XNYS:EV Eaton Vance Corp Quarterly Report 10-Q Filing - 7/31/2012

Effective Date 7/31/2012

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

FORM 10-Q

 
(Mark One)
x   Quarterly Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934
     For the quarterly period ended July 31, 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 July 31, 2012:
    Voting Common Stock — 413,167 shares
    Non-Voting Common Stock – 114,776,913 shares

 

 


 
 

TABLE OF CONTENTS

Eaton Vance Corp.
Form 10-Q
As of July 31, 2012 and for the
Three and Nine Month Periods Ended July 31, 2012

Table of Contents

2


 
 

TABLE OF CONTENTS

Part I — Financial Information

Item 1. Consolidated Financial Statements

Eaton Vance Corp.
Consolidated Balance Sheets (unaudited)

   
(in thousands)   July 31,
2012
  October 31,
2011
Assets
                 
Cash and cash equivalents   $ 600,182     $ 510,913  
Investment advisory fees and other receivables     127,303       130,525  
Investments     285,986       287,735  
Assets of consolidated collateralized loan obligation (“CLO”) entity:
                 
Cash and cash equivalents     33,380       16,521  
Bank loans and other investments     458,392       462,586  
Other assets     1,150       2,715  
Deferred sales commissions     20,370       27,884  
Deferred income taxes     47,858       41,343  
Equipment and leasehold improvements, net     57,732       67,227  
Intangible assets, net     61,227       67,224  
Goodwill     154,636       142,302  
Other assets     75,562       74,325  
Total assets   $ 1,923,778     $ 1,831,300  

 
 
See notes to Consolidated Financial Statements.

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TABLE OF CONTENTS

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

   
(in thousands, except share figures)   July 31,
2012
  October 31,
2011
Liabilities, Temporary Equity and Permanent Equity
                 
Liabilities:
                 
Accrued compensation   $ 110,070     $ 137,431  
Accounts payable and accrued expenses     57,143       51,333  
Dividend payable     21,875       21,959  
Debt     500,000       500,000  
Liabilities of consolidated CLO entity:
                 
Senior and subordinated note obligations     477,096       477,699  
Other liabilities     822       5,193  
Other liabilities     91,077       75,557  
Total liabilities     1,258,083       1,269,172  
Commitments and contingencies
                 
Temporary Equity:
                 
Redeemable non-controlling interests     113,080       100,824  
Permanent Equity:
                 
Voting Common Stock, par value $0.00390625 per share:
                 
Authorized, 1,280,000 shares                  
Issued and outstanding, 413,167 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, 114,776,913 and 115,223,827 shares, respectively     448       450  
Notes receivable from stock option exercises     (3,888 )      (4,441 ) 
Accumulated other comprehensive income     2,630       1,340  
Appropriated retained earnings (deficit)     12,485       (3,867 ) 
Retained earnings     540,047       466,931  
Total Eaton Vance Corp. shareholders' equity     551,724       460,415  
Non-redeemable non-controlling interests     891       889  
Total permanent equity     552,615       461,304  
Total liabilities, temporary equity and permanent equity   $ 1,923,778     $ 1,831,300  

 
 
See notes to Consolidated Financial Statements.

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TABLE OF CONTENTS

Eaton Vance Corp.
Consolidated Statements of Income (unaudited)

       
  Three Months Ended
July 31,
  Nine Months Ended
July 31,
(in thousands, except per share figures)   2012   2011   2012   2011
Revenue:
                                   
Investment advisory and administrative fees   $ 244,655     $ 262,067     $ 732,995     $ 756,471  
Distribution and underwriter fees     22,066       26,432       67,132       79,900  
Service fees     30,760       37,426       95,124       111,249  
Other revenue     1,290       1,131       3,896       3,663  
Total revenue     298,771       327,056       899,147       951,283  
Expenses:
                                   
Compensation and related costs     94,700       94,713       288,949       288,920  
Distribution expense     32,670       33,733       97,958       100,087  
Service fee expense     28,165       32,222       84,926       94,331  
Amortization of deferred sales commissions     4,593       8,503       15,946       28,496  
Fund expenses     7,205       8,099       20,446       17,660  
Other expenses     36,422       34,359       104,275       100,205  
Total expenses     203,755       211,629       612,500       629,699  
Operating income     95,016       115,427       286,647       321,584  
Non-operating income (expense):
                                   
Gains and other investment income, net     1,927       7,594       12,900       21,406  
Interest expense     (8,525 )      (8,414 )      (25,350 )      (25,239 ) 
Other income (expense) of consolidated CLO entity:
                                   
Gains (losses) and other investment income, net     12,872       1,454       32,047       (9,695 ) 
Interest expense     (4,399 )      (3,999 )      (12,844 )      (9,546 ) 
Total non-operating income (expense)     1,875       (3,365 )      6,753       (23,074 ) 
Income before income taxes and equity in net income of affiliates     96,891       112,062       293,400       298,510  
Income taxes     (34,379 )      (43,320 )      (104,730 )      (119,179 ) 
Equity in net income of affiliates, net of tax     175       194       1,657       2,655  
Net income     62,687       68,936       190,327       181,986  
Net income attributable to non-controlling and other beneficial interests     (12,481 )      (868 )      (39,980 )      (13,904 ) 
Net income attributable to Eaton Vance Corp. shareholders   $ 50,206     $ 68,068     $ 150,347     $ 168,082  
Earnings per share:
                                   
Basic   $ 0.44     $ 0.58     $ 1.30     $ 1.42  
Diluted   $ 0.43     $ 0.55     $ 1.27     $ 1.35  
Weighted average shares outstanding:
                                   
Basic     112,110       115,574       112,354       116,191  
Diluted     114,591       120,543       115,031       121,566  
Dividends declared per share   $ 0.19     $ 0.18     $ 0.57     $ 0.54  

 
 
See notes to Consolidated Financial Statements.

