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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,Washington, D.C. 20549
FORM 10-K
---------
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2004
Or
[_]2005
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to ___________________
Commission file number 1-14761
GABELLI ASSET MANAGEMENT INC.
------------------------------------------------------GAMCO Investors, 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, NY 10580-1422
- ------------------------------------------------------------------------------------------------------------------------ ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (914) 921-3700
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange Title of each class on which
registered:
- -------------------------------------- --------------------------------
Class A Common Stock, $ .001 Par Value New York Stock Exchange
Mandatory convertible securities New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
Yes No X
---- -----
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
Yes No X
---- -----
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]X No
[_].---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K [X].
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer Accelerated filer X Non-accelerated filer
----- ----- -----
Indicate by check mark whether the registrant is a shell company (as defined in
Exchange Act Rule 12b-2). Yes [X] No [_].X
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The aggregate market value of the common stock held by non-affiliates of the
registrant as of June 30, 2005 (the last business day of the Registrant's most
recently completed second fiscal quarter) was $301,404,170.
As of March 1, 2005, 7,228,0422006, 5,829,685 shares of class A common stock and 23,128,500
shares of class B common stock were outstanding. All of the shares of class B
common stock were held by GGCP, Inc. (formerly Gabelli Group Capital Partners,
Inc.) and two of its subsidiaries.
The aggregate market value of the common
stock held by non-affiliates of the registrant as of March 1, 2005 was
$243,833,243.
DOCUMENTS INCORPORATED BY REFERENCE: The definitive proxy statement for the 20052006
Annual Meeting of Shareholders.
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PART I
FORWARD-LOOKING INFORMATIONForward-Looking Information
Our disclosure and analysis in this report and in documents that are
incorporated by reference contain some forward-looking statements.
Forward-looking statements give our current expectations or forecasts of future
events. You can identify these statements because they do not relate strictly to
historical or current facts. They use words such as "anticipate," "estimate,"
"expect," "project," "intend," "plan," "believe," and other words and terms of
similar meaning. They also appear in any discussion of future operating or
financial performance. In particular, these include statements relating to
future actions, future performance of our products, expenses, the outcome of any
legal proceedings, and financial results.
Although we believe that we are basing our expectations and beliefs on
reasonable assumptions within the bounds of what we currently know about our
business and operations, there can be no assurance that our actual results will
not differ materially from what we expect or believe. Some of the factors that
could cause our actual results to differ from our expectations or beliefs
include, without limitation: the adverse effect from a decline in the securities
markets; a decline in the performance of our products; a general downturn in the
economy; changes in government policy or regulation; changes in our ability to
attract or retain key employees; and unforeseen costs and other effects related
to legal proceedings or investigations of governmental and self-regulatory
organizations. We also direct your attention to any more specific discussions of
risk contained in Item 1A below and in our other public filings or in documents
incorporated by reference here or in prior filings or reports.
We are providing these statements as permitted by the Private Litigation Reform
Act of 1995. We do not undertake to update publicly any forward-looking
statements if we subsequently learn that we are unlikely to achieve our
expectations or if we receive any additional information relating to the subject
matters of our forward-looking statements.
ITEM 1: BUSINESS
Unless we have indicated otherwise, or the context otherwise requires,
references in this report to "Gabelli Asset Management"GAMCO Investors, Inc.," "GBL," "we," "us" and
"our" or similar terms are to GAMCO Investors, Inc. (formerly Gabelli Asset
Management Inc.), its predecessors and its subsidiaries.
OVERVIEWOverview
GAMCO Investors, Inc. (NYSE: GBL) (formerly Gabelli Asset Management Inc. (NYSE: GBL))
is a widely recognized provider of investment advisory services to mutual funds,
institutional and high net worth investors, and investment partnerships,
principally in the United States. Through Gabelli & Company, Inc., we provide
institutional research services to institutional clients and investment
partnerships. We generally manage assets on a discretionary basis and invest in
a variety of U.S. and international securities through various investment
styles. Our revenues are based primarily on the firm's levels of assets under
management and fees associated with our various investment products, rather than
our own corporate assets.
Since 1977, we have been identified with and enhanced the "value" style approach
to investing. Our investment objective is to earn a superior risk-adjusted
return for our clients over the long-term through our proprietary fundamental
research. In addition to our value products, we offer our clients a broad array
of investment strategies that include growth, international and convertible
products. We also offer non-market correlated, and fixed income strategies.
By
earning returns for our clients, we will be earning returns for all our
stakeholders.
As of December 31, 2004,2005, we had a record $28.7$26.8 billion of assets under management, 93%97% of
which were in equity products. We conduct our investment advisory business
principally through: GAMCO Investors,Asset Management Inc. (Separate Accounts), Gabelli
Funds, LLC (Mutual Funds) and Gabelli Securities, Inc. (Investment
Partnerships). We also act as an underwriter, are a distributor of our open-end
mutual funds and provide institutional research through Gabelli & Company, Inc.,
our broker-dealer subsidiary.
23
Our assets under management are organized into three operating groups:
o SEPARATE ACCOUNTS:Separate Accounts: we currently provide advisory services to a broad
range of investors, including high net worth individuals, corporate
pension and profit sharingprofit-sharing plans, foundations, endowments, jointly
trusteed plans and municipalities, and also serve as sub-advisor to
certain other third-party investment funds which include registered
investment companies ("Separate Accounts"). Each separate accountSeparate Account
portfolio is managed to meet the specific needs and objectives of the
particular client by utilizing investment strategies and techniques
within our areas of expertise. On December 31, 2004,2005, we had $14.0$12.5
billion of Separate Account assets under management.
o MUTUAL FUNDS:Mutual Funds: we currently provide advisory services to (i)
twenty-seven open-end mutual funds within theand closed-end funds under Gabelli,
family of funds;GAMCO and Comstock brands; and (ii) three
money market funds that comprise the Treasurer's Fund; and (iii) six mutual funds within the
Westwood family of funds (collectively, the "Mutual Funds"). The
Mutual Funds have a long-term record of achieving
high returns, relative to similar investment products and had $13.9$13.7 billion of total assets under management on December
31, 2004.2005.
o INVESTMENT PARTNERSHIPS:Investment Partnerships: we currently provide advisory services to
limited partnerships, offshore funds and separate accounts, and also
serve as a sub-advisor to certain third-party investment funds across
merger arbitrage, global and regional long/short equity, and
sector-focused strategies ("Investment Partnerships"). We managed a
total of $814$634 million in Investment Partnership assets on December 31,
2004.
Gabelli Asset Management2005.
GAMCO Investors, Inc. is a holding company formed in connection with our initial
public offering ("Offering") in February 1999. GGCP, Inc. (formerly Gabelli
Group Capital Partners, Inc.) owns all of the outstanding shares of class B
common stock of GAMCO Investors, Inc., which represented approximately 97% of
the combined voting power of the outstanding common stock and approximately 78%
of the equity interest on December 31, 2005. GGCP, Inc. is majority ownedmajority-owned by Mr.
Mario J. Gabelli ("Mr. Gabelli") with the balance owned by our professional
staff and other individuals, owns all of the outstanding shares of class B common stock of
Gabelli Asset Management Inc., which represented approximately 98% of the
combined voting power of the outstanding common stock and 80% of the equity
interest on December 31, 2004.individuals. Accordingly, Mr. Gabelli could be deemed to control
Gabelli Asset ManagementGAMCO Investors, Inc.
Our corporate name change to GAMCO Investors, Inc. became effective August 29,
2005. GAMCO is a more inclusive parent company name, and more appropriately
represents the various investment strategies and asset management brands of our
company.
Our principal executive offices are located at One Corporate Center, Rye, New
York 10580. Our telephone number is (914) 921-3700. OnWe post or provide a link to
on our website, www.gabelli.com, we post the following filings as soon as reasonably
practicable after they are electronically filed with or furnished to the
Securities and Exchange Commission (SEC)("SEC"): our annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments
to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934. All such filings on our website are available
free of charge.
2004 HIGHLIGHTS
In 2004, we reported record earnings of $2.06 per fully diluted share vs. $1.65
per fully diluted share2005 Highlights
Since our initial public offering in 2003. Our revenues increased 23% toFebruary 1999, GBL has generated a record $255.2
million in 2004 from $207.4 million in 2003 and operating income rose 32.6% to
$99.1 million in 2004 from $74.7 million in the prior year.
We ended 2004 with a record $28.7 billion of assets under management (AUM), an
increase of 4.0% from the $27.6 billion on159%
total return (including dividends) for its shareholders through December 31,
2003. On December 31,
2004, AUM in our separate accounts and open-end mutual funds totaled $14.0
billion and $9.6 billion, respectively as solid performance from our equity
portfolios were2005 versus a return of 13% (including dividends) for the major contributor to growth. Our closed-end funds reached a
record AUM of $4.3 billion on December 31, 2004, an increase of approximately
23% from year-end 2003. In 2004, AUM in our Investment Partnerships grew
approximately 18%.S&P 500 Index during
the same period. Our class A common stock, which is traded on the New York Stock
Exchange under the symbol "GBL", ended the year at a closing market price of
$48.52$43.53 versus $39.80$48.52 at the end of 2003. In 2004, our shareholders earned a return of 26%, including
dividends(a). Since our initial public offering in February 1999, GBL has
earned a return for its shareholders of 188% (including dividends) through
December 31, 2004 versus a return of 7% (including dividends) for the S&P 500
Index during the same period.2004.
During 2004,2005, we returned over $100$57.3 million of our earnings to shareholders
through our stock buyback program and dividends. This included $1.16$0.69 per share
in dividends ($20.1 million) paid to our common shareholders in 20042005 and an investmentour
stock repurchases of approximately $70 million through our stock repurchases. We also declared a
special dividend$37.2 million.
In 2005, we reported earnings of $0.60$2.09 per fully diluted share vs. $2.06 per
fully diluted share in November2004. Our net income for the full year ended December 31,
2005 was $63.4 million versus $62.6 million in the 2004 which was payable on
January 18,period. Revenues were
$252.4 million in 2005, to all shareholdersa slippage of 1.1% from the prior year's record on January 3, 2005.
(a) Includes the $0.60 per share dividend payable to GBL shareholders on January
18,revenues
of $255.2 million.
We ended 2005 to shareholderswith equity assets under management of record on January 3, 2005 as GBL stock traded
ex-dividend$26.0 billion versus $26.8
billion on December 30,31, 2004. 3Overall, assets under management were $26.8
billion on December 31, 2005 versus $28.7 billion at the end of 2004. Our equity
mutual funds and closed-end funds reached a record AUM of $13.0 billion on
December 31, 2005, an increase of approximately 4.8% from year-end 2004 as our
open-end mutual funds and closed-end funds had AUM of $7.9 billion and $5.1
billion, respectively.
4
In November 2004,February 2005, we issued 1,517,483 shares of class A common stock and
received proceeds of $70,567,500 in settlement of the purchase contracts issued
pursuant to our mandatory convertible securities. These mandatory convertible
securities consisting of purchase contracts and senior notes were successfullyoriginally
issued in February 2002. The senior notes due February 17, 2007 were remarketed
in November 2004 and the interest rate was reset from 6% to 5.22% at that time.
These senior notes, which are due
February 17, 2007,In March 2005, we announced an agreement with Cascade Investment, L.L.C. to
amend the terms of the $100 million convertible note issued by GBL. The new
terms extend the exercise date of Cascade's put option to September 15, 2006,
reduce the principal of the convertible note to $50 million, effective April 1,
2005, and remove limitations on our issuance of additional debt. Cascade would
own approximately 13% of GBL's class A common stock if the note were originally issued along withconverted
as of December 31, 2005.
During June 2005, our Board of Directors approved the accelerated vesting of all
unvested stock options. In August 2005, the Company commenced a tender offer to
repurchase all outstanding options to purchase contractsits class A common stock. The
tender offer was completed in February 2002 as partOctober 2005 and the Company repurchased options
to purchase an aggregate of our mandatory convertible securities. GBL's senior
unsecured debt currently has an investment grade credit rating of BBB from
Standard and Poor's and Baa2 from Moody's.
During 2004, we established the Graham & Dodd, Murray, Greenwald Prize for Value
Investing in coordination with the Columbia University Graduate School of
Business. The monetary prize will be awarded each year at GAMCO's annual client
meeting to the individual who best exemplifies fundamental research in the
tradition522,000 shares of its honorees.
We also announced several organizational changes duringclass A common stock for
approximately $9.7 million in cash. As a result of the year aimed at
strengthening and broadeningcompletion of the tender
offer, there was a reduction in fully diluted shares outstanding of
approximately 130,000 shares.
The Gabelli Global Gold, Natural Resources & Income Trust (AMEX: GGN), our
management team:
- Douglas R. Jamieson, who joined us in 1981,newest closed-end fund, was named tolaunched on March 29, 2005. Since inception, the new
position of President and Chief Operating Officer.net
asset value has increased 21.97% through December 31, 2005. In addition to
continuing to head upmonthly distributions of $0.14 per share, GGN shareholders received an
additional year-end distribution of $0.18 per share.
Gabelli Securities, Inc., our 92% owned subsidiary, recorded a total gain of
$5.4 million in 2005 from its investment in optionsXpress (NASDAQ: OXPS). Since
our original $100,000 venture capital investment in 2001, we have recorded
approximately $7.8 million in investment gains and dividends through December
31, 2005. OXPS completed its initial public offering during the first quarter
2005.
Gabelli & Company, Inc., our institutional research affiliate, now has
twenty-five sell-side analysts covering companies and sectors on a global basis
as we have strengthened our investment team through the addition of eleven
sell-side research analysts during 2005.
Our research and institutional sales team at Gabelli & Company hosted eight
industry symposiums and conferences during 2005. These symposiums and
conferences provided an opportunity for the firm's institutional clients to meet
with the senior management teams of leading companies and gain insight on the
dynamics within these industries. Our events in 2005 included our 29th Annual
Automotive Aftermarket Symposium, our Third Annual Dental Conference and our
First Annual RFID (Radio Frequency Identification) Conference.
Performance Highlights
Clients of our institutional and high net worth asset management business have
achieved a compound annual net return of 17.8% in our separate accounts
business (GAMCO)composite(a) for the over 28 years since inception through December 31, 2005.
These accounts in this composite have been managed in the absolute return,
research-driven Private Market Value (PMV) with a CatalystTM style since
inception.
(a) The GAMCO Value composite does not track all assets under management.
It consists of fully discretionary, tax-exempt accounts managed for at
least one full quarter and meeting minimum account size requirements.
The minimum size requirement for inclusion in 1985 was $500,000; 1986,
$1 million; and 1987 and thereafter, $5 million. The performance
calculations include accounts under management during the respective
periods. As of 12/31/05 the GAMCO Value composite included 46 accounts
with an aggregate market value of $3.7 billion. A complete list of
composites is available upon request. No two portfolios are identical.
Accounts not within this size and type may have experienced different
results. The inception date of the GAMCO Value composite is 10/1/77.
GAM GAMCO Equity Fund, managed by Mario Gabelli, was awarded Standard & Poor's
AAA Rating(b) for the second consecutive year in November 2005. There are only
eleven S&P AAA Rated funds in S&P's U.S. Mainstream Sector peer group which is
comprised of 1,120 funds, including all share classes. GAM GAMCO Equity Fund has
been sub-advised by GAMCO Asset Management Inc. for Global Asset Management
(GAM), he now overseessince the fund's launch in October 1987.
