10-Q 1 v224985_10q.htm QUARTERLY REPORT

 

 

 

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 April 30, 2011

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 o No x

Shares outstanding as of April 30, 2011:

Voting Common Stock — 399,240 shares

Non-Voting Common Stock — 118,181,496 shares

 

 


 
 

TABLE OF CONTENTS

Eaton Vance Corp.
Form 10-Q
As of April 30, 2011 and for the
Three and Six Month Periods Ended April 30, 2011

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)   April 30,
2011
  October 31,
2010
Assets
                 
Cash and cash equivalents   $ 437,623     $ 307,886  
Investment advisory fees and other receivables     132,053       129,380  
Investments     323,897       334,409  
Assets of consolidated collateralized loan obligation entity:
                 
Cash and cash equivalents     18,404        
Bank loans and other investments     484,566        
Other assets     1,583        
Deferred sales commissions     38,126       48,104  
Deferred income taxes     17,859       97,274  
Equipment and leasehold improvements, net     73,010       71,219  
Other intangible assets, net     71,221       73,018  
Goodwill     142,302       135,786  
Other assets     65,843       61,464  
Total assets   $ 1,806,487     $ 1,258,540  

See notes to Consolidated Financial Statements.

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

   
(in thousands, except share figures)   April 30,
2011
  October 31,
2010
Liabilities, Temporary Equity and Permanent Equity
                 
Liabilities:
                 
Accrued compensation   $ 75,050     $ 119,957  
Accounts payable and accrued expenses     58,317       60,843  
Dividend payable     21,345       21,319  
Contingent purchase price liability           5,079  
Debt     500,000       500,000  
Liabilities of consolidated collateralized loan obligation entity:
                 
Senior and subordinated note obligations     479,277        
Other liabilities     10,446        
Other liabilities     66,682       73,468  
Total liabilities     1,211,117       780,666  
Commitments and contingencies
                 
Temporary Equity:
                 
Redeemable non-controlling interests     118,201       67,019  
Permanent Equity:
                 
Voting Common Stock, par value $0.00390625 per share:
                 
Authorized, 1,280,000 shares
                 
Issued and outstanding, 399,240 and 399,240 shares, respectively     2       2  
Non-Voting Common Stock, par value $0.00390625 per share:
                 
Authorized, 190,720,000 shares
                 
Issued and outstanding, 118,181,496 and 117,927,054 shares, respectively     462       461  
Additional paid-in capital     41,935       50,225  
Notes receivable from stock option exercises     (2,868 )      (3,158 ) 
Accumulated other comprehensive income (loss)     2,615       (435 ) 
Appropriated retained earnings     12,036        
Retained earnings     422,074       363,190  
Total Eaton Vance Corp. shareholders’ equity     476,256       410,285  
Non-redeemable non-controlling interests     913       570  
Total permanent equity     477,169       410,855  
Total liabilities, temporary equity and permanent equity   $ 1,806,487     $ 1,258,540  

See notes to Consolidated Financial Statements.

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Eaton Vance Corp.
Consolidated Statements of Income (unaudited)

       
  Three Months Ended
April 30,
  Six Months Ended
April 30,
(in thousands, except per share figures)   2011   2010   2011   2010
Revenue:
                                   
Investment advisory and administration fees   $ 251,670     $ 212,141     $ 494,404     $ 422,528  
Distribution and underwriter fees     26,141       24,666       53,468       49,700  
Service fees     36,478       34,453       73,823       68,443  
Other revenue     11,549       1,693       16,430       4,317  
Total revenue     325,838       272,953       638,125       544,988  
Expenses:
                                   
Compensation of officers and employees     97,157       88,089       194,207       174,963  
Distribution expense     33,657       30,598       66,354       59,709  
Service fee expense     30,780       29,593       62,109       57,729  
Amortization of deferred sales commissions     9,643       8,376       19,993       16,335  
Fund expenses     5,017       5,103       9,561       9,396  
Other expenses     32,547       30,105       65,846       58,420  
Total expenses     208,801       191,864       418,070       376,552  
Operating income     117,037       81,089       220,055       168,436  
Other Income (Expense):
                                   
Interest income     824       716       1,545       1,486  
Interest expense     (8,412 )      (8,411 )      (16,825 )      (16,827 ) 
Gains and (losses) on investments and derivatives     2,029       1,551       (1,048 )      4,092  
Foreign currency gains (losses)     (586 )      200       (583 )      334  
Other income/(expense) of consolidated collateralized loan obligation entity:
                                   
Interest income     5,356             10,576        
Interest expense     (4,033 )            (5,547 )       
Net losses on investments and note obligations     (18,340 )            (21,725 )       
Income before income taxes and equity in net income (loss) of affiliates     93,875       75,145       186,448       157,521  
Income taxes     (41,337 )      (28,880 )      (75,859 )      (60,525 ) 
Equity in net income (loss) of affiliates, net of tax     1,227       (281 )      2,461       533  
Net income     53,765       45,984       113,050       97,529  
Net loss (income) attributable to non-controlling and other beneficial interests     8,714       (9,984 )      (13,036 )      (15,287 ) 
Net income attributable to Eaton Vance Corp. shareholders   $ 62,479     $ 36,000     $ 100,014     $ 82,242  
Earnings Per Share:
                                   
Basic   $ 0.53     $ 0.30     $ 0.84     $ 0.69  
Diluted   $ 0.50     $ 0.29     $ 0.80     $ 0.66  
Weighted Average Shares Outstanding:
                                   
Basic     116,413       116,565       116,540       116,557  
Diluted     122,292       123,515       122,167       123,218  
Dividends Declared Per Share   $ 0.180     $ 0.160     $ 0.360     $ 0.320  

See notes to Consolidated Financial Statements.

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

       
  Three Months Ended
April 30,
  Six Months Ended
April 30,
(in thousands)   2011   2010   2011   2010
Net income   $ 53,765     $ 45,984     $ 113,050     $ 97,529  
Other comprehensive income (loss):
                                   
Amortization of loss on derivative instrument, net of income taxes of $40, $40, $79 and $79, respectively     72       72       144       144  
Unrealized holding gains on investments, net of income taxes of $714, $953, $1,600 and $644, respectively     1,124       1,535       2,568       926  
Foreign currency translation adjustments, net of income taxes of $(178), $97, $(178) and $164, respectively     331       (157 )      338       (252 ) 
Total comprehensive income     55,292       47,434       116,100       98,347  
Comprehensive loss (income) attributable to non-controlling interests and other beneficial interests     8,714       (9,984 )      (13,036 )      (15,287 ) 
Total comprehensive income attributable to Eaton Vance Corp. shareholders   $ 64,006     $ 37,450     $ 103,064     $ 83,060  

