<PAGE> 1
Filed Pursuant to Rule 424(b)(1)
Registration no. 333-51023
PROSPECTUS
6,000,000 SHARES
GABELLI ASSET MANAGEMENT INC.
CLASS A COMMON STOCK
------------------------
All of the 6,000,000 shares of Class A Common Stock (the "Class A Common
Stock") offered hereby (the "Offering") are being offered by Gabelli Asset
Management Inc. (the "Company"). The Company has two classes of authorized
common stock, consisting of Class A Common Stock and Class B Common Stock (the
"Class B Common Stock" and, together with the Class A Common Stock, the "Common
Stock"). Each share of Class A Common Stock entitles its holder to one vote, and
each share of Class B Common Stock entitles its holder to ten votes.
Following the Offering, Mario J. Gabelli ("Mr. Gabelli") will indirectly
beneficially own shares of Common Stock having approximately 97.6% of the
combined voting power of the outstanding shares of Common Stock (97.2% if the
Underwriters' over-allotment option is exercised in full). See "Ownership of the
Common Stock."
Prior to the Offering, there has been no public market for the Class A
Common Stock. For a discussion of the factors considered in determining the
initial public offering price, see "Underwriting." The Class A Common Stock has
been approved for listing, subject to official notice of issuance, on the New
York Stock Exchange under the symbol "GBL."
SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE CLASS A COMMON STOCK
OFFERED HEREBY.
------------------------
THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
Per Share................................... $17.50 $1.225 $16.275
- ----------------------------------------------------------------------------------------------------------------------
Total(3).................................... $105,000,000 $7,350,000 $97,650,000
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Company has agreed to indemnify the several Underwriters against
certain liabilities, including certain liabilities under the Securities
Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $1,850,000.
(3) The Company has granted the Underwriters an option to purchase up to an
additional 900,000 shares of Class A Common Stock, exercisable within 30
days after the date hereof, solely to cover over-allotments, if any. If
such option is exercised in full, the total Price to Public, Underwriting
Discount and Proceeds to Company will be $120,750,000, $8,452,500 and
$112,297,500, respectively. See "Underwriting."
------------------------
The shares of Class A Common Stock are offered by the several Underwriters,
subject to prior sale, when, as and if issued to and accepted by them, subject
to approval of certain legal matters by counsel for the Underwriters and certain
other conditions. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected that
delivery of the shares of Class A Common Stock will be made in New York, New
York on or about February 17, 1999.
------------------------
Joint Book-Running Managers
MERRILL LYNCH & CO. SALOMON SMITH BARNEY
------------------
GABELLI & COMPANY, INC.
------------------------
The date of this Prospectus is February 10, 1999.
<PAGE> 2
[Bar Graph depicting year end assets under management in the Mutual Funds for
each of the years ended December 31, 1994, 1995, 1996, 1997 and 1998 and
compound annual growth rate of 23%.]
[Bar Graph depicting year end assets under management in the Separate Accounts &
other for each of the years ended December 31, 1994, 1995, 1996, 1997 and 1998
and compound annual growth rate of 17%.]
[Pie chart depicting Morningstar Open-End Mutual Fund ratings as a percent of
assets in rated funds at December 31, 1998.]
[Pie chart depicting composition of assets under management as a percent of
total assets under management at December 31, 1998.]
[Chart depicting Morningstar overall, 3-year, 5-year and 10-year ratings for
selected Mutual Funds at December 31, 1998.]
[Individual photos of Mario J. Gabelli and various portfolio managers and group
photos of selected members of the Mutual Fund management team and the selected
managing directors of the Separate Accounts team.]
[Table depicting Open-End Mutual Fund Performance as of December 31, 1998 for 1
year, 3 year average annual, 5 year average annual, 10 year average annual and
since inception average annual.]
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE CLASS A COMMON
STOCK OF THE COMPANY. SUCH TRANSACTIONS MAY INCLUDE STABILIZING, THE PURCHASE OF
THE CLASS A COMMON STOCK OF THE COMPANY TO COVER SYNDICATE SHORT POSITIONS AND
THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
2
<PAGE> 3
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements
(including notes) appearing elsewhere in this Prospectus. The Company was formed
in connection with a reorganization of Gabelli Funds, Inc. ("GFI"), whereby
prior to the Offering, the Company issued 24 million shares of its Class B
Common Stock, representing all of its then issued and outstanding shares of
Common Stock, to GFI and two of GFI's subsidiaries for substantially all of the
operating assets and liabilities of GFI relating to its institutional and retail
asset management, mutual fund advisory, underwriting and brokerage business.
Following the Offering, GFI will be renamed "Gabelli Group Capital Partners,
Inc." Unless otherwise indicated, the information (other than historical
financial information) contained in this Prospectus (i) gives effect to the
Formation Transactions described under "Certain Relationships and Related
Transactions -- The Formation Transactions," which will have been consummated
prior to or concurrently with the Offering, and (ii) assumes no exercise of the
Underwriters' over-allotment option. Unless the context otherwise requires, (i)
the "Company" means Gabelli Asset Management Inc., its predecessors and its
consolidated subsidiaries and (ii) "GFI" means Gabelli Funds, Inc. (which will
be renamed "Gabelli Group Capital Partners, Inc." after the Offering) and its
consolidated subsidiaries.
THE COMPANY
The Company is a widely recognized provider of investment advisory and
brokerage services to mutual fund, institutional and high net worth investors,
primarily in the United States. The Company generally manages assets on a
discretionary basis and invests in a variety of U.S. and international
securities through various investment styles. The Company's revenues are largely
based on the level of assets under management in its business, rather than its
total assets, as well as the level of fees associated with its various
investment products. At September 30, 1998, the Company had total assets under
management of approximately $13.9 billion. On a pro forma basis after giving
effect to the Formation Transactions, for the nine months ended September 30,
1998, the Company had total revenues of approximately $102.3 million and net
income of approximately $21.7 million. On a pro forma basis after giving effect
to the Formation Transactions, at September 30, 1998, the Company had total
assets of approximately $111.5 million.
At December 31, 1998, the Company had approximately $16.3 billion of assets
under management, 88% of which were invested in equity securities. The Company's
assets under management are organized principally in three groups: Mutual Funds,
Separate Accounts and Partnerships.
- - MUTUAL FUNDS: At December 31, 1998, the Company had $8.2 billion of assets
under management in open-end mutual funds and closed-end funds, representing
approximately 50% of the Company's total assets under management. The Company
currently provides advisory services to (i) the Gabelli family of funds, which
consists of 14 open-end mutual funds and three closed-end funds; (ii) The
Treasurer's Fund, consisting of three open-end money market funds (the
"Treasurer's Funds"); and (iii) the Gabelli Westwood family of funds,
consisting of six open-end mutual funds, five of which are managed on a
day-to-day basis by an unaffiliated subadviser (collectively, the "Mutual
Funds"). The Mutual Funds have a long-term record of achieving high returns,
relative to similar investment products. At December 31, 1998, approximately
99% of the assets under management in the open-end Mutual Funds having an
overall rating from Morningstar, Inc. ("Morningstar") were in open-end Mutual
Funds ranked "three stars" or better, with 36% of such assets in open-end
Mutual Funds ranked "five stars" and 38% of such assets in open-end Mutual
Funds ranked "four stars" on an overall basis (i.e., based on three-, five-
and ten-year risk adjusted average returns). The Gabelli family of funds was
honored as the top performing mutual fund family by Mutual Funds Magazine for
1997.
- - SEPARATE ACCOUNTS: At December 31, 1998, the Company had $8.0 billion of
assets in approximately 975 separate accounts, representing approximately 49%
of the Company's total assets under management. The Company currently provides
advisory services to a broad range of investors, including corporate pension
and profit sharing plans, foundations, endowments, jointly trusteed plans,
municipalities, and high net worth individuals, and also serves as subadviser
to certain other third-party investment funds (collectively, the "Separate
Accounts"). At December 31, 1998, high net worth accounts (accounts of
individuals and related parties in general having a minimum account balance of
$1 million) comprised approximately 79%
3
<PAGE> 4
of the number of Separate Accounts and approximately 25% of the assets, with
institutional investors comprising the balance. Each Separate Account portfolio
is managed to meet the specific needs and objectives of the particular client by
utilizing investment strategies and techniques within the Company's areas of
expertise.
- - PARTNERSHIPS: The Company also provides alternative investments through its
majority-owned subsidiary, Gabelli Securities, Inc. ("GSI"). These alternative
investment products consist primarily of risk arbitrage and merchant banking
limited partnerships and offshore companies (collectively, the
"Partnerships"). The Partnerships had $146 million of assets, or approximately
1% of total assets under management, at December 31, 1998.
Investment advisory and incentive fees relating to the Mutual Funds, the
Separate Accounts, and the Partnerships generated approximately 84% and 85% of
the Company's total revenues for the nine months ended September 30, 1998 and
the year ended December 31, 1997, respectively.
The following table sets forth total assets under management by product
type as of the dates shown and the compound annual growth rates ("CAGR"):
ASSETS UNDER MANAGEMENT
BY PRODUCT TYPE
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
DECEMBER 31, 1994
AT DECEMBER 31, TO
-------------------------------------------- DECEMBER 31, 1998
1994 1995 1996 1997 1998 CAGR(A)
------ ------ ------ ------- ------- -----------------
<S> <C> <C> <C> <C> <C> <C>
EQUITY:
Mutual Funds........................ $3,391 $3,875 $3,969 $ 5,313 $ 7,159 20.5%
Separate Accounts................... 4,276 5,051 5,200 6,085 7,133 13.7
------ ------ ------ ------- ------- ----
Total Equity................ 7,667 8,926 9,169 11,398 14,292 16.9
------ ------ ------ ------- ------- ----
FIXED INCOME:
Money Market Mutual Funds........... 208 236 235 827 1,030 49.2
Bond Mutual Funds................... 5 5 5 6 8 12.5
Separate Accounts................... -- -- -- 928 824 --
------ ------ ------ ------- ------- ----
Total Fixed Income.......... 213 241 240 1,761 1,862 71.9
------ ------ ------ ------- ------- ----
PARTNERSHIPS:
Partnerships........................ 103 112 116 138 146 9.1
------ ------ ------ ------- ------- ----
Total Assets Under Management(b).. $7,983 $9,279 $9,525 $13,297 $16,300 19.5%
====== ====== ====== ======= ======= ====
BREAKDOWN OF TOTAL ASSETS
UNDER MANAGEMENT:
Mutual Funds........................ $3,604 $4,116 $4,209 $ 6,146 $ 8,197 22.8%
Separate Accounts................... 4,276 5,051 5,200 7,013 7,957 16.8
Partnerships........................ 103 112 116 138 146 9.1
------ ------ ------ ------- ------- ----
Total Assets Under Management(b).. $7,983 $9,279 $9,525 $13,297 $16,300 19.5%
====== ====== ====== ======= ======= ====
</TABLE>
- ---------------
(a) Compound annual growth rate.
(b) Effective April 14, 1997 the Company increased its ownership of Gabelli
Fixed Income L.L.C. from 50% to 80.1%, thereby causing Gabelli Fixed Income
L.L.C. to become a consolidated subsidiary of the Company. Accordingly, for
periods after April 14, 1997, the assets managed by Gabelli Fixed Income
L.L.C. are included in the Company's assets under management. If the assets
managed by Gabelli Fixed Income L.L.C. had been included for all periods
presented, assets under management would have been $9,004, $10,793 and
$11,082 at December 31, 1994, 1995 and 1996, respectively, and the CAGR for
total assets would have been 16.0%.
4
<PAGE> 5
The Company's subsidiary, Gabelli & Company, Inc. ("Gabelli & Company"), is
a registered broker-dealer and a member of the National Association of
Securities Dealers, Inc. (the "NASD") and acts as underwriter and distributor of
the open-end Mutual Funds and provides brokerage, trading, underwriting and
research services.
The Company was incorporated in April 1998 as "Alpha G, Inc." under the
laws of the state of New York. In February 1999, the Company was renamed
"Gabelli Asset Management Inc." The Company's principal executive offices are
located at One Corporate Center, Rye, New York 10580 and the telephone number is
(914) 921-3700.
BUSINESS DESCRIPTION
The Company was originally founded in 1976 as an institutional
broker-dealer and entered the separate accounts business in 1977 and the mutual
fund business in 1986. In its early years, the Company's investment philosophy
was value-oriented. Starting in the mid-1980s, the Company began building upon
its core of value-oriented equity investment products by adding new investment
strategies designed for clients seeking to invest in growth-oriented equities,
convertible securities and fixed income products. Since then, the Company has
continued to build its franchise by expanding its investment management
capabilities through the addition of industry specific, international, global,
and real asset oriented product offerings. Throughout its 22-year history, the
Company has marketed most of its products under the "Gabelli" brand name.
The Company manages assets in the following wide spectrum of investment
products and strategies, many of which are focused on fast-growing areas:
SUMMARY OF INVESTMENT PRODUCTS AND STRATEGIES
---------------------------------------------------
<TABLE>
<CAPTION>
U.S. EQUITIES: U.S. FIXED INCOME: GLOBAL AND INTERNATIONAL EQUITIES:
-------------- ------------------ ----------------------------------
<S> <C> <C>
All Cap Value Corporate International Growth
Large Cap Value Government Global Value
Large Cap Growth Municipals Global Telecommunications
Mid Cap Value Asset-backed Global Multimedia
Small Cap Value Intermediate Gold(b)
Small Cap Growth Short-term
Micro Cap
Real Estate(a)
</TABLE>
<TABLE>
<CAPTION>
CONVERTIBLE SECURITIES: U.S. BALANCED: ALTERNATIVE PRODUCTS:
----------------------- -------------- ---------------------
<S> <C> <C>
U.S. Convertible Securities Balanced Growth Risk Arbitrage
Global Convertible Securities Balanced Value Merchant Banking
Fund of Funds
</TABLE>
- ---------------
(a) Invested primarily in publicly-traded real estate investment trusts and
managed by Westwood Management.
(b) Invested primarily in publicly-traded equities of U.S. and international
gold companies.
The Company believes that its growth to date can be largely credited to the
following:
- - LONG-TERM FUND PERFORMANCE: The Company has a long-term record of achieving
relatively high returns for its Mutual Fund and Separate Account clients when
compared to similar investment products. The Company believes that its
performance record is a competitive advantage and a recognized component of
its franchise.
- - WIDELY RECOGNIZED "GABELLI" BRAND NAME: For much of its history, the Company
has advertised in a variety of financial print media, including in
publications such as the Wall Street Journal, Money Magazine,
5
<PAGE> 6
Barron's and Investor's Business Daily. The Company believes that the breadth
and consistency of its advertising has enhanced investor awareness of its
product offerings and of the "Gabelli" brand name.
- - DIVERSIFIED PRODUCT OFFERINGS: Since the inception of its investment
management activities, the Company has sought to expand the breadth of its
product offerings. The Company currently offers a wide spectrum of investment
products and strategies, including product offerings in U.S. equities, U.S.
fixed income, global and international equities, convertible securities, U.S.
balanced and alternative products.
- - STRONG INDUSTRY FUNDAMENTALS: According to data compiled by the U.S. Federal
Reserve, the investment management industry has grown faster than more
traditional segments of the financial services industry, including the banking
and insurance industries. The Company believes that demographic trends and the
growing role of money managers in the placement of capital compared to the
traditional role played by banks and life insurance companies will result in
continued growth of the investment management industry.
BUSINESS STRATEGY
The Company intends to grow its franchise by leveraging its competitive
asset management strengths, including its long-term performance record, brand
name, diverse product offerings and experienced research, client service and
investment staff. In order to achieve continued growth in assets under
management and profitability, the Company will continue to pursue its business
strategy, the key elements of which include:
- - BROADENING AND STRENGTHENING THE GABELLI BRAND. The Company believes that the
Gabelli brand name is one of the more widely recognized brand names in the
U.S. investment management industry. The Company intends to continue to
strengthen its brand name identity by, among other things, increasing its
marketing and advertising to provide a uniform global image. The Company
believes that with its brand name recognition, it has the capacity to create
new products and services around the core Gabelli brand to complement its
existing product offerings. For example, in 1998, the Company launched the
Gabelli Global Opportunity Fund, a global equity fund, and the Gabelli
Westwood Mighty Mites(SM) Fund, a micro cap equity fund.
- - EXPANDING MUTUAL FUND DISTRIBUTION. The Company intends to continue expanding
its distribution network through programs sponsored by third-party
intermediaries that offer their mutual fund customers a variety of competing
products and administrative services ("Third-Party Distribution Programs"),
including, in particular, programs with no transaction fees payable by the
customer ("NTF Programs"), also commonly referred to as "mutual fund
supermarkets." In recent years, the Company has realized significant growth in
its mutual fund assets under management through alliances with "mutual fund
supermarkets" and other Third-Party Distribution Programs, through which its
Mutual Funds are made available to investors. As of December 31, 1998, the
Company was participating in 63 Third-Party Distribution Programs, including
the Charles Schwab and Fidelity Investments "mutual fund supermarket"
programs. In addition, the Company intends to develop a marketing strategy to
increase its presence in the 401(k) market for its Mutual Funds. Additionally,
the Company expects to soon offer investors the ability to purchase mutual
fund shares directly through the Internet. The Company has also entered into
various marketing alliances and distribution arrangements with leading
national brokerage and investment houses and has commenced development of
additional classes of shares for several of its mutual funds for sale through
national brokerage and investment houses and other third-party distribution
channels on a commission basis.
- - INCREASING PENETRATION IN HIGH NET WORTH MARKET. The Company's high net worth
business focuses, in general, on serving clients who have established an
account relationship of $1 million or more with the Company. According to
certain industry estimates, the number of households with over $1 million in
investable assets will grow from approximately 2.5 million in 1996 to over 15
million by 2010. With the Company's 22-year history of serving this segment,
its long-term performance record and brand name recognition, the Company
believes that it is well positioned to capitalize on the growth opportunities
in this market.
6
<PAGE> 7
- - INCREASING MARKETING FOR INSTITUTIONAL SEPARATE ACCOUNTS. The institutional
Separate Accounts business has been primarily developed through direct
marketing channels. Historically, third-party pension consultants and
financial consultants have not been a major source of new institutional
Separate Accounts business for the Company. However, these consultants have
significantly increased their presence among institutional investors. As a
result, the Company intends both to add marketing personnel to target pension
and financial consultants and to expand its efforts through its traditional
marketing channels.
- - ATTRACTING AND RETAINING EXPERIENCED PROFESSIONALS. Following the Offering,
the availability of the publicly-traded Class A Common Stock will enhance the
Company's ability to attract and retain top performing investment
professionals. The ability to attract and retain highly experienced investment
and other professionals with a long-term commitment to the Company and its
clients has been, and will continue to be, a significant factor in its
long-term growth. As the Company continues to increase the breadth of its
investment management capabilities, it plans to add portfolio managers and
other investment personnel in order to foster expansion of its products.
- - CAPITALIZING ON ACQUISITIONS AND STRATEGIC ALLIANCES. The Company intends to
selectively and opportunistically pursue acquisitions and alliances that will
broaden its product offerings and add new sources of distribution. The Company
believes that it will be better positioned to pursue acquisitions and
alliances after the Offering because it will be one of a relatively few
publicly-traded investment management firms. At present, the Company has no
plans, arrangements or understandings relating to any specific acquisitions or
alliances.
7
<PAGE> 8
THE OFFERING
Class A Common Stock Offered.... 6,000,000 shares
Common Stock to be Outstanding
After the Offering.............. 6,000,000 shares of Class A Common Stock(1)
and 24,000,000 shares of Class B Common
Stock(2)
----------------------------------------------
30,000,000 shares(1)
----------------------------------------------
----------------------------------------------
Use of Proceeds................. The Company intends to use the net proceeds
from the Offering for general corporate
purposes, including working capital and the
expansion of its business through new
investment product offerings, enhanced
distribution and marketing of existing
investment products, upgraded management
information systems and strategic
acquisitions as opportunities arise. The
Company currently does not intend to use any
of the net proceeds from the Offering to pay
debt service on the $50 million payable to
Mr. Gabelli under the terms of his Employment
Agreement. See "Use of Proceeds."
Voting Rights................... The rights of holders of shares of Common
Stock are substantially identical, except
that holders of Class B Common Stock will be
entitled to ten votes per share, while
holders of Class A Common Stock will be
entitled to one vote per share.
NYSE Symbol..................... GBL
- ---------------
(1) Excludes 1,500,000 shares of Class A Common Stock reserved for issuance
under the 1999 Stock Award and Incentive Plan of the Company, including
approximately 1,200,000 shares of Class A Common Stock subject to
outstanding options that will be granted at an exercise price equal to the
initial public offering price of the Class A Common Stock (net of the
discount payable to the Underwriters). See "Management -- 1999 Stock Award
and Incentive Plan."
(2) All of the Class B Common Stock is owned by GFI, which is approximately
two-thirds owned by Mr. Gabelli, with the balance owned by the Company's
professional staff and other individuals.
RISK FACTORS
Purchasers of the Class A Common Stock in the Offering should carefully
consider the risk factors set forth under the caption "Risk Factors" and the
other information included in this Prospectus prior to making an investment
decision. See "Risk Factors" beginning on page 12.
8
<PAGE> 9
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
General
The following is a summary of certain consolidated financial information
relating to the Company. The summary has been derived in part from, and should
be read in conjunction with, the audited Consolidated Financial Statements of
Gabelli Funds, Inc. and subsidiaries ("GFI") and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this Prospectus. All financial information for the nine months ended September
30, 1997 and 1998, which has not been audited, has been derived from the
unaudited Consolidated Financial Statements of GFI included elsewhere in this
Prospectus, and, in the opinion of management, reflects all adjustments, which
are of a normal recurring nature, necessary to present fairly such information
for the periods presented. Operating results for the nine months ended September
30, 1998 are not necessarily indicative of the results that may be expected for
the year ended December 31, 1998.
The unaudited pro forma income statement data gives effect to (i) the
Formation Transactions, including the reduction in net gain from investments,
the reduction in interest and dividend income, the lower management fee and the
increase in interest expense as if the Employment Agreement (as defined herein)
(see Note P to the Consolidated Financial Statements) had been in effect for the
year ended December 31, 1997 and nine months ended September 30, 1998, and (ii)
the additional income taxes which would have been recorded if GFI had been a "C"
corporation instead of an "S" corporation based on tax laws in effect for the
respective periods.
The unaudited pro forma financial data does not purport to represent the
results of operations or the financial position of the Company which actually
would have occurred had the Formation Transactions been consummated on the
aforesaid dates, or project the results of operations or the financial position
of the Company for any future date or period. See "Selected Historical and Pro
Forma Financial Data" and "Certain Relationships and Related Transactions -- The
Formation Transactions" and the Unaudited Pro Forma Consolidated Statements of
Income and Financial Condition of the Company included elsewhere in this
Prospectus.
Impact of $50 Million Non-Recurring Charge ($1.10 per share) to be Recorded in
First Quarter of 1999
Under the terms of the Employment Agreement, Mr. Gabelli, who indirectly
beneficially owns shares of Common Stock having 97.6% of the combined voting
power of the Company, will receive, in addition to his portfolio management
compensation and account executive fees, an annual incentive-based management
fee of 10% of the aggregate pre-tax profits of the Company (before consideration
of the management fee or the $50 million deferred payment described below or any
employment taxes thereon) and a deferred payment of $50 million on January 2,
2002, with interest payable quarterly on such deferred amount at an annual rate
of 6%. The $50 million deferred payment will be charged to the Company's
earnings upon the effective date of the Employment Agreement, which occurred in
the first quarter of 1999. This payment, net of tax benefit, will reduce
earnings by $1.10 per share (based on the expected weighted average number of
shares outstanding in the first quarter of 1999 of 27.3 million). The $50
million payment is not reflected in the pro forma income statement data because
it is a one-time event directly related to the Offering; however, it is
reflected, net of tax benefit, in pro forma stockholders' equity.
9
<PAGE> 10
GABELLI FUNDS, INC. AND SUBSIDIARIES SUMMARY HISTORICAL AND PRO FORMA DATA
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------------------- ------------------
1993 1994 1995 1996 1997 1997(1) 1998(1)
-------- -------- -------- ------- -------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Revenues:
Investment advisory and
incentive fees.............. $ 61,110 $ 71,759 $ 77,302 $84,244 $ 89,684 $64,107 $ 86,302
Commission revenue............ 5,555 5,003 5,706 6,667 7,496 5,613 6,197
Distribution fees and other
income...................... 3,716 4,683 6,302 7,257 8,096 5,100 9,810
-------- -------- -------- ------- -------- ------- --------
Total revenues.............. 70,381 81,445 89,310 98,168 105,276 74,820 102,309
-------- -------- -------- ------- -------- ------- --------
Expenses:
Compensation costs............ 31,750 36,235 39,384 41,814 45,260 33,138 41,702
Management fee................ 3,618 6,904 9,423 10,192 10,580 7,425 8,533
Other operating expenses...... 12,592 16,435 18,709 19,274 18,690 13,943 18,072
-------- -------- -------- ------- -------- ------- --------
Total expenses.............. 47,960 59,574 67,516 71,280 74,530 54,506 68,307
-------- -------- -------- ------- -------- ------- --------
Operating income................ 22,421 21,871 21,794 26,888 30,746 20,314 34,002
-------- -------- -------- ------- -------- ------- --------
Other income:
Net gain (loss) from
investments................. 9,199 (1,724) 10,105 8,783 7,888 6,803 (3,910)
Gain on sale of PCS licenses, net.. -- -- -- -- -- -- 17,430
Interest and dividend
income...................... 2,596 4,692 5,853 5,406 4,634 3,168 3,252
Interest expense.............. (337) (868) (679) (879) (1,876) (1,183) (1,355)
Other......................... 195 119 147 331 (109) (52) 79
-------- -------- -------- ------- -------- ------- --------
Total other income, net..... 11,653 2,219 15,426 13,641 10,537 8,736 15,496
-------- -------- -------- ------- -------- ------- --------
Income before income taxes and
minority interest............. 34,074 24,090 37,220 40,529 41,283 29,050 49,498
Income taxes.................. 12,831 9,198 7,769 7,631 3,077 2,369 3,004
Minority interest............. 1,750 2,060 2,555 2,727 1,529 759 1,043
-------- -------- -------- ------- -------- ------- --------
Net income...................... $ 19,493 $ 12,832 $ 26,896 $30,171 $ 36,677 $25,922 $ 45,451
======== ======== ======== ======= ======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
----------------------------------------------------- -------------------
1993 1994 1995 1996 1997 1997(1) 1998(1)
-------- -------- -------- -------- -------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA (UNAUDITED)
Assets under management (at
period end)(2):
Mutual Funds............... $ 3,684 $ 3,604 $ 4,116 $ 4,209 $ 6,146 $ 5,892 $ 7,034
Separate Accounts.......... 4,460 4,276 5,051 5,200 7,013 6,760 6,720
Partnerships............... 67 103 112 116 138 134 147
-------- -------- -------- -------- -------- -------- --------
Total................... $ 8,211 $ 7,983 $ 9,279 $ 9,525 $ 13,297 $ 12,786 $ 13,901
======== ======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
----------------------------------------------------------
PRO FORMA FOR PRO FORMA FOR
ACTUAL(1) FORMATION TRANSACTIONS(1)(3) OFFERING(1)(3)
--------- ---------------------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA
Investment in securities........................ $ 78,597 $ 23,233 $ 23,233
Investment in partnerships...................... 47,081 15,163 15,163
PCS licenses.................................... 33,985 -- --
Total assets.................................... 241,487 111,501 208,501
Total liabilities and minority interest......... 61,385 96,671 96,671
Total stockholders' equity...................... 180,102 14,830 110,630
</TABLE>
10
<PAGE> 11
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
UNAUDITED PRO FORMA DATA(1)(3)(4)
Revenues:
Investment advisory and incentive fees.................. $ 89,684 $ 86,302
Commission revenue...................................... 7,496 6,197
Distribution fees and other income...................... 8,096 9,810
-------- --------
Total revenues..................................... 105,276 102,309
Expenses:
Compensation costs...................................... 45,260 41,702
Management fee.......................................... 4,424 4,216
Other operating expenses................................ 16,901 17,541
-------- --------
Total expenses..................................... 66,585 63,459
Operating income........................................ 38,691 38,850
-------- --------
Other income:
Net gain from investments............................... 3,004 756
Interest and dividend income............................ 1,115 605
Interest expense........................................ (3,000) (2,271)
-------- --------
Total other income, net............................ 1,119 (910)
-------- --------
Income before income taxes and minority interest.......... 39,810 37,940
Income taxes............................................ 15,735 15,047
Minority interest....................................... 1,677 1,228
-------- --------
Net income................................................ $ 22,398 $ 21,665
======== ========
</TABLE>
- ---------------
(1) Unaudited.
(2) Effective April 14, 1997, Gabelli Fixed Income L.L.C. was restructured such
that the Company's ownership increased from 50% to 80.1%, thereby causing
Gabelli Fixed Income L.L.C. to become a consolidated subsidiary of the
Company. Accordingly, for periods after April 14, 1997, the assets managed
by Gabelli Fixed Income L.L.C. are included in the Company's assets under
management. If the assets managed by Gabelli Fixed Income L.L.C. had been
included for all periods presented, assets under management for 1993, 1994,
1995 and 1996 would have been approximately $11.1 billion, $9.0 billion,
$10.8 billion and $11.1 billion, respectively.
(3) The unaudited pro forma data presented above gives effect to the Formation
Transactions and the additional income taxes payable if GFI had been a "C"
corporation instead of an "S" corporation, but does not give effect to the
use of the proceeds received from the Offering. See the Unaudited Pro Forma
Consolidated Financial Statements.
(4) The disclosure requirements of Statements of Financial Accounting Standards
No. 123 require the use of an option valuation model to compute a fair value
of employee stock options. The valuation model used by the Company was not
developed for use in valuing employee stock options and the Company's
employee stock option characteristics vary significantly from those of
traded options. As a result, changes in the subjective input assumptions can
materially affect the fair value estimate. The pro forma compensation
expense, net of tax benefit, related to the Stock Award and Incentive Plan
for the year ended December 31, 1997 and the nine months ended September 30,
1998 is $1,600,000 and $1,200,000, respectively, based on 1,200,000 options
outstanding on the date of consummation of the Offering.
11
<PAGE> 12
RISK FACTORS
In addition to the other information contained in this Prospectus,
prospective investors should consider carefully the following factors relating
to the Company and the Class A Common Stock before making an investment in the
Class A Common Stock offered by this Prospectus.
CONTROL BY MR. GABELLI; CONFLICTS OF INTEREST
Upon completion of the Offering, Mr. Gabelli, through his approximately
two-thirds ownership of GFI, will beneficially own all of the Company's
outstanding Class B Common Stock, representing approximately 97.6% of the
combined voting power of all classes of voting stock of the Company (97.2% if
the Underwriters' over-allotment option is exercised in full). As long as Mr.
Gabelli indirectly beneficially owns a majority of the combined voting power of
the Common Stock, he will have the ability to elect all of the members of the
Board of Directors and thereby control the management and affairs of the
Company, including determinations with respect to acquisitions, dispositions,
borrowings, issuances of Common Stock or other securities of the Company, and
the declaration and payment of dividends on the Common Stock. In addition, Mr.
Gabelli will be able to determine the outcome of matters submitted to a vote of
the Company's shareholders for approval and will be able to cause or prevent a
change in control of the Company. As a result of Mr. Gabelli's control of the
Company, none of the Company's agreements with Mr. Gabelli and other companies
controlled by him have been arrived at through "arm's-length" negotiations,
although the Company believes that the parties endeavored to implement
market-based terms. There can be no assurance that the Company would not have
received more favorable terms from an unaffiliated party. See "Certain
Relationships and Related Transactions."
In order to minimize conflicts and potential competition with the Company's
investment management business, Mr. Gabelli has entered into a written agreement
to limit his activities outside of the Company. Mr. Gabelli has undertaken that
so long as he is associated with the Company or for a period of five years from
the consummation of the Offering, whichever is longer, he shall not provide
investment management services for compensation other than in his capacity as an
officer or employee of the Company except for (a) those investment funds and
accounts currently managed by Mr. Gabelli outside the Company under performance
fee arrangements, but only to the extent that any such investment fund or
account consists solely of one or more of the persons who were investors as of
the date of the consummation of the Offering and (b) successor funds and
accounts which serve no investors other than those in the funds and accounts
referred to in clause (a) or those investors' successors, heirs, donees or
immediate families, which funds and accounts operate according to an investment
style similar to such other accounts or funds, which style is not used at the
Company as of the date of consummation of the Offering, and which are subject to
performance fee arrangements. References to the "Permissible Accounts" mean the
funds and accounts managed outside the Company which are permitted under the
agreement described above in this paragraph. To the extent that such activities
are not prohibited under the foregoing agreement, Mr. Gabelli intends to
continue devoting time to activities outside the Company, including managing his
own assets and his family's assets, managing or controlling companies in other
industries and managing assets for other investors through the Permissible
Accounts (approximately $110 million as of September 30, 1998). These activities
may present conflicts of interest or compete with the Company. The Certificate
of Incorporation of the Company expressly provides in general that Mr. Gabelli,
members of his immediate family who are officers or directors of the Company and
entities controlled by such persons have an obligation to present corporate
opportunities to the Company and resolve conflicts of interest through one of
the processes described in the Certificate of Incorporation, which include
independent director or independent shareholder approval. See "Description of
Capital Stock -- Certificate of Incorporation and Bylaw Provisions -- Overview
of Corporate Opportunity and Conflict of Interest Policies." As of the date of
the consummation of the Offering, it is expected that there will be no members
of Mr. Gabelli's immediate family who are officers or directors of the Company.
The Company will not derive any income from activities outside the Company
by Mr. Gabelli or members of his immediate family who are officers or directors
of the Company and may not be able to take advantage of business and investment
opportunities that could later prove to be beneficial to the Company and its
shareholders, either because such opportunities were not Company opportunities
at the time they arose or
12
<PAGE> 13
because the Company did not pursue them. Where a conflict of interest involves a
transaction between Mr. Gabelli or members of his immediate family who are
officers or directors of the Company or their affiliates and the Company, there
can be no assurance that the Company would not receive more favorable terms if
it were dealing with an unaffiliated party, although the Company will seek to
achieve market-based terms in all such transactions. See "Description of Capital
Stock -- Certificate of Incorporation and Bylaw Provisions -- Overview of
Corporate Opportunity and Conflict of Interest Policies."
