10-Q 1 v304755_10q.htm FORM 10-Q

  

  

 

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 January 31, 2012
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 January 31, 2012:
    Voting Common Stock — 399,240 shares
    Non-Voting Common Stock — 115,435,234 shares

 

 


 
 

TABLE OF CONTENTS

Eaton Vance Corp.
Form 10-Q
As of January 31, 2012 and for the
Three Month Period Ended January 31, 2012

Table of Contents

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Part I — Financial Information
  
Item 1. Consolidated Financial Statements
  
Eaton Vance Corp.
Consolidated Balance Sheets (unaudited)

   
(in thousands)   January 31,
2012
  October 31,
2011
Assets
                 
Cash and cash equivalents   $ 475,370     $ 510,913  
Investment advisory fees and other receivables     126,885       130,525  
Investments     333,404       287,735  
Assets of consolidated collateralized loan obligation (“CLO”) entity:
                 
Cash and cash equivalents     16,832       16,521  
Bank loans and other investments     472,933       462,586  
Other assets     1,222       2,715  
Deferred sales commissions     24,377       27,884  
Deferred income taxes     44,768       41,343  
Equipment and leasehold improvements, net     64,443       67,227  
Intangible assets, net     65,225       67,224  
Goodwill     142,302       142,302  
Other assets     66,772       74,325  
Total assets   $ 1,834,533     $ 1,831,300  

 
 
See notes to Consolidated Financial Statements.

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

   
(in thousands, except share figures)   January 31,
2012
  October 31,
2011
Liabilities, Temporary Equity and Permanent Equity
                 
Liabilities:
                 
Accrued compensation   $ 49,748     $ 137,431  
Accounts payable and accrued expenses     60,788       51,333  
Dividend payable     22,023       21,959  
Debt     500,000       500,000  
Liabilities of consolidated CLO entity:
                 
Senior and subordinated note obligations     480,345       477,699  
Other liabilities     6,777       5,193  
Other liabilities     118,979       75,557  
Total liabilities     1,238,660       1,269,172  
Commitments and contingencies
                 
Temporary Equity:
                 
Redeemable non-controlling interests     118,494       100,824  
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, 115,435,234 and 115,223,827 shares, respectively     451       450  
Notes receivable from stock option exercises     (4,118 )      (4,441 ) 
Accumulated other comprehensive income     2,003       1,340  
Appropriated retained earnings (deficit)     1,124       (3,867 ) 
Retained earnings     477,152       466,931  
Total Eaton Vance Corp. shareholders' equity     476,614       460,415  
Non-redeemable non-controlling interests     765       889  
Total permanent equity     477,379       461,304  
Total liabilities, temporary equity and permanent equity   $ 1,834,533     $ 1,831,300  

 
 
See notes to Consolidated Financial Statements.

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Eaton Vance Corp.
Consolidated Statements of Income (unaudited)

   
  Three Months Ended
January 31,
(in thousands, except per share figures)   2012   2011
Revenue:
                 
Investment advisory and administration fees   $ 239,452     $ 242,734  
Distribution and underwriter fees     22,515       27,327  
Service fees     32,299       37,345  
Other revenue     1,340       1,208  
Total revenue     295,606       308,614  
Expenses:
                 
Compensation of officers and employees     96,683       97,050  
Distribution expense     32,328       32,697  
Service fee expense     28,673       31,329  
Amortization of deferred sales commissions     5,820       10,350  
Fund expenses     6,651       4,544  
Other expenses     32,631       33,299  
Total expenses     202,786       209,269  
Operating income     92,820       99,345  
Other income (expense):
                 
Interest and other income     1,737       2,063  
Interest expense     (8,413 )      (8,413 ) 
Net gains (losses) on investments and derivatives     6,430       (746 ) 
Net foreign currency gains     10       3  
Other income (expense) of consolidated CLO entity:
                 
Interest income     5,544       5,220  
Interest expense     (4,311 )      (1,514 ) 
Net gains (losses) on bank loans, other investments and note obligations     4,736       (3,385 ) 
Income before income taxes and equity in net income of affiliates     98,553       92,573  
Income taxes     (35,187 )      (34,522 ) 
Equity in net income of affiliates, net of tax     1,504       1,234  
Net income     64,870       59,285  
Net income attributable to non-controlling and other beneficial interests     (17,599 )      (21,750 ) 
Net income attributable to Eaton Vance Corp. shareholders   $ 47,271     $ 37,535  
Earnings per share:
                 
Basic   $ 0.41     $ 0.31  
Diluted   $ 0.40     $ 0.30  
Weighted average shares outstanding:
                 
Basic     112,768       116,741  
Diluted     114,901       122,175  
Dividends declared per share   $ 0.19     $ 0.18  

 
 
See notes to Consolidated Financial Statements.

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

   
  Three Months Ended
January 31,
(in thousands)   2012   2011
Net income   $ 64,870     $ 59,285  
Other comprehensive income (loss):
                 
Amortization of loss on derivatives, net of income taxes of $39 and $39, respectively     72       72  
Unrealized holding gains on available-for-sale investments, net of
income taxes of $440 and $886, respectively
    733       1,444  
Foreign currency translation adjustments, net of income taxes of $85 and $0, respectively     (142 )      7  
Total comprehensive income     65,533       60,808  
Comprehensive income attributable to non-controlling and other
beneficial interests
    (17,599 )      (21,750 ) 
Total comprehensive income attributable to Eaton Vance Corp. shareholders   $ 47,934     $ 39,058  

 
 
See notes to Consolidated Financial Statements.