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 Income (Loss)   Appropriated Retained Earnings   Retained Earnings   Non-
Redeemable Non- Controlling Interests
  Total Permanent Equity   Redeemable Non-
Controlling Interests
Balance, November 1, 2010   $ 2     $ 461     $ 50,225     $ (3,158 )    $ (435 )    $     $ 363,190     $ 570     $ 410,855     $ 67,019  
Cumulative effect of adoption of new accounting principle                                   30,666       1,665             32,331        
Net income                                   (18,630 )      100,014       1,264       82,648       30,402  
Other comprehensive income                             3,050                         3,050        
Dividends declared                                         (42,795 )            (42,795 )       
Issuance of Non-Voting Common Stock:
                                                                                         
On exercise of stock options           5       23,068       (490 )                              22,583        
Under employee stock purchase plan                 1,876                                     1,876        
Under employee incentive plan                 2,567                                     2,567        
Under restricted stock plan, net of forfeitures           4                                           4        
Stock-based compensation                 27,529                                     27,529        
Tax benefit of stock option exercises                 3,331                                     3,331        
Repurchase of Non-Voting Common Stock           (8 )      (65,811 )                                    (65,819 )       
Principal repayments                       780                               780        
Subscriptions (redemptions/distributions) of non-controlling interest holders                                               (855 )      (855 )      94,572  
Deconsolidation                                                           (74,708 ) 
Reclass to temporary equity                                               (66 )      (66 )      66  
Other changes in non-controlling interests                 (850 )                                    (850 )      850  
Balance, April 30, 2011   $ 2     $ 462     $ 41,935     $ (2,868 )    $ 2,615     $ 12,036     $ 422,074     $ 913     $ 477,169     $ 118,201  

See notes to Consolidated Financial Statements.

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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 Income (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                                   82,242       581       82,823       14,706  
Other comprehensive income                             818                   818        
Dividends declared                                   (37,933 )            (37,933 )       
Issuance of Non-Voting Common Stock:
                                                                                
On exercise of stock options           5       23,252       (491 )                        22,766        
Under employee stock purchase plan                 1,992                               1,992        
Under employee incentive plan                 1,729                               1,729        
Under restricted stock plan, net of forfeitures           4                                     4        
Stock-based compensation                 25,045                               25,045        
Tax benefit of stock option exercises                 4,240                               4,240        
Repurchase of Voting Common Stock                 (41 )                              (41 )       
Repurchase of Non-Voting Common Stock           (5 )      (44,558 )                              (44,563 )       
Principal repayments                       1,011                         1,011        
Subscriptions (redemptions/distributions) of non-controlling interest holders                                         (251 )      (251 )      (2,601 ) 
Deconsolidation                                                     (417 ) 
Reclass to temporary equity                                         (5 )      (5 )      5  
Other changes in non-controlling interests                 (99 )                  822             723       (723 ) 
Balance, April 30, 2010   $ 2     $ 461     $ 56,346     $ (2,558 )    $ (576 )    $ 311,327     $ 416     $ 365,418     $ 54,841  

See notes to Consolidated Financial Statements.

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

   
  Six Months Ended
April 30,
(in thousands)   2011   2010
Cash Flows From Operating Activities:
                 
Net income   $ 113,050     $ 97,529  
Adjustments to reconcile net income to net cash provided by operating activities:
                 
Depreciation and amortization     12,274       12,055  
Amortization/(accretion) of deferred sales commissions     19,971       16,325  
Stock-based compensation     27,529       25,045  
Deferred income taxes     77,562       (11,789 ) 
Gains on investments     (8,613 )      (5,728 ) 
Equity in net income of affiliates     (3,962 )      (861 ) 
Dividends received from affiliates     1,139       954  
Consolidated collateralized loan obligation entity operating activities:
                 
Losses     21,725        
Amortization of investments     (713 )       
Net decrease in other assets and liabilities, including cash     (151 )       
Changes in operating assets and liabilities:
                 
Investment advisory fees and other receivables     (1,558 )      (8,943 ) 
Investments in trading securities     (127,429 )      9,227  
Deferred sales commissions     (9,988 )      (15,832 ) 
Other assets     (22,518 )      (255 ) 
Accrued compensation     (44,940 )      (25,081 ) 
Accounts payable and accrued expenses     (2,369 )      5,894  
Other liabilities     1,480       (11,779 ) 
Net cash provided by operating activities     52,489       86,761  
Cash Flows From Investing Activities:
                 
Additions to equipment and leasehold improvements     (5,880 )      (5,614 ) 
Net cash paid in acquisition     (11,595 )      (8,797 ) 
Cash paid for intangible assets     (1,650 )       
Payments received on note receivable from affiliate           5,500  
Proceeds from sales of investments     84,422       10,208  
Purchase of investments     (678 )      (21,208 ) 
Consolidated collateralized loan obligation entity investing activities:
                 
Proceeds from sales and maturities of investments     167,869        
Purchase of investments     (171,610 )       
Net cash provided by (used for) investing activities     60,878       (19,911 ) 

See notes to Consolidated Financial Statements.

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

   
  Six Months Ended
April 30,
(in thousands)   2011   2010
Cash Flows From Financing Activities:
                 
Proceeds from issuance of Non-Voting Common Stock     27,030       26,491  
Repurchase of Voting Common Stock           (41 ) 
Repurchase of Non-Voting Common Stock     (65,819 )      (44,563 ) 
Principal repayments on notes receivable from stock option exercises     780       1,011  
Excess tax benefit of stock option exercises     3,331       4,240  
Dividends paid     (42,773 )      (37,770 ) 
Net subscriptions received from (redemptions/distributions paid to) non-controlling interest holders     93,717       (2,852 ) 
Net cash provided by (used for) for financing activities     16,266       (53,484 ) 
Effect of currency rate changes on cash and cash equivalents     104       (237 ) 
Net increase in cash and cash equivalents     129,737       13,129  
Cash and cash equivalents, beginning of period     307,886       310,586  
Cash and cash equivalents, end of period   $ 437,623     $ 323,715  
Supplemental Cash Flow Information:
                 
Cash paid for interest   $ 16,320     $ 16,320  
Cash paid for interest by consolidated loan obligation entity     4,273        
Cash paid for income taxes     78,962       81,335  
Supplemental Disclosure of Non-Cash Information:
                 
Increase in fixed assets due to non-cash additions   $ 3,628     $ 2,861  
Exercise of stock options through issuance of notes receivable     490       491  
Consolidation of collateralized loan obligation entity:
                 
Increase in other assets, net of other liabilities     10,418        
Increase in investments     466,440        
Increase in borrowings     446,192        
Deconsolidations of sponsored investment funds:
                 
Decrease in investments     (74,486 )      (262 ) 
Decrease in non-controlling interests     (74,708 )      (417 ) 

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.

During the first quarter of fiscal 2011, the Company changed its balance sheet presentation from “classified” (distinguishing between short-term and long-term accounts) to “unclassified” (no such distinction). This change was precipitated by factors including (i) the presentation complexities inherent in the consolidation of variable interest entities (“VIEs”); and (ii) a desire to conform the Company’s balance sheet presentation to that of other companies within its peer group. Such a change is a presentation election made by management; the October 31, 2010 balance sheet has also been presented in an unclassified format comparable to the second quarter presentation.

