SECURITIES & EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from____________ to____________
Commission File No. 1-106
GABELLI ASSET MANAGEMENT INC.
- ------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
New York 13-4007862
- -------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Corporate Center, Rye, New York 10580
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(914) 921-3700
- -------------------------------------------------------------------------------
Registrant's telephone number, including area code
-------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the Registrant's
classes of Common Stock, as of the latest practical date.
Class Outstanding at April 30, 1999
----- --------------------------------
Class A Common Stock, .001 par value 6,000,000
Class B Common Stock, .001 par value 24,000,000
INDEX
GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations:
- Three months ended March 31, 1998 and 1999
Condensed Consolidated Statements of Financial Condition:
- March 31, 1999
- December 31, 1998
Condensed Consolidated Statements of Cash Flows:
- Three months ended March 31, 1998 and 1999
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Including Quantitative and Qualitative
Disclosures about Market Risk)
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
(In thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------------
1998 1999
--------- -----
REVENUES
<S> <C> <C>
Investment advisory and incentive fees. . . . . . . . . $ 27,089 $ 32,917
Commission revenue. . . . . . . . . . . . . . . . . . . 2,044 2,920
Distribution fees and other income. . . . . . . . . . . 2,795 3,854
------ ------
Total revenues . . . . . . . . . . . . . . . . . . . 31,928 39,691
EXPENSES
Compensation costs. . . . . . . . . . . . . . . . . . . 13,420 16,775
Management fee. . . . . . . . . . . . . . . . . . . . . 3,487 2,982
Other operating expenses. . . . . . . . . . . . . . . . 5,353 6,185
Non recurring charge. . . . . . . . . . . . . . . . . . -- 50,725
------ ------
Total expenses . . . . . . . . . . . . . . . . . . . 22,260 76,667
Operating income (loss) . . . . . . . . . . . . . . . . . 9,668 (36,976)
OTHER INCOME (EXPENSE)
Net gain from investments . . . . . . . . . . . . . . . 4,059 4,249
Interest and dividend income. . . . . . . . . . . . . . 789 1,158
Interest expense. . . . . . . . . . . . . . . . . . . . (859) (716)
------ ------
Total other income, net. . . . . . . . . . . . . . . 3,989 4,691
------ ------
Income (loss) before income taxes and
minority interest . . . . . . . . . . . . . . . . . . . 13,657 (32,285)
Income tax provision(benefit) . . . . . . . . . . . . . 1,483 (15,118)
Minority interest. . . . . . . . . . . . . . . . . . . 392 714
------ ------
Net income (loss) . . . . . . . . . . . . . . . . . $ 11,782 ($ 17,881)
====== ======
Pro forma data:
Income (loss) before income taxes and minority interest
as reported . . . . . . . . . . . . . . . . . . . . . $ 13,657 ($ 32,285)
Pro forma interest expense on $50 million note payable. (750) (338)
Pro forma management fee adjustment from 20% to 10% of
pre tax profits . . . . . . . . . . . . . . . . . . . 2,065 1,097
Pro forma reallocation of expenses to the new parent
company . . . . . . . . . . . . . . . . . . . . . . . 343 23
Pro forma effect on income and expenses of distribution of
assets and liabilities . . . . . . . . . . . . . . . (2,514) (2,256)
Pro forma(provision) benefit for income taxes.. . . . . (5,075) 12,857
Pro forma minority interest . . . . . . . . . . . . . . (392) (714)
------ ------
Pro forma net income (loss) . . . . . . . . . . . . . . $ 7,334 ($ 21,616)
====== ======
Pro forma net income (loss) per share:
Basic and diluted . . . . . . . . . . . . . . . . . $ 0.24 ($ 0.72)
====== =======
Pro forma weighted average shares outstanding:
Basic and diluted. . . . . . . . . . . . . . . . . 30,000 30,000
====== ======
</TABLE>
See accompanying notes.
GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands except share data)
<TABLE>
<CAPTION>
December 31 March 31,
1998 1999
----------- -----------
(Unaudited)
ASSETS
<S> <C> <C>
Cash and cash equivalents . . . . . . . . . . . . . . . . . $ 50,222 $ 113,205
Investments in securities . . . . . . . . . . . . . . . . . 83,802 46,344
Investments in partnerships and affiliates. . . . . . . . . 49,795 16,024
PCS licenses. . . . . . . . . . . . . . . . . . . . . . . . 33,311 --
Receivable from broker. . . . . . . . . . . . . . . . . . . 13,463 --
Investment advisory fees receivable . . . . . . . . . . . . 8,851 10,577
Notes and other receivables from affiliates . . . . . . . . 5,178 3,399
Capital lease . . . . . . . . . . . . . . . . . . . . . . . 3,433 3,371
Intangible assets, net. . . . . . . . . . . . . . . . . . . 1,724 1,672
Deferred tax asset. . . . . . . . . . . . . . . . . . . . . -- 19,830
Other assets. . . . . . . . . . . . . . . . . . . . . . . . 4,896 3,729
-------- -------
Total assets . . . . . . . . . . . . . . . . . . . . . $ 254,675 $ 218,151
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Securities sold, but not yet purchased. . . . . . . . . . . $ 13,011 $ 483
Distributions payable to shareholders . . . . . . . . . . . 11,616 --
Payable to parent . . . . . . . . . . . . . . . . . . . . . -- 7,139
Note payable. . . . . . . . . . . . . . . . . . . . . . . . 5,876 50,000
Income taxes payable (including deferred income taxes). . . 3,300 7,499
Capital lease obligation. . . . . . . . . . . . . . . . . . 3,614 3,606
Compensation payable. . . . . . . . . . . . . . . . . . . . 5,118 8,724
Payable to brokers. . . . . . . . . . . . . . . . . . . . . -- 4,303
Accrued expenses and other liabilities. . . . . . . . . . . 5,113 5,873
------- ------
Total liabilities. . . . . . . . . . . . . . . . . . . 47,648 87,627
Minority interest . . . . . . . . . . . . . . . . . . . . . 12,127 13,474
Stockholders' equity: . . . . . . . . . . . . . . . . . . . 194,900 117,050
------- -------
Total liabilities and stockholders' equity. . . . . . . . . $ 254,675 $ 218,151
======== =======
</TABLE>
See accompanying notes.
GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(In thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------------
1998 1999
---- ----
OPERATING ACTIVITIES
<S> <C> <C>
Net income (loss) . . . . . . . . . . . . . . . . . . . . . $ 11,782 ($17,881)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Equity in earnings of partnerships and affiliates . . . . (4,559) (2,828)
Depreciation and amortization . . . . . . . . . . . . . . 166 174
Deferred income taxes . . . . . . . . . . . . . . . . . . -- (19,830)
Minority interest in net income of consolidated
Subsidiaries . . . . . . . . . . . . . . . . . . . . . 392 714
Non recurring charge . . . . . . . . . . . . . . . . . . -- 50,000
Changes in operating assets and liabilities:
Investments in securities. . . . . . . . . . . . . . . (5,907) (40,059)
Investment advisory fees receivable. . . . . . . . . . (1,461) (1,726)
Receivables from affiliates. . . . . . . . . . . . . . 459 (294)
Notes and other receivables. . . . . . . . . . . . . . 5,171 --
Receivable from broker . . . . . . . . . . . . . . . . 2,096 529
Other assets . . . . . . . . . . . . . . . . . . . . . (1,880) (18)
Securities sold, but not yet purchased . . . . . . . . (136) 143
Income taxes payable . . . . . . . . . . . . . . . . . 905 3,899
Compensation payable . . . . . . . . . . . . . . . . . 8,668 3,606
Payable to brokers . . . . . . . . . . . . . . . . . . -- 4,303
Payable to parent. . . . . . . . . . . . . . . . . . . -- 7,139
Accrued expenses and other liabilities . . . . . . . . 1,743 760
------- -------
Total adjustments . . . . . . . . . . . . . . . . . . . . . 5,657 6,512
------- -------
Net cash provided by (used in)operating activities . . . . 17,439 (11,369)
------- -------
INVESTING ACTIVITIES
Distributions from partnerships and affiliates. . . . . . . 2,350 5,187
Investments in partnerships and affiliates. . . . . . . . . (3,322) (25)
------- -------
Net cash (used in) provided by investing activities . . . . (972) 5,162
------- -------
FINANCING ACTIVITIES
Distributions to shareholders . . . . . . . . . . . . . . . (5,694) (10,023)
Issuance of notes payable . . . . . . . . . . . . . . . . . 499 --
(Purchase) sale of minority stockholders' interest. . . . . (381) 633
Net proceeds from issuance of common stock. . . . . . . . . -- 96,750
Cash included in deemed distribution . . . . . . . . . . . . -- (18,170)
------- -------
Net cash (used in) provided by financing activities . . . . (5,576) 69,190
------- ------
Net increase in cash and cash equivalents. . . . 10,891 62,983
Cash and cash equivalents at beginning of period. . . . . . 12,610 50,222
------- -------
Cash and cash equivalents at end of period. . . . . . . . . $23,501 $113,205
======= ========
</TABLE>
See footnote C regarding non-cash financing transactions.