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TABLE OF CONTENTS

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

       
  Three Months Ended
July 31,
  Nine Months Ended
July 31,
(in thousands)   2012   2011   2012   2011
Net income   $ 62,687     $ 68,936     $ 190,327     $ 181,986  
Other comprehensive income (loss):
                                   
Amortization of loss on derivatives, net of income taxes of $39, $40, $118 and $119, respectively     73       72       217       216  
Unrealized holding (losses) gains on available-for-sale investments, net of income taxes of $95, $594, $(932) and $(1,006), respectively     (156 )      (969 )      1,526       1,599  
Foreign currency translation adjustments, net of income taxes of $233, $50, $252 and $(128), respectively     (384 )      (81 )      (453 )      257  
Other comprehensive income (loss), net of tax     (467 )      (978 )      1,290       2,072  
Total comprehensive income     62,220       67,958       191,617       184,058  
Comprehensive income attributable to non-controlling and other beneficial interests     (12,481 )      (868 )      (39,980 )      (13,904 ) 
Total comprehensive income attributable to Eaton Vance Corp. shareholders   $ 49,739     $ 67,090     $ 151,637     $ 170,154  

 
 
See notes to Consolidated Financial Statements.

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TABLE OF CONTENTS

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                                   16,352       150,347       2,747       169,446       20,881  
Other comprehensive income                             1,290                         1,290        
Dividends declared                                         (65,867 )            (65,867 )       
Issuance of Voting Common Stock                 56                                     56        
Issuance of Non-Voting Common Stock:
                                                                                         
On exercise of stock options           4       17,328       (211 )                              17,121        
Under employee stock purchase plan           1       3,653                                     3,654        
Under employee incentive plan                 2,068                                     2,068        
Under restricted stock plan, net of forfeitures           5                                           5        
Stock-based compensation                 42,819                                     42,819        
Tax benefit of stock option exercises                 2,228                                     2,228        
Repurchase of Non-Voting Common Stock           (12 )      (65,210 )                        (11,364 )            (76,586 )       
Principal repayments on notes receivable from stock option exercises                       764                               764        
Net subscriptions (redemptions/distributions) of non-controlling interest holders                                               (2,613 )      (2,613 )      29,751  
Deconsolidation                                                           (21,586 ) 
Reclass to temporary equity                                               (132 )      (132 )      132  
Purchase of non-controlling interests                                                           (19,864 ) 
Other changes in non-controlling interests                 (2,942 )                                    (2,942 )      2,942  
Balance, July 31, 2012   $ 2     $ 448     $     $ (3,888 )    $ 2,630     $ 12,485     $ 540,047     $ 891     $ 552,615     $ 113,080  

 
 
See notes to Consolidated Financial Statements.

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TABLE OF CONTENTS

Eaton Vance Corp.
Consolidated Statements of Shareholders' 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)
  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                                   (22,128 )      168,082       1,962       147,916       34,070  
Other comprehensive income                             2,072                         2,072        
Dividends declared                                         (63,921 )            (63,921 )       
Issuance of Non-Voting Common Stock:
                                                                                         
On exercise of stock options           6       29,664       (602 )                              29,068        
Under employee stock purchase plan           1       3,766                                     3,767        
Under employee incentive plan                 3,655                                     3,655        
Under restricted stock plan, net of forfeitures           4                                           4        
Stock-based compensation                 40,184                                     40,184        
Tax benefit of stock option exercises                 4,336                                     4,336        
Repurchase of Non-Voting Common Stock           (15 )      (118,857 )                                    (118,872 )       
Principal repayments on notes receivable from stock option exercises                       839                               839        
Net subscriptions (redemptions/distributions) of non-controlling interest holders                                               (1,630 )      (1,630 )      114,081  
Deconsolidation                                                           (120,260 ) 
Reclass to temporary equity                                               (66 )      (66 )      66  
Purchase of non-controlling interests                                                           (6,611 ) 
Other changes in non-controlling interests                 (860 )                                    (860 )      860  
Balance, July 31, 2011   $ 2     $ 457     $ 12,113     $ (2,921 )    $ 1,637     $ 8,538     $ 469,016     $ 836     $ 489,678     $ 89,225  

 
 
See notes to Consolidated Financial Statements.

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TABLE OF CONTENTS

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

   
  Nine Months Ended
July 31,
(in thousands)   2012   2011
Cash Flows From Operating Activities:
                 
Net income   $ 190,327     $ 181,986  
Adjustments to reconcile net income to net cash provided by operating activities:
                 
Depreciation and amortization     19,007       18,539  
Amortization of deferred sales commissions     15,973       28,457  
Stock-based compensation     42,819       40,184  
Deferred income taxes     (7,315 )      68,022  
Net gains on investments and derivatives     (7,786 )      (14,481 ) 
Equity in net income of affiliates     (2,642 )      (4,273 ) 
Dividends received from affiliates     11,117       1,592  
Consolidated CLO entity operating activities:
                 
Net (gains) losses on bank loans, other investments and note obligations     (15,366 )      25,539  
Amortization of investments     (790 )      (984 ) 
Net decrease in other assets and liabilities, including cash     (19,655 )      (11,953 ) 
Changes in operating assets and liabilities:  
Investment advisory fees and other receivables     3,469       (7,867 ) 
Investments in trading securities     (72,400 )      (173,322 ) 
Deferred sales commissions     (8,462 )      (13,739 ) 
Other assets     (169 )      (19,935 ) 
Accrued compensation     (27,307 )      (8,581 ) 
Accounts payable and accrued expenses     6,027       9,005  
Other liabilities     17,941       5,483  
Net cash provided by operating activities     144,788       123,672  
Cash Flows From Investing Activities:
                 
Additions to equipment and leasehold improvements     (2,928 )      (8,919 ) 
Net cash paid in acquisition     (12,334 )      (11,595 ) 
Cash paid for intangible assets     (200 )      (1,650 ) 
Proceeds from sales of investments     72,597       119,839  
Purchase of investments     (21,624 )      (1,226 ) 
Consolidated CLO entity investing activities:
                 
Proceeds from sales and maturities of bank loans and other investments     182,784       250,689  
Purchase of bank loans and other investments     (163,037 )      (241,310 ) 
Net cash provided by investing activities     55,258       105,828  

 
 
See notes to Consolidated Financial Statements.