2. Principles of Consolidation

As described further in Note 3, the Company adopted the provisions of a new consolidation standard on November 1, 2010. In conjunction with the adoption, the Company concluded that it was the primary beneficiary of one of the collateralized loan obligation (“CLO”) entities for which it acts as collateral manager. As a result, the Company consolidated the assets, liabilities and results of operations of that entity in the Company’s Consolidated Financial Statements beginning on November 1, 2010. The assets of the CLO entity cannot be used by the Company, and the note holders of the entity have no recourse to the general credit or assets of the Company.

The Consolidated Financial Statements include the accounts of the Company and its controlled subsidiaries. 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 VIE (including the above-referenced CLO entity) for which the Company is considered the primary beneficiary. The Company provides for non-controlling and other beneficial interests in consolidated subsidiaries for which the Company’s ownership is less than 100 percent. 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). All intercompany accounts and transactions have been eliminated.

3. Adoption of New Accounting Standards

The Company adopted the following accounting standard in the six months ended April 30, 2011:

VIEs
The Company adopted the provisions of a new accounting standard on November 1, 2010. This standard prescribed a new consolidation model. While the new consolidation model did not change the Company’s conclusions regarding consolidation for the majority of VIEs in which it is involved, it did require that the Company consolidate one CLO entity with non-recourse assets of $487.0 million and non-recourse liabilities of $456.3 million into its Consolidated Financial Statements. The Company irrevocably elected the fair value option for all assets and liabilities of this CLO entity upon adoption. The change in accounting had no effect on the terms of the Company’s management contract with this entity, the revenue the Company is contractually entitled to receive from this entity or the Company’s exposure to liability with respect to this entity. The

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Company’s maximum exposure to loss related to this entity remains limited to its direct investment and beneficial interest in this entity of $2.3 million and investment management fees receivable of $0.5 million as of April 30, 2011.

In conjunction with the adoption, the Company recorded a cumulative effect adjustment to retained earnings of $1.7 million, representing an adjustment to the carrying value of the Company’s direct investment in the CLO entity, and a cumulative effect adjustment to appropriated retained earnings of $30.7 million, equal to the difference between the fair value of the CLO’s assets and the fair value of its liabilities that can be attributed to external investors. This amount was recorded as appropriated retained earnings since the CLO’s external note holders, not the Company, will receive the benefits or absorb the losses associated with their proportionate share of the CLO’s assets and liabilities. In subsequent reporting periods, the net change in the fair value of the CLO’s assets and liabilities that can be attributed to those note holders will be recorded as net income (loss) attributable to those note holders and as an adjustment to appropriated retained earnings.

4. Future Accounting Pronouncements

Fair Value Measurements
In May 2011, the Financial Accounting Standards Board issued an update regarding fair value measurements and disclosures. The amendments in the update result in a common fair value measurement and required disclosure requirements in GAAP and International Financial Reporting Requirements. The amendments change the wording used to describe many of the requirements for measuring fair value and for disclosing information about fair value measurements. The amendment is effective for the Company’s fiscal quarter that begins on February 1, 2012. Early application is prohibited. The Company is currently evaluating the potential impact on its Consolidated Financial Statements.

5. Acquisitions

Tax Advantaged Bond Strategies (“TABS”)
During the second quarter of fiscal 2011, the Company made its second contingent payment of $11.6 million to the selling group based upon prescribed multiples of TABS’s revenue for the twelve months ended December 31, 2010. The payment reduced the contingent purchase price liability to zero and increased goodwill by $6.5 million. The Company will be obligated to make five additional annual contingent payments to the selling group based on prescribed multiples of TABS’s revenue for the twelve months ending December 31, 2011, 2012, 2014, 2015 and 2016. All future payments will be in cash and 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.

Fox Asset Management
On February 6, 2011, the non-controlling interest holders of Fox Asset Management LLC (“Fox Asset Management”) executed a put option requiring the Company to purchase an additional 16 percent interest in Fox Asset Management. The transaction settled on March 1, 2011 and increased the Company’s ownership interest from 84 percent to 100 percent. Pursuant to the terms of the unit purchase agreement, no proceeds were transferred at closing.

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6. Other Intangible Assets

The following is a summary of other intangible assets at April 30, 2011 and October 31, 2010:

April 30, 2011

     
(dollars in thousands)   Gross
carrying amount
  Accumulated amortization   Net
carrying
amount
Amortizing intangible assets:
                          
Client relationships acquired   $ 110,328     $ (46,785 )    $ 63,543  
Intellectual property acquired     1,000       (30 )      970  
Non-amortizing intangible assets:
                          
Mutual fund management contract acquired     6,708             6,708  
Total   $ 118,036     $ (46,815 )    $ 71,221  

October 31, 2010

     
(dollars in thousands)   Gross
carrying amount
  Accumulated amortization   Net
carrying
amount
Amortizing intangible assets:
                          
Client relationships acquired   $ 109,177     $ (42,867 )    $ 66,310  
Non-amortizing intangible assets:
                          
Mutual fund management contract acquired     6,708             6,708  
Total   $ 115,885     $ (42,867 )    $ 73,018  

Amortization expense was $2.0 million for both the three months ended April 30, 2011 and 2010, respectively, and $3.9 million for both the six months ended April 30, 2011 and 2010, respectively.

7. Investments

The following is a summary of investments at April 30, 2011 and October 31, 2010:

   
(in thousands)   April 30, 2011   October 31, 2010
Corporate debt securities   $ 4,866     $ 4,732  
Consolidated funds:
                 
Debt securities     107,953       111,585  
Equity securities     57,042       88,184  
Separately managed accounts:
                 
Debt securities     9,445       3,666  
Equity securities     39,608       28,692  
Sponsored funds     35,784       37,541  
Collateralized loan obligation entities     991       1,391  
Investments in affiliates     60,701       51,111  
Other investments     7,507       7,507  
Total investments   $ 323,897     $ 334,409  

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Investments classified as trading

The following is a summary of the cost and fair value of investments classified as trading at April 30, 2011 and October 31, 2010. These investments include corporate debt securities held directly by the Company, debt and equity securities held in the portfolios of consolidated funds and separately managed accounts seeded for product development purposes, and investments in sponsored funds held by the Company’s wholly owned broker-dealer.

April 30, 2011

   
(in thousands)   Cost   Fair Value
Debt securities   $ 120,476     $ 122,264  
Equity securities     90,076       96,650  
Sponsored funds     5,659       5,328  
Total investments   $ 216,211     $ 224,242  

October 31, 2010

   
(in thousands)   Cost   Fair Value
Debt securities   $ 119,159     $ 119,983  
Equity securities     111,814       116,876  
Total investments   $ 230,973     $ 236,859  

Investment gains and losses on debt and equity securities held in the portfolios of consolidated sponsored funds and on investments in sponsored funds held by the Company’s wholly owned broker-dealer have been reported in income as a component of other revenue. Investment gains and losses on the Company’s investments in corporate debt securities 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 gains (losses) on investments and derivatives (i.e., 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 $9.3 million and $2.0 million of net unrealized gains related to investments classified as trading for the three months ended April 30, 2011 and 2010, respectively, and $9.5 million and $3.2 million for the six months ended April 30, 2011 and 2010, respectively.

