-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PYc7bkB8Golmj2DIzPYN4obYTHtHo5rlV5hI3FAy3aXlLqRtWuXJ8dBPP5dnpayu dS7r3nI52mQZGuN+eQSS7w== 0000350797-96-000004.txt : 19960916 0000350797-96-000004.hdr.sgml : 19960916 ACCESSION NUMBER: 0000350797-96-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960731 FILED AS OF DATE: 19960913 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: EATON VANCE CORP CENTRAL INDEX KEY: 0000350797 STANDARD INDUSTRIAL CLASSIFICATION: INVESTMENT ADVICE [6282] IRS NUMBER: 042718215 STATE OF INCORPORATION: MD FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08100 FILM NUMBER: 96629906 BUSINESS ADDRESS: STREET 1: 24 FEDERAL ST CITY: BOSTON STATE: MA ZIP: 02110 BUSINESS PHONE: 6174828260 MAIL ADDRESS: STREET 1: 24 FEDERAL STREET STREET 2: 11TH FLOOR CITY: BOSTON STATE: MA ZIP: 02110 10-Q 1 JUL9610Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the period ended July 31, 1996 Commission File No. 1-8100 EATON VANCE CORP. (Exact name of registrant as specified in its charter) MARYLAND 04-2718215 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 24 FEDERAL STREET, BOSTON, MASSACHUSETTS 02110 (Address of pricipal executive offices) (Zip Code) (617) 482-8260 (Registrant's telephone number, including area code) NONE (Former name, address and former fiscal year, if changed since last record) Indicate by check-mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO Shares outstanding as of July 31, 1996: Voting common stock - 19,360 shares Non-Voting common stock - 9,455,430 shares Page 1 of 22 pages PART I FINANCIAL INFORMATION -2- ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS Consolidated Balance Sheets (unaudited) ASSETS July 31, October 31, 1996 1995 (in thousands) CURRENT ASSETS: Cash and equivalents $ 90,543 $ 67,650 Short-term investments 20,398 11,471 Receivable for investment company shares sold 894 1,156 Investment adviser fees and other receivables 4,573 3,342 Prepaid income taxes 2,751 658 Net assets of discontinued operations - 13,961 Other current assets 768 364 Total current assets 119,927 98,602 OTHER ASSETS: Investments: Real estate 21,330 21,606 Investment in affiliates 8,612 10,113 Investment companies 8,907 7,542 Other investments 6,329 2,338 Notes receivable and receivables from affiliates 1,229 3,458 Deferred sales commissions 188,026 209,542 Equipment and leasehold improvements, net 2,901 2,855 Goodwill (net of accumulated amortization of $2,801 and $2,422, respectively) 1,151 1,530 Total other assets 238,485 258,984 Total assets $ 358,412 $ 357,586 See notes to consolidated financial statements
-3- ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS Consolidated Balance Sheets (unaudited) (continued) LIABILITIES AND July 31, October 31, SHAREHOLDERS' 1996 1995 EQUITY (in thousands, except share figures) CURRENT LIABILITIES: Payable for investment company shares purchased $ 898 $ 1,179 Accrued compensation 7,184 9,341 Accounts payable and accrued expenses 8,587 7,482 Accrued income taxes - 184 Dividend payable 1,611 1,590 Current portion of mortgage notes payable 246 4,189 Other current liabilities 759 762 Total current liabilities 19,285 24,727 OTHER LIABILITIES: 6.22% Senior Note 50,000 50,000 Mortgage notes payable 5,906 6,102 Total other liabilities 55,906 56,102 Deferred income taxes 76,363 82,237 Commitments and contingencies - - SHAREHOLDERS' EQUITY: Common stock, par value $.0625 per share- Authorized, 80,000 shares, Issued, 19,360 shares 1 1 Non-voting common stock, par value $.0625 per share-Authorized, 11,920,000 shares, Issued, 9,455,430 and 9,315,712 shares, respectively 591 582 Additional paid-in capital 40,184 53,753 Unrealized gain on investments 2,264 1,186 Notes receivable from stock option exercises (3,362) (3,313) Retained earnings 167,180 142,311 Total shareholders' equity 206,858 194,520 Total liabilities and shareholders' equity $ 358,412 $ 357,586 See notes to consolidated financial statements
-4- ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Consolidated Statements of Income (unaudited) Three Months Ended Nine Months Ended July 31, July 31, 1996 1995 1996 1995 (in thousands, except per share figures) REVENUE: Investment adviser and administration fees $25,605 $21,688 $74,064 $62,850 Distribution income 18,176 19,788 56,684 58,607 Income from real estate activities 845 866 2,788 2,619 Other income 436 348 1,485 885 Total revenue 45,062 42,690 135,021 124,961 EXPENSES: Compensation of officers and employees 9,682 10,207 30,327 29,249 Amortization of deferred sales commissions 13,294 12,404 39,354 36,830 Other expenses 5,676 7,492 20,599 24,077 Total operating expenses 28,652 30,103 90,280 90,156 OPERATING INCOME 16,410 12,587 44,741 34,805 OTHER INCOME (EXPENSE): Interest income 961 834 2,757 1,825 Gain on sale of investments 1 - 1,058 - Equity in net income (loss) of affiliates (1,083) 62 685 (1,013) Interest expense (935) (1,221) (2,814) (3,666) Income from continuing operations before income taxes and extraordinary item 15,354 12,262 46,427 31,951 INCOME TAXES 5,859 3,740 18,323 11,907 Income from continuing operations before extraordinary item 9,495 8,522 28,104 20,044 Income from discontinued operations, net of income taxes - 512 - 2,779 See notes to consolidated financial statements