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TABLE OF CONTENTS

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

   
  Nine Months Ended
July 31,
(in thousands)   2012   2011
Cash Flows From Financing Activities:
                 
Purchase of additional non-controlling interest     (19,864 )      (6,611 ) 
Proceeds from issuance of Voting Common Stock     56        
Proceeds from issuance of Non-Voting Common Stock     22,848       36,494  
Repurchase of Non-Voting Common Stock     (76,586 )      (118,872 ) 
Principal repayments on notes receivable from stock option exercises     764       839  
Excess tax benefit of stock option exercises     2,228       4,336  
Dividends paid     (65,950 )      (64,116 ) 
Line of credit issuance costs     (1,192 )       
Net subscriptions received from (redemptions/distributions paid to) non-controlling interest holders     27,138       112,451  
Net cash used for financing activities     (110,558 )      (35,479 ) 
Effect of currency rate changes on cash and cash equivalents     (219 )      355  
Net increase in cash and cash equivalents     89,269       194,376  
Cash and cash equivalents, beginning of period     510,913       307,886  
Cash and cash equivalents, end of period   $ 600,182     $ 502,262  
Supplemental Cash Flow Information:
                 
Cash paid for interest   $ 24,524     $ 24,481  
Cash paid for interest by consolidated CLO entity     13,584       10,360  
Cash paid for income taxes, net of refunds     117,829       41,534  
Supplemental Disclosure of Non-Cash Information:
                 
Increase in equipment and leasehold improvements due to non-cash additions   $ 174     $ 3,350  
Exercise of stock options through issuance of notes receivable     211       602  
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   $ (23,639 )    $ (121,274 ) 
Decrease in non-controlling interests     (21,586 )      (120,260 ) 

 
 
See notes to Consolidated Financial Statements.

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TABLE OF CONTENTS

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 second quarter of fiscal 2012, the Company combined the following line items previously reported within non-operating income (expense) into gains and other investment income, net: interest and other income; net gains (losses) on investments and derivatives; and net foreign currency gains (losses). Also during the second quarter of fiscal 2012, interest income and net gains (losses) on bank loans, other investments, and note obligations of the consolidated CLO entity were combined into gains (losses) and other investment income, net, of the consolidated CLO entity. Amounts for the comparative prior fiscal year periods have been reclassified to conform to the current year presentation. These reclassifications, which simplify the financial statement presentation, had no impact on previously reported net income or financial position and do not represent a restatement of any previously reported financial results. See Note 16 for the components of gains and other investment income.

During the first quarter of fiscal 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 and net investment gains or losses recognized by consolidated sponsored funds, previously included in other revenue, are now presented as components of gains and other investment income. Management believes the revised presentation is more useful to readers of its financial statements as it better highlights the current earnings effect of the investment results of consolidated sponsored funds. Amounts for the comparative prior fiscal year periods 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 tables present the effects of the change in presentation of net investment income and net investment gains or losses earned by consolidated sponsored funds on the Company’s previously reported Consolidated Statements of Income for the three and nine months ended July 31, 2011:

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TABLE OF CONTENTS

     
  Three Months Ended
July 31, 2011
(in thousands)   As Previously Reported   Reclassifications   As
Reclassified
Other revenue   $ 1,378     $ (247 )    $ 1,131  
Total revenue     327,303       (247 )      327,056  
Operating income     115,674       (247 )      115,427  
Gains and other investment income, net     7,347       247       7,594  
Net income     68,936             68,936  
Net income attributable to Eaton Vance Corp. shareholders     68,068             68,068  

  

     
  Nine Months Ended
July 31, 2011
(in thousands)   As Previously Reported   Reclassifications   As
Reclassified
Other revenue   $ 17,808     $ (14,145 )    $ 3,663  
Total revenue     965,428       (14,145 )      951,283  
Operating income     335,729       (14,145 )      321,584  
Gains and other investment income, net     7,261       14,145       21,406  
Net income     181,986             181,986  
Net income attributable to Eaton Vance Corp. shareholders     168,082             168,082  

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 (“VIE’s”) (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. All intercompany accounts and transactions between consolidated entities have been eliminated. The equity method of accounting is used for investments in non-controlled affiliates in which the Company’s ownership ranges from 20 to 50 percent, or in instances in which the Company is able to exercise significant influence but not control (such as representation on the investee’s Board of Directors).

The Company 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 and 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. 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 earnings (deficit) 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.

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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 gains and other investment income 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 intangibles for impairment

In July 2012, the Financial Accounting Standards Board (“FASB”) updated the indefinite-lived asset impairment testing guidance. Under the amended guidance, a reporting entity may elect to assess qualitative factors to determine if it is more likely than not that the fair value of the intangible asset is less than its carrying amount as a basis for determining whether it is necessary to perform the currently required quantitative fair value assessment. The new guidance is effective for the Company for the fiscal year that begins on November 1, 2012. The Company is still in the process of determining whether or not it will make this election. The adoption of this new guidance is not expected to have a material effect on the Company’s Consolidated Financial Statements.

Testing goodwill for impairment

In September 2011, the 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 Company is still in the process of determining whether or not it will make this election. The adoption of this new guidance is not expected to have a material effect on the Company’s Consolidated Financial Statements.