DEPENDENCE ON MARIO J. GABELLI AND OTHER KEY PERSONNEL
The Company is dependent on the efforts of Mr. Gabelli, its Chairman of the
Board, Chief Executive Officer, Chief Investment Officer and the primary
portfolio manager for a significant majority of the Company's assets under
management. The loss of Mr. Gabelli's services would have a material adverse
effect on the Company.
In addition to Mr. Gabelli, the future success of the Company depends to a
substantial degree on its ability to retain and attract other qualified
personnel to conduct its investment management business. The market for
qualified portfolio managers is extremely competitive and has grown more so in
recent periods as the investment management industry has experienced growth. The
Company anticipates that it will be necessary for it to add portfolio managers
and investment analysts as the Company further diversifies its investment
products and strategies. See "Business -- Business Strategy." There can be no
assurance, however, that the Company will be successful in its efforts to
recruit and retain the required personnel. In addition, the investment
professionals as well as the senior marketing personnel have direct contact with
the Company's Separate Account clients, which can lead to a strong client
relationship. The loss of these personnel could jeopardize the Company's
relationships with certain Separate Account clients, and result in the loss of
such accounts. The loss of key management professionals or the inability to
recruit and retain sufficient portfolio managers and marketing personnel could
have a material adverse effect on the Company's business.
POTENTIAL ADVERSE EFFECTS ON THE COMPANY'S PERFORMANCE PROSPECTS FROM A DECLINE
IN THE PERFORMANCE OF THE SECURITIES MARKETS
The Company's results of operations are affected by many economic factors,
including the performance of the securities markets. During recent years,
unusually favorable and sustained performance of the U.S. securities markets,
and the U.S. equity market, in particular, has attracted substantial inflows of
new investments in these markets and has contributed to significant market
appreciation which has, in turn, led to an increase in assets under management
and revenues for the Company. At September 30, 1998, approximately 88% of the
Company's assets under management were invested in portfolios consisting
primarily of equity securities. More recently, the securities markets in general
have experienced significant volatility, with declines in value experienced
during the third quarter of 1998. Any further decline in the securities markets,
in general, and the equity markets, in particular, could further reduce the
Company's assets under management and consequently reduce the Company's
revenues. In addition, any such continuing decline in the equity markets,
failure of these markets to sustain their prior levels of growth, or continued
short-term volatility in these markets could result in investors withdrawing
from the equity markets or decreasing their rate of investment, either of which
would be likely to further adversely affect the Company. The Company's growth
rate has varied from year to year, and there can be no assurance that the
average growth rates sustained in the recent past will continue. From time to
time, a relatively high proportion of the assets managed by the Company may be
concentrated in particular industry sectors. A general decline in the
performance of securities in those industry sectors could have an adverse effect
on the Company's assets under management and revenues.
13
<PAGE> 14
FUTURE INVESTMENT PERFORMANCE COULD REDUCE REVENUES AND OTHER INCOME
Success in the investment management and mutual fund businesses is
dependent on investment performance as well as distribution and client
servicing. Good performance generally stimulates sales of the Company's
investment products and tends to keep withdrawals and redemptions low, which
generates higher management fees (which are based on the amount of assets under
management). Conversely, relatively poor performance tends to result in
decreased sales, increased withdrawals and redemptions in the case of the open-
end Mutual Funds, and in the loss of Separate Accounts, with corresponding
decreases in revenues to the Company. Many analysts of the mutual fund industry
believe that investment performance is the most important factor for the growth
of no-load Mutual Funds, such as those offered by the Company. Failure of the
Company's investment products to perform well could, therefore, have a material
adverse effect on the Company.
LOSS OF SIGNIFICANT SEPARATE ACCOUNTS COULD AFFECT REVENUES
The Company had approximately 950 Separate Accounts as of September 30,
1998, of which the ten largest accounts generated approximately 7% of the
Company's total revenues during the nine months ended September 30, 1998. Loss
of these accounts for any reason would have an adverse effect on the Company's
revenues. Notwithstanding good performance, the Company has from time to time
lost large Separate Accounts as a result of corporate mergers and
restructurings, and the Company could continue to lose accounts under these or
other circumstances.
COMPLIANCE FAILURES AND CHANGES IN REGULATION COULD ADVERSELY AFFECT THE COMPANY
The Company's investment management activities are subject to client
guidelines and its Mutual Fund business involves compliance with numerous
investment, asset valuation, distribution and tax requirements. A failure to
adhere to these guidelines or satisfy these requirements could result in losses
which could be recovered by the client from the Company in certain
circumstances. Although the Company has installed procedures and utilizes the
services of experienced administrators, accountants and lawyers to assist it in
adhering to these guidelines and satisfying these requirements, and maintains
insurance to protect it in the case of client losses, there can be no assurance
that such precautions or insurance will protect the Company from potential
liabilities.
The Company's businesses are subject to extensive regulation in the United
States, including by the Securities and Exchange Commission (the "Commission")
and the NASD. The Company is also subject to the laws of non-U.S. jurisdictions
and non-U.S. regulatory agencies or bodies. The failure of the Company to comply
with applicable laws or regulations could result in fines, suspensions of
personnel or other sanctions, including revocation of the registration of the
Company or any of its subsidiaries as an investment adviser or broker-dealer.
Changes in laws or regulations or in governmental policies could have a material
adverse effect on the Company. See "Business -- Regulation."
THE COMPANY'S SOURCES OF REVENUE ARE SUBJECT TO TERMINATION ON SHORT NOTICE
Substantially all of the Company's revenues are derived from investment
management agreements and distribution arrangements. Investment management
agreements and distribution arrangements with the Mutual Funds are terminable
without penalty on 60 days' notice (subject to certain additional procedural
requirements in the case of termination by a Mutual Fund) and must be
specifically approved at least annually, as required by law. Such annual renewal
requires, among other things, approval by the disinterested members of each
Mutual Fund's board of directors or trustees. See "Business -- Brokerage and
Mutual Fund Distribution." Investment advisory agreements with the Separate
Accounts are typically terminable by the client without penalty on 30 days'
notice or less. Any failure to renew or termination of a significant number of
these agreements or arrangements would have a material adverse effect on the
Company.
14
<PAGE> 15
COMPETITION AND COMPETITORS WITH GREATER RESOURCES
The investment management business is intensely competitive with low
barriers to entry and is undergoing substantial consolidation. Many
organizations in this industry are attempting to market to and service the same
clients as the Company, not only with mutual fund products and services, but
also with a wide range of other financial products and services. Many of the
Company's competitors have greater distribution capabilities, offer more product
lines and services, and may also have a substantially greater amount of assets
under management and financial resources. These competitors would tend to have a
substantial advantage over the Company during periods when the Company's
investment performance is not strong enough to counter these competitors'
greater marketing resources. See "Business -- Competition."
RELIANCE ON THIRD-PARTY DISTRIBUTION PROGRAMS
The Company has recently experienced significant growth in sales of its
open-end Mutual Funds through Third-Party Distribution Programs, most of which
is from NTF Programs. Approximately $900 million of the Company's assets under
management in the open-end Mutual Funds as of September 30, 1998 were obtained
through NTF Programs. The cost of participating in Third-Party Distribution
Programs is higher than the Company's direct distribution costs, and there can
be no assurance that the cost of Third-Party Distribution Programs will not
increase in the future. Any increase would be likely to have an adverse effect
on the Company's profit margins and results of operations. In addition, there
can be no assurance that the Third-Party Distribution Programs will continue to
distribute the Mutual Funds. At September 30, 1998, approximately 89% of the NTF
Program net assets in the Gabelli and Gabelli Westwood families of funds are
attributable to two NTF Programs. Further, 89% of the total assets in The
Treasurer's Funds are attributable to one Third-Party Distribution Program. The
decision by these Third-Party Distribution Programs to discontinue distribution
of the Mutual Funds could have an adverse effect on the Company's growth of
assets under management.
FEE PRESSURES COULD REDUCE PROFIT MARGINS
There has been a trend toward lower fees in some segments of the investment
management industry. In order for the Company to maintain its fee structure in a
competitive environment, the Company must be able to provide clients with
investment returns and service that will encourage them to be willing to pay
such fees. Accordingly, there can be no assurance that the Company will be able
to maintain its current fee structure. Fee reductions on existing or future new
business could have an adverse impact on the Company's profit margins and
results of operations.
POSSIBILITY OF LOSSES ASSOCIATED WITH UNDERWRITING, TRADING AND MARKET-MAKING
ACTIVITIES
The Company's underwriting, trading and market-making activities are
primarily conducted through its subsidiary, Gabelli & Company, both as principal
and agent. Such activities subject the Company's capital to significant risks of
loss. The risks of loss include those resulting from ownership of securities,
extension of credit, leverage, liquidity, counterparty failure to meet
commitments, client fraud, employee errors, misconduct and fraud (including
unauthorized transactions by traders), failures in connection with the
processing of securities transactions and litigation. The Company has procedures
and internal controls to address such risks but there can be no assurance that
these procedures and controls will prevent losses from occurring.
DEPENDENCE ON INFORMATION SYSTEMS
The Company operates in an industry that is highly dependent on its
information systems and technology. The Company outsources a significant portion
of its information systems operations to third parties who are responsible for
providing the management, maintenance and updating of such systems. There can be
no assurance, however, that the Company's information systems and technology
will continue to be able to accommodate the Company's growth, or that the cost
of maintaining such outsourcing arrangements will not increase from its current
level. Such a failure to accommodate growth, or an increase in costs related to
these information systems, could have a material adverse effect on the Company.
15
<PAGE> 16
FAILURE TO ACHIEVE YEAR 2000 COMPATIBILITY WOULD CAUSE SIGNIFICANT LOSSES
With the new millennium approaching, many institutions around the world are
reviewing and modifying their computer systems to ensure that they are Year 2000
compliant. The issue, in general terms, is that many existing computer systems
and microprocessors with date functions (including those in non-information
technology equipment and systems) use only two digits to identify a year in the
date field with the assumption that the first two digits of the year are always
"19". Consequently, on January 1, 2000, computers that are not Year 2000
compliant may read the year as 1900. Systems that calculate, compare or sort
using the incorrect date may malfunction.
Because the Company is dependent, to a very substantial degree, upon the
proper functioning of its computer systems, a failure of its systems to be Year
2000 compliant could have a material adverse effect on the Company. For example,
a failure of this kind could lead to incomplete or inaccurate accounting or
recording of trades in securities or result in the generation of erroneous
results or give rise to uncertainty about the Company's exposure to trading
risks and its need for liquidity. If not remedied, potential risks include
business interruption or shutdown, financial loss, regulatory actions,
reputational harm and legal liability.
In addition, the Company depends primarily upon the proper functioning of
third-party computer and non-information technology systems. These parties
include trading counterparties; financial intermediaries such as stock
exchanges, depositories, clearing agencies, clearing houses and commercial
banks; subcontractors such as third-party administrators; and vendors such as
providers of telecommunication services, quotation equipment and other
utilities. If the third parties with whom the Company interacts have Year 2000
problems that are not remedied, the following problems could result: (i) in the
case of subcontractors, in disruption of critical services such as
administration, valuation and record keeping services for its mutual funds; (ii)
in the case of vendors, in disruption of important services upon which the
Company depends, such as telecommunications and electrical power; (iii) in the
case of third-party data providers, in the receipt of inaccurate or out-of-date
information that would impair the Company's ability to perform critical data
functions, such as pricing its securities or other assets; (iv) in the case of
financial intermediaries such as exchanges and clearing agents, in failed trade
settlements, an inability to trade in certain markets and disruption of funding
flows; (v) in the case of banks and other financial institutions, in the
disruption of capital flows potentially resulting in liquidity stress; and (vi)
in the case of counterparties and customers, in financial and accounting
difficulties for those parties that expose the Company to increased credit risk
and lost business. Disruption or suspension of activity in the world's financial
markets is also possible. In addition, uncertainty about the success of
remediation efforts generally may cause many market participants to reduce the
level of their market activities temporarily as they assess the effectiveness of
these efforts during a "phase-in" period beginning in late 1999. This in turn
could result in a general reduction in trading and other market activities (and
lost revenues). Management cannot predict the impact that such reduction would
have on the Company's business.
In order to ensure that the Company will continue to operate successfully
and be able to meet its fiduciary obligations to its clients after December 31,
1999, the Company has taken numerous steps toward becoming Year 2000 compliant
in both its information technology and non-information technology systems. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Year 2000 Program." The Company currently estimates that the total
cost of implementing its Year 2000 program will not have a material impact on
the Company's results of operations, liquidity or capital resources. There can
be no assurance, however, that the Company's Year 2000 program will be effective
or that the Company's estimates about the cost of completing its program will be
accurate. Neither the Company nor any of its affiliates has been reviewed by
federal or state regulators for Year 2000 compliance.
POTENTIAL ADVERSE EFFECT ON CLASS A COMMON STOCK SHARE PRICE FROM DISPARATE
VOTING RIGHTS
The holders of Class A Common Stock and Class B Common Stock have identical
rights except that (i) holders of Class A Common Stock are entitled to one vote
per share, while holders of Class B Common Stock are entitled to ten votes per
share on all matters to be voted on by shareholders in general, and (ii) holders
of Class A Common Stock are not eligible to vote on matters relating exclusively
to Class B Common Stock and vice versa. The differential in the voting rights
and the ability of the Company to issue
16
<PAGE> 17
additional Class B Common Stock could adversely affect the value of the Class A
Common Stock to the extent that investors, or any potential future purchaser of
the Company, view the superior voting rights of the Class B Common Stock to have
value.
ABSENCE OF A PRIOR PUBLIC MARKET; VOLATILITY OF PRICE; NO ASSURANCE THAT AN
ACTIVE TRADING MARKET WILL DEVELOP OR BE SUSTAINED
Prior to the Offering, there has been no public market for the Class A
Common Stock and there can be no assurance that an active trading market will
develop or be sustained. The initial public offering price of the Class A Common
Stock was determined through negotiation among the Company and the Underwriters
(other than Gabelli & Company) and may not be indicative of the market price for
the Class A Common Stock after the Offering. See "Underwriting." The market
price for the Class A Common Stock may be highly volatile. The Company believes
that factors such as announcements by the Company, or by its competitors, of
quarterly variances in financial results could cause the market price of the
Class A Common Stock to fluctuate substantially. In addition, the stock market
may experience extreme price and volume fluctuations, which often are unrelated
to the operating performance of specific companies. Market fluctuations or
perceptions regarding the Company's industry, as well as general economic or
political conditions, may adversely affect the market price of the Class A
Common Stock.
NO SPECIFIC USE OF PROCEEDS
The Company has not designated any specific use for the net proceeds from
the sale by the Company of Class A Common Stock offered hereby. The Company
intends to use the net proceeds primarily for general corporate purposes,
including working capital and the expansion of its business through new
investment product offerings, enhanced distribution, upgraded management
information systems and strategic acquisitions as opportunities arise.
Accordingly, management will have significant flexibility in applying the net
proceeds of the Offering. At present, the Company has no plans, agreements or
understandings relating to any specific acquisitions or alliances. Although part
of the Company's business strategy is to pursue acquisitions and alliances that
will broaden its product offerings and add new sources of distribution, there
can be no assurance that the Company will find strategic acquisition
opportunities at favorable prices, that the Company will have sufficient capital
resources to finance its acquisition strategy, or that any such acquisitions, if
consummated, will be successfully integrated with the Company's business
operations. See "Use of Proceeds."
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of Class A Common Stock in the Offering will experience
immediate dilution in net tangible book value of $13.87 per share, based on the
initial public offering price of $17.50 per share. To the extent that any
options to be granted with respect to Class A Common Stock are exercised after
the vesting period expires, purchasers of Class A Common Stock will experience
additional dilution. See "Dilution" and "Management -- 1999 Stock Award and
Incentive Plan."
SHARES AVAILABLE FOR FUTURE SALE OR DISTRIBUTION
Immediately after consummation of the Offering, the Company will have
outstanding 6,000,000 shares of Class A Common Stock and 24,000,000 shares of
Class B Common Stock. Subject to the restrictions described under "Shares
Eligible for Future Sale" and applicable law and the lock-up agreement with GFI
and two of its subsidiaries described below, GFI or such subsidiaries could sell
any or all of the shares of Class B Common Stock owned by them from time to time
for any reason. See "Shares Eligible for Future Sale." GFI and two of its
subsidiaries have agreed with the Company that they will not offer, sell or
otherwise dispose of any shares of Class B Common Stock for a period of three
years after the date of this Prospectus without the prior written consent of the
Company (except for transfers among GFI and its two subsidiaries). In addition,
without the prior written consent of Merrill Lynch, Pierce, Fenner & Smith
Incorporated and Salomon Smith Barney Inc., on behalf of the Underwriters, for a
period of 180 days after the date of this Prospectus (i) the Company, GFI and
two of its subsidiaries have agreed with the Underwriters that they will not
offer, sell or otherwise dispose of any shares of Common Stock or any security
convertible into or exchangeable or exercisable for shares of Common Stock,
except for the shares of Class A Common Stock to
17
<PAGE> 18
be sold in the Offering and options granted in the ordinary course of business
under the Plan or for shares of Class B Common Stock transferred among GFI and
its two subsidiaries and (ii) shareholders of GFI who are also officers and
directors of the Company have agreed with the Underwriters that they will not
offer, sell or otherwise dispose of any shares of capital stock of GFI or any
security convertible into or exchangeable or exercisable for shares of capital
stock of GFI, except in transactions between existing shareholders of GFI and
through gifts, in each case, to persons who agree to be bound by similar
restrictions. No prediction can be made as to the effect, if any, that future
sales or distributions of Class B Common Stock by GFI will have on the market
price of the Class A Common Stock prevailing from time to time. Sales or
distributions of substantial amounts of Class A Common Stock or Class B Common
Stock, or the perception that such sales or distributions could occur, could
adversely affect the prevailing market price for the Class A Common Stock.
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
Certain statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business," and elsewhere in this Prospectus constitute
forward-looking statements, which involve known and unknown risks, uncertainties
and other factors that may cause the actual results, levels of activity,
performance or achievements of the Company, or industry results, to be
materially different from any future results, levels of activity, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include, among others, those listed under "Risk Factors" and elsewhere
in this Prospectus. As a result of the foregoing and other factors, no assurance
can be given as to future results, levels of activity or achievements, and
neither the Company nor any other person assumes responsibility for the accuracy
and completeness of such statements.
18
<PAGE> 19
THE COMPANY
The Company is a holding company that was newly formed in connection with
the Offering and, accordingly, has not previously engaged in any business
operations, acquired any assets or incurred any liabilities other than in
connection with the Offering. Prior to the closing of the Offering, the Company
issued 24 million shares of its Class B Common Stock, representing all of its
then issued and outstanding shares of common stock, to GFI for substantially all
of the operating assets and liabilities of GFI relating to its institutional and
retail asset management, mutual fund advisory, underwriting and brokerage
business. Following the Offering, GFI will be renamed "Gabelli Group Capital
Partners, Inc." As a result, GFI, which is approximately two-thirds owned by Mr.
Gabelli with the balance owned by the Company's professional staff and other
individuals, will own all of the outstanding common stock of the Company prior
to the consummation of the Offering. At such time, one of GFI's most significant
assets will be its investment in the Company.
Immediately following the Offering, the Company will conduct its business
operations through its subsidiaries. After the consummation of the Offering, GFI
will own all of the outstanding shares of Class B Common Stock, which will
represent approximately 97.6% of the combined voting power of the outstanding
Common Stock (97.2% if the Underwriters' over-allotment option is exercised in
full). The Company will continue to be controlled by Mr. Gabelli. As part of the
Formation Transactions, the Company entered into an Employment Agreement with
Mr. Gabelli and a Management Services Agreement with GFI. See
"Management -- Employment Agreements" and "Certain Relationships and Related
Transactions -- The Formation Transactions."
19
<PAGE> 20
The following sets forth a simplified organizational chart for the Company
after consummation of the Offering:
[GABELLI & COMPANY ORGANIZATIONAL CHART]
- ---------------
* The 23.4% ownership interest of GSI not held by the Company is owned by the
Company's professional staff (7.2%) and by unaffiliated stockholders
(16.2%).
** The Company owns 51.1% of the Class B common stock of Gabelli Advisers,
Inc., which stock represents approximately 49.9% of the total voting power
and 40.9% of the economic interest. The remaining 48.9% of the Class B
common stock of Gabelli Advisers, Inc. is owned by members of senior
management of the Company and by their affiliates. As a result, the Company
effectively has voting control of Gabelli Advisers, Inc. All of the Class A
common stock of Gabelli Advisers, Inc., representing a 20% economic
interest, is owned by Westwood Management Corporation ("Westwood
Management"). See "Certain Relationships and Related
Transactions -- Transactions with Mr. Gabelli and Affiliates." Gabelli
Advisers, Inc. is the adviser and Westwood Management is the subadviser to
five of the six portfolios of the Gabelli Westwood family of funds.
*** The 19.9% ownership interest of Gabelli Fixed Income L.L.C. not held by the
Company is owned by members of senior management of Gabelli Fixed Income
L.L.C.
The Company was incorporated in April 1998 under the laws of the state of
New York. The Company's principal executive offices are located at One Corporate
Center, Rye, New York 10580 and the telephone number is (914) 921-3700.
20
<PAGE> 21
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the shares
of Class A Common Stock in the Offering after deducting underwriting commissions
and discounts and the estimated expenses of the Offering, are expected to be
approximately $95.8 million ($110.4 million if the Underwriters' over-allotment
option is exercised in full). The Company intends to use the net proceeds from
the Offering for general corporate purposes, including working capital and the
expansion of its business through new investment product offerings, enhanced
distribution and marketing of existing investment products, upgraded management
information systems and strategic acquisitions as opportunities arise. At
present, the Company has no plans, arrangements or understandings relating to
any specific acquisitions or alliances. The Company currently does not intend to
use any of the net proceeds from the Offering to pay debt service on the $50
million payable to Mr. Gabelli under the terms of his Employment Agreement.
DIVIDEND POLICY
The declaration and payment of dividends by the Company are subject to the
discretion of its Board of Directors. The Company currently intends to retain
earnings to finance its growth and operations and does not anticipate paying
dividends on the Common Stock in the foreseeable future. Any determination as to
the payment of dividends, including the level of dividends, will depend on,
among other things, general economic and business conditions, the strategic
plans of the Company, the Company's financial results and condition,
contractual, legal and regulatory restrictions on the payment of dividends by
the Company or its subsidiaries, and such other factors as the Board of
Directors of the Company may consider to be relevant. The Company is a holding
company, and as such, its ability to pay dividends is subject to the ability of
the subsidiaries of the Company to provide cash to the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
21
<PAGE> 22
DILUTION
The pro forma net tangible book value of the Common Stock at September 30,
1998 after giving effect to the Formation Transactions, but before adjustment
for the Offering, was $13.1 million, or $0.54 per share. Net tangible book value
per share represents the amount of total tangible assets less total liabilities,
divided by the number of shares of Common Stock outstanding. After giving effect
to the sale of the 6,000,000 shares of Class A Common Stock in the Offering, and
applying the estimated net proceeds therefrom as set forth in "Use of Proceeds,"
the pro forma net tangible book value of the Company at September 30, 1998 would
have been $108.9 million, or $3.63 per share, calculated as follows:
<TABLE>
<S> <C> <C>
Initial public offering price per share (1)......................... $17.50
------
Pro forma net tangible book value per share before the
Offering............................................... $ 0.54
------
Increase in pro forma net tangible book value per share
attributable to the Offering........................... 3.09
------
As adjusted pro forma net tangible book value per share after the
Offering.......................................................... 3.63
------
Dilution in pro forma net tangible book value per share to new
investors (2)(3).................................................. $13.87
======
</TABLE>
- ---------------
(1) Initial public offering price is before deduction of underwriting discounts
and commissions and estimated expenses of the Offering to be paid by the
Company.
(2) Dilution is determined by subtracting the pro forma net tangible book value
per share of Class A Common Stock after the Offering from the initial public
offering price paid by purchasers in the Offering for a share of Class A
Common Stock.
(3) Assumes no exercise of outstanding stock options. As of the date of this
Prospectus, the Company expects that there will be options outstanding to
purchase a total of approximately 1,200,000 shares of Class A Common Stock
at an exercise price equal to the initial public offering price of the Class
A Common Stock (net of the discount payable to the Underwriters). See
"Management -- 1999 Stock Award and Incentive Plan." If any of these options
were exercised, there would be further dilution to purchasers of Class A
Common Stock in the Offering.
Assuming the Underwriters' over-allotment option is exercised in full, the
pro forma net tangible book value at September 30, 1998 would be $123.5 million
or $4.00 per share, the immediate increase in pro forma net tangible book value
of shares owned by existing shareholders would be $3.46 per share, and the
immediate dilution to purchasers of shares of Class A Common Stock in the
Offering would be $13.50 per share.
The following table summarizes at September 30, 1998, after giving effect
to the sale of the shares of Class A Common Stock in the Offering, (i) the
number and percentage of shares of Common Stock issued by the Company, (ii) the
total cash consideration paid for the Common Stock, and (iii) the average price
per share of Common Stock paid by GFI prior to the Offering and by the public
shareholders of Class A Common Stock in the Offering:
<TABLE>
<CAPTION>
SHARES OF COMMON
STOCK OWNED TOTAL CONSIDERATION AVERAGE
---------------------- --------------------------- PRICE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
------ ---------- ------ ---------- ---------
<S> <C> <C> <C> <C> <C>
GFI......................... 24,000,000 80% $45,000,000(1) 30% $ 1.88(1)
Public Shareholders......... 6,000,000 20 105,000,000 70 17.50
--------- ------ ----------- ------
Total............. 30,000,000 100% $150,000,000 100%
========= ====== =========== ======
</TABLE>
- ---------------
(1) Represents the net assets transferred to the Company by GFI in exchange for
the 24 million shares of Class B Common Stock. Prior to the Offering, the
Company entered into an Employment Agreement (see "Management -- Employment
Agreements") which, among other things, provides for a one time lump sum
payment to Mr. Gabelli of $50 million on January 2, 2002. This payment, net
of tax benefit, will be charged to the Company's earnings in the first
quarter of 1999. If it were treated as a distribution instead of being
charged to the Company's earnings, this payment would reduce Mr. Gabelli's
effective consideration to zero.
The calculations in the tables set forth above do not reflect an aggregate
of 1,500,000 shares of Class A Common Stock reserved for issuance under the 1999
Stock Award and Incentive Plan of the Company, including approximately 1,200,000
shares of Class A Common Stock subject to outstanding options that will be
granted at the initial public offering price of the Class A Common Stock (net of
the discount payable to the Underwriters). See "Management -- 1999 Stock Award
and Incentive Plan."
22
<PAGE> 23
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1998 (i) on an historical basis and (ii) as adjusted for the
Formation Transactions, the Offering and the Company's obligation under the
Employment Agreement to pay Mr. Gabelli $50 million on January 2, 2002. See
"Management -- Employment Agreements." This payment, net of tax benefit, will be
charged to the Company's earnings in the first quarter of 1999. This table
should be read in conjunction with the Consolidated Financial Statements of GFI
and related notes and other financial and operating data appearing elsewhere in
this Prospectus and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
-----------------------
GFI COMPANY
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Debt:
Payable to related party.................................. $ -- $ 50,000
Notes payable............................................. 5,876 --
Payable to Sub-S shareholders............................. 14,642 --
Capital lease obligation.................................. 3,621 3,621
-------- --------
Total debt............................................. 24,139 53,621
Minority Interest........................................... 11,754 11,754
Stockholders' Equity:
Preferred Stock, $.001 par value; authorized 10,000,000
shares; none issued.................................... -- --
Common Stock $.01 par value; authorized 1,000,000 Shares;
issued and outstanding 196,537 shares.................. 2 --
Class A Common Stock, $.001 par value; authorized
100,000,000 shares; issued and outstanding 6,000,000
shares, as adjusted.................................... -- 6
Class B Common Stock, $.001 par value; authorized
100,000,000 shares; issued and outstanding 24,000,000
shares, as adjusted.................................... -- 24
Additional paid-in capital................................ 21,471 118,966
Retained earnings (accumulated deficit)................... 169,252 (8,366)
Notes receivable.......................................... (10,623) --
-------- --------
Total stockholders' equity............................. 180,102 110,630
-------- --------
Total capitalization.............................. $215,995 $176,005
======== ========
</TABLE>
23
<PAGE> 24
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
General
The selected historical financial data presented below has been derived in
part from, and should be read in conjunction with, the audited Consolidated
Financial Statements of GFI and "Management's Discussion and Analysis of
Financial Condition and Results of Operations," included elsewhere in this
Prospectus. All financial information for the nine months ended September 30,
1997 and 1998, which has not been audited, has been derived from the unaudited
Consolidated Financial Statements of GFI included elsewhere in this Prospectus,
and, in the opinion of management, reflects all adjustments, which are of a
normal recurring nature, necessary to present fairly such information for the
periods presented. Operating results for the nine months ended September 30,
1998 are not necessarily indicative of the results that may be expected for the
year ended December 31, 1998.
The unaudited pro forma income statement data gives effect to (i) the
Formation Transactions, including the reduction in net gain from investments,
the reduction in interest and dividend income, the lower management fee and the
increase in interest expense as if the Employment Agreement (see Note P to the
Consolidated Financial Statements) had been in effect for the year ended
December 31, 1997 and nine months ended September 30, 1998, and (ii) the
additional income taxes which would have been recorded if GFI had been a "C"
corporation instead of an "S" corporation based on tax laws in effect for the
respective periods.
The unaudited pro forma adjustments are based upon available information
and certain assumptions that management of the Company believes are reasonable
under the circumstances. The pro forma financial data does not purport to
represent the results of operations or the financial position of the Company
which actually would have occurred had the Formation Transactions been
consummated on the aforesaid dates, or project the results of operations or the
financial position of the Company for any future date or period. See "Certain
Relationships and Related Transactions -- The Formation Transactions" and the
Unaudited Pro Forma Consolidated Statements of Income and Financial Condition of
the Company included elsewhere in this Prospectus.
Impact of $50 Million Non-Recurring Charge ($1.10 per share) to be Recorded in
First Quarter of 1999
Under the terms of the Employment Agreement, Mr. Gabelli, who indirectly
beneficially owns shares of Common Stock having 97.6% of the combined voting
power of the Company, will receive, in addition to his portfolio management
compensation and account executive fees, an annual incentive-based management
fee of 10% of the aggregate pre-tax profits of the Company (before consideration
of the management fee or the $50 million deferred payment described below or any
employment taxes thereon) and a deferred payment of $50 million on January 2,
2002, with interest payable quarterly on such deferred amount at an annual rate
of 6%. The $50 million deferred payment will be charged to the Company's
earnings upon the effective date of the Employment Agreement, which occurred in
the first quarter of 1999. This payment, net of tax benefit, will reduce
earnings by $1.10 per share (based on the expected weighted average number of
shares outstanding in the first quarter of 1999 of 27.3 million). The $50
million payment is not reflected in the pro forma income statement data because
it is a one-time event directly related to the Offering; however, it is
reflected, net of tax benefit, in pro forma stockholders' equity.
24
<PAGE> 25
GABELLI FUNDS, INC. AND SUBSIDIARIES SELECTED HISTORICAL AND PRO FORMA DATA
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------------------- ------------------
1993 1994 1995 1996 1997 1997(1) 1998(1)
-------- -------- -------- ------- -------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Revenues:
Investment advisory and
incentive fees.............. $ 61,110 $ 71,759 $ 77,302 $84,244 $ 89,684 $64,107 $ 86,302
Commission revenue............ 5,555 5,003 5,706 6,667 7,496 5,613 6,197
Distribution fees and other
income...................... 3,716 4,683 6,302 7,257 8,096 5,100 9,810
-------- -------- -------- ------- -------- ------- --------
Total revenues.............. 70,381 81,445 89,310 98,168 105,276 74,820 102,309
-------- -------- -------- ------- -------- ------- --------
Expenses:
Compensation costs............ 31,750 36,235 39,384 41,814 45,260 33,138 41,702
Management fee................ 3,618 6,904 9,423 10,192 10,580 7,425 8,533
Other operating expenses...... 12,592 16,435 18,709 19,274 18,690 13,943 18,072
-------- -------- -------- ------- -------- ------- --------
Total expenses.............. 47,960 59,574 67,516 71,280 74,530 54,506 68,307
-------- -------- -------- ------- -------- ------- --------
Operating income................ 22,421 21,871 21,794 26,888 30,746 20,314 34,002
-------- -------- -------- ------- -------- ------- --------
Other income:
Net gain (loss) from
investments................. 9,199 (1,724) 10,105 8,783 7,888 6,803 (3,910)
Gain on sale of PCS licenses,
net......................... -- -- -- -- -- -- 17,430
Interest and dividend
income...................... 2,596 4,692 5,853 5,406 4,634 3,168 3,252
Interest expense.............. (337) (868) (679) (879) (1,876) (1,183) (1,355)
Other......................... 195 119 147 331 (109) (52) 79
-------- -------- -------- ------- -------- ------- --------
Total other income, net..... 11,653 2,219 15,426 13,641 10,537 8,736 15,496
-------- -------- -------- ------- -------- ------- --------
Income before income taxes and
minority interest............. 34,074 24,090 37,220 40,529 41,283 29,050 49,498
Income taxes.................. 12,831 9,198 7,769 7,631 3,077 2,369 3,004
Minority interest............. 1,750 2,060 2,555 2,727 1,529 759 1,043
-------- -------- -------- ------- -------- ------- --------
Net income...................... $ 19,493 $ 12,832 $ 26,896 $30,171 $ 36,677 $25,922 $ 45,451
======== ======== ======== ======= ======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
----------------------------------------------------- -------------------
1993 1994 1995 1996 1997 1997(1) 1998(1)
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT ASSETS UNDER MANAGEMENT)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Total assets................... $126,161(1) $141,887 $155,541 $182,524 $232,736 $231,076 $241,487
Total liabilities and minority
interest..................... 30,612(1) 33,983 39,470 43,991 69,117 74,051 61,385
-------- -------- -------- -------- -------- -------- --------
Total stockholders' equity..... $ 95,549(1) $107,904 $116,071 $138,533 $163,619 $157,025 $180,102
======== ======== ======== ======== ======== ======== ========
OTHER FINANCIAL DATA (UNAUDITED)
Assets under management (at
period end, in millions)(2):
Mutual Funds............... $ 3,684 $ 3,604 $ 4,116 $ 4,209 $ 6,146 $ 5,892 $ 7,034
Separate Accounts.......... 4,460 4,276 5,051 5,200 7,013 6,760 6,720
Partnerships............... 67 103 112 116 138 134 147
-------- -------- -------- -------- -------- -------- --------
Total................... $ 8,211 $ 7,983 $ 9,279 $ 9,525 $ 13,297 $ 12,786 $ 13,901
======== ======== ======== ======== ======== ======== ========
</TABLE>
25
<PAGE> 26
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
UNAUDITED PRO FORMA DATA(1)(3)(4)
Revenues:
Investment advisory and incentive fees.................. $ 89,684 $ 86,302
Commission revenue...................................... 7,496 6,197
Distribution fees and other income...................... 8,096 9,810
-------- --------
Total revenues..................................... 105,276 102,309
Expenses:
Compensation costs...................................... 45,260 41,702
Management fee.......................................... 4,424 4,216
Other operating expenses................................ 16,901 17,541
-------- --------
Total expenses..................................... 66,585 63,459
Operating income........................................ 38,691 38,850
-------- --------
Other Income:
Net gain from investments............................... 3,004 756
Interest and dividend income............................ 1,115 605
Interest expense........................................ (3,000) (2,271)
-------- --------
Total other income, net............................ 1,119 (910)
-------- --------
Income before income taxes and minority interest.......... 39,810 37,940
Income taxes............................................ 15,735 15,047
Minority interest....................................... 1,677 1,228
-------- --------
Net income................................................ $ 22,398 $ 21,665
======== ========
</TABLE>
- ---------------
(1) Unaudited.