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Eaton Vance Corp.
Consolidated Statements of Shareholders' 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
  Appropriated Retained Earnings (Deficit)   Retained Earnings   Non-Redeemable Non-Controlling Interests   Total
Permanent
Equity
  Redeemable Non-Controlling Interests
Balance, November 1, 2011   $ 2     $ 450     $     $ (4,441 )    $ 1,340     $ (3,867 )    $ 466,931     $ 889     $ 461,304     $ 100,824  
Net income                                   4,991       47,271       808       53,070       11,800  
Other comprehensive income                             663                         663        
Dividends declared                                         (22,022 )            (22,022 )       
Issuance of Non-Voting Common Stock:
                                                                                         
On exercise of stock options           1       2,735       (137 )                              2,599        
Under employee stock purchase plan           1       1,823                                     1,824        
Under employee incentive plan                 1,609                                     1,609        
Under restricted stock plan, net of forfeitures           5                                           5        
Stock-based compensation                 16,342                                     16,342        
Tax benefit of stock option exercises                 225                                     225        
Repurchase of Non-Voting Common Stock           (6 )      (19,766 )                        (15,028 )            (34,800 )       
Principal repayments on notes receivable from stock option exercises                       460                               460        
Net subscriptions (redemptions/distributions) of non-controlling interest holders                                               (800 )      (800 )      19,334  
Deconsolidation                                                           (16,564 ) 
Reclass to temporary equity                                               (132 )      (132 )      132  
Other changes in non-controlling interests                 (2,968 )                                    (2,968 )      2,968  
Balance, January 31, 2012   $ 2     $ 451     $     $ (4,118 )    $ 2,003     $ 1,124     $ 477,152     $ 765     $ 477,379     $ 118,494  

 
 
See notes to Consolidated Financial Statements.

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Eaton Vance Corp.
Consolidated Statements of Shareholders' 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) Income
  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 change in accounting principle                                   30,666       1,665             32,331        
Net income                                   (626 )      37,535       599       37,508       21,777  
Other comprehensive income                             1,523                         1,523        
Dividends declared                                         (21,452 )            (21,452 )       
Issuance of Non-Voting Common Stock:
                                                                                         
On exercise of stock options           2       10,147       (490 )                              9,659        
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                 14,973                                     14,973        
Tax benefit of stock option exercises                 1,484                                     1,484        
Repurchase of Non-Voting Common Stock           (3 )      (26,803 )                                    (26,806 )       
Principal repayments on notes receivable from stock option exercises                       664                               664        
Net subscriptions (redemptions/distributions) of
non-controlling interest holders
                                              (198 )      (198 )      60,235  
Deconsolidation                                                           (28,335 ) 
Reclass to temporary equity                                               (66 )      (66 )      66  
Other changes in non-controlling interests                 (857 )                                    (857 )      857  
Balance, January 31, 2011   $ 2     $ 464     $ 53,612     $ (2,984 )    $ 1,088     $ 30,040     $ 380,938     $ 905     $ 464,065     $ 121,619  

 
 
See notes to Consolidated Financial Statements.

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

   
  Three Months Ended
January 31,
(in thousands)   2012   2011
Cash Flows From Operating Activities:
                 
Net income   $ 64,870     $ 59,285  
Adjustments to reconcile net income to net cash (used for) provided by
operating activities:
                 
Depreciation and amortization     6,314       6,224  
Amortization of deferred sales commissions     5,827       10,332  
Stock-based compensation     16,342       14,973  
Deferred income taxes     (3,821 )      82,678  
Net (gains) losses on investments and derivatives     (6,430 )      741  
Equity in net income of affiliates     (2,417 )      (1,985 ) 
Dividends received from affiliates     10,225        
Consolidated CLO entity operating activities:
                 
Net (gains) losses on bank loans, other investments and note obligations     (4,736 )      3,385  
Amortization of investments     (256 )      (400 ) 
Net increase (decrease) in other assets and liabilities, including cash     2,771       (8,303 ) 
Changes in operating assets and liabilities:
                 
Investment advisory fees and other receivables     3,785       (3,506 ) 
Investments in trading securities     (70,263 )      (41,314 ) 
Deferred sales commissions     (2,322 )      (5,280 ) 
Other assets     3,964       (20,782 ) 
Accrued compensation     (87,633 )      (68,981 ) 
Accounts payable and accrued expenses     9,647       3,929  
Other liabilities     45,918       27,141  
Net cash (used for) provided by operating activities     (8,215 )      58,137  
Cash Flows From Investing Activities:
                 
Additions to equipment and leasehold improvements     (1,486 )      (3,316 ) 
Net cash paid in acquisition           (1,000 ) 
Proceeds from sale of investments     14,542       59,135  
Purchase of investments     (6,126 )      (638 ) 
Consolidated CLO entity investing activities:
                 
Proceeds from sales and maturities of bank loans and other investments     32,512       85,264  
Purchase of bank loans and other investments     (35,221 )      (80,162 ) 
Net cash provided by investing activities     4,221       59,283  

 
 
See notes to Consolidated Financial Statements.

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

   
  Three Months Ended
January 31,
(in thousands)   2012   2011
Cash Flows From Financing Activities:
                 
Proceeds from issuance of Non-Voting Common Stock     6,037       14,106  
Repurchase of Non-Voting Common Stock     (34,800 )      (26,806 ) 
Principal repayments on notes receivable from stock option exercises     460       664  
Excess tax benefit of stock option exercises     225       1,484  
Dividends paid     (21,967 )      (21,319 ) 
Net subscriptions received from (redemptions/distributions paid to)
non-controlling interest holders
    18,534       56,975  
Net cash (used for) provided by financing activities     (31,511 )      25,104  
Effect of currency rate changes on cash and cash equivalents     (38 )      (82 ) 
Net (decrease) increase in cash and cash equivalents     (35,543 )      142,442  
Cash and cash equivalents, beginning of period     510,913       307,886  
Cash and cash equivalents, end of period   $ 475,370     $ 450,328  
Supplemental Cash Flow Information:
                 
Cash paid for interest   $ 36     $ 36  
Cash paid for interest by consolidated CLO entity     722       1,792  
Cash paid for income taxes, net of refunds     9,683       63  
Supplemental Disclosure of Non-Cash Information:
                 
Increase in equipment and leasehold improvements due to non-cash additions   $ 142     $ 5,791  
Exercise of stock options through issuance of notes receivable     137       490  
Consolidation of CLO 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   $ (16,470 )    $ (28,599 ) 
Decrease in non-controlling interests     (16,564 )      (28,335 ) 

 
 
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.

