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, 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 as specified 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 April 30, 2000
----- ------------------------------------
Class A Common Stock, .001 par value 5,589,200
Class B Common Stock, .001 par value 24,000,000
<PAGE>
INDEX
GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Operations:
- Three months ended March 31, 1999 and 2000
Condensed Consolidated Statements of Financial Condition:
- March 31, 2000
- December 31, 1999 (Audited)
Condensed Consolidated Statements of Cash Flows:
- Three months ended March 31, 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
<PAGE>
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,
----------------------------------------
1999 2000
-------- --------
<S> <C> <C>
Revenues
Investment advisory and incentive fees. . . . . . . . . $ 32,917 $ 45,189
Commission revenue. . . . . . . . . . . . . . . . . . . 2,920 3,778
Distribution fees and other income. . . . . . . . . . . 3,854 8,806
------ ------
Total revenues . . . . . . . . . . . . . . . . . . . 39,691 57,773
Expenses
Compensation costs. . . . . . . . . . . . . . . . . . . 16,775 23,729
Management fee. . . . . . . . . . . . . . . . . . . . . 2,982 2,749
Other operating expenses. . . . . . . . . . . . . . . . 6,185 8,662
Non recurring charge. . . . . . . . . . . . . . . . . . 50,725 -
------ ------
Total expenses . . . . . . . . . . . . . . . . . . . 76,667 35,140
Operating (loss) income . . . . . . . . . . . . . . . . . (36,976) 22,633
Other Income (Expense)
Net gain from investments . . . . . . . . . . . . . . . 4,249 1,153
Interest and dividend income. . . . . . . . . . . . . . 1,158 1,891
Interest expense. . . . . . . . . . . . . . . . . . . . (716) (933)
------ ------
Total other income, net. . . . . . . . . . . . . . . 4,691 2,111
------ ------
(Loss) income before income taxes and
minority interest . . . . . . . . . . . . . . . . . . . (32,285) 24,744
Income tax (benefit) provision. . . . . . . . . . . . . (15,118) 9,799
Minority interest. . . . . . . . . . . . . . . . . . . 714 949
------ ------
Net (loss) income . . . . . . . . . . . . . . . . . $(17,881) $ 13,996
====== ======
Net income per share:
Basic and diluted . . . . . . . . . . . . . . . . . . . $ 0.47
====
Weighted average shares outstanding:
Basic and diluted . . . . . . . . . . . . . . . . . . . 29,643
======
Pro forma data:
Loss before income taxes and minority interest
as reported . . . . . . . . . . . . . . . . . . . . . $(32,285)
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 reallocation of expenses to the new parent
company . . . . . . . . . . . . . . . . . . . . . . . 23
Pro forma effect on income and expenses of distribution of
assets and liabilities. . . . . . . . . . . . . . . . (2,256)
Pro forma benefit for income taxes. . . . . . . . . . . 12,857
Pro forma minority interest . . . . . . . . . . . . . . (714)
------
Pro forma net loss. . . . . . . . . . . . . . . . . . . $(21,616)
======
Pro forma net loss per share:
Basic and diluted . . . . . . . . . . . . . . . . . $( 0.72)
======
Pro forma weighted average shares outstanding:
Basic and diluted . . . . . . . . . . . . . . . . . 30,000
======
</TABLE>
See accompanying notes.
<PAGE>
GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands)
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
-------------- ------------
(Unaudited)
ASSETS
<S> <C> <C>
Cash and cash equivalents . . . . . . . . . . . . . . $ 103,032 $ 121,095
Investments in securities . . . . . . . . . . . . . . 69,791 81,784
Investments in partnerships and affiliates. . . . . . 21,018 19,851
Receivable from broker. . . . . . . . . . . . . . . . - 162
Investment advisory fees receivable . . . . . . . . . 14,269 14,479
Deferred income taxes . . . . . . . . . . . . . . . . 16,887 16,887
Other assets. . . . . . . . . . . . . . . . . . . . . 18,065 15,333
-------- --------
Total assets . . . . . . . . . . . . . . . . . . $ 243,062 $ 269,591
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Note payable. . . . . . . . . . . . . . . . . . . . . 50,000 50,000
Payable to brokers. . . . . . . . . . . . . . . . . . 5,637 -
Income taxes payable. . . . . . . . . . . . . . . . . 4,592 10,006
Compensation payable. . . . . . . . . . . . . . . . . 10,260 19,516
Accrued expenses and other liabilities. . . . . . . . 10,179 14,510
-------- --------
Total liabilities. . . . . . . . . . . . . . . . 80,668 94,032
Minority interest . . . . . . . . . . . . . . . . . . 14,818 15,749
Stockholders' equity: . . . . . . . . . . . . . . . . 147,576 159,810
-------- --------
Total liabilities and stockholders' equity. . . . . . $ 243,062 $ 269,591
======== ========
</TABLE>
See accompanying notes.