-5- ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Consolidated Statements of Income (unaudited) (continued) Three Months Ended Nine Months Ended July 31, July 31, 1996 1995 1996 1995 (in thousands, except per share figures) Extraordinary gain on early retirement of debt, net of income taxes of $1,100 - - 1,590 - NET INCOME $ 9,495 $ 9,034 $29,694 $22,823 EARNINGS PER SHARE: Earnings per share from continuing operations before extraordinary item $ 0.98 $ 0.92 $ 2.95 $ 2.18 Earnings per share from discontinued operations, net of income taxes - 0.06 - 0.30 Extraordinary gain on early retirement of debt, net of income taxes, per share - - 0.17 - Earnings per share $ 0.98 $ 0.98 $ 3.12 $ 2.48 Dividends declared, per share $ 0.17 $ 0.16 $ 0.51 $ 0.48 Average common shares outstanding 9,731 9,250 9,526 9,186 See notes to consolidated financial statements
-6- ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Consolidated Statements of Cash Flows (unaudited) Nine Months Ended July 31, 1996 1995 (in thousands) Cash and equivalents (including IB&T for 1995), beginning of period $ 67,650 $ 34,025 CASH FLOWS FROM OPERATING ACTIVITIES: Net income from continuing operations 29,694 20,044 Adjustment to reconcile net income to net cash provided by operating activities: Extraordinary gain on early retirement of debt (1,590) - Equity in net (income) loss of affiliates (685) 1,013 Deferred income taxes (6,162) (4,351) Amortization of deferred sales commissions 39,354 36,830 Depreciation and other amortization 1,797 1,622 Payment of sales commissions (42,477) (27,955) Capitalized sales charges received 24,547 27,755 Gain on sale of investments (1,058) - Change in prepaid income taxes (3,213) - Changes in other assets and liabilities (1,873) (3,752) Cash used for discontinued operations - (8,388) Net cash provided by operating activities 38,334 42,818 CASH FLOWS FROM INVESTING ACTIVITIES: Additions to real estate, equipment and leasehold improvements (957) (927) Investment in partnership - (88) Investment in affiliates - (4,473) Net (increase) decrease in notes receivable and receivables from affiliates 434 (698) Net increase in investment companies and other investments (2,761) (868) Proceeds from sale of investments 13,501 - Purchase of short-term investments (19,939) (11,000) Net cash used for investing activities (9,722) (18,054) See notes to consolidated financial statements
-7- ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS Consolidated Statements of Cash Flows (unaudited) (continued) Nine Months Ended July 31, 1996 1995 (in thousands) CASH FLOWS FROM FINANCING ACTIVITIES: Payments on notes payable (1,428) (261) Proceeds from issuance of non-voting common stock 2,310 2,186 Dividends paid (4,804) (4,403) Repurchase of non-voting common stock (1,797) (1,305) Net cash used for financing activities (5,719) (3,783) Net increase in cash and equivalents 22,893 20,981 Cash and equivalents, end of period $ 90,543 $ 55,006 NON-CASH INVESTING ACTIVITIES: Fair value of common stock received in exchange for note receivable from affiliate $ 1,774 $ - Fair value of common stock distributed from gold mining partnerships 1,689 - Issuance of non-voting common stock for shares of unconsolidated affiliate - (2,698) Total non-cash investing activities $ 3,463 $ (2,698) SUPPLEMENTAL INFORMATION: Interest paid $ 2,033 $ 3,604 Income taxes paid $ 28,018 $ 25,622 See notes to consolidated financial statements
-8- ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited) July 31, 1996. (1) Investment in Affiliates Investment in affiliates includes an $8.3 million and an $8.5 million investment in Lloyd George Management (BVI) Limited (LGM) at July 31, 1996 and October 31, 1995, respectively, and a $0.3 million and $1.6 million investment in gold mining partnerships at July 31, 1996 and October 31, 1995, respectively. The Company has a 21 percent investment in LGM, an independent investment management company based in Hong Kong. LGM currently manages a series of emerging market mutual funds sponsored by the Company. At July 31, 1996 the excess of the Company's investment over its equity in the underlying net assets of LGM was approximately $6.8 million, which is being amortized over a twenty-year period. The Company's investment in gold mining partnerships includes