In the quarter ended January 31, 2012, the Company changed the presentation of its Consolidated Statements of Income. The change relates to the classification of net investment income and net investment gains or losses of consolidated sponsored funds. Net investment income earned by consolidated sponsored funds, previously included in other revenue, is now presented as a component of interest and other income. Net investment gains or losses of consolidated sponsored funds, also previously included in other revenue, are now presented as a component of net gains (losses) on investments and derivatives. Management believes the revised presentation is more useful to readers of its financial statements by better highlighting the current earnings effect of the investment results of consolidated sponsored funds. Amounts for the comparative prior fiscal year period have been reclassified to conform to the current year presentation. These reclassifications had no impact on previously reported net income or financial position and do not represent a restatement of any previously reported financial results.

The following table presents the effects of the change in presentation of net investment income and net investment gains or losses earned by consolidated sponsored funds to the Company’s previously reported Consolidated Statement of Income:

     
  Three Months Ended
January 31, 2011
(in thousands)   As
Previously
Reported
  Reclassifications   As
Reclassified
Other revenue   $ 4,881     $ (3,673 )    $ 1,208  
Total revenue     312,287       (3,673 )      308,614  
Operating income     103,018       (3,673 )      99,345  
Interest and other income     721       1,342       2,063  
Net gains (losses) on investments and derivatives     (3,077 )      2,331       (746 ) 
Net income     59,285             59,285  
Net income attributable to Eaton Vance Corp. shareholders     37,535             37,535  

2. Principles of Consolidation

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 variable interest entities (“VIEs”) (including the below-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.

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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 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.

From time to time, the Company may maintain a controlling financial interest in a sponsored fund. Upon consolidation, the Company assumes the specialized accounting treatment of the fund. All of the underlying investments held by consolidated funds are carried at fair value, with corresponding changes in fair value reflected in net gains (losses) on investments and derivatives in the Company’s Consolidated Statements of Income. When the Company is no longer deemed to control the fund, the fund is deconsolidated and accounted for under another accounting method.

3. New Accounting Standards Not Yet Adopted

Testing goodwill for impairment

In September 2011, the Financial Accounting Standards Board (“FASB”) issued an amendment to the existing goodwill impairment guidance. The terms of the amendment permit a reporting entity to first assess qualitative factors to determine whether it is necessary to perform step one of the two-step goodwill impairment test. The new guidance is effective for the Company for the fiscal year that begins on November 1, 2012. The adoption of this new guidance is not expected to have a material effect on the Company’s Consolidated Financial Statements.

Fair value measurements

In May 2011, the FASB issued an amendment that modifies and clarifies existing fair value measurement and disclosure guidance. The amendment results in common requirements for measuring fair value and for disclosing information about fair value measurements in accordance with GAAP and International Financial Reporting Requirements. In some instances, the amendment changes principles and 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 adoption of this new guidance is not expected to have a material effect on the Company’s Consolidated Financial Statements.

4. Investments

The following is a summary of investments at January 31, 2012 and October 31, 2011:

   
(in thousands)   January 31, 2012   October 31, 2011
Corporate debt securities   $     $ 4,832  
Consolidated funds:
                 
Debt securities     78,425       69,083  
Equity securities     102,276       74,434  
Separately managed accounts:
                 
Debt securities     21,067       11,307  
Equity securities     33,107       33,553  
Sponsored funds     48,348       39,841  
CLO entities     376       278  
Investments in affiliates     42,298       46,900  
Other investments     7,507       7,507  
Total investments   $ 333,404     $ 287,735  

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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 January 31, 2012 and October 31, 2011. 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.

January 31, 2012

   
(in thousands)   Cost   Fair Value
Debt securities   $ 95,985     $ 99,492  
Equity securities     129,006       135,383  
Total investments   $ 224,991     $ 234,875  

October 31, 2011

   
(in thousands)   Cost   Fair Value
Debt securities   $ 83,852     $ 85,222  
Equity securities     105,230       107,987  
Total investments   $ 189,082     $ 193,209  

The Company recognized $5.8 million and $0.2 million of net unrealized gains related to investments classified as trading for the three months ended January 31, 2012 and 2011, respectively.

During the first quarter of fiscal 2012, the Company deconsolidated its investment in Eaton Vance Diversified Currency Income Fund when its ownership fell below 50 percent. The Company’s remaining investment is classified as an investment in affiliate at January 31, 2012.

Investments classified as available-for-sale

The following is a summary of the cost, gross unrealized gains and losses, and fair value of investments classified as available-for-sale at January 31, 2012 and October 31, 2011:

January 31, 2012

       
  Gross Unrealized
(in thousands)   Cost   Gains   Losses   Fair Value
Sponsored funds   $ 41,702     $ 6,683     $ (37 )    $ 48,348  

October 31, 2011

       
  Gross Unrealized
(in thousands)   Cost   Gains   Losses   Fair Value
Sponsored funds   $ 34,368     $ 5,518     $ (45 )    $ 39,841  

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 $37,000 at January 31, 2012 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 January 31, 2012.

The following is a summary of the Company’s realized gains and losses upon disposition of sponsored funds classified as available-for-sale for the three months ended January 31, 2012 and 2011.

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  Three Months Ended
January 31,
(in thousands)   2012   2011
Gains   $ 84     $ 2,021  
Losses     (21 )      (1,554 ) 
Net realized gains   $ 63     $ 467  

Investments in non-consolidated CLO entities

The Company did not recognize any impairment losses related to its investments in non-consolidated CLO entities in either the three months ended January 31, 2012 or 2011.

Investments in affiliates

The Company has a 7 percent equity interest in a private equity partnership managed by a third party that invests in companies in the financial services industry. The Company’s investment in the partnership was $9.8 million and $18.4 million at January 31, 2012 and October 31, 2011, respectively.

The Company had equity interests in the following sponsored funds as of January 31, 2012 and October 31, 2011.

       
  Equity Ownership Interest (%)   Equity Ownership Interest ($)
(dollar amounts in thousands)   January 31,
2012
  October 31,
2011
  January 31,
2012
  October 31,
2011
Eaton Vance Parametric Structured                                    
Commodity Strategy Fund     20 %      47 %    $ 9,030     $ 9,190  
Eaton Vance Diversified Currency Income Fund     40 %            16,758        
Eaton Vance Real Estate Fund     38 %            6,721        
Eaton Vance Parametric Option Absolute Return Strategy Fund           27 %            19,298  

The Company recognized a $2.4 million gain in the first quarter of fiscal 2012 related to its April 2011 sale of its equity interest in Lloyd George Management (BVI) Limited, representing additional settlement payments received during the quarter.

