million in the fiscal years
ended October 31, 2006, 2005 and 2004, respectively. The increase in cash provided by operating activities in fiscal 2006 can be attributed primarily
to an increase in net income and an increase in cash provided by the purchase and sale of trading securities by two consolidated short-term income
funds, which regularly purchase and sell short-term debt instruments. The Company deconsolidated the first of the two funds in April 2005 and the
second in April 2006. Net cash provided by (used for) the
31
purchase and sale of trading securities totaled $30.6
million, ($68.8) million and ($105.8) million in fiscal 2006, 2005 and 2004, respectively. The decrease in cash provided by operating activities in
fiscal 2005 can be attributed primarily to a change in the timing of advisory, administration, distribution and service fee payments made by the
custodian of the Company’s sponsored funds in the quarter ended July 31, 2005. Prior to July 31, 2005, the custodian made all fee payments on the
last business day of the month. Effective July 31, 2005, the custodian pays all fees on the third business day of the following month. As a result,
investment adviser fees and other receivables increased at October 31, 2005 and cash and cash equivalents decreased in comparison to October 31,
2004.
Capitalized sales commissions paid to financial intermediaries
for the distribution of the Company’s Class B and Class C fund shares and certain private funds increased by $6.9 million in fiscal 2006 due
primarily to a 23 percent increase in Class C share sales. Capitalized sales commissions decreased by $16.9 million in fiscal 2005 due to declines in
both Class B and Class C share sales. The Company anticipates that the payment of capitalized sales commissions will continue to be a significant use
of cash in the future.
Investing Cash Flows
Investing activities consist primarily of the purchase of
equipment and leasehold improvements and the purchase and sale of investments in Company-sponsored mutual funds that the Company does not consolidate.
Cash used for investing activities totaled $26.2 million, $30.9 million and $3.5 million in fiscal 2006, 2005 and 2004, respectively. In fiscal 2006,
additions to equipment and leasehold improvements totaled $12.7 million, compared to $3.4 million in fiscal 2005 and $3.6 million in fiscal 2004,
reflecting primarily additional leasehold improvements made in conjunction with additional office space leased to accommodate increased headcount.
Proceeds from the sale of available-for-sale investments of $27.0 million in fiscal 2006 were offset by the purchase of shares in Company-sponsored
mutual funds and other investments of $27.6 million. In fiscal 2005 and 2004, total proceeds from the sale of available-for-sale investments of $1.4
million and $3.3 million, respectively, were offset by the purchase of available-for-sale investments of $28.1 million and $2.4 million, respectively.
In addition, the Company purchased an additional 7 percent interest in Atlanta Capital and an additional 2 percent interest in Parametric Portfolio
Associates in fiscal 2006 for a total of $11.3 million.
Financing Cash Flows
Financing cash flows primarily reflect the issuance and repayment
of long-term debt, the issuance and repurchase of the Company’s non-voting common stock and the payment of dividends to the Company’s
shareholders. Financing cash flows also include proceeds from the issuance of capital stock by the Company’s consolidated mutual fund affiliates
and cash paid to meet redemptions by minority shareholders of these mutual fund subsidiaries. Cash used for financing activities totaled $176.4
million, $73.9 million and $103.0 million in fiscal 2006, 2005 and 2004, respectively, reflecting net proceeds from the issuance of the Company’s
mutual fund affiliates’ capital stock of $79.3 million, $84.6 million and $58.8 million in fiscal 2006, 2005 and 2004,
respectively.
In fiscal 2006, EVM retired its zero-coupon exchangeable notes
with an accreted value on redemption date of $76.4 million. The Company made no long-term debt payments in fiscal 2005. Debt repayments in fiscal 2004
included the retirement of EVM’s 6.22 percent senior loan for $7.1 million and the repurchase of $46.0 million at accreted value of EVM’s
zero-coupon exchangeable notes.
In fiscal 2006, the Company repurchased a total of 5.8 million
shares of its non-voting common stock for $159.9 million under its authorized repurchase program and issued 2.7 million shares of non-voting common
stock in connection with the exercise of stock options and employee stock purchases for total proceeds of $28.2 million. The Company has authorization
to purchase an additional 6.3 million shares under its present share repurchase authorization and anticipates that future repurchases will continue to
be a significant use of cash. The Company’s dividends per share were $0.42 in fiscal 2006, $0.34 in fiscal 2005 and $0.28 in
fiscal
32
2004. The Company increased its quarterly dividend by 20
percent to $0.12 per share in the fourth quarter of fiscal 2006.
The Company believes that cash provided by operating activities
and borrowings available under the Company’s $180 million credit facility will provide the Company with sufficient liquidity to meet its
short-term and long-term cash demands.
Off-Balance Sheet Arrangements
The Company does not invest in any off-balance sheet vehicles
that provide financing, liquidity, market or credit risk support or engage in any leasing activities that expose the Company to any liability that is
not reflected in the Consolidated Financial Statements.
Critical Accounting Policies
Management believes the following critical accounting policies,
among others, affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.
Deferred Sales Commissions
Sales commissions paid by the Company to broker/dealers in
connection with the sale of certain classes of shares of open-end funds, bank loan interval funds and private funds are generally capitalized and
amortized over the period during which the shareholder is subject to a contingent deferred sales charge, which does not exceed six years. Distribution
plan payments received by the Company from these funds are recorded in revenue as earned. Contingent deferred sales charges and early withdrawal
charges received by the Company from redeeming shareholders of open-end and bank loan interval funds reduce unamortized deferred sales commissions.
Should the Company lose its ability to recover such sales commissions through distribution plan payments and contingent deferred sales charges, the
value of these assets would immediately decline, as would future cash flows. The Company periodically reviews the recoverability of deferred sales
commission assets as events or changes in circumstances indicate that the carrying amount of deferred sales commission assets may not be recoverable
and adjusts the deferred sales commission assets accordingly.
Goodwill and Intangible Assets
Goodwill represents the excess of the cost of the Company’s
investment in the net assets of acquired companies over the fair value of the underlying identifiable net assets at the dates of acquisition. The
Company attributes all goodwill associated with the acquisitions of Atlanta Capital, Fox Asset Management and Parametric Portfolio Associates to a
single reporting unit. Goodwill is not amortized but is tested at least annually for impairment by comparing the fair value of the reporting unit to
its carrying amount, including goodwill. The Company establishes fair value for the purpose of impairment testing using discounted cash flow analyses
and appropriate market multiples. In this process, the Company makes assumptions related to projected future earnings and cash flow, market multiples
and applicable discount rates. Changes in these estimates could materially affect the Company’s impairment conclusion.
Identifiable intangible assets generally represent the cost of
client relationships and management contracts acquired. In valuing these assets, the Company makes assumptions regarding useful lives and projected
growth rates and significant judgment is required. In most instances, the Company engages third party consultants to perform these valuations. The
Company periodically reviews identifiable intangibles for impairment as events or changes in circumstances indicate that the carrying amount of such
assets may not be recoverable. If the carrying amounts of the assets exceed their respective fair values, additional impairment tests are performed to
measure the amount of the impairment loss, if any.
33
Deferred Income Taxes
Deferred income taxes reflect the expected future tax
consequences of temporary differences between the carrying amounts and tax bases of the Company’s assets and liabilities. The Company’s
deferred taxes relate principally to stock-based compensation expense and capitalized sales commissions paid to broker/dealers. IRS regulations issued
in 2004 provide that capitalized sales commission payments are deductible for tax purposes at the time of payment. While the Company has considered
future taxable income and ongoing tax planning in assessing its taxes, changes in tax laws may result in a change to the Company’s tax position
and effective tax rate.