an 82 percent general partnership interest in Fulcrum Management Partners II, L.P. (FMPII) and a 3 percent limited partnership interest in VenturesTrident II, L.P. (VTII). FMPII, a Delaware limited partnership of which a pricipal officer of the Company is the other general partner, is a 20 percent general partner of VTII, also a Delaware limited partnership formed to invest in equity securities of public and private gold mining ventures. In accordance with the VenturesTrident, L.P. (VT) Limited Partnership Agreement, as amended, the General Partner terminated the partnership effective December 31, 1995. On December 29, 1995, VT distributed 662,000 shares of Dakota Mining Corporation with a value of $0.9 million and 769,000 share of Golden Queen Mining Co. Ltd. with a value of $0.8 million to its partners. The Company's share of this distribution was 100,300 shares of Dakota Mining with a value $151,000 and 116,600 shares of Golden Queen with a value of $120,000. On May 1, 1996, VTII distributed 3,690,000 shares of Canyon Resources Corporation with a value of $13.6 million to its partners. The Company's share of this distribution was 385,000 shares with a value of $1.4 million. (2) Discontinued Operations On November 10, 1995 the Company completed the spinoff of its banking operations in a tax-free distribution to its shareholders of shares of a newly created holding company for Investors Bank & Trust Company (IB&T) named Investors Financial Services Corp. (IFSC). Under the plan of distribution, the Company transferred to IFSC approximately $14.0 million of net banking assets, including $10.1 million in cash. Each shareholder of the Company received 2.799 shares of Common Stock of IFSC and .538 shares of Class A Stock of IFSC for each ten shares of Eaton Vance Corp. stock held at the close of business on October 30, 1995, which was the record date of the distribution. Revenue applicable to discontinued operations for the three and nine months ended July 31, 1995 was $14 million and $43.7 million, respectively. Income taxes applicable to discontinued operations were $0.4 million and $2.2 million for the same periods. -9- ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited) July 31, 1996 (3) Extraordinary Item In the second quarter of 1996, Northeast Properties, Inc., the Company's real estate subsidiary, retired at a discount an existing mortgage with a remaining unpaid balance of $4.0 million. The Company realized an extraordinary gain on the retirement of $1.6 million, net of income taxes of $1.1 million. (4) Non-Voting Common Stock Options Options to subscribe to shares of non-voting stock are summarized as follows: Shares Under Option Option Price Range Balance, October 31, 1994 732,748 $ 8.75 - 34.00 Exercised (174,327) 8.75 - 15.75 Granted 133,300 27.75 - 30.53 Cancelled/Expired (22,000) 8.75 - 34.00 Balance, October 31, 1995 669,721 8.75 - 34.00 Adjustment for spinoff of IB&T 139,408 Adjusted balance 809,129 7.24 - 28.14 Exercised (145,503) 7.24 - 28.14 Granted 143,770 28.25 - 31.08 Cancelled/Expired (66,476) 22.55 - 28.25 Balance, July 31, 1996 740,920 $ 13.04 - 31.08
At July 31, 1996, options for 479,680 shares were exercisable. Options for 261,240 additional shares will become exercisable over the next four years. As a result of the spinoff of IFSC, all outstanding options to subscribe to shares of the Company's non-voting common stock at November 10, 1995 were adjusted to reflect the decreased value of the stock. This adjustment resulted in additional options for 139,408 shares of the Company's non-voting common stock and a decrease in the option price range to $7.24-$28.14. -10- ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited) July 31, 1996 (5) Net Capital Requirements Two subsidiaries of the Company are subject to the Securities and Exchange Commission uniform net capital rule (Rule 15c3-1) which requires such subsidiaries to maintain a certain minimum level of net capital (as defined). For purposes of this rule, the subsidiaries had net capital of $57,000,000 and $296,000, respectively, which exceeded their respective net capital requirements of $1,143,000 and $5,900 at July 31, 1996. (6) Equipment and Leasehold Improvements Equipment and leasehold improvements at July 31, 1996 and October 31, 1995 follow: July 31, October 31, 1996 1995 (all figures in thousands) AT COST: Furniture and equipment $ 7,127 $ 6,723 Leasehold improvements 531 323 Total 7,658 7,046 Less accumulated depreciation 4,757 4,191 Net book value $ 2,901 $ 2,855
(7) Real Estate Investments Real estate investments held at July 31, 1996 and October 31, 1995 follow: July 31, October 31, 1996 1995 (all figures in thousands) Buildings $ 28,494 $ 27,831 Land 2,216 2,457 Total 30,710 30,288 Less: Accumulated depreciation 9,114 8,424 Net book value 21,596 21,864 Share of accumulated losses in excess of partnership interest (266) (258) Total $ 21,330 $ 21,606