The Company did not recognize any impairment losses related to its investments in affiliates in either the three months ended January 31, 2012 or the three months ended January 31, 2011.

Other investments

Included in other investments are certain investments carried at cost totaling $7.5 million as of both January 31, 2012 and October 31, 2011. Management believes that the carrying value of its other investments approximates their fair value.

5. 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.

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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.

   
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.

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Financial Instrument   Hierarchy   Valuation Methodology
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.
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
CLO 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 and certain debt and certain equity securities. Fair value is determined based upon valuations obtained from independent third-party broker or dealer prices and are derived from such services matrix pricing models, which considers information regarding securities with similar characteristics to determine the valuation.
     Level 3   Includes warrants, bank loans and certain 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 CLO
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.

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The following tables summarize the assets and liabilities measured at fair value on a recurring basis and their assigned levels within the hierarchy at January 31, 2012 and October 31, 2011:

January 31, 2012

         
(in thousands)   Level 1   Level 2   Level 3   Other
Assets
Not Held
at Fair
Value
  Total
Cash equivalents   $     $ 253,416     $     $     $ 253,416  
Investments:
                                            
Consolidated funds:
                                            
Debt securities   $     $ 78,425     $     $     $ 78,425  
Equity securities     96,200       6,076                   102,276  
Separately managed accounts:
                                            
Debt securities     4,467       16,600                   21,067  
Equity securities     30,186       2,921                   33,107  
Sponsored funds     44,373       3,975                   48,348  
CLO entities                       376       376  
Investments in affiliates                       42,298       42,298  
Other investments           37             7,470       7,507  
Total investments   $ 175,226     $ 108,034     $     $ 50,144     $ 333,404  
Other financial assets:
 
Derivative financial assets   $     $ 399     $     $     $ 399  
Assets of consolidated CLO entity:
                                            
Cash equivalents     15,561                         15,561  
Bank loans and other investments     87       468,118       4,728             472,933  
Total other financial assets   $ 15,648     $ 468,517     $ 4,728     $     $ 488,893  
Financial liabilities:
                                            
Derivative financial liabilities   $     $ 6,849     $     $     $ 6,849  
Securities sold, not yet purchased           19,070                   19,070  
Liabilities of consolidated CLO entity:
                                            
Senior and subordinated note obligations                 480,345             480,345  
Total financial liabilities   $     $ 25,919     $ 480,345     $     $ 506,264  

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October 31, 2011

         
(in thousands)   Level 1   Level 2   Level 3   Other
Assets
Not Held
at Fair
Value
  Total
Cash equivalents   $ 6,691     $ 360,676     $     $     $ 367,367  
Investments:
                                            
Corporate debt securities   $     $ 4,832     $     $     $ 4,832  
Consolidated funds:
                                            
Debt securities     6,879       62,204                   69,083  
Equity securities     69,279       5,155                   74,434  
Separately managed accounts:
                                            
Debt securities     4,429       6,878                   11,307  
Equity securities     33,511       42                   33,553  
Sponsored funds     36,128       3,713                   39,841  
CLO entities                       278       278  
Investments in affiliates                       46,900       46,900  
Other investments           37             7,470       7,507  
Total investments   $ 150,226     $ 82,861     $     $ 54,648     $ 287,735  
Other financial assets:
                                            
Derivative financial assets   $     $ 1,060     $     $     $ 1,060  
Assets of consolidated CLO entity:
                                            
Cash equivalents     15,829                         15,829  
Bank loans and other investments     85       456,591       5,910             462,586  
Total other financial assets   $ 15,914     $ 457,651     $ 5,910     $     $ 479,475  
Financial liabilities:
                                            
Derivative financial liabilities   $     $ 6,654     $     $     $ 6,654  
Securities sold, not yet purchased           6,270                   6,270  
Liabilities of consolidated CLO entity:
                                            
Senior and subordinated note obligations                 477,699             477,699  
Total financial liabilities   $     $ 12,924     $ 477,699     $     $ 490,623  

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The changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the three months ended January 31, 2012 and 2011 were as follows:

Three Months Ended January 31, 2012

   
(in thousands)   Bank loans and
other investments of
consolidated CLO
entity
  Senior and
subordinated note
obligations of
consolidated CLO
entity
Balance at November 1, 2011   $ 5,910     $ 477,699  
Net losses on investments and note obligations(1)     (40 )      2,646  
Net transfers out of Level 3     (1,142 )       
Balance at January 31, 2012   $ 4,728     $ 480,345  
Change in unrealized gains and (losses) included in net income relating to assets and liabilities held at January 31, 2012   $ (40 )    $ 2,646  

Three Months Ended January 31, 2011

   
(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)     429       12,876  
Purchases, sales and settlements, net     (1,315 )       
Balance at January 31, 2011   $ 4,379     $ 456,963  
Change in unrealized gains and (losses) included in net income relating to assets and liabilities held at January 31, 2011   $ 429     $ 12,876  

(1) Substantially all 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.

There were no significant transfers between Level 1 and Level 2 during the three months ended January 31, 2012. The transfers out of Level 3 in the first quarter of fiscal 2012 were the result of changes in the observability of the inputs in the valuation model.

Although 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.

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The Company maintains an investment in one non-consolidated CLO entity totaling $0.4 million at January 31, 2012. The Company’s investment in this CLO entity is 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.

6. Derivative Financial Instruments

Derivative financial instruments designated as cash flow hedges

During the three months ended January 31, 2012 and 2011, the Company reclassified into interest expense $0.1 million of the loss on the Treasury lock transaction in connection with the Company’s issuance of ten-year senior notes in October 2007. At January 31, 2012, the remaining unamortized loss on this transaction was $2.5 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 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 separately managed accounts and consolidated funds seeded for new product development purposes.

At January 31, 2012, the Company had 13 outstanding foreign exchange contracts with five counterparties with an aggregate notional value of approximately $12.4 million, ten outstanding stock index futures contracts with one counterparty with an aggregate notional value of approximately $103.2 million and 29 outstanding commodity futures contracts with one counterparty with an aggregate notional value of approximately $23.7 million.