Investments in CDO Entities
The Company acts as collateral manager for a number of CDO entities
pursuant to collateral management agreements between the Company and each CDO entity. At October 31, 2006, combined assets under
management in the collateral pools of these CDO entities plus warehoused assets upon which the Company earns a management fee were
approximately $2.9 billion. The Company had combined minority equity investments of $9.1 million in four of these entities on
October 31, 2006.
The Company accounts for its investments in CDO entities under
Emerging Issues Task Force (“EITF”) 99-20, “Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests
in Securitized Financial Assets.” The excess of future cash flows over the initial investment at the date of purchase is recognized as interest
income over the life of the investment using the effective yield method. The Company reviews cash flow estimates throughout the life of each CDO
investment pool to determine whether an impairment of its equity investments should be recognized. Cash flow estimates are based on the underlying pool
of collateral securities and take into account the overall credit quality of the issuers of the collateral securities, the forecasted default rate of
the collateral securities and the Company’s past experience in managing similar securities. If the updated estimate of future cash flows (taking
into account both timing and amounts) is less than the last revised estimate, an impairment loss is recognized based on the excess of the carrying
amount of the investment over its fair value. Fair value is determined using current information, notably market yields and projected cash flows based
on forecasted default and recovery rates that a market participant would use in determining the current fair value of the equity interest. Market
yields, default rates and recovery rates used in the Company’s estimate of fair value vary based on the nature of the investments in the
underlying collateral pools. In periods of rising credit default rates and lower debt recovery rates, the fair value, and therefore carrying value, of
the Company’s investments in these CDO entities may be adversely affected. The Company’s risk of loss in the CDO entities is limited to the
$9.1 million carrying value of the minority equity investments on the Company’s Consolidated Balance Sheet at October 31, 2006.
A CDO entity issues non-recourse debt securities, which are sold
in a private offering by an underwriter to institutional and high-net-worth investors. The CDO debt securities issued by the CDO entity are secured by
collateral in the form of high-yield bonds and/or floating-rate income instruments that the CDO entity purchases. The Company manages the collateral
securities for a fee and, in most cases, is a minority investor in the equity interests of the CDO entity. An equity interest in a CDO entity is
subordinated to all other interests in the CDO entity and entitles the investor to receive the residual cash flows, if any, from the CDO entity. As a
result, the Company’s equity investment in a CDO entity is sensitive to changes in the credit quality of the issuers of the collateral securities,
including changes in the forecasted default rates and any declines in anticipated recovery rates. The Company’s financial exposure to the CDO
entities it manages is limited to its equity interests in the CDO entities as reflected in the Company’s Consolidated Balance
Sheet.
34
Stock-Based Compensation
Stock-based compensation expense reflects the fair value of
stock-based awards measured at grant date, is recognized over the relevant service period, and is adjusted each period for anticipated forfeitures. The
fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model. The Black-Scholes option valuation
model incorporates assumptions as to dividend yield, volatility, an appropriate risk-free interest rate and the expected life of the option. Many of
these assumptions require management’s judgment. Management must also apply judgment in developing an expectation of awards that may be forfeited.
If actual experience differs significantly from these estimates, stock-based compensation expense and the Company’s results of operations could be
materially affected.
Loss Contingencies
The Company continuously reviews any investor, employee or vendor
complaints and pending or threatened litigation. The likelihood that a loss contingency exists is evaluated under the criteria of Statement of
Financial Accounting Standards (“SFAS”) No. 5, “Accounting for Contingencies,” through consultation with legal counsel and a loss
contingency is recorded if the contingency is probable and reasonably estimable at the date of the financial statements. There are no losses of this
nature that are probable and reasonably estimable, and thus none have been recorded in the financial statements included in this
report.
Inflation
The Company’s assets are, to a large extent, liquid in
nature and therefore the Company does not believe that inflation has had a material impact on the Company’s results of operations. To the extent
that inflation, or the expectation thereof, results in rising interest rates, it may adversely affect the Company’s financial condition and
results of operations. A substantial decline in the value of fixed-income or equity investments could adversely affect the net asset value of funds and
accounts the Company manages, which in turn would result in a decline in investment advisory revenue.
Accounting Developments
In September 2006, the Financial Accounting Standards Board
(“FASB”) issued SFAS No. 157, “Fair Value Measurements” (SFAS No. 157). SFAS No. 157 defines fair value, establishes a framework
for measuring fair value, and expands disclosure requirements about fair value measurements. SFAS No. 157 applies under other accounting pronouncements
that require or permit fair value measurements but does not in itself require any new fair value measurements. The provisions of SFAS No. 157 are
effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. Management is currently evaluating this
standard and its impact, if any, on the Company’s consolidated financial statements.
In September 2006, the FASB issued SFAS No. 158,
“Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106, and
132(R).” SFAS No. 158 requires employers to recognize the overfunded or underfunded status of a defined postretirement plan in its statement of
financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. This statement
also requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position. The provisions of SFAS
No. 158 are effective for fiscal years ending after December 15, 2006 for employers with publicly traded equity securities. The Company does not
anticipate that the provisions of SFAS No. 158 will have an impact on the Company’s consolidated financial statements because the Company does not
maintain any defined benefit, pension or other post-retirement plans.
35
In June 2006, the Financial Accounting Standards Board
(“FASB”) issued interpretation No. 48, “Accounting for the Uncertainty in Income Taxes — an interpretation of FASB Statement No.
109” (FIN 48). FIN 48 clarifies certain aspects of accounting for uncertain tax positions, including issues related to the recognition and
measurement of those tax positions. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006. Management is currently
evaluating the potential impact of the adoption of this interpretation.
In June 2005, the FASB ratified the EITF’s consensus on EITF
Issue No. 04-05, “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When
the Limited Partners Have Certain Rights.” The Task Force reached a consensus that for general partners of all new limited partnerships formed and
for existing limited partnerships for which the partnership agreements are modified, the guidance is effective after June 29, 2005. The Task Force also
reached a consensus that for general partners in all other limited partnerships, the guidance is effective no later than the beginning of the first
reporting period in fiscal years beginning after December 15, 2005. The adoption of the consensus did not have a material effect on the consolidated
results of operations or the consolidated financial position of the Company.
Item 7A. Quantitative and Qualitative Disclosures about
Market Risk
The Company is subjected to different types of risk, including
market risk. Market risk is the risk that the Company will incur losses due to adverse changes in equity and bond prices, interest rates, credit risk,
or currency exchange rates.