-11- ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited) July 31, 1996 (8) Investment Securities The Company accounts for investment securities in accordance with Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities." SFAS No. 115 requires that certain investments in debt and equity securities be classified as trading, available-for-sale or held-to-maturity. Securities classified as trading are to be reported at fair value with the corresponding unrealized gain or loss included in income. Securities classified as available-for-sale are to be reported at fair value with the corresponding unrealized gain or loss included as a separate component of shareholders' equity. Securities classified as held-to-maturity are to be recorded at amortized cost. Securities classified as available-for-sale are included in the following balance sheet categories at July 31, 1996 and October 31, 1995 (in thousands): July 31, 1996 Estimated Gross Gross fair unrealized unrealized value gains losses Cost Current Assets: Short-term investments $ 20,398 $ 459 $ - $ 19,939 Investments: Investment companies 8,907 2,973 40 5,974 Other investments 5,167 729 433 4,871 Total $ 34,472 $ 4,161 $ 473 $ 30,784
October 31, 1995 Estimated Gross Gross fair unrealized unrealized value gains losses Cost Current Assets: Short-term investments $ 11,471 $ 471 $ - $ 11,000 Investments: Investment companies 7,542 2,597 155 5,100 Other investments 1,018 13 604 1,609 Total $ 20,031 $ 3,081 $ 759 $ 17,709
-12- ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited) July 31, 1996 (8) Investment Securities (continued) At July 31, 1996 the unrealized gain included as a separate component of shareholders' equity was $2.3 million, net of income taxes of $1.4 million. At October 31, 1995 the unrealized gain included as a separate component of shareholders' equity was $1.2 million, net of income taxes of $1.1 million. Proceeds from the sale of available-for-sale securities during the nine months ended July 31, 1996 were $13.8 million. (9) Legal Proceedings The Company was informed on January 13, 1995 that a National Association of Securities Dealers (NASD) arbitration panel had awarded a former wholesaler for the Company $0.6 million in damages and an additional $1.2 million in punitive damages in response to a claim for wrongful termination of employment. Through July 31, 1996, the Company has accrued a liability of $2.7 million for these damages. The Company has appealed the decision to the courts and intends to pursue all legal steps to overturn the decision. From time to time, the Company is a party to various employment-related claims, including claims of discrimination, before federal, state and local administrative agencies and courts. The Company vigorously defends itself against these claims. In the opinion of management, after consultation with counsel, it was unlikely that any adverse determination in one or more of such claims would have any material adverse effect on the Company's financial position or results of operations. (10) Earnings Per Share Earnings per share for the nine months ended July 31, 1996 are based upon the weighted average number of common, non-voting common and non- voting common equivalent shares outstanding of 9,526,000. Earnings per share assuming full dilution have not been presented because the dilutive effect is immaterial. Earnings per share for the nine months ended July 31, 1995, are based upon the weighted average number of common and non-voting common shares outstanding of 9,186,000. Earnings per share assuming primary and full dilution have not been presented because the dilutive effect is immaterial. (11) In fiscal 1997 the Company will be required to adopt Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock- Based Compensation." SFAS No. 123 establishes financial accounting and reporting standards for stock-based employee compensation plans and requires certain disclosures about employee stock options based on their fair value at the date of grant. -13- ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited) July 31, 1996 (12) Certain prior year amounts have been reclassified to conform to current year presentation and to reflect the spinoff of IB&T. (13) Opinion of Management In the opinion of management, the unaudited consolidated financial statements include all adjustments, consisting of normal recurring adjustments, necessary to present fairly the results for the interim periods. -14- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company's primary sources of revenue are investment adviser fees and distribution fees received from the Eaton Vance funds and