During the first quarter of fiscal 2011, the Company deconsolidated its investments in Eaton Vance International (Ireland) U.S. Research Fund, Eaton Vance Richard Bernstein Multi-Market Equity Strategy Fund and Eaton Vance Option Absolute Return LLC when the Company redeemed all of its shares.

During the second quarter of fiscal 2011, the Company deconsolidated its investments in Eaton Vance Short Term Real Return Fund and Eaton Vance Parametric Structured International Equity Fund when its ownership interest fell below 50 percent. The Company’s remaining investment in the funds is now classified as an investment in affiliate.

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 April 30, 2011 and October 31, 2010:

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April 30, 2011

       
  Cost   Gross Unrealized   Fair Value
(in thousands)   Gains   Losses
Sponsored funds   $ 23,009     $ 7,481     $ (34 )    $ 30,456  

October 31, 2010

       
  Cost   Gross Unrealized   Fair Value
(in thousands)   Gains   Losses
Sponsored funds   $ 34,300     $ 3,655     $ (414 )    $ 37,541  

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 income (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 $34,000 as of April 30, 2011 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 $0.7 million at April 30, 2011.

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 six months ended April 30, 2011 and 2010. 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
April 30,
  Six Months Ended
April 30,
(in thousands)   2011   2010   2011   2010
Gains   $ 85     $ 57     $ 2,106     $ 2,082  
Losses           (40 )      (1,554 )      (41 ) 
Net realized gains   $ 85     $ 17     $ 552     $ 2,041  

Investments in collateralized loan obligation entities

The Company did not recognize any impairment losses related to its investments in non-consolidated collateralized loan obligation entities in either the three or six months ended April 30, 2011 or 2010, respectively.

Investments in affiliates

During the three months ended April 30, 2011, the Company sold its equity interest in Lloyd George Management (BVI) Limited (“LGM”), an investment management company based in Hong Kong that primarily manages Asia Pacific and emerging market equity funds and separate accounts, including several funds sponsored by the Company. The Company recognized a realized gain of $5.5 million in the Company’s Consolidated Statements of Income in connection with the sale. The Company’s investment in LGM was $8.0 million at October 31, 2010.

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 $15.4 million and $12.8 million at April 30, 2011 and October 31, 2010, respectively.

The Company has a 44 percent equity interest in Eaton Vance Short Term Real Return Fund at April 30, 2011, valued at $27.0 million.

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The Company has a 31 percent equity interest in Eaton Vance Parametric Structured International Equity Fund at April 30, 2011, valued at $18.3 million.

The Company had a 33 percent equity interest in Eaton Vance Global Macro Absolute Return Advantage Fund at October 31, 2010. At April 30, 2011, the Company’s interest in this fund 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 April 30, 2011 and October 31, 2010, respectively. Management believes that the fair value of its other investments approximates their carrying value.

8. Fair Value Measurements

Substantially all of the Company’s investments are carried at fair value, with the exception of its investments in non-consolidated CLO entities that have not been impaired in the current fiscal period and certain non-marketable investments, which are accounted for using the equity or cost method.

The Company has recorded all eligible assets and liabilities in its consolidated CLO entity at fair value. In connection with the adoption of the new accounting standard, the Company has elected and applied the fair value option to measure all of the eligible assets and liabilities of the entity at fair value upon adoption and thereafter. The Company elected the fair value option in order to mitigate any accounting mismatches between the carrying value of the senior and subordinated note obligations and the carrying value of the assets that are held to provide the cash flows for those note obligations. The Company has also concluded that the measurement of the note obligations issued by the entity at fair value better correlates with the fair value of the assets held by the entity, which are held to provide the cash flows for the note obligations of the entity.

The Company recognizes transfers between levels at the end of each quarter. There were no significant transfers between levels during the six months ended April 30, 2011.

The following is a description of the valuation methodologies used for financial assets and liabilities measured at fair value, as well as the general classification of such financial assets and liabilities pursuant to the valuation hierarchy.

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Financial Instrument   Hierarchy   Valuation Methodology
Cash Equivalents   Level 1   Includes investments in money market funds. Fair value is determined based upon unadjusted quoted market prices.
     Level 2   Includes agency securities. Fair value is determined based upon observable inputs other than Level 1 unadjusted quoted market prices, such as quoted market prices for similar assets in active markets, quoted prices for identical or similar assets that are not active, and inputs other than quoted prices that are observable or corroborated by observable market data.
Investments   Level 1   Includes certain debt and certain equity securities held in the portfolios of consolidated funds and separately managed accounts, which are classified as trading, and investments in sponsored funds. Fair value is determined based upon unadjusted quoted market prices.
     Level 2   Includes 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. Fair value is determined 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 of country-specific market proxies.
Derivative assets and liabilities   Level 2   Includes foreign exchange contracts, stock index futures contracts and commodity futures contracts. Foreign exchange contract pricing is determined by interpolating a value using the spot foreign currency rate based on spot rate and currency exchange rate differentials, which are all observable inputs. Index futures contracts and commodity futures contracts pricing is determined by a third-party pricing service that determines fair value based on bid and ask prices.

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Financial Instrument   Hierarchy   Valuation Methodology
Securities sold, not yet purchased   Level 2   Pricing is determined by a third-party pricing service that determines fair value based on bid and ask prices.
Assets of consolidated collateralized loan obligation entity   Level 1   Includes investments in money market funds and certain equity securities. Fair value is determined based upon unadjusted quoted market prices.
     Level 2   Includes bank loans, debt and equity securities. Fair value is determined based upon valuations obtained from independent third-party broker or dealer prices.
     Level 3   Includes warrants, bank loans and equity securities. In certain instances the fair value has been determined using discounted cash flow analyses. Fair value in which pricing is received from one non-binding broker quote is also considered to be Level 3.
Liabilities of consolidated collateralized loan obligation entity   Level 3   Includes senior and subordinated note obligations. Fair value is determined primarily from model-based valuation techniques in which one or more significant inputs are unobservable in the market.

Other assets not held at fair value 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 and liabilities measured at fair value on a recurring basis and their assigned levels within the hierarchy at April 30, 2011.