The following tables present the fair value of derivative instruments not designated as hedging instruments as of January 31, 2012 and October 31, 2011:

January 31, 2012

       
  Assets   Liabilities
(in thousands)   Balance Sheet
Location
  Fair Value   Balance Sheet
Location
  Fair Value
Foreign exchange contracts     Other assets     $       Other liabilities     $ 150  
Stock index futures contracts     Other assets       10       Other liabilities       6,028  
Commodity futures contracts     Other assets       389       Other liabilities       671  
Total         $ 399           $ 6,849  

October 31, 2011

       
  Assets   Liabilities
(in thousands)   Balance Sheet
Location
  Fair Value   Balance Sheet
Location
  Fair Value
Foreign exchange contracts     Other assets     $ 24       Other liabilities     $ 124  
Stock index futures contracts     Other assets       157       Other liabilities       6,363  
Commodity futures contracts     Other assets       879       Other liabilities       167  
Total         $ 1,060           $ 6,654  

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The following is a summary of the net gains (losses) recognized in income for the three months ended January 31, 2012 and 2011:

     
    Three Months Ended
January 31,
(in thousands)   Income Statement
Location
  2012   2011
Foreign exchange contracts     Net gains (losses) on
investments and derivatives
    $ 233     $ 279  
Stock index futures contracts     Net gains (losses) on
investments and derivatives
      (4,145 )      (4,468 ) 
Commodity futures contracts     Net gains (losses) on
investments and derivatives
      494       (1,464 ) 
Total         $ (3,418 )    $ (5,653 ) 

7. Fair Value Measurements of Other Financial Instruments

Certain financial instruments are not required to be carried on the Consolidated Balance Sheet at fair value. The following is a summary of the carrying amounts and estimated fair values of these financial instruments at January 31, 2012 and October 31, 2011:

       
  January 31, 2012   October 31, 2011
(in thousands)   Carrying
Value
  Fair
Value
  Carrying
Value
  Fair
Value
Other investments   $ 7,470     $ 7,470     $ 7,470     $ 7,470  
Notes receivable from stock option exercises   $ 4,118     $ 4,118     $ 4,441     $ 4,441  
Debt   $ 500,000     $ 573,584     $ 500,000     $ 566,047  

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 determined using publicly available market prices, which are considered Level 1 inputs.

8. VIEs

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.

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.

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Investments in VIEs that are consolidated

Consolidated CLO entity

As described in Note 2, the Company adopted the provisions of a new consolidation standard on November 1, 2010 that resulted in the consolidation of a CLO entity.

The Company irrevocably elected the fair value option for all financial assets and liabilities of the consolidated CLO entity upon adoption of new accounting guidance. 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.

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 tables present, as of January 31, 2012 and October 31, 2011, the fair value of the consolidated CLO entity’s assets and liabilities subject to fair value accounting:

January 31, 2012

     
  CLO Bank Loan Investments  
(in thousands)   Total CLO
bank loan
investments
  90 days or
more past
due
  Senior and
subordinated
note obligations
Unpaid principal balance   $ 477,994     $ 500     $ 500,094  
Excess unpaid principal balance over fair value     (10,834 )      (489 )      (19,749 ) 
Fair Value   $ 467,160     $ 11     $ 480,345  

October 31, 2011

     
  CLO Bank Loan Investments  
(in thousands)   Total CLO
bank loan
investments
  90 days or
more past
due
  Senior and
subordinated note
obligations
Unpaid principal balance   $ 474,515     $ 1,192     $ 500,066  
Excess unpaid principal balance over fair value     (17,820 )      (617 )      (22,367 ) 
Fair Value   $ 456,695     $ 575     $ 477,699  

During the three months ended January 31, 2012 and 2011, the changes in the fair values of the CLO entity’s bank loans and other investments resulted in net gains of $7.3 million and $9.5 million respectively, while an increase in the fair value of the CLO’s note obligations resulted in net losses of $2.6 million and $12.9 million, respectively. The combined net gains of $4.7 million and net losses of $3.4 million for three months ended January 31, 2012 and 2011, respectively, were recorded as net gains (losses) on bank loans, other investments and note obligations of the consolidated CLO entity on the Company’s Consolidated Statement of Income for those periods. Substantially all gains (losses) related to the CLO entity’s bank loans, other investments and note obligations recorded in earnings for the periods were attributable to changes in instrument-specific credit risk.

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The CLO entity’s note obligations bear interest at variable rates based on LIBOR plus a pre-defined spread, which ranges from 0.21 percent to 1.50 percent. The principal amounts outstanding of the note obligations issued by the CLO entity mature on April 20, 2019. The CLO entity may elect to reinvest any prepayments received on bank loans or other investments prior to April 2013. Any subsequent prepayments received must be used to pay down its note obligations.

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 ended January 31, 2012 and 2011.

At January 31, 2012 and October 31, 2011, the following carrying amounts related to the consolidated CLO entity were included in the Company’s Consolidated Balance Sheet:

   
(in thousands)   January 31,
2012
  October 31,
2011
Assets of consolidated CLO entity:
                 
Cash and cash equivalents   $ 16,832     $ 16,521  
Bank loans and other investments     472,933       462,586  
Other assets     1,222       2,715                    
Liabilities of consolidated CLO entity:
                 
Senior and subordinated note obligations     480,345       477,699  
Other liabilities     6,777       5,193  
Appropriated retained earnings (deficit)     1,124       (3,867 ) 
Total net interest in consolidated CLO entity   $ 2,741     $ 2,797  

For the three months ended January 31, 2012 and 2011, the Company recorded net income of $5.8 million and $0.2 million, respectively, related to the consolidated CLO entity. A net gain of $5.0 million and a net loss of $0.6 million for the three months ended January 31, 2012 and 2011, respectively, was included in net income attributable to non-controlling interests and other beneficial interests for those periods, reflecting the interests of third-party note holders of the consolidated CLO entity. Net income attributable to Eaton Vance Corp. shareholders included $0.8 million related to the consolidated CLO entity for each of the three months ended January 31, 2012 and 2011.

Other entities

Our controlled subsidiary Parametric Portfolio Associates LLC (“Parametric Portfolio Associates”) maintains a 60 percent economic interest in Parametric Risk Advisors LLC (“Parametric Risk Advisors”), which meets the definition of a VIE. Consistent with its majority economic interest and other considerations, the Company has determined that Parametric Portfolio Associates is the primary beneficiary of the VIE.