separately managed accounts. Such fees are generally based on the net asset value of the investment portfolios managed by the Company and fluctuate with changes in the total value of the assets under management. The Company s major expenses, other than the amortization of deferred sales commissions, include employee compensation, occupancy costs, service fees and other marketing costs. RESULTS OF OPERATIONS QUARTER ENDED JULY 31, 1996 TO QUARTER ENDED JULY 31, 1995 Assets under management of $16.7 billion on July 31, 1996 were 4 percent higher than the $16.0 billion at the beginning of the fiscal year and 7 percent higher than the $15.6 billion reported a year earlier. Mutual fund sales increased to $0.6 billion in the third quarter of 1996 from $0.5 billion in the third quarter of 1995. Redemptions were $0.5 billion in the third quarter of both 1996 and 1995. Total revenue increased $2.4 million to $45.1 million in the third quarter of 1996 from $42.7 million a year earlier. Investment adviser and administration fees increased by $3.9 million to $25.6 million in 1996 from $21.7 million a year ago, primarily as a result of higher average assets under management (in total) in comparison with the same period last year. Distribution income, however, decreased by $1.6 million to $18.2 million in the third quarter of 1996 from $19.8 million in the same quarter of 1995 as a result of a decrease in average assets under management in the Company's spread-commission funds. Total operating expenses decreased 5 percent or $1.5 million to $28.6 million in the third quarter of 1996. Compensation expense was little changed from the third quarter of 1995. Amortization expense increased 7 percent to $13.3 million primarily due to an increase in the gross sales of Eaton Vance Prime Rate Reserves, a spread-commission fund with no distribution fee. Other expenses decreased by $1.8 million or 24 percent as a result of a decrease in legal costs and sales and literature costs and the reversal of a bad debt reserve associated with the termination of a gold mining partnership, VenturesTrident, L.P. Portfolio valuations of the Company's remaining gold mining investment partnership contributed net partnership losses of $1.2 million in the third quarter of 1996 compared to net partnership gains of $0.1 million in the third quarter of 1995. Interest expense decreased to $0.9 million in the third quarter of 1996 from $1.2 million in the third quarter of 1995 primarily as a result of the retirement, at a discount, of an existing mortgage with a remaining unpaid balance of $4.0 million in the second quarter of 1996. -15- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Net income from continuing operations of the Company totaled $9.5 million for the quarter ended July 31, 1996 compared to $8.5 million for the quarter ended July 31, 1995. Earnings per share from continuing operations were $0.98 and $0.92 for the third quarters of 1996 and 1995, respectively. On November 10, 1995, the Company completed the spin-off of Investors Financial Services Corp. (IFSC), the new parent company of Investors Bank & Trust Company (IB&T), in a tax-free distribution to Eaton Vance Corp. shareholders. The banking business has been treated as a discontinued operation in the accompanying consolidated financial statements. Net income of $9.0 million for the third quarter of 1995 includes income from discontinued banking operations of $0.5 million. NINE MONTHS ENDED JULY 31, 1996 TO NINE MONTHS ENDED JULY 31, 1995 Mutual fund sales in the first nine months of 1996 were $2.0 billion compared to $1.1 billion in the first nine months of last year. The sales gain was led by the Company's senior floating-rate loan funds. Sales from the recently introduced Eaton Vance High Yield Municipals Funds, Eaton Vance Information Age Funds and Eaton Vance Tax-Managed Growth Funds also contributed to the increase. Fund redemptions of $1.5 billion in the first nine months of 1996 were 6 percent below the $1.6 billion recorded in the first nine months of 1995. Total revenue increased $10.0 million to $135.0 million in the first nine months of 1996. Investment adviser and administration fees increased by $11.2 million in the first nine months of 1996 to $74.1 million from $62.9 million a year earlier, primarily as a result of higher average assets under management (in total) in comparison with the same period last year. Distribution income, however, decreased by $1.9 million to $56.7 million in the first nine months of 1996 from $58.6 million in the same period a year ago as a result of a decrease in average assets under management in the Company's spread-commission funds. Total operating expenses of $90.3 million in the first nine months of 1996 were consistent with the $90.2 million