The Company’s primary direct exposure to equity price risk
arises from its investments in sponsored equity funds and equity securities held by sponsored funds the Company consolidates. The Company’s
investments in sponsored equity funds and equity securities are carried at fair value on the Company’s Consolidated Balance Sheets. Equity price
risk as it relates to these investments represents the potential future loss of value that would result from a decline in the fair values of the fund
shares or underlying equity securities. The following is a summary of the effect that a 10 percent increase or decrease in equity prices would have on
the Company’s investments subject to equity price fluctuation at October 31, 2006:
(in thousands)
|
|
|
|
Carrying
Value
|
|
Carrying
Value
assuming a
10%
increase
|
|
Carrying
Value
assuming a
10%
decrease
|
Trading: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
securities |
|
|
|
|
$12,775 |
|
|
|
$14,053 |
|
|
|
$11,498 |
|
Available for
sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sponsored
funds |
|
|
|
|
32,747 |
|
|
|
36,022 |
|
|
|
29,472 |
|
Total |
|
|
|
|
$45,522 |
|
|
|
$50,075 |
|
|
|
$40,970 |
|
The Company’s primary direct exposure to interest rate risk
arises from its investment in fixed and floating-rate income funds sponsored by the Company and debt securities held by sponsored funds the Company
consolidates. The Company considered the negative effect on pre-tax interest income of a 50 basis point (0.50%) decline in interest rates as of October
31, 2006. A 50 basis point decline in interest rates is a hypothetical scenario used to demonstrate potential risk and does not represent
management’s view of future market changes. The following is a summary of the effect that a 50 basis point percent (0.50%) decline in interest
rates would have on the Company’s pre-tax net income as of October 31, 2006:
36
(in
thousands)
|
|
|
|
Carrying
Value
|
|
Pre-tax interest
income impact of a
50 basis
point decline
in interest rates
|
|
Trading: |
|
|
|
|
|
|
|
|
|
|
|
Debt
securities |
|
|
|
$ |
761 |
|
|
$ |
4 |
|
|
Available for
sale securities: |
|
|
|
|
|
|
|
|
|
|
|
Sponsored
funds |
|
|
|
|
3,736 |
|
|
|
19 |
|
|
Investment in
affiliates |
|
|
|
|
20,669 |
|
|
|
103 |
|
|
Total |
|
|
|
$ |
25,166 |
|
|
$ |
126 |
|
The Company’s primary direct exposure to credit risk arises
from its minority equity interests in four CDO entities that are included in long-term investments in the Company’s Consolidated Balance Sheets.
As a minority equity investor in a CDO entity, the Company is entitled to only a residual interest in the CDO entity, making these investments highly
sensitive to the default rates of the underlying issuers of the high-yield bonds or floating-rate income instruments held by the CDO entity. The
Company’s minority equity investments are subject to an impairment loss in the event that the cash flows generated by the collateral securities
are not sufficient to allow equity holders to recover their investments. If there is deterioration in the credit quality of the issuers underlying the
collateral securities and a corresponding increase in the number of defaults, cash flows generated by the collateral securities may be adversely
impacted and the Company may be unable to recover its investment. The Company’s total investment in minority equity interests in CDO entities is
approximately $9.1 million at October 31, 2006, which represents the total value at risk with respect to such entities as of October 31,
2006.
The Company does not enter into foreign currency transactions for
speculative purposes and currently has no material investments that would expose it to foreign currency exchange risk.
In evaluating market risk, it is also important to note that most
of the Company’s revenue is based on the market value of assets under management. As noted in “Risk Factors” in Item 1A, declines of
financial market values will negatively impact the Company’s revenue and net income.
37
Item 8. Financial Statements and Supplementary
Data
Index to Consolidated Financial Statements and
Supplementary Data
For the Fiscal Years Ended October 31, 2006, 2005 and 2004
Contents
|
|
|
|
Page
number
reference
|
Consolidated
Financial Statements of Eaton Vance Corp.:
|
|
|
|
|
|
|
Consolidated
Statements of Income for each of the three years in the period
ended October 31, 2006 |
|
|
|
|
39 |
|
Consolidated
Balance Sheets as of October 31, 2006 and 2005 |
|
|
|
|
40 |
|
Consolidated
Statements of Shareholders’ Equity and Comprehensive Income
for each of the three years in the period ended October 31, 2006 |
|
|
|
|
41 |
|
Consolidated
Statements of Cash Flows for each of the three years in the
period ended October 31, 2006 |
|
|
|
|
43 |
|
Notes to
Consolidated Financial Statements |
|
|
|
|
44 |
|
Report of
Independent Registered Public Accounting Firm |
|
|
|
|
64 |
|
All schedules have been omitted because they are not required,
are not applicable or the information is otherwise shown in the consolidated financial statements or notes thereto.
38
Consolidated Statements of Income
|
|
|
|
|
|
|
|
|
|
Years Ended October 31,
|
|
(in
thousands, except per share figures)
|
|
|
|
2006
|
|
2005
|
|
2004
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
adviser and administration fees |
|
|
|
$ |
594,632 |
|
|
$ |
503,085 |
|
|
$ |
413,102 |
|
Distribution
and underwriter fees |
|
|
|
|
140,331 |
|
|
|
139,043 |
|
|
|
150,018 |
|
Service
fees |
|
|
|
|
122,805 |
|
|
|
104,644 |
|
|
|
92,087 |
|
Other
revenue |
|
|
|
|
4,426 |
|
|
|
6,403 |
|
|
|
6,606 |
|
Total
revenue |
|
|
|
|
862,194 |
|
|
|
753,175 |
|
|
|
661,813 |
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
of officers and other employees |
|
|
|
|
244,620 |
|
|
|
205,663 |
|
|
|
172,411 |
|
Amortization
of deferred sales commissions |
|
|
|
|
52,048 |
|
|
|
63,535 |
|
|
|
81,202 |
|
Service fee
expense |
|
|
|
|
95,573 |
|
|
|
86,197 |
|
|
|
76,620 |
|
Distribution
expense |
|
|
|
|
116,741 |
|
|
|
103,447 |
|
|
|
81,559 |
|
Other
expenses |
|
|
|
|
88,246 |
|
|
|
61,726 |
|
|
|
49,381 |
|
Total
expenses |
|
|
|
|
597,228 |
|
|
|
520,568 |
|
|
|
461,173 |
|
Operating
income |
|
|
|
|
264,966 |
|
|
|
232,607 |
|
|
|
200,640 |
|
Other
Income (Expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income |
|
|
|
|
8,033 |
|
|
|
4,354 |
|
|
|
2,799 |
|
Interest
expense |
|
|
|
|
(12,850 |
) |
|
|
(1,464 |
) |
|
|
(5,898 |
) |
Gain on
investments |
|
|
|
|
3,667 |
|
|
|
38 |
|
|
|
275 |
|
Foreign
currency loss |
|
|
|
|
(222 |
) |
|
|
(32 |
) |
|
|
(85 |
) |
Impairment
loss on investments |
|
|
|
|
(592 |
) |
|
|
(2,120 |
) |
|
|
— |
|
Income before
income taxes, minority interest, equity in net income of affiliates and cumulative effect of change in accounting principle |
|
|
|
|
263,002 |
|
|
|
233,383 |
|
|
|
197,731 |
|
Income
taxes |
|
|
|
|
(102,245 |
) |
|
|
(90,871 |
) |
|
|
(72,493 |
) |
Minority
interest |
|
|
|
|
(5,103 |
) |
|
|
(5,037 |
) |
|
|
(4,559 |
) |
Equity in net
income of affiliates, net of tax |
|
|
|
|
4,349 |
|
|
|
1,231 |
|
|
|
1,283 |
|
Income before
cumulative effect of change in accounting principle |
|
|
|
|
160,003 |
|
|
|
138,706 |
|
|
|
121,962 |
|
Cumulative
effect of change in accounting principle, net of tax |
|
|
|
|
(626 |
) |
|
|
— |
|
|
|
— |
|
Net
income |
|
|
|
$ |
159,377 |
|
|
$ |
138,706 |
|
|
$ |
121,962 |
|
Earnings per
share before cumulative effect of change in accounting principle: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
|
$ |
1.25 |
|
|
$ |
1.05 |
|
|
$ |
0.90 |
|
Diluted |
|
|
|
$ |
1.18 |
|
|
$ |
0.99 |
|
|
$ |
0.87 |
|
Earnings per
share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
|
$ |
1.25 |
|
|
$ |
1.05 |
|
|
$ |
0.90 |
|
Diluted |
|
|
|
$ |
1.17 |
|
|
$ |
0.99 |
|
|
$ |
0.87 |
|
Weighted
average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
|
|
127,807 |
|
|
|
131,591 |
|
|
|
134,938 |
|
Diluted |
|
|
|
|
137,004 |
|
|
|
140,520 |
|
|
|
144,313 |
|
See notes to consolidated financial
statements.
