10-Q 1 v195730_10q.htm

  

  

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

  FORM 10-Q
  

 
(Mark One)     
x   Quarterly Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934
For the quarterly period ended July 31, 2010
or
o
    
Transition Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934
For the transition period from  to 

  
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
incorporation or organization)
  (I.R.S. Employer Identification No.)

  
Two International Place, Boston, Massachusetts 02110
(Address of principal executive offices) (zip code)

(617) 482-8260
(Registrant’s telephone number, including area code)

  
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 o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

x

 

Accelerated filer

o

Non-accelerated filer

o (Do not check if smaller reporting company)

 

Smaller reporting company

o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes x No o

Shares outstanding as of July 31, 2010:

Voting Common Stock — 399,240 shares

Non-Voting Common Stock — 117,736,966 shares

 

 


 
 

TABLE OF CONTENTS

Eaton Vance Corp.
Form 10-Q
As of July 31, 2010 and for the
Three and Nine Month Periods Ended July 31, 2010

Table of Contents

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TABLE OF CONTENTS

Part I — Financial Information

Item 1. Consolidated Financial Statements

Eaton Vance Corp.
Consolidated Balance Sheets (unaudited)

   
(in thousands)   July 31,
2010
  October 31,
2009
Assets
                 
Current Assets:
                 
Cash and cash equivalents   $ 384,931     $ 310,586  
Short-term investments           49,924  
Investment advisory fees and other receivables     113,811       107,975  
Other current assets     11,753       19,677  
Total current assets     510,495       488,162  
Other Assets:
                 
Long-term investments     205,554       133,536  
Goodwill     135,786       135,786  
Other intangible assets, net     74,972       80,834  
Deferred income taxes     124,189       97,044  
Equipment and leasehold improvements, net     71,742       75,201  
Deferred sales commissions     49,917       51,966  
Note receivable from affiliate           8,000  
Other assets     4,072       4,538  
Total other assets     666,232       586,905  
Total assets   $ 1,176,727     $ 1,075,067  

See notes to Consolidated Financial Statements.

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TABLE OF CONTENTS

Eaton Vance Corp.
Consolidated Balance Sheets (unaudited) (continued)

   
(in thousands, except share figures)   July 31,
2010
  October 31,
2009
Liabilities, Temporary Equity and Permanent Equity
                 
Current Liabilities:
                 
Accrued compensation   $ 88,543     $ 85,273  
Accounts payable and accrued expenses     62,760       51,881  
Dividend payable     18,905       18,812  
Deferred income taxes     18,856       15,580  
Contingent purchase price liability     5,079       13,876  
Other current liabilities     8,078       2,902  
Total current liabilities     202,221       188,324  
Long-Term Liabilities:
                 
Long-term debt     500,000       500,000  
Other long-term liabilities     44,065       35,812  
Total long-term liabilities     544,065       535,812  
Total liabilities     746,286       724,136  
Commitments and contingencies (See Note 19)            
Temporary Equity:
                 
Redeemable non-controlling interests     46,075       43,871  
Permanent Equity:
                 
Voting Common Stock, par value $0.00390625 per share:
                 
Authorized, 1,280,000 shares
                 
Issued and outstanding, 399,240 and 431,790 shares, respectively     2       2  
Non-Voting Common Stock, par value $0.00390625 per share:
                 
Authorized, 190,720,000 shares
                 
Issued and outstanding, 117,736,966 and 117,087,810 shares, respectively     460       457  
Additional paid in capital     53,262       44,786  
Notes receivable from stock option exercises     (2,794 )      (3,078 ) 
Accumulated other comprehensive loss     (1,208 )      (1,394 ) 
Retained earnings     334,174       266,196  
Total Eaton Vance Corp. shareholders’ equity     383,896       306,969  
Non-redeemable non-controlling interests     470       91  
Total permanent equity     384,366       307,060  
Total liabilities, temporary equity and permanent equity   $ 1,176,727     $ 1,075,067  

See notes to Consolidated Financial Statements.

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TABLE OF CONTENTS

Eaton Vance Corp.
Consolidated Statements of Income (unaudited)

       
  Three Months Ended
July 31,
  Nine Months Ended
July 31,
(in thousands, except per share figures)   2010   2009   2010   2009
Revenue:
                                   
Investment advisory and administration fees   $ 214,752     $ 175,167     $ 637,280     $ 488,837  
Distributions and underwriter fees     24,341       21,719       74,041       61,521  
Service fees     34,243       29,862       102,686       83,103  
Other revenue     (257 )      1,625       4,060       2,772  
Total revenue     273,079       228,373       818,067       636,233  
Expenses:
                          
Compensation of officers and employees     86,079       77,316       261,042       214,179  
Distribution expense     33,771       25,386       93,480       68,893  
Service fee expense     28,906       24,151       86,635       68,027  
Amortization of deferred sales commissions     9,187       8,319       25,522       27,399  
Fund expenses     6,267       5,230       15,663       14,646  
Other expenses     30,107       28,738       88,527       86,734  
Total expenses     194,317       169,140       570,869       479,878  
Operating income     78,762       59,233       247,198       156,355  
Other Income (Expense):
                                   
Interest income     719       857       2,205       2,956  
Interest expense     (8,413 )      (8,446 )      (25,240 )      (25,269 ) 
Realized gains (losses) on investments     6,445       (375 )      7,942       (2,761 ) 
Unrealized gains (losses) on investments     (5,132 )      3,499       (2,537 )      6,652  
Foreign currency gains (losses)     (22 )      93       312       129  
Impairment losses on investments           (369 )            (1,637 ) 
Income before income taxes and equity in net income (loss) of affiliates     72,359       54,492       229,880       136,425  
Income taxes     (28,889 )      (21,507 )      (89,414 )      (49,833 ) 
Equity in net income (loss) of affiliates, net of tax     10       (163 )      543       (1,504 ) 
Net income     43,480       32,822       141,009       85,088  
Net income attributable to non-controlling interests     (1,730 )      (1,599 )      (17,017 )      (3,415 ) 
Net income attributable to Eaton Vance Corp. shareholders   $ 41,750     $ 31,223     $ 123,992     $ 81,673  
Earnings Per Share:
                                   
Basic   $ 0.35     $ 0.27     $ 1.05     $ 0.70  
Diluted   $ 0.34     $ 0.25     $ 0.99     $ 0.68  
Weighted Average Shares Outstanding:
                                   
Basic     116,549       116,410       116,541       116,092  
Diluted     122,612       121,797       122,996       119,933  
Dividends Declared Per Share   $ 0.160     $ 0.155     $ 0.480     $ 0.465  

See notes to Consolidated Financial Statements.

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Eaton Vance Corp.
Consolidated Statements of Comprehensive Income (unaudited)

       
  Three Months Ended
July 31,
  Nine Months Ended
July 31,
(in thousands)   2010   2009   2010   2009
Net income   $ 43,480     $ 32,822     $ 141,009     $ 85,088  
Other comprehensive income (loss):
                                   
Amortization of loss on derivative instrument, net of income tax expense of $40, $39, $119 and $118, respectively     72       72       216       217  
Unrealized holding gains (losses) on investments, net of income tax benefit (expense) of $473, $(1,667), $(171) and $(1,613), respectively     (762 )      2,472       164       2,780  
Foreign currency translation adjustments, net of income tax benefit (expense) of $(77), $(243), $87 and $(110), respectively     58       407       (194 )      203  
Total comprehensive income     42,848       35,773       141,195       88,288  
Comprehensive income attributable to non-controlling interests     (1,730 )      (1,599 )      (17,017 )      (3,415 ) 
Total comprehensive income attributable to Eaton Vance Corp. shareholders   $ 41,118     $ 34,174     $ 124,178     $ 84,873  

See notes to Consolidated Financial Statements.