5
In 2005, The Gabelli ABC Fund recorded its twelfth consecutive full year of
positive returns. According to Lipper, Inc.(c), The Gabelli ABC Fund is one of
only three equity-oriented funds (among 1,487 funds) that has had a positive
return for each of the last twelve years. The fund seeks to achieve total
returns that are attractive to investors in various market conditions without
excessive risk of capital with a current fee structure that is lower than some
money market funds. The performance of The Gabelli ABC Fund has been enhanced
since April 2002 by fee waivers initiated by Gabelli Funds, LLC.
The Westwood Equity Fund, sub-advised by Westwood Management Corporation and
managed by Susan Byrne, has a Lipper ranking of 1 out of 469 funds (1st
percentile) within the Large Cap Value category for the one year period ended
December 31, 2005. The fund's Class AAA shares had an average annual return of
13.81% during this period. Additionally, for the three year, five year and ten
year period, the average annual returns were 16.13%, 3.00% and 10.70%,
respectively. The Lipper rankings for the fund for the three year, five year
period and ten year periods were 101 out of 386 funds, 117 out of 259 funds, and
18 out of 115 funds, respectively.
The Gabelli Blue Chip Value Fund, managed by Barbara Marcin, has a Lipper
ranking of 6 out of 386 funds (2nd percentile) within the Large Cap Value
category for the three year period ended December 31, 2005. The fund's Class AAA
shares had an average annual return of 19.96% during this period. Additionally,
for the one year, five year and period since inception on August 26, 1999, the
average annual returns were 6.69%, 0.81% and 4.98%, respectively. The Lipper
rankings for the fund for the one year and five year periods were 156 out of 469
funds and 229 out of 259 funds, respectively.
The Gabelli Equity Income Fund's Class AAA shares had an average annual return
of 15.53% for the three year period ended December 31, 2005 and has an overall
Morningstar RatingTM(d) of four stars. The one year, five year and ten year
average annual returns for the fund through December 31, 2005 were 6.36%, 7.12%
and 11.29%, respectively. The fund was rated three stars for the three year
period, four stars for the five year period and five stars for the ten year
period out of 1,014, 697 and 333 funds, respectively, among Large Value funds.
The GAMCO Gold Fund(e), managed by Caesar Bryan, continues to deliver strong
performance as the fund generated a return of 33.63% for its shareholders in
2005 and average annual returns of 21.18%, 33.22%, 6.92% for the three year,
five year and ten year periods ended December 31, 2005, respectively.
Our Growth team, headed by Howard Ward, believes the investment cycle is turning
and growth stocks are in the early stages of returning to favor. For the one
year, three year and ten year periods ended December 31, 2005, The GAMCO Growth
Fund and The GAMCO Global Growth Fund are both ranked in the first quartile of
Lipper rankings within the Large-Cap Growth and Global Multi-Cap Core category,
respectively. For the five year period ended December 31, 2005 the Funds were in
the third quartile and fourth quartile, respectively. The GAMCO Growth Fund's
Class AAA shares generated average annual returns of 10.30%, 14.91%, -5.28% and
8.23% for the one year, three year, five year and ten year periods,
respectively, during this period and the Lipper rankings were 111 out of 687
funds, 146 out of 593 funds, 315 out of 475 funds, and 47 out of 158 funds for
each of the respective periods. The GAMCO Global Growth Fund had average annual
returns for the one year, three year, five year and ten year periods of 13.72%,
20.73%, 0.08% and 10.79%, respectively, and the Lipper rankings for these
respective periods were 9 out of 69 funds, 11 out of 55 funds, 37 out of 42
funds, and 1 out of 13 funds.
The Gabelli U.S. Treasury Money Market Fund (GUSTO) is currently the lowest cost
money market fund in its class of money market funds investing exclusively in
U.S. Treasury obligations(f). Gabelli Funds, LLC, the adviser of the fund, has
voluntarily waived a larger portion of its management fee and will maintain
total expenses at eight basis points or 0.08% of the average net assets at least
for the period from December 1, 2005 through June 30, 2006.
Past performance is no guarantee of future results. Other share classes are
available and have different performance characteristics. The average
annual returns and total returns are historical and reflect changes in
share price, reinvested dividends and capital gains and are net of
expenses. Investment returns and principal value of an investment will
fluctuate. When shares are redeemed, they may be worth more or less than
their original costs. Current performance may be lower or higher than the
performance presented. Performance information as of the most recent
month-end is available at www.gabelli.com. Investors should consider the
investment objectives, risks, charges and expenses of a fund carefully
before investing. The prospectus for a fund contains information about this
and other matters and should be read carefully before investing. Call
800-GABELLI to obtain a prospectus.
6
(b) Standard & Poor's is a globally recognized provider of objective fund
information and a leading authority in the investment world. S&P's
evaluation process is based on an in-depth analysis of both
quantitative and qualitative factors that are considered key
contributors to long-term investment performance. These include the
historic performance, volatility and portfolio construction of a fund;
the manager's investment process, risk control, skill, experience and
resources; and the group's corporate management, investment culture
and stability.
(c) Lipper, Inc. is a nationally recognized organization which tracks the
performance of all of GBL's business units.
- Henry G. Van der Eb, CFA, was named Senior Vice President and serves
as a Senior Advisor to management in all aspects of GBL's business. He
has over 30 years of registered investment advisor industry experience
including regulatory, legal, compliance, operations, public relations,
personnelcompanies.
(d) Morningstar calculates a Morningstar RatingTM based on a Morningstar
risk adjusted return measure that accounts for variation in a fund's
monthly performance (including the effects of sales charges, loads and
acquisitions. He has a wide range of responsibilities
across GBL's three major product groups (Mutual Funds, Separate
Accounts,redemption fees) placing more emphasis on downward variations and
Investment Partnerships) including portfolio management,
security analysis, macroeconomic strategy, marketing and client
service.
- Michael R. Anastasio, Jr., CPA, was named Chief Financial Officer. He
had served as the Chief Accounting Officer since September 2003 and
was previously the CFOrewarding consistent performance. The top 10% of the Investment Partnerships business at GBL.
- Christopher C. Desmarais, Senior Vice President of GAMCO, has been
named Director of Institutional Marketing. He was previouslyfunds in an
investment category receive five stars, the Director of GAMCO's Socially Responsive Investments (SRI) since March
2003 where assets have grown to over halfnext 22.5% receive four
stars, the next 35% receive three stars, the next 22.5% receive two
stars and the bottom 10% receive one star. The Overall Morningstar
Rating for a billion dollars. His
responsibilities include marketing separate account products directly
to Consultants, Corporate Plan Sponsors, Taft Hartley Plans,
Foundations and Endowments.
- Howard F. Ward, CFA, portfolio managerfund is derived from a weighted average of the
Gabelli Growth Fund
since 1994, was named Director of Growth Products. He now oversees
GBL's domestic, internationalperformance figures associated with its three, five, and global growth equity productsten-year (if
applicable) Morningstar metrics. Morningstar Ratings are shown for mutual funds and separate accountsthe
respective class shown; other classes may have different performance
characteristics.
(e) An investment in gold stocks is considered speculative and is affected
by a membervariety of worldwide economic, financial and political factors.
GAMCO Gold Fund invests in foreign securities, which involves risks
not ordinarily associated with investments in domestic stocks
including currency fluctuations, economic and political risks.
(f) According to iMoneyNet, Inc. An investment in a money market fund is
not insured or guaranteed by The Federal Deposit Insurance Corporation
or any other government agency. Although the fund seeks to preserve
the value of an investment at $1.00 per share, it is possible to lose
money by investing in the fund. There is no guarantee that the fund
can achieve its objective. Yields fluctuate. Yields are enhanced by a
fee waiver initiated by Gabelli Global Growth Fund's portfolio management team.
BUSINESS STRATEGYFunds, LLC.
Business Strategy
Our business strategy targets global growth of the franchise through continued
leveraging of our proven asset management strengths including our brand name,
long-term performance record, diverse product offerings and experienced
investment, research and client service professionals. In order to achieve
growth in assets under management and profitability, we are pursuing a strategy
which includes the following key elements:
o BROADENING AND STRENGTHENING OUR BRAND.Corporate Branding Initiative. We are undertakinghave undertaken a series of branding
initiatives to enhance long-term shareholder value. Initially,On August 29, 2005, our
Board of Directors has approved and will be recommending to shareholders a
change in the
corporate name from Gabelli Asset Management Inc.change to GAMCO Investors, Inc. ("GAMCO"). Our ticker symbol will remain GBL onbecame effective. Since the
New
York Stock Exchange. Additionally,firm was founded in 1977, GAMCO has been the name of our existing subsidiary named GAMCO
Investors, Inc. will be renamed.
GAMCO is our oldest asset management
company and brand,business, representing our institutional and high net worth effort since its founding in 1978, and has
historically represented the majority of the firm's asset base.effort. We
believe changing theour corporate name back to GAMCO helps us achieve our mission of
earningvision
for assets entrusted to us, that is, to earn a superior returnsreturn for our
clients by providing various value addedvalue-added (alpha) products. GAMCO is a more
encompassinginclusive parent company name, and more appropriately represents the
various investmentsinvestment strategies philosophies, and asset management brands contributing to
the continued growth of our company. The Gabelli brand will continue to
represent our absolute return, research driven Value style that focuses on
our unique Private Market Value (PMV) with a Catalyst (TM) investment
approach. Our class A common stock continues to trade on the organization.New York Stock
Exchange under the ticker symbol "GBL".
During January 2006, the Board of Directors of eight Mutual Funds changed
the brand of those funds to GAMCO from Gabelli to align the branding of the
funds to better reflect the investment strategies offered. The mutual funds
bearing the Gabelli name will primarily represent value portfolios managed
in the absolute return, research-driven Private Market Value (PMV) with a
CatalystTM style while the GAMCO mutual funds will represent various
investment strategies including growth, gold, convertible securities and
contrarian.
o ESTABLISHING RELATIONSHIP CENTERS.Establishing Relationship Centers. In addition to our corporate office in
Rye NY, we have sevensix offices which conduct portfolio management, research
and marketing activities in the United States and abroad in the following
cities: Greenwich CT, Chicago IL, Minneapolis MN, Palm Beach FL, Reno NV,
Atlanta GA
and London UK. Our offices in Chicago and Minneapolis were established as
the result of acquisitions of on-going investment advisory operations. The
London office was opened in January 2000 to provide a geographic presence
overseas and to coordinate investment research and marketing activities for
our investment product offerings in the European markets.
47
o INTRODUCING NEW PRODUCTS AND SERVICES.Introducing New Products and Services. We believe we have the capacity for
development of new products and services around the Gabelli and GAMCO
brands to complement our existing product offerings. New products since our
initial public offering include:
- FourThree open-end mutual funds: Gabelli Blue Chip Value Fund (1999),
Gabelli Utilities Fund (1999) and the Gabelli Woodland Small Cap Value
Fund (2003) and Ned Davis Research Asset Allocation Fund (2003)
brands..
- ThreeFour closed-end funds: The Gabelli Utility Trust, The Gabelli Dividend
& Income Trust, and The Gabelli Global Utility and Income Trust and The
Gabelli Global Gold, Natural Resources & Income Trust.
- SixEight private limited partnerships: Gemini Global Partners, L.P.,
Gabelli European Partners, L.P., Gabelli Japanese Value Partners,
L.P., Gabelli Associates Fund II, L.P., GAMCO Performance Partners,
L.P., and GAMA Select Energy Plus, L.P., GAMCO Telecom Plus, L.P. and
Gabelli Umbrella Fund, L.P.
- Five offshore funds: GeminiGabelli Global Partners, Ltd., Gabelli European
Partners, Ltd., Gabelli Japanese Value Partners, Ltd., GAMCO
Performance Partners, Ltd., and GAMCO ArbitrageSRI Partners, Ltd.
O PROMULGATING THE GABELLI "PRIVATE MARKET VALUE WITH A CATALYST" INVESTMENT
APPROACH.During January 2006, we also launched GAMCO Medical Opportunities, L.P., which
focuses its investment strategy on the medical and healthcare industries.
o Promulgating the Gabelli "Private Market Value with a Catalyst"TM
Investment Approach. While we have expanded our investment product
offerings, our "value investing" approach remains the core of our business.
This method is based on the value investing principles articulated by
Graham & Dodd in 1934, and further augmented by Mario J. Gabelli with his
development of private market valuePrivate Market Value ("PMV") and his introduction of a
catalyst into the value investment methodology. The development of private market value ("PMV")PMV
analysis combined with the concept of a catalyst has evolved into our value
investing approach, commonly referred to as "PMV with a Catalyst"TM
investing. Our approach encompasses the broad spectrum of event-driven
investing including arbitrage and special situations, implemented on a
global basis.
PMV with a CatalystCatalystTM investing is a disciplined, research driven approach
based on the extensive use of security analysis. In this process, we
carefully select stocks whose intrinsic value, based on our estimate of
current asset value and future growth and earnings power, is significantly
different from the value as reflected in the public market. We then
calculate the firm's PMV, which is defined as the price an informed
industrial buyer would be likely to pay to acquire the business.
To limit the time horizon in which the PMV is likely to be realized, we
look for situations in which catalysts are working to help eliminate the
premium or realize the discount between the public market price and the
estimated PMV. Catalysts which are company specific include: realization of
hidden assets, recognition of underperforming subsidiaries, share buybacks,
spin-offs, mergers and acquisitions, balance sheet changes, new products,
accounting changes, new management and cross-shareholder unwinding. Other
catalysts are related to industry dynamics or macroeconomic and include but
are not limited to: industry consolidation, deregulation, accounting, tax,
pension and political reforms, technological change and the macroeconomic
backdrop. The time horizons for catalysts to trigger change can either be
short, medium or long-term.
In an effort to further extend the "value investing" tradition:
- we have established the Graham & Dodd, Murray, Greenwald Prize for
Value Investing in coordination with the Columbia University Graduate
School of Business. The monetary prize will be awarded each year at
GAMCO's annual client meeting to the individual who best exemplifies
fundamental research in the tradition of its honorees. In May 2005 we
awarded the initial prize to Columbia University Graduate School of
Business Adjunct Professor, Joel M. Greenblatt. Mr. Greenblatt is the
President of Gotham Partners, a New York-based investment firm. He is
also the author of "The Little Book That Beats The Market" (John Wiley
& Sons 2005) and "You Can Be a Stock Market Genius" (New York: Simon
& Schuster, 1997). Mr. Greenblatt is also the founder of
ValueInvestorsClub.com, a website where members contribute investment
ideas. Mr. Greenblatt has an undergraduate and a graduate degree from
the University of Pennsylvania's Wharton School.
- we will underwritesponsored two "value investing" seminars to beValue Investing Seminars in our Graham and Dodd
Lecture Series that were held in Milan and London in July and Milan in the summer of 2005August
for institutional investors from leading UK and other European
business schools. The seminars will bewere hosted by Bruce N. Greenwald, the
Robert Heilbrunn Professor of Finance and Asset Management at Columbia
University Graduate School of Business and the academic Director of
the Heilbrunn Center for Graham & Dodd Investing.