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(in thousands)   Level 1   Level 2   Level 3   Other Assets
Not Held
at Fair
Value
  Total
Cash equivalents   $ 7,087     $ 241,142     $     $     $ 248,229  
Investments:
                                            
Corporate debt securities   $     $ 4,866     $     $     $ 4,866  
Consolidated funds:
                                            
Debt securities           107,953                   107,953  
Equity securities     51,795       5,247                   57,042  
Separately managed accounts:
                                            
Debt securities     4,517       4,928                   9,445  
Equity securities     39,095       513                   39,608  
Sponsored funds     31,882       3,902                   35,784  
Collateralized loan obligation entities                       991       991  
Investments in affiliates                       60,701       60,701  
Other investments           37             7,470       7,507  
Total investments   $ 127,289     $ 127,446     $     $ 69,162     $ 323,897  
Other financial assets:
                                            
Derivative financial assets   $     $ 456     $     $     $ 456  
Assets of consolidated collateralized loan obligation entity:
                                            
Cash equivalents     17,305                         17,305  
Bank loans and other investments     149       480,247       4,170             484,566  
Total other financial assets   $ 17,454     $ 480,703     $ 4,170     $     $ 502,327  
Financial liabilities:
                                            
Derivative financial liabilities   $     $ 7,231     $     $     $ 7,231  
Securities sold, not yet purchased           6,738                   6,738  
Liabilities of consolidated collateralized loan obligation entity:
                                            
Senior and subordinated note obligations                 479,277             479,277  
Total financial liabilities   $     $ 13,969     $ 479,277     $     $ 493,246  

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

         
(in thousands)   Level 1   Level 2   Level 3   Other Assets
Not Held
at Fair
Value
  Total
Cash equivalents   $ 1,291     $ 90,416     $   —     $     $ 91,707  
Investments:
                                            
Corporate debt securities   $     $ 4,732     $     $     $ 4,732  
Consolidated funds:
                                            
Debt securities     9,372       102,213                   111,585  
Equity securities     45,135       43,049                   88,184  
Separately managed accounts:
                                            
Debt securities           3,666                   3,666  
Equity securities     27,724       968                   28,692  
Sponsored funds     34,194       3,347                   37,541  
Collateralized loan obligation entities                       1,391       1,391  
Investments in affiliates                       51,111       51,111  
Other investments           37             7,470       7,507  
Total investments   $ 116,425     $ 158,012     $     $ 59,972     $ 334,409  
Other financial assets:
                                            
Derivative financial assets   $     $ 582     $     $     $ 582  
Financial liabilities:
                                            
Derivative financial liabilities   $     $ 3,519     $     $     $ 3,519  
Securities sold, not yet purchased           731                   731  
Total financial liabilities   $     $ 4,250     $     $     $ 4,250  

The changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the three months ended April 30, 2011 were as follows:

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(in thousands)   Bank loans and
other investments
of consolidated
CLO entity
  Senior and subordinated
note obligations
of consolidated
CLO entity
Balance at February 1, 2011   $ 4,379     $ 456,963  
Net losses on investments and note obligations(1)     395       22,314  
Net transfers in and/or out of Level 3     (604 )       
Balance at April 30, 2011   $ 4,170     $ 479,277  
Change in unrealized gains and (losses) included in net income relating to assets and liabilities held at April 30, 2011   $ 395     $ 22,314  

(1) Net losses on investments and note obligations attributable to the assets and borrowings of the Company’s consolidated CLO entity are allocated to non-controlling and other beneficial interests on the Company’s Consolidated Statement of Income.

The changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the six months ended April 30, 2011 were as follows:

   
(in thousands)   Bank loans and
other investments
of consolidated
CLO entity
  Senior and subordinated
note obligations
of consolidated
CLO entity
Balance at November 1, 2010   $     $  
Adjustment for adoption of new consolidation guidance     5,265       444,087  
Net losses on investments and note obligations(1)     825       35,190  
Purchases, sales and settlements, net     (1,316 )       
Net transfers in and/or out of Level 3     (604 )       
Balance at April 30, 2011   $ 4,170     $ 479,277  
Change in unrealized gains and (losses) included in net income relating to assets and liabilities held at April 30, 2011   $ 825     $ 35,190  

(1) Net losses on investments and note obligations attributable to the assets and borrowings of the Company’s consolidated CLO entity are allocated to non-controlling and other beneficial interests on the Company’s Consolidated Statement of Income.

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 two non-consolidated CLO entities totaling $1.0 million at April 30, 2011. The Company’s investments in these CLO 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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9. Fair Value Measurements of Other Financial Instruments

Certain financial instruments are not required to be carried on the balance sheet at fair value. The following is a summary of the carrying amounts and estimated fair values of these financial instruments at April 30, 2011 and October 31, 2010:

       
  April 30, 2011   October 31, 2010
(in thousands)   Carrying
Value
  Fair
Value
  Carrying
Value
  Fair
Value
Other investments   $ 7,507     $ 7,507     $ 7,507     $ 7,507  
Notes receivable from stock option exercises   $ 2,868     $ 2,868     $ 3,158     $ 3,158  
Long-term debt   $ 500,000     $ 574,666     $ 500,000     $ 590,692  

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

10. Variable Interest Entities

In the normal course of business, the Company maintains investments in sponsored CLO entities and privately offered equity funds that are considered VIEs. These variable interests generally 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 to these entities. These fees may also be considered variable interests.

A company is the primary beneficiary of a VIE if it has a controlling financial interest in the entity. A company is deemed to have a controlling financial interest in the entity if it has both (i) the power to direct the activities of the entity that most significantly impact the entity’s economic performance, and (ii) the obligation to absorb a majority of the entity’s expected losses, receive a majority of the entity’s expected residual returns, or both, that potentially could be significant to the entity.

To determine whether or not the Company should be treated as the primary beneficiary of a VIE, management must make significant estimates and assumptions regarding probable future cash flows of the VIE. These estimates and assumptions relate primarily to market interest rates, credit default rates, pre-payment rates, discount rates, the marketability of certain securities and the probability of certain outcomes.

Investments in VIEs That Are Consolidated

CLO Entities
As described in Note 3, the Company adopted the provisions of a new consolidation standard on November 1, 2010.

The Company irrevocably elected the fair value option for all assets and liabilities of this CLO entity upon adoption of the new accounting guidance. The Company elected the fair value option to mitigate any accounting mismatches between the carrying value of the senior and subordinated note obligations and the carrying value of the assets that are held to provide the cash flows for those note obligations. Unrealized gains and losses on assets and liabilities for which the fair value option has been elected are reported in earnings. Although the subordinated note obligations of the CLO entity have certain equity characteristics, the Company has determined that the subordinated notes should be recorded as liabilities on the Company’s Consolidated Balance Sheet.

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The assets of this CLO entity are held solely as collateral to satisfy the obligations of the entity. The Company has no right to the benefits from, nor does the Company bear the risks associated with, the assets held by the entity beyond the Company’s minimal direct investment and beneficial interest therein and management fees generated from the entity. The note holders of the CLO entity have no recourse to the Company’s general assets. There are neither explicit arrangements nor does the Company hold implicit variable interests that would require the Company to provide any ongoing financial support to the entity.