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Eaton Vance Corp.
Consolidated Statements of Shareholder’s Equity (unaudited)

                 
  Permanent Equity   Temporary
Equity
(in thousands)   Voting
Common
Stock
  Non-Voting
Common
Stock
  Additional
Paid-In
Capital
  Notes
Receivable
from Stock
Option
Exercises
  Accumulated
Other
Comprehensive
Loss
  Retained
Earnings
  Non-
Redeemable
Non-
Controlling
Interests
  Total
Permanent
Equity
  Redeemable
Non-
Controlling
Interests
Balance, November 1, 2009   $ 2     $ 457     $ 44,786     $ (3,078 )    $ (1,394 )    $ 266,196     $ 91     $ 307,060     $ 43,871  
Net income                                   123,992       883       124,875       16,134  
Other comprehensive income                             186                   186        
Dividends declared                                   (56,836 )            (56,836 )       
Issuance of Non-Voting Common Stock:
                                                                                
On exercise of stock options           6       28,849       (1,063 )                        27,792        
Under employee stock purchase plan           1       3,887                               3,888        
Under employee incentive plan           1       2,873                               2,874        
Under restricted stock plan           4                                     4        
Stock-based compensation                 36,897                               36,897        
Tax benefit of stock option exercises                 4,917                               4,917        
Repurchase of Voting Common Stock                 (96 )                              (96 )       
Repurchase of Non-Voting Common Stock           (9 )      (68,750 )                              (68,759 )       
Principal repayments                       1,347                         1,347        
Subscriptions (redemptions/ distributions) of non-controlling interest holders                                         (499 )      (499 )      (139 ) 
Deconsolidation                                                     (1,831 ) 
Reclass to temporary equity                                         (5 )      (5 )      5  
Purchase of non-controlling interests                                                     (11,244 ) 
Other changes in non-controlling interests                 (101 )                  822             721       (721 ) 
Balance, July 31, 2010   $ 2     $ 460     $ 53,262     $ (2,794 )    $ (1,208 )    $ 334,174     $ 470     $ 384,366     $ 46,075  

See notes to Consolidated Financial Statements.

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TABLE OF CONTENTS

Eaton Vance Corp.
Consolidated Statements of Shareholder’s Equity (unaudited) (continued)

                 
  Permanent Equity   Temporary
Equity
(in thousands)   Voting
Common
Stock
  Non-Voting
Common
Stock
  Additional
Paid-In
Capital
  Notes
Receivable
from Stock
Option
Exercises
  Accumulated
Other
Comprehensive
Loss
  Retained
Earnings
  Non-
Redeemable
Non-
Controlling
Interests
  Total
Permanent
Equity
  Redeemable
Non-
Controlling
Interests
Balance, November 1, 2008   $ 2     $ 451     $     $ (4,704 )    $ (5,135 )    $ 187,904     $     $ 178,518     $ 72,137  
Net income                                   81,673       65       81,738       3,350  
Other comprehensive income                             3,200                   3,200        
Dividends declared                                   (54,480 )            (54,480 )       
Issuance of Voting Common Stock                 86                               86        
Issuance of Non-Voting Common Stock:
                                                                                
On exercise of stock options           3       10,689       (988 )                        9,704        
Under employee stock purchase plan                 4,082                               4,082        
Under employee incentive plan           1       3,612                               3,613        
Under restricted stock plan           4                                     4        
Stock-based compensation                 31,318                               31,318        
Tax benefit of stock option exercises                 9,671                               9,671        
Repurchase of Non-Voting Common Stock           (2 )      (12,401 )                              (12,403 )       
Principal repayments                       2,520                         2,520        
Subscriptions (redemptions/ distributions) of non-controlling interest holders                                         (18 )      (18 )      (5,851 ) 
Deconsolidation                                                     (4,461 ) 
Purchase of non-controlling interests                                   17,051             17,051       (17,051 ) 
Other changes in non-controlling interests                                   2,084             2,084       (2,437 ) 
Balance, July 31, 2009   $ 2     $ 457     $ 47,057     $ (3,172 )    $ (1,935 )    $ 234,232     $ 47     $ 276,688     $ 45,687  

See notes to Consolidated Financial Statements.

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Eaton Vance Corp.
Consolidated Statements of Cash Flows (unaudited)

   
  Nine Months Ended
July 31,
(in thousands)   2010   2009
Cash and cash equivalents, beginning of period   $ 310,586     $ 196,923  
Cash Flows From Operating Activities:
                 
Net income     141,009       85,088  
Adjustments to reconcile net income to net cash provided by operating activities:
                 
Gains on investments     (4,776 )      (3,006 ) 
Amortization of long-term investments     528       1,847  
Equity in net (income) loss of affiliates     (876 )      2,388  
Dividends received from affiliates     1,313       2,944  
Amortization of debt issuance costs     759       529  
Deferred income taxes     (24,030 )      (33,403 ) 
Stock-based compensation     36,897       31,473  
Depreciation and other amortization     17,184       15,285  
Amortization of deferred sales commissions     25,507       27,399  
Payment of capitalized sales commissions     (27,254 )      (15,072 ) 
Contingent deferred sales charges received     3,787       6,203  
Proceeds from the sale of trading investments     80,761       35,720  
Purchase of trading investments     (86,344 )      (38,151 ) 
Changes in other assets and liabilities:
                 
Investment advisory fees and other receivables     (6,091 )      17,068  
Other current assets     2,081       1,982  
Other assets     34       (427 ) 
Accrued compensation     3,304       (31,723 ) 
Accounts payable and accrued expenses     11,119       (447 ) 
Taxes payable – current     13,933       (4,161 ) 
Other current liabilities     1,317       1,708  
Other long-term liabilities     88       6,797  
Net cash provided by operating activities     190,250       110,041  
Cash Flows From Investing Activities:
                 
Additions to equipment and leasehold improvements     (7,958 )      (42,075 ) 
Net cash paid in acquisition     (8,797 )      (29,017 ) 
Payments received on note receivable from affiliate     8,000        
Issuance of note receivable to affiliate           (5,000 ) 
Proceeds from the sale of available-for-sale investments and investments in affiliates     21,279       122,975  
Purchase of available-for-sale investments and investments in affiliates     (31,452 )      (9,902 ) 
Net cash (used for) provided by investing activities     (18,928 )      36,981  

See notes to Consolidated Financial Statements.

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Eaton Vance Corp.
Consolidated Statements of Cash Flows (unaudited) (continued)

   
  Nine Months Ended
July 31,
(in thousands)   2010   2009
Cash Flows From Financing Activities:
                 
Distributions to non-controlling interest holders     (6,288 )      (4,248 ) 
Purchase of additional non-controlling interests     (11,244 )      (17,075 ) 
Excess tax benefit of stock option exercises     4,917       9,671  
Proceeds from issuance of Voting Common Stock           86  
Proceeds from issuance of Non-Voting Common Stock     34,558       17,402  
Repurchase of Voting Common Stock     (96 )       
Repurchase of Non-Voting Common Stock     (68,759 )      (12,403 ) 
Principal repayments on notes receivable from stock option exercises     1,347       2,520  
Dividends paid     (56,747 )      (54,219 ) 
Proceeds from the issuance of mutual fund subsidiaries’ capital stock     5,706       2,034  
Redemption of mutual fund subsidiaries’ capital stock     (57 )      (3,654 ) 
Net cash used for financing activities     (96,663 )      (59,886 ) 
Effect of currency rate changes on cash and cash equivalents     (314 )      (263 ) 
Net increase in cash and cash equivalents     74,345       86,873  
Cash and cash equivalents, end of period   $ 384,931     $ 283,796  
Supplemental Cash Flow Information:
                 
Interest paid   $ 24,481     $ 24,481  
Income taxes paid   $ 94,838     $ 76,837  
Supplemental Non-Cash Flow Information:
                 
Supplemental Non-Cash Flow Information from Investing Activities:
                 
Decrease in investments due to net deconsolidations of sponsored investment funds   $ (1,625 )    $ (4,442 ) 
Decrease in non-controlling interests due to net deconsolidations of sponsored investment funds   $ (1,831 )    $ (4,461 ) 
Increase in fixed assets due to non-cash fixed asset additions   $ 3,088     $ 4,746  
Supplemental Non-Cash Flow Information from Financing Activities:
                 
Exercise of stock options through issuance of notes receivable   $ 1,063     $ 988  

See notes to Consolidated Financial Statements.

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Eaton Vance Corp.
Notes to Consolidated Financial Statements (unaudited)

1. Basis of Presentation

In the opinion of management, the accompanying unaudited interim Consolidated Financial Statements of Eaton Vance Corp. (“the Company”) include all adjustments necessary to present fairly the results for the interim periods in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Such financial statements have been prepared in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures have been omitted pursuant to such rules and regulations. As a result, these financial statements should be read in conjunction with the audited Consolidated Financial Statements and related notes included in the Company’s latest annual report on Form 10-K and the Company’s current report on Form 8-K filed with the SEC on June 2, 2010, which updated the financial information in the Company’s annual report on Form 10-K for the year ended October 31, 2009.

2. Principles of Consolidation

The Consolidated Financial Statements include the accounts of the Company and its controlled subsidiaries. The equity method of accounting is used for investments in non-controlled affiliates in which the Company’s ownership ranges from 20 to 50 percent, or in instances in which the Company is able to exercise significant influence but not control (such as representation on the investee’s Board of Directors). The Company consolidates all investments in affiliates in which the Company’s ownership exceeds 50 percent or where the Company has control. In addition, the Company consolidates any variable interest entity (“VIE”) for which the Company is considered the primary beneficiary. The Company provides for non-controlling interests in consolidated subsidiaries for which the Company’s ownership is less than 100 percent. All intercompany accounts and transactions have been eliminated.