(2) Effective April 14, 1997, Gabelli Fixed Income L.L.C. was restructured such
that the Company's ownership increased from 50% to 80.1%, thereby causing
Gabelli Fixed Income L.L.C. to become a consolidated subsidiary of the
Company. Accordingly, for periods after April 14, 1997, the assets managed
by Gabelli Fixed Income L.L.C. are included in the Company's assets under
management. If the assets managed by Gabelli Fixed Income L.L.C. had been
included for all periods presented, assets under management for 1993, 1994,
1995 and 1996 would have been approximately $11.1 billion, $9.0 billion,
$10.8 billion and $11.1 billion, respectively.
(3) The unaudited pro forma data presented above gives effect to the Formation
Transactions and the additional income taxes payable if GFI had been a "C"
corporation instead of an "S" corporation, but does not give effect to the
use of the proceeds received from the Offering. See the Unaudited Pro Forma
Consolidated Financial Statements.
(4) The disclosure requirements of SFAS No. 123 require the use of an option
valuation model to compute a fair value of employee stock options. The
valuation model used by the Company was not developed for use in valuing
employee stock options and the Company's employee stock option
characteristics vary significantly from those of traded options. As a
result, changes in the subjective input assumptions can materially affect
the fair value estimate. The pro forma compensation expense, net of tax
benefit, related to the Stock Award and Incentive Plan for the year ended
December 31, 1997 and the nine months ended September 30, 1998 is $1,600,000
and $1,200,000, respectively, based on 1,200,000 options outstanding on the
date of consummation of the Offering.
26
<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements of GFI and the notes thereto included
elsewhere in this Prospectus. The Consolidated Financial Statements of GFI
include the accounts of the following majority-owned or controlled subsidiaries
of the Company: Funds Adviser (100%-owned), GAMCO (100%-owned), GSI
(76.6%-owned), Gabelli & Company (76.6%-owned), Gabelli Fixed Income, Inc.
(100%-owned), Gabelli Fixed Income L.L.C. (80.1%-owned) and Gabelli Advisers,
Inc. (40.9%-owned, combined with the voting interests of affiliated parties,
represents voting control).
Prior to the Offering, GFI will transfer substantially all of the operating
assets and liabilities relating to its institutional and retail asset
management, mutual fund advisory, underwriting and brokerage business to Gabelli
Asset Management Inc. in exchange for 24 million shares of Class B Common Stock.
After the Offering, the Company's financial statements will reflect the
financial condition and results of operations of Gabelli Asset Management Inc.
and the historical results of GFI will be shown as predecessor company financial
statements.
OVERVIEW
The Company's revenues are largely based on the level of assets under
management in its businesses as well as the level of fees associated with its
various investment products. Growth in revenues generally depends on good
investment performance, which increases assets under management by increasing
the value of existing assets under management, contributing to higher investment
and lower redemption rates and facilitating the ability to attract additional
investors while maintaining current fee levels. Growth in assets under
management is also dependent on being able to access various distribution
channels, which is usually based on several factors, including performance and
service. Historically, the Company depended primarily on direct distribution of
its products and services, but since 1995 has increasingly participated in
Third-Party Distribution Programs, particularly NTF Programs. Fluctuations in
financial markets also have a substantial effect on assets under management and
results of operations, although the Company's extensive use of variable
compensation programs tends to moderate the effects of fluctuations in revenues.
The Company's largest source of revenues is investment advisory fees which are
based on the amount of assets under management in its Mutual Funds and Separate
Accounts businesses. Advisory fees from the Mutual Funds are computed daily or
weekly, while advisory fees from the Separate Accounts are generally computed
quarterly based on account values as of the end of the preceding quarter. These
revenues vary depending upon the level of sales compared with redemptions,
financial market conditions and the fee structure for assets under management.
Revenues derived from the equity oriented portfolios generally have higher
management fee rates than fixed income portfolios.
Commission revenues consist of brokerage commissions derived from
securities transactions executed on an agency basis on behalf of mutual funds,
institutional and high net worth clients as well as investment banking revenue,
which consists of underwriting profits, selling concessions and management fees
associated with underwriting activities.
Distribution fees and other income primarily include distribution fees
payable in accordance with Rule 12b-1 ("12b-1") of the Investment Company Act of
1940, as amended (the "Investment Company Act"), along with sales charges and
underwriting fees associated with the sale of the Mutual Funds plus other
revenues. Distribution fees fluctuate based on the level of assets under
management and the amount and type of Mutual Funds sold directly by the Company
and through various distribution channels. During 1997, the 12b-1 plans for 15
of the open-end Mutual Funds were restructured as compensation plans with annual
fees set at 25 basis points of average assets under management. Previously,
these plans were structured to only reimburse the Company for actual
distribution expenses incurred, up to 25 basis points of average assets under
management.
Compensation costs include variable and fixed compensation and related
expenses paid to the officers, portfolio managers, sales, trading, research and
all other staff members of the Company.
27
<PAGE> 28
Other operating expenses include product distribution and promotion costs,
clearing charges and fees for GFI's brokerage operation, rental of office space
and electronic data equipment and services, insurance, charitable contributions
and other general and administrative operating costs.
Interest and dividend income net, as well as net gain from investments
(which includes both realized and unrealized gains) is derived from proprietary
investments of GFI's capital in various public and private investments.
Net gain from investments is derived primarily from the assets to be
distributed to GFI and also includes the results of GFI's hedging activities. As
part of an overall hedge of the risks associated with GFI's proprietary
investment portfolio, GFI entered into transactions in domestic equity index
contracts. These financial instruments represent future commitments to sell an
underlying index for specified amounts at specified future dates. In connection
with the Formation Transactions, GFI will retain most of the proprietary
investment portfolio (which includes GFI's hedging activities).
In connection with the completion of the Offering, the Company will become
taxable as a "C" corporation for federal and state income tax purposes and will
pay taxes at an effective rate considerably higher than when GFI and certain of
its subsidiaries were treated as Subchapter "S" corporations.
Minority interest represents the share of net income attributable to the
minority stockholders, as reported on a separate company basis, of GFI's
consolidated majority-owned subsidiaries.
IMPACT OF $50 MILLION NON-RECURRING CHARGE ($1.10 PER SHARE) TO BE RECORDED IN
FIRST QUARTER OF 1999
On an historical basis, the Company has paid to Mr. Gabelli a management
fee equal to 20% of the pre-tax profits of each of the Company's operating
divisions, before consideration of the management fee. Prior to the Offering,
the Company and Mr. Gabelli entered into an Employment Agreement (the
"Employment Agreement"). Pursuant to the Employment Agreement, Mr. Gabelli will
receive, in addition to his portfolio management compensation and account
executive fees, an incentive-based management fee of 10% of the aggregate
pre-tax profits of the Company as computed for financial reporting purposes in
accordance with generally accepted accounting principles (before consideration
of this fee or the $50 million deferred payment described below or any
employment taxes thereon) so long as he is an executive of the Company and
devoting the substantial majority of his working time to its business. Pursuant
to the Employment Agreement, Mr. Gabelli will also receive a deferred payment of
$50 million on January 2, 2002, plus interest payable quarterly at an annual
rate of 6%. See "Management -- Employment Agreements." The Company will incur a
non-recurring charge of $50 million, before a tax benefit of approximately $20
million, upon the effective date of the Employment Agreement, which occurred in
the first quarter of 1999. This payment, net of tax benefit, will reduce
earnings by $1.10 per share (based on the expected weighted average number of
shares outstanding in the first quarter of 1999 of 27.3 million).
OPERATING RESULTS FOR NINE MONTHS ENDED SEPTEMBER 30, 1998 AS COMPARED TO NINE
MONTHS ENDED SEPTEMBER 30, 1997
Total revenues for the nine months ended September 30, 1998 were $102.3
million, an increase of $27.5 million, or 37%, compared to $74.8 million for the
nine months ended September 30, 1997. Investment advisory and incentive fees,
comprising 84% of total revenues, increased $22.2 million, or 35%, to $86.3
million, as GFI experienced strong growth in the level of average assets under
management in both its Mutual Funds and Separate Accounts businesses. Total
average assets under management, which is the basis for investment advisory and
incentive fees, were $14.8 billion for the nine months ended September 30, 1998,
an increase of $3.7 billion, or 33%, compared to average assets under management
of $11.1 billion in the same period a year earlier. Total assets under
management at September 30, 1998 were $13.9 billion, an increase of $1.1 billion
from assets under management of $12.8 billion at September 30, 1997. Assets
under management in Mutual Funds were $7.0 billion at September 30, 1998, an
increase of approximately $1.1 billion, or 19%, from September 30, 1997. This
increase represents approximately $1.2 billion in net cash inflows offset by $56
million from market-related depreciation. Assets under management in Separate
Accounts were $6.7 billion at September 30, 1998 and $6.8 billion at September
30, 1997. Growth in revenues was greater than growth in assets due to a greater
weighting of assets to higher fee equity portfolios.
28
<PAGE> 29
Commission revenues for the nine months ended September 30, 1998 were $6.2
million, an increase of $0.6 million, or 10%, from commission revenues of $5.6
million in the same period a year earlier. The increase principally resulted
from increased agency trading activity for accounts managed by affiliated
companies. Commission revenues derived from transactions on behalf of the Mutual
Funds and Separate Accounts clients totaled $4.9 million, or approximately 79%
of total commission revenues for the first nine months of 1998.
Distribution fees and other income increased more than 92% to $9.8 million
for the nine months ended September 30, 1998 from $5.1 million in the first nine
months of 1997. Increased 12b-1 fees, resulting from the growth in assets under
management and restructuring of the Mutual Funds' 12b-1 plans as compensation
plans, accounted for $4.1 million, or 88%, of the total increase in distribution
fees and other income during the first nine months of 1998 as compared to the
same period a year earlier.
Total expenses for the first nine months of 1998 were $68.3 million, an
increase of $13.8 million, or 25%, from $54.5 million in the comparable period
of 1997. Total expenses as a percentage of total revenues declined to 67% from
73% as fixed expenses were spread over a larger revenue base. Compensation
costs, which are largely variable in nature and increase or decrease as revenues
grow or decline, rose approximately $8.6 million, or 26%, to $41.7 million for
the nine months ended September 30, 1998 from $33.1 million for the nine months
ended September 30, 1997. Management fee expense, which is totally variable and
increases or decreases as operating profits grow or decline, was $8.5 million
for the nine months ended September 30, 1998, an increase of $1.1 million, or
15%, from $7.4 million for the nine months ended September 30, 1997. Other
operating expenses, which include general operating expenses, as well as
marketing, promotion and distribution costs, were $18.1 million for the nine
months ended September 30, 1998, an increase of approximately $4.2 million, or
30%, from $13.9 million for the comparable period in 1997. Mutual fund
administration and distribution expenses accounted for more than $3.7 million,
or 90%, of this increase and are directly related to GFI's growth of assets
under management.
Net gain from investments, which is derived from GFI's proprietary
investment portfolio, was approximately $13.5 million for the nine months ended
September 30, 1998 compared to a net gain of $6.8 million for the nine months
ended September 30, 1997. This increase reflects a net gain of approximately
$17.4 million from the sale of certain Personal Communications Services ("PCS")
licenses as well as lower losses from hedging activities, which losses declined
to $0.6 million in 1998 from a loss of $7.6 million in 1997. These gains were
partially reduced by market related losses from certain other public and private
investments. Interest and dividend income, net of interest expense, declined to
$1.9 million for the first nine months of 1998 compared to $2.0 million in the
same 1997 period. In connection with the Formation Transactions, GFI will retain
most of the proprietary investment portfolio (which includes GFI's remaining PCS
licenses and hedging activities). The net gain (loss) from the proprietary
investment portfolio to be retained by GFI was ($4.7) million and $4.2 million
for the nine months ended September 30, 1998 and 1997, respectively.
Income taxes increased to $3.0 million for the nine months ended September
30, 1998 from $2.4 million for the nine months ended September 30, 1997 in line
with the increase in income before income taxes and minority interest.
Minority interest increased to $1.0 million for the nine months ended
September 30, 1998 up from $0.8 million in the comparable 1997 period. This
increase is reflective of additional income attributable to the minority
interests of GFI's 76.6%-owned subsidiary, GSI, and GFI's 40.9% economic
interest in Gabelli Advisers, Inc.
OPERATING RESULTS FOR YEAR ENDED DECEMBER 31, 1997 AS COMPARED TO YEAR ENDED
DECEMBER 31, 1996
Total revenues for GFI in 1997 increased to $105.3 million compared to
$98.2 million in 1996, an increase of approximately $7.1 million or 7%. The
largest component of revenues, investment advisory and incentive fees, increased
$5.4 million, or 6%, to $89.7 million, as total assets under management
increased by $3.8 billion or 40% to $13.3 billion from $9.5 billion at the end
of 1996. The improvements in revenues occurred as assets under management in the
Mutual Funds for 1997 increased approximately $1.9 billion, or 46% to $6.1
billion at December 31, 1997 from $4.2 billion on December 31, 1996. In
addition, assets under management in the Separate Accounts grew approximately
35% to $7.0 billion at December 31, 1997 from
29
<PAGE> 30
$5.2 billion at the end of the prior year. Approximately 39% of the increase in
total assets under management for 1997 and 30% of the increase in investment
advisory and incentive fees was due to Gabelli Fixed Income L.L.C. becoming a
consolidated subsidiary on April 14, 1997 when GFI increased its ownership
interest from 50% to 80.1%. The remaining 61% of the increase in total assets
under management was primarily the result of investment performance of the
equity portfolios throughout the year and net sales of the Mutual Funds from NTF
Programs in the second half of the year. Growth in assets was substantially
greater than growth in revenues, due to the consolidation of Gabelli Fixed
Income L.L.C. which charges relatively lower fees, the weighting of net sales
toward the end of the year and increasingly strong investment performance in the
latter part of the year.
As a result of increased agency trading activity for institutional clients,
including accounts managed by affiliated companies, commission revenues in 1997
increased 12% to $7.5 million from $6.7 million in 1996. Commissions from the
Mutual Funds and the Separate Account clients totaled $6.1 million, or
approximately 81% of total commission revenues in 1997.
Distribution fees and other income for 1997 increased approximately 12% to
$8.1 million from $7.3 million in 1996. This was the result of both increased
assets under management and the restructuring of the Mutual Funds' 12b-1 plans
as compensation plans.
Total expenses for 1997 increased to $74.5 million, from $71.3 million in
1996, an increase of $3.2 million, or approximately 4%. Approximately half of
this increase was associated with GFI's acquisition of a controlling interest in
Gabelli Fixed Income L.L.C. in April 1997 and the inclusion of its expenses in
GFI's 1997 results. Compensation costs rose to $45.3 million in 1997 from
$41.8 million in 1996, an increase of approximately 8%. Management fee expense
rose in line with the increase in pre-tax profits to $10.6 million in 1997 from
$10.2 million in 1996. Other operating expenses were $18.7 million in 1997
compared to $19.3 million in 1996, a decline of approximately 3%. This decline
in other operating expenses was generally due to lower mutual fund distribution
costs.
Net gain from investments, which is derived from GFI's proprietary
investment portfolio, was approximately $7.9 million in 1997, compared to $8.8
million for 1996, a decline of approximately $0.9 million. This decline was
principally due to higher costs associated with hedging activities which in 1997
resulted in hedging losses of $8.1 million compared to hedging losses of $3.7
million in 1996. Interest and dividend income, net of interest expense,
decreased by approximately $1.7 million in 1997 to $2.8 million compared with
$4.5 million in 1996. This decrease was primarily a result of GFI's change in
its mix of investments from publicly-traded securities and mutual funds which
paid interest and dividends to certain private investments which did not provide
a current return. In connection with the Formation Transactions, GFI will retain
most of the proprietary investment portfolio (which includes GFI's hedging
activities). The net gain from the proprietary investment portfolio to be
retained by GFI was $4.9 million and $7.6 million for 1997 and 1996,
respectively.
Income taxes decreased to $3.1 million in 1997 from $7.6 million in 1996.
This was primarily a result of GAMCO's election of Subchapter "S" corporate
status effective January 1, 1997.
Minority interest declined in 1997 by $1.2 million from $2.7 million in
1996 as a result of GAMCO becoming a wholly owned subsidiary of GFI on January
1, 1997. Minority interest of $1.5 million in 1997 represents income
attributable to the minority interests of GFI's then 76.1%-owned subsidiary,
GSI, GFI's 80.1%-owned subsidiary, Gabelli Fixed Income L.L.C., and GFI's then
51.1% economic interest in Gabelli Advisers, LLC (now Gabelli Advisers, Inc.).
OPERATING RESULTS FOR YEAR ENDED DECEMBER 31, 1996 AS COMPARED TO YEAR ENDED
DECEMBER 31, 1995
Total revenues for GFI increased to $98.2 million in 1996 from $89.3
million in 1995, an increase of approximately $8.9 million or approximately 10%.
Investment advisory and incentive fees accounted for the largest portion of this
growth, increasing by $6.9 million or approximately 9% to $84.2 million in 1996
as overall assets under management rose to $9.5 billion in 1996 from $9.3
billion in the prior year. For 1996, assets under management in the Mutual Funds
increased to $4.2 billion at December 31, 1996 from $4.1 billion at the end of
1995. Assets under management in the Separate Accounts were $5.2 billion
compared to $5.1 billion at December 31, 1995.
30
<PAGE> 31
As a result of increased agency trading activity for institutional clients,
including accounts managed by affiliated companies, commission revenues
increased to $6.7 million in 1996 from $5.7 million in 1995, an increase of
approximately 17%. Commissions from the Mutual Funds and the Separate Accounts
totaled $4.8 million in 1996, or approximately 72% of total commission revenues.
Distribution fees and other income increased to $7.3 million in 1996 from
$6.3 million in 1995, an increase of approximately 15%, reflecting GFI's
increased efforts to distribute its Mutual Funds. For 1996 and 1995,
distribution revenues were closely tied to distribution expenses, as the 12b-1
plans for the open-end Mutual Funds were then structured to reimburse GFI for
distribution expenditures incurred on behalf of such funds, subject to a
limitation of 25 basis points of average fund net assets for those funds with
12b-1 plans.
Total expenses in 1996 increased to $71.3 million, from $67.5 million in
1995, an increase of $3.8 million, or approximately 6%, primarily as a result of
increased compensation costs and costs associated with the distribution of the
Mutual Funds. Compensation costs, a significant portion of which are variable in
nature, rose approximately 6% from $39.4 million in 1995 to $41.8 million in
1996. Other operating expenses increased approximately $0.6 million or 3% to
$19.3 million in 1996 from $18.7 million in 1995.
Net gain from investments, which is derived from GFI's proprietary
investment portfolio, was approximately $8.8 million in 1996 compared to $10.1
million in 1995, a decline of approximately $1.3 million. This decline was
attributable to lower investment and market related gains from GFI's investments
including losses from hedging activities of $3.7 million. Interest and dividend
income, net of interest expense, decreased to $4.5 million in 1996 from $5.2
million in 1995, a decrease of approximately 13%. This was primarily a result of
the use of capital for certain private investments in 1996 which did not provide
a current return. In connection with the Formation Transactions, GFI will retain
most of the proprietary investment portfolio (which includes GFI's hedging
activities). The net gain from the proprietary investment portfolio to be
retained by GFI was $7.6 million and $6.9 million in 1996 and 1995,
respectively.
Higher net income reported on a separate company basis by both GFI's then
79.1%-owned subsidiary, GAMCO, and then 75.3%-owned subsidiary, GSI, resulted in
an increase in income attributable to the minority interests in GFI's
consolidated subsidiaries.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal assets consist of cash, short-term investments,
securities held for investment purposes and investments in partnerships in which
the Company is either a general or limited partner. Short-term investments are
comprised primarily of United States treasury securities with maturities of less
than one year and money market funds managed by the Company. Although
investments in investment partnerships are for the most part illiquid, the
underlying investments of such partnerships are for the most part liquid and the
valuations of the investment partnerships reflect that underlying liquidity.
The Company has historically met its cash requirements through cash
generated by its operating activities. Based upon the Company's current level of
operations and anticipated growth in net revenues and net income as a result of
implementing its business strategy, the Company expects that cash flows from its
operating activities will be sufficient to enable the Company to finance its
working capital needs for the foreseeable future. The Company has no material
commitments for capital expenditures.
Gabelli & Company is registered with the Commission as a broker-dealer and
is a member of the NASD. As such, it is subject to the minimum net capital
requirements promulgated by the Commission. Gabelli & Company's net capital has
historically exceeded these minimum requirements. Gabelli & Company computes its
net capital under the alternative method permitted by the Commission, which
requires that minimum net capital be $250,000. As of September 30, 1998 and
December 31, 1997 and 1996, Gabelli & Company had net capital, as defined, of
approximately $12.3 million, $6.6 million and $8.1 million, respectively,
exceeding the regulatory requirement by approximately $12.1 million, $6.3
million and $7.8 million, respectively. Regulatory net capital requirements
increase when Gabelli & Company is involved in underwriting activities.
The net proceeds of the Offering to be received by the Company, which are
expected to be approximately $95.8 million ($110.4 million if the Underwriters'
overallotment option is exercised in full), will be used for general corporate
purposes, including working capital and the expansion of its business through
new
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<PAGE> 32
investment product offerings, enhanced distribution and marketing of existing
investment products, upgraded management information systems and strategic
acquisitions as opportunities arise. At present, the Company has no plans,
arrangements or understandings relating to any specific acquisitions or
alliances. The Company currently does not intend to use any of the net proceeds
from the Offering to pay debt service on the $50 million payable to Mr. Gabelli
under the terms of his Employment Agreement.
RECENT ACCOUNTING DEVELOPMENTS
In 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 130 ("Reporting Comprehensive
Income") and SFAS No. 131 ("Disclosure about Segments of an Enterprise and
Related Information"). These statements, which are effective for periods
beginning after December 15, 1997, expand or modify disclosures. In addition, in
1998, the FASB issued SFAS No. 133 ("Accounting for Derivative Instruments and
Hedging Activities"). SFAS No. 133 establishes standards for recognizing and
fair valuing derivative financial instruments. SFAS No. 133 is required to be
adopted for fiscal years beginning after June 15, 1999. The Company does not
expect implementation to have any significant effect on the Company's reported
financial position or results of operations.
SEASONALITY AND INFLATION
The Company does not believe its operations are subject to significant
seasonal fluctuations. The Company does not believe inflation will significantly
affect its compensation costs as they are substantially variable in nature.
However, the rate of inflation may affect Company expenses such as information
technology and occupancy costs. To the extent inflation results in rising
interest rates and has other effects upon the securities markets, it may
adversely affect the Company's financial position and results of operations by
reducing the Company's assets under management, revenues or otherwise. See "Risk
Factors -- Potential Adverse Effects on the Company's Performance Prospects from
a Decline in the Performance of the Securities Markets."
YEAR 2000 PROGRAM
With the new millennium approaching, many institutions around the world are
reviewing and modifying their computer systems to ensure that they are Year 2000
compliant. The issue, in general terms, is that many existing computer systems
and microprocessors with date functions (including those in non-information
technology equipment and systems) use only two digits to identify a year in the
date field with the assumption that the first two digits of the year are always
"19". Consequently, on January 1, 2000, computers that are not Year 2000
compliant may read the year as 1900. Systems that calculate, compare or sort
using the incorrect date may malfunction.
Because the Company is dependent, to a very substantial degree, upon the
proper functioning of its computer systems, a failure of its systems to be Year
2000 compliant could have a material adverse effect on the Company. For example,
a failure of this kind could lead to incomplete or inaccurate accounting or
recording of trades in securities or result in the generation of erroneous
results or give rise to uncertainty about the Company's exposure to trading
risks and its need for liquidity. If not remedied, potential risks include
business interruption or shutdown, financial loss, regulatory actions,
reputational harm and legal liability.
In addition, the Company depends primarily upon the proper functioning of
third-party computer and non-information technology systems. These parties
include trading counterparties; financial intermediaries such as stock
exchanges, depositories, clearing agencies, clearing houses and commercial
banks; subcontractors such as third-party administrators; and vendors such as
providers of telecommunication services, quotation equipment and other
utilities. If the third parties with whom the Company interacts have Year 2000
problems that are not remedied, the following problems could result: (i) in the
case of subcontractors, in disruption of critical services such as
administration, valuation and record keeping services for its mutual funds; (ii)
in the case of vendors, in disruption of important services upon which the
Company depends, such as telecommunications and electrical power; (iii) in the
case of third-party data providers, in the receipt of inaccurate or out-of-date
information that would impair the Company's ability to perform critical data
32
<PAGE> 33
functions, such as pricing its securities or other assets; (iv) in the case of
financial intermediaries such as exchanges and clearing agents, in failed trade
settlements, an inability to trade in certain markets and disruption of funding
flows; (v) in the case of banks and other financial institutions, in the
disruption of capital flows potentially resulting in liquidity stress; and (vi)
in the case of counterparties and customers, in financial and accounting
difficulties for those parties that expose the Company to increased credit risk
and lost business. Disruption or suspension of activity in the world's financial
markets is also possible. In addition, uncertainty about the success of
remediation efforts generally may cause many market participants to reduce the
level of their market activities temporarily as they assess the effectiveness of
these efforts during a "phase-in" period beginning in late 1999. This in turn
could result in a general reduction in trading and other market activities (and
thus, lost revenues). Management cannot predict the impact that such reduction
would have on the Company's business.
In order to ensure that the Company will continue to operate successfully
and be able to meet its fiduciary obligations to its clients after December 31,
1999, the Company has taken numerous steps toward becoming Year 2000 compliant
in respect to both its information technology and non-information technology
systems. The Company has established a comprehensive Year 2000 program and
already has begun to implement it. To date, the Company has (i) taken inventory
of all its technology systems; (ii) performed an analysis of all internal
systems, all facilities and communications systems, and all third-party
providers' software and hardware products; and (iii) updated its internal
system, which is its only in-house developed system, for Year 2000 compliance.
In addition, the Company has identified and contacted 34 counterparties,
intermediaries, subcontractors and vendors with whom it has important financial
or operational relationships (13 of which the Company has identified as mission
critical) and has requested from them assurances that those systems either are
already Year 2000 compliant or that they are taking the necessary steps to make
such systems Year 2000 compliant. The Company has received both oral and written
responses to these requests from all third-party providers and 22 of them (6 of
which the Company has identified as mission critical) have advised the Company
that their systems are Year 2000 compliant. The remaining third parties have
advised the Company that they are in the process of achieving compliance and are
currently in the testing phase.
The Company intends to maintain ongoing communications with its third-party
providers and continue to monitor their compliance progress. The Company is also
currently in the process of testing its own updated internal system to ensure
Year 2000 compliance. The Company's subsidiaries which are registered with the
Commission as broker-dealers or investment advisers have made certain filings
with the Commission and other regulatory agencies regarding their Year 2000
compliance efforts and will be making additional filings in 1999. The Company
does not anticipate encountering any technology issue which would impede its
ability to become Year 2000 compliant; however, there has been no limitation,
contractual or otherwise, on the Company's legal remedies in the event that any
of the third parties should fail to remedy any Year 2000 problem relating to
their systems.
The Company currently estimates that the total cost of implementing its
Year 2000 program will not have a material impact on the Company's results of
operations, liquidity or capital resources. There can be no assurance, however,
that the Company's Year 2000 program will be effective or that the Company's
estimates about the cost of completing its program will be accurate. Neither the
Company nor any of its affiliates has been reviewed by federal or state
regulators for Year 2000 compliance.
33
<PAGE> 34
BUSINESS
The Company is a widely recognized provider of investment advisory and
brokerage services to mutual fund, institutional and high net worth investors,
primarily in the United States. The Company generally manages assets on a
discretionary basis and invests in a variety of U.S. and international
securities through various investment styles. At December 31, 1998, the Company
had approximately $16.3 billion of assets under management, 88% of which were
invested in equity securities. The Company's assets under management are
organized principally in three groups: Mutual Funds, Separate Accounts and
Partnerships.
- - MUTUAL FUNDS: At December 31, 1998, the Company had $8.2 billion of assets
under management in open-end mutual funds and closed-end funds, representing
approximately 50% of the Company's total assets under management. The Company
currently provides advisory services to (i) the Gabelli family of funds,
which consists of 14 open-end mutual funds and three closed-end funds; (ii)
The Treasurer's Fund, consisting of three open-end money market funds (the
"Treasurer's Funds"); and (iii) the Gabelli Westwood family of funds,
consisting of six open-end mutual funds, five of which are managed on a
day-to-day basis by an unaffiliated subadviser (collectively, the "Mutual
Funds"). The Mutual Funds have a long-term record of achieving high returns,
relative to similar investment products. At December 31, 1998, approximately
99% of the assets under management in the open-end Mutual Funds having an
overall rating from Morningstar, Inc. ("Morningstar") were in open-end Mutual
Funds ranked "three stars" or better, with 36% of such assets in open-end
Mutual Funds ranked "five stars" and 38% of such assets in open-end Mutual
Funds ranked "four stars" on an overall basis (i.e., based on three-, five-
and ten-year risk adjusted average returns). The Gabelli family of funds was
honored as the top performing mutual fund family by Mutual Funds Magazine for
1997. At December 31, 1998, approximately 60% of the Company's assets under
management in open-end, no-load equity Mutual Funds had been obtained through
direct sales relationships. The Company has further expanded its product
distribution by offering its open-end Mutual Funds through Third-Party
Distribution Programs, particularly NTF Programs, and has commenced
development of additional classes of shares for several of its mutual funds
for sale through additional third-party distribution channels on a commission
basis.
- - SEPARATE ACCOUNTS: At December 31, 1998, the Company had $8.0 billion of
assets in approximately 975 separate accounts, representing approximately 49%
of the Company's total assets under management. The Company currently
provides advisory services to a broad range of investors, including corporate
pension and profit sharing plans, foundations, endowments, jointly trusteed
plans, municipalities, and high net worth individuals, and also serves as
subadviser to certain other third-party investment funds (collectively, the
"Separate Accounts"). At December 31, 1998, high net worth accounts (accounts
of individuals and related parties in general having a minimum account
balance of $1 million) comprised approximately 79% of the number of Separate
Accounts and approximately 25% of the assets, with institutional investors
comprising the balance. Each Separate Account portfolio is managed to meet
the specific needs and objectives of the particular client by utilizing
investment strategies and techniques within the Company's areas of expertise.
At December 31, 1998, over 95% of the Company's assets in Separate Accounts
(excluding subadvisory assets) had been obtained through direct sales
relationships.
- - PARTNERSHIPS: The Company also provides alternative investments through its
majority-owned subsidiary, Gabelli Securities, Inc. ("GSI"). These
alternative investment products consist primarily of risk arbitrage and
merchant banking limited partnerships and offshore companies (collectively,
the "Partnerships"). The Partnerships had $146 million of assets, or
approximately 1% of total assets under management, at December 31, 1998.
Investment advisory and incentive fees relating to the Mutual Funds, the
Separate Accounts, and the Partnerships generated approximately 84% and 85% of
the Company's total revenues for the nine months ended September 30, 1998 and
the year ended December 31, 1997, respectively.
The Company's subsidiary, Gabelli & Company, Inc. ("Gabelli & Company"), is
a registered broker-dealer and a member of the NASD and acts as underwriter and
distributor of the open-end Mutual Funds and provides brokerage, trading,
underwriting and research services.
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As of December 31, 1998, the Company had approximately $16.3 billion of
assets under management, consisting of $8.2 billion in the Mutual Funds, $8.0
billion in the Separate Accounts and $146 million in the Partnerships. The
Company's total assets under management grew from $2.1 billion as of December
31, 1987 to $16.3 billion as of December 31, 1998, which represents an average
annual growth rate of approximately 20.5% over the corresponding eleven year
period. The Company's growth of average assets under management has led to a
corresponding increase in operating revenues and pre-tax profitability.
The following table sets forth total assets under management by product
type as of the dates shown and the compound annual growth rates ("CAGR").
ASSETS UNDER MANAGEMENT
BY PRODUCT TYPE
(Dollars in millions)
<TABLE>
<CAPTION>
DECEMBER 31,
1994 TO
AT DECEMBER 31, DECEMBER 31,
-------------------------------------------- 1998
1994 1995 1996 1997 1998 CAGR(A)
------ ------ ------ ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
EQUITY:
Mutual Funds.............................. $3,391 $3,875 $3,969 $ 5,313 $ 7,159 20.5%
Separate Accounts......................... 4,276 5,051 5,200 6,085 7,133 13.7
------ ------ ------ ------- ------- ----
Total Equity............................ 7,667 8,926 9,169 11,398 14,292 16.9
------ ------ ------ ------- ------- ----
FIXED INCOME:
Money Market Mutual Funds................. 208 236 235 827 1,030 49.2
Bond Mutual Funds......................... 5 5 5 6 8 12.5
Separate Accounts......................... -- -- -- 928 824 --
------ ------ ------ ------- ------- ----
Total Fixed Income...................... 213 241 240 1,761 1,862 71.9
------ ------ ------ ------- ------- ----
PARTNERSHIPS:
Partnerships.............................. 103 112 116 138 146 9.1
------ ------ ------ ------- ------- ----
Total Assets Under Management(b)........ $7,983 $9,279 $9,525 $13,297 $16,300 19.5%
====== ====== ====== ======= ======= ====
BREAKDOWN OF TOTAL ASSETS UNDER MANAGEMENT:
Mutual Funds.............................. $3,604 $4,116 $4,209 $ 6,146 $ 8,197 22.8
Separate Accounts......................... 4,276 5,051 5,200 7,013 7,957 16.8
Partnerships.............................. 103 112 116 138 146 9.1
------ ------ ------ ------- ------- ----
Total Assets Under Management(b)........ $7,983 $9,279 $9,525 $13,297 $16,300 19.5%
====== ====== ====== ======= ======= ====
</TABLE>
- ---------------
(a) Compound annual growth rate.