recorded a year earlier. Compensation expense increased by $1.1 million to $30.3 million, primarily as a result of an increase in sales incentives associated with the increase in mutual fund sales. Amortization expense increased by 7 percent to $39.4 million primarily as a result of the increase in gross sales of Eaton Vance Prime Rate Reserves. The increases noted in compensation and amortization expense were offset by a decrease in other expenses due to the inclusion of a one-time charge of $2.0 million in the first quarter of 1995 relating to the accrual of a National Association of Securities Dealers (NASD) arbitration panel award. The Company has appealed the decision to the courts and continues to pursue all legal steps to overturn the decision. -16- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Net income amounted to $29.7 million or $3.12 per share in the first nine months of 1996, compared to $22.8 million or $2.48 per share in the first nine months of 1995. Net income for the first three quarters of 1996 included an extraordinary gain of $1.6 million or $0.17 per share, net of income taxes, related to the early retirement of a mortgage owed by the Company s real estate subsidiary. Bank earnings of $2.8 million or $0.30 per share were included in 1995 results but were insignificant in 1996. Earnings per share from continuing operations before extraordinary item were $2.95 and $2.18 for the first nine months of 1996 and 1995, respectively. Despite significant partnership losses recognized in the third quarter of 1996, the Company's gold mining partnerships contributed a gain of $0.3 million in the first nine months of 1996 compared to a loss of $1.0 million in the first nine months of 1995. The general partner of VenturesTrident, L.P., one of the Company's two gold mining partnerships, terminated that partnership effective December 31, 1995. In conjunction with the termination of the partnership and the distribution of the partnership's assets in the first quarter of 1996, the Company received marketable securities with a fair value of $0.3 million. The Company also received marketable securities with a fair value of $1.7 million in settlement of a note receivable from VenturesTrident, L.P. In the third quarter of 1996, VenturesTrident II, L.P., the remaining gold mining partnership, distributed marketable securities with a fair value of $13.6 million to its partners. The Company received securities with a fair value of $1.4 million as a result of this distribution. Excluding discontinued banking operations of $14.0 million on October 31, 1995, total assets increased 4 percent to $358.4 million at July 31, 1996 from $343.6 million on October 31, 1995. Cash, cash equivalents and short-term investments increased by $31.8 million to $110.9 million on July 31, 1996. The increase in other investments of $4.0 million can be primarily attributed to the receipt of gold mining securities distributed by the Company's two gold mining partnerships in the first and third quarters of 1996. Both distributions were offset by unrealized losses on the securities recognized in the third quarter of 1996. Deferred sales commissions decreased $21.5 million to $188.0 million on July 31, 1996 primarily due to an increase in amortization expense and redemptions in excess of new mutual fund sales in the Company's spread-commission funds. In fiscal 1997 the Company will be required to adopt Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock- Based Compensation." SFAS No. 123 establishes financial accounting and reporting standards for stock-based employee compensation plans and requires certain disclosures about employee stock options based on their fair value at the date of grant. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents increased by $22.8 million to $90.5 million at July 31, 1996 from $67.7 million at October 31, 1995. In addition, the Company's short-term investments increased by $8.9 million to $20.4 million at July 31, 1996 from $11.5 million at the end of the previous fiscal year. -17- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Cash provided by operating activities in the first nine months of 1996 was $38.3 million, compared to $42.8 million in the same period a year ago. The decrease can be primarily attributed to an increase in sales commissions paid to brokers and a decrease in the collection of capitalized sales charges received on early redemptions. In the first nine months of 1996, the Company paid $42.5 million in sales commissions associated with the sale of spread commission mutual funds, compared to $28.0 million in the same period a year earlier. In contrast, the Company collected only $24.5 million in capitalized sales charges in the first nine months of 1996 compared to $27.8 