Parametric Risk Advisors had assets of $5.7 million and $4.9 million on January 31, 2012 and October 31, 2011, respectively, consisting primarily of cash and cash equivalents and investment advisory fees receivable, and liabilities of $2.6 million and $2.5 million on January 31, 2012 and October 31, 2011, 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

Non-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 $1.8 billion and $1.9 billion as of January 31, 2012 and

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October 31, 2011, 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 maintains an investment in one of these entities totaling $0.4 million and $0.3 million on January 31, 2012 and October 31, 2011, respectively. Collateral management fees receivable for these three CLO entities totaled $1.8 million and $3.0 million on January 31, 2012 and October 31, 2011, respectively. In the first three months of fiscal 2012, 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 January 31, 2012.

The Company’s investment in the CLO entity identified above is carried at amortized cost and is disclosed as a component of investments in Note 4. Income from these entities is recorded as a component of interest and other income based upon projected investment yields.

Other entities

The Company holds variable interests in, but is not deemed to be the primary beneficiary of, certain sponsored privately offered equity funds with total assets of $9.7 billion and $9.6 billion as of January 31, 2012 and October 31, 2011, 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 $4.0 million and $3.7 million on January 31, 2012 and October 31, 2011, respectively, and collateral management fees receivable totaling $0.4 million on January 31, 2012 and October 31, 2011. In the first three months of fiscal 2012, 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 January 31, 2012.

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 4. 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).

9. Acquisitions

Tax Advantaged Bond Strategies (“TABS”)

In December 2008, the Company acquired the TABS business of M.D. Sass Investors Services for cash and future consideration. The Company will make a contingent payment of $12.3 million in the second quarter of fiscal 2012 to the selling group based upon prescribed multiples of TABS’s revenue for the twelve months ended December 31, 2011. The payment will increase goodwill by $12.3 million as the acquisition was completed prior to the change in accounting for contingent purchase price consideration. The Company will be obligated to make four additional annual contingent payments to the selling group based on prescribed multiples of TABS’s revenue for the twelve months ending December 31, 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.

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10. Intangible Assets

The following is a summary of intangible assets at January 31, 2012 and October 31, 2011:

January 31, 2012

     
(dollars in thousands)   Gross
carrying
amount
  Accumulated
amortization
  Net
carrying
amount
Amortizing intangible assets:
                          
Client relationships acquired   $ 110,327     $ (52,738 )    $ 57,589  
Intellectual property acquired     1,000       (72 )      928  
Non-amortizing intangible assets:
                          
Mutual fund management contract acquired     6,708             6,708  
Total   $ 118,035     $ (52,810 )    $ 65,225  

October 31, 2011

     
(dollars in thousands)   Gross
carrying
amount
  Accumulated
amortization
  Net
carrying
amount
Amortizing intangible assets:
                          
Client relationships acquired   $ 110,327     $ (50,749 )    $ 59,578  
Intellectual property acquired     1,000       (62 )      938  
Non-amortizing intangible assets:
                          
Mutual fund management contract acquired     6,708             6,708  
Total   $ 118,035     $ (50,811 )    $ 67,224  

Amortization expense was $2.0 million for both the three months ended January 31, 2012 and 2011.

11. Stock-Based Compensation Plans

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

   
  Three Months Ended
January 31,
(in thousands)   2012   2011
2008 Plan:
 
Stock options   $ 9,183     $ 9,548  
Restricted shares     6,115       4,367  
Phantom stock units     55       99  
Employee Stock Purchase Plan     108       253  
Incentive Plan – Stock Alternative     126       265  
ACM Plan     231       160  
PPA Plan     579       380  
Total stock-based compensation expense   $ 16,397     $ 15,072  

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The total income tax benefit recognized for stock-based compensation arrangements was $5.3 million and $4.9 million for the three months ended January 31, 2012 and 2011, 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 16.8 million shares of Non-Voting Common Stock have been reserved for issuance under the 2008 Plan. Through January 31, 2012, 4.4 million restricted shares and options to purchase 11.6 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 three months ended January 31, 2012 and 2011 using the Black-Scholes option pricing model were as follows:

   
  2012   2011
Weighted-average grant date fair value of options granted   $ 6.68     $ 8.54  
Assumptions:
 
Dividend yield     3.0% to 3.1%       2.3% to 2.4%  
Volatility     35% to 36%       34%  
Risk-free interest rate     1.5% to 1.6%       2.2% to 2.9%  
Expected life of options     7.2 years       7.3 years  

Stock option transactions under the 2008 Plan and predecessor plans for the three months ended January 31, 2012 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     27,799     $ 26.50                    
Granted     3,091       25.06                    
Exercised     (156 )      17.56                    
Forfeited/expired     (188 )      31.24              
Options outstanding, end of period     30,546     $ 26.37       5.2     $ 81,345  
Options exercisable, end of period     20,827     $ 25.43       3.7     $ 73,783  
Vested or expected to vest     30,157     $ 26.34       5.1     $ 81,042  

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The Company received $2.6 million and $9.7 million related to the exercise of options for the three months ended January 31, 2012 and 2011, respectively. Options exercised represent newly issued shares. The total intrinsic value of options exercised during the three months ended January 31, 2012 and 2011 was $1.1 million and $6.4 million, respectively. The total fair value of options that vested during the three months ended January 31, 2012 was $29.4 million.

As of January 31, 2012, there was $46.9 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 2.8 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 January 31, 2012, there was $74.2 million of compensation cost related to unvested awards not yet recognized. That cost is expected to be recognized over a weighted-average period of 3.5 years.

A summary of the Company's restricted share activity for the three months ended January 31, 2012 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     2,482     $ 27.29  
Granted     1,376       25.06  
Vested     (458 )      26.33  
Forfeited/expired     (44 )      26.55  
Unvested, end of period     3,356     $ 26.51  

Phantom Stock Units

In the three months ended January 31, 2012, 10,125 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 January 31, 2012, 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 1.5 years.

12. Common Stock Repurchases

The Company’s current share repurchase program was announced on October 26, 2011. 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 timing and amount of share purchases are subject to management’s discretion. The Company’s share repurchase program is not subject to an expiration date.