A VIE is an entity in which either (a) the equity investment at risk is not sufficient to permit the entity to finance its own activities without additional financial support or (b) the voting rights of the equity investors are not proportional to their obligations to absorb the expected losses of the entity or their rights to receive the expected residual returns of the entity. The Company evaluates whether entities in which it has an interest are VIEs and whether the Company qualifies as the primary beneficiary of any VIEs identified in its analysis.

3. Revisions to Amounts Previously Presented

Certain prior year amounts have been revised or reclassified to conform to the current year presentation, including those required by the retrospective adoption of new authoritative accounting guidance related to earnings per share and non-controlling interests in subsidiaries. Accordingly, the purchase of non-controlling interests, which was classified as an investing activity under previous guidance, has been reclassified as a financing activity under current guidance for all periods presented. Cash flow activity for the nine months ended July 31, 2009 has been corrected to reclassify activity related to the note receivable from affiliate from a financing activity to an investing activity. These revisions resulted in revised cash provided by investing activities of $37.0 million ($24.9 million previously reported) and revised cash used for financing activities of $59.9 million ($47.8 million previously reported) for the nine months ended July 31, 2009.

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4. Adoption of New Accounting Standards

The Company adopted the following accounting standards in the nine months ended July 31, 2010:

Earnings per Share

On November 1, 2009, the Company adopted a new accounting standard relating to the computation of earnings per share. The standard specifies that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. The adoption of this new accounting standard reduced diluted earnings per share for the three months ended July 31, 2009 by $0.01 from the $0.26 that was previously reported to $0.25. The adoption of this new standard had no impact on the calculation of basic earnings per share for the three months ended July 31, 2009 or on the calculation of basic or diluted earnings per share for the nine months ended July 31, 2009.

Non-controlling Interests

A new accounting standard on non-controlling interests in consolidated financial statements was adopted in the first quarter of 2010. The new accounting standard is intended to establish accounting and reporting standards for non-controlling interests in subsidiaries and for the deconsolidation of subsidiaries. The new accounting standard clarifies that a non-controlling interest in a subsidiary is an ownership interest in that entity that should be reported as equity, separate from the parent’s equity, in the consolidated financial statements. The Company adopted the new accounting standard on November 1, 2009, which required retrospective adoption of the presentation and disclosure requirements for existing non-controlling interests. All other requirements of the new accounting standard were applied prospectively, including the provision that requires that the Company charge or credit the statement of income for an amount equal to the change in amounts redeemable by the non-controlling interest for something other than fair value.

At October 31, 2009, the Company determined that $43.9 million of non-controlling interests related to certain majority-owned subsidiaries were redeemable for cash, resulting in temporary equity classification on the Company’s Consolidated Balance Sheets.

5. Future Accounting Pronouncements

VIEs

In June 2009, the FASB issued literature introducing a new consolidation model. This new literature prescribes how enterprises account for and disclose their involvement with VIEs and other entities whose equity at risk is insufficient or lacks certain characteristics. This new accounting changes how an entity determines whether it is the primary beneficiary of a VIE and whether that VIE should be consolidated and requires additional disclosures. As a result, the Company must comprehensively review its involvements with VIEs and potential VIEs to determine the effect on its Consolidated Financial Statements and related disclosures. The new consolidation standard is effective for the Company’s fiscal year that begins on November 1, 2010 and for interim periods within the first annual reporting period. Earlier application is prohibited. In February 2010, the FASB issued an amendment to this standard. For certain investments held by a reporting entity, the amendment indefinitely defers a requirement to perform a qualitative analysis to determine whether its variable interests give it a controlling financial interest in a VIE. This deferral generally applies to the reporting entities interests in entities that have the attributes of an investment company or that apply the specialized accounting guidance for investment companies, such as the privately offered equity funds in which the Company invests. The Company is currently evaluating the potential impact on its Consolidated Financial Statements of the accounting changes related to entities not contemplated in the deferral.

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6. Acquisitions

Tax Advantaged Bond Strategies (“TABS”)

On December 31, 2008, the Company acquired the Tax Advantaged Bond Strategies (“TABS”) business of M.D. Sass Investors Services (“MD Sass”), a privately held investment manager based in New York, New York. In conjunction with the purchase, the Company recorded $44.8 million of intangible assets representing client relationship intangible assets acquired, which will be amortized over a 10 year period, and a contingent purchase price liability of $13.9 million, which represents the difference between net cash paid at acquisition and the fair value of assets acquired and liabilities assumed. Proforma results of operations have not been presented because the results of operations would not have been materially different from those reported in the accompanying Consolidated Statements of Income.

During the second quarter of fiscal 2010, the Company made its first contingent payment of $8.8 million to the selling group based upon prescribed multiples of TABS revenue for the twelve months ended December 31, 2009. The payment reduced the contingent purchase price liability. The Company will be obligated to make six additional annual contingent payments to the selling group based on prescribed multiples of TABS’s revenue for the twelve months ending December 31, 2010, 2011, 2012, 2014, 2015 and 2016. All future payments will be in cash and will first reduce the remaining contingent purchase price liability. Once the contingent purchase price liability has been utilized any remaining contingent payments will result in an addition to goodwill. These payments are not contingent upon any member of the selling group remaining an employee of the Company.

Parametric Portfolio Associates

On May 14, 2010, the Company exercised a call option requiring the non-controlling interest holders of Parametric Portfolio Associates LLC (“Parametric Portfolio Associates”) to sell units representing a 1.9 percent capital ownership interest in Parametric Portfolio Associates for $9.0 million to the Company. Pursuant to the acquisition agreement, the exercise price of the call option was based on a multiple of earnings before taxes for the calendar year ended December 31, 2009. As a result of the transaction, the Company’s capital ownership increased from 92.4 percent to 94.3 percent and the Company’s profit interest increased from 85.8 percent to 88.9 percent. The payment was treated as an equity transaction and resulted in a reduction to redeemable non-controlling interests.

Parametric Risk Advisors

On July 6, 2010, the Company exercised a call option requiring the non-controlling interest holders of Parametric Risk Advisors LLC (“Parametric Risk Advisors”) to sell units representing an 11 percent ownership interest in Parametric Risk Advisors for $2.2 million. Pursuant to the acquisition agreement, the exercise price of the call option was based on a multiple of earnings before interest and taxes for the twelve month period ended April 30, 2010. As a result of the transaction, the Company’s ownership interest increased from 40 percent to 51 percent. The payment was treated as an equity transaction and resulted in a reduction to redeemable non-controlling interest.

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7. Other Intangible Assets

The following is a summary of other intangible assets at July 31, 2010 and October 31, 2009:

July 31, 2010

       
(dollars in thousands)   Weighted-
average
amortization
period
(in years)
  Gross
carrying
amount
  Accumulated
amortization
  Net
carrying
amount
Amortizing intangible assets:
                                   
Client relationships acquired     9.0     $ 109,177     $ (40,913 )    $ 68,264  
Non-amortizing intangible assets:
                                   
Mutual fund management contract acquired              6,708             6,708  
Total            $ 115,885     $ (40,913 )    $ 74,972  

October 31, 2009

       
(dollars in thousands)   Weighted-
average
amortization
period
(in years)
  Gross
carrying
amount
  Accumulated
amortization
  Net
carrying
amount
Amortizing intangible assets:
                                   
Client relationships acquired     9.8     $ 109,177     $ (35,051 )    $ 74,126  
Non-amortizing intangible assets:
                                   
Mutual fund management contract acquired              6,708             6,708  
Total            $ 115,885     $ (35,051 )    $ 80,834  

Amortization expense was $2.0 million and $1.9 million for the three months ended July 31, 2010 and 2009, respectively, and $5.9 million and $5.0 million for the nine months ended July 31, 2010 and 2009, respectively.