39
Consolidated Balance Sheets
|
|
|
|
October 31,
|
|
(in
thousands, except share figures)
|
|
|
|
2006
|
|
2005
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
Current
Assets: |
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents |
|
|
|
$ |
206,705 |
|
|
$ |
146,389 |
|
Short-term
investments |
|
|
|
|
20,669 |
|
|
|
127,858 |
|
Investment
adviser fees and other receivables |
|
|
|
|
94,669 |
|
|
|
83,868 |
|
Other current
assets |
|
|
|
|
7,324 |
|
|
|
10,473 |
|
Total current
assets |
|
|
|
|
329,367 |
|
|
|
368,588 |
|
Other
Assets: |
|
|
|
|
|
|
|
|
|
|
Deferred
sales commissions |
|
|
|
|
112,314 |
|
|
|
126,113 |
|
Goodwill |
|
|
|
|
96,837 |
|
|
|
89,634 |
|
Other
intangible assets, net |
|
|
|
|
34,549 |
|
|
|
40,644 |
|
Long-term
investments |
|
|
|
|
73,075 |
|
|
|
61,766 |
|
Equipment and
leasehold improvements, net |
|
|
|
|
21,495 |
|
|
|
12,764 |
|
Other
assets |
|
|
|
|
558 |
|
|
|
3,035 |
|
Total other
assets |
|
|
|
|
338,828 |
|
|
|
333,956 |
|
Total
assets |
|
|
|
$ |
668,195 |
|
|
$ |
702,544 |
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
Current
Liabilities: |
|
|
|
|
|
|
|
|
|
|
Accrued
compensation |
|
|
|
$ |
80,975 |
|
|
$ |
62,880 |
|
Accounts
payable and accrued expenses |
|
|
|
|
33,660 |
|
|
|
27,987 |
|
Dividend
payable |
|
|
|
|
15,187 |
|
|
|
12,952 |
|
Other current
liabilities |
|
|
|
|
9,823 |
|
|
|
12,538 |
|
Total current
liabilities |
|
|
|
|
139,645 |
|
|
|
116,357 |
|
Long-Term
Liabilities: |
|
|
|
|
|
|
|
|
|
|
Long-term
debt |
|
|
|
|
— |
|
|
|
75,467 |
|
Deferred
income taxes |
|
|
|
|
22,520 |
|
|
|
29,804 |
|
Total
long-term liabilities |
|
|
|
|
22,520 |
|
|
|
105,271 |
|
Total
liabilities |
|
|
|
|
162,165 |
|
|
|
221,628 |
|
Minority
interest |
|
|
|
|
9,545 |
|
|
|
4,620 |
|
Commitments and
contingencies (See Note 7) |
|
|
|
|
— |
|
|
|
— |
|
Shareholders’ Equity: |
|
|
|
|
|
|
|
|
|
|
Common stock,
par value $0.00390625 per share: |
|
|
|
|
|
|
|
|
|
|
Authorized,
1,280,000 shares |
|
|
|
|
|
|
|
|
|
|
Issued and
outstanding, 309,760 shares |
|
|
|
|
1 |
|
|
|
1 |
|
Non-voting
common stock, par value $0.00390625 per share: |
|
|
|
|
|
|
|
|
|
|
Authorized,
190,720,000 shares |
|
|
|
|
|
|
|
|
|
|
Issued and
outstanding, 126,125,717 and 129,243,023 shares, respectively |
|
|
|
|
493 |
|
|
|
505 |
|
Notes
receivable from stock option exercises |
|
|
|
|
(1,891 |
) |
|
|
(2,741 |
) |
Accumulated
other comprehensive income |
|
|
|
|
4,383 |
|
|
|
2,566 |
|
Retained
earnings |
|
|
|
|
493,499 |
|
|
|
475,965 |
|
Total
shareholders’ equity |
|
|
|
|
496,485 |
|
|
|
476,296 |
|
Total
liabilities and shareholders’ equity |
|
|
|
$ |
668,195 |
|
|
$ |
702,544 |
|
See notes to consolidated financial statements.
40
Consolidated Statements of Shareholders’ Equity and
Comprehensive Income (Continued)
(in
thousands)
|
|
Common
and
Non-Voting
Common
Shares
|
|
Common
Stock
|
|
Non-Voting
Common
Stock
|
|
Additional
Paid-In
Capital
|
|
Notes
Receivable
From Stock
Option
Exercises
|
| Balance,
October 31, 2003 |
|
|
136,810 |
|
|
$ |
1 |
|
|
$ |
533 |
|
|
$ |
— |
|
|
$ |
(2,995 |
) |
| Net
income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| Other
comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Unrealized
gains on investments, net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| Foreign
currency translation adjustments, net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| Total
comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Dividends
declared ($0.28 per share) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| Issuance
of non-voting common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| On
exercise of stock options |
|
|
878 |
|
|
|
— |
|
|
|
3 |
|
|
|
8,194 |
|
|
|
(577 |
) |
| Under
employee stock purchase plan |
|
|
140 |
|
|
|
— |
|
|
|
1 |
|
|
|
2,024 |
|
|
|
— |
|
| Under
employee incentive plan |
|
|
108 |
|
|
|
— |
|
|
|
1 |
|
|
|
1,695 |
|
|
|
— |
|
| Under
restricted stock plan |
|
|
171 |
|
|
|
— |
|
|
|
1 |
|
|
|
— |
|
|
|
— |
|
| Stock-based
compensation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
23,522 |
|
|
|
— |
|
| Tax
benefit of stock option exercises |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,511 |
|
|
|
— |
|
| Repurchase
of non-voting common stock |
|
|
(4,526 |
) |
|
|
— |
|
|
|
(18 |
) |
|
|
(36,946 |
) |
|
|
— |
|
| Principal
repayments |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
854 |
|
| Balance,
October 31, 2004 |
|
|
133,581 |
|
|
|
1 |
|
|
|
521 |
|
|
|
— |
|
|
|
(2,718 |
) |
| Net
income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| Other
comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Unrealized
gains on investments, net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| Foreign
currency translation adjustments, net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| Total
comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Dividends
declared ($0.34 per share) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| Issuance
of non-voting common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| On
exercise of stock options |
|
|
1,075 |
|
|
|
— |
|
|
|
4 |
|
|
|
12,623 |
|
|
|
(615 |
) |
| Under
employee stock purchase plan |
|
|
134 |
|
|
|
— |
|
|
|
1 |
|
|
|
2,424 |
|
|
|
— |
|
| Under
employee incentive plan |
|
|
126 |
|
|
|
— |
|
|
|
— |
|
|
|
2,641 |
|
|
|
— |
|
| Under
restricted stock plan |
|
|
46 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| Stock-based
compensation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
28,607 |
|
|
|
— |
|
| Tax
benefit of stock option exercises |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,434 |
|
|
|
— |
|
| Repurchase
of non-voting common stock |
|
|
(5,409 |
) |
|
|
— |
|
|
|
(21 |
) |
|
|
(49,729 |
) |
|
|
— |
|
| Principal
repayments |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
592 |
|
| Balance,
October 31, 2005 |
|
|
129,553 |
|
|
|
1 |
|
|
|
505 |
|
|
|
— |
|
|
|
(2,741 |
) |
| Net
income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| Other
comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Unrealized
gains on investments, net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| Foreign
currency translation adjustments, net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| Total
comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Dividends
declared ($0.42 per share) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| Issuance
of non-voting common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| On
exercise of stock options |
|
|
2,388 |
|
|
|
— |
|
|
|
9 |
|
|
|
22,238 |
|
|
|
(552 |
) |
| Under
employee stock purchase plan |
|
|
134 |
|
|
|
— |
|
|
|
1 |
|
|
|
2,910 |
|
|
|
— |
|
| Under
employee incentive plan |
|
|
153 |
|
|
|
— |
|
|
|
1 |
|
|
|
3,589 |
|
|
|
— |
|
| Under
restricted stock plan |
|
|
40 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| Stock-based
compensation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
36,867 |
|
|
|
— |
|
| Tax
benefit of stock option exercises |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
6,073 |
|
|
|
— |
|
| Repurchase
of non-voting common stock |
|
|
(5,833 |
) |
|
|
— |
|
|
|
(23 |
) |
|
|
(71,677 |
) |
|
|
— |
|
| Principal
repayments |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,402 |
|
| Balance,
October 31, 2006 |
|
|
126,435 |
|
|
$ |
1 |
|
|
$ |
493 |
|
|
$ |
— |
|
|
$ |
(1,891 |
) |
See notes to consolidated financial statements.