(b) Effective April 14, 1997, the Company increased its ownership of Gabelli
Fixed Income L.L.C. from 50% to 80.1%, thereby causing Gabelli Fixed Income
L.L.C. to become a consolidated subsidiary of the Company. Accordingly, for
periods after April 14, 1997, the assets managed by Gabelli Fixed Income
L.L.C. are included in the Company's assets under management. If the assets
managed by Gabelli Fixed Income L.L.C. had been included for all periods
presented, assets under management would have been $9,004, $10,793 and
$11,082 at December 31, 1994, 1995 and 1996, respectively, and the CAGR for
total assets would have been 16.0%.
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<PAGE> 36
The Company manages assets in the following wide spectrum of investment
products and strategies, many of which are focused on fast-growing areas:
SUMMARY OF INVESTMENT PRODUCTS AND STRATEGIES
<TABLE>
<S> <C> <C>
U.S. EQUITIES: U.S. FIXED INCOME: GLOBAL AND INTERNATIONAL EQUITIES:
All Cap Value Corporate International Growth
Large Cap Value Government Global Value
Large Cap Growth Municipals Global Telecommunications
Mid Cap Value Asset-backed Global Multimedia
Small Cap Value Intermediate Gold(b)
Small Cap Growth Short-term
Micro Cap
Real Estate(a)
U.S. BALANCED: ALTERNATIVE PRODUCTS:
CONVERTIBLE SECURITIES: Balanced Growth Risk Arbitrage
U.S. Convertible Securities Balanced Value Merchant Banking
Global Convertible Securities Fund of Funds
</TABLE>
- ---------------
(a) Invested primarily in publicly-traded real estate investment trusts and
managed by Westwood Management.
(b) Invested primarily in publicly-traded equities of U.S. and international
gold companies.
The Mutual Funds have a long-term record of achieving high returns compared
against similar investment products. From December 31, 1987 through December 31,
1998, the Company's assets under management in Mutual Funds have increased at a
compound annual growth rate of approximately 29%. As of December 31, 1998, two
of the Gabelli funds were ranked by Morningstar as "five stars" (its highest
rating) and three of the Gabelli funds and two of the Gabelli Westwood funds as
"four stars", in each case, on an overall basis (i.e. based on three-, five- and
ten-year risk adjusted average returns). At December 31, 1998, approximately 99%
of the assets under management in the open-end Mutual Funds having an overall
rating from Morningstar were in open-end Mutual Funds ranked "three stars" or
better, with 36% of such assets in open-end Mutual Funds ranked "five stars" and
38% of such assets in open-end Mutual Funds ranked "four stars" on an overall
basis. The Gabelli family of funds was honored as the top performing mutual fund
family by Mutual Funds Magazine for 1997. In addition, Mario J. Gabelli, Chief
Investment Officer of the Company, was named as the Domestic Equity Fund Manager
of the Year for 1997 by Morningstar. There can be no assurance, however, that
these funds will be able to maintain such ratings or that past performance will
be indicative of future results.
The Company's long-term strategic goal is to continue to expand its asset
management capabilities in order to provide a range of products suitable to meet
the diverse requirements of its clients. The Company was originally founded in
1976 as an institutional broker-dealer and entered the separate accounts
business in 1977 and the mutual fund business in 1986. In its early years, the
Company's investment philosophy was value-oriented. Starting in the mid-1980s,
the Company began building upon its core of value-oriented equity investment
products by adding new investment strategies designed for clients seeking to
invest in growth-oriented equities, convertible securities and fixed income
products. Since then, the Company has continued to build its franchise by
expanding its investment management capabilities through the addition of
industry specific, international, global and real asset oriented product
offerings. Throughout its 22-year history, the Company has marketed most of its
products under the "Gabelli" brand name.
The Company believes that its growth to date can be largely credited to the
following:
- - LONG-TERM FUND PERFORMANCE: The Company has a long-term record of achieving
relatively high returns for its Mutual Fund and Separate Account clients when
compared to similar investment products. The Company believes that its
performance record is a competitive advantage and a recognized component of
its franchise.
36
<PAGE> 37
- - WIDELY RECOGNIZED "GABELLI" BRAND NAME: For much of its history, the Company
has advertised in a variety of financial print media, including in
publications such as the Wall Street Journal, Money Magazine, Barron's and
Investor's Business Daily. The Company believes that the breadth and
consistency of its advertising has enhanced investor awareness of its product
offerings and of the "Gabelli" brand name.
- - DIVERSIFIED PRODUCT OFFERINGS: Since the inception of its investment
management activities, the Company has sought to expand the breadth of its
product offerings. The Company currently offers a wide spectrum of investment
products and strategies, including product offerings in U.S. equities, U.S.
fixed income, global and international equities, convertible securities, U.S.
balanced and alternative products.
- - STRONG INDUSTRY FUNDAMENTALS: According to data compiled by the U.S. Federal
Reserve, the investment management industry has grown faster than more
traditional segments of the financial services industry, including the banking
and insurance industries. The Company believes that demographic trends and the
growing role of money managers in the placement of capital compared to the
traditional role played by banks and life insurance companies will result in
continued growth of the investment management industry.
BUSINESS STRATEGY
The Company intends to grow its franchise by leveraging its competitive
asset management strengths, including its long-term performance record, brand
name, diverse product offerings and experienced research, client service and
investment staff. In order to achieve continued growth in assets under
management and profitability, the Company will continue to pursue its business
strategy, the key elements of which include:
- - BROADENING AND STRENGTHENING THE GABELLI BRAND. The Company believes that the
Gabelli brand name is one of the more widely recognized brand names in the
U.S. investment management industry. The Company intends to continue to
strengthen its brand name identity by, among other things, increasing its
marketing and advertising to provide a uniform global image. The Company
believes that with its brand name recognition, it has the capacity to create
new products and services around the core Gabelli brand to complement its
existing product offerings. For example, in 1998, the Company launched the
Gabelli Global Opportunity Fund, a global equity fund, and the Gabelli
Westwood Mighty Mites(SM) Fund, a micro cap equity fund.
- - EXPANDING MUTUAL FUND DISTRIBUTION. The Company intends to continue expanding
its distribution network through Third-Party Distribution Programs,
particularly NTF Programs. In recent years, the Company has realized
significant growth in its mutual fund assets under management through
alliances with "mutual fund supermarkets" and other Third-Party Distribution
Programs, through which its Mutual Funds are made available to investors. As
of December 31, 1998, the Company was participating in 63 Third-Party
Distribution Programs, including the Charles Schwab and Fidelity Investments
"mutual fund supermarket" programs. In addition, the Company intends to
develop a marketing strategy to increase its presence in the 401(k) market for
its Mutual Funds. Additionally, the Company expects to soon offer investors
the ability to purchase mutual fund shares directly through the Internet. The
Company has also entered into various marketing alliances and distribution
arrangements with leading national brokerage and investment houses and has
commenced development of additional classes of shares for several of its
mutual funds for sale through national brokerage and investment houses and
other third-party distribution channels on a commission basis.
- - INCREASING PENETRATION IN HIGH NET WORTH MARKET. The Company's high net worth
business focuses, in general, on serving clients who have established an
account relationship of $1 million or more with the Company. According to
certain industry estimates, the number of households with over $1 million in
investable assets will grow from approximately 2.5 million in 1996 to over 15
million by 2010. With the Company's 22-year history of serving this segment,
its long-term performance record and brand name recognition, the Company
believes that it is well positioned to capitalize on the growth opportunities
in this market.
- - INCREASING MARKETING FOR INSTITUTIONAL SEPARATE ACCOUNTS. The institutional
Separate Accounts business has been primarily developed through direct
marketing channels. Historically, third-party pension consul-
37
<PAGE> 38
tants and financial consultants have not been a major source of new
institutional Separate Accounts business for the Company. However, these
consultants have significantly increased their presence among institutional
investors. As a result, the Company intends both to add marketing personnel to
target pension and financial consultants and to expand its efforts through its
traditional marketing channels.
- - ATTRACTING AND RETAINING EXPERIENCED PROFESSIONALS. Following the Offering,
the availability of publicly traded Class A Common Stock will enhance the
Company's ability to attract and retain top performing investment
professionals. The ability to attract and retain highly experienced investment
and other professionals with a long-term commitment to the Company and its
clients has been, and will continue to be, a significant factor in its
long-term growth. As the Company continues to increase the breadth of its
investment management capabilities, it plans to add portfolio managers and
other investment personnel in order to foster expansion of its products.
- - CAPITALIZING ON ACQUISITIONS AND STRATEGIC ALLIANCES. The Company intends to
selectively and opportunistically pursue acquisitions and alliances that will
broaden its product offerings and add new sources of distribution. The Company
believes that it will be better positioned to pursue acquisitions and
alliances after the Offering because it will be one of a relatively few
publicly-traded investment management firms. At present, the Company has no
plans, arrangements or understandings relating to any specific acquisitions or
alliances.
MUTUAL FUNDS
The Mutual Funds include 23 open-end Mutual Funds and three closed-end
funds which had total assets as of September 30, 1998 of $7.0 billion. The
open-end Mutual Funds are available to individuals and institutions primarily on
a no-load basis, while the closed-end funds are listed and traded on the NYSE.
At September 30, 1998, the open-end funds had total assets of $5.5 billion and
the closed-end funds had total assets of $1.5 billion. The assets managed in the
closed-end funds represent approximately 21% of the assets in the Mutual Funds
and 11% of the total assets under management of the Company at September 30,
1998. The Company's assets under management consist of a broad range of U.S. and
international stock, bond and money market mutual funds that meet the varied
needs and objectives of its Mutual Fund shareholders. At September 30, 1998,
over two-thirds of the Company's assets under management in open-end, no-load
equity Mutual Funds had been obtained through direct sales relationships.
The Company, through its affiliates, acts as adviser to all of the Mutual
Funds, except with respect to the Gabelli Capital Asset Fund in which the
Company acts as a subadviser and Guardian Investment Services Corporation, an
unaffiliated company, acts as manager. As subadviser, the Company makes
day-to-day investment decisions for the Gabelli Capital Asset Fund.
Funds Adviser, a wholly owned subsidiary of the Company, acts as the
investment adviser for all of the Mutual Funds other than the Gabelli Westwood
family of funds and the Treasurer's Funds.
Gabelli Advisers, Inc. acts as investment adviser to the Gabelli Westwood
family of funds and has retained Westwood Management to act as subadviser for
five of the six portfolios. Westwood Management is a wholly owned subsidiary of
Southwest Securities Group, Inc., a publicly held securities brokerage firm. In
its capacity as subadviser, Westwood Management makes day-to-day investment
decisions and provides the portfolio management services for five of the six
current Gabelli Westwood portfolios. The Gabelli Westwood Mighty Mites(SM) Fund,
launched in May 1998, is advised solely by Gabelli Advisers, Inc., using a team
investment approach, without any subadvisers. Westwood Management owns 100% of
the Class A common stock of Gabelli Advisers, Inc. (representing 20% of the
economic interest), and is not an affiliate of the Company. The Company believes
that Gabelli Advisers, Inc. will serve as a platform for future growth and
diversification of the Company's product line.
Gabelli Fixed Income L.L.C. currently manages short-term and
short-intermediate term fixed income securities for the Treasurer's Funds as
well as for the Separate Accounts. In the future, the Company plans to further
increase and diversify the number of fixed income products offered by Gabelli
Fixed Income L.L.C. Certain members of senior management of Gabelli Fixed Income
L.L.C. own a 19.9% equity interest in it.
38
<PAGE> 39
The following table lists the Mutual Funds, together with the December 31,
1998 Morningstar overall rating, where rated (ratings are not available for the
money-market Mutual Funds and other Mutual Funds, which collectively represent
15% of the assets under management in the Mutual Funds), the portfolio
manager(s) and associate portfolio managers(s) for such Mutual Fund, and
provides a description of the primary investment objective, fund
characteristics, fees, the date that the Mutual Fund was initially offered to
investors and the assets under management in the Mutual Fund as of September 30,
1998 and December 31, 1998.
<TABLE>
<CAPTION>
NET ASSETS AS OF
FUND ----------------------------
(MORNINGSTAR OVERALL ADVISORY 12B-1 INITIAL SEPTEMBER 30, DECEMBER 31,
RATING)(1) PRIMARY INVESTMENT FUND FEES FEES OFFER 1998 1998
PORTFOLIO MANAGER(S) OBJECTIVE CHARACTERISTICS (%) (%) DATE ($ IN MILLIONS)
- --------------------- --------------------- --------------- -------- ----- -------- ----------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
GABELLI OPEN-END FUNDS:
The Gabelli Growth Capital appreciation No-load, 1.00 .25 04/10/87 $1,405.5 $1,864.0
Fund from companies that Open-end,
(GRAPHIC - 5 STARS) have favorable, yet Diversified
undervalued,
Howard F. Ward prospects for
earnings growth.
Invests in equity
securities of
companies that have
above-average or
expanding market
shares and profit
margins.
The Gabelli Global High level of capital No-load, 1.00 .25 02/07/94 62.7 74.0
Interactive Couch appreciation through Open-end,
Potato(R) Fund investment in a Non-diversified
(GRAPHIC - 5 STARS) portfolio of equity
securities focused on
Marc J. Gabelli the entertainment,
media and
communications
sectors.
The Gabelli Asset Growth of capital as No-load, 1.00 .25 03/03/86 1,373.7 1,593.6
Fund a primary investment Open-end,
(GRAPHIC - 4 STARS) objective, with Diversified
current income as a
Mario J. Gabelli secondary investment
objective. Invests in
equity securities of
companies selling at
a significant
discount to their
private market value.
The Gabelli Equity High level of total No-load, 1.00 .25 01/02/92 79.7 87.2
Income Fund return with an Open-end,
(GRAPHIC - 4 STARS) emphasis on income Diversified
producing equities
Mario J. Gabelli with yields greater
James Foung than the S&P 500
average.
Gabelli International Capital appreciation No-load, 1.00 .25 06/30/95 25.2 26.8
Growth Fund by investing Open-end,
(GRAPHIC - 4 STARS) primarily in equity Diversified
securities of foreign
Caesar M.P. Bryan companies with rapid
growth in revenues
and earnings.
</TABLE>
39
<PAGE> 40
<TABLE>
<CAPTION>
NET ASSETS AS OF
FUND ----------------------------
(MORNINGSTAR OVERALL ADVISORY 12B-1 INITIAL SEPTEMBER 30, DECEMBER 31,
RATING)(1) PRIMARY INVESTMENT FUND FEES FEES OFFER 1998 1998
PORTFOLIO MANAGER(S) OBJECTIVE CHARACTERISTICS (%) (%) DATE ($ IN MILLIONS)
- --------------------- --------------------- --------------- -------- ----- -------- ----------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
The Gabelli Value High level of capital Load, Open-end, 1.00 .25 09/29/89 676.5 797.5
Fund appreciation from Non-diversified
(GRAPHIC - 3 STARS) undervalued equity
securities that are
Mario J. Gabelli held in a
concentrated
portfolio.
The Gabelli Small Cap High level of capital No-load, 1.00 .25 10/22/91 277.8 321.3
Growth Fund appreciation from Open-end,
(GRAPHIC - 3 STARS) equity securities of Diversified
smaller companies
Mario J. Gabelli with market
capitalization of
$500 million or less.
The Gabelli Global High level of capital No-load, 1.00 .25 11/01/94 136.5 170.1
Telecommunications appreciation through Open-end,
Fund worldwide investments Non-diversified
(GRAPHIC - 3 STARS) in equity securities,
including the U.S.,
Mario J. Gabelli primarily in the
Marc J. Gabelli telecommunications
industry.
The Gabelli ABC Fund Total returns from No-load, 1.00 .25 05/14/93 41.2 39.4
(GRAPHIC - 3 STARS) equity and debt Open-end,
securities that are Non-diversified
Mario J. Gabelli attractive to
investors in various
market conditions
without excessive
risk of capital loss.
The Gabelli Global High level of total No-load, 1.00 .25 02/03/94 6.9 7.3
Convertible return through a Open-end,
Securities Fund combination of Non-diversified
(GRAPHIC - 2 STARS) current income and
capital appreciation
A. Hartswell through investment in
Woodson, III convertible
securities of U.S.
and non-U.S. issuers.
Gabelli Gold Seeks capital No-load, 1.00 .25 07/11/94 13.1 11.3
Fund appreciation and Open-end,
(GRAPHIC - 1 STAR) employs a value Diversified
approach to investing
Caesar M.P. Bryan primarily in equity
securities of gold-
related companies
worldwide.
Gabelli U.S. Treasury High current income Money Market, .30 n/a 10/01/92 314.4 385.1
Money Market Fund with preservation of Open-end,
(Not rated) principal and Diversified
liquidity, while
Judith A. Raneri striving to keep
expenses among the
lowest of all U.S.
Treasury money market
funds.
</TABLE>
40
<PAGE> 41
<TABLE>
<CAPTION>
NET ASSETS AS OF
FUND ----------------------------
(MORNINGSTAR OVERALL ADVISORY 12B-1 INITIAL SEPTEMBER 30, DECEMBER 31,
RATING)(1) PRIMARY INVESTMENT FUND FEES FEES OFFER 1998 1998
PORTFOLIO MANAGER(S) OBJECTIVE CHARACTERISTICS (%) (%) DATE ($ IN MILLIONS)
- --------------------- --------------------- --------------- -------- ----- -------- ----------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Gabelli Capital Asset Capital appreciation No-load, .75 n/a 05/01/95 134.3 155.8
Fund from equity Open-end,
(Not rated) securities of Diversified
companies selling at Variable
Mario J. Gabelli a significant Annuity
discount to their
private market value.
The Gabelli Global High level of capital No-load, 1.00 .25 05/11/98 5.0 5.9
Opportunity Fund appreciation through Open-end,
(Not rated) worldwide investments Non-diversified
in equity securities.
Caesar M.P. Bryan
Marc J. Gabelli
GABELLI WESTWOOD OPEN-END FUNDS:
Gabelli Westwood Capital appreciation Retail Class: 1.00 .25 01/02/87 177.9 202.1
Equity Fund through a diversified No-load,
(GRAPHIC - 4 STARS) portfolio of equity Open-end, .50 1/28/94
securities using a Diversified
Susan M. Byrne top- down approach Service Class:
that begins with an Load,
analysis of the Open-end,
broad, long-term Diversified
trends in the economy
and an assessment of
the business cycle
which identifies
sectors that will
benefit from that
environment.
Gabelli Westwood Both capital Retail Class: .75 .25 10/01/91 142.8 153.5
Balanced Fund appreciation and No-load,
(GRAPHIC - 4 STARS) current income using Open-end, .50 4/6/93
portfolios containing Diversified
Susan M. Byrne stocks, bonds, and Service Class:
Patricia K. Fraze cash as appropriate Load, Open-
in light of current end,
economic and business Diversified
conditions.
Gabelli Westwood Total return and No-load, .60 .25 04/06/93 7.6 7.9
Intermediate Bond current income, while Open-end,
Fund limiting risk to Diversified
(GRAPHIC - 3 STARS) principal. Pursues
higher yields than
Patricia K. Fraze shorter maturity
funds, and has more
price stability than
generally higher
yielding long-term
funds.
</TABLE>
41
<PAGE> 42
<TABLE>
<CAPTION>
NET ASSETS AS OF
FUND ----------------------------
(MORNINGSTAR OVERALL ADVISORY 12B-1 INITIAL SEPTEMBER 30, DECEMBER 31,
RATING)(1) PRIMARY INVESTMENT FUND FEES FEES OFFER 1998 1998
PORTFOLIO MANAGER(S) OBJECTIVE CHARACTERISTICS (%) (%) DATE ($ IN MILLIONS)
- --------------------- --------------------- --------------- -------- ----- -------- ----------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Gabelli Westwood Long-term capital No-load, 1.00 .25 04/15/97 11.7 15.7
SmallCap appreciation, Open-end,
Equity Fund investing at least Diversified
(Not rated) 65% of its assets in
equity securities of
Lynda Calkin companies with market
capitalizations of $1
billion or less.
Gabelli Westwood Long-term capital No-load, 1.00 .25 05/11/98 4.8 6.1
Mighty Mites(SM) Fund appreciation by Open-end,
(Not rated) investing primarily Diversified
in equity securities
Mario J. Gabelli with market
Marc J. Gabelli capitalizations of
Laura K. Linehan $300 million or less.
Walter K. Walsh
Gabelli Westwood Long-term capital No-load, 1.00 .25 09/30/97 1.8 1.9
Realty Fund appreciation as well Open-end,
(Not rated) as current income, Diversified
investing in equity
Susan M. Byrne securities that are
primarily engaged in
or related to the
real estate industry.
THE TREASURER'S OPEN-END MONEY MARKET FUNDS:
The Treasurer's Fund, Current income with No-load, .30 n/a 01/01/88 345.0 357.9
Inc. -- Domestic preservation of Open-end,
Prime Money Market principal and Diversified
Portfolio liquidity through
(Not rated) investment in U.S.
Treasury securities
Judith A. Raneri and corporate bonds.
The Treasurer's Current income with No-load, .30 n/a 12/18/87 207.5 177.1
Fund, Inc. -- Tax preservation of Open-end,
Exempt Money Market principal and Non-diversified
Portfolio liquidity through
(Not rated) investment in U.S.
municipal bond
Judith A. Raneri securities.
The Treasurer's Current income with No-load, .30 n/a 07/25/90 111.6 109.8
Fund, Inc. -- U.S. preservation of Open-end,
Treasury Money Market principal and Diversified
Portfolio liquidity through
(Not rated) investment in U.S.
Treasury securities.
Judith A. Raneri
</TABLE>
42
<PAGE> 43
<TABLE>
<CAPTION>
NET ASSETS AS OF
FUND ----------------------------
(MORNINGSTAR OVERALL ADVISORY 12B-1 INITIAL SEPTEMBER 30, DECEMBER 31,
RATING)(1) PRIMARY INVESTMENT FUND FEES FEES OFFER 1998 1998
PORTFOLIO MANAGER(S) OBJECTIVE CHARACTERISTICS (%) (%) DATE ($ IN MILLIONS)
- --------------------- --------------------- --------------- -------- ----- -------- ----------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
GABELLI CLOSED-END FUNDS:
The Gabelli Global Long-term capital Closed-end, 1.00 n/a 11/15/94 141.2 163.8
Multimedia Trust Inc. appreciation from Non-Diversified
(GRAPHIC - 5 STARS) equity investments in NYSE
global telecommunica- Symbol: GGT
Mario J. Gabelli tions, media,
publishing and
entertainment
holdings.
The Gabelli Equity Long-term growth of Closed-end, 1.00 n/a 08/14/86 1,212.8 1,341.5
Trust Inc.(2) capital by investing Non-Diversified
(GRAPHIC - 3 STARS) in equity securities. NYSE
Symbol: GAB
Mario J. Gabelli
The Gabelli High total return Closed-end, 1.00 n/a 07/03/89 116.8 120.7
Convertible from investing Diversified
Securities Fund, Inc. primarily in NYSE
(GRAPHIC - 3 STARS) convertible Symbol: GCV
instruments.
Mario J. Gabelli
</TABLE>
- ---------------
(1) Morningstar proprietary ratings reflect historical risk adjusted performance
as of December 31, 1998 and are subject to change every month. Overall
Morningstar ratings are calculated from the fund's three-, five- and
ten-year average annual returns, as available, in excess of 90 day T-bill
returns with appropriate fee adjustments and a risk factor that reflects
fund performance below 90 day T-bill returns. The top 10% of the funds in an
investment category receive five stars, the next 22.5% receive four stars,
the next 35% receive three stars, the next 22.5% receive two stars and the
last 10% receive one star. The ratings for the Gabelli Westwood funds are
for the retail classes.
(2) The Gabelli Equity Trust has announced its intention to spin-off
approximately $60 million to $80 million of its assets in the form of shares
of a new closed-end fund that will invest primarily in the securities of
companies involved in the gas, electricity and water industries (the utility
sector).
Shareholders of the no-load open-end Mutual Funds are allowed to exchange
shares among the funds as economic and market conditions and investor needs
change at no additional cost. The Company periodically introduces new mutual
funds designed to complement and expand its investment product offerings,
respond to competitive developments in the financial marketplace, and meet the
changing needs of clients.
The Company's marketing efforts for the Mutual Funds are currently focused
on increasing the distribution and sales of its existing funds, as well as
creating new products for sale through its distribution channels. The Company
believes that its marketing efforts for the Mutual Funds will continue to
generate additional revenues from investment advisory fees. The Company has
traditionally distributed most of its open-end Mutual Funds by using a variety
of direct response marketing techniques, including telemarketing and
advertising, and as a result the Company maintains direct relationships with a
majority of its no-load open-end Mutual Fund customers. Beginning in late 1995,
the Company expanded its product distribution by offering additional open-end
Mutual Funds through Third-Party Distribution Programs, including NTF Programs.
In 1997 and through the first nine months of 1998, the Company further expanded
these efforts to include substantially all of its open-end Mutual Funds in over
60 Third-Party Distribution Programs. Although most of the assets under
management in the open-end Mutual Funds are still attributable to the Company's
direct response marketing efforts, Third-Party Distribution Programs,
particularly NTF Programs, have become an increasingly important source of asset
growth for the Company. Of the $5.5 billion of assets under management in the
open-end Mutual Funds as of September 30, 1998, approximately 16% were generated
from NTF Programs. Sales (net of redemptions) of the Company's open-end Mutual
Funds through the NTF Programs were approximately $96 million, $194 million and
$476 million for the first and second halves of 1997 and the first half of 1998,
respectively. In the first nine months of 1998, sales (net of redemptions) of
the Mutual Funds were $1.0 billion, of which approximately 50% was generated
from direct marketing and approximately 50% was generated from the NTF Programs.
Further, the Company has commenced development of additional classes of shares
for several of its mutual funds for sale through national brokerage and
investment houses and other third-party distribution channels on a commission
basis.
43
<PAGE> 44
In general, distribution through Third-Party Distribution Programs has greater
variable cost components and lower fixed cost components than distribution
through the Company's traditional direct sales methods.
The Company provides investment advisory and management services pursuant
to an investment management agreement with each Mutual Fund. While the specific
terms of the investment management agreements vary to some degree, the basic
terms of the investment management agreements are similar. The investment
management agreements with the Mutual Funds generally provide that the Company
is responsible for the overall investment and administrative services, subject
to the oversight of each Mutual Fund's board of directors and in accordance with
each Mutual Fund's fundamental investment objectives and policies. The
investment management agreements permit the Company to enter into separate
agreements for administrative and accounting services on behalf of the
respective Mutual Funds.
The Company provides the Mutual Funds with administrative services pursuant
to management contracts. Most of these administrative services are provided
through subcontracts with unaffiliated third parties. Such services include,
without limitation, calculation of net asset value, preparation of financial
reports for shareholders of the Mutual Funds, internal accounting, tax
accounting and reporting, regulatory filings, and other services. Transfer
agency and custodial services are provided directly to the Mutual Funds by third
parties.
The Company's Mutual Fund investment management agreements may continue in
effect from year to year only if specifically approved at least annually by (i)
the Mutual Fund's board of directors or trustees or (ii) the Mutual Fund's
shareholders and, in either case, the vote of a majority of the Mutual Fund's
directors or trustees who are not parties to the agreement or "interested
persons" of any such party, within the meaning of the Investment Company Act.
Each Mutual Fund may terminate its investment management agreement at any time
upon 60 days' written notice by (i) a vote of the majority of the board of
directors or trustees cast in person at a meeting called for the purpose of
voting on such termination or (ii) a vote at a meeting of shareholders of the
lesser of either 67% of the voting shares represented in person or by proxy or
50% of the outstanding voting shares of such Mutual Fund. Each investment
management agreement automatically terminates in the event of its assignment, as
defined in the Investment Company Act. The Offering will not constitute an
"assignment" for the purposes of the Investment Company Act. The Company may
terminate an investment management agreement without penalty on 60 days' written
notice.
SEPARATE ACCOUNTS
Since 1977, the Company has provided investment management services through
its subsidiary GAMCO to a broad spectrum of institutional and high net worth
investors. As of September 30, 1998, the Company had approximately 950 Separate
Accounts with an aggregate of approximately $6.7 billion of assets, which
represent approximately 48% of the total assets under management of the Company
at September 30, 1998. The ten largest Separate Accounts comprise approximately
15% of the Company's total assets under management and 7% of the Company's total
revenues as of and for the period ended September 30, 1998. The Separate
Accounts are invested in U.S. and international equity securities, U.S.
fixed-income securities and convertible securities. At September 30, 1998, high
net worth accounts (accounts of individuals and related parties in general
having a minimum account balance of $1 million) comprised approximately 78% of
the number of Separate Accounts and approximately 25% of the assets, with
institutional investors accounting for the balance.
Each Separate Account portfolio is managed to meet the specific needs and
objectives of the particular client by utilizing investment strategies and
techniques within the Company's areas of expertise. Members of the sales and
marketing staff for the Separate Accounts business have an average of
approximately 10 years of experience with the Company and focus on developing
and maintaining long-term relationships with their Separate Account clients in
order to be able to understand and meet their individual clients' needs.
Investment advisory agreements with the Separate Accounts are typically
terminable by the client without penalty on 30 days' notice or less.
The Company's Separate Accounts business is marketed primarily through the
direct efforts of its in-house sales force. At September 30, 1998, over 95% of
the Company's assets in Separate Accounts (excluding subadvisory assets) were
obtained through direct sales relationships. Sales efforts are conducted on a
regional and product specialist basis. Clients are generally serviced by a team
of individuals, the core of which remain
44
<PAGE> 45
assigned to a specific client from the onset of the client relationship. The
Company's sales force maintains direct relationships with corporate pension and
profit sharing plans, foundations, endowment funds, jointly trusteed plans,
municipalities and high net worth individuals that comprise the Company's
Separate Accounts business.
PARTNERSHIPS
The Company offers alternative investment products through its
majority-owned subsidiary, GSI. These alternative investments products consist
primarily of risk arbitrage and merchant banking limited partnerships and
offshore companies. The Partnerships had $147 million of assets at September 30,
1998. Gabelli Associates Fund had $115 million of assets under management as of
September 30, 1998 and invests in merger arbitrage opportunities. Merchant
banking activities are carried out through ALCE Partners, L.P. ("Alce"), and
Gabelli Multimedia Partners, L.P. ("Multimedia"), both of which are closed to
new investors. Aggregate assets for Alce and Multimedia as of September 30, 1998
were approximately $9 million and $6 million, respectively. Gabelli Associates
Limited, which had approximately $17 million of assets as of September 30, 1998,
is an offshore investment company designed for non-U.S. investors seeking to
participate in risk arbitrage opportunities utilizing the same investment
objectives and strategies as the Gabelli Associates Fund. The Company also
manages the Gabelli International Gold Fund Limited, which as of September 30,
1998 had less than $1 million of assets. The Company's alternative investment
products are marketed primarily through its direct sales force. The Company does
not expect that assets invested in the Partnerships or other alternative
investment products will contribute significantly to the Company's future
growth.
BROKERAGE AND MUTUAL FUND DISTRIBUTION
The Company offers underwriting, execution and trading services through its
subsidiary, Gabelli & Company. Gabelli & Company is a broker-dealer registered
under the Securities Exchange Act of 1934 and a member of the NASD. Gabelli &
Company's revenues are derived primarily from distribution of the Mutual Funds,
brokerage commissions and selling concessions on transactions in equity
securities for the Mutual Funds, Separate Accounts and other customers, and from
underwriting fees and market-making activities.
The Company distributes the open-end Mutual Funds pursuant to distribution
agreements with each open-end Mutual Fund. Under each distribution agreement
with an open-end Mutual Fund, the Company offers and sells such open-end Mutual
Fund's shares on a continual basis and pays all of the costs of marketing and
selling the shares of such open-end Mutual Fund, including printing and mailing
prospectuses and sales literature, advertising and maintaining sales and
customer service personnel and sales and services fulfillment systems, and
payments to the sponsors of Third-Party Distribution Programs, financial
intermediaries and sales personnel of the Company. The Company receives fees for
such services pursuant to distribution agreements adopted under provisions of
Rule 12b-1. Distribution fees from the open-end Mutual Funds amounted to $4.7
million and $8.8 million for the nine months ended September 30, 1997 and 1998,
respectively, and $6.2 million, $7.1 million and $7.5 million for the years
ended December 31, 1995, 1996 and 1997, respectively. The Company is the
principal underwriter for several funds distributed with a sales charge,
including shares of The Gabelli Value Fund Inc. and service class shares of the
Gabelli Westwood Equity Fund and the Gabelli Westwood Balanced Fund.
Under the distribution agreements, the open-end Mutual Funds (except the
Treasurer's Funds, the Gabelli U.S. Treasury Money Market Fund and the Gabelli
Capital Asset Fund) pay the Company a distribution fee of .25% per year (except
the Service Class of the Gabelli Westwood Equity and Balanced Funds which pay
.50% per year) on the average daily net assets of the fund. The Company's
distribution agreements with the Mutual Funds may continue in effect from year
to year only if specifically approved at least annually by (i) the Mutual Fund's
board of directors or trustees or (ii) the Mutual Fund's shareholders and, in
either case, the vote of a majority of the Mutual Fund's directors or trustees
who are not parties to the agreement or "interested persons" of any such party,
within the meaning of the Investment Company Act. Each Mutual Fund may terminate
its distribution agreement, or any agreement thereunder, at any time upon 60
days' written notice by (i) a vote of the majority of its directors or trustees
cast in person at a meeting called for the purpose of voting on such termination
or (ii) a vote at a meeting of shareholders of the lesser of either 67% of the
voting shares represented in person or by proxy or 50% of the outstanding voting
shares of such Mutual Fund. Each distribution agreement automatically terminates
in the event of its assignment, as
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<PAGE> 46
defined in the Investment Company Act. The Offering will not constitute an
"assignment" for the purposes of the Investment Company Act. The Company may
terminate a distribution agreement without penalty upon 60 days' written notice.
Gabelli & Company is involved in external syndicated underwriting
activities. For the nine months ended September 30, 1998, Gabelli & Company
participated as an underwriter in 28 syndicated underwritings with commitments
totaling $96 million for public equity and debt offerings managed by major
investment banks. During 1997, Gabelli & Company participated in 35 syndicated
underwritings with commitments totaling $51 million.