58
The table below compares the long-term performance record for our separate
account composite since 1977, using our traditional value-oriented product,
the Gabelli "PMV with a Catalyst" investment approach, versus various
benchmarks.
GAMCO VALUE 1977-2004
S&P Russell
GAMCO(a) 500(b) 2000(b) CPI + 10(b)
-------- ------ ------- -----------
Number of Up Years 23 22 19
Number of Down Years 4 5 7
Years GAMCO Beat Index 17 17 17
Total Return (CAGR) 18.4% 13.3% 13.5% 14.2%
Total Return 9,761% 2,917%
Beta 0.77
GAMCO Value 1977-2005
S&P Russell
GAMCO (a) 500 (b) 2000 (b) CPI+10 (b)
--------- ------- -------- ----------
Number of Up Years 24 23 20*
Number of Down Years 4 5 7
Years GAMCO Value Beat Index 17 17* 17
Total Return (CAGR) (a) 17.8% 13.0% 13.2% 14.2%
Total Return 9,998% 3,065%
Beta 0.78
The chart below illustrates how this methodology performed during recent market
cycles to capture the upside in bull markets while limiting the downside in the
most recent bear market.
Performance 1997 to 2004
GAMCO Value vs. S&P 500 Index
-Up Market- -Down Market- -Up Markets-
30.5% 27.6% -4.4% -14.6% 33.9% 28.7% 17.8% 10.9%
GAMCO(a) S&P 500(b) GAMCO S&P 500 GAMCO S&P 500 GAMCO S&P 500
1997 - 1999 2000 - 2002 2003 2004
Performance 1977-2005
GAMCO Value vs. S&P 500 Index
-Up Markets- -Down Markets- -Up Markets-
27.6% 30.5% -14.6% -4.4% 14.4% 17.3%
S&P 500 (b) GAMCO (a) S&P 500 GAMCO S&P 500 GAMCO
1997-1999 2000-2002 2003-2005
CAGR CAGR CAGR
- --------------------------------------------------------------------------------
FOOTNOTES TO TABLE AND CHARTFootnotes to Table and Chart
(a)
o The GAMCO Value composite represents fully discretionary, tax-exempt
accounts managed for at least one full quarter and meeting minimum account
size requirements. The minimum size requirement for inclusion in 1985 was
$500,000; 1986, $1 million; and 1987 and thereafter, $5 million. The
performance calculations include accounts under management during the
respective periods. As of 12/31/04,05, the GAMCO Value composite included 5046
accounts with an aggregate market value of $4.0$3.7 billion. A complete list of composites is available upon request. No two portfolios
are identical. Accounts not within this size and type may have experienced
different results.
o GAMCO Value performance results are computed on a total-return basis, which
includes all dividends, interest and accrued interest, and realized and
unrealized gains and losses. The summary of past performance is not
intended as a prediction of future results. Returns are presented in U.S.
dollars. The inception date of the GAMCO Value composite is 10/1/77.
o GAMCOThe Compound Annualized Growth Rateannual growth rate from 1990 to present is computed afternet of actual fees
and actual transaction costs,costs. The compound annual growth rate before 1990
reflects the calculation of a model investment advisory feesfee (1% compounded
quarterly) and other expenses.
oactual transaction costs."
GAMCO Total Return represents the total net return of the composite from
10/1/77 through 12/31/04.
o05.
Beta is the measure of the GAMCO composite's risk (volatility) in relation
to the S&P 500 Index.
(b) o
The S&P 500 is an unmanaged index of 500 U.S. stocks and performance
represents total return of index including reinvestment of dividends. The
Russell 2000 is an unmanaged index of 2000 small capitalization stocks and
performance represents total return of index including reinvestment of
dividends. The performance figures for the Russell 2000 are based on an
inception date of 1/1/79. The S&P 500 and Russell 2000 does not necessarily
reflect how a managed portfolio of equity securities would have performed.
The CPI is a widely used measure of inflation and the CPI+10 measure is
used to show the results that would have been achieved by obtaining a rate
of return that exceeded the CPI by a constant 10% as a basis of comparison
versus the results of the GAMCO composite.
o Up and down markets in Chart determined by the performance of the S&P 500
Index during the respective periods.
6- --------------------------------------------------------------------------------
9
o EXPANDING MUTUAL FUND DISTRIBUTION.Expanding Mutual Fund Distribution. We continue to expand our distribution
network primarily through national and regional brokerage firms and have
developed additional classes of shares for most of our mutual funds for
sale through these firms and other third-party distribution channels on a
commission basis. We intend to increase our wholesaling efforts to market
the multi-class shares, which have been designed to meet the needs of
investors who seek advice through financial consultantsconsultants.
o INCREASING PRESENCE IN HIGH NET WORTH MARKET.Increasing Presence in High Net Worth Market. Our high net worth business
focuses, in general, on serving clients who have established an account
relationship of $1 million or more with us. According to industry
estimates, the number of households with over $1 million in investable
assets will continue to grow in the future, subject to ups and downs in the
equity and fixed income markets. With our 28-year29-year history of serving this
segment, long-term performance record, customized portfolio approach,
dominant, tax-sensitive, buy-hold investment strategy, brand name
recognition and broad array of product offerings, we believe that we are
well positioned to capitalize on the growth opportunities in this market.
o INCREASING MARKETING FOR INSTITUTIONAL SEPARATE ACCOUNTS.Increasing Marketing for Institutional Separate Accounts. The institutional
Separate Accounts business was principally developed through direct
marketing channels. Historically, pension and financial consultants have
not been a major source of new institutional Separate Accounts business for
us. We promoted Christopher Desmarais to lead
our institutional marketing efforts. We have also launched an effortplan to augment our institutional sales force including addingthrough the addition
of staff to market directly to the consultant community as well as our
traditional marketing channels.
o ATTRACTING AND RETAINING EXPERIENCED PROFESSIONALS.Attracting and Retaining Experienced Professionals. We have increased the
scope of our investment management capabilities by adding portfolio
managers and other investment personnel in order to expand our broad array
of products. The ability to attract and retain highly experienced
investment and other professionals with a long-term commitment to us and
our clients has been, and will continue to be, a significant factor in our
long-term growth. For example, we acquired the Mathers Fund in 1999,
managed by Henry Van der Eb, CFA, (Chicago) and the Comstock Partners Funds
in 2000, managed by Charlie Minter and Martin Weiner. In addition,
Elizabeth M. Lilly, CFA, (Minneapolis) joined us through our alliance with
Woodland Partners, LLC in November 2002.
Subsequent to the year-end, L.J.During 2005, Lawrence J. Haverty, Jr., CFA, joined the firm as an associate
portfolio manager of the Gabelli Global Multimedia Trust.Trust, Nancy E. Stuebe
rejoined the firm as associate portfolio manager for the Gabelli Small Cap
Growth Fund and Earl V. Gould, CFA, joined the firm as portfolio manager of
the GAMA Select Energy+ Fund.
o SPONSORSHIP OF INDUSTRY CONFERENCES.Sponsorship of Industry Conferences. Gabelli & Company, Inc., our
institutional research boutique, sponsors industry conferences and
management events throughout the year. At these conferences and events,
senior management from leading industry companies share their thoughts on
the industry, competition, regulatory issues and the challenges and
opportunities in their businesses with portfolio managers and securities
analysts. We currently host five annual industry conferences and symposiums
which include the Automotive Aftermarket Symposium (28(29 years), Pump Valve &
Motor Symposium (15(16 years), Aircraft Supplier Conference (10(11 years), Dental
Conference (2(3 years) and the Small Cap OrthopedicOrthopedics Conference (2(3 years).
Consistent with our innovative research on emerging technologies, we
will be sponsoringsponsored conferences focusing on WiMAX (Worldwide Interoperability for
Microwave Access) and RFID (Radio Frequency Identification) in 2005.
o HOSTING OF INVESTOR SYMPOSIUMS.Hosting of Investor Symposiums. We have a Gabelli tradition of sponsoring
symposiums that bring together prominent portfolio managers, members of
academia and other leading business professionals to present, discuss and
debate current issues and topics in the investment industry.
- 1997 "Active vs. Passive Stock Selection"
- 1998 "The Role of Hedge Funds as a Way of Generating Absolute Returns"
- 2001 "Virtues of Value Investing"
- 2003 "Dividends, Taxable versus Non-Taxable Issues"
In February 2006, we hosted "Closed-End Funds: Premiums vs. Discounts,
Dividends and Distributions", which focused on managed distribution
policies and other important topics affecting the closed-end fund industry.
We also hold annual conferences for our investment partnership clients and
prospects in New York and London at which our portfolio management team
discusses the investment environment, our strategies and portfolios, and
event-driven investment opportunities.
710
o CAPITALIZING ON ACQUISITIONS AND STRATEGIC ALLIANCES.Capitalizing on Acquisitions and Strategic Alliances. We intend to
selectively and opportunistically pursue acquisitions and alliances that
will broaden our product offerings and add new sources of distribution. In
November 2002, we completed our alliance with Woodland Partners LLC, a
Minneapolis based investment advisor of institutional, high net-worth and
sub-advisory accounts. In March
2003, we launched the Ned Davis Research Asset Allocation Fund, a
quantitative style product. On October 1, 1999, we completed our alliance with
Mathers and Company, Inc. and now act as investment advisor to the Mathers
Fund (renamed GabelliGAMCO Mathers Fund) and in May 2000 we added Comstock
Partners Funds, Inc., (renamed Comstock Funds, Inc.). The Mathers Comstock and
Ned Davis ResearchComstock funds are part of our Non-Market Correlated mutual fund product
line, which also includes our Gabelli ABC Fund and GabelliGAMCO Gold Fund. We
believe that we are well positioned to pursue acquisitions and alliances
because of our flexibility in structuring appropriate arrangements to meet
the specific needs of all parties.
o EXPANDING SUB-ADVISORY RELATIONSHIPS. BeginningThrough an affiliation with Global AssetWestwood Holdings Group (NYSE:WHG), Westwood
Management Corporation acts as a sub-advisor for five of the six Westwood
portfolios managed by Gabelli Advisers, Inc., a subsidiary controlled by
GBL. Westwood Management Corporation, in 1987, globally renowned institutions have approached us
seeking GBL'sits capacity as sub-advisor, makes
day-to-day investment decisions and provides the portfolio management
expertise and we have actively
pursuedservices for these portfolios. Westwood Management Corporation also owns an
approximately 19.0% equity interest in Gabelli Advisers, Inc. At December
31, 2005, GBL in turn owned 18.7% of WHG as compared to 16.1% at the strategic partneringend of
our investment products with these
prominent distribution firms. The resulting relationships include
American Express, EQ/Enterprise Funds, Skandia Global and UBS (GAM)
funds. We believe sub-advisory relationships provide a significant
growth opportunity for our business.2004.
We believe that our growth to date is attributable to the following factors:
o STOCK MARKET GAINS:Stock market gains: Since GBL began managing institutional separate
accounts in 1977, our traditional value-oriented separate account composite
has earned a compound annual return of 18.4%17.8% versus a compound annual
return of 13.3%13.0% for the S&P 500.500 through December 31, 2005. Since our
initial public offering in February 1999 through December 2004,2005, the
compound annual return for our traditional value-oriented separate account
composite was 9.3%8.29% versus the S&P 500's compound annual total return of
1.0%1.85%.
o LONG-TERM PERFORMANCE:Long-Term Performance: We have a long-term record of achieving relatively
high returns for our Mutual Fund and Separate Account clients when compared
to similar investment products. We believe that our performance record
represents a competitive advantage and a recognized component of our
franchise.
o WIDELY RECOGNIZED "GABELLI" AND GAMCO BRAND NAMES:Widely Recognized "Gabelli" and "GAMCO" Brand Names: For much of our
history, our portfolio managers and investment products have been featured
in a variety of financial print media, including both U.S. and
international publications such as THE WALL STREET JOURNAL,
FINANCIAL TIMES, MONEY MAGAZINE, BARRON'S, FORTUNE, BUSINESS WEEK,
NIKKEI FINANCIAL NEWS, FORBES MAGAZINEThe Wall Street Journal, Financial
Times, Money Magazine, Barron's, Fortune, Business Week, Nikkei Financial
News, Forbes Magazine and INVESTOR'S BUSINESS DAILY.Investor's Business Daily. We also underwrite
publications written by our investment professionals, including
"DEALS...DEALS...AND MORE DEALS""Deals...Deals...and More Deals" which examines the practice of merger
arbitrage and "GLOBAL CONVERTIBLE
INVESTING: THE GABELLI"Global Convertible Investing: The Gabelli Way", a
comprehensive guide to effective investing in convertible securities.
o DIVERSIFIED PRODUCT OFFERINGS:Diversified Product Offerings: Since the inception of our investment
management activities, we have sought to expand the breadth of our product
offerings. We currently offer a wide spectrum of investment products and
strategies, including product offerings in U.S. equities, U.S. fixed
income, global and international equities, convertible securities, U.S.
balanced and investment partnerships.
o STRONG INDUSTRY FUNDAMENTALS:Strong Industry Fundamentals: According to data compiled by the U.S.
Federal Reserve, the investment management industry has grown faster than
more traditional segments of the financial services industry, including the
banking and insurance industries. Since GBL began managing institutional
separate accounts in 1977, world equity markets have grown at an 11.8%a 12.1%
compounded annual growth rate through December 31, 2004,2005, including the net
addition of new stocks in many countries, to $36.4$40.9 trillion(a). The U.S.
equity market comprises about $15.1$15.7 trillion(a) or 41.5%38.4% of world equity
markets. We believe that demographic trends and the growing role of money
managers in the placement of capital compared to the traditional role
played by banks and life insurance companies will result in continued
growth of the investment management industry.
GBL's financial strength is underscored by having received an investment grade
rating from two well-respected ratings agencies, Moody's Investors Services and
Standard and Poor's Ratings Services. We believe that maintaining these
investment grade ratings will provide greater access to the capital markets,
enhance liquidity and lower overall borrowing costs.
(a) Source: Birinyi Associates, LLC
811
BUSINESS DESCRIPTIONBusiness Description
GBL was originally founded in 1976 as an investment partnership. Our initial
operations focused on our institutional broker-dealer and webroker-dealer. We entered
the separate accounts business in 1977, management of investment partnerships in
1985 and the mutual fund business in 1986. Our initial product offering centered
on GBL's tax sensitive, buy-hold, value-oriented investment philosophy. Starting
in the mid-1980s, we began building on our core value-oriented equity investment
products by adding new investment strategies designed for a broad array of
clients seeking to invest in growth-oriented equities, convertible securities
and fixed income products. Since then, we have continued to build our franchise
by expanding our investment management capabilities through the addition of
industry specific, international, global, non-market correlated, venture
capital, leveraged buy-out and merchant banking product offerings. Throughout
our 28-year29-year history, we have marketed most of our products under the "Gabelli"
and "GAMCO" brand names. Other brands include Mathers, Comstock, Westwood Woodland and
Ned Davis Research.Woodland.
Our assets under management are organized principally in three groups: Separate
Accounts, Mutual Funds and Investment Partnerships.