4. Adoption of New Accounting Standards

The Company adopted the following accounting standard in fiscal 2012:

Fair value measurements

On February 1, 2012, the Company adopted new requirements for expanded fair value disclosures as issued by the FASB. The updated guidance modifies and clarifies existing fair value guidance and expands disclosure requirements. The expanded disclosures are included in Note 7.

5. Consolidated Sponsored Funds

The Company consolidates sponsored funds in which it holds a controlling financial interest. All investments held by consolidated sponsored funds were included in investments on the Company’s Consolidated Balance Sheets and classified as investment securities, trading, at July 31, 2012 and October 31, 2011. Net investment income related to these funds was included in gains and other investment income, net, on the Company’s Consolidated Statements of Income for all periods presented. Net investment income was partially offset by amounts attributable to non-controlling interest holders, which were recorded in net income attributable to non-controlling and other beneficial interest holders in the Company’s Consolidated Statements of Income for all periods presented.

The following table sets forth the balances related to consolidated sponsored funds that were included on the Company’s Consolidated Balance Sheets at July 31, 2012 and October 31, 2011 as well as the Company’s net interest in these funds:

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(in thousands)   July 31, 2012   October 31, 2011
Investments   $ 169,925     $ 143,517  
Other assets     4,734       13,465  
Other liabilities     (13,391 )      (10,764 ) 
Redeemable non-controlling interests     (45,069 )      (25,569 ) 
Net interest in consolidated sponsored funds(1)   $ 116,199     $ 120,649  

(1) Excludes the Company's investment in its consolidated CLO entity, which is discussed in Note 10.

6. Investments

The following is a summary of the carrying value of investments at July 31, 2012 and October 31, 2011:

   
(in thousands)   July 31, 2012   October 31, 2011
Investment securities, trading:
                 
Corporate debt securities   $     $ 4,832  
Consolidated sponsored funds     169,925       143,517  
Separately managed accounts     36,301       44,860  
Total investment securities, trading     206,226       193,209  
Investment securities, available-for-sale     34,156       39,841  
Investment in non-consolidated CLO entity     349       278  
Investments in equity method investees     37,748       46,900  
Investments, other     7,507       7,507  
Total investments(1)   $ 285,986     $ 287,735  

(1) Excludes the Company's investment in its consolidated CLO entity, which is discussed in Note 10.

Investment securities, trading

Investment securities, trading, consist of corporate debt securities held directly by the Company and debt and equity securities held in the portfolios of consolidated sponsored funds and separately managed accounts. The following is a summary of the fair value of investments classified as trading at July 31, 2012 and October 31, 2011:

   
(in thousands)   July 31, 2012   October 31, 2011
Debt securities   $ 65,515     $ 85,222  
Equity securities     140,711       107,987  
Total investment securities, trading   $ 206,226     $ 193,209  

The Company recognized trading (losses) and gains related to trading securities still held at the reporting date of $(1.0) million and $(3.0) million for the three months ended July 31, 2012 and 2011, respectively, and $5.8 million and $6.5 million for the nine months ended July 31, 2012 and 2011, respectively.

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Investment securities, available-for-sale

Investment securities, available-for-sale, consist exclusively of seed investments in certain Company-sponsored funds. The following is a summary of the gross unrealized gains and (losses) included in accumulated other comprehensive income related to securities classified as available-for-sale at July 31, 2012 and October 31, 2011:

July 31, 2012

       
  Cost   Gross Unrealized   Fair Value
(in thousands)   Gains   Losses
Sponsored funds   $ 26,224     $ 8,073     $ (141 )    $ 34,156  

October 31, 2011

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

Net unrealized holding (losses) and gains on investment securities, available-for-sale, included in other comprehensive income were $(0.3) million and $(1.6) million for the three months ended July 31, 2012 and 2011, respectively, and $2.5 million and $2.6 million for the nine months ended July 31 2012 and 2011, respectively.

The Company reviewed gross unrealized losses of $0.1 million as of July 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 with unrealized losses was $2.7 million at July 31, 2012. No investment with a gross unrealized loss has been in a loss position for greater than one year.

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 and nine months ended July 31, 2012 and 2011:

       
  Three Months Ended
July 31,
  Nine Months Ended
July 31,
(in thousands)   2012   2011   2012   2011
Gains   $ 41     $ 232     $ 288     $ 2,338  
Losses     (230 )      (379 )      (353 )      (1,933 ) 
Net realized (losses) gains   $ (189 )    $ (147 )    $ (65 )    $ 405  

Investments in equity method investees

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 $9.5 million and $18.4 million at July 31, 2012 and October 31, 2011, respectively.

In addition, the Company had equity interests in the following sponsored funds as of July 31, 2012 and October 31, 2011:

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  Equity Ownership Interest (%)   Fair Value ($)(1)
(dollar amounts in thousands)   July 31,
2012
  October 31,
2011
  July 31,
2012
  October 31,
2011
Eaton Vance Tax-Advantaged Bond
Strategies Long Term Fund
    42 %          $ 12,227     $  
AGF Floating Rate Income Fund     36 %            15,013        
Eaton Vance Parametric Structured Currency Fund     34 %            1,019        
Eaton Vance Parametric Structured Commodity
Strategy Fund
          47 %            9,190  
Eaton Vance Parametric Option Absolute Return Strategy Fund           27 %            19,298  

(1) Equity method investments in sponsored funds are measured at fair value based on the funds’ net asset values. The Company has the ability to redeem its investments in these funds at any time.

The Company did not recognize any impairment losses related to its investments in affiliates during the three and nine months ended July 31, 2012 and 2011, respectively.