See accompanying notes.
GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(UNAUDITED)
A. ORGANIZATION
Gabelli Asset Management Inc. (the "Company") was incorporated in
April 1998 in the state of New York, with no significant assets or
liabilities and did not engage in any substantial business activities
prior to the public offering ("Offering") of its shares. On February 9,
1999 the company exchanged 24 million shares of its Class B Common Stock,
representing all of its issued and outstanding shares of Common Stock, with
Gabelli Funds, Inc. and two of its subsidiaries ("GFI") in consideration 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 (the "Reorganization").
On February 17, 1999, the Company completed its sale of 6 million
shares of Class A Common Stock and received proceeds, after fees and
expenses, of approximately $97 million. After the Offering, GFI owns 80% of
the outstanding common stock of the Company. In addition, with the
completion of the Offering, the Company is now a "C" Corporation for
Federal and state income tax purposes and will be subject to substantially
higher income tax rates.
The accompanying condensed consolidated financial statements for
periods prior to the date of the Reorganization, include the assets,
liabilities and earnings of 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"). After the Reorganization
these financial statements include the accounts of Gabelli Funds, LLC and
GAMCO and former GFI majority-owned subsidiaries GSI, Fixed Income and
Advisers.
B. BASIS OF PRESENTATION
The unaudited interim condensed 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 condensed 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 condensed 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 included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998,
from which the accompanying Statement of Financial Condition was derived.
C. FORMATION TRANSACTIONS
Reorganization
The exchange of operating assets and liabilities of approximately
$169 million, including cash of approximately $18 million, has been
recorded as a deemed distribution. Accordingly only the cash portion of
this deemed distribution has been reflected in the Statement of Cash Flows.
Employment Agreement
Immediately preceding the Offering and in conjunction with the
Reorganization, the Company and its Chairman and Chief Executive Officer
("Chairman") entered into an Employment Agreement ("Agreement"). The
Agreement provides that the Company will pay the Chairman 10% of the
Company's aggregate pre-tax profits, before consideration of the one-time
charge discussed below, while he remains an executive of the Company and
devotes the substantial majority of his working time to the business of the
Company.
Note Payable
The Agreement further provides the Chairman will be paid $50
million on January 2, 2002 plus interest payable quarterly at an annual
rate of 6% from the date of the Agreement. This payment, plus related costs
and net of a related deferred tax benefit of $19.8 million, has been reflected
as a one-time charge to earnings in the first quarter of 1999 and the
liability has been recorded as a note payable.
Stock Award and Incentive Plan
On February 5, 1999, the Board of Directors adopted the 1999
Gabelli Asset Management Inc. Stock Award and Incentive Plan (the "Plan"),
designed to provide incentives which will attract and retain individuals
key to the success of the Company through direct or indirect ownership of
the Company's common stock. Benefits under the Plan may be granted in any
one or a combination of stock options, stock appreciation rights,
restricted stock, 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 75% after three years and 100% after
four years from the date of grant and expire after ten years.
Options were granted to all full time employees to purchase
1,124,500 shares and to a non-employee director to purchase 10,000 shares
of common stock at an exercise price of $16.28 per share. At March 31, 1999
there were 365,500 shares available for future awards.
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 is
immaterial.
Pro Forma Information
Pro forma information has been included which gives effect to the
Reorganization, including the reduction in other income as a result of the
deemed distribution of a proprietary investment portfolio, the lower
management fee and the increase in interest expense as if the Employment
Agreement had been in effect as of January 1, 1998 and 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. The
pro forma information does not give effect to the use of proceeds received
from the Offering.
D. 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 for all periods presented. The Company has
presented pro forma earnings per share based upon the number of shares
outstanding at the close of the Offering. Options outstanding for the
period do not have a dilutive effect and therefore are excluded from the
computation of diluted earnings per share.
GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
The following unaudited pro forma consolidated financial
information gives effect to assets and liabilities assumed to be
distributed as part of the Reorganization 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 consolidated financial information does
not purport to represent the results of operations or the financial
position of the Company which actually would have occurred had the
Reorganization and Formation Transactions been previously consummated or
project the results of operations or the financial position of the Company
for any future date or period. The pro forma information does not reflect
the $96 million in net cash proceeds received upon completion of the
Offering.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
AS REPORTED ADJUSTMENTS CONSOLIDATED
REVENUES
<S> <C> <C> <C>
Investment advisory and incentive fees. . . . . . . . . . . $ 32,917 $ 32,917
Commission revenue . . . . . . . . . . . . . . . . . . . . 2,920 2,920
Distribution fees and other income. . . . . . . . . . . . . 3,854 3,854
------ ------
Total revenues . . . . . . . . . . . . . . . . . . . . . 39,691 39,691
EXPENSES
Compensation costs. . . . . . . . . . . . . . . . . . . . . 16,775 16,775
Management fee. . . . . . . . . . . . . . . . . . . . . . . 2,982 ($ 1,097)(a) 1,885
Other operating expenses. . . . . . . . . . . . . . . . . . 6,185 (23)(b) 6,162
Non recurring charge. . . . . . . . . . . . . . . . . . . . 50,725 50,725
------ ------- ------
Total expenses . . . . . . . . . . . . . . . . . . . . . 76,667 (1,120) 75,547
------ ------- ------
Operating loss . . . . . . . . . . . . . . . . . . . . . . . (36,976) 1,120 (35,856)
OTHER INCOME (EXPENSE)
Net gain from investments . . . . . . . . . . . . . . . . . 4,249 (1,903)(c) 2,346
Interest and dividend income. . . . . . . . . . . . . . . . 1,158 (476)(c) 682
Interest expense. . . . . . . . . . . . . . . . . . . . . . (716) 123 (c)
(338)(d) (931)
------ ------- ------
Total other income, net. . . . . . . . . . . . . . . . . 4,691 (2,594) 2,097
------ ------- ------
Income before income taxes and minority interest . . . . . . (32,285) (1,474) (33,759)
Income tax benefit . . . . . . . . . . . . . . . . . . . . . (15,118) 2,261 (e) (12,857)
Minority interest . . . . . . . . . . . . . . . . . . . . . 714 714
------ ------- ------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . ($ 17,881) ($ 3,735) ($ 21,616)
====== ======= =======
Pro forma net (loss) per share:
Basic and diluted . . . . . . . . . . . . . . . . . . . ($ 0.72) (f)
=======
Pro forma weighted average shares outstanding:
Basic and diluted. . . . . . . . . . . . . . . . . . . 30,000
======
</TABLE>
Notes to Pro Forma Adjustments:
(a) To reflect the change in management fee from 20% to 10%.
(b) To reflect reallocation of expenses to new parent company.
(c) To reflect effect on income and expenses of distribution of assets
and liabilities.
(d) To reflect a full quarter of interest on $50 million note payable.
(e) To record additional taxes related to conversion from Subchapter S
Corporation to "C" Corporation for Federal and state income tax
purposes and tax effects of pro forma adjustments.
(f) Excluding the one-time charge, net of tax benefit, of $30.9 million
the pro forma net income per share on both a basic and diluted
basis is $0.31 per share.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
AS REPORTED ADJUSTMENTS CONSOLIDATED
REVENUES
<S> <C> <C> <C>
Investment advisory and incentive fees . . . . . . . . . $ 27,089 $ 27,089
Commission revenue. . . . . . .. . . . . . . . . . . . . 2,044 2,044
Distribution fees and other income. . . . . . . . . . . 2,795 2,795
------ ------
Total revenues . . . . . . . . . . . . . . . . . . . 31,928 31,928
EXPENSES
Compensation costs. . . . . . . . . . . . . . . . . . . 13,420 13,420
Management fee. . . . . . . . . . . . . . . . . . . . . 3,487 (2,065)(a) 1,422
Other operating expenses. . . . . . . . . . . . . . . . 5,353 (343)(b) 5,010
------ ----- ------
Total expenses . . . . . . . . . . . . . . . . . . . 22,260 (2,408) 19,852
------ ----- ------
Operating income. . . . . . . . . . . . . . . . . . . . . 9,668 2,408 12,076
OTHER INCOME (EXPENSE)
Net gain from investments . . . . . . . . . . . . . . . 4,059 (2,636)(c) 1,423
Interest and dividend income. . . . . . . . . . . . . . 789 (558)(c) 231
Interest expense. . . . . . . . . . . . . . . . . . . . (859) 680 (c) (929)
(750)(d)
------- -----
Total other income, net. . . . . . . . . . . . . . . 3,989 (3,264) 725
------ ----- ------
Income before income taxes and
minority interest . . . . . . . . . . . . . . . . . . . 13,657 (856) 12,801
Income tax provision (benefit) . . . . . . . . . . . . . 1,483 3,592 (e) 5,075
Minority interest. . . . . . . . . . . . . . . . . . . . 392 392
------ ------ ------
Net income . . . . . . . . . . . . . . . . . . . . . . $ 11,782 ($4,448) $ 7,334
====== ===== ======
Pro forma net income per share:
Basic and diluted . . . . . . . . . . . . . . . . . $ 0.24
======
Pro forma weighted average shares outstanding:
Basic and diluted. . . . . . . . . . . . . . . . . 30,000
======
</TABLE>
Notes to Pro Forma Adjustments:
(a) To reflect the change in management fee from 20% to 10%.