The following table presents, as of April 30, 2011, the fair value of the CLO entity’s assets and liabilities subject to fair value accounting:

     
  CLO Bank Loan Investments   Senior and
subordinated
note obligations
(in thousands)   Total CLO
bank loan
investments
  90 days or
more past
due
Unpaid principal balance   $ 477,395     $ 798     $ 499,825  
Excess unpaid principal balance over fair value     553       (600 )      (20,548 ) 
Fair value   $ 477,948     $ 198     $ 479,277  

During the three and six months ended April 30, 2011, the changes in the fair value of the CLO entity’s investments resulted in net gains of $4.0 million and $13.5 million, respectively. For the three and six months ended April 30, 2011, net gains were offset by net losses of $22.4 million and $35.3 million, respectively, resulting from an increase in the fair value of the CLO’s note obligations. The combined net losses of $18.3 million and $21.7 million were recorded as net losses on investments and note obligations of the consolidated CLO entity on the Company’s Consolidated Statements of Income for the three and six months ended April 30, 2011, respectively. Substantially all of the gains and losses related to the CLO entity’s investments and note obligations recorded in earnings for the period were attributable to changes in instrument-specific credit risk due to the credit spreads for these instruments tightening while benchmarked interest rates remained relatively unchanged.

The CLO entity’s note obligations bear interest at variable rates based on LIBOR plus a pre-defined spread, which ranges from 0.21% to 1.50%. The principal amounts outstanding of the note obligations issued by the CLO entity mature on April 20, 2019. The CLO entity may prepay its note obligations prior to contractual maturity date as a result of collateral asset repayments.

Interest income and expense are recorded on an accrual basis and reported as interest income and interest expense in other income/(expense) of the consolidated CLO entity on the Company’s Consolidated Statements of Income for the three months and six months ended April 30, 2011.

At April 30, 2011, the following carrying amounts related to this CLO entity were included in the Company’s consolidated balance sheet:

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(in thousands)   April 30, 2011
Assets of consolidated CLO entity:
        
Cash and cash equivalents   $ 18,404  
Bank loans and other investments     484,566  
Other assets     1,583  
Liabilities of consolidated CLO entity:
        
Senior and subordinated note obligations     479,277  
Other liabilities     10,446  
Appropriated retained earnings     12,036  
Total net interest in consolidated CLO entity   $ 2,794  

For the three and six months ended April 30, 2011, the Company recorded net losses of $17.1 million and $16.9 million, respectively, related to the CLO entity. Net losses of $18.0 million and $18.6 million for the three and six months ended April 30, 2011, respectively, were included in net income attributable to non-controlling interests and other beneficial interests, reflecting the interests of third-party note holders of the CLO entity.

Other Entities
Parametric Portfolio Associates maintains a 51 percent economic interest in Parametric Risk Advisors, which meets the definition of a VIE. The Company has made the determination that Parametric Portfolio Associates is the primary beneficiary of the VIE based on the fact that Parametric Portfolio Associates has the ability to direct the activities of Parametric Risk Advisors that most significantly impact its economic performance and Parametric Portfolio Associates is committed to providing ongoing working capital and infrastructure support. Additionally, Parametric Portfolio Associates is obligated to absorb all of the losses of Parametric Risk Advisors that could potentially be significant to Parametric Risk Advisors.

Parametric Risk Advisors had assets of $3.9 million and $3.8 million on April 30, 2011 and October 31, 2010, respectively, consisting primarily of cash and cash equivalents and investment advisory fees receivable, and current liabilities of $1.7 million on both April 30, 2011 and October 31, 2010, 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 the Company’s Consolidated Financial Statements at either balance sheet date.

Investments in VIEs That Are Not Consolidated

CLO Entities
The Company is not deemed the primary beneficiary of three CLO entities in which it holds variable interests. These non-consolidated entities had total assets of $1.9 billion as of April 30, 2011 and October 31, 2010, respectively. The Company’s variable interests in these entities consist of the Company’s direct ownership in these entities and any collateral management fees earned but uncollected. The Company held investments in these entities totaling $1.0 million and $1.3 million on April 30, 2011 and October 31, 2010, respectively, and collateral management fees receivable totaling $1.8 million on April 30, 2011 and October 31, 2010. In the first six months of fiscal 2011, the Company did not provide any financial or other support to these entities that it was not previously contractually required to provide. The Company’s risk of loss with respect to these managed CLO entities is limited to the carrying value of its investments in and collateral management fees receivable from the CLO entities as of April 30, 2011.

The Company’s investments in the CLO entities identified above are carried at amortized cost and collectively disclosed as a component of investments in Note 7. Income from these entities is recorded as a component of interest income based upon projected investment yields.

Other Entities
The Company holds variable interests in but is not deemed to be the primary beneficiary of 15 privately offered equity funds with total assets of $10.6 billion and $10.9 billion as of April 30, 2011 and October 31, 2010,

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respectively. The Company’s variable interests in these entities consist of the Company’s direct ownership in these entities and any investment advisory fees earned but uncollected. The Company held investments in these entities totaling $3.9 million and $3.3 million on April 30, 2011 and October 31, 2010, respectively, and collateral management fees receivable totaling $0.5 million and $0.4 million on April 30, 2011 and October 31, 2010, respectively. In the first six months of fiscal 2011, the Company did not provide any financial or other support to these entities that it was not previously contractually required to provide. The Company’s risk of loss with respect to these managed entities is limited to the carrying value of its investments in and investment advisory fees receivable from the entities as of April 30, 2011.

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 investments in Note 7. These investments are classified as available-for-sale and the Company records any change in fair value, net of income tax, in other comprehensive income (loss).

11. Stock-Based Compensation Plans

The Company recognized total compensation cost related to its stock-based compensation plans as follows:

       
  Three Months Ended
April 30,
  Six Months Ended
April 30,
(in thousands)   2011   2010   2011   2010
2008 Plan:
                                   
Stock options   $ 7,661     $ 8,141     $ 17,209     $ 16,674  
Restricted shares     4,355       3,338       8,722       7,224  
Phantom stock units     110       141       209       217  
Employee Stock Purchase Plan                 253       360  
Incentive Plan – Stock Alternative                 265       223  
ACM Plan     160       102       320       204  
PPA Plan     380       180       760       360  
Total stock-based compensation expense   $ 12,666     $ 11,902     $ 27,738     $ 25,262  

The total income tax benefit recognized for stock-based compensation arrangements was $9.1 million and $3.9 million for the three months ended April 30, 2011 and 2010, respectively, and $14.0 million and $8.1 million for the six months ended April 30, 2011 and 2010, respectively.

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. A total of 12.5 million shares of Non-Voting Common Stock have been reserved for issuance under the 2008 Plan. Through April 30, 2011, 3.0 million restricted shares and options to purchase 8.5 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.