SEPARATE ACCOUNTSSeparate Accounts - INSTITUTIONAL AND HIGH NET WORTH:Institutional and High Net Worth: Since 1977, we have
provided investment management services through our subsidiary GAMCO Investors,Asset
Management Inc. ("GAMCO") (formerly GAMCO Investors, Inc.) to a broad spectrum
of institutional and high net worth investors. At December 31, 2004,2005, we had
$14.0$12.5 billion of assets under management (AUM) in approximately 1,800 separate
accounts, representing approximately 49%47% of our total assets
under management.AUM. We currently provide
advisory services to a broad range of investors, the majority of which (in total
number of accounts) are high net worth client accounts - defined as individuals
and their retirement assets generally having minimum account balances of $1
million. As of December 31, 2004,2005, high net worth accounts comprised
approximately 82% of the total number of Separate Accounts and approximately 24%27%
of the assets.
High net worth clients are attracted to us by our gross returns and the tax
efficient nature of the underlying investment process in these traditional
products. Foundation and endowment fund assets represented an additional 9% of
the number of Separate Accounts and approximately 11% of the assets. The
sub-advisory portion of the Separate Accounts (where we act as sub-advisor to
certain other third-party investment funds) held approximately $3.7$2.8 billion or
27%22% of total Separate Account assets with less than 1% of the number of
accounts. Institutional client accounts, which include corporate pension and
profit sharing plans, jointly-trusteed plans and public funds, represented 39%40%
of the Separate Accounts assets and 8% of the accounts. The ten largest Separate
Accounts comprised approximately 40%41% of our total Separate Account assets under
management and approximately 21%23% of our total Separate Account revenues as of
and for the period ended December 31, 2004,2005, respectively.
In general, our Separate Accounts are managed under the GAMCO brand to meet the
specific needs and objectives of each client by utilizing investment strategies
- - traditional "value", "large cap value", "large cap growth", "global",
"international growth" and "convertible bonds" - and techniques that are within
our areas of expertise. We distinguish between taxable and tax-free assets and
manage client portfolios with tax sensitivity within given investment
strategies.
At December 31, 2004,2005, over 76%86% of our assets in Separate Accounts (excluding
sub-advisory assets) were obtained through direct sales relationships. Sales
efforts are conducted on a regional and product specialist basis. A team of
professionals (who generally remain assigned to a specific client from the onset
of the relationship) focus on client service. Members of the sales and marketing
staff for the Separate Accounts business have an average of more than ten years
of experience with us and focus on developing and maintaining direct, long-term
relationships with their Separate Account clients. This enables the service team
to understand and focus on the individual client's needs. We believe that an
important element of future growth in the Separate Accounts is dependent on
client relationships and retention. The firm will host its 20th21st Annual Client
conferenceConference in May.May 2006. This two-day event will kick off with a gathering at the
Waldorf-Astoria in New York followed by presentations by our portfolio managers
and analysts the following day. Along with these client seminars, we continue to
establish and staff relationship offices around the country.
We are also willing to fight for clients as evidenced by our efforts in a recent
appraisal action. After a lengthy and time-consuming process, the Delaware
Chancery Court decided in favor of our GAMCO clients in this appraisal action
during the fourth quarter 2004. Over five hundred clients received a premium of
nearly 45% over the merger price offered in September 2001.
912
Sub-advisory relationships are a growing source of assets under management and
require above average operational, trading and marketing support.
We act as a sub-advisor on certain funds for several large and well-known fund
managers including RiverSource (formerly American Express,Express), AXA EQ/Enterprise
Funds, Skandia Global and UBS (GAM)Global Asset Management funds. In November 2004, a sub-advisory client transferred management of the
largest of its three portfolios managed by the firm to another asset manager. Similar to corporate
clients, sub-advisory clients are also subject to business combinations which
may result in the curtailment of product distribution or the termination of the
relationship.
Investment advisory agreements for our Separate Accounts are typically subject
to termination by the client without penalty on 30 days' notice or less.
MUTUAL FUNDS:Mutual Funds: We currently provide advisory services to (a) the Gabelli family
of funds, which consists of twenty-onetwenty open-end
mutual funds and sixseven closed-end funds of which one open-end fund iswas managed
by an unaffiliated sub-advisor; (b)
The Treasurer's Fund, consisting of three open-end money market funds (the
"Treasurer's Funds"); and (c)(b) the Westwood family of funds, consisting
of six open-end mutual funds, five of which are managed on a day-to-day basis by
Westwood Management Corporation, a wholly-owned subsidiary of Westwood Holdings
Group (collectively, the "Mutual Funds"). At December 31, 2004,2005, we had $13.9$13.7
billion of assets under managementAUM in open-end mutual funds and closed-end funds, representing
approximately 48%51% of our total assets under management. TheAUM. Our equity mutual funds and closed-end funds
reached a record $13.0 billion in AUM on December 31, 2005, 4.8% ahead of the
$12.4 billion on December 31, 2004.
During January 2006, the Board of Directors of eight Mutual Funds havechanged the
brand of those funds to GAMCO from Gabelli. The GAMCO brand more appropriately
represents the various investment strategies offered to investors by Gabelli
Funds, including growth, gold, convertible securities and contrarian. Funds
continuing to use the Gabelli name primarily represent value portfolios managed
in the absolute return, research-driven Private Market Value (PMV) with a
long-term recordCatalystTM style. This name change has no effect on the management, the
investment objective, or the investment strategy of achieving high returns, relativeeach Fund.
The eight newly branded GAMCO open-end mutual funds are:
New Name - GAMCO Previous Name - Gabelli
GAMCO Growth Gabelli Growth
------
"" International Growth "" International Growth
--------------------
"" Gold "" Gold
----
"" Global Telecommunications "" Global Telecommunications
-------------------------
"" Global Growth "" Global Growth
-------------
"" Global Opportunity "" Global Opportunity
------------------
"" Global Convertible Securities "" Global Convertible Securities
-----------------------------
"" Mathers "" Mathers
-------
The Gabelli brand continues to similarrepresent our "Value" business and is primarily
our absolute return, research driven Private Market Value (PMV) with a
CatalystTM funds including the Westwood series Mighty MitesSM micro-cap value
fund and the Global Telecommunications Fund which is a value portfolio, but
retains the GAMCO Global series name. The Gabelli brand also includes The
Gabelli Blue Chip Value Fund and The Gabelli Woodland Small Cap Value Fund as
well as all of the closed-end funds.
The GAMCO brand encompasses a panoply of portfolios. It is the brand for our
"Growth" business, which is primarily represented by The GAMCO Growth Fund, The
GAMCO Global Growth Fund, and The GAMCO International Growth Fund. GAMCO also
includes other distinct investment products. Atstrategies and styles including our gold,
convertible securities and contrarian funds.
Open-end Mutual Funds
On December 31, 2004, 94%2005, we had $8.6 billion of AUM in twenty seven open-end mutual
funds. At year-end, 84% of the assets under
managementAUM in the open-end Mutual Fundsmutual funds having an overall
rating from Morningstar, Inc. ("Morningstar") were in open-end Mutual Funds
ranked "three stars" or better, with approximately 37%13% of such assets in
open-end Mutual Fundsmutual funds ranked "five stars" and/or "four stars" on an overall
basis (I.E.(i.e., derived from a weighted average of the performance figures
associated with its three-, five-, and ten-year Morningstar Rating metrics).
There can be no assurance, however, that these funds will be able to maintain
such ratings or that past performance will be indicative of future results.
At December 31, 2004,2005, approximately 38%37% of our assets under management in
open-end, no-load equity Mutual Fundsmutual funds had been obtained through direct sales
relationships. We also sell our open-end Mutual
Fundsmutual funds through Third-Party
Distribution Programs, particularly No-Transaction Fee ("NTF") Programs, and
have developed additional classes of shares for many of our mutual funds for
sale through additional third-party distribution channels on a commission basis.
At December 31, 2004,2005, Third Party Distribution Programs accounted for
approximately 62%63% of all assets in open-end funds.
Six13
Closed-end Funds
We act as investment adviser to seven closed-end funds, represent 31%five of which trade on
the NYSE: Gabelli Equity Trust (GAB), Gabelli Global Multimedia Trust (GGT),
Gabelli Convertible and Income Securities Fund (GCV), Gabelli Utility Trust
(GUT) and Gabelli Dividend & Income Trust (GDV) and two that trade on the AMEX:
Gabelli Global Utility & Income Trust (GLU) and Gabelli Global Gold, Natural
Resources & Income Trust (GGN). As of December 31, 2005, the seven Gabelli
closed-end funds had total assets of $5.1 billion, representing 37% of the total
assets in our Mutual Funds business.
The Gabelli Equity Trust, which raised $400 million through its initial public
offering in August 1986, finished its 19th year with net assets of $1.8 billion.
In September 2005, the mutualEquity Trust completed its first acquisition of the
assets of another closed-end investment company, Sterling Capital Corporation,
for total consideration of approximately $18.3 million. In October 2005, the
Equity Trust completed a heavily over-subscribed rights offering, retaining
gross proceeds of $143.7 million. Since inception, the Equity Trust has
distributed over $1.8 billion in cash to shareholders through its 10%
Distribution Policy and has spun off two other closed-end funds, business.the Gabelli
Global Multimedia Trust and the Gabelli Utility Trust.
The Gabelli Dividend & Income Trust, launched in November 2003, raised $196.6
million in net proceeds through its placement of Series D and Series E Preferred
Shares in November 2005. The Gabelli Dividend & Income Trust, which generatedinvests
primarily in dividend-paying equity securities, had a total annualized return of
10.10% since inception and net assets of $2.2 billion as of December 31, 2005.
The Gabelli Global Gold, Natural Resources & Income Trust raised gross proceeds
of $1.46 billion
in November 2003$332 million through its initial public offering raised an additional $194in March 2005 and $20
million in gross proceeds through the exercise of the underwriters' overallotment option in January 2004 and $300 million through the placement of
preferred shares in October 2004. In addition,May
2005. The Gabelli Global UtilityGold, Natural Resources & Income Trust, generated gross proceedswhich invests
primarily in equity securities of approximately $58gold and natural resources companies and
utilizes a covered call option writing program to generate current income, had a
total return of 22.0% during its first nine months of operation and net assets
of $390 million through its
initial public offering in May 2004.as of December 31, 2005.
A detailed description of our Mutual Funds is provided within this Item 1
beginning on page 12.
INVESTMENT PARTNERSHIPS:16.
Investment Partnerships: We manage Investment Partnerships through our rapidly
growing (29% CAGR since 2000) 92%
majority-owned subsidiary, Gabelli Securities, Inc. ("GSI"). The Investment
Partnerships consist primarily of limited partnerships, offshore funds, separate
accounts and sub-advisory relationships within the following strategies: merger
arbitrage, event-driven long/short equity funds, sector-focused funds and
merchant banking. We had $814$634 million of Investment Partnership assets under
management, or approximately 3%2% of total assets under management,AUM, at December 31, 2004.2005.
We introduced our first targeted portfolio, a merger arbitrage partnership in
1985. An offshore version of this strategy was added in 1989. Building on our
strengths in global event-driven value investing, several new Investment
Partnerships have been added to balance investors' geographic, strategy and
sector needs. Today we offer a broad range of absolute return products. Within
our merger arbitrage strategy, we manage approximately $432$410 million of assets
for investors who seek positive returns not correlated to fluctuations of the
general market. These funds seek to drive returns by investing in announced
merger and acquisition transactions that are primarily dependent on the deal
closure and less on the overall market environment. In event-driven long/short
strategies,
we manage $358$195 million of assets focused on the U.S., Japanese, and European
markets. We also manage a series of sector-focused absolute return funds
designed to offer investors a mechanism to diversify their portfolios by global
economic sector rather than by geographic region. We currently offer twothree
sector-focused portfolios: the Gabelli International Gold Fund Ltd. and, GAMA Select
Energy Plus, L.P., and GAMCO Telecom Plus, L.P. with a fourth sector-focused
portfolio, GAMCO Medical Opportunities, L.P. added in January 2006. Merchant
banking activities are carried out through ALCE Partners, L.P. and Gabelli
Multimedia Partners, L.P., both of which are closed to new investors.
Our Investment Partnerships have been marketed primarily by our direct sales
force to high net worth individuals and institutions. Separate accounts and
sub-advisory relationships continue to be an important aspect of our Investment
Partnerships business and account for approximately 48%37% of our Investment
Partnership assets under management. We intend to expand product offerings, both
domestic and international, and the geographic composition of our customer base
in Investment Partnerships. It is our expectation that the assets invested in
these products will provide a growing source of revenues in the future.
1014
ASSETS UNDER MANAGEMENTAssets Under Management
The following table sets forth total assets under management by product type as
of the dates shown and their compound annual growth rates ("CAGR"):
Assets Under Management
By Product Type
(Dollars in millions)
JANUARYJanuary 1,
2000 TO
DECEMBER2001 to
December 31,
AT DECEMBERAt December 31, 2004
----------------------------------------------------
20002005
--------------------------------------------------------
2001 2002 2003 2004 CAGR(A)
-------- -------- -------- -------- --------2005 CAGR(a)
----------
EQUITY:---------- ---------- ---------- ---------- ------------
Equity:
Mutual Funds ............................ $ 10,680 $ 10,165$10,165 $ 8,091 $ 11,618 $ 12,371 3.4%$11,618 $12,371 $12,963 4.0%
Institutional & HNW Separate Accounts ... 10,142 11,513 9,990 13,031 13,587 7.7
-------- -------- -------- -------- --------12,382 4.1
------- ------- ------- ------- -------
Total Equity .......................... 20,822 21,678 18,081 24,649 25,958 5.5
-------- -------- -------- -------- --------
FIXED INCOME:25,345 4.0
------- ------- ------- ------- -------
Fixed Income:
Money Market Mutual Funds ............... 1,425 1,781 1,963 1,703 1,488 4.8724 (12.7)
Bond Mutual Funds ....................... 8 9 14 11 11 12.911 6.6
Institutional & HNW Separate Accounts ... 859 720 613 504 388 (11.0)
-------- -------- -------- -------- --------84 (37.2)
------- ------- ------- ------- -------
Total Fixed Income .................... 2,292 2,510 2,590 2,218 1,887 0.1
-------- -------- -------- -------- --------
INVESTMENT PARTNERSHIPS:819 (18.6)
------- ------- ------- ------- -------
Investment Partnerships:
Investment Partnerships ................. 437 573 578 692 814 28.8
-------- -------- -------- -------- --------634 7.7
------- ------- ------- ------- -------
Total Assets Under Management ......... $ 23,551 $ 24,761 $ 21,249 $ 27,559 $ 28,659 5.5
======== ======== ======== ======== ========
BREAKDOWN OF TOTAL ASSETS UNDER MANAGEMENT:$24,761 $21,249 $27,559 $28,659 $26,798 2.6
======= ======= ======= ======= =======
Breakdown of Total Assets Under Management:
Mutual Funds ............................ $ 12,113 $ 11,955 $ 10,068 $ 13,332 $ 13,870 3.6$11,955 $10,068 $13,332 $13,870 $13,698 2.5
Institutional & HNW Separate Accounts ... 11,001 12,233 10,603 13,535 13,975 6.812,466 2.5
Investment Partnerships ................. 437 573 578 692 814 28.8
-------- -------- -------- -------- --------634 7.7
------- ------- ------- ------- -------
Total Assets Under Management ......... $ 23,551 $ 24,761 $ 21,249 $ 27,559 $ 28,659 5.5
======== ======== ======== ======== ========$24,761 $21,249 $27,559 $28,659 $26,798 2.6
======= ======= ======= ======= =======
(a) Compound annual growth rate.