(b) To reflect reallocation of expenses to new parent company.
(c) To reflect effect on income and expenses of distribution of assets and
liabilities.
(d) To reflect interest on $50 million note payable.
(e) To record additional taxes related to conversion from Subchapter S
Corporation to "C" Corporation for Federal and state income tax purposes
and tax effects of pro forma adjustments.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
Gabelli Asset Management Inc. (the "Company"), incorporated in
April 1998, had no significant assets or liabilities and did not engage in
any business activities prior to its reorganization and the public offering
("Offering") of its shares. On February 9, 1999, the Company exchanged 24
million shares of its Class B Common Stock, representing all of its then
issued and outstanding common stock, to Gabelli Funds, Inc. ("GFI") and two
of its subsidiaries in consideration for substantially all of the operating
assets and liabilities of GFI related to its institutional and retail asset
management, mutual fund advisory, underwriting and brokerage business (the
"Reorganization").
Immediately following the Reorganization, the Company sold 6
million shares of its Class A Common Stock in an initial public offering.
Proceeds from the Offering, net of fees and expenses, were approximately
$97 million. Following the Offering, GFI owns 80% of the outstanding common
stock of the Company. For periods 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 financial statements.
The following discussion should be read in conjunction with the
Condensed Consolidated Financial Statements and the notes thereto included
in Item 1 to this report.
The Company's revenues are largely based on the level of assets
under management in its business as well as the level of fees associated
with it various investment products. Growth in revenues generally depends
on good investment performance and the ability to attract additional
investors while maintaining current fee levels. 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
business. Revenues derived from the equity oriented portfolios generally
have higher management fee rates than fixed income portfolios.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 AS COMPARED TO THREE MONTHS ENDED
MARCH 31, 1998
Total revenues rose 24% in the first quarter of 1999, to $39.7
million, up $7.8 million over the first quarter of 1998.
Investment advisory and incentive fees, which comprise 83% of
total revenues, were $32.9 million in the first quarter of 1999, 22% higher
than the same period a year earlier. The growth in investment advisory and
incentive fees is largely based on the growth in average assets under
management during the respective periods. Average assets under management
were $16.7 billion in the first quarter 1999, 22% higher than in the first
quarter of 1998. The Company also benefited from a further shift towards
equity products which generate higher investment advisory fees.
Commission revenue was $2.9 million in the first quarter of 1999,
43% higher than the same period a year earlier benefiting from increased
syndicate activities.
Distribution fees and other income were 3.9 million, 38% higher in
the first quarter of 1999 than the first quarter of 1998. This increase
results principally from a 30% increase in average assets managed in open
end mutual funds which generate distribution fees under 12b-1 compensation
plans.
Total expenses, including a one-time charge of $50.7 million, were
$76.7 million in the first quarter of 1999. Excluding this one-time charge
total expenses were $26.0 million, 17% higher than in the first quarter of
1998. Compensation costs, which are largely variable in nature and increase
or decrease as revenues grow or decline, were $16.8 million or 25% higher
in the first quarter of 1999. Management fee expense, which is totally
variable and increases or decreases as pre-tax profits grow or decline, was
nearly 14% lower in the first quarter 1999, at $3.0 million, as compared to
the first quarter of 1998. The lower management fee results from the
reduction in the management fee rate to 10% of aggregate pre-tax profits
(excluding one-time charge) as of the date of the Reorganization from 20%
in the first quarter of 1998. Other operating expenses were $6.2 million in
the first quarter of 1999, an increase of 16% over the same period of the
prior year but well below the Company's growth in revenues as increased
distribution costs were offset by efficiencies obtained from spreading
fixed expenses over a larger revenue base.