41
Consolidated Statements of Shareholders’ Equity and
Comprehensive Income (Concluded)
(in
thousands)
|
|
|
|
Accumulated
Other
Comprehensive
Income
(Loss)
|
|
Retained
Earnings
|
|
Total
Shareholders’
Equity
|
|
Comprehensive
Income (Loss)
|
|
Balance,
October 31, 2003 |
|
|
|
$ |
1,245 |
|
|
$ |
427,727 |
|
|
$ |
426,511 |
|
|
|
|
|
|
Net
income |
|
|
|
|
— |
|
|
|
121,962 |
|
|
|
121,962 |
|
|
$ |
121,962 |
|
|
Other
comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gains on investments, net of tax |
|
|
|
|
558 |
|
|
|
— |
|
|
|
558 |
|
|
|
558 |
|
|
Foreign
currency translation adjustments, net of tax |
|
|
|
|
51 |
|
|
|
— |
|
|
|
51 |
|
|
|
51 |
|
|
Total
comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
122,571 |
|
|
Dividends
declared ($0.28 per share) |
|
|
|
|
— |
|
|
|
(36,962 |
) |
|
|
(36,962 |
) |
|
|
|
|
|
Issuance of
non-voting common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On exercise
of stock options |
|
|
|
|
— |
|
|
|
— |
|
|
|
7,620 |
|
|
|
|
|
|
Under
employee stock purchase plan |
|
|
|
|
— |
|
|
|
— |
|
|
|
2,025 |
|
|
|
|
|
|
Under
employee incentive plan |
|
|
|
|
— |
|
|
|
— |
|
|
|
1,696 |
|
|
|
|
|
|
Under
restricted stock plan |
|
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
|
|
|
|
|
Stock-based
compensation |
|
|
|
|
— |
|
|
|
— |
|
|
|
23,522 |
|
|
|
|
|
|
Tax benefit
of stock option exercises |
|
|
|
|
— |
|
|
|
— |
|
|
|
1,511 |
|
|
|
|
|
|
Repurchase
of non-voting common stock |
|
|
|
|
— |
|
|
|
(48,057 |
) |
|
|
(85,021 |
) |
|
|
|
|
|
Principal
repayments |
|
|
|
|
— |
|
|
|
— |
|
|
|
854 |
|
|
|
|
|
|
Balance,
October 31, 2004 |
|
|
|
|
1,854 |
|
|
|
464,670 |
|
|
|
464,328 |
|
|
|
|
|
|
Net
income |
|
|
|
|
— |
|
|
|
138,706 |
|
|
|
138,706 |
|
|
$ |
138,706 |
|
|
Other
comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gains on investments, net of tax |
|
|
|
|
760 |
|
|
|
— |
|
|
|
760 |
|
|
|
760 |
|
|
Foreign
currency translation adjustments, net of tax |
|
|
|
|
(48 |
) |
|
|
— |
|
|
|
(48 |
) |
|
|
(48 |
) |
|
Total
comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
139,418 |
|
|
Dividends
declared ($0.34 per share) |
|
|
|
|
— |
|
|
|
(44,539 |
) |
|
|
(44,539 |
) |
|
|
|
|
|
Issuance of
non-voting common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On exercise
of stock options |
|
|
|
|
— |
|
|
|
— |
|
|
|
12,012 |
|
|
|
|
|
|
Under
employee stock purchase plan |
|
|
|
|
— |
|
|
|
— |
|
|
|
2,425 |
|
|
|
|
|
|
Under
employee incentive plan |
|
|
|
|
— |
|
|
|
— |
|
|
|
2,641 |
|
|
|
|
|
|
Under
restricted stock plan |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Stock-based
compensation |
|
|
|
|
— |
|
|
|
— |
|
|
|
28,607 |
|
|
|
|
|
|
Tax benefit
of stock option exercises |
|
|
|
|
— |
|
|
|
— |
|
|
|
3,434 |
|
|
|
|
|
|
Repurchase of
non-voting common stock |
|
|
|
|
— |
|
|
|
(82,872 |
) |
|
|
(132,622 |
) |
|
|
|
|
|
Principal
repayments |
|
|
|
|
— |
|
|
|
— |
|
|
|
592 |
|
|
|
|
|
|
Balance,
October 31, 2005 |
|
|
|
|
2,566 |
|
|
|
475,965 |
|
|
|
476,296 |
|
|
|
|
|
|
Net
income |
|
|
|
|
— |
|
|
|
159,377 |
|
|
|
159,377 |
|
|
$ |
159,377 |
|
|
Other
comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gains on investments, net of tax |
|
|
|
|
1,754 |
|
|
|
— |
|
|
|
1,754 |
|
|
|
1,754 |
|
|
Foreign
currency translation adjustments, net of tax |
|
|
|
|
63 |
|
|
|
— |
|
|
|
63 |
|
|
|
63 |
|
|
Total
comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
161,194 |
|
|
Dividends
declared ($0.42 per share) |
|
|
|
|
— |
|
|
|
(53,629 |
) |
|
|
(53,629 |
) |
|
|
|
|
|
Issuance of
non-voting common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On exercise
of stock options |
|
|
|
|
— |
|
|
|
— |
|
|
|
21,695 |
|
|
|
|
|
|
Under
employee stock purchase plan |
|
|
|
|
— |
|
|
|
— |
|
|
|
2,911 |
|
|
|
|
|
|
Under
employee incentive plan |
|
|
|
|
— |
|
|
|
— |
|
|
|
3,590 |
|
|
|
|
|
|
Under
restricted stock plan |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Stock-based
compensation |
|
|
|
|
— |
|
|
|
— |
|
|
|
36,867 |
|
|
|
|
|
|
Tax benefit
of stock option exercises |
|
|
|
|
— |
|
|
|
— |
|
|
|
6,073 |
|
|
|
|
|
|
Repurchase of
non-voting common stock |
|
|
|
|
— |
|
|
|
(88,214 |
) |
|
|
(159,914 |
) |
|
|
|
|
|
Principal
repayments |
|
|
|
|
— |
|
|
|
— |
|
|
|
1,402 |
|
|
|
|
|
|
Balance,
October 31, 2006 |
|
|
|
$ |
4,383 |
|
|
$ |
493,499 |
|
|
$ |
496,485 |
|
|
|
|
|
See notes to consolidated financial statements.