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8. Investments

The following is a summary of investments at July 31, 2010 and October 31, 2009:

   
(in thousands)   July 31, 2010   October 31, 2009
Short-term investments:
                 
Consolidated funds:
                 
Commercial paper   $     $ 20,800  
Debt securities           29,124  
Total short-term investments   $     $ 49,924  

  

   
(in thousands)   July 31, 2010   October 31, 2009
Long-term investments:
                 
Consolidated funds:
                 
Debt securities   $ 41,899     $ 15,129  
Equity securities     37,870       11,913  
Separately managed accounts:
                 
Debt securities     28,016       31,797  
Equity securities     12,478       10,450  
Corporate bonds     4,594        
Sponsored funds     41,310       32,405  
Collateralized debt obligation entities     1,538       2,066  
Investments in affiliates     30,340       22,267  
Other investments     7,509       7,509  
Total long-term investments   $ 205,554     $ 133,536  

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Investments classified as trading

The following is a summary of the cost and fair value of investments held in the portfolios of consolidated funds, separately managed accounts and corporate bonds held by the Company classified as trading at July 31, 2010 and October 31, 2009:

   
July 31, 2010
(in thousands)   Cost   Fair Value
Long-term investments:                  
Debt securities   $ 69,190     $ 74,509  
Equity securities     50,257       50,348  
Total long-term investments   $ 119,447     $ 124,857  

  

   
October 31, 2009
(in thousands)   Cost   Fair Value
Short-term investments:
                 
Commercial paper   $ 20,800     $ 20,800  
Debt securities     29,394       29,124  
Total short-term investments   $ 50,194     $ 49,924  
Long-term investments:
                 
Debt securities   $ 43,370     $ 46,926  
Equity securities     21,305       22,363  
Total long-term investments   $ 64,675     $ 69,289  

Gross realized and unrealized gains and losses on debt and equity securities held in the portfolios of consolidated sponsored funds have been reported in income as a component of other revenue. Gross realized and unrealized gains and losses on the Company’s investments in corporate bonds and on debt and equity securities held in the portfolios of the Company’s separately managed accounts have been reported in income as a component of realized gains (losses) and unrealized gains (losses) on investments (below operating income). The specific identified cost method is used to determine the realized gain or loss on all trading securities sold.

The Company recognized $0.5 million of realized gains and $1.4 million of realized losses related to investments classified as trading for the three months ended July 31, 2010. The Company recognized $1.9 million of realized gains and $3.0 million of realized losses related to investments classified as trading for the nine months ended July 31, 2010. The Company had $7.8 million of unrealized gains and $2.4 million of unrealized losses related to trading securities held at July 31, 2010.

During the second quarter of fiscal 2010, the Company deconsolidated its short-term investment in Eaton Vance Short-Term Income Fund (“EVSI”) upon the closing of the fund. The underlying portfolio holdings were transferred to the Company as a redemption-in-kind.

During the third quarter of fiscal 2010, the Company deconsolidated its investment in Eaton Vance Commodity Strategy Fund when its ownership interest fell below 50 percent. The Company’s remaining investment in the fund is now classified as available-for-sale.

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Investments classified as available-for-sale

The following is a summary of the cost and fair value of investments classified as available-for-sale at July 31, 2010 and October 31, 2009:

July 31, 2010

       
    Gross Unrealized
(in thousands)   Cost   Gains   Losses   Fair Value
Long-term investments:
                                   
Sponsored funds   $ 39,021     $ 2,385     $ (96 )    $ 41,310  
Total long-term investments   $ 39,021     $ 2,385     $ (96 )    $ 41,310  

October 31, 2009

       
    Gross Unrealized
(in thousands)   Cost   Gains   Losses   Fair Value
Long-term investments:
                                   
Sponsored funds   $ 30,414     $ 2,073     $ (82 )    $ 32,405  
Total long-term investments   $ 30,414     $ 2,073     $ (82 )    $ 32,405  

Gross unrealized gains and losses on investments in sponsored funds classified as available-for-sale have been excluded from earnings and reported as a component of accumulated other comprehensive loss, net of deferred taxes. No investment with a gross unrealized loss has been in a loss position for greater than one year.

The Company reviewed the gross unrealized losses of $0.1 million as of July 31, 2010 and determined that these losses were not other-than-temporary, primarily because the Company has both the ability and intent to hold the investments for a period of time sufficient to recover such losses. The aggregate fair value of investments associated with the unrealized losses was $2.4 million at July 31, 2010.

The following is a summary of the Company’s realized gains and losses upon disposition of sponsored funds and certain equity securities classified as available-for-sale for the three and nine months ended July 31, 2010 and 2009. The specific identified cost method is used to determine the realized gain or loss on the sale of shares of sponsored funds.

       
  Three Months Ended
July 31,
  Nine Months Ended
July 31,
(in thousands)   2010   2009   2010   2009
Gains   $ 26     $ 703     $ 2,109     $ 703  
Losses           (131 )      (40 )      (365 ) 
Net realized gains (losses)   $ 26     $ 572     $ 2,069     $ 338  

Investments in collateralized debt obligation entities

The Company has not recognized any impairment losses to date in fiscal 2010. The Company recognized impairment losses totaling $0.4 million in the third quarter of fiscal 2009, representing losses related to two of the Company’s cash instrument collateralized debt obligation (“CDO”) entities, and impairment losses of $1.6 million in the first nine months of fiscal 2009, representing losses relating to two of the Company’s cash instrument CDO entities and a synthetic CDO entity. The impairment losses associated with the cash instrument CDO entities resulted from a decrease in the estimated future cash flows from the CDO entities due to an increase in the default rate of the underlying loan portfolios. The impairment loss associated with the synthetic CDO entity, which reduced the Company’s investment in that entity to zero, resulted from a decrease in the

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estimated cash flows from the entity due to higher realized default rates and lower recovery rates on the reference securities underlying the synthetic CDO entity’s portfolio of credit default swaps.

Investments in affiliates

The Company has a 20 percent equity interest in Lloyd George Management (BVI) Limited (“LGM”), an independent investment management company based in Hong Kong that primarily manages emerging market equity funds and separate accounts, including several funds sponsored by the Company. The Company’s investment in LGM was $7.8 million and $8.3 million at July 31, 2010 and October 31, 2009, respectively.

The Company has a 7 percent equity interest in a private equity partnership that invests in companies in the financial services industry. The Company’s investment in the partnership was $13.1 million and $12.5 million at July 31, 2010 and October 31, 2009, respectively.

The Company has a 26 percent equity interest in Eaton Vance Emerging Markets Local Income Fund. The Company’s $9.4 million investment in the fund at July 31, 2010 was equal to its share of the underlying assets.

The Company had a 27 percent interest in Eaton Vance Enhanced Equity Option Income Fund as of October 31, 2009. As of July 31, 2010, the Company’s interest in this fund had dropped below 20 percent and the Company’s remaining investment is now classified as available-for-sale.

During the second quarter of fiscal 2010, the Company deconsolidated its investment in Eaton Vance Real Estate Fund when its ownership percentage fell below 50 percent. The Company had a 30 percent interest in the Fund as of April 30, 2010 and accounted for it under the equity method of accounting. As of July 31, 2010, the Company’s interest in this fund had dropped below 20 percent and the Company’s remaining investment is now classified as available-for-sale.

The Company reviews its equity method investments annually for impairment in the fourth quarter of each fiscal year.

Other investments

Included in other investments are certain investments carried at cost totaling $7.5 million for the periods ended July 31, 2010 and October 31, 2009, respectively. In the third quarter of fiscal 2009, the Company purchased a non-controlling capital interest in Atlanta Capital Management Holdings LLC (“ACM Holdings”), a partnership that owns the non-controlling interests of Atlanta Capital Management Company, LLC (“Atlanta Capital”), for $6.6 million. The Company’s interest in ACM Holdings is non-voting and entitles the Company to receive $6.6 million when the put or call options for the non-controlling interests of Atlanta Capital are exercised. The Company’s investment in ACM Holdings is included as a component of long-term investments in the Company’s Consolidated Balance Sheet at July 31, 2010. Management believes that the fair value of its other investments approximates their carrying value.

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9. Fair Value Measurements

Accounting standards define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and establishes a hierarchy that prioritizes inputs to valuation techniques to measure fair value. The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value and gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.

Level 1 Investments valued using unadjusted quoted market prices in active markets for identical assets at the reporting date. Assets classified as Level 1 include debt and equity securities held in the portfolio of consolidated funds and separate accounts that are classified as trading and investments in sponsored mutual funds that are classified as available-for-sale.
Level 2 Investments valued using observable inputs other than Level 1 unadjusted quoted market prices, such as quoted market prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities that are not active, and inputs other than quoted prices that are observable or corroborated by observable market data. If events occur after the close of the primary market for any security, the quoted market prices may be adjusted for the observable price movements within country specific market proxies. Investments in this category include commercial paper, certain debt securities, certain equity securities, investments in privately offered equity funds that are not listed but have a net asset value that is comparable to mutual funds and investments in portfolios that have a net asset value that is comparable to mutual funds.
Level 3 Investments valued using unobservable inputs that are supported by little or no market activity. Level 3 valuations are derived primarily from model-based valuation techniques that require significant management judgment or estimation based on assumptions that the Company believes market participants would use in pricing the asset or liability.