COMPETITION
The Company competes with mutual fund companies and other investment
management firms, insurance companies, banks, brokerage firms and other
financial institutions that offer products which have similar features and
investment objectives to those offered by the Company. Many of the investment
management firms with which the Company competes are subsidiaries of large
diversified financial companies and many others are much larger in terms of
assets under management and revenues and, accordingly, have much larger sales
organizations and marketing budgets. Historically, the Company has competed
primarily on the basis of the long-term investment performance of many of its
funds. However, the Company has determined that competing primarily on the basis
of performance is inadequate and accordingly, the Company has taken steps over
the past two years to substantially increase its distribution channels, brand
name awareness and marketing efforts. Although there can be no assurance that
the Company will be successful in these efforts, its net sales of Mutual Funds
have increased significantly over the past year and the Company's strategy is to
continue to devote significant additional resources to its sales and marketing
efforts.
The market for providing investment management services to institutional
and high net worth Separate Accounts is also highly competitive. Approximately
41% and 43% of the Company's investment management fee revenues for the nine
months ended September 30, 1998 and year ended December 31, 1997, respectively,
was derived from its Separate Accounts. Selection of investment advisers by U.S.
institutional investors is often subject to a screening process and to favorable
recommendation by investment industry consultants. Many of these investors
require their investment advisers to have a successful and sustained performance
record, often five years or longer, and also focus on one and three year
performance records. The Company has significantly increased its assets under
management on behalf of U.S. institutional investors since its entry into the
institutional asset management business in 1977. At the current time, the
Company believes that its investment performance record would be attractive to
potential new institutional and high net worth clients and the Company has
determined to devote additional resources to the institutional and high net
worth investor markets. However, no assurance can be given that the Company's
efforts to obtain new business will be successful.
INTELLECTUAL PROPERTY
Service marks and brand name recognition are important to the Company's
business. The Company has rights to the service marks under which its products
are offered. The Company has registered certain service marks in the United
States and will continue to do so as new trademarks and service marks are
developed or acquired. The Company has rights to use (i) the "Gabelli" name,
(ii) the "GAMCO" name, (iii) the research triangle logo, (iv) the "Interactive
Couch Potato" name, and (v) the "Mighty Mites" name. Pursuant to an assignment
agreement, Mr. Gabelli has assigned to the Company, effective as of the
Offering, all of his rights, title and interests in and to the "Gabelli" name
for use in connection with investment management services, mutual funds and
securities brokerage services. However, under the agreement, Mr. Gabelli will
retain any and all right, title and interest he has or may have in the "Gabelli"
name for use in connection with (i) charitable foundations controlled by Mr.
Gabelli or members of his family or (ii) entities engaged in private investment
activities for Mr. Gabelli or members of his family. In addition, the funds
managed by Mr. Gabelli outside the Company have entered into a license agreement
with the Company, effective as of the Offering, permitting them to continue
limited use of the "Gabelli" name under specified circumstances. The Company has
taken, and will continue to take, action to protect its interests in these
service marks.
46
<PAGE> 47
STAFF
At December 31, 1998, the Company had a full-time staff of approximately
133 individuals, of whom 40 served in the portfolio management, research and
trading areas, 47 served in the marketing and shareholder servicing areas and 46
served in the administrative area. As part of its staff, the Company employs ten
portfolio managers for the Mutual Funds, Separate Accounts and Partnerships.
Additionally, Westwood Management employs three portfolio managers who advise
five of the six portfolios of the Gabelli Westwood family of funds.
PROPERTIES
As of December 31, 1998, the principal properties leased by the Company for
use in its business were as follows:
<TABLE>
<CAPTION>
LOCATION LEASE EXPIRATION SQUARE FOOTAGE
-------- ---------------- --------------
<S> <C> <C>
Gabelli Funds, Inc. ...................................... December 11, 2001 24,555
One Corporate Center
Rye, New York 10580
Gabelli Funds, Inc. ...................................... April 30, 2013 60,055
401 Theodore Fremd Avenue
Rye, New York 10580
Gabelli & Company, Inc. .................................. month-to-month 4,177
655 Third Avenue, Suite 1425
New York, New York 10017
Gabelli Funds, Inc. ...................................... month-to-month 1,599
165 West Liberty Street
Reno, Nevada 89501
</TABLE>
All of these properties are used or will be used by the Company as office
space. The building and property at 401 Theodore Fremd Avenue were leased from
an entity controlled by members of Mr. Gabelli's family, and approximately
35,000 square feet are currently subleased to other tenants. The Company has
begun relocating certain departments of the Company to these premises and
expects to completely relocate its principal executive office to these premises
in the year 2001. See "Certain Relationships and Related
Transactions -- Transactions with Mr. Gabelli and Affiliates."
REGULATION
Virtually all aspects of the Company's businesses are subject to various
federal and state laws and regulations. These laws and regulations are primarily
intended to protect investment advisory clients and shareholders of registered
investment companies. Under such laws and regulations, agencies that regulate
investment advisers and broker-dealers such as the Company have broad
administrative powers, including the power to limit, restrict or prohibit such
an adviser or broker-dealer from carrying on its business in the event that it
fails to comply with such laws and regulations. In such event, the possible
sanctions that may be imposed include the suspension of individual employees,
limitations on engaging in certain lines of business for specified periods of
time, revocation of investment adviser and other registrations, censures, and
fines. The Company believes that it is in substantial compliance with all
material laws and regulations.
The business of the Company is subject to regulation at both the federal
and state level by the Commission and other regulatory bodies. Subsidiaries of
the Company are registered with the Commission under the Investment Advisers
Act, and the Mutual Funds are registered with the Commission under the
Investment Company Act. Two subsidiaries of the Company are also registered as
broker-dealers with the Commission and are subject to regulation by the NASD and
various states.
The subsidiaries of the Company that are registered with the Commission
under the Investment Advisers Act (Funds Adviser, Gabelli Advisers, Inc.,
Gabelli Fixed Income L.L.C. and GAMCO) are regulated by and subject to
examination by the Commission. The Investment Advisers Act imposes numerous
obligations on registered investment advisers including fiduciary duties, record
keeping requirements, operational requirements, marketing requirements and
disclosure obligations. The Commission is authorized to institute proceedings
and impose sanctions for violations of the Investment Advisers Act, ranging from
censure to termination of an investment adviser's registration. The failure of a
subsidiary of the Company to comply with
47
<PAGE> 48
the requirements of the Commission could have a material adverse effect on the
Company. The Company believes it is in substantial compliance with the
requirements of the Commission.
The Company derives a substantial majority of its revenues from investment
advisory services through its investment management agreements. Under the
Investment Advisers Act, the Company's investment management agreements
terminate automatically if assigned without the client's consent. Under the
Investment Company Act, advisory agreements with registered investment companies
such as the Mutual Funds terminate automatically upon assignment. The term
"assignment" is broadly defined and includes direct assignments as well as
assignments that may be deemed to occur, under certain circumstances, upon the
transfer, directly or indirectly, of a controlling interest in the Company. The
Offering will not constitute an assignment for these purposes. Accordingly, the
Company does not intend to seek approvals of new investment advisory agreements
from the shareholders of the registered investment companies it manages or other
client consents in connection with these transactions.
In its capacity as a broker-dealer, Gabelli & Company is required to
maintain certain minimum net capital and cash reserves for the benefit of its
customers. Gabelli & Company's net capital, as defined, has consistently met or
exceeded all minimum requirements. Under the rules and regulations of the
Commission promulgated pursuant to the federal securities laws, the Company is
subject to periodic examination by the Commission. Gabelli & Company is also
subject to periodic examination by the NASD. The most recent examination by the
Commission of the Gabelli family of funds was in June 1998 and of the Gabelli
Westwood family of funds was in November 1997. The most recent examination of
Gabelli & Company by the NASD was in September 1998. There were no material
compliance issues reported by either the Commission or the NASD as a result of
such examinations.
Subsidiaries of the Company are subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), and to regulations promulgated
thereunder, insofar as they are "fiduciaries" under ERISA with respect to their
clients. ERISA and applicable provisions of the Internal Revenue Code of 1986,
as amended (the "Code"), impose certain duties on persons who are fiduciaries
under ERISA and prohibit certain transactions involving ERISA plan clients. The
failure of the Company to comply with these requirements could have a material
adverse effect on the Company.
Investments by the Company on behalf of its clients often represent a
significant equity ownership position in an issuer's class of stock. As of
September 30, 1998, the Company had five percent or more beneficial ownership
with respect to more than 85 equity securities. This activity raises frequent
regulatory and legal issues regarding the Company's aggregate beneficial
ownership level with respect to portfolio securities, including issues relating
to issuers' shareholder rights plans or "poison pills," state gaming laws and
regulations, federal communications laws and regulations, public utility holding
company laws and regulations, federal proxy rules governing shareholder
communications and federal laws and regulations regarding the reporting of
beneficial ownership positions. The failure of the Company to comply with these
requirements could have a material adverse effect on the Company.
Mr. Gabelli is registered with the U.S. Commodity Futures Trading
Commission/National Futures Association as a floor broker and commodity pool
operator.
The Company and certain of its affiliates are subject to the laws of
non-U.S. jurisdictions and non-U.S. regulatory agencies or bodies. In
particular, the Company is subject to requirements in numerous jurisdictions
regarding reporting of beneficial ownership positions in securities issued by
companies whose securities are publicly traded in those countries. In addition,
GAMCO is registered as an international adviser, investment counsel and
portfolio manager with the Ontario Securities Commission in Canada in order to
market its services to prospective clients which reside in Ontario. Gabelli
Associates Limited is organized under the laws of the British Virgin Islands and
Gabelli International Gold Fund Limited is organized under the laws of Bermuda.
LEGAL MATTERS
From time to time, the Company is a defendant in various lawsuits
incidental to its business. The Company does not believe that the outcome of any
current litigation will have a material effect on the financial condition of the
Company.
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<PAGE> 49
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning the persons
who will serve as the Company's directors and executive officers upon
consummation of the Offering. All directors will serve terms of one year or
until the election of their respective successors.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Mario J. Gabelli..... 56 Chairman of the Board, Chief Executive Officer and Chief
Investment Officer, Director
Stephen G. Bondi..... 40 Executive Vice President -- Finance and Administration
James E. McKee....... 35 Vice President, General Counsel and Secretary
Robert S. Zuccaro.... 42 Vice President and Chief Financial Officer
Douglas R.
Jamieson........... 44 Executive Vice President and Chief Operating Officer of
GAMCO
Bruce N. Alpert...... 47 Executive Vice President and Chief Operating Officer of
Funds Adviser
Charles C. Baum...... 57 Director
Richard B. Black..... 65 Director
Eamon M. Kelly....... 62 Director
Karl Otto Pohl....... 69 Director
</TABLE>
MARIO J. GABELLI has served as Chairman, Chief Executive Officer and Chief
Investment Officer of the Company since November 1976. In connection with those
responsibilities, he serves as Chairman and/or President of thirteen registered
investment companies managed by Funds Adviser and as the primary Portfolio
Manager for a significant majority of the Company's assets under management. Mr.
Gabelli also serves as a Governor of the American Stock Exchange, Chairman and
Chief Executive Officer of Lynch Corporation, a public company engaged in
multimedia, specialized transportation and manufacturing and as a director of
East/West Communications, Inc., a publicly-held communications services company.
In addition, Mr. Gabelli is the sole employee of MJG Associates, Inc., which
acts as a general partner of an equity fund, Gabelli Performance Partnership
L.P., and investment manager of various offshore investment companies and other
accounts. Prior to founding the Company, Mr. Gabelli served as a research
analyst at William D. Witter from 1975 through 1977 and as a Vice President of
Loeb, Rhoades & Co. from 1967 through 1975. Mr. Gabelli received a B.S. from
Fordham University and an M.B.A. from Columbia University Graduate School of
Business.
STEPHEN G. BONDI joined the Company in 1982 and has served as Executive
Vice President -- Finance and Administration of the Company since 1997 and from
1982 to 1997 as a financial officer in various capacities. Mr. Bondi also serves
as Vice President of GAMCO, GSI and Gabelli & Company and is a director of
Gabelli & Company. Prior to joining the Company, Mr. Bondi was an accountant
with the accounting firm of Spicer & Oppenheim. He holds a B.B.A. in Accounting
from Hofstra University, received an M.B.A. from Columbia University Graduate
School of Business and is a Certified Public Accountant.
JAMES E. MCKEE has served as Vice President, General Counsel and Secretary
of the Company since August 1995 and as Vice President, General Counsel and
Secretary of GAMCO since December 1993. Mr. McKee also serves as Secretary of
the Company's subsidiaries and all of the Mutual Funds except the Treasurer's
Funds. Prior to joining the Company, he was a Branch Chief with the Commission
in New York from 1992 to 1993 and a Staff Attorney with the Commission from 1989
through 1992, where he worked on matters involving registered investment
advisers and investment companies. Mr. McKee received a B.A. from the University
of Michigan and a J.D. from the University of Virginia School of Law.
ROBERT S. ZUCCARO has served as Vice President and Chief Financial Officer
of the Company since June 1, 1998. Prior to joining the Company, he was Vice
President and Treasurer of Cybex International, Inc., an international, publicly
held manufacturer of medical, rehabilitative and fitness products, from 1992 to
1997, and served as its Corporate Controller from 1984 to 1997. Mr. Zuccaro was
previously with Shearson Lehman
49
<PAGE> 50
Bros. from 1983 to 1984 and with Ernst & Young from 1979 to 1983. Mr. Zuccaro
received a B.S. in Accounting from C.W. Post College and is a Certified Public
Accountant.
DOUGLAS R. JAMIESON has served as Executive Vice President and Chief
Operating Officer of GAMCO since 1986 and as a director since 1991. Mr. Jamieson
was an investment analyst with the Company from 1981 to 1986. Mr. Jamieson
received a B.A. from Bucknell University and an M.B.A. from Columbia University
Graduate School of Business.
BRUCE N. ALPERT has served as Vice President and Chief Operating Officer of
Funds Adviser since June 1988 and was appointed Executive Vice President and
Chief Operating Officer of Funds Adviser on January 1, 1999. Mr. Alpert is an
officer of all of the Mutual Funds. Mr. Alpert is also a director of Gabelli
Advisers, Inc. Prior to June 1988 he worked at the InterCapital Division of Dean
Witter from 1986 to 1988 as Vice President and Treasurer of the Mutual Funds
sponsored by Dean Witter. From 1983 through 1986 he worked at Smith Barney
Harris Upham & Co. as Vice President in the Financial Services Division and as
Vice President and Treasurer of Mutual Funds sponsored by Smith Barney. Mr.
Alpert also was an Audit Manager and Specialist at Price Waterhouse in the
Investment Company Industry Services Group from 1975 through 1983. Mr. Alpert
received a B.S. in Management Science and an M.B.A. from Rensselaer Polytechnic
Institute and is a Certified Public Accountant.
CHARLES C. BAUM joined the Company's Board of Directors in October 1992.
Mr. Baum has also served since August 1992 as Chairman and Chief Executive
Officer of The Morgan Group, Inc., a transportation services company and
subsidiary of Lynch Corporation, and as Treasurer of United Holdings Co., Inc.
and its predecessors and affiliates since 1973. United Holdings Co., Inc. was
involved in the metal business until 1990 when it shifted focus to concentrate
on investments in real estate and securities. Mr. Baum is also a director of
United Holdings Co.; Shapiro Robinson & Associates, a firm which represents
professional athletes; and Municipal Mortgage and Equity LLC, a company engaged
in the business of mortgage financing. Mr. Baum received an A.B. from Princeton
University, an M.B.A. from Harvard Business School and an LLB from Maryland Law
School.
RICHARD B. BLACK originally joined the Company's Board of Directors in
November 1982. He currently serves as President and director of Oak Technology,
Inc., an international supplier of semiconductors, as well as Chairman and
Director of ECRM, Incorporated, an international supplier of electronic imaging
devices to the publishing and graphic arts industries. Mr. Black also serves as
a director of Benedetto, Gartland & Greene, Inc.; General Scanning, Inc.; Grand
Eagle Companies, Inc.; and The Morgan Group, Inc. Mr. Black was Chairman and
Chief Executive Officer of AM International, Inc. from 1981 to 1982; President
and Chief Executive Officer of Alusuisse of America (Swiss Aluminum of America)
from 1979 to 1981; and Chairman of the Board, President and Chief Executive
Officer of Maremont Corporation, an automotive parts manufacturer with
world-wide distribution, from 1967 to 1979. Mr. Black received a B.S. in
Engineering from Texas A&M University and an M.B.A. from Harvard University, and
he was awarded an Honorary Doctorate of Humane Letters Degree from Beloit
College.
EAMON M. KELLY joined the Company's Board of Directors in October 1992. Dr.
Kelly is currently serving as a Professor at the Payson Center for International
Development and Technology Transfer as well as in other departments at Tulane
University, New Orleans. From 1981 through July 1998, he served as President and
Chief Executive Officer of Tulane University. From 1974 to 1979, Dr. Kelly
served in numerous positions, including Officer-in-Charge of Program Related
Investments at the Ford Foundation, a philanthropic organization with
initiatives in community and housing development, communications and public
television, resources and environment, higher and public education, the arts and
minority enterprises. Dr. Kelly's career includes numerous appointments, most
recently, the appointments by President Clinton in 1995 to the National Science
Board (the governing board of the National Science Foundation) and in 1994 to
the National Security Education Board. Dr. Kelly received a B.S. from Fordham
University, and his M.S. and Ph.D. in Economics from Columbia University.
KARL OTTO POHL joined the Company's Board of Directors in April 1998. Mr.
Pohl is a member of the Shareholder Committee of Sal Oppenheim Jr., & Cie., a
private investment bank. Currently Mr. Pohl is a director/trustee of all of the
Mutual Funds and serves as a board member of Zurich Versicherungs-Gesellshaft
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<PAGE> 51
(Insurance), the International Council for J.P. Morgan & Co. and TrizecHahn
Corp. Mr. Pohl is a former President of the Deutsche Bundesbank, Germany's
Central Bank, and was Chairman of its Central Bank Council from 1980 to 1991. He
also served as German Governor of the International Monetary Fund from 1980 to
1991 and as a Board Member to the Bank for International Settlements. Mr. Pohl
also served as Chairman to the European Economic Community Central Bank
Governors from 1990 to 1991. Mr. Pohl served as a director of Unilever (from
1992 to 1998), Royal Dutch Shell (from 1992 to 1997) and other international
companies. He received a "Dipl. Volkswirt" from Gottingen University and was
awarded with honorary degrees from Georgetown University, London University,
University of Tel-Aviv and others.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company has established an Audit Committee comprised solely of
independent directors, a Compensation Committee and a Nominating Committee. The
Audit Committee, consisting of Richard B. Black and Eamon M. Kelly, will
recommend the annual appointment of the Company's auditors, with whom the Audit
Committee will review the scope of audit and non-audit assignments and related
fees, accounting principles used by the Company in financial reporting, internal
auditing procedures and the adequacy of the Company's internal control
procedures. The Compensation Committee, consisting of Richard B. Black and Eamon
M. Kelly, will administer the Company's 1999 Stock Award and Incentive Plan and
1999 Annual Performance Incentive Plan and make recommendations to the Board of
Directors regarding compensation for the Company's executive officers. The
Nominating Committee, consisting of Mario J. Gabelli and Karl Otto Pohl, will
review the qualifications of potential candidates for the Board of Directors,
report its findings to the Board of Directors and propose nominations for Board
memberships for approval by the Board of Directors and submission to the
shareholders of the Company for approval.
COMPENSATION OF DIRECTORS
Directors of the Company who are also employees receive no additional
compensation for their services as a director. Non-employee directors do not
currently receive fees for their service as directors, although it is
anticipated that non-employee directors will receive fees in the future. The
Company will reimburse all directors of the Company for travel expenses incurred
in attending meetings of the Board of Directors and its committees. See "Certain
Relationships and Related Transactions -- Transactions with Others."
EXECUTIVE COMPENSATION
The following table sets forth certain compensation awarded to, earned by
or paid to the Company's Chairman of the Board, Chief Executive Officer and
Chief Investment Officer and the four other most highly paid executive officers
of the Company who served as executive officers of the Company as of December
31, 1998, for services rendered in all capacities to the Company and its
subsidiaries during 1998.
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<PAGE> 52
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
----------------------------- ALL OTHER
NAMES AND PRINCIPAL POSITIONS YEAR SALARY BONUS COMPENSATION
- ----------------------------- ---- ----------- -------- ------------
<S> <C> <C> <C> <C>
Mario J. Gabelli................................ 1998 $42,351,316(1) $ 0 $ 955(2)
Chairman of the Board, Chief Executive Officer
and Chief Investment Officer
Douglas R. Jamieson............................. 1998 $ 1,330,465 $ 75,000 $ 955(3)
Executive Vice President and Chief Operating
Officer of GAMCO
Bruce N. Alpert................................. 1998 $ 308,471 $600,000 $54,986(3)
Executive Vice President and Chief Operating
Officer of Funds Adviser
Stephen G. Bondi................................ 1998 $ 300,000 $ 75,000 $ 7,130(3)
Executive Vice President -- Finance and
Administration
James E. McKee.................................. 1998 $ 300,000 $120,000 $ 7,130(3)
Vice President, General Counsel and Secretary
</TABLE>
- ---------------
(1) Represents the incentive-based management fee of $12,245,877 and portfolio
management and other variable compensation of $30,105,439. Mr. Gabelli
receives no fixed salary.
(2) Represents contributions made by the Company under its profit sharing plan.
(3) Represents contributions made by the Company under its profit sharing plan
in the amount of $955 and the fair value of subsidiary stock awards made to
Messrs. Alpert, Bondi and McKee worth $54,031, $6,175 and $6,175,
respectively.
EMPLOYMENT AGREEMENTS
Prior to the Offering, Mr. Gabelli entered into an Employment Agreement
with the Company relating to his service as Chairman of the Board, Chief
Executive Officer, Chief Investment Officer of the Company, an executive for
certain subsidiaries and Portfolio Manager for certain Mutual Funds and Separate
Accounts, effective as of the consummation of the Offering. Under the Employment
Agreement, Mr. Gabelli will receive, as compensation for managing or overseeing
the management of investment companies and the Partnerships, attracting mutual
fund accounts, attracting or managing Separate Accounts, providing investment
banking services, acting as a broker or otherwise generating revenues for the
Company, a percentage of revenues or net profits related to or generated by such
activities (which revenues or net profits are substantially derived from assets
under management). Such payments will be made in a manner and at rates as agreed
to from time to time by Mr. Gabelli and the Company, which rates have been and
generally will be the same as those received by other professionals in the
Company performing similar services. With respect to the Company's institutional
and retail asset management, mutual fund advisory and brokerage business, the
Company generally pays out up to 40% of the revenues or net profits to the
portfolio managers, brokers and marketing staff who service or generate such
business, with payments involving the Separate Accounts being typically based on
revenues and payments involving the Mutual Funds being typically based on net
profits.
For example, during 1998, Mr. Gabelli received the following compensation:
(i) $15,760,084 (which represents approximately 52% of Mr. Gabelli's
revenue-based or net profit-based compensation of $30,105,439) for acting as
portfolio manager of several of the Mutual Funds; (ii) $9,280,798 (which
represents approximately 31% of his $30,105,439 of revenue-based or net
profit-based compensation) for acting as portfolio manager and/or attracting and
providing client service to a large number of the Separate Accounts; (iii)
$5,064,557 (which represents the remaining 17% of his $30,105,439 of
revenue-based or net profit-based compensation) for providing other services,
including acting as portfolio manager of the Partnerships and as a broker; and
(iv) $12,245,877 (which represents his historical incentive-based management fee
of 20% of the Company's pre-tax profits rather than the 10% incentive-based
management fee receivable under the Employment Agreement discussed below).
Pursuant to the Employment Agreement, in addition to his revenue or net
profit-based compensation, Mr. Gabelli will receive an incentive-based
management fee in the amount of 10% of the aggregate pre-tax profits, if any, of
the Company as computed for financial reporting purposes in accordance with
generally
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<PAGE> 53
accepted accounting principles (before consideration of this fee or the $50
million deferred payment described below or any employment taxes thereon) so
long as he is an executive of the Company and devoting the substantial majority
of his working time to its business. This incentive-based management fee will be
subject to review at least annually by an independent committee of the Board for
compliance with the terms hereof. Mr. Gabelli has agreed that while he is
employed by the Company or for five years from the consummation of the Offering,
whichever is longer, he will not provide investment management services outside
of the Company, except for the Permissible Accounts. Pursuant to the Employment
Agreement, Mr. Gabelli will also receive a deferred payment of $50 million on
January 2, 2002, plus interest payable quarterly at an annual rate of 6%.
Because these compensation arrangements will be in existence before the
completion of the Offering, the $1.0 million deductibility limit of Section
162(m) is generally not expected to apply to the payments until the first
meeting of the Company's shareholders at which directors will be elected after
the close of the third calendar year following the calendar year in which the
Offering occurs. Thereafter, while no assurance can be given, the Company
believes that it will be able to take steps to allow for the continued
deductibility of these payments pursuant to the Employment Agreement. The
Employment Agreement may not be amended without the approval of an independent
committee of the Board.
The Company has also entered into employment agreements and other
arrangements with several of its other key investment professionals which are
designed to retain them through variable compensation, equity ownership, stock
options, other incentives and non-solicitation or non-compete provisions. For
example, three of the Company's portfolio managers have employment agreements
with terms extending beyond January 2000 setting forth their compensation and
incentive arrangements and including certain restrictive covenants.
1999 STOCK AWARD AND INCENTIVE PLAN
In General
The Company has adopted the Gabelli Asset Management Inc. 1999 Stock Award
and Incentive Plan (the "Plan"). A maximum of 1,500,000 shares of Class A Common
Stock has been reserved for issuance under the Plan, generally subject to
equitable adjustment upon the occurrence of any stock dividend or other
distribution, recapitalization, stock split, reverse split, reorganization,
merger, consolidation, spin-off, combination, share repurchase or exchange, or
other similar corporate transaction or event.
Pursuant to the Plan, there may be granted stock options (including
"incentive stock options" and "nonqualified stock options"), stock appreciation
rights (either in connection with stock options granted under the Plan or
independent of options), restricted stock, restricted stock units, dividend
equivalents and other stock- or cash-based awards ("Awards"). After the
consummation of the Offering, the Plan is intended to satisfy any applicable
requirements of Rule 16b-3 ("Rule 16b-3") promulgated under Section 16 of the
Exchange Act and the deductions for amounts paid under the Plan are not expected
to be limited by Section 162(m) for federal income tax purposes.
The Plan will be administered by a committee established by the Board of
Directors, consisting of two or more persons each of whom is a "nonemployee
director" within the meaning of Rule 16b-3 (the "Committee"). The Committee
shall have full authority, subject to the provisions of the Plan, to, among
other things, determine the persons to whom Awards will be granted, determine
the terms and conditions (including any applicable performance criteria and the
circumstances in which Awards may be cancelled or forfeited) of such Awards, and
prescribe, amend and rescind rules and regulations relating to the Plan.
Grants of Awards may be made under the Plan to selected employees,
independent contractors and directors of the Company and its present or future
affiliates, at the discretion of the Committee.
Stock Options and Appreciation Rights
Stock options may be either "incentive stock options," as such term is
defined in Section 422 of the Code, or nonqualified stock options. The exercise
price of a nonqualified stock option may be above, at or below the fair market
value per share of Class A Common Stock on the date of grant; the exercise price
of an incentive stock option may not be less than the fair market value per
share of Class A Common Stock on the date of
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grant. The exercise price may be paid in cash, by the surrender or withholding
of Class A Common Stock or through a "broker's cashless exercise" procedure
meeting the requirements of 12 C.F.R. sec. 220 or any successor thereof.
Stock appreciation rights may be granted alone or in tandem with stock
options. A stock appreciation right is a right to be paid an amount equal to the
excess of the fair market value of a share of Class A Common Stock on the date
the stock appreciation right is exercised over either the fair market value of a
share of Class A Common Stock on the date of grant (in the case of a free
standing stock appreciation right) or the exercise price of the related stock
option (in the case of a tandem stock appreciation right), with payment to be
made in cash, Class A Common Stock or both, as specified in the Award agreement
or determined by the Committee.
Stock options and stock appreciation rights will be exercisable at such
times and upon such conditions as the Committee may determine, as reflected in
the applicable Award agreement. In addition, all stock options and stock
appreciation rights will become exercisable in the event of a "change in
control" of the Company. The exercise period shall be determined by the
Committee except that such exercise period shall not exceed ten years from the
date of grant of such incentive stock option.
Except to the extent that the applicable Award agreement provides
otherwise, in the event that the employment of a participant shall terminate,
such participant's right to exercise stock options and stock appreciation rights
will cease.
Restricted Stock and Restricted Stock Units
A restricted stock award is an award of Class A Common Stock ("Restricted
Stock") and a restricted stock unit award is an Award of the right to receive
cash or Class A Common Stock ("Restricted Stock Unit") at a future date, in each
case, that is subject to such restrictions on transferability and other
restrictions, if any, as the Committee may impose at the date of grant, which
restrictions may lapse separately or in combination at such times, under such
circumstances, in such installments or otherwise, as the Committee may
determine. Except to the extent restricted under the Award agreement relating to
the Restricted Stock, a participant granted Restricted Stock shall have all of
the rights of a shareholder, including without limitation the right to vote and
the right to receive dividends thereon. The Committee has the authority to
cancel all or any portion of any outstanding restrictions. In addition, all
restrictions affecting the awarded shares or units will lapse in the event of a
"change in control" of the Company.
Upon termination of employment or termination of the independent contractor
relationship during the applicable restriction period, Restricted Stock,
Restricted Stock Units and any accrued but unpaid dividends or Dividend
Equivalents (as defined below) that are at that time subject to restrictions
will be forfeited unless the Committee provides, by rule or regulation or in any
Award agreement, or may determine in any individual case, that restrictions or
forfeiture conditions relating to Restricted Stock will be waived in whole or in
part in the event of terminations resulting from specified causes, and the
Committee may in other cases waive in whole or in part the forfeiture of
Restricted Stock.
Other Awards
The Committee may grant to a participant the right to receive cash in lieu
of Class A Common Stock equal in value to dividends paid with respect to a
specified number of shares of Class A Common Stock ("Dividend Equivalents").
Dividend Equivalents may be awarded on a free-standing basis or in connection
with another Award, and may be paid currently or on a deferred basis. The
Committee is also authorized to grant Class A Common Stock as a bonus or to
grant other Awards in lieu of Company commitments to pay cash under other plans
or compensatory arrangements, on such terms as shall be determined by the
Committee.
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Transferability
Except as otherwise determined by the Committee, awards granted under the
Plan may not be transferred other than by will, or by the laws of descent and
distribution, or if permitted under Rule 16b-3, pursuant to a qualified domestic
relation order.
Amendment and Termination
The Plan may, at any time and from time to time, be altered, amended,
suspended or terminated by the Board of Directors, in whole or in part, except
that no amendment that requires shareholder approval in order for the Plan to
avoid the application of Section 162(m) for federal income tax purposes, or for
the Plan to comply with state law, stock exchange requirements or other
applicable law will be effective (except as otherwise determined by the
Committee) unless such amendment has received the requisite approval of
shareholders. In addition, no amendment may be made which adversely affects any
of the rights of a participant under any Award theretofore granted, without such
participant's consent.
Outstanding Awards
Effective with the Offering, the Board of Directors of the Company will
grant to certain employees (excluding Mr. Gabelli) stock options to acquire
approximately 1,200,000 shares of Class A Common Stock at an exercise price
equal to the public offering price of the Class A Common Stock (net of the
discount payable to the Underwriters). These stock options will vest three years
from the date of consummation of the Offering.
ANNUAL PERFORMANCE INCENTIVE PLAN
The Company has adopted the Gabelli Asset Management Inc. 1999 Annual
Performance Incentive Plan (the "Annual Plan"), pursuant to which executive
officers and professional staff members of the Company and its subsidiaries will
be eligible to receive annual incentive bonuses. The Annual Plan will be
administered by the Compensation Committee or a subcommittee thereof. The Annual
Plan will be effective for 1999 and each of calendar years 2000, 2001 and 2002,
after which time the Plan will terminate, unless extended or terminated earlier
by the Board of Directors of the Company. Non-Employee Directors will not be
eligible for awards under the Annual Plan.
Each year the Company will establish target incentive bonuses for
participants in the Annual Plan. Bonuses will be payable under the Annual Plan
for a year if the Company meets the performance criteria for such year selected
for a participant or group of participants by the compensation committee or such
subcommittee, which performance criteria may include, without limitation: (i)
earnings per share growth; (ii) revenue growth; (iii) growth in assets under
management; (iv) increase in consolidated net income; (v) return on equity; and
(vi) controlling operating expenses. The actual bonus payable to a participant,
which may equal, exceed or be less than the target bonus, will be determined
based on whether the applicable performance targets are met, exceeded or not
met, and may be decreased or increased based on individual performance and
contributions, or such other factors as the Compensation Committee or such
subcommittee may deem appropriate. Bonuses payable under the Annual Plan are not
subject to any predetermined limitations.
In addition, notwithstanding the foregoing, the Compensation Committee or
such subcommittee will have the right, in its discretion, to pay to any
participant an annual bonus based on individual performance or any other
criteria that the Compensation Committee deems appropriate and, in connection
with the hiring of any person or otherwise, the Compensation Committee may
provide for a minimum bonus amount in any calendar year, regardless of whether
performance objectives are attained.
Any such bonuses will be payable as soon as practicable after the
Compensation Committee certifies that the applicable performance criteria have
been obtained, or, in the case of bonuses that are not tied to such performance
criteria, at such time as the Compensation Committee determines.
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A portion of a participant's annual incentive bonus may be payable in
Restricted Stock. Any such shares of Restricted Stock will generally vest over
three years.
Because the Annual Plan will be in existence before the completion of the
Offering, the $1 million deductibility limit of Section 162(m) is generally not
expected to apply to payments under the Annual Plan until the first meeting of
the Company's stockholders at which directors will be elected after the close of
the third calendar year following the calendar year in which the Offering
occurs. The Board or the Compensation Committee may, at any time, amend,
suspend, discontinue or terminate the Annual Plan; provided, however, that no
material modification to the Annual Plan will be effective without approval by
the shareholders of the Company.
