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 September 30, 2000
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 asspecified in its charter)
New York 13-4007862
--------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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 September 30, 2000
----- -------------------------------------
Class A Common Stock, .001 par value 5,524,300
Class B Common Stock, .001 par value 24,000,000
1
<PAGE>
INDEX
GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited, except as noted)
Condensed Consolidated Statements of Operations:
- Three months ended September 30, 1999 and 2000
- Nine months ended September 30, 1999 and 2000
Condensed Consolidated Statements of Financial Condition:
- September 30, 2000
- December 31, 1999 (Audited)
Condensed Consolidated Statements of Cash Flows:
- Nine months ended September 30, 1999 and 2000
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 6. Exhibits and Reports on Form 8-K
SIGNATURES
2
<PAGE>
GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
----------------------------------------
1999 2000
-------- --------
<S> <C> <C>
Revenues
Investment advisory and incentive fees. . . . . . . . . $ 37,337 $ 49,009
Commission revenue. . . . . . . . . . . . . . . . . . . 2,199 3,800
Distribution fees and other income. . . . . . . . . . . 4,555 6,355
------ ------
Total revenues . . . . . . . . . . . . . . . . . . . 44,091 59,164
Expenses
Compensation costs. . . . . . . . . . . . . . . . . . . 17,900 24,685
Management fee. . . . . . . . . . . . . . . . . . . . . 2,040 2,844
Other operating expenses. . . . . . . . . . . . . . . . 6,723 10,024
------ ------
Total expenses . . . . . . . . . . . . . . . . . . . 26,663 37,553
Operating income. . . . . . . . . . . . . . . . . . . . . 17,428 21,611
Other income (expense)
Net gain from investments . . . . . . . . . . . . . . . 279 2,732
Interest and dividend income. . . . . . . . . . . . . . 1,583 2,188
Interest expense. . . . . . . . . . . . . . . . . . . . (926) (933)
------ ------
Total other income, net. . . . . . . . . . . . . . . 936 3,987
------ ------
Income before income taxes and
minority interest . . . . . . . . . . . . . . . . . . . 18,364 25,598
Income tax provision. . . . . . . . . . . . . . . . . . 7,297 10,137
Minority interest. . . . . . . . . . . . . . . . . . . 830 971
------ ------
Net income. . . . . . . . . . . . . . . . . . . . . . $ 10,237 $ 14,490
====== ======
Net income per share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.34 $ 0.49
====== ======
Diluted . . . . . . . . . . . . . . . . . . . . . . . . $ 0.34 $ 0.48
====== ======
Weighted average shares outstanding:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . 29,861 29,547
====== ======
Diluted . . . . . . . . . . . . . . . . . . . . . . . . 29,861 29,969
====== ======
</TABLE>
3
<PAGE>
GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
(In thousands, except per share data)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------------------
1999 2000
-------- ---------
<S> <C> <C>
Revenues
Investment advisory and incentive fees. . . . . . . . . $105,694 $ 141,666
Commission revenue. . . . . . . . . . . . . . . . . . . 8,452 11,493
Distribution fees and other income. . . . . . . . . . . 12,259 20,898
------- -------
Total revenues . . . . . . . . . . . . . . . . . . . 126,405 174,057
Expenses
Compensation costs. . . . . . . . . . . . . . . . . . . 52,179 71,704
Management fee. . . . . . . . . . . . . . . . . . . . . 7,339 8,376
Other operating expenses. . . . . . . . . . . . . . . . 21,205 27,591
Non-recurring charge. . . . . . . . . . . . . . . . . . 50,725 -
------- -------
Total expenses . . . . . . . . . . . . . . . . . . . 131,448 107,671
Operating (loss)income. . . . . . . . . . . . . . . . . . (5,043) 66,386
Other income (expense)
Net gain from investments . . . . . . . . . . . . . . . 10,432 5,353
Interest and dividend income. . . . . . . . . . . . . . 4,064 6,434
Interest expense. . . . . . . . . . . . . . . . . . . . (2,514) (2,791)
-------- --------
Total other income, net. . . . . . . . . . . . . . . 11,982 8,996
Income before income taxes and
minority interest . . . . . . . . . . . . . . . . . . . 6,939 75,382
Income tax provision. . . . . . . . . . . . . . . . . . 439 29,852
Minority interest . . . . . . . . . . . . . . . . . . . 2,488 2,790
------- -------
Net income . . . . . . . . . . . . . . . . . . $ 4,012 $ 42,740
======= =======
Net income per share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.14 $ 1.44
======= =======