7. Fair Value Measurements

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

July 31, 2012

         
(in thousands)   Level 1   Level 2   Level 3   Other Assets Not Held at Fair Value   Total
Financial assets:
                                            
Cash equivalents   $ 7,002     $ 210,059     $     $     $ 217,061  
Investments:
                                            
Investment securities, trading – debt     4,529       60,986                   65,515  
Investment securities, trading – equity     122,520       18,191                   140,711  
Investment securities, available-for-sale     29,847       4,309                   34,156  
Investment in non-consolidated CLO entity(1)                       349       349  
Investments in equity method investees(2)                       37,748       37,748  
Investments, other(3)           37             7,470       7,507  
Derivative instruments           316                   316  
Assets of consolidated CLO entity:
                                            
Cash equivalents     31,156                         31,156  
Bank loans and other investments     69       456,205       2,118             458,392  
Total financial assets   $ 195,123     $ 750,103     $ 2,118     $ 45,567     $ 992,911  

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July 31, 2012

         
(in thousands)   Level 1   Level 2   Level 3   Other Assets Not Held at Fair Value   Total
Financial liabilities:
                                            
Derivative instruments   $     $ 3,435     $     $     $ 3,435  
Securities sold, not yet purchased           26,018                   26,018  
Liabilities of consolidated CLO entity:
                                
Senior and subordinated note obligations           2,633       474,463             477,096  
Total financial liabilities   $     $ 32,086     $ 474,463     $     $ 506,549  

October 31, 2011

         
(in thousands)   Level 1   Level 2   Level 3   Other Assets Not Held at Fair Value   Total
Financial assets:
                                            
Cash equivalents   $ 6,691     $ 360,676     $     $     $ 367,367  
Investments:
                                            
Investment securities, trading – debt     11,308       73,914                   85,222  
Investment securities, trading – equity     102,790       5,197                   107,987  
Investment securities, available-for-sale     36,128       3,713                   39,841  
Investment in non-consolidated CLO entity(1)                       278       278  
Investments in equity method investees(2)                       46,900       46,900  
Investments, other(3)           37             7,470       7,507  
Derivative instruments           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 financial assets   $ 172,831     $ 901,188     $ 5,910     $ 54,648     $ 1,134,577  
Financial liabilities:
                                            
Derivative instruments   $     $ 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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(1) The Company’s investment in this CLO entity is measured at fair value on a non-recurring basis using Level 3 inputs.

The investment is carried at amortized cost unless facts and circumstances indicate that the investment has been impaired, at which time the investment is written down to fair value. There was no re-measurement of this asset during the nine month period ended July 31, 2012 or the twelve month period ended October 31, 2011.

(2) Investments in equity method investees are not measured at fair value in accordance with GAAP.
(3) Investments, other include investments carried at cost which are not measured at fair value in accordance with GAAP.

Valuation methodologies

The following is a description of the valuation methodologies used for financial assets and liabilities measured at fair value on a recurring basis as well as the general classification of those assets and liabilities pursuant to the valuation hierarchy:

Cash equivalents

Cash equivalents consist of investments in money market funds and agency securities. Money market funds are valued using published net asset values and are classified as Level 1 within the valuation hierarchy. Agency securities are valued based upon 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. Depending on the nature of the inputs, these assets are generally classified as Level 1 or 2 within the valuation hierarchy.

Investment securities, trading

Investment securities, trading, consist of debt and equity securities held in the portfolios of consolidated sponsored funds and separately managed accounts. In certain instances, fair value is determined using unadjusted quoted market prices. If unadjusted quoted market prices are unavailable, fair value is determined using quoted market prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets that are not active, or inputs other than quoted prices that are observable or corroborated by observable market data. If events occur after the close of the primary market, the quoted market prices may be adjusted for the observable price movements of country-specific market proxies. Depending upon the nature of the inputs, investment securities, trading are generally classified as Level 1 or 2 within the valuation hierarchy.

Investment securities, available-for-sale

Investment securities, available-for-sale, consist of investments in sponsored mutual funds and privately offered equity funds. Sponsored mutual funds that are listed on an active exchange are valued using published net asset values and are classified as Level 1 within the valuation hierarchy. Investments in sponsored privately offered equity funds and portfolios that are not listed on an active exchange but have net asset values that are comparable to mutual funds and have no redemption restrictions are classified as Level 2 within the valuation hierarchy.

Derivative instruments

Derivative instruments, which include foreign exchange contracts, stock index futures contracts and commodity futures contracts, are recorded as either other assets or other liabilities on the Company’s Consolidated Balance Sheets. Foreign exchange contracts are valued by interpolating a value using the spot foreign exchange rate and forward points, which are based on spot rate and currency interest rate differentials. Index futures contracts and commodity futures contracts are valued using a third-party pricing service that determines fair value based on bid and ask prices. Derivative instruments are generally classified as Level 2 within the valuation hierarchy.

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Assets of consolidated CLO entity

Assets of the consolidated CLO entity include investments in money market funds, equity securities, debt securities, bank loans and warrants. Fair value is determined utilizing unadjusted quoted market prices when available. Fair value may also be based upon valuations obtained from independent third-party broker or dealers utilizing matrix pricing models that consider information regarding securities with similar characteristics. In certain instances, fair value has been determined utilizing discounted cash flow analyses or single broker non-binding quotes. Depending on the nature of the inputs, these assets are classified as Level 1, 2 or 3 within the valuation hierarchy.

Securities sold, not yet purchased

Securities sold, not yet purchased, are recorded as other liabilities on the Company’s Consolidated Balance Sheets and are valued by a third-party pricing service that determines fair value based on bid and ask prices. Securities sold, not yet purchased, are generally classified as Level 2 within the valuation hierarchy.

Liabilities of consolidated CLO entity

Liabilities of the consolidated CLO entity include debt securities and senior and subordinated note obligations of the consolidated CLO entity. The liabilities are valued based upon quoted prices for identical or similar liabilities that are not active and inputs other than quoted prices that are observable or corroborated by observable market data. Fair value may also be based upon model-based valuation techniques in which one or more significant inputs are unobservable in the market. Depending on the nature of the inputs, these liabilities are classified as Level 2 or 3 within the valuation hierarchy.