OWNERSHIP OF THE COMMON STOCK
Immediately prior to the consummation of the Offering, Mario J. Gabelli,
One Corporate Center, Rye, New York, through his approximately two-thirds
ownership of GFI, will beneficially own all of the outstanding shares of Class B
Common Stock of the Company. Immediately after consummation of the Offering,
GFI, directly and indirectly through two of its subsidiaries, will beneficially
own all of the 24,000,000 outstanding shares of Class B Common Stock, which
ownership will represent approximately 97.6% of the combined voting power of the
outstanding shares of Common Stock of the Company (approximately 97.2% if the
Underwriters' over-allotment option is exercised in full). Accordingly, Mr.
Gabelli, through his approximately two-thirds ownership of GFI, will
beneficially own approximately 97.6% of the combined voting power of the
outstanding shares of Common Stock of the Company immediately following
consummation of the Offering (approximately 97.2% if the Underwriters'
over-allotment option is exercised in full). No other director or executive
officer of the Company will beneficially own any shares of Common Stock, and no
other person will beneficially own more than 5% of any class of the Common Stock
of the Company outstanding immediately after the consummation of the Offering.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following is a summary of certain arrangements between the Company and
Mr. Gabelli and members of his immediate family. Although the Company believes
that these arrangements embody terms and conditions no less favorable to the
Company than could be obtained in negotiations between independent parties,
these arrangements were established before the Offering and were not the subject
of arm's-length negotiations. See "Risk Factors -- Control by Mr. Gabelli;
Conflicts of Interest."
THE FORMATION TRANSACTIONS
The Company is a holding company that was newly formed in connection with
the Offering and, accordingly, has not previously engaged in any business
operations, acquired any assets or incurred any liabilities other than in
connection with the Offering. Prior to the Offering, the Company issued 24
million shares of its Class B Common Stock, representing all of its then issued
and outstanding shares of Common Stock to GFI for substantially all of the
operating assets and liabilities of GFI relating to its institutional and retail
asset management, mutual fund advisory, underwriting and brokerage business.
Following the Offering, GFI will be renamed "Gabelli Group Capital Partners,
Inc." As a result, GFI, which is approximately two-thirds owned by Mr. Gabelli
with the balance owned by the Company's professional staff and other
individuals, will own all of the outstanding common stock of the Company prior
to the consummation of the Offering. At such time, one of GFI's most significant
assets will be its investment in the Company. Immediately following the
Offering, the Company will conduct its business operations through its
subsidiaries. After the consummation of the Offering, GFI will own all of the
outstanding shares of Class B Common Stock, which will represent approximately
97.6% of the combined voting power of the outstanding Common Stock of the
Company (97.2% if the Underwriters' over-allotment option is exercised in full).
The Company will continue to be controlled by Mr. Gabelli, who through his
approximately two-thirds ownership of GFI will indirectly beneficially own
approximately 97.6% of the combined voting power of the outstanding Common Stock
of the Company (97.2% if the Underwriters' over-allotment option is exercised in
full).
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Prior to the Offering, the Company and Mr. Gabelli entered into an
Employment Agreement which provides that Mr. Gabelli will receive an
incentive-based management fee of 10% of the aggregate pre-tax profits of the
Company as computed for financial reporting purposes in accordance with
generally accepted accounting principles before consideration of this fee so
long as he is an executive of the Company and devoting the substantial majority
of his working time to the business of the Company. The Employment Agreement
further provides that Mr. Gabelli will receive a deferred payment of $50 million
on January 2, 2002, plus interest payable quarterly at an annual rate of 6%. See
"Management -- Employment Agreements."
The Company and GFI have entered into a Management Services Agreement, with
a one year term and renewable annually, under which the Company will provide
certain services for GFI, including furnishing office space and equipment,
providing insurance coverage, overseeing the administration of its business and
providing personnel to perform certain administrative services.
Effective with the Offering, the Company will enter into an agreement with
GFI (the "Tax Indemnification Agreement") to indemnify GFI and the shareholders
of GFI (the "Tax Indemnitees"), against certain taxes due and payable by the Tax
Indemnitees on or after the Offering that relate to activities of GFI or certain
of its affiliates in respect of periods prior to the Offering ("Taxes").
Generally, when a corporation owns assets and conducts a business prior to a
public offering of its stock, such corporation continues to be liable for any
unpaid taxes relating to its business operations prior to such offering.
However, since the operations of the Company were conducted by GFI and not the
Company prior to the Offering, the Company is not automatically liable for any
unpaid taxes relating to such operations prior to the Offering. Consequently,
the Tax Indemnification Agreement has been agreed to by the Company and GFI to
require the Company, and not GFI or the shareholders of GFI, to bear the cost of
Taxes relating to the assets and operations of the Company prior to the
Offering. The Company will be required to make additional payments to offset any
taxes payable by a Tax Indemnitee in respect of payments made pursuant to the
Tax Indemnification Agreement. Any payment of Taxes by the Company will be
offset by any tax benefit received by the Tax Indemnitee. The Tax
Indemnification Agreement includes provisions that permit the Company to control
any tax proceeding or contest which might result in the Company being required
to make a payment under the Tax Indemnification Agreement.
The foregoing transactions are collectively referred to herein as the
"Formation Transactions."
TRANSACTIONS WITH MR. GABELLI AND AFFILIATES
Mr. Gabelli intends to continue devoting time to activities outside of the
Company, including managing his own assets and his family's assets, managing or
controlling companies in other industries and managing assets for other
investors through the Permissible Accounts (approximately $110 million as of
September 30, 1998). These activities may present conflicts of interest or
compete with the Company. In order to minimize conflicts and potential
competition with the Company's investment management business, Mr. Gabelli has
undertaken that so long as he is associated with the Company or for a period of
five years from the consummation of the Offering, whichever is longer, he will
not provide investment management services for compensation other than in his
capacity as an officer or employee of the Company except for the Permissible
Accounts. Prior to establishing any additional Permissible Accounts, Mr. Gabelli
has agreed to have a committee of independent directors review any proposed new
Permissible Account for conformity with the specific undertakings set forth
under "Risk Factors -- Control by Mr. Gabelli; Conflicts of Interests", and to
accept the committee's determination as final. See "Risk Factors -- Control by
Mr. Gabelli; Conflicts of Interest." The Certificate of Incorporation of the
Company expressly provides that in general Mr. Gabelli, members of his immediate
family who are officers and directors of the Company and entities controlled by
such persons have an obligation to present corporate opportunities to the
Company and resolve conflicts of interests through one of the processes
described in the Certificate of Incorporation, which include independent
director or independent shareholder approval. See "Description of Capital
Stock -- Certificate of Incorporation and Bylaw Provisions -- Overview of
Corporate Opportunity and Conflict of Interest Policies." As of the completion
of the Offering, it is expected that there will be no members of Mr. Gabelli's
immediate family who are officers or directors of the Company.
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The Company will not derive any income from activities outside of the
Company by Mr. Gabelli, members of his immediate family who are officers and
directors of the Company and entities controlled by such persons, and the
Company may not be able to take advantage of business and investment
opportunities that could later prove to be beneficial to the Company and the
shareholders. Where a conflict of interest involves a transaction between Mr.
Gabelli, members of his immediate family who are officers and directors of the
Company or entities controlled by such persons and the Company, there can be no
assurance that the Company would not receive more favorable terms if it were
dealing with an unaffiliated party although the Company will seek to achieve
market-based terms in all such transactions. See "Risk Factors -- Control by Mr.
Gabelli; Conflicts of Interest" and "Description of Capital Stock -- Certificate
of Incorporation and Bylaw Provisions -- Overview of Corporate Opportunity and
Conflict of Interest Policies."
Among the existing activities outside of the Company (including the
Permissible Accounts) in which Mr. Gabelli is engaged, Mr. Gabelli will continue
to serve as Chairman of the Board, Chief Executive Officer and Chief Investment
Officer of GFI, and as President and Chief Investment Officer of MJG Associates,
Inc. ("MJG Associates"), which is wholly owned by Mr. Gabelli and which acts as
investment manager for Gabelli Performance Partnership L.P. (a domestic hedge
fund), Gabelli International Limited (an offshore investment company), Gabelli
International II Limited (an offshore investment company), Gabelli Fund, LDC (an
offshore limited duration company) and an account for an unaffiliated hedge
fund. At September 30, 1998, such entities had assets under management of
approximately $110 million from unaffiliated third parties. Mr. Gabelli will
also continue to serve as managing member of Rivgam LMDS, LLC (a wireless
communications company). Mr. Gabelli will also continue to serve as the general
partner of MJG IV Limited Partnership (a family-controlled investment
partnership), and as President and a trustee of the Gabelli Foundation, Inc. (an
accredited charitable foundation). Mr. Gabelli also expects to continue to serve
as Chairman and Chief Executive Officer of Lynch Corporation (a public company
engaged in multimedia, specialized transportation and manufacturing businesses),
a director of East/West Communications, Inc. (a public company holding personal
communications services licenses) and a Governor of the American Stock Exchange.
Historically, the Company has been required to pay Mr. Gabelli as part of
his total compensation a management fee equal to 20% of the pre-tax profits of
each of the Company's operating units before consideration of this management
fee. This fee approximated $9,423,000, $10,192,000, $10,580,000 and $12,245,877
for the years ended December 31, 1995, 1996, 1997 and 1998, respectively.
The Company has entered into an agreement with Mr. Gabelli which provides
that Mr. Gabelli will assign and transfer to the Company, effective as of the
Offering, any and all right, title and interest he has in the "Gabelli" name as
a trademark, service mark or corporate or trade name for use in connection with
investment management services, mutual funds and securities brokerage services.
However, under the agreement, Mr. Gabelli will retain any and all right, title
and interest he has or may have in the "Gabelli" name for use in connection with
(i) charitable foundations controlled by Mr. Gabelli or members of his family or
(ii) entities engaged in private investment activities for Mr. Gabelli or
members of his family. In addition, the funds managed by Mr. Gabelli outside the
Company have entered into a license agreement with the Company, effective as of
the Offering, permitting them to continue limited use of the "Gabelli" name
under specified circumstances.
The Company and GAMCO made contributions to the Gabelli Foundation, Inc. of
approximately $1.0 million and $1.6 million in 1997 and 1996, respectively.
As of December 5, 1997, the Company entered into a master lease agreement
with M(4)E, LLC, which is owned by the children of Mr. Gabelli, for a 60,000
square foot building, of which approximately 35,000 square feet are currently
subleased to other tenants. The master lease for the building and property,
which is located at 401 Theodore Fremd Avenue, Rye, New York 10580, expires on
April 30, 2013. From December 5, 1997 through December 31, 2002, the Company has
agreed to pay rent equal to $720,000 per year. From January 1, 2003 through
December 31, 2003, the rent will increase to $756,000 per year. From January 1,
2004 through April 30, 2013, the rent will be a minimum of $756,000, adjusted
for inflation. The Company is responsible under the lease agreement for all
operating expenses, costs of electricity and other utilities and taxes. In
connection with the purchase of this building, the Company loaned M(4)E, LLC
$3.6 million in December
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1997, which loan accrued interest at an annual rate of 7%. Such loan and
interest thereon was repaid in March 1998.
As of December 5, 1997, the Company subleased to Lynch Corporation, an
entity for which Mario J. Gabelli serves as Chairman and Chief Executive Officer
and is an approximately 23% stockholder, approximately 5,000 square feet in the
building located at 401 Theodore Fremd Avenue, Rye, New York 10580. The sublease
has a five-year term. Lynch Corporation pays rent to the Company at the rate of
$18 per square foot, subject to adjustment for increases in taxes and other
operating expenses, plus a minimum payment of $2.50 per square foot for
electricity.
On August 12, 1996, the Company made a secured loan of $11.8 million to
Lynch Corporation, which accrued interest at the annual rate of 10% and a 1%
commitment fee. Such loan and interest thereon was repaid in August 1997. The
Company also received a special fee equal to a 10% net profits interest (after a
capital charge) in an entity now known as East/West Communications, Inc., which
interest was converted into a 10% equity interest in December 1997.
GAMCO has entered into agreements to provide advisory and administrative
services to MJG Associates, Inc., which is wholly owned by Mr. Gabelli, and to
GSI with respect to the private investment funds managed by each of them.
Pursuant to such agreements, GSI and MJG Associates, Inc. each paid GAMCO
$50,000 (excluding reimbursement of expenses) in 1997.
In March 1997, the Company made a loan of $10 million to Lynch Corporation
which accrued interest at the prime rate and a 1% commitment fee. Such loan and
interest thereon was repaid in June 1997.
In February 1998, the Company guaranteed a $30 million loan made by The
Chase Manhattan Bank to Rivgam LMDS, LLC, an entity for which Mr. Gabelli is the
Managing Member and in which he has a 71% ownership interest. Such loan and
interest thereon was repaid in April 1998.
Gabelli Advisers, Inc. has two classes of stock. The Company owns 51.1% of
the Class B common stock of Gabelli Advisers, Inc. (representing approximately
40.9% of the total equity interest and 49.9% of the total voting power). The
remainder of the Class B common stock is owned by the Company's staff, including
34.9% owned by a limited partnership controlled by Mr. Gabelli and owned by him
and his children, 7% owned by Mr. Alpert, 1% owned by Mr. Jamieson, 1% owned by
Mr. Bondi and the remaining 5% owned by the other staff members. Westwood
Management, a wholly owned subsidiary of Southwest Securities Group, Inc., owns
all of the Class A common stock (representing 20% of the total equity interest
and 2.4% of the total voting power). In February 1998, Gabelli Advisers, Inc.
offered all of its shareholders the opportunity to subscribe to a $3 million
short-term debt offering in proportion to their economic ownership interest. In
lieu of interest, Gabelli Advisers, Inc. offered a total of 60,000 warrants
expiring in three years to acquire Class A common stock of Gabelli Advisers,
Inc. at $5 per share. The majority of the shareholders participated in this
offering, including GFI, the above-mentioned limited partnership and Messrs.
Alpert, Bondi and Jamieson.
Gabelli Securities International Limited ("Gabelli Securities
International") was formed in 1994 to provide management and investment advisory
services to the Gabelli International Gold Fund Limited ("GIGFL"), an offshore
investment company investing primarily in securities of issuers with
gold-related activities. One of Mr. Gabelli's children owns 55% of Gabelli
Securities International and GSI owns the remaining 45%. GSI has entered into an
agreement with Gabelli Securities International to provide investment advisory
services to GIGFL in return for receiving all investment management fees paid by
GIGFL. Pursuant to such agreement, GSI received investment management fees of
$127,000, $162,000 and $14,000 in 1995, 1996 and 1997, respectively.
TRANSACTIONS WITH OTHER RELATED PARTIES
As required by the Company's Code of Ethics, the Company's staff members
are required to maintain their brokerage accounts at Gabelli & Company unless
they receive permission to maintain an outside account. Gabelli & Company offers
all of its staff the opportunity to engage in brokerage transactions at
discounted rates. Accordingly, many of the Company's staff members, including
senior management, have brokerage accounts at Gabelli & Company and have engaged
in securities transactions through it at discounted rates.
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In connection with the acquisition of a limited partnership interest in a
private fund managed by the Company, Mr. Jamieson executed a demand note with
respect to a loan of $350,000, which accrues interest at an annual rate of 7%.
The Company has an agreement with Mr. Karl Otto Pohl to pay him an annual
retainer fee equal to the difference between $250,000 and the amounts received
by Mr. Pohl directly from the Mutual Funds for his service on the boards of
directors of the Mutual Funds.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 100,000,000 shares
of Class A Common Stock, 100,000,000 shares of Class B Common Stock, and
10,000,000 shares of Preferred Stock. No Preferred Stock is outstanding as of
the date of this Prospectus. Of the 100,000,000 shares of Class A Common Stock
authorized, the 6,000,000 shares being offered in the Offering (6,900,000 shares
if the Underwriters' over-allotment option is exercised in full) will be
outstanding, and 1,500,000 shares have been reserved for issuance pursuant to
certain employee benefits plans. See "Management -- 1999 Stock Award and
Incentive Plan." Of the 100,000,000 shares of Class B Common Stock authorized,
24,000,000 will be outstanding and held by GFI upon consummation of the
Offering. The following is a summary description of all material terms and
provisions relating to the Company's capital stock, Restated Certificate of
Incorporation (the "Certificate of Incorporation") and the Amended and Restated
Bylaws (the "Bylaws"), but is qualified by reference to the Certificate of
Incorporation and Bylaws, copies of which are filed as exhibits to the
Registration Statement of which this Prospectus forms a part.
COMMON STOCK
Voting Rights. The holders of Class A Common Stock and Class B Common
Stock have identical voting rights except that (i) holders of Class A Common
Stock are entitled to one vote per share while holders of Class B Common Stock
are entitled to ten votes per share on all matters to be voted on by
shareholders and (ii) holders of Class A Common Stock are not eligible to vote
on matters relating exclusively to Class B Common Stock and vice versa. Holders
of Shares of Class A Common Stock and Class B Common Stock are not entitled to
cumulate their votes in the election of directors. Generally, all matters to be
voted on by shareholders must be approved by a majority (or, in the case of
election of directors, by a plurality) of the votes entitled to be cast by all
shares of Class A Common Stock and Class B Common Stock present in person or
represented by proxy, voting together as a single class, subject to any voting
rights granted to holders of any Preferred Stock. Except as otherwise provided
by law, and subject to any voting rights granted to holders of any outstanding
Preferred Stock, amendments to the Company's Certificate of Incorporation
generally must be approved by a majority of the combined voting power of all
Class A Common Stock and Class B Common Stock voting together as a single class.
Amendments to the Company's Certificate of Incorporation that would alter or
change the powers, preferences or special rights of the Class A Common Stock or
the Class B Common Stock so as to affect them adversely also must be approved by
a majority of the votes entitled to be cast by the holders of the shares
affected by the amendment, voting as a separate class. Notwithstanding the
foregoing, any amendment to the Company's Certificate of Incorporation to
increase the authorized shares of any class or classes of Stock will be deemed
not to affect adversely the powers, preferences or special rights of the Class A
Common Stock or Class B Common Stock.
Dividends. Holders of Class A Common Stock and Class B Common Stock will
receive an equal amount per share in any dividend declared by the Board of
Directors, subject to any preferential rights of any outstanding Preferred
Stock. Dividends consisting of shares of Class A Common Stock and Class B Common
Stock may be paid only as follows: (i) shares of Class A Common Stock may be
paid only to holders of Class A Common Stock and shares of Class B Common Stock
may be paid only to holders of Class B Common Stock and (ii) shares will be paid
proportionally with respect to each outstanding share of Class A Common Stock
and Class B Common Stock.
Other Rights. On liquidation, dissolution or winding up of the Company,
after payment in full of the amounts required to be paid to holders of Preferred
Stock, if any, all holders of Common Stock, regardless of class, are entitled to
share ratably in any assets available for distribution to holders of shares of
Common
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Stock. No shares of Common Stock are subject to redemption or have preemptive
rights to purchase additional shares of Common Stock. Upon consummation of the
Offering, all the outstanding Shares of Class A Common Stock and Class B Common
Stock will be validly issued, fully paid and nonassessable.
In the event of any corporate merger, consolidation, purchase or
acquisition of property or stock, or other reorganization in which any
consideration is to be received by the holders of Class A Common Stock or the
holders of Class B Common Stock as a class, the holders of Class A Common Stock
and the holders of Class B Common Stock will receive the same consideration on a
per share basis; except that, if such consideration shall consist in any part of
voting securities (or of options or warrants to purchase, or of securities
convertible into or exchangeable for, voting securities), the holders of Class B
Common Stock may receive, on a per share basis, voting securities with up to ten
times the number of votes per share as those voting securities to be received by
the holders of Class A Common Stock (or options or warrants to purchase, or
securities convertible into or exchangeable for, voting securities with up to
ten times the number of votes per share as those voting securities issuable upon
exercise of the options or warrants, or into which the convertible or
exchangeable securities may be converted or exchanged, received by the holders
of Class A Common Stock). Accordingly, except with respect to voting rights, the
holders of Class B Common Stock will not receive greater value than the holders
of Class A Common Stock in an extraordinary corporate transaction involving the
Company. In the event of any corporate merger, consolidation, purchase of
property or stock or other reorganization to be accounted for under the pooling
of interests method of accounting, in which the Company issues common stock, the
Company anticipates that it will be required to issue shares of Class B Common
Stock as consideration for such transaction.
Preferred Stock. As of the date of this Prospectus, no shares of Preferred
Stock are outstanding. The Board of Directors may authorize the issuance of
Preferred Stock in one or more series and may determine, with respect to any
such series, the powers, preferences and rights of such series, and its
qualifications, limitations and restrictions, including, without limitation, (i)
the designation of the series; (ii) the number of shares of the series, which
number the Board of Directors may thereafter (except where otherwise provided in
the designations for such series) increase or decrease (but not below the number
of shares of such series then outstanding); (iii) whether dividends, if any,
will be cumulative or noncumulative and the dividend rate of the series; (iv)
the conditions upon which and the dates at which dividends, if any, will be
payable, and the relation that such dividends, if any, will bear to the
dividends payable on any other class or classes of Stock; (v) the redemption
rights and price or prices, if any, for shares of the series; (vi) the terms and
amounts of any sinking fund provided for the purchase or redemption of shares of
the series; (vii) the amounts payable on and the preferences, if any, of shares
of the series, in the event of any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Company; (viii) whether the
shares of the series will be convertible into shares of any other class or
series, or any other security, of the Company or any other corporation, and, if
so, the specification of such other class or series or such other security, the
conversion price or prices or rate or rates, any adjustments thereof, the date
or dates as of which such shares will be convertible and all other terms and
conditions upon which such conversion may be made; and (ix) the voting rights,
in addition to the voting rights provided by law, if any, of the holders of
shares of such series.
The Company believes that the ability of the Board of Directors to issue
one or more series of Preferred Stock will provide the Company with flexibility
in structuring possible future financings and acquisitions and in meeting other
corporate needs that might arise. The authorized shares of Preferred Stock will
be available for issuance without further action by the Company's shareholders
unless such action is required by applicable law or the rules of any stock
exchange or automated quotation system on which the Company's securities may be
listed or traded. The NYSE currently requires shareholder approval as a
prerequisite to listing shares in several circumstances, including where the
present or potential issuance of shares could result in an increase in the
number of shares of Common Stock outstanding, or in the amount of voting
securities outstanding, of at least 20%.
Although the Board of Directors has no current intention of doing so, it
could issue a series of Preferred Stock that could, depending on the terms of
such series, impede the completion of a merger, tender offer or other takeover
attempt. The Board of Directors will make any determination to issue such shares
based on its judgment as to the best interests of the Company and its
shareholders. The Board of Directors, in so acting,
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could issue Preferred Stock having terms that could discourage a potential
acquirer from making, without first negotiating with the Board of Directors, an
acquisition attempt through which such acquirer may be able to change the
composition of the Board of Directors, including a tender offer or other
transaction that some, or a majority, of the Company's shareholders might
believe to be in their best interests or in which shareholders might receive a
premium for their stock over the then current market price of such stock.
BUSINESS COMBINATION STATUTE
Section 912 of the New York Business Corporation Law ("NYBCL") prohibits a
company from entering into a business combination (e.g., a merger,
consolidation, sale of 10% or more of a company's assets or issuance of
securities with an aggregate market value of 5% or more of the aggregate market
value of all of the company's outstanding capital stock) with a beneficial owner
of 20% or more of a company's securities (a "20% shareholder") for a period of
five years following the date such beneficial owner became a 20% shareholder
(the "stock acquisition date"), unless, among other things, such business
combination or the purchase of stock resulting in the 20% shareholder's
beneficial ownership was approved by the Company's board of directors prior to
the stock acquisition date or the business combination is approved by the
affirmative vote of the holders of a majority of the outstanding voting stock
exclusive of the stock beneficially owned by the 20% shareholder. The Bylaws of
the Company were amended to provide that the Company will not be governed by
Section 912 of the NYBCL effective August 2000.
CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS
The summary set forth below describes certain provisions of the Certificate
of Incorporation and Bylaws. The summary is qualified in its entirety by
reference to the provisions of the Certificate of Incorporation and Bylaws,
copies of which will be filed as exhibits to the Registration Statement of which
this Prospectus forms a part.
Certain of the provisions of the Certificate of Incorporation or the Bylaws
discussed below may have the effect, either alone or in combination with the
provisions of the NYBCL discussed above, of making more difficult or
discouraging a tender offer, proxy contest or other takeover attempt that is
opposed by the Board of Directors but that a shareholder might consider to be in
such shareholder's best interest. Those provisions include (i) restrictions on
the rights of shareholders to remove or elect directors; and (ii) prohibitions
against shareholders calling a special meeting of shareholders. In addition, the
Certificate of Incorporation contains provisions relating to the allocation of
certain corporate opportunities and resolution of certain potential conflicts of
interest. See "-- Overview of Corporate Opportunity and Conflict of Interest
Policies," "-- Corporate Opportunity Policy" and "-- Conflict of Interests
Policy."
Number of Directors; Removal; Filling Vacancies
The Bylaws provide that, subject to any rights of holders of Preferred
Stock to elect directors under specified circumstances, the number of directors
will be fixed from time to time exclusively pursuant to a resolution adopted by
directors constituting a majority of the total number of directors that the
Company would have if there were no vacancies on the Board of Directors (the
"Whole Board"), with the Whole Board consisting of not more than nine nor less
than five directors. The Certificate of Incorporation and Bylaws also provide
that, subject to any rights of holders of Preferred Stock or any other series or
class of Stock, and unless the Board of Directors otherwise determines, any
vacancies will be filled only by the affirmative vote of a majority of the
remaining directors, even if less than a quorum. Accordingly, absent an
amendment to the Bylaws, the Board of Directors could prevent any shareholder
from enlarging the Board of Directors and filling the new directorships with
such shareholder's own nominees.
The Certificate of Incorporation provides that, subject to the rights of
holders of Preferred Stock to elect directors under specified circumstances,
effective as of the date on which Mr. Gabelli beneficially owns less than a
majority of the voting power of the Voting Stock (as defined below) (the
"Trigger Date"), a director may be removed only for cause and only upon the
affirmative vote of holders of at least 80% of the voting power of all the then
outstanding shares of Stock entitled to vote generally in the election of
directors ("Voting
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Stock"), voting together as a single class. Before the Trigger Date, directors
may be removed, without cause, with the affirmative vote of the holders of at
least a majority of the voting power of the then outstanding Voting Stock,
voting together as a single class.
Special Meetings
The Bylaws provide that, subject to the rights of holders of any series of
Preferred Stock to elect additional directors under specified circumstances and
the rights of shareholders to call a special meeting to elect a sufficient
number of directors to conduct the business of the Company under specified
circumstances, special meetings of shareholders can be called only by the Board
of Directors pursuant to a resolution adopted by a majority of the Whole Board
or the Chairman of the Board, except that prior to the Trigger Date, special
meetings can also be called at the request of the holders of a majority of the
voting power of the then outstanding Voting Stock. Accordingly, effective as of
the Trigger Date, shareholders will not be permitted to call a special meeting
or to require that the Board of Directors call a special meeting of shareholders
except under the limited circumstances described in the preceding sentence.
Moreover, the business permitted to be conducted at any special meeting of
shareholders is limited to the business brought before the meeting pursuant to
the notice of meeting given by the Company.
The provisions of the Bylaws permitting special meetings to be called only
by the Chairman or at the request of a majority of the Whole Board may have the
effect, after the Trigger Date, of delaying consideration of a shareholder
proposal until the next annual meeting. Moreover, a shareholder could not force
shareholder consideration of a proposal over the opposition of the Chairman or a
majority of the Whole Board by calling a special meeting of shareholders prior
to the time such parties believe such consideration to be appropriate.
Liability of Directors; Indemnification
The Company's Certificate of Incorporation provides that, to the fullest
extent permitted by the NYBCL, no director of the Company shall be liable to the
Company or it shareholders for monetary damages for the breach of fiduciary duty
in such capacity. Under the NYBCL, such provision does not eliminate or limit
the liability of any director (i) if a judgment or other final adjudication
adverse to such director establishes that his acts or omissions were in bad
faith or involved intentional misconduct or a knowing violation of law or that
he personally gained a material profit or other advantage to which he was not
legally entitled or that his acts violated Section 719 of the NYBCL or (ii) for
any act or omission prior to the adoption of this provision. As a result of this
provision, the Company and its shareholders may be unable to obtain monetary
damages from a director for breach of his duty of care. Although shareholders
may continue to seek injunctive or other equitable relief for an alleged breach
of fiduciary duty by a director, shareholders may not have any effective remedy
against the challenged conduct if equitable remedies are unavailable.
The Bylaws provide that the Company will indemnify any person who was or is
a party to any threatened, pending, or completed action, suit or proceeding
because he or she is or was a director, officer, employee or agent of the
Company, or is or was serving at the request of the Company as a director or
officer of another corporation, partnership or other enterprise. The Bylaws
provide that indemnification will be from and against expenses, judgments, fines
and amounts paid in settlement by the indemnitee. However, this indemnification
will only be provided if the indemnitee acted in good faith and in a manner he
or she reasonably believed to be in, or not opposed to, the best interests of
the Company, and, with respect to a criminal action or proceeding, if the
indemnitee had no reasonable cause to believe that his or her conduct was
unlawful.
Overview of Corporate Opportunity and Conflict of Interest Policies
In order to address certain potential conflicts of interest between the
Company and Mr. Gabelli, members of his immediate family and affiliates, Mr.
Gabelli and members of his immediate family who are currently officers or
directors of the Company have agreed to limitations on their activities in the
investment management business other than Permissible Accounts. See "Certain
Relationships and Related Transactions -- Transactions with Mr. Gabelli and
Affiliates." In addition, the Certificate of Incorporation contains provisions
concerning the conduct of certain affairs of the Company as they may involve Mr.
Gabelli,
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members of his immediate family and affiliates, and the powers, rights, duties
and liabilities of the Company and its subsidiaries and their respective
officers, directors and shareholders in connection therewith.
For purposes of these provisions, (i) the "Company" includes its
subsidiaries and other entities in which it beneficially owns 50% or more of the
outstanding voting securities or comparable interests, and (ii) a "Gabelli"
includes Mr. Gabelli, any member of his immediate family who is at the time an
officer or director of the Company and any entity in which one or more Gabellis
beneficially own a controlling interest of the outstanding voting securities or
comparable interests. "Corporate opportunities" potentially allocable to the
Company consist of business opportunities that (i) the Company is financially
able to undertake; (ii) are, from their nature, in the Company's actual line or
lines of business and are of practical advantage to the Company; and (iii) are
ones in which the Company has an interest or reasonable expectancy. "Corporate
opportunities" do not include transactions in which the Company or a Gabelli is
permitted to participate pursuant to any agreement between the Company and such
Gabelli that is in effect as of the time any equity security of the Company is
held of record by any person other than a Gabelli or is subsequently entered
into with the approval of the members of the Board of Directors and do not
include passive investments.
Before the Trigger Date, the affirmative vote of the holders of a majority
of the outstanding Voting Stock, voting together as a single class, will be
required to alter, amend or repeal any of these conflict of interest or
corporate opportunity provisions in a manner adverse to the interests of any
Gabelli. After the Trigger Date, such vote will be increased to 80% to alter,
amend, repeal or replace any of the conflict of interest and corporate
opportunity provisions.
Corporate Opportunity Policy
Except with respect to opportunities that involve Permissible Accounts, if
a Gabelli acquires knowledge of a potential transaction on a matter that is a
corporate opportunity for both any Gabelli and the Company, such Gabelli will
have a duty to communicate that opportunity to the Company and may not pursue
that opportunity or direct it to another person unless the Company declines such
opportunity or fails to pursue it.
If a director or officer of the Company other than a Gabelli acquires
knowledge of a potential transaction or matter that may be a corporate
opportunity for both the Company and a Gabelli, the Certificate of Incorporation
requires that such director or officer act in good faith in accordance with the
following two-part policy.
First, a corporate opportunity offered to any person who is a director but
not an officer of the Company and who is also a director (whether or not an
officer) of an entity which is at the time a Gabelli will belong to such Gabelli
or to the Company, as the case may be, depending on whether the opportunity is
expressly offered to the person primarily in his or her capacity as an officer
or director of the entity which is at the time a Gabelli or of the Company,
respectively. Otherwise, the opportunity will belong to the Company to the same
extent as if the opportunity came directly to the Company.
Second, a corporate opportunity offered to any person who is an officer
(whether or not a director) of the Company and who is also a director or an
officer of an entity which is at the time a Gabelli will belong to the Company,
unless the opportunity is expressly offered to that person primarily in his or
her capacity as a director or officer of the entity which is at the time a
Gabelli, in which case the opportunity will belong to such Gabelli to the same
extent as if the opportunity came directly to a Gabelli.
Under the Certificate of Incorporation, a director or officer of the
Company (other than a Gabelli) who acts in accordance with the foregoing
two-part policy (i) will be deemed fully to have satisfied his or her fiduciary
duties to the Company and its shareholders with respect to such corporate
opportunity; (ii) will not be liable to the Company or its shareholders for any
breach of fiduciary duty by reason of the fact that a Gabelli pursues or
acquires such opportunity or directs such corporate opportunity to another
person or entity or does not communicate information regarding such opportunity
to the Company; (iii) will be deemed to have acted in good faith and in a manner
he or she reasonably believes to be in the best interests of the Company; and
(iv) will be deemed not to have breached his or her duty of loyalty to the
Company or its shareholders and not to have derived an improper benefit
therefrom.
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Under the Certificate of Incorporation, any corporate opportunity that
belongs to a Gabelli or to the Company pursuant to the foregoing policy will not
be pursued by the other (or directed by the other to another person or entity)
unless and until such Gabelli or the Company, as the case may be, determines not
to pursue the opportunity. If the party to whom the corporate opportunity
belongs does not, however, within a reasonable period of time, begin to pursue,
or thereafter continue to pursue, such opportunity diligently and in good faith,
the other party may pursue such opportunity (or direct it to another person or
entity).