SUMMARY OF INVESTMENT PRODUCTSSummary of Investment Products
We manage assets in the following wide spectrum of investment products and
strategies, many of which are focused on fast-growing areas:
U.S. EQUITIES: GLOBAL AND INTERNATIONAL EQUITIES: INVESTMENT PARTNERSHIPS:Equities: Global and International Equities: Investment Partnerships:
-------------- ---------------------------------- ------------------------
All Cap Value International Growth Merger Arbitrage
Large Cap Value Global Growth U.S. Long/Short
Large Cap Growth Global Value Global Long/Short
Mid Cap Value Global Telecommunications European Arbitrage
Small Cap Value Global Multimedia Japanese Long/Short
Small Cap Growth Gold Sector-Focused
Micro Cap - Energy
Natural Resources - Global Telecom
Real Estate - Gold
Utilities - Medical Opportunities(a)
Non-Market Correlated Merchant Banking
Real Estate
Utilities
Non-Market Correlated
CONVERTIBLE SECURITIES:Convertible Securities: U.S. BALANCED:Balanced: U.S. FIXED INCOME:Fixed Income:
----------------------- -------------- -----------------
U.S. Convertible Securities Asset AllocationBalanced Growth Corporate
Global Convertible Securities Balanced GrowthValue Government
Balanced Value Municipals
Asset-backed
Intermediate
Short-term
(a) GAMCO Medical Opportunities, LP was launched on January 1, 2006.
1115
ADDITIONAL INFORMATION ON MUTUAL FUNDSAdditional Information on Mutual Funds
The Mutual Funds include 3027 open-end mutual funds and 67 closed-end funds which
had total assets as of December 31, 20042005 of $13.9$13.7 billion. The open-end Mutual
Funds are available to individuals and institutions on both a no-load and
commission basis, while the closed-end funds are listed and traded on either the
New York Stock Exchange ("NYSE") or the American Stock Exchange ("AMEX"). At
December 31, 2004,2005, the open-end funds had total net assets of $9.6$8.6 billion and
the closed-end funds had total net assets of $4.3$5.1 billion. The assets managed in
the closed-end funds represent approximately 31%37% of the assets in the Mutual
Funds and 15%19% of the total assets under management at December 31, 2004.2005. Our
assets under management consist of a broad range of U.S. and international
stock, bond and money market mutual funds that meet the varied needs and
objectives of our Mutual Fund shareholders. At December 31, 2004,2005, approximately
38%37% of our assets under management in open-end Mutual Funds had been obtained
through direct sales relationships.
We, through our affiliates, act as advisor to all of the Mutual Funds, except
with respect to the Gabelli Capital Asset Fund for which we act as a sub-advisor
and Guardian Investment Services Corporation, an unaffiliated company, acts as
manager. As sub-advisor, we make day-to-day investment decisions for the Gabelli
Capital Asset Fund.
Gabelli Funds, LLC ("Funds Adviser"), a wholly-owned subsidiary of Gabelli Asset
ManagementGAMCO
Investors, Inc., acts as the investment advisor for all of the Mutual Funds
other than the Westwood family of funds and The Treasurer's Fund. Funds Adviser
has retained Ned Davis Research, Inc. ("NDR") to act as sub-advisor for the Ned
Davis Research Asset Allocation Fund ("NDR Fund"). As sub-advisor, NDR makes
day-to-day investment decisions for the NDR Fund utilizing a team investment
approach.funds.
Gabelli Advisers, Inc., a subsidiary controlled by Gabelli Asset ManagementGAMCO Investors, Inc., acts
as investment advisor to the Westwood family of funds and has retained Westwood
Management Corporation a wholly owned subsidiary of Westwood Holdings Group
(NYSE: WHG) to act as sub-advisor for five of the six portfolios. Westwood
Management Corporation, in its capacity as sub-advisor, makes day-to-day
investment decisions and provides the portfolio management services for five of
the six current Westwood portfolios. The Westwood Mighty MitesSM Fund, launched
in May 1998, is advised solely by Gabelli Advisers, Inc., using a team
investment approach, without any sub-advisors. Westwood Management Corporation
owns an approximately 19.0% equity interest in Gabelli Advisers, Inc. At
December 31, 2004,2005, GBL in turn owned 16.1%18.7% of Westwood Holdings Group
(NYSE: WHG).Group.
During 2005, the decline in fixed income AUM to $735 million at year end from
$1.5 billion at the end of 2004 was principally related to the withdrawal of
assets from the Treasurer's Fund, which was closed during the fourth quarter
2005. The Treasurer's Fund was managed by Gabelli Fixed Income LLC, a
majority-ownedwholly-owned subsidiary of Gabelli Fixed Income, Inc., currently manages short-term and short-intermediate term fixed income
securities for the Treasurer's Fund as well as for Separate Accounts. We plan to
further increase and diversify the number of fixed income products offered.
Certain members of senior management of Gabelli Fixed Income LLC
own a 19.9%
equity interest in Gabelli Fixed Income LLC.
12continues to manage Separate Account assets.
16
The following table lists the Mutual Funds, together with the December 31, 20042005
Morningstar overall rating, where rated (ratings are not available for the
money-market mutual funds and other mutual funds, which collectively represent
43.4%43.7% of the assets under management in the Mutual Funds), provides a
description of the primary investment objective, fund characteristics, fees, the
date that the mutual fund was initially offered to investors and the assets
under management in the Mutual Funds as of December 31, 2004.2005.
NET ASSETS AS
OF
DECEMBER 31,
FUND ADVISORY 12B-1 INITIAL 2004
(MORNINGSTAR OVERALL PRIMARY INVESTMENT FUND FEES FEES OFFER (ALL CLASSES)
RATING)(1) OBJECTIVE CHARACTERISTICS (%) (%) DATE ($ IN MILLIONS)
- --------------------- ------------------ --------------- ---- ---- ------- -------------
GABELLINet Assets as
of
December 31,
Fund Advisory 12b-1 Initial 2005
(Morningstar Overall Primary Investment Fund Fees Fees Offer (all classes)
Rating) (1) Objective Characteristics (%) (%) Date ($ in millions)
- ------------------------- ------------------------- --------------- --------- ---------- ---------- ---------------
OPEN-END FUNDS:
VALUE:
The Gabelli Asset Growth of capital as Class AAA: 1.00 .25 03/03/86 $ 2,218.42,258
Fund a primary investment No-load,
oooo*** objective, with Open-end,
current income as a Diversified
secondary investment Multi-class shares(2)
objective. Invests in shares (2)
equity securities of
companies selling at a
significant discount to
their private market value.
Westwood Capital appreciation Class AAA: 1.00 .25 01/02/87 $ 181.7184
Equity Fund through a diversified No-load,
ooo*** portfolio of equity Open-end,
securities using bottom-up Diversified
fundamental research Multi-class shares(2)
with a focus on shares (2)
identifying well-seasoned
companies.
The Gabelli Blue Chip Capital appreciation through Class AAA: 1.00(8)1.00 .25 08/26/99 $ 38.437
Value Fund investments in equity No-load,
o*** securities of established Open-end,
companies, which are Diversified
temporarily out of favor Multi-class shares(2)
and which have market shares (2)
capitalizations in excess of
$5 billion.
The Gabelli Capital Capital appreciation No-load, .75 n/a 05/01/95 $ 240.2219
Asset Fund from equity Open-end,
(not rated)(7) securities of Diversified,
companies selling at Variable Annuity
a significant
discount to their
private market value.
FOCUSED VALUE:
The Gabelli Value High level of capital Class A: 1.00 .25 09/29/89 $ 1,299.11,097
Fund appreciation from Front end-load,
ooo** undervalued equity Open-end
securities that are Non-diversified
held in a concentrated Multi-class shares(2)
portfolio. shares (2)
SMALL CAP VALUE:
The Gabelli Small Cap High level of capital Class AAA: 1.00 .25 10/22/91 $ 703.6739
Growth Fund appreciation from No-load,
ooo*** equity securities of Open-end,
smaller companies Diversified
with market Multi-Class Shares(2)
capitalization of Shares (2)
$1 billion or less.less at
the time of purchase.
1317
NET ASSETS AS
OF
DECEMBER 31,
FUND ADVISORY 12B-1 INITIAL 2004
(MORNINGSTAR OVERALL PRIMARY INVESTMENT FUND FEES FEES OFFER (ALL CLASSES)
RATING)(1) OBJECTIVE CHARACTERISTICS (%) (%) DATE ($ IN MILLIONS)
- --------------------- ------------------ --------------- ---- ---- ------- -------------
Net Assets as
of
December 31,
Fund Advisory 12b-1 Initial 2005
(Morningstar Overall Primary Investment Fund Fees Fees Offer (all classes)
Rating) (1) Objective Characteristics (%) (%) Date ($ in millions)
- ------------------------- ------------------------- --------------- --------- ---------- --------- ---------------
The Gabelli Woodland Long Term capital Class AAA: 1.00(8)1.00 (8) .25 12/31/02 $ 4.511
Small Cap Value Fund appreciation investing No-load,
(not rated) (7) at least 80% of Open-end,
its assets Open-end,
in equity Non-diversified
securities of Non-diversified
companies Multi-class with market Multi-class shares(2)
capitalizations shares (2) of
$1.5 billion or less.
Westwood Long-term capital Class AAA: 1.00(8)1.00 (8) .25 04/15/97 $ 13.79
SmallCap appreciation, No-load,
Equity Fund investing at least Open-end,
oo** 80% of its assets in Diversified
equity securities of Multi-class shares(2)
companies with market shares (2)
capitalizations of $1.5
billion or
less.less at the time of purchase
GROWTH:
GabelliGAMCO International Capital appreciation Class AAA: 1.00 .25 06/30/95 $ 55.659
Growth Fund by investing No-load,
oooo**** primarily in equity Open-end,
securities of foreign Diversified
companies with rapid Multi-class shares(2)
growth in revenues and
shares (2)
earnings.
The GabelliGAMCO Growth Capital appreciation from Class AAA: 1.00 .25 04/10/87 $ 1,452.71,143
Fund companies that have No-load,
ooo*** favorable, yet undervalued, Open-end,
prospects for earnings Diversified
growth. Multi-Class Shares(2)
Invests in equity Shares (2) securities
of companies that have above-averageabove-
average or expanding market
shares and profit margins.
AGGRESSIVE GROWTH:
The GabelliGAMCO Global High level of capital Class AAA: 1.00 .25 02/07/94 $ 114.9110
Growth Fund appreciation through No load,
oo*** investment in a Open-end,
portfolio of equity Non-diversified
securities focused on Multi-class shares(2)
companies involved shares (2)
in the global marketplace.
MICRO-CAP:
Westwood Long-term capital Class AAA:, 1.00(8)1.00 .25 05/11/98 $ 53.044
Mighty MitesSM Fund appreciation by No-load,
oo*** investing primarily Open-end,
in equity securities Diversified
with market Multi-class shares(2)
capitalization of shares (2)
$300 million or less.less at the
time of purchase.
EQUITY INCOME:
The Gabelli Equity High level of total Class AAA: 1.00 .25 01/02/92 $ 396.8659
Income Fund return with an No-load,
ooooo**** emphasis on income Open-end,
producing equities Diversified
with yields greater Multi-Class Shares(2)
than the S&P 500 Shares (2)
average.
1418
NET ASSETS AS
OF
DECEMBER 31,
FUND ADVISORY 12B-1 INITIAL 2004
(MORNINGSTAR OVERALL PRIMARY INVESTMENT FUND FEES FEES OFFER (ALL CLASSES)
RATING)(1) OBJECTIVE CHARACTERISTICS (%) (%) DATE ($ IN MILLIONS)
- --------------------- ------------------ --------------- ---- ---- ------- -------------
Net Assets as
of
December 31,
Fund Advisory 12b-1 Initial 2005
(Morningstar Overall Primary Investment Fund Fees Fees Offer (all classes)
Rating) (1) Objective Characteristics (%) (%) Date ($ in millions)
- ------------------------- ------------------------- --------------- --------- ---------- --------- --------------
Westwood Both capital Class AAA: .75 .25 10/01/91 $ 146.2153
Balanced Fund appreciation and No-load,
oooo**** current income using Open-end,
portfolios containing Diversified
stocks, bonds, and Multi-class shares(2)
cash as appropriate shares (2) in
light of current economic and
business conditions.
Westwood Long-term capitalHigh level of current income Class AAA: 1.00(8)1.00 (8) .25 09/30/97 $ 19.3
Realty14
Income Fund appreciation as well as long-term capital No-load,
oo as current* appreciation by investing Open-end,
primarily in income Open-end,
investing inDiversified
producing equity Diversified
securities that areand Multi-class primarily engaged in shares (2)
or related to the
real estate industry.shares(2)
fixed income securities.
SPECIALTY EQUITY:
The GabelliGAMCO Global High level of capital Class AAA: 1.00(8)1.00 (8) .25 05/11/98 $ 21.222
Opportunity Fund appreciation through No-load,
ooo*** worldwide investments Open-end,
in equity securities. Non-diversified
Multi-class shares (2)shares(2)
The GabelliGAMCO Global High level of total Class AAA: 1.00(8)1.00 (8) .25 02/03/94 $ 21.214
Convertible return through a No-load,
Securities Fund combination of Open-end,
oo*** current income and Non-diversified
capital appreciation Multi-class shares(2)
through investment in shares (2)
convertible securities of
U.S. and non-U.S. issuers.
SECTOR:
The Gabelli Utilities High level of total return Class AAA: 1.00(8)1.00 .25 08/31/99 $ 102.1301
Fund return through a No-load,
oooo combination of No-load,
**** capital Open-end, appreciation and Open-end,
current Diversified income from Diversified
investments Multi-class in utility Multi-class shares(2)
companies.
shares (2)
The GabelliGAMCO Global High level of capital Class AAA: 1.00 .25 11/01/93 $ 211.2187
Telecommunications appreciation through No-load,
Fund worldwide investments Open-end,
ooo*** in equity securities, Non-diversified
including the U.S., Multi-class shares(2)
primarily in the
shares (2)
telecommunications
industry.
GabelliGAMCO Gold Seeks capital Class AAA: 1.00 .25 07/11/94 $ 298.7348
Fund appreciation and No-load,
ooo*** employs a value Open-end,
approach to investing Diversified
primarily in equity Multi-class shares(2)
securities of gold- shares (2)
related companies
worldwide.
MERGER AND ARBITRAGE:
The Gabelli ABC Fund Total returns from equity No-load, 0.50(6)1.00(6) n/a(6) 05/14/93 $ 301.4
ooo177
*** and debt securities that are Open-end,
are
attractive to investors Non-diversified
in various market conditions
without excessive risk
of capital loss.