<PAGE>
GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------------
1999 2000
---------- ----------
<S> <C> <C>
Operating activities
Net (loss) income . . . . . . . . . . . . . . . . . . . . . $(17,881) $ 13,996
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Equity in earnings of partnerships and affiliates . . . . (2,828) (1,115)
Depreciation and amortization . . . . . . . . . . . . . . 174 177
Non recurring charge. . . . . . . . . . . . . . . . . . . 50,725 -
Deferred income tax asset . . . . . . . . . . . . . . . . (19,830) -
Minority interest in net income of consolidated
Subsidiaries . . . . . . . . . . . . . . . . . . . . . 714 949
Net change in operating assets and liabilities. . . . . . (22,443) 3,494
-------- --------
Total adjustments . . . . . . . . . . . . . . . . . . . . . 6,512 3,505
-------- --------
Net cash (used in) provided by operating activities . . . . (11,369) 17,501
-------- --------
Investing activities
Distributions from partnerships and affiliates. . . . . . . 5,187 3,342
Investments in partnerships and affiliates. . . . . . . . . (25) (1,000)
-------- --------
Net cash provided by investing activities . . . . . . . . . 5,162 2,342
-------- --------
Financing activities
Distributions to shareholders . . . . . . . . . . . . . . . (10,023) -
Sale (purchase) of minority stockholders' interest. . . . . 633 (18)
Net proceeds from issuance of common stock. . . . . . . . . 96,750 -
Purchase of treasury stock - (1,762)
Cash included in deemed distribution. . . . . . . . . . . . (18,170) -
-------- --------
Net cash provided by (used in) financing activities . . . . 69,190 (1,780)
-------- --------
Net increase in cash and cash equivalents. . . . 62,983 18,063
Cash and cash equivalents at beginning of period. . . . . . 50,222 103,032
-------- --------
Cash and cash equivalents at end of period. . . . . . . . . $113,205 $121,095
======== ========
</TABLE>
See footnote C regarding non-cash financing transactions.
See accompanying notes.
<PAGE>
GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 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 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, 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.
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 for the three
months ended March 31, 1999.
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 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 or his assignee 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.
On February 10, 1999, options were granted to all full time employees
and a non-employee director to purchase an aggregate of 1,134,500 shares of
common stock at an exercise price of $16.28 per share. On February 15, 2000, the
Compensation Committee of the Board of Directors approved a second option grant
of 135,000 shares under the Stock Award and Incentive Plan at an exercise price,
equal to the market price on that date, of $16.00 per share. There were 41,000
options canceled and none exercised during 1999 and 24,000 options canceled and
none exercised during the first quarter of 2000. At March 31, 2000, there were
295,500 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, 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.
D. Earnings Per Share
For the quarter ended March 31, 2000, 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. Options outstanding for the period do not have
a dilutive effect and therefore are excluded from the computation of diluted
earnings per share.
The Company has not presented historical earnings per share for the
first quarter of 1999 due to the significant changes in its operations which are
not reflected in the historical financial statements as reported. The Company
has presented pro forma earnings per share based upon the number of shares
outstanding at the close of the Offering.
E. 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 quarter ended March 31, 2000. During the first quarter
of 2000 the Board of Directors authorized the repurchase of an additional
$3,000,000 of shares in open market transactions. Through March 31, 2000, the
Company has repurchased 410,900 shares, including 110,000 in the first quarter
of 2000, at an average cost of $15.61 per share, which are held in treasury.
<PAGE>
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 STATEMENT 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
----------- ----------- ------------
<S> <C> <C> <C>
Revenues
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
-------- ------- --------
Loss 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.
<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 three months ended
March 31, 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 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 first quarter
of 1999 by $3.7 million. These adjustments principally consisted of $2.4 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.
<PAGE>
Three Months Ended March 31, 2000 As Compared To
Three Months Ended March 31, 1999
Consolidated Results - Three Months Ended March 31:
<TABLE>
<CAPTION>
(unaudited; in thousands, except per share data)
1999 (a)
1999 Adjusted 2000 % Change
(As reported) (pro forma) (vs. pro forma)
------------- ------------ ---------- ---------------
<S> <C> <C> <C> <C>
Revenues $ 39,691 $ 39,691 $ 57,773 45.6 %
Expenses 76,667 24,822 35,140 41.6
--------- ---------- ----------
Operating income (loss) (36,976) 14,869 22,633 52.2
Other income (expense), net 4,691 2,097 2,111
--------- ---------- ----------
Income (loss) before taxes and minority interest (32,285) 16,966 24,744 45.8
Income tax provision (15,118) 6,973 9,799
Minority interest 714 714 949
--------- ---------- ----------
Net income (loss) $( 17,881) $ 9,279 $ 13,996 50.8
========= ========== ==========
Net income per share:
Basic and diluted $ 0.31 $ 0.47 51.6
========== ==========
Included in income before taxes and minority interest:
Depreciation and amortization $ 174 $ 169
Interest expense $ 931 $ 933
Adjusted EBITDA(b) $ 18,071 $ 25,846 43.0%
</TABLE>
(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 a net loss of $21.6 million or $0.72 per share
for the three months ended March 31, 1999.