Transfers in and/or out of Levels

The following table summarizes fair value transfers between Level 1 and Level 2 for the three and nine months ended July 31, 2012:

   
(in thousands)   Three Months Ended
July 31, 2012
  Nine Months Ended
July 31, 2012
Transfers from Level 1 into Level 2(a)   $ 7,861     $ 18,104  
Transfers from Level 2 into Level 1            

(a) Transfers from Level 1 into Level 2 primarily represent debt and equity securities which were valued based on prices of similar securities because unadjusted quoted market prices were not available in the current period.

There were no significant transfers between Level 1 and Level 2 during the three and nine months ended July 31, 2011.

Level 3 assets and liabilities

The following table shows a reconciliation of the beginning and ending fair value measurements of assets and liabilities that are valued on a recurring basis and classified as Level 3 for the three and nine months ended July 31, 2012 and 2011:

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  Three Months Ended
July 31, 2012
  Three Months Ended
July 31, 2011
(in thousands)   Bank loans
and other
investments of
consolidated
CLO entity
  Senior and
subordinated
note obligations
of consolidated
CLO entity
  Bank loans
and other
investments of
consolidated
CLO entity
  Senior and
subordinated
note obligations
of consolidated
CLO entity
Beginning balance   $ 2,150     $ 483,062     $ 4,170     $ 479,277  
Net gains (losses) on investments and note obligations included in net income(1)     (139 )      (8,599 )      337       1,189  
Purchases, sales and settlements, net                 (39 )       
Transfers into Level 3(2)     122                    
Transfers out of Level 3(3)     (15 )                   
Net transfers in and/or out of Level 3                 49        
Ending balance   $ 2,118     $ 474,463     $ 4,517     $ 480,466  
Change in unrealized (losses) gains included in net income relating to assets and liabilities held   $ (139 )    $ (8,599 )    $ 337     $ 1,189  

  

       
  Nine Months Ended
July 31, 2012
  Nine Months Ended
July 31, 2011
(in thousands)   Bank loans
and other investments of consolidated CLO entity
  Senior and subordinated note obligations of consolidated CLO entity   Bank loans
and other investments of consolidated CLO entity
  Senior and subordinated
note obligations
of consolidated
CLO entity
Beginning balance   $ 5,910     $ 477,699     $     $  
Adjustment for adoption of new consolidation guidance                 5,265       444,087  
Net gains (losses) on investments and note obligations included in net income(1)     (139 )      (603 )      1,162       36,379  
Purchases, sales and settlements, net                 (1,354 )       
Transfers into Level 3(2)     137                    
Transfers out of Level 3(3)     (3,790 )      (2,633 )             
Net transfers in and/or out of Level 3                 (556 )       
Ending balance   $ 2,118     $ 474,463     $ 4,517     $ 480,466  
Change in unrealized (losses) gains included in net income relating to assets and liabilities held   $ (139 )    $ (603 )    $ 1,162     $ 36,379  

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(1) Substantially all net gains and 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 Statements of Income.
(2) Transfers into Level 3 were the result of a reduction in the availability of significant observable inputs used in determining the fair value of a second lien bank loan that defaulted during the period. Fair value was determined utilizing a discounted cash flow analysis.
(3) Transfers out of Level 3 into Level 2 were due to an increase in the observability of the inputs used in determining the fair value of certain instruments attributable to an increase in the number of price quotes received.

The following table shows the valuation technique and significant unobservable inputs utilized in the fair value measurement of Level 3 liabilities at July 31, 2012:

       
($ in thousands)   Fair Value at July 31, 2012   Valuation
Technique
  Unobservable
Inputs*
  Range
Liabilities of consolidated CLO entity:
                                   
Senior and subordinated note
obligations
  $ 474,463       Income
approach
      Default rate 
Discount Rate
      200 bps
145-1000 bps
 

* Discount rate refers to spread over LIBOR. Lower spreads relate to the more senior tranches in the CLO note structure; higher spreads relate to the less senior tranches. The default rate refers to the constant annual default rate.

Valuation process

The Company elected the fair value option for both the collateral assets held and senior and subordinated notes issued by its consolidated CLO entity upon consolidation to mitigate any accounting inconsistencies between the carrying value of the assets held to provide cash flows for the note obligations and the carrying value of those note obligations.

Senior and subordinated note obligations issued by the Company’s consolidated CLO entity are issued in various tranches with different risk profiles. The notes are valued on a quarterly basis by the Company’s bank loan investment team utilizing an income approach that projects the cash flows of the collateral assets using the team’s assumptions about market yields, collateral reimbursement assumptions, prepayment speeds, forecasted default and recovery rates, callability and other market factors that vary based on the nature of the investments in the underlying collateral pool. Once the undiscounted cash flows of the collateral assets have been determined, the bank loan team applies appropriate discount rates that it believes a reasonable market participant would use to determine the discounted cash flow valuation of the notes. The bank loan team routinely monitors market conditions and model inputs for cyclical and secular changes in order to identify any material factors that could influence the Company’s valuation method.

Sensitivity to changes in significant unobservable inputs

For senior and subordinated notes issued by the Company’s consolidated CLO entity, a change in the assumption used for the probability of default is generally accompanied by a directionally similar change in the assumption used for discount rates. Significant increases in either of these inputs would result in a significantly lower measurement of fair value.

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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8. Derivative Financial Instruments

Derivative financial instruments designated as cash flow hedges

During the nine months ended July 31, 2012 and 2011, the Company reclassified into interest expense $0.3 million of the loss recognized on a Treasury lock transaction in connection with the Company’s issuance of ten-year senior notes in October 2007. At July 31, 2012, the remaining unamortized loss on this transaction was $2.3 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 hedge currency risk and market risk associated with its investments in separately managed accounts and consolidated sponsored funds seeded for new product development purposes.