In the first three months of fiscal 2012, the Company purchased and retired approximately 1.4 million shares of its Non-Voting Common Stock under the current repurchase authorization. Approximately 6.6 million additional shares may be repurchased under the current authorization.

13. Income Taxes

The provision for income taxes was $35.2 million and $34.5 million, or 35.7 percent and 37.3 percent of pre-tax income, for the three months ended January 31, 2012 and 2011, respectively. The provision for income taxes in

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the three months ended January 31, 2012 and 2011 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 are state income taxes, income recognized by the consolidated CLO entity and other minority interests.

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 January 31, 2012 or 2011.

The Company is currently under audit by several states. One state previously provided the Company with a draft position that may result in a proposed adjustment to the Company’s previously filed tax returns. The state is currently reevaluating its draft position. 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 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. Non-controlling and Other Beneficial Interests

Net income attributable to non-controlling and other beneficial interest holders totaled $17.6 million and $21.8 million for the three months ended January 31, 2012 and 2011, respectively. In the three months ended January 31, 2012, net income attributable to non-controlling and other beneficial interests included $5.0 million of income attributed to other beneficial holders of the consolidated CLO entity and $8.1 million of adjustments to the redemption value of non-controlling interests redeemable at other than fair value. In the three months ended January 31, 2011, net income attributable to non-controlling and other beneficial interests included $0.6 million of losses borne by other beneficial holders of the consolidated CLO entity and $18.2 million of adjustments to the redemption value of non-controlling interests redeemable at other than fair value.

15. Earnings per 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
January 31,
(in thousands, except per share data)   2012   2011
Net income allocated to:
                 
Common shares   $ 45,900     $ 36,752  
Participating restricted shares     1,371       783  
Total net income attributable to Eaton Vance Corp. shareholders   $ 47,271     $ 37,535  
Weighted-average shares outstanding – basic     112,768       116,741  
Incremental common shares     2,133       5,434  
Weighted-average shares outstanding – diluted     114,901       122,175  
Earnings per common share attributable to Eaton Vance Corp. shareholders:
                 
Basic   $ 0.41     $ 0.31  
Diluted   $ 0.40     $ 0.30  

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 19.9 million and 11.1 million for the three months ended January 31, 2012 and 2011, respectively.

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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 managed by a third party that invests in companies in the financial services industry. The Company had invested $13.8 million of the total $15.0 million of committed capital at January 31, 2012. The Company believes the remaining $1.2 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 January 31, 2012 the Company has $19.1 million included within other liabilities on its Consolidated Balance Sheet related to securities sold, not yet purchased.

17. Related Party Transactions

Sponsored funds

The Company is an investment advisor to, and has administrative agreements with, sponsored open-end and closed-end funds for which certain employees are officers and/or directors. Substantially all of the services to these entities for which the Company earns a fee, including investment advisory, distribution, shareholder and administrative, are provided under contracts that set forth the services to be provided and the fees to be charged. These contracts are subject to annual review and approval by the funds’ boards of directors or trustees. Revenue for services provided or related to these funds for the three months ended January 31, 2012 and 2011 are as follows:

   
  Three Months Ended
January 31,
(in thousands)   2012   2011
Investment advisory and administrative fees   $ 183,484     $ 186,957  
Distribution fees     20,477       24,423  
Service fees     32,299       37,345  
Shareholder services fees     597       518  
Total   $ 236,857     $ 249,243  

For the three months ended January 31, 2012 and 2011, the Company had investment advisory agreements with certain sponsored funds pursuant to which the Company contractually waived $2.4 million and $4.5 million, respectively, of investment advisory fees it was otherwise entitled to receive.

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Sales proceeds and net realized gains from investments in sponsored funds classified as available-for-sale for the three months ended January 31, 2012 and 2011 are as follows:

   
  Three Months Ended
January 31,
(in thousands)   2012   2011
Proceeds from sales   $ 7,202     $ 28,271  
Net realized gains     63       467  

The Company bears the non-advisory expenses of certain sponsored funds for which it earns an all-in management fee and provides subsidies to startup and other smaller sponsored funds to enhance their competitiveness. For the three months ended January 31, 2012 and 2011, expenses of $4.4 million and $3.2 million, respectively, were incurred by the Company pursuant to these arrangements.

Included in investment advisory and other receivables at January 31, 2012 and October 31, 2011 are receivables due from sponsored funds of $83.2 million and $82.5 million, respectively.

Employee Loan Program

The Company has established an Employee Loan Program under which a program maximum of $10.0 million is available for loans to officers (other than executive officers) and other key employees of the Company for purposes of financing the exercise of employee stock options. Loans are written for a seven-year period, at varying fixed interest rates (currently ranging from 1.3 percent to 5.0 percent), are payable in annual installments commencing with the third year in which the loan is outstanding, and are collateralized by the stock issued upon exercise of the option. Loans outstanding under this program, which are full recourse in nature, are reflected as notes receivable from stock option exercises in shareholders’ equity and were $4.1 million and $4.4 million at January 31, 2012 and October 31, 2011, respectively.

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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”, “will”, “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 broadly diversified investment management capabilities and a powerful marketing, distribution and customer service organization. Although we manage and distribute a wide range of investment 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, structured emerging market equity, floating-rate bank loan, municipal bond, investment grade, global and high-yield bond investing. Our breadth of investment management capabilities supports a wide range of products and services offered to fund shareholders, retail managed account investors, institutional investors and high-net-worth clients. Our equity strategies encompass a diversity of investment objectives, risk profiles, income levels and geographic representation. Our income investment strategies cover a broad duration and credit quality range and encompass both taxable and tax-free investments. We also offer a range of alternative investment strategies, including commodity-based investments and a spectrum of absolute return strategies. As of January 31, 2012, we had $191.7 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 approximately130 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. The first quarter of our fiscal 2011 was a period of generally favorable market action, as reflected by the 5% increase in the S&P 500 Index and the positive returns of most income strategies.