The Company recognizes transfers between levels at the end of each quarter. There were no material transfers between Level 1 and Level 2 during the nine months ended July 31, 2010.

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The following table summarizes the assets measured at fair value on a recurring basis and their assigned levels within the hierarchy at July 31, 2010.

         
(in thousands)   Level 1   Level 2   Level 3   Other Assets
Not Held
at Fair
Value(1)
  Total
Cash equivalents   $ 297     $ 195,793     $     $     $ 196,090  
Total cash equivalents   $ 297     $ 195,793     $     $     $ 196,090  
Long-term investments:
                                            
Consolidated funds:
                                   
Debt securities   $ 9,996     $ 31,903     $     $     $ 41,899  
Equity securities     13,795       24,075                   37,870  
Separately managed accounts:
                                            
Debt securities     12,904       15,112                   28,016  
Equity securities     11,075       1,403                   12,478  
Corporate bonds           4,594                   4,594  
Sponsored funds     38,258       3,052                   41,310  
Collateralized debt obligation entities                       1,538       1,538  
Investments in affiliates                       30,340       30,340  
Other investments           38             7,471       7,509  
Total long-term investments   $ 86,028     $ 80,177     $     $ 39,349     $ 205,554  
(1) Includes investments in equity method investees and other investments carried at cost which, in accordance with GAAP, are not measured at fair value.

The following table summarizes the assets measured at fair value on a recurring basis and their assigned levels within the hierarchy at October 31, 2009:

         
(in thousands)   Level 1   Level 2   Level 3   Other
Assets
Not Held
at Fair
Value(1)
  Total
Cash equivalents   $ 22,956     $ 184,709     $     $     $ 207,665  
Total cash equivalents   $ 22,956     $ 184,709     $     $     $ 207,665  
Short-term investments:
                                            
Consolidated funds:
                                   
Commercial paper   $     $ 20,800     $     $     $ 20,800  
Debt securities           29,124                   29,124  
Total short-term investments   $     $ 49,924     $     $     $ 49,924  

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(in thousands)   Level 1   Level 2   Level 3   Other
Assets
Not Held
at Fair
Value(1)
  Total
Long-term investments:
                                            
Consolidated funds:
                                            
Debt securities   $ 15,129     $     $     $     $ 15,129  
Equity securities     11,913                         11,913  
Separately managed accounts:
                                            
Debt securities     11,007       20,790                   31,797  
Equity securities     10,450                         10,450  
Sponsored funds     29,643       2,762                   32,405  
Collateralized debt obligation entities                       1,338       1,338  
Investments in affiliates                       22,267       22,267  
Other investments           38             7,471       7,509  
Total long-term investments   $ 78,142     $ 23,590     $     $ 31,076     $ 132,808  
(1) Includes investments in equity method investees and other investments carried at cost which, in accordance with GAAP, are not measured at fair value.

The following table summarizes the assets measured at fair value on a non-recurring basis at October 31, 2009:

 
(in thousands)   Total
Level 3
Collateralized debt obligation entities   $ 728  
Total   $ 728  

While the Company believes the valuation methods described above are appropriate, the use of different methodologies or assumptions to determine fair value could result in a different estimate of fair value at the reporting date.

The Company had investments in three CDO entities totaling $1.5 million at July 31, 2010. The Company’s investments in CDO entities are carried at amortized cost unless facts and circumstances indicate that the investment has been impaired, at which point the investment is written down to fair value.

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10. Fair Value Measurements of Other Financial Instruments

The following is a summary of the carrying amounts and estimated fair values of the Company’s other financial instruments at July 31, 2010 and October 31, 2009:

       
  July 31, 2010   October 31, 2009
(in thousands)   Carrying
Value
  Fair
Value
  Carrying
Value
  Fair
Value
Other investments   $ 7,509     $ 7,509     $ 7,509     $ 7,509  
Note receivable from affiliate   $     $     $ 8,000     $ 8,000  
Notes receivable from stock option exercises   $ 2,794     $ 2,794     $ 3,078     $ 3,078  
Long-term debt   $ 500,000     $ 575,745     $ 500,000     $ 530,375  

For fair value purposes the carrying value of the other investments, note receivable from affiliate and notes receivable from stock option exercises approximates fair value. The carrying value of the long-term debt has been valued utilizing publicly available market prices, which are considered Level 1 inputs.

11. Variable Interest Entities

Investments in VIEs That Are Not Consolidated

In the normal course of business, the Company maintains investments in sponsored CDO entities and privately offered equity funds that are considered VIEs. In most instances, these variable interests represent seed investments made by the Company, as collateral manager or investment advisor, to launch or market these vehicles. The Company receives management fees for the services it provides as collateral manager or investment advisor.

As a matter of course, the Company evaluates its investment in each CDO entity and privately offered equity fund that qualifies as a VIE at inception to determine whether or not it qualifies as the primary beneficiary of the entity based on its obligation to absorb a majority of the expected losses or its right to receive the majority of the residual returns. The Company reevaluates its investment in each entity as facts and circumstances indicate that either the obligation to absorb these expected losses or the right to receive these expected residual returns has been reallocated between the existing primary beneficiary and other unrelated parties. At July 31, 2010, the Company did not qualify as the primary beneficiary of any CDO entity or privately offered equity fund in which it invests.

The Company managed CDO entities with total assets of $2.3 billion and $2.5 billion as of July 31, 2010 and October 31, 2009, respectively, on which the Company earns a management fee. The Company held investments in three of these entities totaling $1.5 million and $2.1 million on July 31, 2010 and October 31, 2009, respectively. In fiscal 2010, the Company did not provide any financial or other support that it was not previously contractually required to provide. The Company’s risk of loss with respect to managed CDO entities remains limited to the $1.5 million carrying value of the investments on its Consolidated Balance Sheet at July 31, 2010. There are no arrangements that could require the Company to provide additional financial support to any of the CDO entities in which it invests.

The Company’s investments in CDO entities are carried at amortized cost and collectively disclosed as a component of long-term investments in Note 8. Income from these entities is recorded as a component of interest income based upon projected investment yields.

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The Company had investments in 15 privately offered equity funds totaling $3.1 million on July 31, 2010 and investments in 16 privately offered equity funds totaling $2.8 million on October 31, 2009. Assets under management in these entities totaled $10.4 billion and $11.6 billion on July 31, 2010 and October 31, 2009, respectively. In the fourth quarter of fiscal 2008, the Company, as lender, entered into a subordinated term note agreement (the “Note”) with one of the privately offered equity funds in which it invests as further described in Note 12. The Company’s risk of loss in the privately offered equity funds was $3.1 million and $10.8 million on July 31, 2010 and October 31, 2009, respectively, representing the carrying value of the investments held on its Consolidated Balance Sheet plus the stated amount of the Note on October 31, 2009. The Note was repaid in full in the third quarter of fiscal 2010. There are no additional arrangements that could require the Company to provide additional financial support to any of the privately offered equity funds in which it invests.

The Company’s investments in privately offered equity funds are carried at fair value and included in investments in sponsored funds, which are disclosed as a component of long-term investments in Note 8. These investments are classified as available-for-sale and the Company records any change in fair value, net of tax, in other comprehensive income (loss).

Investments in VIEs That Are Consolidated

Parametric Portfolio Associates maintains a 51 percent economic interest in Parametric Risk Advisors, which meets the definition of a VIE. The Company made the determination at the date of acquisition that Parametric Portfolio Associates is the primary beneficiary of the VIE based on the fact that Parametric Portfolio Associates is committed to providing ongoing working capital and infrastructure support and is obligated to absorb all of the losses of Parametric Risk Advisors.

Parametric Risk Advisors had assets of $4.2 million and $2.7 million on July 31, 2010 and October 31, 2009, respectively, consisting primarily of cash and cash equivalents and investment advisory fees receivable, and current liabilities of $1.3 million and $0.9 million on July 31, 2010 and October 31, 2009, respectively, consisting primarily of accrued compensation, accounts payable, accrued expenses and intercompany payables. Neither the Company’s variable interest nor maximum risk of loss related to this VIE was material to its Consolidated Financial Statements at either balance sheet date.

12. Note Receivable from Affiliate

In October 2008, the Company, as lender, entered into a $10.0 million subordinated term note agreement (the “Note”) with a sponsored privately offered equity fund. The Note earns daily interest based on the fund’s cost of borrowing under its commercial paper financing facility. Upon expiration of the Note on January 16, 2009, it was extended to December 17, 2009 and increased to $15.0 million. During the first quarter of fiscal 2010 the Note was extended to December 17, 2010. Subject to certain conditions, the fund may prepay the Note in whole or in part, at any time, without premium or penalty. During fiscal 2009, the sponsored privately offered equity fund prepaid $7.0 million of the Note. During fiscal 2010, the sponsored privately offered equity fund prepaid the remaining balance of the Note.