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The weighted-average fair value per share of stock options granted during the six months ended April 30, 2011 and 2010 using the Black-Scholes option pricing model were as follows:

   
  2011   2010
Weighted-average grant date fair value of options granted     $8.55       $8.84  
Assumptions:
                 
Dividend yield     2.2% to 2.4%       1.8% to 2.3%  
Volatility     34%       33%  
Risk-free interest rate     2.2% to 3.1%       3.3% to 3.6%  
Expected life of options     7.3 years       7.3 years  

Stock option transactions under the 2008 Plan and predecessor plans for the six months ended April 30, 2011 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     28,712     $ 25.16                    
Granted     2,793       29.42                    
Exercised     (1,213 )      19.02                    
Forfeited/expired     (186 )      33.17                    
Options outstanding, end of period     30,106     $ 25.75       5.1     $ 289,044  
Options exercisable, end of period     20,311     $ 23.31       3.7     $ 235,141  
Vested or expected to vest     29,714     $ 25.68       5.0     $ 286,888  

The Company received $22.6 million and $22.8 million related to the exercise of options for the six months ended April 30, 2011 and 2010, respectively. Options exercised represent newly issued shares. The total intrinsic value of options exercised during the six months ended April 30, 2011 and 2010 was $15.6 million and $20.3 million, respectively. The total fair value of options that vested during the six months ended April 30, 2011 was $31.0 million.

As of April 30, 2011, there was $51.6 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 2.7 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 April 30, 2011, there was $54.5 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 six months ended April 30, 2011 under the 2008 Plan and predecessor plans is presented below:

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(share figures in thousands)   Shares   Weighted-
Average
Grant
Date Fair
Value
Unvested, beginning of period     1,792     $ 25.73  
Granted     994       29.42  
Vested     (283 )      25.50  
Forfeited/expired     (39 )      26.03  
Unvested, end of period     2,464     $ 27.27  

Phantom Stock Units
In the six months ended April 30, 2011, 8,738 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 April 30, 2011, there was $0.3 million of compensation cost related to unvested awards not yet recognized. That cost is expected to be recognized over a weighted-average period of 1.2 years.

12. 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 six months of fiscal 2011, the Company purchased and retired approximately 2.1 million shares of its Non-Voting Common Stock under the current repurchase authorization. Approximately 2.7 million additional shares may be repurchased under the current authorization.

13. Income Taxes

The provision for income taxes for the three months ended April 30, 2011 and 2010 was $41.3 million and $28.9 million, or 44.0 percent and 38.4 percent of pre-tax income, respectively. The provision for income taxes for the six months ended April 30, 2011 and 2010 was $75.9 million and $60.5 million, or 40.7 percent and 38.4 percent of pre-tax income, respectively. The provision for income taxes 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 and losses recognized by the consolidated CLO entity.

During the first quarter of fiscal 2011, the Company received approval from the Internal Revenue Service to change the Company’s tax accounting for certain closed-end fund expenses. This change in tax accounting allows for the immediate tax deduction of current year closed-end fund expenses, as well as a tax deduction in the Company’s fiscal 2010 federal tax return for previously deferred expenses. This change in accounting resulted in a decrease in deferred tax assets and a corresponding decrease in taxes payable of $94.7 million. In conjunction with the approval of the change in tax accounting, the Company filed for and received a refund of $85.0 million in the first three months of fiscal 2011.

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 is no valuation allowance recorded as of April 30, 2011 or 2010.

The Company is currently under audit by several states. One state previously provided the Company with a draft position that may have resulted in a proposed adjustment to the Company’s previously filed tax returns. The state is currently reevaluating its draft position, and has not provided the Company with any further comment. The Company believes that its tax positions related to this potential adjustment were correct, and if an adjustment is proposed, the Company intends to vigorously defend its positions. It is possible the ultimate

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resolution of the proposed adjustment, if unfavorable, may be material to the results of operations in the period it occurs. Pending receipt of a formal assessment, an estimate of the range of the reasonably possible change in unrecognized tax benefits over the next twelve months cannot be made.

14. Earnings per Share

Earnings per basic share is calculated pursuant to the two-class method to determine income attributable to common shareholders. Earnings per basic share is calculated by dividing net distributed and undistributed earnings allocated to common shareholders by the weighted-average number of common shares outstanding during the period. Earnings per diluted share is computed on the basis of the weighted-average number of common shares outstanding during the period plus the dilutive effect of any potential common shares outstanding during the period using the more dilutive of the treasury method or two-class method. The weighted-average number of restricted stock awards that have vested within the period are included in the calculation of earnings per basic and diluted share. Unvested restricted stock awards are not included as incremental shares in the calculation of earnings per diluted share.

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
April 30,
  Six Months Ended
April 30,
(in thousands, except per share data)   2011   2010   2011   2010
Net income allocated to:
                                   
Common shares   $ 61,186     $ 35,443     $ 97,938     $ 80,966  
Participating restricted shares     1,293       557       2,076       1,276  
Total net income attributable to Eaton Vance Corp. shareholders   $ 62,479     $ 36,000     $ 100,014     $ 82,242  
Weighted-average shares outstanding – basic     116,413       116,565       116,540       116,557  
Incremental common shares     5,879       6,950       5,627       6,661  
Weighted-average shares outstanding – diluted     122,292       123,515       122,167       123,218  
Earnings per common share attributable to Eaton Vance Corp. shareholders:
                                   
Basic   $ 0.53     $ 0.30     $ 0.84     $ 0.69  
Diluted   $ 0.50     $ 0.29     $ 0.80     $ 0.66  

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 7.8 million and 8.7 million for the three months ended April 30, 2011 and 2010, respectively and were approximately 10.7 million and 9.1 million for the six months ended April 30, 2011 and 2010, respectively.

15. Derivative Financial Instruments

Derivative Financial Instruments Designated as Cash Flow Hedges
During the six months ended April 30, 2011 and 2010, the Company reclassified $0.2 million of the loss on the Treasury lock transaction into interest expense. At April 30, 2011, the remaining unamortized loss on this transaction was $2.9 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.

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Other Derivative Financial Instruments not Designated for Hedge Accounting
The Company has entered into a series of foreign exchange contracts, stock index futures contracts and commodity futures contracts to structurally hedge currency risk exposure and market risk associated with its investments in separate accounts and consolidated funds seeded for new product development purposes.

At April 30, 2011, the Company had ten outstanding foreign exchange contracts with seven counterparties with an aggregate notional value of approximately $25.0 million. At April 30, 2011, the Company had twelve outstanding stock index futures contracts with one counterparty with an aggregate notional value of approximately $97.5 million. In addition, at April 30, 2011 the Company had twenty-two outstanding commodity futures contracts with one counterparty with an aggregate notional value of approximately $13.6 million.