Other income, net, increased 18% to $4.7 million in the first
quarter of 1999 as the Company benefited from improved performance in its
investment portfolio, investment income on the $97 million in proceeds
received from the Offering and lower interest costs due to lower
outstanding borrowings in the first quarter of 1999.
An income tax benefit of $15.1 million was recorded in the first
quarter of 1999 due to a deferred tax benefit of $19.8 million related to
the one-time charge of $50.7 million. Excluding this deferred tax benefit,
the first quarter 1999 income tax provision was $4.7 million, substantially
higher than the $1.5 million tax provision recorded in the first quarter of
1998. This increase results from the conversion from a Subchapter S
Corporation to a "C" Corporation for Federal and state income tax purposes,
which became effective at the close of the Offering.
LIQUIDITY AND CAPITAL RESOURCES
The Company's assets are primarily liquid, consisting mainly of
cash, short term investments, securities held for investment purposes and
investments in partnerships in which the Company is a general or limited
partner. Investments in partnerships are generally illiquid, however the
underlying investments in such partnerships are generally liquid and the
valuations of the investment partnerships reflect this underlying
liquidity.
Cash requirements and liquidity needs have historically been met
through cash generated by operating activities and the Company's borrowing
capacity. At March 31, 1999, the Company had cash and cash equivalents of
$113.2 million, an increase of $63 million from December 31, 1998. Included
in cash and cash equivalents at March 31, 1999 were net proceeds of
approximately $97 million received from the sale of the Company's Class A
Common Stock in an initial public offering completed on February 17, 1999.
Proceeds from the Offering will be used for general corporate purposes,
including working capital, and achieving its strategic growth plans which
call for expanding product offerings, accessing new distribution channels
and pursuing strategic acquisitions or alliances, as opportunities arise.
Cash used in operating activities was $11.4 million in the first
quarter of 1999 principally resulting from $40.1 million of investment
securities purchased and partially offset by $13 million in income before a
non-recurring charge and net changes in other operating assets and
liabilities of approximately $18 million. In the first quarter of 1998 cash
provided by operating activities was $17.4 million.
Cash provided by investing activities, related to investments in
and distributions from partnerships and affiliates, was $5.2 million in the
first quarter of 1999. Cash used in these investing activities in the first
quarter of 1998 was $1 million.
Cash provided by financing activities in the first quarter of 1999
was $69.2 million principally resulting from the receipt of the net
proceeds from the Offering of $97 million partially offset by distributions
to shareholders of $10 million and $18 million of cash included in the
deemed distribution.
Based upon the Company's current level of operations and
anticipated growth the Company expects that cash flows from operating
activities plus its borrowing capacity and the net proceeds from its
Offering will be sufficient 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 National Association of Securities Dealers. 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 minimum net
capital of $250,000. At March 31, 1999, Gabelli & Company had net capital,
as defined, of approximately $14 million exceeding the regulatory
requirement by approximately $13.7 million. Regulatory net capital
requirements increase when Gabelli & Company is involved in underwriting
activities.
MARKET RISK
The Company is subject to potential losses from certain market
risks as a result of absolute and relative price movements in financial
instruments due to changes in interest rates, equity prices and other
factors. The Company's exposure to market risk is directly related to its
role as financial intermediary and advisor for assets under management in
its mutual funds, institutional and separate accounts business and its
proprietary trading activities. Since December 31, 1998, the Company has
substantially increased its positions in cash and cash equivalents and
reduced its positions in securities held for investment purposes and
investment in partnerships, effectively reducing its exposure to market
risk. At March 31, 1999, the company's primary market risk exposure was for
changes in equity prices and interest rates. Included in investments in
securities of $46.3 million at March 31, 1999 were investments in mutual
funds, largely invested in equity products, of $13.0 million and a diverse
selection of common stocks totaling $33.3 million. Investments in mutual
funds generally lower market risk through the diversification of financial
instruments within their portfolio. In addition, the Company may alter its
investment holdings from time to time in response to changes in market
risks and other factors considered appropriate by management. More than $30
million of the $33.3 million invested in common stocks at March 31, 1999,
represent the Company's participation in risk arbitrage opportunities in
connection with mergers, consolidations, acquisitions, tender offers or
other similar transactions. These transactions involve announced deals with
agreed upon terms and conditions, including pricing, which generally
involve less market risk than common stocks held in a trading portfolio.