13. Non-controlling Interests

Effective November 1, 2009, the Company adopted new accounting standards related to non-controlling interests and redeemable non-controlling interests, and retrospectively applied such provisions to reported prior periods. Non-redeemable non-controlling interests have been reclassified to permanent equity with no change in the measurement principles previously applied to these interests. Redeemable non-controlling interests remain classified in mezzanine equity as temporary equity and are measured at redemption value as of the balance sheet date. Presentation of net income in the Consolidated Statements of Income has been changed to reflect net income with and without consideration of the non-controlling interests. Earnings per share continue to be calculated after consideration of the net income attributable to non-controlling interests.

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Non-Redeemable Non-controlling Interests

Non-redeemable non-controlling interests consist entirely of interests granted to employees of the Company’s majority-owned subsidiaries under subsidiary-specific long-term equity plans. These grants become subject to put rights upon vesting and will be reclassified to temporary equity as vesting occurs.

Redeemable Non-controlling Interests

Redeemable non-controlling interests consist of interests in the Company’s majority-owned subsidiaries, consolidated funds and interests granted to employees of the Company’s majority-owned subsidiaries under subsidiary-specific long-term equity plans. These interests are currently redeemable to the Company or will become redeemable at certain future dates.

The interests in the Company’s majority owned subsidiaries are puttable at established multiples of earnings before interest and taxes and, as such, are considered redeemable at other than fair value. The recognition of the redemption value of these redeemable non-controlling interests was effected through an increase to redeemable non-controlling interests and a charge to net income attributable to non-controlling interests. Future changes in the redemption value of these interests will be recognized as increases or decreases to net income attributable to non-controlling interests.

The interests in the Company’s consolidated funds and interests granted to employees of the Company’s majority-owned subsidiaries under subsidiary-specific long-term equity plans are considered redeemable at fair value. The recognition of the redemption value of these redeemable non-controlling interests was effected through an increase to redeemable non-controlling interests and a charge to additional paid in capital. Future changes in the redemption value of these interests will be recognized as increases or decreases to additional paid in capital.

14. Stock-Based Compensation Plans

The Company’s stock-based compensation plans include the 2008 Omnibus Incentive Plan, as amended and restated (the “2008 Plan”), the Employee Stock Purchase Plan, the Incentive Plan – Stock Alternative, the Atlanta Capital Management Company, LLC Long-term Equity Incentive Plan (the “ACM Plan”) and the Parametric Portfolio Associates LLC, Long-term Equity Incentive Plan (the “PPA Plan”). The Company recognized total compensation cost related to its plans as follows:

       
  Three Months Ended
July 31,
  Nine Months Ended
July 31,
(in thousands)   2010   2009   2010   2009
2008 Plan:
                                   
Stock options   $ 7,812     $ 8,372     $ 24,486     $ 25,703  
Restricted shares     2,900       1,526       10,124       4,415  
Phantom stock units     23       44       240       155  
Employee Stock Purchase Plan     739       651       1,099       897  
Incentive Plan – Stock Alternative     119       153       342       153  
ACM Plan     102       50       306       150  
PPA Plan     180             540        
Total stock-based compensation expense   $ 11,875     $ 10,796     $ 37,137     $ 31,473  

The total income tax benefit recognized for stock-based compensation arrangements was $3.4 million and $3.0 million for the three months ended July 31, 2010 and 2009, respectively and $11.5 million and $9.0 million for the nine months ended July 31, 2010 and 2009, respectively.

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2008 Omnibus Incentive Plan

The 2008 Plan, which is administered by the Compensation Committee of the Board, allows for awards of stock options, restricted shares and phantom stock units to eligible employees and non-employee Directors. Options to purchase Non-Voting Common Stock granted under the 2008 Plan expire ten years from the date of grant, vest over five years and may not be granted with an exercise price that is less than the fair market value of the stock as of the close of business on the date of grant. Restricted shares of Non-Voting Common Stock granted under the 2008 Plan vest over five years and may be subject to performance goals. Phantom stock units granted under the 2008 Plan vest over two years. The 2008 Plan contains change in control provisions that may accelerate the vesting of awards. A total of 9.0 million shares of Non-Voting Common Stock have been reserved for issuance under the 2008 Plan. Through July 31, 2010, 2.0 million restricted shares and options to purchase 5.7 million shares have been issued pursuant to the 2008 Plan.

Stock Options

The fair value of each stock 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. The Company’s stock volatility assumption is based upon its historical stock price fluctuations. The Company uses historical data to estimate option forfeiture rates and the expected term of options granted. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

The weighted-average fair value per share of stock options granted during the nine months ended July 31, 2010 and 2009 using the Black-Scholes option pricing model were as follows:

   
  2010   2009
Weighted-average grant date fair value of options granted     $8.84       $6.72  
Assumptions:
                 
Dividend yield     1.8% to 2.3%       2.3% to 3.1%  
Volatility     33%       32% to 34%  
Risk-free interest rate     2.7% to 3.6%       2.9% to 4.6%  
Expected life of options     7.3 years       7.4 years  

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Stock option transactions under the 2008 Plan and predecessor plans for the nine months ended July 31, 2010 are summarized as follows:

       
(share and intrinsic value figures in thousands)   Shares   Weighted-
Average
Exercise
Price
  Weighted-
Average
Remaining
Contractual
Term
  Aggregate
Intrinsic
Value
Options outstanding, beginning of period     29,717     $ 23.89                    
Granted     2,605       28.24                    
Exercised     (1,637 )      17.63                    
Forfeited/expired     (200 )      31.62                    
Options outstanding, end of period     30,485     $ 24.54       5.1     $ 224,353  
Options exercisable, end of period     20,053     $ 21.10       3.8     $ 193,759  
Vested or expected to vest     30,068     $ 24.45       5.1     $ 223,130  

The Company received $27.8 million and $9.7 million related to the exercise of options for the nine months ended July 31, 2010 and 2009, respectively. Options exercised represent newly issued shares. The total intrinsic value of options exercised during the nine months ended July 31, 2010 and 2009 was $24.0 million and $9.2 million, respectively. The total fair value of options that vested during the nine months ended July 31, 2010 was $30.7 million.

As of July 31, 2010, there was $54.7 million of compensation cost related to unvested stock options granted under the 2008 Plan and predecessor plans not yet recognized. That cost is expected to be recognized over a weighted-average period of 2.6 years.

Restricted Shares

Compensation expense related to restricted share grants is recorded over the forfeiture period of the restricted shares, as they are contingently forfeitable. As of July 31, 2010, there was $37.6 million of compensation cost related to unvested awards not yet recognized. That cost is expected to be recognized over a weighted-average period of 3.5 years.

A summary of the Company’s restricted share activity for the nine months ended July 31, 2010 under the 2008 Plan and predecessor plans is presented below:

   
(share figures in thousands)   Shares   Weighted-
Average
Grant
Date Fair
Value
Unvested, beginning of period     1,008     $ 22.87  
Granted     1,000       28.30  
Vested     (164 )      24.11  
Forfeited/expired     (36 )      25.01  
Unvested, end of period     1,808     $ 25.72  

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Phantom Stock Units

In the nine months ended July 31, 2010, 9,189 phantom stock units were issued to non-employee Directors pursuant to the 2008 Plan. Because these units are contingently forfeitable, compensation expense is recorded over the forfeiture period. As of July 31, 2010, there was $0.2 million of compensation cost related to unvested awards not yet recognized. That cost is expected to be recognized over a weighted-average period of 1.0 year.

15. Common Stock Repurchases

The Company’s current share repurchase program was announced on January 15, 2010. The Board authorized management to repurchase and retire up to 8.0 million shares of its Non-Voting Common Stock on the open market and in private transactions in accordance with applicable securities laws. The Company’s stock repurchase program is not subject to an expiration date.

In the first nine months of fiscal 2010, the Company purchased and retired approximately 0.5 million shares of its Non-Voting Common Stock under a previous repurchase authorization and approximately 1.7 million shares of its Non-Voting Common Stock under the current repurchase authorization. Approximately 6.3 million additional shares may be repurchased under the current authorization.

16. Income Taxes

The provision for income taxes for the three months ended July 31, 2010 and 2009 was $28.9 million and $21.5 million, or 39.9 percent and 39.5 percent of pre-tax income, respectively. The provision for income taxes for the nine months ended July 31, 2010 and 2009 was $89.4 million and $49.8 million, or 38.9 percent and 36.5 percent of pre-tax income, respectively.