1519
NET ASSETS AS
OF
DECEMBER 31,
FUND ADVISORY 12B-1 INITIAL 2004
(MORNINGSTAR OVERALL PRIMARY INVESTMENT FUND FEES FEES OFFER (ALL CLASSES)
RATING)(1) OBJECTIVE CHARACTERISTICS (%) (%) DATE ($ IN MILLIONS)
- --------------------- ------------------ --------------- ---- ---- ------- -------------
Net Assets as
of
December 31,
Fund Advisory 12b-1 Initial 2005
(Morningstar Overall Primary Investment Fund Fees Fees Offer (all classes)
Rating) (1) Objective Characteristics (%) (%) Date ($ in millions)
- ------------------------- ------------------------- --------------- --------- ---------- --------- ---------------
QUANTITATIVE:
Ned Davis Research Seeks to provide capital Class AAA: 1.00(8)1.00 .25 03/31/03 $ 9.37
Asset Allocation Fund appreciation as its primary No-load,(10)
(not rated) (7) objective with a secondary Open-end,
objective of current income. Diversified
Multi-class shares (2)shares(2)
CONTRARIAN:
Comstock Capital appreciation and Class A 1.00 .25 10/10/85 $ 70.146
Capital Value Fund current income through Load,
(not rated)(7) investment in a highly Open-end,
diversified portfolio of Diversified
of
securities. Multi-class shares (2)shares(2)
Comstock Capital appreciation and Class A .85 .25 05/5/88 $ 14.711
Strategy Fund current income through Load,
(not rated)(7) investment in a Open-end,
portfolio of Open-end,
debt securities. Non-Diversified
securities. Multi-class shares (2)
Gabellishares(2)
GAMCO Mathers Long-term capital Class AAA: 1.00 .25 8/19/65 $ 41.338
Fund appreciation in various No-load,
o* market conditions without Open-end,
without
excess risk of Diversified
capital loss. Diversified
FIXED INCOME:
Westwood Total return and Class AAA: .60(8).60 (8) .25 04/06/93 $ 10.611
Intermediate Bond current income, while No-load,
Fund limiting risk to Open-end,
ooo*** principal. Pursues Diversified
higher yields than Multi-class shares(2)
shorter maturity funds, shares (2) and
has more price stability than
generally higher yielding
long-term funds.
CASH MANAGEMENT-MONEY MARKET:
The Gabelli U.S. High current income Money Market, .30(8).30 (8) n/a 10/01/92 $ 970.8724
Treasury Money Market with preservation of Open-end,
Money Market Fund principal and Diversified
(not rated) (7) liquidity, while
striving to keep
expenses among the
lowest of all U.S.
Treasury money market
funds.
The Treasurer's Fund, Current income with No-load, .30(8) n/a 01/01/88 $ 322.7
Inc. -- Domestic preservation of Open-end,
Prime Money Market principal and Diversified
Portfolio liquidity through Dual class
(not rated) (7) investment inliquidity, while striving to
keep expenses among the
lowest of all U.S.
Treasury securities
and corporate bonds.money market funds.
1620
NET ASSETS AS
OF
DECEMBER 31,
FUND ADVISORY 12B-1 INITIAL 2004
(MORNINGSTAR OVERALL PRIMARY INVESTMENT FUND FEES FEES OFFER (ALL CLASSES)
RATING)(1) OBJECTIVE CHARACTERISTICS (%) (%) DATE ($ IN MILLIONS)
- --------------------- ------------------ --------------- ---- ---- ------- -------------
The Treasurer's Current income with No-load, .30(8) n/a 12/18/87 $ 139.4Net Assets as
of
December 31,
Fund Inc. -- Tax preservation of Open-end,
Exempt Money Market principal and Diversified
Portfolio liquidity through Dual class
(not rated) (7) investmentAdvisory 12b-1 Initial 2005
(Morningstar Overall Primary Investment Fund Fees Fees Offer (all classes)
Rating) (1) Objective Characteristics (%) (%) Date ($ in U.S.
municipal bond
securities.
The Treasurer's Current income with No-load, .30(8) n/a 07/25/90 $ 54.9
Fund, Inc. -- U.S. preservation of Open-end,
Treasury Money Market principal and Diversified
Portfolio liquidity through Dual class
(not rated) (7) investment in U.S.
Treasury securities.
GABELLImillions)
- ------------------------- ------------------------- --------------- --------- ---------- ---------- ---------------
CLOSED-END FUNDS:
The Gabelli Equity Long-term growth of Closed-end, 1.00(9)1.00 (9) n/a 08/14/86 $ 1,638.41,764
Trust Inc. capital by investing Non-diversified
(not rated) (7) in equity securities. NYSE Symbol: GAB
The Gabelli High total return Closed-end, 1.00(9)1.00 (9) n/a 07/03/89 $ 147.2145
Convertible and Income from investing Diversified
Securities Fund Inc.(4) primarily in NYSE Symbol: GCV
(4)(not rated) (7) convertible
oo
instruments.
The Gabelli Global Long-term capital Closed-end, 1.00(9)1.00 (9) n/a 11/15/94 $ 223.8215
Multimedia Trust Inc.(3) appreciation from Non-diversified
Inc. (3)(not rated) (7) equity investments in NYSE Symbol: GGT
(not rated) (7)
global telecommunications,
media, publishing and
entertainment holdings.
The Gabelli High total return from Closed-end, 1.00(9)1.00 (9) n/a 07/09/99 $ 261.6259
Utility Trust (5) investments primarily in Non-Diversified
(not rated) (7) securities of companies NYSE Symbol: GUT
involved in gas, electricity
and water industries.
The Gabelli Qualified dividend income Closed-end, 1.00(9)1.00 (9) n/a 11/24/03 $ 2,006.82,238
Dividend & Income and capital appreciation Non-Diversified
Trust potential. NYSE Symbol: GDV
(not rated) (7)
The Gabelli A consistent level of Closed-end, 1.00 n/a 5/28/04 $ 64.262
Global Utility & Income after-tax total Non-Diversified
& Income Trust return with Non-Diversified
Trust an emphasis on tax-advantaged AMEX Symbol: GLU
(not rated) (7) on tax-advantaged
dividend income.
The Gabelli High level of current income Closed-end, 1.00 n/a 3/29/05 $ 390
Global Gold, Natural through an option writing Non-Diversified
Resources & Income strategy on equity securities AMEX Symbol: GGN
Trust owned in the gold and natural
(not rated) (7) resources industries
(1) For each fund with at least a three-year history, Morningstar calculates a
Morningstar RatingTM based on a Morningstar risk-adjusted return measure
that accounts for variation in a fund's monthly performance (including the
effects of sales charges, loads and redemption fees) placing more emphasis
on downward variations and rewarding consistent performance. The top 10% of
the funds in an investment category receive five stars, the next 22.5%
receive four stars, the next 35% receive three stars, the next 22.5%
receive two stars and the bottom 10% receive one star. The Overall
Morningstar Rating for a fund is derived from a weighted average of the
performance figures associated with its three, five, and ten-year (if
applicable) Morningstar Rating metrics. Morningstar Ratings are shown for
the respective class shown; other classes may have different performance
characteristics. There were 228318 Conservative Allocation funds rated for
three years, 164194 funds for five years and 5369 funds for ten years (The
Gabelli ABC Fund, GabelliGAMCO Mathers Fund).
21
There were 283351 Mid-Cap Blend funds rated for three years, 172256 funds for
five years and 5798 funds for ten years (The Gabelli Asset Fund, The Gabelli
Value Fund). 17
There were 7811,014 Large Value funds rated for three years, 559697
funds for five years and 244333 funds for ten years (The Gabelli Blue Chip
Value Fund, Westwood Equity Fund, The Gabelli Equity Income Fund). There
were 6480 Convertibles funds rated for three years, 5670 funds for five years
and 2746 funds for ten years (The GabelliGAMCO Global Convertible Securities Fund, The
Gabelli Convertible and Income Securities Fund Inc.)Fund).
There were 274392 World Stock funds rated for three years, 208285 funds for five
years and 73126 funds for ten years (The GabelliGAMCO Global Growth Fund, The GabelliGAMCO
Global Opportunity Fund). There were 40 Specialty-Communications funds
rated for three years, 1539 funds for five years and 811 funds for ten years
(The GabelliGAMCO Global Telecommunications Fund). There were 3956
Specialty-Precious Metals funds rated for three years, 3041 funds for five
years and 1930 funds for ten years (Gabelli(GAMCO Gold Fund). There were 1,0391,353 Large
Growth funds rated for three years, 7431,065 funds for five years and 260370
funds for ten years (The GabelliGAMCO Growth Fund). There were 175196 Foreign Large
Growth funds rated for three years, and 131151 funds for five years (Gabelliand 62 funds
for ten years (GAMCO International Growth Fund). There were 201276 Small Value
funds rated for three years, 154192 funds for five years and 4059 funds for ten
years (The Gabelli Small Cap Growth Fund, Westwood Mighty MitesSM Fund).
There were 6692 Specialty-Utilities funds rated for three years and 5977 funds
rated for five years (The Gabelli Utilities Fund). There were 654868 Moderate
Allocation funds rated for three years, 515664 funds for five years and 212296
funds for ten years (Westwood Balanced Fund). There were 738901
Intermediate-Term Bond funds rated for three years, 554691 funds for five
years and 275351 funds for ten years (Westwood Intermediate Bond Fund). There
were 146191 Specialty-Real Estate funds rated for three years and 120143 funds
for five years (Westwood RealtyIncome Fund). There were 554650 Small Growth funds
rated for three years and 402507 funds for five years (Westwood SmallCap
Equity Fund). (a) 20042005 Morningstar, Inc. All Rights reserved. This
information is (1) proprietary to Morningstar and/or its content providers
(2) may not be copied or distributed; and (3) is not warranted to be
accurate, complete or timely. Neither Morningstar nor its content providers
are responsible for any damages or losses arising from any use of this
information. Past performance is no guarantee of future results.
Other share classes may have different performance
characteristics.
(2) These funds have multi-classes of shares available. Multi-class shares
include Class A shares with a front-end sales charge; Class B shares are
subject to a back-end contingent deferred sales charge for up to 6 years
and Class C shares are subject to a 1% back-end contingent deferred sales
charge for up to two years. However, Class B shares are no longer offered
for new purchases as of July 2004. Comstock Strategy Fund Class R shares,
which are no-load, are available only for retirement and certain
institutional accounts. Comstock Strategy Fund class O shares are no longer
offered to the public. Ned Davis Research Asset Allocation Fund and The
Gabelli Blue Chip Value Fund Class I shares are available to institutional
accounts. Class I shares for other funds are expected to bewere available insince May 2005. Net
assets include all shares classes.
(3) The Gabelli Global Multimedia Trust Inc. was formed in 1994 through a spin
off of assets from The Gabelli Equity Trust.
(4) The Gabelli Convertible and Income Securities Fund Inc. was originally
formed in 1989 as an open-end investment company and was converted to a
closed-end investment company in March 1995.
(5) The Gabelli Utility Trust was formed in 1999 through a spin off of assets
from The Gabelli Equity Trust.
(6) Funds Adviser has voluntarily reduced the Advisory fee from 1.00% to 0.50%
since April 1, 2002. Gabelli & Company, Inc. has waived receipt of the 12b-1
Plan distribution fees as of January 1, 2003 and on February 25, 2004 the
Fund's Board of Directors agreed with the Funds Advisers' request to
terminate the 12b-1 Plan.
(7) Certain funds are not rated because they don't have a three year history or
there are not enough similar funds in the category determined by
Morningstar.
(8) Funds Adviser has an agreement in place to waive its advisory fee or
reimburse expenses of the Fund to maintain fund expenses at a specified
level for Class AAA shares; Multiclass shares have separate limits as
described in the Fund's prospectus. (The Gabelli Blue Chip Value Fund -
2.00%; The Gabelli Woodland Small Cap Value
Fund - 2.00%; Westwood Mighty
Mites SM Fund - 1.50%; Westwood RealtyIncome Fund - 1.50%; The GabelliGAMCO Global Opportunity
Fund - 1.50% (2.00% after May 1, 2005)2.00%; The GabelliGAMCO Global Convertible Securities Fund - 2.00%; The Gabelli Utilities Fund - 2.00%;
Ned Davis Research Asset Allocation Fund - 2.50% through April 30, 2005;
Westwood SmallCap Equity Fund - 1.50%; Westwood Intermediate Bond Fund -
1.00%; The Gabelli U.S. Treasury Money Market Fund - 0.30%; The Treasurer's
Fund - Domestic Prime Money Market Portfolio - 0.60%; The Treasurer's Fund
- Tax Exempt Money Market Fund - 0.60%; The Treasurer's Fund - U.S.
Treasury Money Market Portfolio - 0.65%. overall further
limited to 0.08% through June 30, 2006.)
(9) Funds Adviser has agreed to reduce its advisory fee on the liquidation
value of Preferred stock outstanding if certain performance levels are not
met.
18(10) The Ned Davis Research Asset Allocation Fund was liquidated on February 10,
2006.
22
Shareholders of the no-load open-end Mutual Funds are allowed to exchange shares
among the open-end funds as economic and market conditions and investor needs
change at no additional cost. However, as noted below certain Mutual Funds
impose a 2% redemption fee on shares redeemed within 60 days of a purchase. We
periodically introduce new mutual funds designed to complement and expand our
investment product offerings, respond to competitive developments in the
financial marketplace and meet the changing needs of investors.
In February 2003, to discourage short-term trading, time zone arbitrage and late
trading, the Boards of Directors of
several of our open-end Mutual Funds with significant
holdings in non-US securities, approved the imposition of a 2% redemption
fee on shares redeemed within 60 days of purchase. The 2% redemption fee on
these funds became effective in May 2003. In May 2004, the Boards of Directors
of our other open-end Mutual Funds, other than the money market funds and The
Gabelli Capital Asset Fund, considered and approved the imposition of a 2%
redemption fee on shares redeemed within 60 days of a purchase. As of November
2004, the 2% redemption fee was effective for all of these funds. Effective
April 1, 2005 the redemption fee was eliminated for funds sub-advised by
Westwood Management Corporation. As of July 15, 2005, the redemption fee period
was reduced to seven days or less. The Board of Directors of our open-end Mutual
Funds will continue to review the need to maintain the 2% redemption fee in
light of the regulatory environment and other industry developments and may elect to selectively remove this fee on certain funds.
Thedevelopments.
On December 30, 2004, the shareholders of The Gabelli ABC Fund voted on December 30, 2004 to approve
a charter amendment that would require investment accounts held at the fund's
transfer agent, State Street Bank & Trust Company, be directly registered to the
beneficial owners of the fund. The action, which was recommended by Funds
Adviser and approved by the fund's Board of Directors, permits the redemption of
shares held through certain brokers and financial consultants in omnibus and
individual accounts where the beneficial owner is not disclosed.
In December 2005, Funds Adviser announced that it immediately increased the
yield on the Gabelli U. S. Treasury Money Market Fund (NASDAQ: GABXX) by
voluntarily waiving a larger portion of its management fee and maintaining total
expenses at 8 basis points or 0.08% of the average net assets for the period
from December 1, 2005 through June 30, 2006. The Gabelli U. S. Treasury Money
Market Fund, a money market mutual fund managed by Funds Adviser, invests
exclusively in U.S. Treasury securities and its dividends derived from such
securities are exempt from state and local income taxes.