(b) Adjusted EBITDA is defined as earnings before interest, taxes, depreciation
and amortization and minority interest.
Total revenues rose 46% in the first quarter of 2000, to $57.8 million,
up $18.1 million from $39.7 million in the first quarter of 1999. 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 $54.7 million,
a 38% increase over the prior year quarter.
Investment advisory and incentive fees, which comprise 78% of total
revenues, were $45.2 million in the first quarter of 2000, 37% higher than the
same period a year earlier. The growth in investment advisory and incentive fees
is based on the growth in average assets under management during the respective
periods. Average assets under management were $22.4 billion in the first quarter
2000, 34% higher than average assets of $16.7 billion in the first quarter of
1999. Average assets under management in open end equity mutual funds climbed
53%, to $8.8 billion, in the first quarter 2000 compared to $5.7 billion in the
first quarter 1999.
Commission revenue was $3.8 million in the first quarter of 2000, 29%
higher than the same period a year earlier.
Distribution fees and other income were $8.8 million in the first
quarter of 2000 including a $3.1 million investment banking fee. Excluding this
fee, distribution fees and other income were $5.7 million, an increase of 47%
from the $3.9 million reported in the first 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 $35.1 million in the first quarter of 2000, a 41.6%
increase over total expenses, excluding the $50.7 million non-recurring charge,
of $24.8 million in 1999. Total expenses declined as a percentage of total
revenues to 60.8% in 2000 from 62.5% in the prior year quarter as the Company
continues to benefit from spreading the fixed component of both compensation
costs and other operating expenses over a larger revenue base. Compensation
costs, which are largely variable in nature, were $23.7 million in 2000, 41.5%
ahead of the first quarter of 1999. Management fee expense, which is totally
variable and based on pretax income, increased 45.8% to $2.7 million in 2000
versus $1.9 million a year earlier. Other operating expenses increased $2.5
million, or 40.6%, to $8.7 million in the current year versus $6.2 million in
the first quarter of 1999. This increase, principally resulting from the
increased mutual fund distribution costs associated with the more than 53%
increase in average open end equity mutual fund assets under management, was
partially offset by lower mutual fund administration costs.
<PAGE>
Other income, net, which includes investment gains from our proprietary
portfolio was $2.1 million in both the first quarter of 2000 and the first
quarter of 1999.
The effective tax rate for the first quarter of 2000 was approximately
39.6%. In the first quarter of 1999, the Company had recorded a tax benefit of
$15.1 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 quarter of 1999 was
41.1%.
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.
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 through the Company's
borrowing capacity. At March 31, 2000, the Company had cash and cash equivalents
of $121.1 million, an increase of $18.1 million from December 31, 1999. Included
in cash and cash equivalents at March 31, 1999 were net proceeds of
approximately $96 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 are being used for general corporate purposes, including
working capital, and achieving strategic growth plans which call for expanding
product offerings, accessing new distribution channels and pursuing strategic
acquisitions or alliances, as opportunities arise.
Cash provided by operating activities was $17.5 million in the first
quarter of 2000 principally resulting from $14.0 million in net income. In the
first quarter of 1999, cash used in operating activities was $11.4 million.
Cash provided by investing activities, related to investments in and
distributions from partnerships and affiliates, was $2.3 million in the first
quarter of 2000. Cash provided by these investing activities in the first
quarter of 1999 was $5.2 million.
Cash used in financing activities in the first quarter of 2000 was $1.8
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 $96 million partially offset by distributions to shareholders of
$10 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.
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, 2000, Gabelli & Company had net capital, as
defined, of approximately $15.2 million exceeding the regulatory requirement by
approximately $15.0 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 March 31, 2000, the Company's primary market risk exposure was
for changes in equity prices and interest rates. Included in investments in
securities of $81.8 million at March 31, 2000 were investments in Treasury Bills
and Notes of $28.2 million, in mutual funds, largely invested in equity
products, of $28.2 million, a diverse selection of common stocks totaling $24.3
million and other investments of approximately $1 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 $20.2 million of
the $24.3 million invested in common stocks at March 31, 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 fair 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.
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
expenselevels 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.
<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 March 31, 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)
May 10, 2000 /s/ Robert S. Zuccaro
------------------ --------------------------------------
Date Robert S. Zuccaro
Vice President and Chief Financial Officer
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