The provision for income taxes in the nine months ended July 31, 2010 and 2009 is comprised of federal, state, and foreign taxes. The primary difference between the Company’s effective tax rate and the statutory federal rate of 35.0 percent is state income taxes. In the first nine months of fiscal 2009, the Company executed a state tax voluntary disclosure agreement that resulted in a net reduction in income tax expense in the amount of $2.7 million.

The Company’s net deferred tax asset is primarily comprised of deferred tax assets related to future income deductions attributable to stock-based compensation and certain closed-end fund expenses, partially offset by deferred tax liabilities related to deferred sales commissions, a change in accounting method filed with the IRS in December 2007 and differences between the book and tax bases of goodwill and intangibles that are amortizable for tax.

The Company records a valuation allowance, when necessary, to reduce deferred tax assets to an amount that is more likely than not to be realized. There was no valuation allowance recorded as of July 31, 2010 or 2009.

17. Earnings per Share

Effective November 1, 2009, the Company retroactively adopted a new accounting standard that modifies the Company’s earnings per share calculations to recognize outstanding restricted stock, on which the Company pays non-forfeitable dividends, as if it was a separate class of stock. Basic earnings per share is computed on the basis of the weighted-average number of shares of common stock outstanding during the period. Earnings per diluted share is computed on the basis of the weighted-average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the two-class method. Unvested restricted stock awards are not included as incremental shares in the diluted earnings per share calculation.

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The following table provides a reconciliation of common shares used in the earnings per basic share and earnings per diluted share computations as follows:

       
  Three Months
Ended July 31,
  Nine Months
Ended July 31,
(in thousands, except per share data)   2010   2009   2010   2009
Net income allocated to:
                                   
Common shares   $ 41,113     $ 30,952     $ 122,095     $ 80,963  
Participating restricted shares     637       271       1,897       710  
Total net income attributable to Eaton Vance Corp. shareholders   $ 41,750     $ 31,223     $ 123,992     $ 81,673  
Weighted-average shares outstanding – basic     116,549       116,410       116,541       116,092  
Incremental common shares     6,063       5,387       6,455       3,841  
Weighted-average shares outstanding – diluted     122,612       121,797       122,996       119,933  
Earnings per common share attributable to Eaton Vance Corp. shareholders:
                                   
Basic   $ 0.35     $ 0.27     $ 1.05     $ 0.70  
Diluted   $ 0.34     $ 0.25     $ 0.99     $ 0.68  

The Company uses the treasury stock method to account for the dilutive effect of unexercised stock options in earnings per diluted share. Antidilutive common shares related to stock options excluded from the computation of earnings per diluted share were approximately 8.8 million and 13.3 million for the three months ended July 31, 2010 and 2009, respectively and were approximately 9.0 million and 17.9 million for the nine months ended July 31, 2010 and 2009, respectively.

18. Derivative Financial Instruments

Derivative Financial Instruments Designated as Cash Flow Hedges

During the nine months ended July 31, 2010 and 2009, the Company reclassified $0.3 million and $0.3 million, respectively, of the loss on the Treasury lock transaction into interest expense. At July 31, 2010, the remaining unamortized loss on this transaction was $3.2 million. During the next twelve months, the Company expects to reclassify approximately $0.4 million of the loss on the Treasury lock transaction into interest expense.

Other Derivative Financial Instruments

During fiscal 2010, the Company entered into a series of futures contracts and forward foreign exchange contracts to hedge market price and currency risk exposure on its investments in separate accounts and consolidated funds seeded for new product development purposes.

At July 31, 2010, the Company had six outstanding futures contracts with five counterparties with an aggregate notional value of approximately $37.6 million. In addition, the Company had 16 outstanding forward foreign exchange contracts with 15 counterparties with an aggregate notional value of approximately $29.7 million.

The following table presents the fair value as of July 31, 2010 of derivative instruments not designated as hedging instruments:

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  Assets   Liabilities
(in thousands)   Balance Sheet
Location
  Fair Value   Balance Sheet
Location
  Fair Value
Foreign exchange contracts     Other current
assets
    $       Other current
liabilities
    $ 1,951  
Futures contracts     Other current
assets
      19       Other current
liabilities
      1,925  
Total         $ 19           $ 3,876  

The following table presents the fair value as of October 31, 2009, of derivative instruments not designated as hedging instruments:

   
  Assets
(in thousands)   Balance Sheet
Location
  Fair Value
Futures contracts     Investment advisory fees
and other receivables
    $ 42  
Total         $ 42  

The following is a summary of the gains (losses) recognized in income for the three and nine month periods ended July 31, 2010 and 2009:

         
(in thousands)   Income
Statement
Location
  Three Months
Ended July 31,
  Nine Months
Ended July 31,
  2010   2009   2010   2009
Foreign exchange contracts     Other income/expense     $ 533     $     $ 663     $  
Futures contracts     Other income/expense       1,214             517        
Total         $ 1,747     $     $ 1,180     $  

19. Commitments and Contingencies

In the normal course of business, the Company enters into agreements that include indemnities in favor of third parties, such as engagement letters with advisors and consultants, information technology agreements, distribution agreements and service agreements. In certain circumstances, these indemnities in favor of third parties relate to service agreements entered into by investment funds managed and/or advised by Eaton Vance Management or Boston Management and Research. The Company has also agreed to indemnify its directors, officers and employees in accordance with the Company’s Articles of Incorporation, as amended. Certain agreements do not contain any limits on the Company’s liability and, therefore, it is not possible to estimate the Company’s potential liability under these indemnities. In certain cases, the Company has recourse against third

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parties with respect to these indemnities. Further, the Company maintains insurance policies that may provide coverage against certain claims under these indemnities.

The Company and its subsidiaries are subject to various legal proceedings. In the opinion of management, after discussions with legal counsel, the ultimate resolution of these matters will not have a material adverse effect on the consolidated financial condition or results of operations of the Company.

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. The Company had invested $12.8 million of the total $15.0 million of committed capital at July 31, 2010.

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Item 2. 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-Q 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 the “Risk Factors” section of this Form 10-Q. 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

Our principal business is managing investment funds and providing investment management and counseling services to high-net-worth individuals and institutions. Our core strategy is to develop and sustain management expertise across a range of investment disciplines and to offer leading investment products and services through multiple distribution channels. In executing this strategy, we have developed a broadly diversified product line and a powerful marketing, distribution and customer service capability. Although we manage and distribute a wide range of products and services, we operate in one business segment, namely as an investment adviser to funds and separate accounts.

We are a market leader in a number of investment areas, including tax-managed equity, value equity, equity income, emerging market equity, floating-rate bank loan, municipal bond, investment grade, global and high-yield bond investing. Our diversified product line offers 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. Our equity products encompass a diversity of investment objectives, risk profiles, income levels and geographic representation. Our income investment products cover a broad duration and credit quality range and encompass both taxable and tax-free investments. As of July 31, 2010, we had $173.3 billion in assets under management.

Our principal retail marketing strategy is to distribute funds and separately managed accounts through financial intermediaries in the advice channel. We have 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. We support these distribution partners with a team of more than 130 sales professionals covering U.S. and international markets. Specialized sales and marketing professionals in our Wealth Management Solutions Group serve as a resource to financial advisors seeking to help high-net-worth clients address wealth management issues and support the marketing of our products and services tailored to this marketplace.

We also commit significant resources to serving institutional and high-net-worth clients who access investment management services on a direct basis. Through our wholly owned affiliates and consolidated subsidiaries we manage investments for 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 our affiliates develop relationships in this market and deal directly with these clients.

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Our revenue is derived primarily from investment advisory, administration, distribution and service fees received from Eaton Vance funds and investment advisory fees received from separate accounts. Our fees are based primarily on the value of the investment portfolios we manage and fluctuate with changes in the total value and mix of assets under management. Such fees are recognized over the period that we manage these assets. Our major expenses are employee compensation, distribution-related expenses, amortization of deferred sales commissions, facilities expense and information technology expense.

Our discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of these financial statements requires us 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, we evaluate our estimates, including those related to deferred sales commissions, goodwill and intangible assets, income taxes, investments and stock-based compensation. We base our estimates on historical experience and on various assumptions that we believe 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.

Market Developments

Global equity and credit markets experienced a recovery from previously depressed levels in the twelve months ended July 31, 2010, with the S&P 500 Index increasing 12 percent. Counter to the improving trend, domestic stocks moved lower in our third fiscal quarter, with the S&P 500 Index down 7 percent.