Diluted . . . . . . . . . . . . . . . . . . . . . . . . $ 0.14 $ 1.43
======= =======
Weighted average shares outstanding:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . 28,903 29,593
======= =======
Diluted . . . . . . . . . . . . . . . . . . . . . . . . 28,903 29,857
======= =======
Pro forma data:
Income before income taxes and minority interest,
as reported . . . . . . . . . . . . . . . . . . . . . $ 6,939
Pro forma interest expense on $50 million note payable. (338)
Pro forma management fee adjustment from 20% to 10% of
pre tax profits . . . . . . . . . . . . . . . . . . . 1,097
Pro forma reallocations to the new parent company . . . 23
Pro forma effect on income and expenses of distribution
of assets and liabilities. . . . . . . . . . . . . . (2,256)
Pro forma provision for income taxes.. . . . . . . . . . (2,701)
Pro forma minority interest . . . . . . . . . . . . . . (2,488)
-------
Pro forma net income . . . .. . . . . . . . . . . . . . $ 276
=======
Pro forma net income per share:
Basic and diluted . . . . . . . . . . . . . . . . . $ 0.01
=======
Pro forma weighted average shares outstanding:
Basic and diluted. . . . . . . . . . . . . . . . . 29,936
=======
</TABLE>
4
<PAGE>
GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands)
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
---------------- ------------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents . . . . . . . . . . . . $ 103,032 $ 103,677
Investments in securities . . . . . . . . . . . . 69,791 110,282
Investments in partnerships and affiliates. . . . 21,018 52,560
Investment advisory fees receivable . . . . . . . 14,269 15,453
Deferred income taxes, net. . . . . . . . . . . . 16,887 17,599
Other assets. . . . . . . . . . . . . . . . . . . 18,065 17,619
-------- --------
Total assets . . . . . . . . . . . . . . . . $ 243,062 $ 317,190
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Note payable. . . . . . . . . . . . . . . . . . . 50,000 50,000
Payable to brokers. . . . . . . . . . . . . . . . 5,637 6,863
Income taxes payable. . . . . . . . . . . . . . . 4,592 4,289
Compensation payable. . . . . . . . . . . . . . . 10,260 36,476
Accrued expenses and other liabilities. . . . . . 10,179 15,008
-------- --------
Total liabilities. . . . . . . . . . . . . . 80,668 112,636
Minority interest . . . . . . . . . . . . . . . . 14,818 17,476
Stockholders' equity: . . . . . . . . . . . . . . 147,576 187,078
-------- --------
Total liabilities and stockholders' equity. . . . $ 243,062 $ 317,190
======== ========
</TABLE>
See accompanying notes.
5
<PAGE>
GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------------------
1999 2000
-------- --------
<S> <C> <C>
Operating activities
Net income . . . . . . . . . . . . . . . . . . . . . . . . $ 4,012 $ 42,740
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Equity in earnings of partnerships and affiliates . . . . (5,060) (4,897)
Depreciation and amortization . . . . . . . . . . . . . . 572 521
Non recurring charge. . . . . . . . . . . . . . . . . . . 50,725 -
Deferred income taxes, net. . . . . . . . . . . . . . . . (19,830) (712)
Minority interest in net income of consolidated
subsidiaries . . . . . . . . . . . . . . . . . . . . . 2,488 2,790
Changes in operating assets and liabilities . . . . . . . (36,687) (9,782)
------- -------
Total adjustments . . . . . . . . . . . . . . . . . . . . . (7,792) (12,080)
------- -------
Net cash (used in) provided by operating activities . . . . (3,780) 30,660
------- -------
Investing activities
Distributions from partnerships and affiliates. . . . . . . 5,554 3,523
Investments in partnerships and affiliates. . . . . . . . . (694) (30,168)
------- -------
Net cash provided by (used in) investing activities . . . . 4,860 (26,645)
------- -------
Financing activities
Distributions to shareholders . . . . . . . . . . . . . . . (10,023) -
Purchase of minority stockholders' interest. . . . . (549) (132)
Net proceeds from issuance of common stock. . . . . . . . . 95,619 -
Purchase of treasury stock. . . . . . . . . . . . . . . . . (2,868) (3,238)
Cash included in deemed distribution. . . . . . . . . . . . (18,170) -
------- -------
Net cash provided by (used in) financing activities . . . . 64,009 (3,370)
------- -------
Net increase in cash and cash equivalents . . . . . . . . . 65,089 645
Cash and cash equivalents at beginning of period. . . . . . 50,222 103,032
------- -------
Cash and cash equivalents at end of period. . . . . . . . . $115,311 $103,677
======= =======
See footnote C regarding non-cash financing transactions.