In January 2006, Funds Adviser announced that the Board of Trustees of the Ned
Davis Research Funds has voted to liquidate the Ned Davis Research Asset
Allocation Fund and distribute the assets to shareholders. The Board agreed that
liquidating the Fund, which was launched on March 31, 2003, was in the best
interests of shareholders given its asset level, ongoing transactional and
operating costs, and limited marketability.
Our marketing efforts for the Mutual Funds are currently focused on increasing
the distribution and sales of our existing funds as well as creating new
products for sale through our distribution channels. We believe that our
marketing efforts for the Mutual Funds will continue to generate additional
revenues from investment advisory fees. We have traditionally distributed most
of our open-end Mutual Funds by using a variety of direct response marketing
techniques, including telemarketing and advertising, and as a result we maintain
direct relationships with many of our no-load open-end Mutual Fund customers.
Beginning in late 1995, we expanded our product distribution by offering several
of our open-end Mutual Funds through Third-Party Distribution Programs,
including NTF Programs. In 1998 and 1999, we further expanded these efforts to
include substantially all of our open-end Mutual Funds in Third-Party
Distribution Programs. More than 38%37% of the assets under management in the
open-end Mutual Funds are still attributable to our direct response marketing
efforts. Third-Party Distribution Programs have become an increasingly important
source of asset growth for us. Of the $8.0$7.9 billion of assets under management in
the open-end equity Mutual Funds as of December 31, 2004,2005, approximately 62%63% were
generated through Third-Party Distribution Programs. We are responsible for
paying the service and distribution fees charged by many of the Third-Party
Distribution Programs. Several bills have been introduced in Congress that would
amend the Investment Company Act. These proposals, which include but are not
limited to the elimination or restriction of Rule 12b-1 distribution fees, if
enacted or adopted, could have a substantial impact on the regulation and
operation of our registered funds. In light of such legislation and efforts by
some of the program sponsors to increase fees beyond what we deem to be
acceptable, several of our Mutual Funds may be withdrawn from such programs.
During 2000, we completed development of additional classes of shares for many
of our mutual funds for sale through national brokerage and investment firms and
other third-party distribution channels on a commission basis. The multi-class
shares are available in all of Gabelli mutual funds except The Gabelli ABC Fund,
Gabelli Capital Asset Fund and the GabelliGAMCO Mathers Fund. The use of multi-class
share products will expand the distribution of all Gabelli Fund products into
the advised sector of the mutual fund investment community. During 2003, we
introduced Class I shares, which are no load shares with higher minimum initial
investment and without distribution fees available to Institutional and
Retirement Plan Accounts directly through Gabelli & Company. The no-load shares
are designated as Class AAA shares and are available for new and current
investors. In general, distribution through Third-Party Distribution Programs
has greater variable cost components and lower fixed cost components than
distribution through our traditional direct sales methods.
23
We provide investment advisory and management services pursuant to an investment
management agreement with each Mutual Fund. The investment management agreements
with the Mutual Funds generally provide that we are responsible for the overall
investment and administrative services, subject to the oversight of each Mutual
Fund's Board of Directors or Trustees and in accordance with each Mutual Fund's
fundamental investment objectives and policies. The investment management
agreements permit us to enter into separate agreements for administrative and
accounting services on behalf of the respective Mutual Funds.
19
We provide the Mutual Funds with administrative services pursuant to the
management contracts. Such services include, without limitation, supervision of
the calculation of net asset value, preparation of financial reports for
shareholders of the Mutual Funds, internal accounting, tax accounting and
reporting, regulatory filings and other services. Most of these administrative
services are provided through sub-contracts with unaffiliated third parties.
Transfer agency and custodial services are provided directly to the Mutual Funds
by unaffiliated third parties.
Our Mutual Fund investment management agreements may continue in effect from
year to year only if specifically approved at least annually by (i) the Mutual
Fund's Board of Directors or Trustees or (ii) the Mutual Fund's shareholders
and, in either case, the vote of a majority of the Mutual Fund's directors or
trustees who are not parties to the agreement or "interested persons" of any
such party, within the meaning of the Investment Company Act of 1940 as amended
(the "Investment Company Act"). Each Mutual Fund may terminate its investment
management agreement at any time upon 60 days' written notice by (i) a vote of
the majority of the Board of Directors or Trustees cast in person at a meeting
called for the purpose of voting on such termination or (ii) a vote at a meeting
of shareholders of the lesser of either 67% of the voting shares represented in
person or by proxy or 50% of the outstanding voting shares of such Mutual Fund.
Each investment management agreement automatically terminates in the event of
its assignment, as defined in the Investment Company Act. We may terminate an
investment management agreement without penalty on 60 days' written notice.
MUTUAL FUND DISTRIBUTION, INSTITUTIONAL RESEARCH, BROKERAGE AND UNDERWRITINGMutual Fund Distribution, Institutional Research, Brokerage and Underwriting
Gabelli & Company, Inc. ("Gabelli & Company"), the wholly-owned subsidiary of
our 92% majority-owned subsidiary Gabelli Securities, Inc., is a broker-dealer
registered under the Securities Exchange Act of 1934 and a member of the
National Association of Securities Dealers, Inc. ("NASD"). Gabelli & Company's
revenues are derived primarily from the distribution of our Mutual Funds,
brokerage commissions, underwriting fees and selling concessions.
MUTUAL FUND DISTRIBUTIONMutual Fund Distribution
Gabelli & Company distributes our open-end Mutual Funds pursuant to distribution
agreements with each Mutual Fund. Under each distribution agreement with an
open-end Mutual Fund, Gabelli & Company offers and sells such open-end Mutual
Fund's shares on a continuous basis and pays all of the costs of marketing and
selling the shares, including printing and mailing prospectuses and sales
literature, advertising and maintaining sales and customer service personnel and
sales and services fulfillment systems, and payments to the sponsors of
Third-Party Distribution Programs, financial intermediaries and Gabelli sales
personnel. Gabelli & Company receives fees for such services pursuant to
distribution plans adopted under provisions of Rule 12b-1 ("12b-1") of the
Investment Company Act. Distribution fees from the open-end Mutual Funds
amounted to $18.4 million, $17.1 million, $18.9 million and $18.9$19.4 million for the years ended
December 31, 2002, 2003, 2004 and 2004,2005, respectively. Gabelli & Company is the
principal underwriter for funds distributed in multiple classes of shares which
carry either a front-end or back- end sales charge. Underwriting fees and sales
charges retained amounted to $356,000, $268,000, $346,000 and $346,000$646,000 for the years ended
December 31, 2002, 2003, 2004 and 2004,2005, respectively.
Under the distribution plans, the open-end no load (Class AAA shares) Mutual
Funds (except The Treasurer's Fund, The Gabelli US Treasury Money Market Fund, Gabelli Capital Asset
Fund and The Gabelli ABC Fund) and the Class A shares of various funds pay
Gabelli & Company a distribution or service fee of .25% per year (except the
Class A shares of the Westwood Funds which pay .50% per year) on the average
daily net assets of the fund. Class B and Class C shares have a 12b-1
distribution plan with a service and distribution fee totaling 1%. Gabelli &
Company's distribution agreements with the Mutual Funds may continue in effect
from year to year only if specifically approved at least annually by (i) the
Mutual Fund's Board of Directors or Trustees or (ii) the Mutual Fund's
shareholders and, in either case, the vote of a majority of the Mutual Fund's
directors or trustees who are not parties to the agreement or "interested
persons" of any such party, within the meaning of the Investment Company Act.
Each Mutual Fund may terminate its distribution agreement, or any agreement
thereunder, at any time upon 60 days' written notice by (i) a vote of the
majority of its directors or trustees cast in person at a meeting called for the
purpose of voting on such termination or (ii) a vote at a meeting of
shareholders of the lesser of either 67% of the voting shares represented in
person or by proxy or 50% of the outstanding voting shares of such Mutual Fund.
Each distribution agreement automatically terminates in the event of its
assignment, as defined in the Investment Company Act. Gabelli & Company may
terminate a distribution agreement without penalty upon 60 days' written notice.
2024
Gabelli & Company also offers our open-end mutual fund products through our
website, WWW.GABELLI.COM,www.gabelli.com, where directly registered mutual fund investors can
access their personal account information and buy, sell and exchange Fund
shares. Fund prospectuses, quarterly reports, fund applications, daily net asset
values and performance charts are all available. As part of our efforts to
educate investors, we introduced Gabelli University with our initial
publications "DEALS, DEALS... AND MORE DEALS""Deals, Deals... and "GLOBAL CONVERTIBLE INVESTING:
THE GABELLI WAY.More Deals" and "Global Convertible Investing:
The Gabelli Way." Our website is an active, informative and valuable resource
which we believe has become an increasingly important feature of our client
service efforts.
INSTITUTIONAL RESEARCHInstitutional Research
Gabelli & Company provides institutional investors with investment ideas on
numerous industries and special situations, with a particular focus on small and
midcap companies. Our team of sell-side analysts follow economic sectors on a
global basis, and are bottom-up stock pickers, recommending companies that trade
at significant differences to Private Market Value. Our research focuses on
company fundamentals, cash flow statistics, and catalysts that will help realize
returns.
COMMISSIONSBrokerage Commissions and Trading
Gabelli & Company generates brokerage commission revenues from securities
transactions executed on an agency basis on behalf of our mutual funds,
institutional and high net worth clients as well as from institutional and
retail customers. Commission revenues totaled $13.9 million, $12.9 million, $15.6 million, and
$15.6$12.2 million for the years ended December 31, 2002, 2003, 2004 and 2004,2005,
respectively.
UNDERWRITINGGabelli & Company has considered and continues to explore expansion of its
proprietary trading activities. While these activities may entail a relatively
high use of the firm's capital, we believe proprietary trading represents a
growth opportunity for the Company.
Underwriting
Gabelli & Company is involved in external syndicated underwriting activities. In
2002, 2003, 2004 and 2004,2005, Gabelli & Company participated in 10, 9, 5 and 54 syndicated
underwritings of public equity and debt offerings managed by major investment
banks, respectively, with commitments of $34.9 million, $24.7 million, and $32.1 million and $21.4
million, respectively.
COMPETITIONCompetition
We compete with other investment management firms and mutual fund companies,
insurance companies, banks, brokerage firms and other financial institutions
that offer products that have similar features and investment objectives to
those offered by us. Many of the investment management firms with which we
compete are subsidiaries of large diversified financial companies and many
others are much larger in terms of assets under management and revenues and,
accordingly, have much larger sales organizations and marketing budgets.
Historically, we have competed primarily on the basis of the long-term
investment performance of many of our investment products. However, we have
taken steps to increase our distribution channels, brand name awareness and
marketing efforts.
The market for providing investment management services to institutional and
high net worth Separate Accounts is also highly competitive. Approximately 40%38%
of our investment advisory fee revenue for the year ended December 31, 20042005 was
derived from our Separate Accounts. Selection of investment advisors by U.S.
institutional investors is often subject to a screening process and to favorable
recommendations by investment industry consultants. Many of these investors
require their investment advisors to have a successful and sustained performance
record, often five years or longer, and also focus on one and three year
performance records. We have significantly increased our assets under management
on behalf of U.S. institutional investors since our entry into the institutional
asset management business in 1977. At the current time, we believe that our
investment performance record would be attractive to potential new institutional
and high net worth clients. However, no assurance can be given that our efforts
to obtain new business will be successful.
2125
INTELLECTUAL PROPERTYIntellectual Property
Service marks and brand name recognition are important to our business. We have
rights to the service marks under which our products are offered. We have
registered certain service marks in the United States and will continue to do so
as new trademarks and service marks are developed or acquired. We have rights to
use (i) the "Gabelli" name, (ii) the "GAMCO" name, (iii) the research triangle
logo, and (iv) the "Mighty Mites" name. Pursuant to an assignment agreement, Mr.
Gabelli has assigned to us all of his rights, title and interests in and to the
"Gabelli" name for use in connection with investment management services, mutual
funds and securities brokerage services. However, under the agreement, Mr.
Gabelli will retain any and all right, title and interest he has or may have in
the "Gabelli" name for use in connection with (i) charitable foundations
controlled by Mr. Gabelli or members of his family or (ii) entities engaged in
private investment activities for Mr. Gabelli or members of his family. In
addition, the funds managed by Mr. Gabelli outside GBL have entered into a
license agreement with us permitting them to continue limited use of the
"Gabelli" name under specified circumstances. We have taken, and will continue
to take, action to protect our interests in these service marks.
REGULATIONRegulation
Virtually all aspects of our businesses are subject to various Federal and state
laws and regulations. These laws and regulations are primarily intended to
protect investment advisory clients and shareholders of registered investment
companies. Under such laws and regulations, agencies that regulate investment
advisors and broker-dealers such as us have broad administrative powers,
including the power to limit, restrict or prohibit such an advisor or
broker-dealer from carrying on its business in the event that it fails to comply
with such laws and regulations. In such event, the possible sanctions that may
be imposed include the suspension of individual employees, limitations on
engaging in certain lines of business for specified periods of time, revocation
of investment advisor and other registrations, censures, and fines. We believe
that we are in substantial compliance with all material laws and regulations.
Our business is subject to regulation at both the federal and state level by the
Securities and Exchange Commission ("Commission") and other regulatory bodies.
Certain of our subsidiaries are registered with the Commission under the
Investment Advisers Act, and the Mutual Funds are registered with the Commission
under the Investment Company Act. Three of our subsidiaries are also registered
as broker-dealers with the Commission and are subject to regulation by the NASD
and various states.
The subsidiaries of GBL that are registered with the Commission under the
Investment Advisers Act (Gabelli Funds LLC, Gabelli Advisers, Inc., Gabelli
Fixed Income LLC, GAMCO Asset Management Inc. and GAMCO)effective January 19, 2006
Gabelli Securities, Inc.) are regulated by and subject to examination by the
Commission. The Investment Advisers Act imposes numerous obligations on
registered investment advisors including fiduciary duties, record keeping
requirements, operational requirements, marketing requirements and disclosure
obligations. The Commission is authorized to institute proceedings and impose
sanctions for violations of the Investment Advisers Act, ranging from censure to
termination of an investment advisor's registration. The failure of a subsidiary
to comply with the requirements of the Commission could have a material adverse
effect on us. We believe that we are in substantial compliance with the
requirements of the regulations under the Investment Advisers Act.
We derive a substantial majority of our revenues from investment advisory
services through our investment management agreements. Under the Investment
Advisers Act, our investment management agreements terminate automatically if
assigned without the client's consent. Under the Investment Company Act,
advisory agreements with registered investment companies such as the Mutual
Funds terminate automatically upon assignment. The term "assignment" is broadly
defined and includes direct assignments as well as assignments that may be
deemed to occur, under certain circumstances, upon the transfer, directly or
indirectly, of a controlling interest in GBL.
In their capacity as broker-dealers, Gabelli & Company, Inc., Gabelli Fixed
Income Distributors, Inc. and Gabelli Direct, Inc. are required to maintain
certain minimum net capital and cash reserves for the benefit of our customers.