Average assets under management of $187.4 billion in the first quarter of fiscal 2012 were substantially unchanged from the $187.2 billion reported in the first quarter of fiscal 2011. Gross inflows were well diversified among major investment categories and well balanced between funds and separate accounts. Growth in separate account assets, which earn lower fees on average than funds, contributed to a decline in our average fee rate to 63 basis points in the first quarter of fiscal 2012 from 66 basis points in the first quarter of fiscal 2011.

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 them from doing so.

Assets under Management

Assets under management of $191.7 billion on January 31, 2012 were unchanged from the $191.7 billion reported a year earlier. Long-term fund net outflows of $2.0 billion over the last twelve months reflect $2.2 billion of open-end fund net outflows offset by $0.2 billion of closed-end fund net inflows. Long-term fund net outflows include net reductions in fund leverage of $0.3 billion. Over the last twelve months, institutional separate account net inflows were $1.7 billion, high-net-worth separate account net inflows were $0.7 billion, and retail managed account net inflows were $0.5 billion. Net price declines in managed assets reduced assets under management by $1.0 billion over the last twelve months, while net exchanges out of long-term funds and a decrease in cash management assets reduced assets under management by $0.1 billion and $0.2 billion, respectively. Acquired assets contributed $0.4 billion to growth in assets under management over the last twelve months.

We report managed assets and flow data by investment mandate, using fund or separate account investment strategy as the primary driver. The “Alternative” category includes a range of absolute return strategies, as well as commodity-linked investments.

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Ending Assets Under Management by Investment Mandate(1)

         
  January 31,  
(in millions)   2012   % of
Total
  2011   % of
Total
  %
Change
Equity   $ 110,834       58 %    $ 114,722       60 %      -3 % 
Fixed income     45,514       24 %      43,013       22 %      6 % 
Floating-rate bank loan     24,376       13 %      21,939       12 %      11 % 
Alternative     10,449       5 %      11,367       6 %      -8 % 
Cash management     533       0 %      703       0 %      -24 % 
Total   $ 191,706       100 %    $ 191,744       100 %      0 % 

(1) Includes funds and separate accounts.

Equity assets under management included $29.0 billion and $32.1 billion of equity funds managed for after-tax returns on January 31, 2012 and 2011, respectively. Fixed income assets included $15.6 billion and $14.3 billion of tax-exempt municipal bond fund assets on January 31, 2012 and 2011, 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
January 31,
 
(in millions)   2012   2011   %
Change
Long-term funds:
                          
Open-end funds   $ (1,518 )    $ 2,061       NM(1)  
Closed-end funds     (47 )      (111 )      -58 % 
Private funds     357       (598 )      NM  
Total long-term fund net (outflows) inflows     (1,208 )      1,352       NM  
Institutional accounts     (391 )      471       NM  
High-net-worth accounts     469       156       201 % 
Retail managed accounts     10       (131 )      NM  
Total separate account net inflows     88       496       -82 % 
Total net (outflows) inflows   $ (1,120 )    $ 1,848       NM  

(1) Not meaningful (“NM”)

Net outflows totaled $1.1 billion in the first quarter of fiscal 2012 compared to net inflows of $1.8 billion in the first quarter of fiscal 2011. Open-end fund net outflows of $1.5 billion in the first quarter of fiscal 2012 and open-end fund net inflows of $2.1 billion in the first quarter of fiscal 2011, respectively, reflect gross inflows of $5.8 billion and $8.8 billion, respectively, net of redemptions of $7.3 billion and $6.7 billion, respectively. Closed-end fund net outflows in the first quarter of fiscal 2012 reflect a decrease in portfolio leverage partially offset by reinvested distributions and the $26.2 million initial public offering of the Company’s eUnitsTM 2 Year

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U.S. Market Participation Trust: Upside to Cap/Buffered Downside. Closed-end fund net outflows in the first quarter of fiscal 2011 reflect a decrease in portfolio leverage partially offset by reinvested distributions. Private funds, which include privately offered equity, fixed income and floating-rate income funds as well as collateralized loan obligation (“CLO”) entities, had net inflows of $0.4 billion in the first quarter of fiscal 2012 compared to net outflows of $0.6 billion in the first quarter of fiscal 2011. Approximately $0.1 billion and $0.7 billion of private fund outflows in the first quarter of fiscal 2012 and 2011, respectively, can be attributed to reductions in portfolio leverage. Reductions in portfolio leverage in long-term funds reflect paydowns to maintain required asset coverage ratios as well as other portfolio activity.

Separate account net inflows totaled $0.1 billion in the first quarter of fiscal 2012 compared to net inflows of $0.5 billion in the first quarter of fiscal 2011. Institutional separate account net outflows totaled $0.4 billion in the first quarter of fiscal 2012 compared to net inflows of $0.5 billion in the first quarter of fiscal 2011, reflecting gross inflows of $1.8 billion and $2.2 billion in the first quarter of fiscal 2012 and 2011, respectively, net of withdrawals of $2.2 billion and $1.7 billion, respectively. High-net-worth account net inflows totaled $0.5 billion in the first quarter of fiscal 2012 compared to $0.2 billion in the first quarter of fiscal 2011, reflecting gross inflows of $1.0 billion and $0.8 billion in the first quarter of fiscal 2012 and 2011, respectively, net of withdrawals of $0.5 billion and $0.6 billion, respectively. Retail managed account gross inflows of $1.7 billion were offset by withdrawals of $1.7 billion in the first quarter of fiscal 2012, while retail managed account net outflows totaled $0.1 billion in the first quarter of fiscal 2011, reflecting gross inflows of $1.6 billion net of withdrawals of $1.7 billion.

The following table summarizes the asset flows by investment mandate for the three months ended January 31, 2012 and 2011:

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Asset Flows

     
  Three Months Ended
January 31,
 
(in millions)   2012   2011   %
Change
Equity fund assets – beginning   $ 53,860     $ 58,434       -8 % 
Sales/inflows     2,752       4,178       -34 % 
Redemptions/outflows     (4,216 )      (4,142 )      2 % 
Exchanges     (19 )      66       NM  
Market value change     1,392       2,813       -51 % 
Equity fund assets – ending     53,769       61,349       -12 % 
Fixed income fund assets – beginning     27,472       29,412       -7 % 
Sales/inflows     1,662       1,678       -1 % 
Redemptions/outflows     (1,604 )      (2,577 )      -38 % 
Exchanges     51       (229 )      NM