At July 31, 2012, the Company had 14 foreign exchange contracts outstanding with six counterparties with an aggregate notional value of $18.0 million; 13 types of stock index futures contracts outstanding with one counterparty with an aggregate notional value of $65.4 million; and 29 types of commodity futures contracts outstanding with one counterparty with an aggregate notional value of $15.9 million.

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

July 31, 2012

       
(in thousands)   Assets   Liabilities
  Balance Sheet Location   Fair Value   Balance Sheet Location   Fair Value
Foreign exchange contracts     Other  assets     $ 63       Other  liabilities     $ 335  
Stock index futures contracts     Other  assets             Other  liabilities       2,467  
Commodity futures contracts     Other  assets       253       Other  liabilities       633  
Total         $ 316           $ 3,435  

October 31, 2011

       
(in thousands)   Assets   Liabilities
  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  

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

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(in thousands)   Income Statement Location   Three Months Ended
July 31,
  Nine Months Ended
July 31,
  2012   2011   2012   2011
Foreign exchange contracts     Gains and other
investment  income, net
    $ 299     $ 322     $ 727     $ (1,595 ) 
Stock index futures contracts     Gains and other
investment income, net
      616       5,682       (9,285 )      (3,159 ) 
Commodity futures contracts     Gains and other
investment income, net
      56       239       1,069       (1,953 ) 
Total         $ 971     $ 6,243     $ (7,489 )    $ (6,707 ) 

9. Fair Value Measurements of Other Financial Instruments

Certain financial instruments are not carried at fair value. The following is a summary of the carrying amounts and estimated fair values of these financial instruments at July 31, 2012 and October 31, 2011:

         
(in thousands)   July 31, 2012   October 31, 2011
  Carrying Value   Fair Value   Fair Value Level   Carrying Value   Fair Value
Investments, other   $ 7,470     $ 7,470       3     $ 7,470     $ 7,470  
Notes receivable from stock option exercises   $ 3,888     $ 3,888       3     $ 4,441     $ 4,441  
Debt   $ 500,000     $ 574,830       1     $ 500,000     $ 566,047  

Included in investments, other is a $6.6 million non-controlling capital interest in Atlanta Capital Management Holdings, LLC (“ACM Holdings”), a partnership that owns certain non-controlling interests of Atlanta Capital Management LLC (“Atlanta Capital Management”). The Company’s interest in ACM Holdings is non-voting and entitles the Company to receive $6.6 million when put or call options for certain non-controlling interests of Atlanta Capital Management are exercised. The carrying value of these investments approximates fair value. The fair value of the investment is determined using a cash flow model which projects future cash flows based upon contractual obligations. Once the undiscounted cash flows have been determined, the Company applies an appropriate discount rate. The inputs to the model are considered Level 3.

Notes receivable from stock option exercises represent loans to employees under the Employee Loan Program for the purpose of financing the exercise of employee stock options. Loans are made for a seven-year period, at varying fixed interest rates, and are payable in annual installments. The fair value of the notes is determined using a cash flow model which projects cash flows based upon the contractual terms of the notes. Once the undiscounted cash flows have been determined, the Company applies an appropriate market yield. The inputs to the model are considered Level 3. The carrying value of the notes receivable approximates fair value.

The fair value of the Company’s debt has been determined using publicly available market prices, which are considered Level 1 inputs.

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10. 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.

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 the 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 Sheets.

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

July 31, 2012

     
(in thousands)   CLO Bank Loan Investments   Senior and subordinated note obligations
    
Total CLO bank
loan investments
  90 days or more
past due
Unpaid principal balance   $ 458,202     $ 569     $ 500,134  
Excess unpaid principal balance over fair value     (5,758 )      (523 )      (23,038 ) 
Fair value   $ 452,444     $ 46     $ 477,096  

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October 31, 2011

     
(in thousands)   CLO Bank Loan Investments   Senior and subordinated note obligations
    
Total CLO bank
loan investments
  90 days or more
past due
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 July 31, 2012 and 2011, the changes in the fair values of the CLO entity’s bank loans and other investments resulted in net losses of $1.1 million and $2.7 million, respectively, while changes in the fair value of the CLO’s note obligations resulted in net gains of $8.5 million and net losses of $1.1 million, respectively. The combined net gains of $7.4 million and net losses of $3.8 million for the three months ended July 31, 2012 and 2011, respectively, were recorded as gains (losses) and other investment income of the consolidated CLO entity on the Company’s Consolidated Statements of Income for these periods.

During the nine months ended July 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 $14.8 million and $10.8 million, respectively, while changes in the fair value of the CLO’s note obligations resulted in net gains of $0.6 million and net losses of $36.4 million, respectively. The combined net gains of $15.4 million and net losses of $25.5 million for the nine months ended July 31, 2012 and 2011, respectively, were recorded as gains (losses) and other investment income of the consolidated CLO entity on the Company’s Consolidated Statements of Income for these 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.

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. Subsequent to April 2012, reinvestment opportunities are limited and it is expected that prepayments received will be used to pay down the entity’s note obligations. The holders of a majority of the subordinated notes have the option to liquidate the CLO entity, provided there is sufficient value to repay the senior notes in full.

Interest income and expense are recorded on an accrual basis and reported as gains (losses) and other investment income and as interest expense in other income (expense) of the consolidated CLO entity on the Company’s Consolidated Statements of Income for the three and nine months ended July 31, 2012.