</TABLE>
See accompanying notes.
6
<PAGE>
GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(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 then issued
and outstanding shares of Common Stock, with Gabelli Group Capital Partners,
Inc. and two of its subsidiaries ("GGCP") in consideration for substantially all
of the operating assets and liabilities of GGCP 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 $96 million. After the Offering, GGCP owned 80% of the
outstanding common stock of the Company. In addition, with the completion of the
Offering, the Company is a "C" Corporation for Federal and state income tax
purposes and is 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 GGCP, its wholly-owned subsidiary GAMCO Investors, Inc.
("GAMCO"), and GGCP 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 GGCP
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 accounting
principles generally accepted in the United States for interim financial
information and Rule 10-01 of Regulation S-X. Accordingly, they do not include
all the information and footnotes required by accounting principles generally
accepted in the United States 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, 1999, from which the
accompanying Statement of Financial Condition was derived.
Certain items previously reported have been reclassified to conform
with the current year's financial statement presentation.
7
<PAGE>
C. Stockholder's Equity
Stock Award and Incentive Plan
On August 15, 2000, the Compensation Committee of the Board of
Directors approved a third option grant of 36,000 shares under the Stock Award
and Incentive Plan at an exercise price, equal to the market price on that date,
of $23.06 per share. At September 30, 2000, there were 306,500 shares available
for future awards.
Stock Repurchase Program
During 1999 the Board of Directors authorized the repurchase of up to
$6,000,000 of the Company's Class A Common Stock. The Company completed the
stock buyback during the first quarter of 2000 at which time the Board of
Directors authorized the repurchase of an additional $3,000,000 of shares in
open market transactions. During 2000 the Company repurchased 175,000 shares at
an average cost of $ 18.50 per share. A total of 475,000 shares have been
repurchased since the inception of this program in May 1999 at an average cost
of $16.58 per share.
D. 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, 1999 and the additional income taxes which would have
been recorded if GGCP 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 prior to the date received.
E. Earnings Per Share
Net income per share is computed in accordance with the Statement of
Financial Accounting Standards No. 128 "Earnings Per Share." Basic net income
per common share is calculated by dividing net income applicable to common
shareholders by the weighted average number of common shares outstanding.
Diluted net income per share is computed using the treasury stock method and
includes the effect of the assumed exercise of dilutive stock options.
Pro forma earnings per share for 1999 are based on the number of shares
outstanding at the close of the Offering for the period prior to the Offering
and on the actual number of shares outstanding subsequent thereto.
8
<PAGE>
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 Group Capital Partners, Inc. ("GGCP")
and two of its subsidiaries in consideration for substantially all of the
operating assets and liabilities of GGCP 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 $96 million.
Following the Offering, GGCP owned 80% of the outstanding common stock of the
Company. For periods after the Offering, the Company's financial statements
reflect the financial condition and results of operations of Gabelli Asset
Management Inc. and the historical results of GGCP are 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 its
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
The pro forma information presented herein for the nine months ended
September 30, 1999 presents results of operations as if the Reorganization and
Offering had occurred at the beginning of 1999. The Company believes the pro
forma results provide more meaningful information for comparing operating
results and earnings trends. The pro forma information is not necessarily
indicative of the results that the Company would have reported had these events
occurred at the beginning of the year.