The following table presents the fair value as of April 30, 2011 of derivative instruments not designated as hedging instruments:

       
  Assets   Liabilities
(in thousands)   Balance Sheet Location   Fair Value   Balance Sheet Location   Fair Value
Foreign exchange contracts     Other assets     $ 27       Other liabilities     $ 1,854  
Stock index futures contracts     Other assets       265       Other liabilities       4,764  
Commodity futures contracts     Other assets       164       Other liabilities       613  
Total            $ 456              $ 7,231  

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

       
  Assets   Liabilities
(in thousands)   Balance Sheet Location   Fair Value   Balance Sheet Location   Fair Value
Foreign exchange contracts     Other assets     $ 12       Other liabilities     $ 1,187  
Stock index futures contracts     Other assets       489       Other liabilities       1,415  
Commodity futures contracts     Other assets       81       Other liabilities       917  
Total            $ 582              $ 3,519  

The following is a summary of the gains (losses) recognized in income for the three and six months ended April 30, 2011 and 2010:

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  Income Statement
Location
  Three Months
Ended April 30,
  Six Months
Ended April 30,
(in thousands)   2011   2010   2011   2010
Foreign exchange contracts     Gains and (losses) on investments and derivatives     $ (2,196 )    $ 130     $ (1,917 )    $ 130  
Stock index futures contracts     Gains and (losses) on investments and derivatives       (4,373 )      (288 )      (8,841 )      (696 ) 
Commodity futures contracts     Gains and (losses) on investments and derivatives       (728 )            (2,192 )       
Total         $ (7,297 )    $ (158 )    $ (12,950 )    $ (566 ) 

16. 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 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 $13.3 million of the total $15.0 million of committed capital at April 30, 2011. The Company believes the remaining $1.7 million will likely be invested by March 2015.

The Company has entered into transactions in financial instruments in which it has sold securities, not yet purchased as part of its corporate hedging program. As of April 30, 2011 the Company has $6.7 million included within other liabilities on its Consolidated Balance Sheet related to securities sold, not yet purchased.

17. Subsequent Events

In April 2011, the non-controlling interest holders of Parametric Portfolio Associates exercised a put option requiring the Company to purchase an additional interest in Parametric Portfolio Associates for approximately $4.3 million. The transaction settled on May 3, 2011 and increased the Company’s capital ownership interest from 94.3 percent to 94.8 percent. The payment was treated as an equity transaction and reduced redeemable non-controlling interests at closing.

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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. The terms “may”, “could”, “anticipate”, “plan”, “continue”, “project”, “intend”, “estimate”, “believe”, “expect” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such words. Although we believe that the assumptions and expectations reflected in such forward-looking statements are reasonable, we can give no assurance that they will prove to have been correct or that we will take any actions that may now 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 April 30, 2011, we had $203.0 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.

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.

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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.

Market Developments

Prevailing market conditions affect our managed asset levels, operating results and 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 increased 17 percent in the second quarter of fiscal 2011 relative to the second quarter of fiscal 2010, reflecting strong net flows and positive market action. Gross inflows were well diversified among major investment categories and well balanced between funds and separate accounts. Revenue increased faster than our overall expenses in the second quarter of fiscal 2011, resulting in higher operating margins.

Managed Asset Levels
Average assets under management were $197.3 billion in the second quarter of fiscal 2011 compared to $169.0 billion in the second quarter of fiscal 2010. Our average effective fee rate was 64 basis points in the second quarter both of fiscal 2011 and 2010.

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 second quarter of fiscal 2011, our revenue increased by $52.9 million, or 19 percent, from the second quarter of fiscal 2010. Our operating expenses increased by $16.9 million, or 9 percent, in the same period, reflecting increases in asset-based expenses 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. The increase in our operating expenses also reflects an increase in our sales-related expenses, which vary with the level of sales and the acquisition costs of new assets.

Recoverability of our Investments
Our $323.9 million of investments consist primarily of positions in Eaton Vance-managed funds and separate accounts entered into for investment and business development purposes. These investments are generally in liquid debt or equity securities and are carried at fair market value. We test our investments, including our investments in collateralized loan obligation (“CLO”) entities and investments classified as available-for-sale, for impairment on a quarterly basis. Our investments in non-consolidated CLO entities, which have been the

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subject of past impairments, totaled $1.0 million on April 30, 2011. We evaluate our investments in CLO 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 non-consolidated CLO entities or investments classified as available-for-sale in future quarters that were in an unrealized loss position at April 30, 2011.

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 second quarter of fiscal 2011 that would indicate that an impairment loss exists at April 30, 2011.

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 second quarter of fiscal 2011 that would indicate that an impairment loss exists at April 30, 2011.

Assets under Management

Assets under management of $203.0 billion on April 30, 2011 were 15 percent higher than the $176.2 billion reported a year earlier, reflecting improving securities prices and strong open-end fund and institutional net inflows. Long-term fund net inflows of $10.4 billion over the last twelve months reflect $11.5 billion of open-end fund and $0.4 billion of closed-end fund net inflows offset by $1.5 billion of private fund net outflows. Gross outflows from private and closed-end funds include net reductions in fund leverage of $1.0 billion in the last twelve months. Institutional separate account net inflows were $2.5 billion, high-net-worth separate account net inflows were $0.3 billion and retail managed account net outflows were $0.4 billion. Market price appreciation, reflecting recovering equity and income markets, contributed $14.1 billion to growth in managed assets, while a decrease in cash management assets reduced assets under management by $0.4 billion. Acquired assets contributed $0.3 billion to assets under management.

In prior years we have shown managed assets and flow data by major investment class (equity, fixed income and floating-rate income), using portfolio classification as the primary driver. In the first quarter of fiscal 2011, we began reporting managed assets and flow data by investment mandate, using fund investment strategy as the primary driver. Concurrent with this change, we added a new “Alternative” category to reflect the growing importance to our business of investment mandates that are designed to exhibit low correlation to stock and bond market performance. The Alternative category includes a range of absolute return and market neutral strategies, as well as commodity-linked investments.

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Ending Assets Under Management by Investment Mandate(1)

         
  April 30,
(in millions)   2011   % of
Total
  2010   % of
Total
  %
Change
Equity   $ 122,740       60 %    $ 110,987       63 %      11 % 
Fixed income     43,093       21 %      41,194       23 %      5 % 
Floating-rate income     24,224       12 %      17,180       10 %      41 % 
Alternative     11,833       6 %      5,364       3 %      121 % 
Cash management     1,071       1 %      1,520       1 %      -30 % 
Total   $ 202,961       100 %    $ 176,245       100 %      15 % 

(1) Includes funds and separate accounts.

Equity assets under management included $33.0 billion and $32.2 billion of equity funds managed for after-tax returns on April 30, 2011 and 2010, respectively. Fixed income assets included $14.3 billion and $16.7 billion of tax-exempt municipal bond fund assets on April 30, 2011 and 2010, respectively.

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

Long-Term Fund and Separate Account Net Flows

           
  Three Months Ended
April 30,
  %
Change
  Six Months Ended
April 30,
  %
Change
(in millions)   2011   2010   2011   2010
Long-term funds:
                                                     
Open-end funds   $ 2,767     $ 3,674       -25 %    $ 4,827     $ 6,166       -22 % 
Closed-end funds     (2 )      152       NM (1)      (112 )      131       NM  
Private funds     (537 )      (633 )      -15 %      (1,135 )      (1,647 )      -31 % 
Total long-term fund net inflows     2,228       3,193       -30 %      3,580