Prevailing market conditions affect our 1) asset levels, 2) operating results and 3) the recoverability of our investments. Since financial markets bottomed in the first half of fiscal 2009, we have experienced significant improvement in our key financial metrics. Average assets under management have increased due to strong gross and net flows and positive market action, revenue has increased faster than our overall expenses, resulting in higher operating margins, and our balance sheet continues to provide financial flexibility as more fully described below.

Asset Levels

In the third quarter of fiscal 2010, revenue increased relative to the third quarter of fiscal 2009, primarily reflecting an increase in average managed assets due to improving equity markets and positive net flows. Average assets under management were $170.8 billion in the third quarter of fiscal 2010 compared to $136.0 billion in the third quarter of fiscal 2009. Significant growth in separate account assets, which earn lower fees on average than funds, contributed to a decline in our average effective fee rate to 64 basis points in the third quarter of fiscal 2010 from 67 basis points in the third quarter of fiscal 2009.

As a matter of course, investors in our sponsored open-end funds and separate accounts have the ability to redeem their shares or investments at any time, without prior notice, and there are no material restrictions that would prevent investors from doing so.

Operating Results

In the third quarter of fiscal 2010, our revenue increased by $44.7 million, or 20 percent, from the third quarter of fiscal 2009. Our operating expenses increased by $25.2 million, or 15 percent, in the same period, reflecting increases in expenses tied to asset levels that increase as assets under management increase, such as certain distribution and service fees, and increases in expenses that adjust to increases in operating earnings, such as the performance-based management incentives we accrue. Our sales-related expenses, including sales incentives, vary with the level of sales and the rate we pay to acquire those assets.

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Recoverability of our Investments

We test our investments, including our investments in collateralized debt obligation (“CDO”) entities and investments classified as available-for-sale, for impairment on a quarterly basis. Our investments in CDO entities, which have been the subject of past impairments, totaled $1.5 million on July 31, 2010. We evaluate our investments in CDO entities and investments classified as available-for-sale for impairment using quantitative factors, including how long the investment has been in a net unrealized loss position, and qualitative factors, including the underlying credit quality of the issuer and our ability and intent to hold the investment. If markets deteriorate during the quarters ahead, our assessment of impairment on a quantitative basis may lead us to impair investments in CDO entities or investments classified as available-for-sale in future quarters that were in an unrealized loss position at July 31, 2010.

We test our investments in affiliates and goodwill in the fourth quarter of each fiscal year, or as facts and circumstances indicate that additional analysis is warranted. There have been no significant changes in financial condition in the third quarter of fiscal 2010 that would indicate that an impairment loss exists at July 31, 2010.

We periodically review our deferred sales commissions and identifiable intangible assets for impairment as events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. There have been no significant changes in financial condition in the third quarter of fiscal 2010 that would indicate that an impairment loss exists at July 31, 2010.

Assets under Management

Assets under management of $173.3 billion on July 31, 2010 were 21 percent higher than the $143.7 billion reported a year earlier, reflecting improving securities prices and strong open-end fund, high-net worth and institutional and retail managed account net inflows. Long-term fund net inflows of $8.5 billion over the last twelve months reflect $10.7 billion of open-end fund net inflows and $0.4 billion of closed-end fund net inflows offset by $2.6 billion of private fund net outflows. Outflows from private and closed-end funds include net reductions in fund leverage of $0.7 billion in the last twelve months. High-net-worth and institutional separate account net inflows were $8.3 billion and retail managed account net inflows were $1.8 billion. Market price appreciation, reflecting recovering equity and income markets, contributed $11.3 billion to growth in managed assets, while a decrease in cash management assets reduced assets under management by $0.3 billion.

Ending Assets Under Management by Investment Category(1)

         
  July 31,  
(in millions)   2010   % of Total   2009   % of Total   % Change
Equity   $ 103,002       59 %    $ 88,125       61 %      17 % 
Fixed income     50,453       29 %      38,798       27 %      30 % 
Floating-rate bank loan     19,857       12 %      16,789       12 %      18 % 
Total   $ 173,312       100 %    $ 143,712       100 %      21 % 
(1) Includes funds and separate accounts.

Assets under management for which we estimate fair value are not material relative to the total value of the assets we manage.

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Equity assets under management included $30.1 billion and $31.0 billion of equity funds managed for after-tax returns on July 31, 2010 and 2009, respectively. Fixed income assets included $16.9 billion and $15.4 billion of tax-exempt municipal bond fund assets and $1.2 billion and $1.5 billion of cash management fund assets on July 31, 2010 and 2009, respectively.

Long-Term Fund and Separate Account Net Flows

           
  Three Months Ended
July 31,
    Nine Months Ended
July 31,
 
(in millions)   2010   2009   % Change   2010   2009   % Change
Long-term funds:
                                                     
Open-end funds   $ 3,431     $ 1,825       88 %    $ 9,597     $ 6,303       52 % 
Closed-end funds     171       458       -63 %      301       (116 )      NM(2)  
Private funds     (178 )      (550 )      -68 %      (1,824 )      (3,213 )      -43 % 
Total long-term fund net inflows     3,424       1,733       98 %      8,074       2,974       171 % 
HNW and institutional accounts(1)     1,311       1,164       13 %      3,849       3,500       10 % 
Retail managed accounts     85       966       -91 %      1,179       1,447       -19 % 
Total separate account net inflows     1,396       2,130       -34 %      5,028       4,947       2 % 
Total net inflows   $ 4,820     $ 3,863       25 %    $ 13,102     $ 7,921       65 % 
(1) High-net-worth (“HNW”)
(2) Not meaningful (“NM”)

Net inflows totaled $4.8 billion in the third quarter of fiscal 2010 compared to $3.9 billion in the third quarter of fiscal 2009. Open-end fund net inflows of $3.4 billion and $1.8 billion in the third quarter of fiscal 2010 and 2009, respectively, reflect gross inflows of $7.9 billion and $5.0 billion, respectively, net of redemptions of $4.5 billion and $3.2 billion in the third quarter of fiscal 2010 and 2009, respectively. Closed-end fund net inflows in the third quarter of fiscal 2010 reflect the $200.0 million initial public offering of Eaton Vance Tax-Advantaged Bond and Option Strategies Fund offset by a reduction in portfolio leverage. Private funds, which include privately offered equity and bank loan funds as well as CDO entities, had net outflows of $0.2 billion and $0.5 billion in the third quarter of fiscal 2010 and 2009, respectively. Approximately $0.1 billion and $0.2 billion of private fund outflows in the third quarter of fiscal 2010 and 2009, respectively, can be attributed to reductions in portfolio leverage. Reductions in portfolio leverage in closed-end and private funds reflect paydowns to maintain required asset coverage ratios as well as other portfolio activity.

Separate account net inflows totaled $1.4 billion in the third quarter of fiscal 2010 compared to net inflows of $2.1 billion in the third quarter of fiscal 2009. High-net-worth and institutional account net inflows totaled $1.3 billion in the third quarter of fiscal 2010 compared to $1.2 billion in the third quarter of fiscal 2009, reflecting gross inflows of $3.4 billion and $2.3 billion in the third quarter of fiscal 2010 and 2009, respectively, net of redemptions of $2.1 billion and $1.1 billion, respectively. Retail managed account net inflows totaled $0.1 billion and $1.0 billion in the third quarter of fiscal 2010 and 2009, respectively, reflecting gross inflows of $1.5 billion and $2.2 billion, respectively, net of redemptions of $1.4 billion and $1.2 billion, respectively.

The following table summarizes the asset flows by investment category for the three and nine months ended July 31, 2010 and 2009:

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Asset Flows

           
  Three Months Ended
July 31,
    Nine Months Ended
July 31,
 
(in millions)   2010   2009   % Change   2010   2009   % Change
Equity fund assets – beginning   $ 60,997     $ 47,137       29 %    $ 54,779     $ 51,956       5 % 
Sales/inflows     2,907       2,887       1 %      9,630       11,189       -14 % 
Redemptions/outflows     (2,991 )      (2,587 )      16 %      (9,156 )      (9,614 )      -5 % 
Exchanges     (57 )      27       NM       392       (60 )      NM  
Market value change     (3,877 )      5,409       NM       1,334       (598 )      NM  
Equity fund assets – ending     56,979       52,873       8 %      56,979       52,873       8 % 
Fixed income fund assets – beginning     29,383       21,251       38 %      24,970       20,382       23 % 
Sales/inflows     4,644       1,903       144 %      11,050       4,689       136 % 
Redemptions/outflows     (1,398 )      (893 )      56 %      (4,553 )      (3,335 )      37 % 
Exchanges     65       14       365 %      175       100       75 % 
Market value change     239       803