Conflict of Interests Policy
The Certificate of Incorporation provides that no contract, agreement,
arrangement or transaction, or any amendment, modification or termination
thereof, or any waiver of any right thereunder, (each, a "Transaction") between
the Company and (i) a Gabelli, (ii) any customer or supplier, (iii) any entity
in which a director of the Company has a financial interest (a "Related
Entity"), or (iv) one or more of the directors or officers of the Company or any
Related Entity; will be voidable solely because any of the persons or entities
listed in (i) through (iv) above are parties thereto, if the standard specified
below is satisfied. Further, no Transaction will be voidable solely because any
such directors or officers are present at or participate in the meeting of the
Board of Directors or committee thereof that authorizes the Transaction or
because their votes are counted for such purpose, if the standard specified is
satisfied. That standard will be satisfied, and such Gabelli, the Related
Entity, and the directors and officers of the Company, or the Related Entity (as
applicable) will be deemed to have acted reasonably and in good faith (to the
extent such standard is applicable to such person's conduct) and fully to have
satisfied any duties of loyalty and fiduciary duties they may have to the
Company and its shareholders with respect to such Transaction if any of the
following four requirements are met:
(i) the material facts as to the relationship or interest and as to
the Transaction are disclosed or known to the Board of Directors or the
committee thereof that authorizes the Transaction, and the Board of
Directors or such committee in good faith approves the Transaction by the
affirmative vote of a majority of the disinterested directors on the Board
of Directors or such committee, even if the disinterested directors are
less than a quorum;
(ii) the material facts as to the relationship or interest and as to
the Transaction are disclosed or known to the holders of Voting Stock
entitled to vote thereon, and the Transaction is specifically approved by
vote of the holders of a majority of the voting power of the then
outstanding Voting Stock not owned by such Gabelli or such Related Entity,
voting together as a single class;
(iii) the Transaction is effected pursuant to guidelines that are in
good faith approved by a majority of the disinterested directors on the
Board of Directors or the applicable committee thereof or by vote of the
holders of a majority of the then outstanding voting Stock not owned by
such Gabelli or such Related Entity, voting together as a single class; or
(iv) the Transaction is fair to the Company as of the time it is
approved by the Board of Directors, a committee thereof or the shareholders
of the Company.
The Certificate of Incorporation also provides that any such Transaction
authorized, approved, or effected, and each of such guidelines so authorized or
approved, as described in (i), (ii) or (iii) above, will be deemed to be
entirely fair to the Company and its shareholders, except that, if such
authorization or approval is not obtained, or such Transaction is not so
effected, no presumption will arise that such Transaction or guideline is not
fair to the Company and its shareholders. In addition, the Certificate of
Incorporation provides that a Gabelli will not be liable to the Company or its
shareholders for breach of any fiduciary duty that a Gabelli may have as a
shareholder of the Company by reason of the fact that a Gabelli takes any action
in connection with any transaction between such Gabelli and the Company. For
purposes of these provisions, interests in an entity that are not equity or
ownership interests or that constitute less than 10% of the equity or ownership
interests of such entity will not be considered to confer a financial interest
on any person who beneficially owns such interests.
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The New York courts have not ruled on the validity or enforceability of
provisions similar to the corporate opportunity and conflicts of interest
provisions that are included in the Company's Certificate of Incorporation and
could rule that certain liabilities which they purport to eliminate remain in
effect.
LISTING
The Class A Common Stock has been approved for listing, subject to official
notice of issuance, on the NYSE under the symbol "GBL."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is State Street Bank
and Trust Company.
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SHARES ELIGIBLE FOR FUTURE SALE
Immediately after consummation of the Offering, the Company will have 6
million shares of Class A Common Stock issued and outstanding (6.9 million
shares of Class A Common Stock if the Underwriters' over-allotment option is
exercised in full) and 24 million shares of Class B Common Stock issued and
outstanding. All of the shares of Class A Common Stock to be sold in the
Offering will be freely tradable without restrictions or further registration
under the Securities Act, except that shares purchased by an "affiliate" of the
Company (as that term is defined in Rule 144 (an "Affiliate")) will be subject
to the resale limitations of Rule 144. The 24 million shares of Class B Common
Stock owned by GFI and two of its subsidiaries are "restricted securities" as
defined in Rule 144 under the Securities Act, and may not be sold in the absence
of registration under the Securities Act other than pursuant to Rule 144 under
the Securities Act or another exemption from registration under the Securities
Act.
In general, under Rule 144, as currently in effect, (i) a person (or
persons whose shares are required to be aggregated) who has beneficially owned
shares of Common Stock as to which at least one year has elapsed since such
shares were sold by the Company or by an Affiliate of the Company in a
transaction or chain of transactions not involving a public offering
("restricted securities") or (ii) an Affiliate of the Company who holds shares
of Common Stock that are not restricted securities may sell, within any
three-month period, a number of such shares that does not exceed the greater of
1% of the Company's class of Common Stock then outstanding or the average weekly
trading volume in the class of Common Stock during the four calendar weeks
preceding the date on which notice of such sale required under Rule 144 was
filed. Sales under Rule 144 are also subject to certain provisions relating to
the manner and notice of sale and availability of current public information
about the Company. Affiliates of the Company must comply with the requirements
of Rule 144, including the one-year holding period requirement, to sell shares
of Common Stock that are restricted securities. Furthermore, if a period of at
least two years has elapsed from the date restricted securities were acquired
from the Company or an Affiliate of the Company, a holder of such restricted
securities who is not an Affiliate of the Company at the time of the sale and
has not been an Affiliate of the Company at any time during the three months
prior to such sale would be entitled to sell such shares without regard to the
volume limitation and other conditions described above.
For a period of 180 days after the date of this Prospectus, without the
prior written consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated and
Salomon Smith Barney Inc., on behalf of the Underwriters, (i) the Company, GFI
and two of its subsidiaries have agreed with the Underwriters that they will not
offer, sell or otherwise dispose of any shares of Common Stock or any security
convertible into or exchangeable or exercisable for shares of Common Stock,
except for the shares of Class A Common Stock to be sold in the Offering and
options granted in the ordinary course of business under the Plan or for shares
of Class B Common Stock transferred among GFI and its two subsidiaries and (ii)
shareholders of GFI who are also officers and directors of the Company have
agreed with the Underwriters that they will not offer, sell or otherwise dispose
of any shares of capital stock of GFI or any security convertible into or
exchangeable or exercisable for shares of capital stock of GFI, except in
transactions between existing shareholders of GFI and through gifts, in each
case, to persons who agree to be bound by similar restrictions. See
"Underwriting." In addition, GFI and two of its subsidiaries have agreed with
the Company that they will not offer, sell or otherwise dispose of any shares of
Class B Common Stock for a period of three years after the date of this
Prospectus without the prior written consent of the Company (except for
transfers among GFI and its two subsidiaries).
The shares of Class A Common Stock authorized for issuance pursuant to
awards that may be granted under the Company's 1999 Stock Award and Incentive
Plan may be either authorized but unissued shares or treasury shares obtained by
the Company through market or private purchases. See "Management -- 1999 Stock
Award and Incentive Plan." The Company intends to register under the Securities
Act the shares of Class A Common Stock issuable upon the exercise of options
granted pursuant to the 1999 Stock Award and Incentive Plan.
Prior to the Offering, there has been no public market for Class A Common
Stock. Although the Company can make no prediction as to the effect, if any,
that sales of shares of Class B Common Stock by GFI or two of its subsidiaries
would have on the market price of Class A Common Stock prevailing from time to
time, sales of substantial amounts of Class A Common Stock or Class B Common
Stock, or the perception that such sales could occur, could adversely affect
prevailing market prices for the Class A Common Stock. See "Risk
Factors -- Shares Available for Future Sale or Distribution."
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UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"),
Salomon Smith Barney Inc. ("Salomon Smith Barney"), and Gabelli & Company are
acting as representatives (the "Representatives") of each of the Underwriters
named below (the "Underwriters"). Subject to the terms and conditions set forth
in a purchase agreement (the "Purchase Agreement") among the Company and the
Underwriters, the Company has agreed to sell to the Underwriters, and each of
the Underwriters severally and not jointly has agreed to purchase from the
Company, the aggregate number of shares of Class A Common Stock set forth
opposite its name below.
<TABLE>
<CAPTION>
NUMBER
OF
UNDERWRITERS SHARES
- ------------------------------------------------------------ ------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated................................... 2,024,000
Salomon Smith Barney Inc. .................................. 2,024,000
Gabelli & Company, Inc. .................................... 450,000
Allen & Company Incorporated................................ 65,000
Bear, Stearns & Co. Inc. ................................... 65,000
BT Alex. Brown Incorporated................................. 65,000
CIBC Oppenheimer Corp. ..................................... 65,000
Donaldson, Lufkin & Jenrette Securities Corporation......... 65,000
A.G. Edwards & Sons, Inc. .................................. 65,000
Lehman Brothers Inc. ....................................... 65,000
Morgan Stanley & Co. Incorporated........................... 65,000
PaineWebber Incorporated.................................... 65,000
Prudential Securities Incorporated.......................... 65,000
Schroder & Co. Inc.......................................... 65,000
Warburg Dillon Read LLC..................................... 65,000
Advest, Inc. ............................................... 38,000
Barrington Research Associates, Inc. ....................... 38,000
George K. Baum & Company.................................... 38,000
William Blair & Company, L.L.C. ............................ 38,000
Burnham Securities Inc. .................................... 38,000
EVEREN Securities, Inc. .................................... 38,000
Ferris, Baker Watts, Incorporated........................... 38,000
Gruntal & Co., L.L.C. ...................................... 38,000
Herzog, Heine, Geduld Inc. ................................. 38,000
Edward D. Jones & Co., L.P. ................................ 38,000
Keeley Investment Corporation............................... 38,000
Legg Mason Wood Walker, Incorporated........................ 38,000
Needham & Company, Inc. .................................... 38,000
Putnam, Lovell, de Guardiola & Thornton Inc. ............... 38,000
The Robinson-Humphrey Company, LLC.......................... 38,000
Sanders Morris Mundy........................................ 38,000
Sandler O'Neill & Partners, L.P. ........................... 38,000
Southwest Securities, Inc. ................................. 38,000
C.E. Unterberg, Towbin...................................... 38,000
--------
Total.......................................... 6,000,000
========
</TABLE>
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The Underwriters propose to offer the shares of Class A Common Stock in
part directly to the public at the initial public offering price set forth on
the cover page of this Prospectus and in part to certain securities dealers at
such price less a concession of $.73 per share. The Underwriters may allow, and
such dealers may reallow, a concession not in excess of $.10 per share to
certain brokers and dealers. After the initial offering of the shares to the
public, the public offering price and such concessions may from time to time be
varied by the Representatives. Under the terms and conditions of the Purchase
Agreement, the Underwriters are committed to take and pay for all of the shares
offered hereby, if any are taken.
The Company has granted the Underwriters an option, exercisable for 30 days
after the date of this Prospectus, to purchase up to 900,000 additional shares
of Class A Common Stock at the price to the public set forth on the cover page
of this Prospectus minus the underwriting discounts and commissions. The
Underwriters may exercise such option solely for the purpose of covering
over-allotments, if any, in connection with the offering of the shares offered
hereby. To the extent such option is exercised, each Underwriter will be
obligated, subject to certain conditions, to purchase approximately the same
percentage of such additional shares as the number of shares set forth opposite
each Underwriter's name in the preceding table bears to the total number of
shares listed in such table.
For a period of 180 days after the date of this Prospectus, without the
prior written consent of Merrill Lynch and Salomon Smith Barney, (i) the
Company, GFI and two of GFI's subsidiaries have agreed that they will not offer,
sell, contract to sell or otherwise dispose of any Common Stock or any
securities of the Company which are convertible into or exchangeable or
exercisable for Common Stock or any such other securities, except for the shares
of Class A Common Stock to be sold in the Offering and options granted in the
ordinary course of business under the Plan or for shares of Class B Common Stock
transferred among GFI and its two subsidiaries and (ii) shareholders of GFI who
are also officers and directors of the Company have agreed with the Underwriters
that they will not offer, sell or otherwise dispose of any shares of capital
stock of GFI or any security convertible into or exchangeable or exercisable for
shares of capital stock of GFI, except in transactions between existing
shareholders of GFI and through gifts, in each case, to persons who agree to be
bound by similar restrictions.
In connection with the Offering, the Underwriters may purchase and sell the
Class A Common Stock in the open market. These transactions may include
over-allotment and stabilizing transactions and purchases to cover syndicate
short positions created in connection with the Offering. Stabilizing
transactions consist of certain bids or purchases for the purpose of preventing
or retarding a decline in the market price of the Class A Common Stock; and
syndicate short positions involve the sale by the Underwriters of a greater
number of shares of Class A Common Stock than they are required to purchase from
the Company in the Offering. The Underwriters also may impose a penalty bid,
whereby selling concessions allowed to syndicate members or other broker-dealers
in respect of the Class A Common Stock sold in the Offering for their account
may be reclaimed by the syndicate if such Class A Common Stock is repurchased by
the syndicate in stabilizing or covering transactions. These activities may
stabilize, maintain or otherwise affect the market price of the Class A Common
Stock, which may be higher than the price that might otherwise prevail in the
open market, and these activities, if commenced, may be discontinued at any
time. These transactions may be effected on the NYSE, in the over-the-counter
market or otherwise.
Gabelli & Company, one of the Underwriters, is an indirect 76.6%-owned
subsidiary of the Company. The Offering is therefore being conducted in
accordance with the applicable provisions of Rule 2720 to the Conduct Rules of
the National Association of Securities Dealers, Inc. Rule 2720 requires that the
initial public offering price of the Class A Common Stock not be higher than
that recommended by a "qualified independent underwriter" meeting certain
standards. Accordingly, Merrill Lynch is assuming the responsibilities of acting
as the qualified independent underwriter in pricing the Offering and conducting
due diligence. In connection with the Offering, Merrill Lynch in its role as
qualified independent underwriter has performed due diligence investigations and
reviewed and participated in the preparation of this Prospectus and the
Registration Statement of which this Prospectus forms a part. The initial public
offering price of the Class A Common Stock set forth on the cover page of this
Prospectus is no higher than the price recommended by Merrill Lynch.
69
<PAGE> 70
Prior to the Offering, there has not been any public market for the Class A
Common Stock of the Company. Consequently, the initial public offering price for
the shares of Class A Common Stock included in the Offering has been determined
by negotiations between the Company and the Representatives. Among the factors
considered in determining such price were the history of and prospects for the
Company's business and the industry in which it competes, an assessment of the
Company's management and the present state of the Company's development, the
past and present revenues and earnings of the Company, the prospects for growth
of the Company's revenues and earnings, the current state of the economy in the
United States and the current level of economic activity in the industry in
which the Company competes and in related or comparable industries, and
currently prevailing conditions in the securities markets, including current
market valuations of publicly traded companies which are comparable to the
Company.
The Underwriters do not intend to confirm sales of shares of Class A Common
Stock to accounts over which they exercise discretionary authority.
The Class A Common Stock has been approved for listing, subject to official
notice of issuance, on the NYSE under the symbol "GBL." In order to meet one of
the requirements for listing the Common Stock on the NYSE, the Underwriters have
undertaken to sell lots of 100 or more shares to a minimum of 2,000 beneficial
holders.
The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act.
Certain of the Underwriters and their affiliates have in the past provided,
and may in the future from time to time provide, investment banking services to
the Company and its affiliates for which they may receive customary fees. In
addition, each of the Representatives of the Underwriters distributes the
Company's Mutual Funds (and provides shareholder services in connection
therewith) in the ordinary course of business for which it receives customary
compensation.
70
<PAGE> 71
LEGAL MATTERS
Certain legal matters with respect to the validity of the shares of Class A
Common Stock offered hereby will be passed upon for the Company by Skadden,
Arps, Slate, Meagher & Flom LLP, New York, New York. Certain legal matters
relating to the Offering will be passed upon for the Underwriters by Simpson
Thacher & Bartlett, New York, New York.
EXPERTS
The consolidated financial statements of GFI at December 31, 1996 and 1997,
and for each of the three years in the period ended December 31, 1997, appearing
in this Prospectus and Registration Statement have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (as amended from time to time and together with all exhibits and schedules
thereto, the "Registration Statement") under the Securities Act with respect to
the Class A Common Stock to be sold in the Offering. This Prospectus constitutes
a part of the Registration Statement and does not contain all the information
set forth in the Registration Statement, certain portions of which have been
omitted as permitted by the rules and regulations of the Commission. Statements
contained in this Prospectus as to the content of any contract or other document
are summaries of the material terms of such contract or other document. With
respect to such statements in the Prospectus, reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement for a more complete description, each such statement being qualified
in all respects by such reference. For further information regarding the Company
and the Class A Common Stock, reference is hereby made to the Registration
Statement, a copy of which may be obtained from the Commission at its principal
office in Washington, D.C. upon payment of the fees prescribed by the
Commission.
The Registration Statement, and the reports and other information to be
filed by the Company with the Commission following the Offering in accordance
with the Exchange Act, can be inspected and copied at the principal office of
the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street N.W., Washington,
D.C. 20549, and at the following regional offices of the Commission: 7 World
Trade Center, New York, New York 10048 and Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material may
be obtained from the Commission's website, http://www.sec.gov, and from the
Public Reference Section of the Commission at its principal office at 450 Fifth
Street, N.W., Washington, D.C. 20549, upon payment of the fees prescribed by the
Commission.
The Company intends to furnish to its shareholders annual reports
containing audited consolidated financial statements and quarterly reports for
the first three quarters of each fiscal year containing unaudited interim
financial information.
71
<PAGE> 72
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS OF GABELLI FUNDS, INC. AND
SUBSIDIARIES
Report of Independent Auditors.............................. F-2
Consolidated Statements of Income for the years ended
December 31, 1995, 1996 and 1997.......................... F-3
Consolidated Statements of Financial Condition as of
December 31, 1996 and 1997................................ F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1995, 1996 and 1997.............. F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS OF
GABELLI FUNDS, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of Income for the nine
month periods ended September 30, 1997 and 1998........... F-16
Unaudited Consolidated Statement of Financial Condition as
of September 30, 1998..................................... F-17
Unaudited Consolidated Statement of Stockholders' Equity for
the nine month period ended September 30, 1998............ F-18
Unaudited Consolidated Statements of Cash Flows for the nine
month periods ended September 30, 1997 and 1998........... F-19
Notes to Unaudited Consolidated Financial Statements........ F-20
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME AND
FINANCIAL CONDITION
Unaudited Pro Forma Consolidated Statements of Income....... F-22
Unaudited Pro Forma Consolidated Statements of Financial
Condition................................................. F-24
Notes to Unaudited Pro Forma Consolidated Financial
Statements................................................ F-25
</TABLE>
------------------------
Gabelli Asset Management Inc. is a holding company that was newly formed in
connection with the Offering and, accordingly, has not previously engaged in any
business operations, acquired any assets or incurred any liabilities other than
in connection with the Offering. Accordingly, the historical financial
statements of Gabelli Asset Management Inc. are not included in this Prospectus
because management has determined that they are not material to an investment
decision.
F-1
<PAGE> 73
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Gabelli Funds, Inc.
We have audited the accompanying consolidated statements of financial
condition of Gabelli Funds, Inc. and subsidiaries as of December 31, 1997 and
1996 and the related consolidated statements of income, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Gabelli Funds,
Inc. and subsidiaries at December 31, 1997 and 1996, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
New York, New York
March 11, 1998
F-2
<PAGE> 74
GABELLI FUNDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1995 1996 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
REVENUES
Investment advisory and incentive fees..................... $ 77,302 $ 84,244 $ 89,684
Commission revenue......................................... 5,706 6,667 7,496
Distribution fees and other income......................... 6,302 7,257 8,096
-------- -------- --------
Total revenues........................................ 89,310 98,168 105,276
-------- -------- --------
EXPENSES
Compensation costs......................................... 39,384 41,814 45,260
Management fee............................................. 9,423 10,192 10,580
Other operating expenses................................... 18,709 19,274 18,690
-------- -------- --------
Total expenses........................................ 67,516 71,280 74,530
-------- -------- --------
Operating income........................................... 21,794 26,888 30,746
-------- -------- --------
OTHER INCOME (EXPENSE)
Net gain from investments.................................. 10,105 8,783 7,888
Interest and dividend income............................... 5,853 5,406 4,634
Interest expense........................................... (679) (879) (1,876)
Other...................................................... 147 331 (109)
-------- -------- --------
Total other income, net............................... 15,426 13,641 10,537
-------- -------- --------
Income before income taxes and minority interest........... 37,220 40,529 41,283
Income taxes............................................... 7,769 7,631 3,077
Minority interest.......................................... 2,555 2,727 1,529
-------- -------- --------
Net income................................................. $ 26,896 $ 30,171 $ 36,677
======== ======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE> 75
GABELLI FUNDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1996 1997
--------- ---------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 32,949 $ 12,610
PCS licenses and deposits................................... 21,661 84,862
Investments in securities................................... 59,812 56,607
Investments in partnerships and affiliates.................. 35,133 46,972
Investment advisory fees receivable......................... 7,339 8,484
Receivables from affiliates................................. 12,353 6,534
Notes and other receivables................................. 5,230 4,578
Capital lease............................................... -- 3,679
Intangible assets, net of accumulated amortization of
$148...................................................... -- 1,932
Other assets................................................ 8,047 6,478
-------- --------
Total assets........................................... $182,524 $232,736
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Bank loan payable........................................... $ -- $ 30,000
Notes payable............................................... 7,011 7,108
Income taxes payable (including deferred income taxes of
$2,768 in 1996 and $2,818 in 1997)........................ 4,372 3,752
Capital lease obligation.................................... -- 3,650
Compensation payable........................................ 3,589 3,456
Accrued expenses and other liabilities...................... 7,978 9,848
-------- --------
Total liabilities...................................... 22,950 57,814
-------- --------
Minority interest........................................... 21,041 11,303
-------- --------
Stockholders' equity:
Common Stock, $.01 par value; authorized 1,000,000 shares;
issued and outstanding 174,803 and 185,937 shares,
respectively........................................... 2 2
Additional paid-in capital................................ 2,967 12,372
Retained earnings......................................... 136,690 152,775
Notes receivable.......................................... (1,126) (1,530)
-------- --------
Total stockholders' equity............................. 138,533 163,619
-------- --------
Total liabilities and stockholders' equity.................. $182,524 $232,736
======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE> 76
GABELLI FUNDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED NOTES
STOCK CAPITAL EARNINGS RECEIVABLE TOTAL
------ ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994.............. $2 $ 1,367 $106,535 $ -- $107,904
Repurchase and retirement of 536
shares............................... -- (39) (291) -- (330)
Issuance of note receivable............. -- -- -- (235) (235)
Issuance of 750 shares.................. -- 397 -- -- 397
Distributions to shareholders........... -- -- (18,670) -- (18,670)
Accretion of stock option............... -- 110 -- -- 110
Net income.............................. -- -- 26,896 -- 26,896
-- ------- -------- ------- --------
Balance at December 31, 1995.............. 2 1,835 114,470 (235) 116,072
Repurchase and retirement of 1,600
shares............................... -- (9) (1,273) -- (1,282)
Issuance of note receivable............. -- -- -- (891) (891)
Issuance of 1,704 shares................ -- 1,141 -- -- 1,141
Distributions to shareholders........... -- -- (6,678) -- (6,678)
Net income.............................. -- -- 30,171 -- 30,171
-- ------- -------- ------- --------
Balance at December 31, 1996.............. 2 2,967 136,690 (1,126) 138,533
Repurchase and retirement of 50
shares............................... -- (38) -- -- (38)
Net issuances of notes receivable....... -- -- -- (404) (404)
Issuance of 11,184 shares............... -- 9,443 -- -- 9,443
Distributions to shareholders........... -- -- (20,592) -- (20,592)
Net income.............................. -- -- 36,677 -- 36,677
-- ------- -------- ------- --------
Balance at December 31, 1997.............. $2 $12,372 $152,775 $(1,530) $163,619
== ======= ======== ======= ========
</TABLE>
See accompanying notes.
F-5
<PAGE> 77
GABELLI FUNDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1995 1996 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income................................................. $ 26,896 $ 30,171 $ 36,677
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Equity in earnings of partnerships and affiliates........ (5,744) (5,997) (7,886)
Depreciation and amortization............................ 339 424 451
Deferred income taxes.................................... 884 (114) 50
Minority interest in net income of consolidated
subsidiaries.......................................... 2,555 2,727 1,529
Accretion of stock option................................ 110 -- --
Changes in operating assets and liabilities:
Investments in securities............................. (11,862) 4,435 3,205
Investment advisory fees receivable................... (533) 526 (1,145)
Receivables from affiliates........................... -- (12,353) 5,819
Notes and other receivables........................... -- (5,230) 1,027
Due from broker/dealers............................... -- (1,764) (1,391)
Other assets.......................................... (430) (2,103) 2,837
Notes payable......................................... -- -- (879)
Income taxes payable.................................. (1,312) 1,470 (670)
Compensation payable.................................. 1,090 (1,933) (133)
Accrued expenses and other liabilities................ 1,721 366 (920)
-------- -------- --------
Total adjustments.......................................... (13,182) (19,546) 1,894
-------- -------- --------
Net cash provided by operating activities.................. 13,714 10,625 38,571
-------- -------- --------
INVESTING ACTIVITIES
Purchases of PCS licenses and deposits..................... -- (21,661) (63,201)
Distributions from partnerships and affiliates............. 2,128 5,101 2,607
Investments in partnerships and affiliates................. (6,241) (2,832) (6,560)
Cost of acquisitions....................................... -- -- (2,175)
-------- -------- --------
Net cash (used in) investing activities.................... (4,113) (19,392) (69,329)
-------- -------- --------
FINANCING ACTIVITIES
Proceeds from bank loan.................................... -- -- 30,000
Distributions to shareholders.............................. (18,670) (5,988) (17,794)
Repayments of subsidiaries' notes receivable............... 95 127 5
Issuances of subsidiaries' common stock.................... 864 -- 108
Purchase of minority stockholders' interest................ (409) -- (1,864)
Proceeds from issuances of common stock.................... 162 738 --
Payment for common stock repurchased and retired........... (331) (581) (38)
Repayments of notes receivable............................. -- -- 2
-------- -------- --------
Net cash provided by (used in) financing activities........ (18,289) (5,704) 10,419
-------- -------- --------
Net (decrease) in cash and cash equivalents................ (8,688) (14,471) (20,339)
Cash and cash equivalents at beginning of year............. 56,108 47,420 32,949
-------- -------- --------
Cash and cash equivalents at end of year................... $ 47,420 $ 32,949 $ 12,610
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest..................................... $ 679 $ 879 $ 1,784
======== ======== ========
Cash paid for income taxes................................. $ 8,896 $ 5,952 $ 3,337
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITY
Issuance of note payable for repurchase of subsidiary's
common stock............................................. $ -- $ -- $ 976
======== ======== ========
Issuance of note payable for repurchase of common stock.... $ -- $ 1,232 $ --
======== ======== ========
Receipt of note for common stock sold...................... $ 235 $ 891 $ 404
======== ======== ========
Receipt of notes for sale of minority interest............. $ -- $ -- $ 375
======== ======== ========
</TABLE>
See accompanying notes.
F-6
<PAGE> 78
GABELLI FUNDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
A. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the assets, liabilities and
earnings of Gabelli Funds, Inc. ("GFI"), its wholly-owned subsidiary GAMCO
Investors, Inc. ("GAMCO"), and GFI's majority-owned subsidiaries consisting of
Gabelli Securities, Inc. ("GSI"), Gabelli Fixed Income L.L.C. ("Fixed Income")
and Gabelli Advisers LLC ("Advisers") (collectively, the "Company").
Prior to a reorganization on January 1, 1997, GFI owned approximately 79%
of GAMCO. On that date, all outstanding shares of GAMCO not previously held by
GFI were either redeemed at book value by GAMCO or exchanged for shares of GFI
at a predetermined ratio. At December 31, 1995, 1996 and 1997, GFI owned
approximately 76% of GSI and 41% of Advisers, which, combined with the voting
interests of affiliated parties, represents voting control. At December 31,
1997, GFI owned approximately 80% of Fixed Income, which commenced operations on
April 15, 1997. All significant intercompany transactions and balances have been
eliminated.
Use of Estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Nature of Operations
GFI, GAMCO, Fixed Income and Advisers are registered investment advisers
under the Investment Advisers Act of 1940. Gabelli & Company, Inc. ("Gabelli &
Company"), a wholly-owned subsidiary of GSI, is a registered broker-dealer.
Gabelli & Company acts as an introducing broker and all transactions for its
customers are cleared through New York Stock Exchange member firms on a fully
disclosed basis. Accordingly, open customer transactions are not reflected in
the accompanying statements of financial condition. Gabelli & Company is exposed
to credit losses on these open positions in the event of nonperformance by its
customers. This exposure is reduced by the clearing brokers' policy of obtaining
and maintaining adequate collateral until the open transaction is completed.
Cash Equivalents
Cash equivalents consist of investments in money market mutual funds.
Investments in Securities
Investments in securities are accounted for as "trading securities" and are
stated at quoted market values. Securities which are not readily marketable are
stated at their estimated fair values as determined by the Company's management.
The resulting unrealized gains and losses are included in net gain from
investments. Security transactions and any related gains and losses are recorded
on a trade date basis. Realized gains and losses from securities transactions
are recorded on the identified cost basis.
The Company periodically enters into short sales. Securities sold short are
stated at quoted market values and represent obligations of the Company to
purchase the securities at prevailing market prices. The ultimate gains or
losses recognized are dependent upon the prices at which these securities are
purchased to settle the obligations under the sales commitments.
F-7
<PAGE> 79
GABELLI FUNDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Investments in Partnerships and Affiliates
Investments in partnerships, whose underlying assets consist of marketable
securities, and investments in affiliates are accounted for using the equity
method, under which the Company's share of net earnings or losses of these
partnerships and affiliated entities is reflected in income as earned and
distributions received are reductions of the investments. Investments in
partnerships for which market values are not readily available are valued at
fair value as determined by the Company's management.
Investment Advisory Fees
Investment advisory fees are recognized as revenue as the related services
are performed. Investment advisory fees are based on predetermined percentages
of the market values of the portfolios under management.
Depreciation and Amortization
Fixed assets are depreciated using the straight-line method over their
estimated useful lives. Leasehold improvements are amortized using the
straight-line method over their estimated useful lives or lease terms, whichever
is shorter.
Intangible Assets
The cost in excess of net assets acquired is amortized on a straight-line
basis over ten years. The carrying value of cost in excess of net assets
acquired is reviewed for impairment whenever events or changes in circumstances
indicate that it may not be recoverable based upon expectations of operating
income and non-discounted cash flows over its remaining life.
Minority Interest
Minority interest represents the minority stockholders' ownership of GAMCO
for 1995 and 1996, Fixed Income for 1997 and GSI and Advisers for 1995, 1996 and
1997. With the exception of GSI, these minority stockholders are principally
employees, officers and directors of the Company.
Earnings Per Share
The Company has not presented historical earnings per share due to the
significant changes in its operations which are not reflected in the historical
financial statements. (See Note P.) The Company prospectively will apply
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share". Basic earnings per common share is calculated by dividing net income
applicable to common stockholders by the weighted average number of shares of
common stock outstanding. Diluted earnings per share is computed using the
treasury stock method. Diluted earnings per common share assumes full dilution
and is computed by dividing net income by the total of the weighted average
number of shares of common stock outstanding and common stock equivalents.
Business Segments
The Company has not presented business segment data in accordance with SFAS
No. 131 because it operates predominantly in one business segment, the
investment advisory and asset management business.
Distribution Costs
The Company incurs certain promotion and distribution costs, which are
expensed as incurred, related to the sale of shares of mutual funds advised by
the Company (the "Funds").
Comprehensive Income
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income",
which requires companies to report all changes in equity during a period, except
those resulting from investments by owners and distributions to owners. The
Company has not presented a consolidated statement of comprehensive income
because it does not have any items of "other comprehensive income".
F-8
<PAGE> 80
GABELLI FUNDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
B. INVESTMENTS IN SECURITIES
Investments in securities at December 31, 1996 and 1997 consist of the
following:
<TABLE>
<CAPTION>
1996 1997
------------------ ------------------
MARKET MARKET
COST VALUE COST VALUE
------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Government obligations................. $16,932 $17,385 $ 6,229 $ 6,352
Common stocks............................... 13,530 20,543 13,551 19,895
Mutual funds................................ 13,180 15,057 21,265 25,707
Corporate bonds............................. 198 312 -- --
Preferred stocks............................ 1,854 1,960 300 1,038
Other investments........................... 1,492 4,555 862 3,615
------- ------- ------- -------
$47,186 $59,812 $42,207 $56,607
======= ======= ======= =======
</TABLE>
C. INVESTMENTS IN PARTNERSHIPS AND AFFILIATES
The Company is a co-General Partner of various limited partnerships whose
underlying assets consist primarily of marketable securities. As co-General
Partner, the Company is contingently liable for all of the partnerships'
liabilities. Summary financial information, including the Company's carrying
value and income from these partnerships at December 31, 1996 and 1997 and for
the years then ended, which are accounted for using the equity method, is as
follows (in thousands):
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Total assets........................................... $125,059 $131,281
Total liabilities...................................... 16,630 1,458
Equity................................................. 108,429 129,823
Net earnings........................................... 8,364 12,073
Company's carrying value............................... 11,613 14,479
Company's income....................................... 1,944 3,065
</TABLE>
Income from the above partnerships for the year ended December 31, 1995 was
approximately $2,505,000.
The Company's income from these partnerships consists of its pro rata
capital allocation and its share of a 20% incentive allocation from the limited
partners. The general partners also receive an annual administrative fee based
on a percentage of each partnership's net assets, excluding the capital accounts
of the general partners and related parties. For the years ended December 31,
1995, 1996 and 1997, the Company earned administrative fees of approximately
$836,000, $820,000 and $1,085,000, respectively.
At December 31, 1996 and 1997, the Company had various limited partner
interests in unaffiliated limited partnerships aggregating approximately
$23,065,000 and $32,332,000, respectively. For the years ended December 31,
1995, 1996 and 1997, the gains recorded by the Company in these investments
approximated $3,092,000, $3,722,000 and $5,666,000, respectively.
At December 31, 1996, the Company was a 50% general partner in two
investment advisory companies, one which managed fixed income mutual funds and
the other which managed separate accounts. In addition, it had a 49% investment
in a related broker-dealer. These investments were accounted for using the
equity method. The carrying value of these entities at December 31, 1996 was
approximately $450,000. In April 1997, through the acquisition of the general
partnership interests held by the other general partner and a reorganization
into Fixed Income, the Company increased its ownership stake in these companies
to approximately 80%. This transaction resulted in the recognition of
approximately $2,080,000 of cost in excess
F-9
<PAGE> 81
GABELLI FUNDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of net assets acquired, which is being amortized over a period of 10 years. The
results of Fixed Income's operations are included in the consolidated statement
of income effective April 15, 1997. For the years ended December 31, 1995, 1996
and 1997, the Company recorded equity income (loss) from these entities of
approximately $147,000, $331,000 and $(109,000), respectively. Pro forma
information relating to this transaction is not presented because its effect is
immaterial.
D. NOTES RECEIVABLE
At December 31, 1996, the Company had a note receivable amounting to
$11,800,000, which represents a loan made during 1996 to an affiliate, Lynch
Corporation. The interest rate on the note was 10% per annum. In addition, there
was a one-time commitment fee of 1% and a special fee equal to 10% of the net
profits of an affiliate of Lynch Corporation. The affiliate was the high bidder
for Personal Communications Services ("PCS") licenses in the Federal
Communications Commission's ("FCC") F Block Auction concluded in January 1997.