Information for the nine months ended September 30, 1999 is also
presented herein on an "as reported" basis to meet certain disclosure
requirements. This information does not give 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% and the conversion from an "S" corporation
to a "C" corporation for tax purposes. The net effect of these adjustments was
to lower net income on a pro forma basis for the nine months of 1999 by $3.7
million. These adjustments principally consisted of $2.3 million of investment
earnings from assets distributed as part of the Reorganization and a $2.3
million increase in the pro forma tax provision due to the conversion from an S
corporation to a C corporation partially offset by a $1.1 million decrease in
the pro forma management fee.
9
<PAGE>
Three Months Ended September 30, 2000 as Compared to the
Three Months Ended September 30, 1999
Consolidated Results - Three Months Ended September 30:
<TABLE>
<CAPTION>
(unaudited; in thousands, except per share data)
------------------------------------------------
1999 2000 % Change
---------- ---------- --------
<S> <C> <C> <C>
Revenues $ 44,091 $ 59,164 34.2
Expenses 26,663 37,553 40.8
---------- ----------
Operating income 17,428 21,611 24.0
Other income, net 936 3,987
---------- ----------
Income before taxes and minority interest 18,364 25,598 39.4
Income tax provision 7,297 10,137
Minority interest 830 971
---------- ----------
Net income $ 10,237 $ 14,490 41.5
========== ==========
Net income per share:
Basic $ 0.34 $ 0.49 44.1
========== ==========
Diluted $ 0.34 $ 0.48 41.2
========== ==========
Included in income before taxes and minority interest:
Depreciation and amortization $ 175 $ 177
Interest expense $ 925 $ 933
Adjusted EBITDA(a) $ 19,464 $ 26,708 37.2
========== ==========
</TABLE>
(a) Adjusted EBITDA is defined as earnings before interest, taxes, depreciation
and amortization and minority interest.
Total revenues rose 34% in the third quarter of 2000, to $59.2 million,
up $15.1 million from $44.1 million in the third quarter of 1999. The increase
in revenues results from the increase in assets under management, which drive
investment advisory fees, commission revenues and incentive fees earned as
General Partner of the alternative investment partnerships.
Investment advisory and incentive fees, which comprised 83% of total
revenues, were $49.0 million in the third quarter of 2000, 31% higher than the
same period a year earlier. The growth in investment advisory and incentive fees
from mutual funds and partnerships is driven by the growth in average assets
under management. For institutional and separate accounts fees are based on
asset values on the last day of the preceding quarter. For the third quarter of
2000 average assets under management in open end equity mutual funds was $9.9
billion, a 48% increase from the prior year average assets in open end equity
mutual funds of $6.7 billion. Assets under management used in computing fees
from institutional and separate accounts rose 19% for the third quarter of 2000
versus the same period a year earlier.
Commission revenue was $3.8 million in the third quarter of 2000, 73%
higher than the same period a year earlier, largely the result of increased
trading volume associated with the increase in assets under management.
Distribution fees and other income were $6.4 million, an increase of
40% from the $4.6 million reported in the third quarter of 1999. This increase
results from the growth in average assets managed in open end mutual funds which
generate distribution fees under 12b-1 compensation plans.
Total expenses were $37.6 million in the third quarter of 2000, a 41%
increase from total expenses of $26.7 million in the third quarter of 1999.
Compensation costs, which are largely variable in nature, were $24.7 million in
2000, 38% ahead of the third quarter of 1999. Compensation costs rose at a
faster pace than revenues as a result of planned increases in sales and
marketing, research and portfolio management personnel. Management fee expense,
which is totally variable and based on pretax income, increased 39% to $2.8
million in 2000 versus $2.0 million a year earlier. Other operating expenses
increased $3.3 million, or 49%, to $10.0 million in the current year versus $6.7
million in the third quarter of 1999. This increase results principally from the
increased mutual fund distribution costs associated with the increase in open
end equity mutual fund assets under management and the higher costs associated
with assets gathered under No Transaction Fee ("NTF") programs.