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

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(in thousands)   July 31, 2012   October 31, 2011
Assets of consolidated CLO entity:
                 
Cash and cash equivalents   $ 33,380     $ 16,521  
Bank loans and other investments     458,392       462,586  
Other assets     1,150       2,715  
Liabilities of consolidated CLO entity:
                 
Senior and subordinated note obligations     477,096       477,699  
Other liabilities     822       5,193  
Appropriated retained earnings (deficit)     12,485       (3,867 ) 
Total net interest in consolidated CLO entity   $ 2,519     $ 2,797  

The Company had direct equity interests in the consolidated CLO entity of $2.0 million and $2.3 million as of July 31, 2012, and October 31, 2011, respectively, which were eliminated in consolidation.

For the three months ended July 31, 2012 and 2011, the Company recorded net income of $8.4 million and a net loss of $2.6 million, respectively, related to the consolidated CLO entity. A net gain of $7.5 million and a net loss of $3.5 million for three months ended July 31, 2012 and 2011, respectively, were included in net income attributable to non-controlling 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 $0.9 million related to the consolidated CLO entity for both the three months ended July 31, 2012 and 2011, respectively.

For the nine months ended July 31, 2012 and 2011, the Company recorded net income of $18.9 million and net losses of $19.5 million, respectively, related to the consolidated CLO entity. The Company recorded an associated net gain of $16.4 million and a net loss of $22.1 million for the nine months ended July 31, 2012 and 2011, respectively, in net income attributable to non-controlling 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 $2.5 million and $2.6 million related to the consolidated CLO entity for the nine months ended July 31, 2012 and 2011, respectively.

Other Entities

The Company’s controlled subsidiary Parametric Portfolio Associates LLC (“Parametric Portfolio Associates”) maintains a 70 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 $4.9 million on both July 31, 2012 and October 31, 2011, consisting primarily of cash and cash equivalents and investment advisory fees receivable, and liabilities of $2.3 million and $2.5 million on July 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.

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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 $1.7 billion and $1.9 billion as of July 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 collateral management fees earned but uncollected. The Company maintains an investment in one of these entities totaling $0.3 million as of July 31, 2012 and October 31, 2011, respectively. Collateral management fees receivable for these three CLO entities totaled $2.0 million and $3.0 million on July 31, 2012 and October 31, 2011, respectively. In the first nine 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 investment in and collateral management fees receivable from the CLO entities as of July 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 6. Income from this entity is recorded as a component of gains and other investment 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 $9.2 billion and $9.6 billion as of July 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 $4.3 million and $3.7 million on July 31, 2012 and October 31, 2011, respectively, and collateral management fees receivable totaling $0.5 million and $0.4 million on July 31, 2012 and October 31, 2011, respectively. In the first nine 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 July 31, 2012.

The Company’s investments in privately offered equity funds are carried at fair value and included in investment securities, available for sale, which are disclosed as a component of investments in Note 6. The Company records any change in fair value, net of income tax, in other comprehensive income (loss).

11. 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. During the second quarter of fiscal 2012, the Company made a contingent payment of $12.3 million to the selling group based upon prescribed multiples of TABS’s revenue for the twelve months ended December 31, 2011. The payment increased 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.

Parametric Portfolio Associates

On April 27, 2012, 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

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approximately $17.0 million. Pursuant to the acquisition agreement, the exercise price of the put option was based on a multiple of earnings before taxes for the calendar year ended December 31, 2011. As a result of the transaction, which settled on May 1, 2012, the Company’s capital ownership interest increased from 94.8 percent to 96.6 percent. The payment was treated as an equity transaction and reduced redeemable non-controlling interests at closing.

Parametric Risk Advisors

On July 2, 2012, the Company exercised a call option requiring the non-controlling interest holders of Parametric Risk Advisors to sell units representing a 10 percent ownership interest in Parametric Risk Advisors for $2.9 million. Pursuant to the acquisition agreement, the exercise price of the call option was based on a multiple of earnings before interest and taxes for the twelve months ended April 30, 2012. As a result of the transaction, the Company’s ownership interest increased from 60 percent to 70 percent. The payment was treated as an equity transaction and reduced redeemable non-controlling interests at closing.

12. Intangible Assets

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

July 31, 2012

     
(dollars in thousands)   Gross carrying amount   Accumulated amortization   Net carrying amount
Amortizing intangible assets:
                          
Client relationships acquired   $ 110,327     $ (56,698 )    $ 53,629  
Intellectual property acquired     1,000       (110 )      890  
Non-amortizing intangible assets:
                          
Mutual fund management contract acquired     6,708             6,708  
Total   $ 118,035     $ (56,808 )    $ 61,227  

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 July 31, 2012 and 2011 and $6.0 million and $5.9 million for the nine months ended July 31, 2012 and 2011, respectively. Estimated remaining amortization expense for the next five fiscal years is as follows:

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Year Ending October 31,
(in thousands)
  Estimated Amortization Expense
Remaining 2012   $ 1,999  
2013     7,995  
2014     7,968  
2015     7,743  
2016     7,301  
2017     7,189  

13. Debt

Corporate Credit Facility

The Company entered into a $300.0 million senior unsecured revolving credit facility on June 4, 2012, which replaced the Company's previous senior unsecured revolving credit facility. The credit facility has a three-year term, expiring on June 4, 2015. Under the facility, the Company may borrow up to $300.0 million at LIBOR-based rates of interest that vary depending on the level of usage of the facility and credit ratings of the Company. The credit facility is unsecured, contains financial covenants with respect to leverage and interest coverage, and requires the Company to pay an annual commitment fee on any unused portion.

14. Stock-Based Compensation Plans

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

       
(in thousands)   Three Months Ended
July 31,
  Nine Months Ended
July 31,
  2012   2011   2012   2011
2008 Plan:
                                   
Stock options   $ 6,314     $ 7,408     $ 21,758     $ 24,617  
Restricted shares     6,014       4,072       18,021       12,794  
Phantom stock units     67       (1 )      190       208  
Employee Stock Purchase Plan     318       528       426       781  
Incentive Plan – Stock Alternative     25       108       151       373  
ACM Plan     232       159       695