In 1997, the affiliate repaid all outstanding principal and interest due on this
loan. Additionally, the Company transferred its 10% net profits interest in
exchange for an equity ownership in a non-controlled entity which currently
holds these PCS licenses.
At December 31, 1996 and 1997, the Company had full recourse notes and
interest receivable from directors of GAMCO in the amount of approximately
$1,560,000 and $1,666,000, respectively, which are secured by the directors'
ownership interests in the Company and various affiliates. The notes bear
interest at an annual rate of 7% and are payable on demand.
At December 31, 1997, the Company had a note receivable of approximately
$603,000 from an affiliated entity in which the Company has a 49.9% ownership
interest. Under the terms of the note, 15% of the realized net profits of the
affiliate are payable to the Company. The note is secured by a security interest
in all of the assets of the affiliate, which consist primarily of Wireless
Communications Service ("WCS") licenses. For the year ended December 31, 1997,
the Company did not record any income under the terms of the note.
At December 31, 1997, the Company had a note receivable from an entity
controlled by certain stockholders of the Company in the amount of $3,600,000.
The note bears interest at an annual rate of 7%. All principal and interest due
on the note was repaid in 1998.
The Company has approximately $2,464,000 in various other notes and
interest receivable outstanding at December 31, 1997 from certain executive
officers, directors and employees in connection with the acquisition of stock
and other ownership interests in the Company. Interest rates on these notes
range from 5% to 10%.
E. INCOME TAXES
The Company accounts for income taxes under the liability method prescribed
by SFAS No. 109, "Accounting for Income Taxes". Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to the
differences between the financial statement carrying amount of existing assets
and liabilities and their respective tax bases.
GFI and GSI each file separate income tax returns. Accordingly, the tax
provision represents the aggregate of the amounts provided for all companies.
GFI elected to be treated as a Subchapter "S" corporation for federal and
state income tax purposes effective January 1, 1995. On January 1, 1997, the
Company elected to treat GAMCO as a Qualified Subchapter "S" subsidiary for
Federal and state income tax purposes. As a result of converting from a taxable
"C" corporation to a nontaxable "S" corporation, a federal income tax will be
imposed on any "built-in gain" recognized by the Company on the disposition of
assets within ten years from the date of conversion. The Company retained its
existing deferred tax liability at the date of conversion to the extent of the
estimated built-in gains tax. This tax liability is subject to remeasurement at
each financial statement date until the end of the ten-year period.
F-10
<PAGE> 82
GABELLI FUNDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provision (benefit) for income taxes for the years ended December 31,
1995, 1996 and 1997 consisted of the following:
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal:
Current................................................... $5,667 $6,232 $2,399
Deferred.................................................. 854 (93) (8)
State and local:
Current................................................... 1,218 1,514 628
Deferred.................................................. 30 (22) 58
------ ------ ------
$7,769 $7,631 $3,077
====== ====== ======
</TABLE>
The Company's deferred income tax liability at December 31, 1996 and 1997
relates primarily to unrealized gains and losses on investments in securities
and partnerships.
The Company's provision for income taxes differs from the amount of income
tax determined by applying the applicable U.S. federal statutory income tax rate
to income before income taxes and minority interest principally due to GFI's
status as a Subchapter "S" corporation.
F. BANK LOAN AND NOTES PAYABLE
In 1997, the Company, through Rivgam Communicators, LLC ("Rivgam"), a
wholly-owned subsidiary of GAMCO, entered into a credit facility with The Chase
Manhattan Bank under which Rivgam has borrowed $30 million. Interest is variable
based upon changes in the London Interbank Offering Rate or the Federal Funds
Rate. The loan, which is guaranteed by GAMCO, is due in four equal annual
installments starting May 12, 1998. The Company believes that the fair value of
the loan approximates its carrying value. Under the terms of the loan, GAMCO is
required to comply with certain debt covenants, which it complied with through
December 31, 1997.
At December 31, 1996 and 1997, the Company had notes payable outstanding of
approximately $5,779,000 and $4,900,000, respectively, which mature on May 31,
2003, unless certain circumstances arise which allow for an accelerated
repayment. The notes accrue interest at 2% over the prime rate, subject to a
minimum interest rate of 9% and a maximum interest rate of 15%, payable
quarterly. Interest expense on these notes amounted to approximately $636,000,
$636,000 and $557,000 for the years ended December 31, 1995, 1996 and 1997,
respectively.
On September 30, 1996, a note payable amounting to $1,232,000 was issued as
consideration for repurchase of the Company's common stock. The note matured and
was fully paid on January 2, 1998. The note accrued interest at an annual rate
of 10%, payable quarterly. Interest expense on this note amounted to
approximately $31,000 and $123,000 for the years ended December 31, 1996 and
1997, respectively.
In connection with the restructuring of GAMCO's ownership, GAMCO issued a
note payable in 1997 of approximately $976,000 to an employee and director of
the Company and GAMCO, respectively, in consideration for repurchase of GAMCO
common stock. The note matures on January 2, 2000, unless certain circumstances
arise which allow for an accelerated repayment. GAMCO also has the option to
redeem the note at any time prior to maturity at predetermined rates. The note
accrues interest at an annual rate of 12%, payable quarterly. Interest expense
on this note amounted to approximately $117,000 for the year ended December 31,
1997.
G. STOCKHOLDERS' EQUITY
Upon their disassociation with the Company, certain stockholders of the
Company are required to sell their shares to the Company at book value
(approximately $14.5 million at December 31, 1997).
F-11
<PAGE> 83
GABELLI FUNDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
H. CAPITAL LEASE
In December 1997, the Company signed an agreement to lease new primary
office space from a company owned by stockholders of GFI. The Company has
recorded a capital lease asset and liability for the fair value of the leased
property. Amortization of the capital lease is computed on the straight-line
method over the term of the lease, which expires on April 30, 2013. The lease
provides that all operating expenses relating to the property (such as property
taxes, utilities and maintenance) are to be paid by the lessee, the Company.
Future minimum lease payments for this capitalized property at December 31,
1997 are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1998........................................... $ 720
1999........................................... 720
2000........................................... 720
2001........................................... 720
2002........................................... 720
Thereafter..................................... 7,896
-------
Total minimum obligations...................... 11,496
Interest....................................... 4,471
-------
Present value of net obligations............... $ 7,025
=======
</TABLE>
Future minimum lease payments have not been reduced by related minimum
future sublease rentals of approximately $1,885,000, of which approximately
$515,000 is due from an affiliated entity. Lease payments under this agreement
amounted to approximately $50,000 for the year ended December 31, 1997.
Total minimum obligations exclude the operating expenses to be borne by the
Company, which are estimated to be $400,000 per year.
I. COMMITMENTS
The Company rents office space under leases which expire at various dates
through 2001. Future minimum lease commitments under these operating leases as
of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1998........................................... $ 880
1999........................................... 756
2000........................................... 665
2001........................................... 593
------
$2,894
======
</TABLE>
Equipment rentals and occupancy expense amounted to approximately
$1,729,000, $1,457,000 and $1,644,000, respectively, for the years ended
December 31, 1995, 1996 and 1997.
J. RELATED PARTY TRANSACTIONS
GFI serves as the investment adviser for the Funds and earns advisory fees
based on predetermined percentages of the average net assets of the Funds. In
addition, Gabelli & Company has entered into distribution agreements with each
of the Funds. As principal distributor, Gabelli & Company incurs certain
promotional and distribution costs related to the sale of Fund shares, for which
it receives a fee or reimbursement from the Funds.
The Company had an aggregate investment in the Funds of approximately
$40,902,000 and $34,464,000 at December 31, 1996 and 1997, respectively, of
which approximately $27,966,000 and $11,305,000, respectively, is invested in a
money market mutual fund.
Gabelli & Company earns a majority of its commission revenue from
transactions executed on behalf of clients of affiliated companies.
The Company is required to pay the Chairman of the Board and Chief
Executive Officer a management fee which is equal to 20% of the pretax profits
of each of the Company's operating divisions before
F-12
<PAGE> 84
GABELLI FUNDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
consideration of this management fee. This fee approximated $9,423,000,
$10,192,000 and $10,580,000 for the years ended December 31, 1995, 1996 and
1997, respectively. The Chairman of the Board and Chief Executive Officer also
received portfolio management compensation and account executive fees of
approximately $19,533,000, $21,260,000 and $23,005,000 for the years ended
December 31, 1995, 1996 and 1997, respectively, which have been included in
compensation costs.
The Company contributed approximately $1,628,000 and $1,014,000 for the
years ended December 31, 1996 and 1997, respectively, to an accredited
charitable foundation, of which the Chairman of the Board and Chief Executive
Officer of the Company is an officer.
In March 1997, the Company made a secured loan of $10 million to Lynch
Corporation which accrued interest at the prime rate and included a 1%
commitment fee. The loan and all accrued interest were repaid in June 1997.
K. FINANCIAL REQUIREMENTS
The Company is required to maintain minimum capital levels with affiliated
partnerships. At December 31, 1997, the minimum capital requirements
approximated $1,298,000. In addition, at December 31, 1997, the Company had
commitments to make investments in unaffiliated partnerships of approximately
$1,600,000.
As a registered broker-dealer, Gabelli & Company is subject to Uniform Net
Capital Rule 15c3-1 (the "Rule") of the Securities and Exchange Commission.
Gabelli & Company computes its net capital under the alternative method
permitted by the Rule which requires minimum net capital of $250,000. At
December 31, 1997, Gabelli & Company had net capital in excess of the minimum
requirement of approximately $6,300,000.
L. ADMINISTRATION FEES
The Company has entered into administration agreements with other companies
(the "Administrators"), whereby the Administrators provide certain services on
behalf of several of the Funds. Such services do not include the investment
advisory and portfolio management services provided by the Company. The fees are
negotiated based on predetermined percentages of the net assets of each of the
Funds for which such agreements have been entered into.
M. PROFIT SHARING PLAN AND INCENTIVE SAVINGS PLAN
The Company has a qualified contributory employee profit sharing plan and
incentive savings plan covering substantially all employees. Company
contributions to the plans are determined annually by the Board of Directors but
may not exceed the amount permitted as a deductible expense under the Internal
Revenue Code. The Company accrued contributions of approximately $102,000,
$121,000 and $80,000 to the plans for the years ended December 31, 1995, 1996
and 1997, respectively.
N. DERIVATIVE FINANCIAL INSTRUMENTS
During 1997 and 1996, the Company's trading activities included
transactions in domestic equity index futures contracts. These financial
instruments represent future commitments to purchase or sell an underlying index
for specified amounts at specified future dates. Such contracts create
off-balance sheet risk for the Company as the future satisfaction of these
contracts may be for amounts in excess of the amounts recognized in the
consolidated statements of financial condition. The amounts disclosed below
represent the notional amounts outstanding, end of year fair values and average
fair values of domestic equity index futures contracts sold as of and for the
years ended December 31, 1996 and 1997:
<TABLE>
<CAPTION>
NOTIONAL AVERAGE FAIR
AMOUNTS VALUE FOR THE
OUTSTANDING AT FAIR VALUE AT YEAR ENDED
YEAR DECEMBER 31 DECEMBER 31 DECEMBER 31
---- -------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
1997................................. $33,246 $ 202 $(776)
1996................................. $32,877 $(626) $(425)
</TABLE>
F-13
<PAGE> 85
GABELLI FUNDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1996 and 1997, the Company had margin deposits of
approximately $1,200,000 and $1,470,000, respectively, with a futures broker for
these open futures contracts.
In connection with this futures activity, the Company incurred losses of
approximately $3,692,000 and $8,063,000 during the years ended December 31, 1996
and 1997. Such losses are reflected as part of net gain from investments in the
consolidated statements of income.
O. PCS LICENSES
The Company, through Rivgam, purchased PCS licenses auctioned by the FCC in
1997. The PCS licenses are valued at the lower of their original purchase cost
or their market value. Market values are determined based upon the most recent
public auction for similar licenses, or in the absence thereof, fair value
estimates provided by independent companies that solicit bids for such licenses.
P. SUBSEQUENT EVENTS (UNAUDITED)
Loan Guarantee
In February 1998, the Company guaranteed a $30 million loan made by a
commercial bank to Rivgam LMDS, LLC, an entity for which the Chairman of the
Board and Chief Executive Officer of the Company is the managing member and in
which he has a controlling interest. All principal and interest on the loan was
repaid by Rivgam LMDS, LLC on April 3, 1998, thereby relieving the Company of
its obligation under the guarantee.
Sale of PCS Licenses
During 1998, the Company sold certain of its PCS licenses with a cost basis
of $51,000,000. The Company recorded a pre-tax gain of $17,400,000, net of
investment banking, management and other related fees of approximately
$10,700,000 paid principally to related parties, of which $4,196,000 was paid to
the Company's Chairman of the Board and Chief Executive Officer.
Reorganization and Initial Public Offering (Formation Transactions)
Prior to the initial public offering (the "Offering"), the Company will
transfer substantially all of the operating assets and liabilities relating to
its institutional and retail asset management, mutual fund advisory and
underwriting business to Gabelli Asset Management Inc. ("GAMI"), in exchange for
24 million shares of GAMI's Class B Common Stock, representing all of its issued
and outstanding shares of Common Stock (the "Reorganization"). GAMI is a newly
formed company, incorporated in April 1998 in the state of New York with no
significant assets or liabilities and which has not engaged in any substantial
business activities prior to the offering. GAMI intends to sell 6 million shares
of Class A Common Stock as part of the Offering, resulting in 30 million shares
expected to be outstanding immediately after the Offering.
Upon completion of the Offering, the Company will no longer be treated as
an "S" corporation and will be subject to corporate income taxes.
Immediately preceding the Offering, the Company and its Chairman of the
Board and Chief Executive Officer will enter into an Employment Agreement. The
Employment Agreement provides that the Company will pay the Chairman of the
Board and Chief Executive Officer 10% of the Company's aggregate pre-tax profits
while he is an executive of the Company and devoting the substantial majority of
his working time to the business of the Company. The Employment Agreement
further provides that the Company will pay the Chairman of the Board and Chief
Executive Officer $50 million on January 2, 2002, plus interest payable
quarterly at an annual rate of 6% from the date of the Employment Agreement.
Stock Award and Incentive Plan
Immediately prior to the Offering, the Board of Directors will adopt the
1999 GAMI Stock Award and Incentive Plan (the "Plan"), designed to provide
incentives which will attract and retain individuals key to the success of GAMI
through direct or indirect ownership of GAMI's common stock. Benefits under the
Plan may be granted in any one or a combination of stock options, stock
appreciation rights, restricted stock,
F-14
<PAGE> 86
GABELLI FUNDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
restricted stock units, stock awards, dividend equivalents and other stock or
cash based awards. A maximum of 1,500,000 shares Class A Common Stock has been
reserved for issuance and the Plan provides that the terms and conditions of
each award are to be determined by a committee of the Board of Directors charged
with administering the Plan. Under the Plan, the committee may grant either
incentive or nonqualified stock options with a term not to exceed ten years from
the grant date and at an exercise price that the committee may determine.
Options granted under the Plan vest three years from the date of grant and
expire after ten years.
The Company has elected to account for stock options under the intrinsic
value method. Under the intrinsic value method, compensation expense is
recognized only if the exercise price of the employee stock option is less than
the market price of the underlying stock on the date of grant. The estimated pro
forma compensation expense attributable to options granted to employees under
the Plan is not presented as its effect, if any, is expected to be immaterial.
F-15
<PAGE> 87
GABELLI FUNDS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1997 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
REVENUES
Investment advisory and incentive fees...................... $ 64,107 $ 86,302
Commission revenue.......................................... 5,613 6,197
Distribution fees and other income.......................... 5,100 9,810
-------- --------
Total revenues.................................... 74,820 102,309
EXPENSES
Compensation................................................ 33,138 41,702
Management fee.............................................. 7,425 8,533
Other operating expenses.................................... 13,943 18,072
-------- --------
Total expenses.................................... 54,506 68,307
OPERATING INCOME............................................ 20,314 34,002
OTHER INCOME
Net gain (loss) from investments............................ 6,803 (3,910)
Gain on sale of PCS licenses, net of fees payable to related
parties................................................... -- 17,430
Interest and dividend income................................ 3,168 3,252
Interest expense............................................ (1,183) (1,355)
Other....................................................... (52) 79
-------- --------
Total other income, net........................... 8,736 15,496
-------- --------
Income before income taxes and minority interest............ 29,050 49,498
Income taxes................................................ 2,369 3,004
Minority interest........................................... 759 1,043
-------- --------
Net income.................................................. $ 25,922 $ 45,451
======== ========
</TABLE>
See accompanying notes.
F-16
<PAGE> 88
GABELLI FUNDS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
------------------
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C>
ASSETS
Cash and cash equivalents................................... $ 56,499
Investments in securities................................... 78,597
Investments in partnerships................................. 47,081
PCS licenses................................................ 33,985
Investment advisory fees receivable......................... 9,380
Receivables from affiliates................................. 3,506
Notes and other receivables................................. 4,094
Capital lease............................................... 3,494
Other assets................................................ 4,851
--------
Total assets...................................... $241,487
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable............................................... $ 5,876
Payable to Sub-S shareholders............................... 14,642
Income taxes payable (including deferred income taxes)...... 3,217
Capital lease obligation.................................... 3,621
Compensation payable........................................ 15,692
Accrued expenses and other liabilities...................... 6,583
--------
Total liabilities................................. 49,631
--------
Minority interest........................................... 11,754
--------
Stockholders' equity:
Common Stock, $.01 par value; authorized 1,000,000 shares;
issued and outstanding
196,537 shares......................................... 2
Class A Common Stock, $.001 par value; authorized,
100,000,000 shares;
none issued............................................ --
Class B Common Stock, $.001 par value; authorized,
100,000,000 shares;
none issued............................................ --
Additional paid-in capital................................ 21,471
Retained earnings......................................... 169,252
Notes receivable.......................................... (10,623)
--------
Total stockholders' equity........................ 180,102
--------
Total liabilities and stockholders' equity.................. $241,487
========
</TABLE>
See accompanying notes.
F-17
<PAGE> 89
GABELLI FUNDS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED NOTES
STOCK CAPITAL EARNINGS RECEIVABLE TOTAL
------ ---------- -------- ---------- --------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997.............. $2 $12,372 $152,775 $ (1,530) $163,619
Repurchase and retirement of 400 --
shares............................... (345) -- -- (345)
Net issuances of notes receivable....... -- -- -- (9,093) (9,093)
Issuance of 10,600 shares............... -- 9,444 -- -- 9,444
Distributions to shareholders........... -- -- (28,974) -- (28,974)
Net income.............................. -- -- 45,451 -- 45,451
-- ------- -------- -------- --------
Balance at September 30, 1998............. $2 $21,471 $169,252 $(10,623) $180,102
== ======= ======== ======== ========
</TABLE>
See accompanying notes.
F-18
<PAGE> 90
GABELLI FUNDS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1997 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net income.................................................. $ 25,922 $ 45,451
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in earnings of partnerships and affiliates......... (7,627) 1,934
Gain on sale of PCS licenses.............................. -- (29,123)
Depreciation and amortization............................. 426 662
Deferred income taxes..................................... 2,893 162
Minority interest in net income of consolidated
subsidiaries........................................... 759 1,043
Changes in operating assets and liabilities:
Investment in securities............................... (10,957) (21,990)
Investment advisory fees receivable.................... 442 (896)
Receivables from affiliates............................ 8,093 3,028
Notes and other receivables............................ 2,357 484
Other assets........................................... 5,444 3,059
Notes payable.......................................... (879) (1,232)
Income taxes payable................................... (3,016) (697)
Compensation payable................................... 8,655 12,236
Accrued expenses and other liabilities................. (1,641) 1,040
-------- --------
Total adjustments........................................... 4,949 (30,290)
-------- --------
Net cash provided by operating activities................... 30,871 15,161
-------- --------
INVESTING ACTIVITIES
(Purchases) sales of PCS licenses........................... (63,201) 80,000
Distributions from partnerships and affiliates.............. 2,607 2,746
Investments in partnerships and affiliates.................. (6,272) (4,789)
Cost of acquisitions........................................ (2,175) --
-------- --------
Net cash (used in) provided by investing activities......... (69,041) 77,957
-------- --------
FINANCING ACTIVITIES
Proceeds from (repayment of) bank loan...................... 30,000 (30,000)
Distributions to shareholders............................... (12,987) (18,637)
Repurchases of subsidiaries' common stock................... (519) (592)
Purchase of minority stockholders' interest................. (1,282) --
-------- --------
Net cash provided by (used in) financing activities......... 15,212 (49,229)
-------- --------
Net (decrease) increase in cash and cash equivalents........ (22,958) 43,889
Cash and cash equivalents at beginning of period............ 32,949 12,610
-------- --------
Cash and cash equivalents at end of period.................. $ 9,991 $ 56,499
======== ========
</TABLE>
F-19
<PAGE> 91
GABELLI FUNDS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
A. BASIS OF PRESENTATION
The unaudited interim consolidated financial statements of the Company
included herein have been prepared in accordance with generally accepted
accounting principles for interim financial information and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the unaudited interim
consolidated financial statements reflect all adjustments, which are of a normal
recurring nature, necessary for a fair presentation of financial position,
results of operations and cash flows of the Company for the interim periods
presented and are not necessarily indicative of a full year's results.
In preparing the unaudited interim consolidated financial statements,
management is required to make estimates and assumptions that affect the amounts
reported in the financial statements. Actual results could differ from those
estimates.
These financial statements should be read in conjunction with the Company's
audited consolidated financial statements for the year ended December 31, 1997.
B. NOTES RECEIVABLE
During the nine months ended September 30, 1998, the Company issued
approximately $9 million of common stock to employees and affiliates of the
Company in return for interest bearing demand notes receivable.
F-20
<PAGE> 92
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma Consolidated Statements of Income and
Financial Condition give effect to the Formation Transactions, including the
assets and liabilities assumed to be distributed and the resulting impact on
allocated income and expenses; the $50 million deferred payment to the Chairman
and Chief Executive Officer net of deferred tax benefit; the reduction in the
management fee from 20% to 10% pursuant to the Employment Agreement; and the
conversion from an "S" corporation to a "C" corporation.
The unaudited pro forma financial data does not purport to represent the
results of operations or the financial position of the Company which actually
would have occurred had the Formation Transactions been previously consummated
or project the results of operations or the financial position of the Company
for any future date or period.
F-21
<PAGE> 93
GABELLI FUNDS, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
PRO FORMA
YEAR ENDED GAMI
DECEMBER 31, PRO FORMA YEAR ENDED
1997 ADJUSTMENTS DECEMBER 31, 1997
------------ ----------- -----------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
REVENUES
Investment advisory and incentive fees............. $ 89,684 $ $ 89,684
Commission revenue................................. 7,496 7,496
Distribution fees and other income................. 8,096 8,096
-------- --------
Total revenues........................... 105,276 105,276
-------- --------
EXPENSES
Compensation costs................................. 45,260 45,260
Management fee..................................... 10,580 (5,290)(a) 4,424
(866)(b)
Other operating expenses........................... 18,690 (1,789)(c) 16,901
-------- --------
Total expenses........................... 74,530 66,585
Operating income................................... 30,746 38,691
-------- --------
OTHER INCOME (EXPENSE)
Net gain from investments.......................... 7,888 (4,884)(d) 3,004
Interest and dividend income....................... 4,634 (3,519)(d) 1,115
Interest expense................................... (1,876) 1,876(d) (3,000)
(3,000)(e)
Other.............................................. (109) 109(d) --
-------- --------
Total other income, net.................. 10,537 1,119
-------- --------
Income before income taxes and minority interest... 41,283 39,810
Income taxes....................................... 3,077 12,658(f) 15,735
Minority interest.................................. 1,529 148(g) 1,677
-------- --------
Net income......................................... $ 36,677 $ 22,398
======== ========
NET INCOME PER SHARE:
Basic and diluted............................. $ 0.75
========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic and diluted............................. 30,000
========
</TABLE>
- ---------------
(a) To adjust the management fee to reflect the Employment Agreement, which
provides for a reduction in the fee from 20% to 10% of pre-tax profits.
(b) To adjust the management fee for the impact of the other pro forma
adjustments.
(c) To reflect the reallocation of expenses to the new parent company.
(d) To reflect the effect on income and expenses related to the distribution of
assets and liabilities.
(e) To reflect interest expense on the $50 million note payable to the Chairman
and Chief Executive Officer.
(f) To record additional taxes related to conversion from an "S" corporation to
a "C" corporation and other pro forma adjustments.
(g) To adjust minority interest for the impact of the other pro forma
adjustments.
F-22
<PAGE> 94
GABELLI FUNDS, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
PRO FORMA
GAMI
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, PRO FORMA SEPTEMBER 30,
1998 ADJUSTMENTS 1998
------------- ----------- -------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
REVENUES
Investment advisory and incentive fees................ $86,302 $ $ 86,302
Commission revenue.................................... 6,197 6,197
Distribution fees and other income.................... 9,810 9,810
------- --------
Total revenues.............................. 102,309 102,309
------- --------
EXPENSES
Compensation costs.................................... 41,702 41,702
Management fee........................................ 8,533 (4,267)(a) 4,216
(50)(b)
Other operating expenses.............................. 18,072 (531)(c) 17,541
------- --------
Total expenses.............................. 68,307 63,459
Operating income...................................... 34,002 38,850
------- --------
OTHER INCOME (EXPENSE)
Net gain from investments............................. (3,910) 4,666(d) 756
Interest and dividend income.......................... 3,252 (2,647)(d) 605
Interest expense...................................... (1,355) 1,334(d) (2,271)
(2,250)(e)
Gain on sale of PCS licenses, net..................... 17,430 (17,430)(d) --
Other................................................. 79 (79)(d) --
------- --------
Total other income, net..................... 15,496 (910)
------- --------
Income before income taxes and minority interest...... 49,498 37,940
Income taxes.......................................... 3,004 12,043(f) 15,047
Minority interest..................................... 1,043 185(g) 1,228
------- --------
Net income............................................ $45,451 $ 21,665
======= ========
NET INCOME PER SHARE:
Basic and diluted................................ $ 0.72
========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic and diluted................................ 30,000
========
</TABLE>
- ---------------
(a) To adjust the management fee to reflect the Employment Agreement, which
provides for a reduction in the fee from 20% to 10% of pre-tax profits.
(b) To adjust the management fee for the impact of the other pro forma
adjustments.
(c) To reflect the reallocation of expenses to the new parent company.
(d) To reflect the effect on income and expenses related to the distribution of
assets and liabilities.
(e) To reflect interest expense on the $50 million note payable to the Chairman
and Chief Executive Officer.
(f) To record additional taxes related to conversion from an "S" corporation to
a "C" corporation and other pro forma adjustments.
(g) To adjust minority interest for the impact of the other pro forma
adjustments.
F-23
<PAGE> 95
GABELLI FUNDS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA GAMI
SEPTEMBER 30, 1998 ADJUSTMENTS SEPTEMBER 30, 1998
------------------ ----------- ------------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents....................... $ 56,499 $ (26,643)(a) $ 29,856
Investments in securities....................... 78,597 (55,364)(a) 23,233
Investments in partnerships..................... 47,081 (31,918)(a) 15,163
PCS licenses.................................... 33,985 (33,985)(a) --
Investment advisory fees receivable............. 9,380 -- 9,380
Receivables from affiliates..................... 3,506 (806)(a) 2,700
Notes and other receivables..................... 4,094 (1,426)(a) 2,668
Capital lease................................... 3,494 -- 3,494
Other assets.................................... 4,851 20,156 (a)(b 25,007
-------- --------
Total assets.......................... $241,487 $111,501
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Payable to related party........................ $ -- $ 50,000(b) $ 50,000
Notes payable................................... 5,876 (5,876)(a) --
Payable to Sub-S shareholders................... 14,642 (14,642)(a) --
Income taxes payable (including deferred income
taxes)........................................ 3,217 10,202(c) 13,419
Capital lease obligation........................ 3,621 -- 3,621
Compensation payable............................ 15,692 (4,196)(a) 11,496
Accrued expenses and other liabilities.......... 6,583 (202)(a) 6,381
-------- --------
Total liabilities..................... 49,631 84,917
-------- --------
Minority interest............................... 11,754 11,754
-------- --------
Stockholders' equity:
Common Stock, $.01 par value; authorized
1,000,000 shares, issued and outstanding
196,537....................................... 2 (2)(a) --
Class A Common Stock, $.001 par value;
authorized, 100,000,000 shares; none issued... -- -- --
Class B Common Stock, $.001 par value;
authorized, 100,000,000 shares; 24,000,000
shares issued and outstanding................. -- 24(a) 24
Additional paid-in capital...................... 21,471 1,701(a) 23,172
Retained earnings............................... 169,252 (177,618)(a) (8,366)
Notes receivable................................ (10,623) 10,623(a) --
-------- --------
Total stockholders' equity............ 180,102 14,830
-------- --------
Total liabilities and stockholders' equity...... $241,487 $111,501
======== ========
</TABLE>
- ---------------
(a) To reflect the stock issued, the assets to be distributed and the
liabilities to be assumed in connection with the Formation Transactions.
(b) To record the $50 million payment, net of $19.8 million deferred tax
benefit, to the Chairman and Chief Executive Officer upon consummation of
the Offering, and the related management fee.
(c) To record additional taxes related to conversion from an "S" corporation to
a "C" corporation and the effect of other pro forma adjustments.
F-24
<PAGE> 96
GABELLI FUNDS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
A. REORGANIZATION AND INITIAL PUBLIC OFFERING
Reorganization and Initial Public Offering
Prior to the initial public offering (the "Offering"), the Company will
transfer substantially all of the operating assets and liabilities relating to
its institutional and retail asset management, mutual fund advisory and
brokerage business to Gabelli Asset Management Inc. ("GAMI"), in exchange for 24
million shares of GAMI's Class B Common Stock, representing all of its issued
and outstanding shares of Common Stock (the "Reorganization"). GAMI is a newly
formed company, incorporated in April 1998 in the state of New York, with no
significant assets or liabilities and which has not engaged in any substantial
business activities prior to the Offering. GAMI intends to sell 6 million shares
of Class A Common Stock as part of the Offering, resulting in 30 million shares
expected to be outstanding immediately after the Offering.
Upon completion of the Offering, the Company will no longer be treated as
an "S" corporation and will be subject to corporate income taxes. Accordingly,
the consolidated statements of income include a pro forma adjustment for
additional income taxes which would have been recorded if the Company had been a
"C" corporation for 1997 based on tax laws then in effect.
For pro forma purposes the financial statements have been prepared as if
the shareholders of GFI formed a newly created parent company (NewCo) and
transferred their ownership interest in GFI to NewCo as of the beginning of the
fiscal period. Concurrent therewith, GFI is assumed to have changed its name to
Gabelli Asset Management Inc. and to have made a dividend to NewCo equal to its
net equity, with the exception of $45 million in net assets retained by GAMI.
The unaudited pro forma data gives effect to the lower management fee and
increase in interest expense as if a new employment agreement with the Company's
Chairman of the Board and Chief Executive Officer, effective immediately
preceding the Offering, had been in effect at the beginning of each period, and
the effects of these adjustments on income tax expense and minority interest.
Under the terms of this agreement, the Company will issue a $50 million note
payable to the Chairman, payable in 2002, and the Chairman will receive 10% of
pre-tax profits. Previously the Chairman received 20% of the Company's pre-tax
profits. The $50 million payment is not reflected in the pro forma income
statement data because it is a one-time event directly related to the Offering.
The pro forma adjustments also reflect the income and expenses incurred on the
net equity assumed to have been distributed in connection with the Formation
Transactions. Additionally, for purposes of the pro forma basic earnings per
share calculation for each period, the denominator represents the 30 million
shares expected to be outstanding immediately after the Offering.
For purposes of the pro forma diluted earnings per share calculation, the
denominator has been calculated using the Treasury Stock method to account for
options granted under the Plan.
B. STOCK AWARD AND INCENTIVE PLAN
The disclosure requirements of Statements of Financial Accounting Standards
No. 123 require the use of an option valuation model to compute a fair value of
employee stock options. The valuation model used by the Company was not
developed for use in valuing employee stock options and the Company's employee
stock option characteristics vary significantly from those of traded options. As
a result, changes in the subjective input assumptions can materially affect the
fair value estimate.
F-25
<PAGE> 97
GABELLI FUNDS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS -- (CONCLUDED)
SEPTEMBER 30, 1998
The fair value of each option grant is estimated on the assumed date of
grant using the following assumptions:
<TABLE>
<S> <C>
Risk-free interest rate..................................... 5%
Dividend yield.............................................. 0%
Volatility.................................................. 30%
Weighted average expected life.............................. 8 years
</TABLE>
A pro forma summary of the status of the Plan as of the Offering is as
follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1997 SEPTEMBER 30, 1998
------------------ ------------------
<S> <C> <C>
Options outstanding at Offering date.................. 1,200,000 1,200,000
Weighted average fair value of options granted on
Offering date....................................... $8.49 per share $8.49 per share
Pro forma net income.................................. $20,798,000 $20,465,000
Pro forma earnings per share.......................... $0.69 $0.68
</TABLE>
C. EARNINGS PER SHARE
For purposes of the pro forma basic and diluted earnings per share
calculation, the denominator represents the shares expected to be outstanding
immediately after the Offering, including the sale of 6 million shares of Class
A Common Stock.
F-26
<PAGE> 98
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE CLASS A COMMON STOCK IN ANY
JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS
NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS
OF THE COMPANY SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 12
Special Note Regarding Forward-Looking
Information......................... 18
The Company........................... 19
Use of Proceeds....................... 21
Dividend Policy....................... 21
Dilution.............................. 22
Capitalization........................ 23
Selected Historical and Pro Forma
Financial Data...................... 24
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 27
Business.............................. 34
Management............................ 49
Ownership of the Common Stock......... 56
Certain Relationships and Related
Transactions........................ 56
Description of Capital Stock.......... 60
Shares Eligible for Future Sale....... 67
Underwriting.......................... 68
Legal Matters......................... 71
Experts............................... 71
Available Information................. 71
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
UNTIL MARCH 7, 1999 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE CLASS A COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
6,000,000 SHARES
[GABELLI LOGO]
CLASS A COMMON STOCK
------------------------
PROSPECTUS
------------------------
MERRILL LYNCH & CO.
SALOMON SMITH BARNEY
GABELLI & COMPANY, INC.
FEBRUARY 10, 1999
- ------------------------------------------------------
- ------------------------------------------------------