The principal risk associated with risk arbitrage transactions is the
inability of the companies involved to complete the transaction.
The Company's exposure to interest rate risk results, principally,
from its investment of excess cash in government obligations. These
investments are primarily short term in nature and the fair value of these
investments generally approximate market value.
The Company's revenues are largely driven by the market value of
its assets under management and are therefore exposed to fluctuations in
market prices. Investment advisory fees for mutual funds are based on
average daily asset values. Management fees earned on institutional and
separate accounts, for any given quarter, are determined based on asset
values on the last day of the preceding quarter. Any significant increases
or decreases in market value of assets managed which occur on the last day
of the quarter will result in a relative increase or decrease in revenues
for the following quarter.
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 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 58
counterparties, intermediaries, subcontractors and vendors with whom it has
important financial or operational relationships (18 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 37 of them (9 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.
FORWARD LOOKING INFORMATION
Statements included in the Management's Discussion and Analysis of
Financial Condition and Results of Operations may contain "forward-looking
information", including information relating to anticipated growth in
assets under management, revenues or earnings, strategies to bring about
anticipated growth, anticipated expense levels and expectations regarding
market risk. The Company cautions readers that any forward-looking
information provided by or on behalf of the Company is not a guarantee of
future performance or events. Actual results may differ materially from
those in forward-looking information as a result of many risk factors
including, but not limited to, economic, competitive, governmental and
technological, many of which are beyond the Company's control or are
subject to change. Further, such forward-looking information speaks only as
of the date on which such statements are made and the Company undertakes no
obligation to update any forward-looking information to reflect changes in
events or circumstances subsequent to the date made or to reflect the
occurrence of unanticipated events.
PART II: OTHER INFORMATION
ITEM 2. Changes in Securities and Use of Proceeds
On February 10, 1999, the Company's Registration
Statement on Form S-1 (No. 333- 51023) relating
to the initial public offering of 6,000,000
shares of the Company's Class A Common Stock was
declared effective by the Securities and
Exchange Commission. All of the 6,000,000 shares
of Class A Common Stock that were registered
were sold in the Offering at an initial public
offering price of $17.50 per share ($105 million
in the aggregate). The Offering was completed on
February 17, 1999 and was lead managed by
Merrill Lynch & Co., Salomon Smith Barney and
Gabelli & Company (an affiliate of the Company).
The net proceeds to the Company are expected to
be approximately $96 million, after payment of
underwriting discount of $7.35 million and other
estimated expenses of $1.65 million. To date,
expenses related to the Offering have been $0.9
million. The remaining costs to this Offering
are expected to be finalized in the second
quarter of 1999. As of March 31, 1999, the
Company had not applied any of the net proceeds
of the Offering for its intended uses (namely,
general corporate purposes, including working
capital, and achieving its strategic growth
plans which call for expanding product
offerings, accessing new distribution channels
and pursuing strategic acquisitions or
alliances, as opportunities arise), but had
invested the net proceeds from the Offering in
short-term marketable securities pending such
application.
ITEM 4. Submission of Matters to a Vote of Security Holders
By action by written consent dated as of
February 5, 1999, the then sole shareholder of
the Company approved the Company's name change,
the Company's Restated Certificate of
Incorporation, the Company's Restated Bylaws,
the Company's 1999 Stock Award and Incentive
Plan and the Company's 1999 Annual Performance
Incentive Plan.
ITEM 6. (a) Exhibits
Exhibit No. Description
----------- -----------
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
The Company did not file any reports on
Form 8-K during the three months ended
March 31, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
GABELLI ASSET MANAGEMENT INC.
(Registrant)
5/17/99 /s/ Robert S. Zuccaro
------------------ ----------------------------------
Date Robert S. Zuccaro
Vice President and Chief Financial
Officer
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<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 113,205
<SECURITIES> 46,344
<RECEIVABLES> 13,976
<ALLOWANCES> 0
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0
0
<COMMON> 30
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<CGS> 0
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<INCOME-PRETAX> (32,285)
<INCOME-TAX> (15,118)
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