42
Consolidated Statements of Cash
Flows
|
|
|
|
Years Ended October 31,
|
|
(in
thousands)
|
|
|
|
2006
|
|
2005
|
|
2004
|
Cash and cash
equivalents, beginning of year |
|
|
|
$ |
146,389 |
|
|
$ |
147,137 |
|
|
$ |
138,328 |
|
Cash
Flows From Operating Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income |
|
|
|
|
159,377 |
|
|
|
138,706 |
|
|
|
121,962 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
Impairment
loss on long-term investments |
|
|
|
|
592 |
|
|
|
2,120 |
|
|
|
— |
|
(Gain) loss
on investments |
|
|
|
|
(4,256 |
) |
|
|
192 |
|
|
|
(326 |
) |
Equity in net
income of affiliates |
|
|
|
|
(6,845 |
) |
|
|
(1,958 |
) |
|
|
(2,005 |
) |
Dividends
received from affiliate |
|
|
|
|
2,734 |
|
|
|
875 |
|
|
|
438 |
|
Minority
interest |
|
|
|
|
5,103 |
|
|
|
5,037 |
|
|
|
4,559 |
|
Interest on
long-term debt and amortization of debt issuance costs |
|
|
|
|
2,551 |
|
|
|
1,282 |
|
|
|
2,969 |
|
Deferred
income taxes |
|
|
|
|
(11,206 |
) |
|
|
(14,539 |
) |
|
|
19,192 |
|
Stock-based
compensation |
|
|
|
|
36,314 |
|
|
|
28,607 |
|
|
|
23,522 |
|
Cumulative
effect of change in accounting principle, net of tax |
|
|
|
|
626 |
|
|
|
— |
|
|
|
— |
|
Depreciation
and other amortization |
|
|
|
|
15,524 |
|
|
|
6,830 |
|
|
|
6,627 |
|
Amortization
of deferred sales commissions |
|
|
|
|
52,048 |
|
|
|
63,540 |
|
|
|
81,202 |
|
Payment of
capitalized sales commissions |
|
|
|
|
(53,848 |
) |
|
|
(46,950 |
) |
|
|
(63,830 |
) |
Contingent
deferred sales charges received |
|
|
|
|
15,628 |
|
|
|
19,548 |
|
|
|
19,691 |
|
Proceeds from
sale of trading investments |
|
|
|
|
190,725 |
|
|
|
88,762 |
|
|
|
19,177 |
|
Purchase of
trading investments |
|
|
|
|
(160,172 |
) |
|
|
(157,562 |
) |
|
|
(125,015 |
) |
Changes in
assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
adviser fees and other receivables |
|
|
|
|
(10,801 |
) |
|
|
(52,356 |
) |
|
|
(6,327 |
) |
Other current
assets |
|
|
|
|
3,773 |
|
|
|
(4,643 |
) |
|
|
(1,329 |
) |
Other
assets |
|
|
|
|
3,942 |
|
|
|
2,688 |
|
|
|
(1,338 |
) |
Accrued
compensation |
|
|
|
|
18,093 |
|
|
|
10,583 |
|
|
|
16,960 |
|
Accounts
payable and accrued expenses |
|
|
|
|
5,666 |
|
|
|
8,199 |
|
|
|
(33 |
) |
Other current
liabilities |
|
|
|
|
(2,717 |
) |
|
|
5,091 |
|
|
|
(876 |
) |
Net cash
provided by operating activities |
|
|
|
|
262,851 |
|
|
|
104,052 |
|
|
|
115,220 |
|
Cash
Flows From Investing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to
equipment and leasehold improvements |
|
|
|
|
(12,721 |
) |
|
|
(3,397 |
) |
|
|
(3,600 |
) |
Purchase of
minority members’ interests |
|
|
|
|
(11,256 |
) |
|
|
(360 |
) |
|
|
— |
|
Purchase of
management contracts |
|
|
|
|
(1,703 |
) |
|
|
(463 |
) |
|
|
(801 |
) |
Proceeds from
sale of available-for-sale investments |
|
|
|
|
27,048 |
|
|
|
1,441 |
|
|
|
3,279 |
|
Purchase of
available-for-sale investments |
|
|
|
|
(27,565 |
) |
|
|
(28,089 |
) |
|
|
(2,367 |
) |
Net cash used
for investing activities |
|
|
|
|
(26,197 |
) |
|
|
(30,868 |
) |
|
|
(3,489 |
) |
Cash
Flows From Financing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions
to minority shareholders |
|
|
|
|
(5,828 |
) |
|
|
(4,379 |
) |
|
|
(3,169 |
) |
Long-term
debt issuance costs |
|
|
|
|
— |
|
|
|
(428 |
) |
|
|
— |
|
Repayment of
long-term debt |
|
|
|
|
(76,358 |
) |
|
|
— |
|
|
|
(53,171 |
) |
Excess tax
benefit of stock option exercises |
|
|
|
|
8,234 |
|
|
|
3,542 |
|
|
|
1,865 |
|
Proceeds from
issuance of non-voting common stock |
|
|
|
|
28,196 |
|
|
|
17,078 |
|
|
|
11,341 |
|
Repurchase of
non-voting common stock |
|
|
|
|
(159,914 |
) |
|
|
(132,622 |
) |
|
|
(85,021 |
) |
Principal
repayments on notes receivable from stock option exercises |
|
|
|
|
1,402 |
|
|
|
592 |
|
|
|
854 |
|
Dividends
paid |
|
|
|
|
(51,394 |
) |
|
|
(42,248 |
) |
|
|
(34,491 |
) |
Proceeds from
the issuance of mutual fund subsidiaries’ capital stock |
|
|
|
|
80,000 |
|
|
|
151,500 |
|
|
|
76,818 |
|
Redemption of
mutual fund subsidiaries’ capital stock |
|
|
|
|
(745 |
) |
|
|
(66,891 |
) |
|
|
(18,030 |
) |
Net cash used
for financing activities |
|
|
|
|
(176,407 |
) |
|
|
(73,856 |
) |
|
|
(103,004 |
) |
Effect of
currency rate changes on cash and cash equivalents |
|
|
|
|
69 |
|
|
|
(76 |
) |
|
|
82 |
|
Net increase
(decrease) in cash and cash equivalents |
|
|
|
|
60,316 |
|
|
|
(748 |
) |
|
|
8,809 |
|
Cash and cash
equivalents, end of year |
|
|
|
$ |
206,705 |
|
|
$ |
146,389 |
|
|
$ |
147,137 |
|
Supplemental Cash Flow Information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
paid |
|
|
|
$ |
10,022 |
|
|
$ |
182 |
|
|
$ |
3,589 |
|
Income taxes
paid |
|
|
|
$ |
107,404 |
|
|
$ |
100,702 |
|
|
$ |
54,344 |
|
Supplemental Non-Cash Flow Information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of
stock options through issuance of notes receivable |
|
|
|
$ |
552 |
|
|
$ |
615 |
|
|
$ |
577 |
|
See notes to consolidated financial statements.
43
Notes to Consolidated Financial
Statements
1. |
|
Summary of Significant Accounting
Policies
|
Business and
Organization
Eaton Vance Corp. and its subsidiaries
(“the Company”) provide investment advisory and distribution services to mutual funds and other investment funds, and investment management
and counseling services to individual high-net-worth investors, family offices and institutional clients. Revenue is largely dependent on the total
value and composition of assets under management, which include sponsored funds and other investment portfolios. Accordingly, fluctuations in financial
markets and in the composition of assets under management impact revenue and the results of operations.
Principles of
Consolidation
The consolidated financial statements
include the accounts of Eaton Vance Corp. and its wholly and majority-owned subsidiaries. The equity method of accounting is used for investments in
affiliates in which the Company’s ownership ranges from 20 to 50 percent. The Company consolidates all investments in affiliates in which the
Company’s ownership exceeds 50 percent. The Company provides for minority interests in consolidated companies for which the Company’s
ownership is less than 100 percent. All material intercompany accounts and transactions have been eliminated.