10
<PAGE>
Other income, net, which includes investment gains from our proprietary
portfolio was $4.0 million in 2000 as compared to $0.9 million in the third
quarter of 1999 with the increase largely the result of market appreciation in
our investment portfolio.
The effective tax rate for the three months ended September 30, 2000 of
39.6% remains consistent with the prior year.
Nine Months Ended September 30, 2000 as Compared to the
Nine Months Ended September 30, 1999
Consolidated Results - Nine Months Ended September 30:
<TABLE>
<CAPTION>
(unaudited; in thousands, except per share data)
------------------------------------------------
1999 (a)
1999 Adjusted % Change
(as reported) (pro forma) 2000 (vs. pro forma)
------------- ----------- --------- ---------------
<S> <C> <C> <C> <C>
Revenues $ 126,405 $ 126,405 $ 174,057 37.7
Expenses 131,448 79,604 107,671 35.3
--------- --------- ---------
Operating (loss) income (5,043) 46,801 66,386 41.8
Other income, net 11,982 9,388 8,996
--------- --------- ---------
Income before taxes and minority interest 6,939 56,189 75,382 34.2
Income tax provision 439 22,530 29,852
Minority interest 2,488 2,488 2,790
--------- --------- ---------
Net income $ 4,012 $ 31,171 $ 42,740 37.1
========= ========= =========
Net income per share:
Basic $ 0.14 $ 1.04 $ 1.44
========= ========= =========
Diluted $ 0.14 $ 1.04 $ 1.43 37.5
========= ========= =========
Included in income before taxes and minority interest:
Depreciation and amortization $ 572 $ 521
Interest expense $ 2,514 $ 2,791
Adjusted EBITDA(b) $ 59,275 $ 78,694 32.8
======== =========
</TABLE>
11
<PAGE>
(a) The 1999 adjusted pro forma results above do not include the $50.7 million
non-recurring charge ($30.9 million net of tax benefit or $1.03 per share)
recorded in the first quarter of 1999. After giving effect to this charge,
net of tax, the Company had net income of $0.01 per share for the nine
months ended September 30, 1999.
(b) Adjusted EBITDA is defined as earnings before interest, taxes, depreciation
and amortization and minority interest.
Total revenues rose 38% in the nine months ended September 30, 2000, to
$174.1 million, up $47.7 million from $126.4 million in the 1999 period.
Included in total revenue is a $3.1 million investment banking fee earned by a
subsidiary in the first quarter of 2000. Excluding this fee total revenues were
$171.0 million, a 35% increase over the prior year period.
Investment advisory and incentive fees, which comprised 81% of total
revenues, were $141.7 million in the nine months ended September 30, 2000, 34%
higher than the same period a year earlier. The growth in investment advisory
and incentive fees results from the growth in average assets under management,
principally in the open end equity mutual funds, during the respective periods.
Average total assets under management were $22.9 billion for the nine months of
2000, 28% higher than average total assets of $17.9 billion during the same
period of the prior year. Average assets under management in open end equity
mutual funds climbed 49%, to $9.3 billion, over the first nine months of 2000
compared to $6.2 billion during the same period a year earlier.
Commission revenue was $11.5 million in the nine months ended September
30, 2000, 36% higher than the prior year period and largely reflects the
increased trading activities associated with the increase in assets under
management.
Distribution fees and other income were $20.9 million for the first
nine months of 2000, including a $3.1 million investment banking fee, as
compared to $12.3 million in 1999. Excluding this fee, distribution fees and
other income were $17.8 million in 2000, an increase of 45% from the prior year,
largely resulting from the growth in average assets managed in open end mutual
funds which generate distribution fees under 12b-1 compensation plans.
Total expenses were $107.7 million in the first nine months of 2000, a
35% increase over total expenses, excluding the $50.7 million non-recurring
charge, of $79.6 million in 1999. Included in total expenses in 1999 were $1.5
million consisting of additional compensation ($0.6 million) and other operating
costs ($0.9 million) directly related to investment earnings. Excluding these
costs total expenses increased $29.6 million or 38% from the prior year and
remained consistent, as a percentage of total revenues, at 62%. Compensation
costs were $71.7 million in 2000, 37% ahead of the prior year period. Management
fee expense increased 34% to $8.4 million in 2000 versus $6.2 million a year
earlier. Other operating expenses increased $4.2 million, or 18%, to $27.6
million in the current year versus $23.4 million in the same period a year
earlier. Other operating expenses rose at a slower pace than revenues as
increases in mutual fund distribution costs, particularly those associated with
NTF programs, were offset by the leveraging of our fixed costs over a larger
revenue base.