million in the first nine months of 1995. The spin-off of IFSC had no significant impact on cash flows in the first nine months of 1996. Cash used for investing activities was $9.7 million in the first nine months of 1996. The primary use was the purchase of $19.9 million in short term investments following the sale of certain marketable securities. Significant financing activities during the first nine months of 1996 included the repurchase of 62,000 shares of the Company's non-voting common stock. In the second quarter of 1996, Northeast Properties Inc., the Company's real estate subsidiary, retired at a discount an existing mortgage with a remaining unpaid balance of $4.0 million. The Company realized an extraordinary gain on the retirement of $1.6 million (net of income taxes of $1.1 million) or $0.17 per share. On July 17, 1996, the Board of Directors of the Company declared a quarterly common stock dividend of $.17 per share, payable on August 12, 1996, to stockholders of record on July 31, 1996. At July 31, 1996, the Company had no borrowings under its $75.0 million bank credit facility. CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS From time to time, information provided by the Company or information included in its filings with the Securities and Exchange Commission (including this Form 10-Q) may contain statements which are not historical facts, for this purpose referred to as "forward-looking statements." The Company's actual future results may differ significantly from those stated in any forward-looking statements. Important factors that could cause actual results to differ materially from those indicated by such forward-looking statements include, but are not limited to, the factors discussed below. The Company is subject to substantial competition in all aspects of its business. The Company's ability to market investment products is highly dependent on access to the retail distribution systems of national and regional securities dealer firms, which generally offer competing internally and externally managed investment products. Although the Company has historically been successful in gaining access to these channels, there can be no assurance that it will continue to do so. The inability to have such access could have a material adverse effect on the Company's business. -18- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) There are few barriers to entry by new investment management firms. The Company's funds compete against an ever increasing number of investment products sold to the public by investment dealers, banks, insurance companies and others that sell tax-free investments, taxable income funds, equity funds and other investment products. Many institutions competing with the Company have greater resources than the Company. The Company competes with other providers of investment products on the basis of the range of products offered, the investment performance of such products, quality of service, fees charged, the level and type of sales representative compensation, the manner in which such products are marketed and distributed and the services provided to investors. As noted above, the Company derives almost all of its revenues from investment adviser and administration fees and distribution income received from the Eaton Vance funds and separately managed accounts. As a result, the Company is dependent upon the contractual relationships it maintains with these funds and separately managed accounts. In the event that any of the management contracts, administration contracts, underwriting contracts or service agreements are not renewed pursuant to the terms of these contracts or agreements, the Company may be adversely affected. -19- PART II OTHER INFORMATION -20- ITEM 1. LEGAL PROCEEDINGS From time to time, the Company is a party to various employment-related claims, including claims of discrimination, before federal, state and local administrative agencies and courts. The Company vigorously defends itself against these claims. In the opinion of management, after consultation with counsel, it is unlikely that any adverse determination in one or more of such claims would have any material adverse effect on the Company's financial position or results of operations. -21- SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. EATON VANCE CORP. (Registrant) DATE: September 13, 1996 /s/William M. Steul (Signature) William M. Steul Chief Financial Officer DATE: September 13, 1996 /s/John P. Rynne (Signature) John P. Rynne Corporate Controller -22- EX-27 2
5 1000 3-MOS OCT-31-1996 JUL-31-1996 90543 20398 5467 0 0 119927 2901 0 358412 19285 0 592 0 0 206266 358412 0 135021 0 0 90280 0 2814 46427 18323 28104 0 1590 0 29694 3.12 3.12
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