Reclassification and
Presentation
In December 2004, the Financial
Accounting Standards Board (“FASB”) revised Statement of Financial Accounting Standards (“SFAS”) No. 123,
“Accounting For Stock-Based Compensation,” requiring public companies to recognize the cost resulting from all share-based
payment transactions in their financial statements based on the grant-date fair value of those awards. The Company has applied the
modified version of retrospective application of SFAS No. 123R, “Share-Based Payment,” for all periods prior to the
required effective date and adjusted its financials statements for all periods presented on a basis consistent with the pro forma
disclosures previously made under SFAS No. 123.
Certain prior year amounts have been reclassified to conform to the current year
presentation.
Segment
Information
SFAS No. 131, “Disclosures about
Segments of an Enterprise and Related Information,” establishes disclosure requirements relating to operating segments in annual and interim
financial statements. Management has determined that the Company operates in one business segment, namely as an investment adviser managing funds and
separate accounts.
Accounting
Estimates
The preparation of the Company’s
consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to
make estimates and assumptions that affect the amounts reported in the consolidated financial statements and related notes to the consolidated
financial statements. Changes in these estimates may affect amounts reported in future periods.
Cash
Equivalents
Cash equivalents consist principally of
highly liquid investments in sponsored money market mutual funds, which are readily convertible to cash.
44
Investments
Marketable securities classified as
trading consist primarily of investments in debt and equity securities held in the portfolios of sponsored funds consolidated by the Company and are
carried at fair value based on quoted market prices. Net unrealized holding gains or losses, as well as realized gains or losses, are reflected as a
component of other revenue. The specific identified cost method is used to determine the realized gain or loss on securities sold.
Marketable securities classified as
available-for-sale consist primarily of investments in sponsored funds and other debt and equity securities held by the Company in separately managed
accounts and are carried at fair value based on quoted market prices. Unrealized holding gains or losses are reported net of deferred tax as a separate
component of accumulated other comprehensive income (loss) until realized. Realized gains or losses are reflected as a component of gain (loss) on
investments. The average cost method is used to determine the realized gain or loss on the sale of shares of sponsored funds. The specific identified
cost method is used to determine the realized gain or loss on sale of debt and equity securities maintained in separately managed
accounts.
The Company evaluates the carrying
value of marketable securities for impairment on a quarterly basis. In its impairment analysis, the Company takes into consideration numerous criteria,
including the duration and extent of any decline in fair value. If the decline in value is determined to be other than temporary, the carrying value of
the security is written down to fair value through net income.
Investments in the equity of
collateralized debt obligation entities (“CDO entities”) are carried at fair value based on discounted cash flows. The excess of actual and
anticipated future cash flows over the initial investment at the date of purchase is recognized as interest income over the life of the investment
using the effective yield method. The Company reviews cash flow estimates throughout the life of each CDO entity. If the updated estimate of future
cash flows (taking into account both timing and amounts) is less than the last revised estimate, an impairment loss is recognized based on the excess
of the carrying amount of the investment over its fair value.
Certain other investments are carried
at the lower of cost or management’s estimate of net realizable value owing primarily to restrictions on resale of the
investments.
Deferred Sales
Commissions
Sales commissions paid by the Company
to broker/dealers in connection with the sale of certain classes of shares of open-end funds, bank loan interval funds and private funds are generally
capitalized and amortized over the period during which the shareholder is subject to a contingent deferred sales charge, which does not exceed six
years. Distribution plan payments received by the Company from these funds are recorded in revenue as earned. Contingent deferred sales charges and
early withdrawal charges received by the Company from redeeming shareholders of open-end, bank loan interval and private funds reduce unamortized
deferred sales commissions.
The Company evaluates the carrying
value of its deferred sales commission asset for impairment on a quarterly basis. In its impairment analysis, the Company compares the carrying value
of the deferred sales commission asset to the undiscounted cash flows expected to be generated by the asset over its remaining useful life to determine
whether impairment has occurred. If the carrying value of the asset exceeds the undiscounted cash flows, the asset is written down to fair value based
on discounted cash flows. Impairment adjustments are recognized in operating income as a component of amortization of deferred sales
commissions.
45
Goodwill and Other Intangible
Assets
Goodwill represents the excess of the
cost of the Company’s investment in the net assets of acquired companies over the fair value of the underlying identifiable net assets at the
dates of acquisition. Goodwill is not amortized, but is tested at least annually for impairment.
Identifiable intangible assets
generally represent the cost of client relationships and management contracts acquired. Identifiable intangible assets with indefinite useful lives are
not amortized. Identifiable intangible assets with discrete useful lives are amortized on a straight-line basis over their weighted average lives. The
Company periodically reviews identifiable intangible assets for impairment as events or changes in circumstances indicate that the carrying amount of
such assets may not be recoverable.
Equipment and Leasehold
Improvements
Equipment and other fixed assets are
recorded at cost and depreciated on a straight-line basis over their estimated useful lives, which range from three to five years. Leasehold
improvements are amortized on a straight-line basis over the shorter of their estimated useful lives or the term of the lease.
Debt Issuance
Costs
Deferred debt issuance costs are
amortized on a straight-line basis over the related term of the debt and are included in other assets. The amortization of deferred debt issuance costs
is included in interest expense.
Revenue
Recognition
Investment adviser, administration,
distribution and service fees for the funds and investment adviser fees for separate accounts managed by the Company are recognized as the services are
performed. Such fees are primarily based on predetermined percentages of the market values of the assets under management. With the exception of the
Company’s separate account investment adviser fees, which are calculated generally as a percentage of either beginning, average or ending
quarterly assets, the Company’s investment adviser, administration, distribution and service fees are calculated principally as a percentage of
average daily assets. The Company may waive certain fees for investment and administration services at its discretion. Investment adviser and
administration fees are recorded gross of any subadvisory arrangements based on the terms of those arrangements, with the corresponding fees paid to
any subadvisor included in other expenses. In instances where the Company acts as subadvisor or co-manager, investment adviser fees are recorded net.
Distribution and service fees are recorded gross of any third-party distribution and service arrangements; the expenses associated with these
third-party distribution and service arrangements are recorded in distribution and service fee expense, respectively.
Sales of shares of investment companies
in connection with the Company’s activities as principal underwriter are accounted for on a settlement date basis, which approximates trade date
basis, with the related commission income and expense recorded on a trade date basis.
Interest income is accrued as
earned.
Income
Taxes
Deferred income taxes reflect the
expected future tax consequences of temporary differences between the carrying amounts and tax bases of the Company’s assets and liabilities
measured using rates
46
expected to be in effect when such
differences reverse. Deferred taxes relate principally to stock-based compensation expense and capitalized sales commissions paid to brokers and
dealers.
Earnings Per
Share
Basic earnings per share are based on
the weighted-average number of common shares outstanding during each period less non-vested restricted stock. Diluted earnings per share are based on
basic shares as determined above plus the incremental shares that would be issued upon the assumed exercise of in-the-money stock options, non-vested
restricted stock using the treasury stock method and contingently convertible debt using the if-converted method.