Other income, net, which includes investment gains from our proprietary
portfolio was $9.0 million during the nine months ended September 30, 2000 as
compared to $9.4 million during the prior year period.
12
<PAGE>
The effective tax rate for the nine months ended September 30, 2000 was
approximately 39.6% which reflects our estimate of the effective tax rate for
the full year. In the same period a year earlier, the Company had recorded tax
expense of $0.4 million, which included a deferred tax benefit of $19.8 million
related to a non-recurring charge of $50.7 million. On a pro forma basis and
excluding this deferred tax benefit, the effective tax rate for the first nine
months of 1999 was 40.1%.
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. Although
investments in partnerships are generally illiquid, the underlying investments
in such partnerships are generally liquid and the valuations of the investment
partnerships reflect this underlying liquidity.
Summary cash flow data is as follows:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1999 2000
---- ----
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Cash flows provided by (used in):
Operating activities $ (3,780) $ 30,660
Investing activities 4,860 (26,645)
Financing activities 64,009 (3,370)
--------- ---------
Increase 65,089 645
Cash and cash equivalents at beginning of year 50,222 103,032
--------- ---------
Cash and cash equivalents at end of year $ 115,311 $ 103,677
========= =========
</TABLE>
Cash requirements and liquidity needs have historically been met
through cash generated by operating activities and through the Company's
borrowing capacity. At September 30, 2000, the Company had cash and cash
equivalents of $103.7 million, an increase of $0.6 million from December 31,
1999.
Cash provided by operating activities of $30.7 million in the first
nine months of 2000 resulting from $42.7 million in net income partially offset
by the net decrease of $9.8 million in other operating assets. In the first nine
months of 1999, cash used in operating activities was $3.8 million.
Cash used by investing activities, principally related to increased
investments in partnerships and affiliates, was $26.6 million in the first nine
months of 2000. Cash provided by investing activities in the first nine months
of 1999 was $4.9 million largely due to distributions received from partnerships
and affiliates.
Cash used in financing activities in the first nine months of 2000 of
$3.4 was million principally due to the purchase of the Company's Class A Common
Stock under its Share Repurchase Program. Cash provided by financing activities
in the first nine months of 1999 was $64.0 million largely resulting from the
net proceeds received in the Offering of $95.6 million and reduced by
distributions to shareholders of $10.0 million and $18.2 million of cash
included in the deemed distribution.
Based upon the Company's current level of operations and its
anticipated growth, the Company expects that its current cash balances plus cash
flows from operating activities and its borrowing capacity will be sufficient to
finance its working capital needs for the foreseeable future. The Company has no
material commitments for capital expenditures.
13
<PAGE>
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 September 30, 2000, Gabelli & Company had net capital,
as defined, of approximately $13.0 million exceeding the regulatory requirement
by approximately $12.8 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, 1999, the Company has increased its positions in
securities held for investment purposes effectively increasing its exposure to
market risk. At September 30, 2000, the Company's primary market risk exposure
was for changes in equity prices and interest rates. Included in investments in
securities of $110.3 million at September 30, 2000 were investments in
government obligations of $29.5 million, in mutual funds, largely invested in
equity products, of $27.0 million, a diverse selection of common stocks totaling
$53.1 million and other investments of approximately $0.7 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 $48.6 million
of the $53.1 million invested in common stocks at September 30, 2000, represents
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 carrying value of these investments
generally approximates 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
institutional and separate accounts 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.
14
<PAGE>
Forward Looking Information
Statements included in 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.
15
<PAGE>
Part II: Other Information
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 September 30, 2000.
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)
November 10, 2000 /s/ Robert S. Zuccaro
----------------- ---------------------
Date Robert S. Zuccaro
Vice President and Chief Financial Officer