Stock-Based
Compensation
The Company accounts for stock-based
compensation expense in accordance with SFAS No. 123R. Under SFAS No. 123R, stock-based compensation expense reflects the fair value of stock-based
awards measured at grant date, is recognized over the relevant service period, and is adjusted each period for anticipated forfeitures. The fair value
of each option award is estimated on the date of grant using the Black-Scholes option valuation model. The Black-Scholes option valuation model
incorporates assumptions as to dividend yield, volatility, an appropriate risk-free interest rate and the expected life of the option. Stock-based
compensation expense for employees who are not retirement eligible is recognized on a straight-line basis over the service or vesting period of the
option (generally five years). Prior to the implementation of SFAS No. 123R, and consistent with SFAS 123, it had been the Company’s policy to
recognize all stock-based compensation expense over the vesting period without regard to retirement eligibility. The Company continues to recognize all
stock-based compensation expense for awards granted to retirement-eligible employees prior to November 1, 2005 over the vesting period. The Company
immediately recognizes compensation expense at grant date for all awards granted to retirement-eligible employees on or after adoption of SFAS No. 123R on November 1,
2005. For awards granted to employees approaching retirement eligibility, the adoption of SFAS No. 123R resulted in compensation expense on a
straight-line basis over the period from the grant date through the retirement eligibility date.
Foreign Currency
Translation
Assets and liabilities of foreign
subsidiaries are translated into U.S. dollars at current exchange rates as of the end of the accounting period. Related revenue and expenses are
translated at average exchange rates in effect during the accounting period. Net translation exchange gains and losses are excluded from income and
recorded in accumulated other comprehensive income. Foreign currency transaction gains and losses are reflected in other income
currently.
Comprehensive
Income
The Company reports all changes in
comprehensive income in the Consolidated Statements of Shareholders’ Equity and Comprehensive Income. Comprehensive income includes net income,
unrealized gains and losses on securities classified as available-for-sale (net of tax) and foreign currency translation adjustments (net of
tax).
2. |
|
Accounting Developments |
In September 2006, the FASB issued SFAS
No. 157, “Fair Value Measurements” (SFAS No. 157). SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and
expands disclosure requirements about fair value measurements. SFAS No. 157 applies to other accounting pronouncements that require or permit fair
value measurements but does not in itself require any new fair value measurements. The provisions of SFAS No. 157 are effective for fiscal years
beginning
47
after November 15, 2007 and interim
periods within those fiscal years. Management is currently evaluating this standard and its impact, if any, on the Company’s consolidated
financial statements.
In September 2006, the FASB issued SFAS
No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88,
106, and 132(R).” SFAS No. 158 requires employers to recognize the overfunded or underfunded status of a defined postretirement plan in its
statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income.
This statement also requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position. The
provisions of SFAS No. 158 are effective for fiscal years ending after December 15, 2006 for employers with publicly traded equity securities. The
Company does not anticipate that the provisions of SFAS No. 158 will have an impact on the Company’s consolidated financial statements because the
Company does not maintain any defined benefit, pension or other post-retirement plans.
In June 2006, the FASB issued
interpretation No. 48, “Accounting for the Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (FIN 48). FIN 48
clarifies certain aspects of accounting for uncertain tax positions, including issues related to the recognition and measurement of those tax
positions. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006. Management is currently evaluating the potential
impact of the adoption of this interpretation.
In June 2005, the FASB ratified the
EITF’s consensus on EITF Issue No. 04-05, “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited
Partnership or Similar Entity When the Limited Partners Have Certain Rights.” The Task Force reached a consensus that for general partners of all
new limited partnerships formed and for existing limited partnerships for which the partnership agreements are modified, the guidance is effective
after June 29, 2005. The Task Force also reached a consensus that for general partners in all other limited partnerships, the guidance is effective no
later than the beginning of the first reporting period in fiscal years beginning after December 15, 2005. The adoption of the consensus did not have a
material effect on the consolidated results of operations or the consolidated financial position of the Company.
3. |
|
Goodwill and Other Intangible Assets |
In fiscal 2003, the Company acquired a
majority interest in Parametric Portfolio Associates LLC (“Parametric Portfolio Associates”). Parametric Portfolio Associates’ minority
shareholders held a 20 percent capital and an 18.8 percent profits interest at closing. Certain minority shareholders of Parametric Portfolio
Associates have the right to sell and the Company has the right to purchase an additional 8.6 percent of the capital of Parametric Portfolio Associates
over a three-year period beginning January 1, 2006. Beginning January 1, 2008, certain minority shareholders of Parametric Portfolio Associates will
have the right to sell and the Company will have the right to purchase the remaining 11.4 percent of the capital of Parametric Portfolio Associates
(which entitles the holder to the remaining 18.8 percent profits interest) over a six-year period. The price for acquiring the remaining capital and
profits interests in Parametric Portfolio Associates will be based on a multiple of earnings before interest and taxes (a measure that is intended to
approximate fair market value) in the previous calendar year. Any additional payments made will be treated as additional purchase price for accounting
purposes. In fiscal 2006, the Company exercised a call option with the minority shareholders of Parametric Portfolio Associates whereby units
representing a 2 percent capital ownership interest in Parametric were sold to the Company for $4.0 million. Pursuant to the acquisition agreement, the
purchase price was based on a multiple of earnings before taxes for the calendar year ended December 31, 2005. As a result of the transaction, the
Company’s capital ownership interest in Parametric Portfolio Associates increased to 82 percent on May 31, 2006 and the Company recorded
intangible assets of $1.4 million (representing $0.7
48
million of amortizable intangible
assets and $0.7 million of non-amortizable intangible assets) and goodwill of $2.5 million. The remainder of the purchase price was allocated to
minority interest.
In fiscal 2001, the Company acquired
majority interests in Atlanta Capital Management, LLC (“Atlanta Capital”) and Fox Asset Management LLC (“Fox Asset Management”).
Atlanta Capital’s minority shareholders held 30 percent of the equity of Atlanta Capital at closing. Atlanta Capital’s minority shareholders
have the right to sell and the Company has the right to purchase the remaining 30 percent of Atlanta Capital over a five-year period beginning January
1, 2005, at a price based on a multiple of earnings before taxes in the previous calendar year. In fiscal 2006, the minority shareholders of Atlanta
Capital Management, LLC (“Atlanta Capital”) exercised a put option whereby units representing a 7 percent ownership interest in Atlanta
Capital were sold to the Company for $7.2 million. Pursuant to the acquisition agreement, the purchase price was based on a multiple of earnings before
taxes for the calendar year ended December 31, 2005. As a result of the transaction, the Company’s ownership interest in Atlanta Capital increased
to 77.4 percent on June 30, 2006 and the Company recorded intangible assets of $2.4 million and goodwill of $4.7 million. The remainder of the purchase
price was allocated to minority interest. In June 2005, the minority shareholders of Atlanta Capital exercised a put option whereby units representing
a 0.4 percent ownership interest in Atlanta Capital were sold to the Company for $0.4 million.
Fox Asset Management’s principals
held 20 percent of the equity of Fox Asset Management at closing. Beginning January 1, 2008, Fox Asset Management’s minority shareholders will
have the right to sell and the Company will have the right to purchase the remaining 20 percent of Fox Asset Management over a four-year period at a
price based on a multiple of earnings before interest and taxes in the previous calendar year. Any additional payments made to the minority
shareholders of either Atlanta Capital or Fox Asset Management will be treated as additional purchase price for accounting purposes.
The changes in the carrying amount of
goodwill for the years ended October 31, 2006 and 2005 are as follows:
(in
thousands)
|
|
|
|
2006
|
|
2005
|
Balance,
beginning of period |
|
|
|
$ |
89,634 |
|
|
$ |
89,281 |
|
Goodwill acquired |
|
|
|
|
7,203 |
|
|
|
353 |
|
Balance, end of period |
|
|
|
$ |
96,837 |
|
|
$ |
89,634 |
|
49
The following is a summary of other
intangible assets at October 31, 2006 and 2005:
2006
(in
thousands)
|
|
|
|
Weighted
Average
Amortization
Period
(In Years)
|
|
Gross
Carrying
Amount
|
|