Gabelli & Company, Inc.'s net capital, as defined, has consistently met or
exceeded all minimum requirements. Gabelli Direct, Inc. and Gabelli Fixed Income Distributors, Inc. areis
currently dormant, but havehas also consistently met or exceeded all minimum
requirements. Gabelli Direct, Inc. is also currently dormant, but did exceed its
minimum net capital as of December 31, 2005. However it did not meet its minimum
net capital requirements as of June 30, 2005 or September 30, 2005. The cause of
the failure to meet the minimum net capital requirement was the ownership of
certain securities that are ineligible for net capital calculations. Those
ineligible securities were sold to Gabelli Securities, Inc. in November 2005,
which remedied the net capital requirement. Gabelli & Company, Inc., Gabelli
Fixed Income Distributors, Inc. and Gabelli Direct, Inc. are also subject to
periodic examination by the NASD.
2226
Subsidiaries of GBL are subject to the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), and to regulations promulgated there under,
insofar as they are "fiduciaries" under ERISA with respect to certain of their
clients. ERISA and applicable provisions of the Internal Revenue Code of 1986,
as amended (the "Code"), impose certain duties on persons who are fiduciaries
under ERISA and prohibit certain transactions involving ERISA plan clients. Our
failure to comply with these requirements could have a material adverse effect
on us.
Investments by GBL on behalf of our clients often represent a significant equity
ownership position in an issuer's class of stock. As of December 31, 2004,2005, we
had five percent or more beneficial ownership with respect to 121approximately 110
equity securities. This activity raises frequent regulatory and legal issues
regarding our aggregate beneficial ownership level with respect to portfolio
securities, including issues relating to issuers' shareholder rights plans or
"poison pills," state gaming laws and regulations, federal communications laws
and regulations, public utility holding company laws and regulations, federal
proxy rules governing shareholder communications and federal laws and
regulations regarding the reporting of beneficial ownership positions. Our
failure to comply with these requirements could have a material adverse effect
on us.
The USA Patriot Act of 2001, enacted in response to the terrorist attacks on
September 11, 2001, contains anti-money laundering and financial transparency
laws and mandates the implementation of various new regulations applicable to
broker-dealers, mutual funds and other financial services companies, including
standards for verifying client identification at account opening, and
obligations to monitor client transactions and report suspicious activities.
Anti-money-laundering laws outside of the U.S. contain some similar provisions.
Our failure to comply with these requirements could have a material adverse
effect on us.
We, and certain of our affiliates, are subject to the laws of non-U.S.
jurisdictions and non-U.S. regulatory agencies or bodies. In particular, we are
subject to requirements in numerous jurisdictions regarding reporting of
beneficial ownership positions in securities issued by companies whose
securities are publicly traded in those countries. In addition, GAMCO is
registered as an international advisor, investment counsel and portfolio manager
with the Ontario Securities Commission in Canada in order to market our services
to prospective clients which reside in Ontario. Several of our Investment
Partnerships are organized under the laws of foreign jurisdictions. In
connection with our opening of an office in London and our plans to market
certain products in Europe we are required to comply with the laws of the United
Kingdom and other European countries regarding these activities. Our subsidiary,
Gabelli Asset Management (UK) Limited is regulated by the Financial Services
Authority. In connection with our registration in the United Kingdom we have
minimum capital requirements that have been consistently met or exceeded.
RECENT REGULATORY DEVELOPMENTSRecent regulatory developments
On September 3, 2003, the New York Attorney General's office ("NYAG") announced
that it had found evidence of widespread improper trading involving mutual fund
shares. These transactions included the "late trading" of mutual fund shares
after the 4:00 p.m. pricing cutoff and "time zone arbitrage" of mutual fund
shares designed to exploit pricing inefficiencies. Since the NYAG's
announcement, the NASD, the SEC, the NYAG and officials of other states have
been conducting inquiries into and bringing enforcement actions related to
trading abuses in mutual fund shares. We have received information requests and
subpoenas from the SEC and the NYAG in connection with their inquiries. We are
complying with these requests for documents and testimony and have been
conducting an internal review of our mutual fund practices and procedures in a
variety of areas with the guidance of outside counsel. A special committee of
all of our independent directors was also formed to review various issues
involving mutual fund share transactions and was assisted by independent
counsel.
As part of our review, hundreds of documents were examined and approximately
fifteen individuals were interviewed. We have found no evidence that any
employee participated in or facilitated any "late trading". We also have found
no evidence of any improper trading in our mutual funds by our investment
professionals or senior executives. As we previously reported, we did find that
in August of 2002, we banned an account, which had been engaging in frequent
trading in our Global Growth Fund (the prospectus of which did not impose limits
on frequent trading) and which had made a small investment in one of our hedge
funds, from further transactions with our firm. Certain other investors had been
banned prior to that. Since our internal review and requests from regulators for
documents and testimony are ongoing, we can make no assurances that additional
information will not become available or that we will not become subject to
disciplinary action.
23In September 2005, we were informed by the staff of the Securities and Exchange
Commission that they may recommend to the Commission that one of our advisory
subsidiaries be held accountable for the actions of two of the seven closed-end
funds managed by the subsidiary relating to Section 19(a) and Rule 19a-1 of the
Investment Company Act of 1940. These provisions require registered investment
companies to provide written statements to shareholders when a dividend is made
from a source other than net investment income. While the funds sent annual
statements containing the required information and 1099 statements as required
27
by the IRS, the funds did not send written statements to shareholders with each
distribution in 2002 and 2003. The staff indicated that they may recommend to
the Commission that administrative remedies be sought, including a monetary
penalty. The closed-end funds changed their notification procedures and we
believe that all of the funds are now in compliance.
In response to industry wideindustry-wide inquiries and enforcement actions, a number of
regulatory and legislative initiatives were introduced. The SEC has proposed and
adopted a number of rules under the Investment Company Act and the Investment
Advisers Act and is currently studying potential major revisions of other rules.
The SEC adopted rules requiring written compliance programs for registered
investment advisorsadvisers and registered investment companies and additional
disclosures regarding portfolio management and advisory contract renewals. In
addition, several bills were introduced in thea prior Congress that, if adopted,
would have amended the Investment Company Act. These proposals, if reintroduced
and enacted, or if adopted by the SEC, could have a substantial impact on the
regulation and operation of our registered and unregistered funds. For example,
certain of these proposals would, among other things, limit or eliminate Rule
12b-1 distribution fees, limit or prohibit third party soft dollar arrangements
and restrict the management of hedge funds and mutual funds by the same
portfolio manager.
In the coming months, the investment management industry is likely to continue
facing a high level of regulatory scrutiny and become subject to additional
rules designed to increase disclosure, tighten controls and reduce potential
conflicts of interest. In addition, the SEC has substantially increased its use
of focused inquiries in which it requests information from a number of fund
complexes regarding particular practices or provisions of the securities laws.
We participate in some of these inquiries in the normal course of our business.
Changes in laws, regulations and administrative practices by regulatory
authorities, and the associated compliance costs, have increased our cost
structure and could in the future have a material impact.
PERSONNEL
AtPersonnel
On March 1, 2005,2006, we had a full-time staff of approximately 188200 individuals, of
whom 7283 served in the portfolio management, research and trading areas, 7166
served in the marketing and shareholder servicing areas and 4551 served in the
administrative area. As part of our staff, we employ 1817 portfolio managers for
the Mutual Funds, Separate Accounts and Investment Partnerships. Additionally,
Westwood Management employs a team of 19 investment professionals who advise
five of the six portfolios of the Westwood family of funds.
28
ITEM 1A: RISK FACTORS
Business Risks
We caution the reader that the following business risks and those risks
described elsewhere in this report and in our other Securities and Exchange
Commission, or SEC, filings, could cause our actual results to differ materially
from expectations stated in our forward-looking statements.
Risks Related to Our Industry
Changes in laws or regulations or in governmental policies could limit the
sources and amounts of our revenues, increase our costs of doing business,
decrease our profitability and materially and adversely affect our business.
Our business is subject to extensive regulation in the United States, primarily
at the federal level, including regulation by the SEC under the Investment
Company Act of 1940, as amended, and the Investment Advisers Act of 1940, as
amended, by the Department of Labor under the Employee Retirement Income
Security Act of 1974, as amended, or ERISA, as well as regulation by the
National Association of Securities Dealers, Inc., or NASD, and state regulators.
The mutual funds managed by Gabelli Funds, LLC and Gabelli Advisers, Inc. are
registered with the SEC as investment companies under the Investment Company
Act. The Investment Advisers Act imposes numerous obligations on investment
advisors, including record-keeping, advertising and operating requirements,
disclosure obligations and prohibitions on fraudulent activities. The Investment
Company Act imposes similar obligations, as well as additional detailed
operational requirements, on registered investment companies and investment
advisors. Our failure to comply with applicable laws or regulations could result
in fines, censure, suspensions of personnel or other sanctions, including
revocation of our registration as an investment advisor or broker-dealer.
Industry regulations are designed to protect our clients and investors in our
funds and Ned Davis
Research,other third parties who deal with us and to ensure the integrity of
the financial markets. They are not designed to protect our stockholders.
Changes in laws or regulations or in governmental policies could limit the
sources and amounts of our revenues, increase our costs of doing business,
decrease our profitability and materially and adversely affect our business.
In response to scandals in the financial services industry regarding late
trading, market timing and selective disclosure of portfolio information,
various legislative and regulatory proposals are pending in or before, or have
been adopted by, the U.S. Congress, the legislatures in states in which we
conduct operations and the various regulatory agencies that supervise our
operations, including the SEC. These proposals, to the extent enacted or
adopted, could have a substantial impact on the regulation and operation of
registered funds, investment advisors and broker-dealers and could adversely
affect our assets under management, revenues and net income. Additionally, the
SEC, the NASD and other regulators, as well as Congress, are investigating
certain practices within our industry. These investigations could lead to
further legislative and regulatory proposals that, if enacted or adopted, could
adversely affect our business.
To the extent we are forced to compete on the basis of price, we may not be able
to maintain our current fee structure.
The investment management business is highly competitive and has relatively low
barriers to entry. To the extent we are forced to compete on the basis of price,
we may not be able to maintain our current fee structure. Although our
investment management fees vary from product to product, historically we have
competed primarily on the performance of our products and not on the level of
our investment management fees relative to those of our competitors. In recent
years, however, there has been a trend toward lower fees in the investment
management industry. In order to maintain our fee structure in a competitive
environment, we must be able to continue to provide clients with investment
returns and service that make investors willing to pay our fees. In addition,
the board of directors of each mutual fund managed by Gabelli Funds, LLC and
Gabelli Advisers, Inc. employs fourmust make certain findings as to the reasonableness of
its fees. We cannot be assured that we will succeed in providing investment
returns and service that will allow us to maintain our current fee structure.
Fee reductions on existing or future new business could have an adverse effect
on our profit margins and results of operations.
29
We derive a substantial portion of our revenues from contracts that
may be terminated on short notice.
A substantial majority of all of our revenues are derived from investment
management agreements and distribution arrangements. Investment management
agreements and distribution arrangements with the Mutual Funds are terminable
without penalty on 60 days' notice (subject to certain additional procedural
requirements in the case of termination by a Mutual Fund) and must be
specifically approved at least annually, as required by law. Such annual renewal
requires, among other things, approval by the disinterested members of each
Mutual Fund's board of directors or trustees. Investment advisory agreements
with the Separate Accounts are typically terminable by the client without
penalty on 30 days' notice or less. Any failure to renew or termination of a
significant number of these agreements or arrangements would have a material
adverse effect on us.
Investors in the open-end funds can redeem their investments in these funds at
any time without prior notice, which could adversely affect our earnings.
Open-end fund investors may redeem their investments in those funds at any time
without prior notice. Investors may reduce the aggregate amount of assets under
management for any number of reasons, including investment performance, changes
in prevailing interest rates and financial market performance. In a declining
stock market, the pace of mutual fund redemptions could accelerate. Poor
performance relative to other asset management firms tends to result in
decreased purchases of mutual fund shares and increased redemptions of mutual
fund shares. The redemption of investments in mutual funds managed by Gabelli
Funds, LLC or Gabelli Advisers, Inc. would adversely affect our revenues, which
are substantially dependent upon the assets under management in our funds. If
redemptions of investments in mutual funds caused our revenues to decline, it
could have a material adverse effect on our earnings.
Regulatory developments designed to increase oversight of hedge funds
may adversely affect our business.
The SEC has adopted a rule that requires registration of many hedge fund
managers. Registration under the rule requires hedge fund managers to adopt
certain compliance controls in order to ensure compliance with applicable
securities laws and permits increased oversight of hedge fund managers by the
SEC. Any regulations applicable to hedge funds that may be adopted pursuant to
this rule could have an impact on our operations and may adversely affect our
hedge fund business and decrease our future income.
A decline in the prices of securities would lead to a decline in our assets
under management, revenues and earnings.
Substantially all of our revenues are determined by the amount of our assets
under management. Under our investment advisory contracts with our clients, the
investment advisory fees we receive are typically based on the market value of
assets under management. In addition, we receive asset-based distribution and/or
service fees with respect to the open-end funds managed by Gabelli Funds, LLC or
Gabelli Advisers, Inc. over time pursuant to distribution plans adopted under
provisions of Rule 12b-1 under the Investment Company Act. Rule 12b-1 fees
typically are based on the market value of assets under management and
represented approximately 7.7% of our revenues for the year ended December 31,
2005 and 8.2% and 7.4% of our revenues for the years ended December 31, 2003 and
2004, respectively. Accordingly, a decline in the prices of securities generally
may cause our revenues and net income to decline by either causing the value of
our assets under management to decrease, which would result in lower investment
advisory and Rule 12b-1 fees, or causing our clients to withdraw funds in favor
of investments they perceive to offer greater opportunity or lower risk, which
would also result in lower fees. The securities markets are highly volatile, and
securities prices may increase or decrease for many reasons, including economic
and political events and acts of terrorism beyond our control. If a decline in
securities prices caused our revenues to decline, it could have a material
adverse effect on our earnings.
30
Catastrophic and unpredictable events could have a material adverse
effect on our business.
A terrorist attack, war, power failure, cyber-attack, natural disaster or other
catastrophic or unpredictable event could adversely affect our future revenues,
expenses and earnings by: interrupting our normal business operations;
sustaining employee casualties, including loss of our key executives; requiring
substantial expenditures and expenses to repair, replace and restore normal
business operations; and reducing investor confidence.
We have a disaster recovery plan to address certain contingencies but we cannot
be assured that this plan will be sufficient in responding or ameliorating the
effects of all disaster scenarios. If our employees or vendors we rely upon for
support in a catastrophic event are unable to respond adequately or in a timely
manner, we may lose clients resulting in a decrease in assets under management
with a material adverse effect on revenues and net income.
Risks Related to Our Business
Control by Mr. Gabelli of a majority of the combined voting power of
our common stock may give rise to conflicts of interests.
Since our initial public offering in 1999, Mr. Gabelli, through his majority
ownership of GGCP has beneficially owned all of our outstanding class B common
stock, representing approximately over 95% of the combined voting power of all
classes of our voting stock. As long as Mr. Gabelli indirectly beneficially owns
a majority of the combined voting power of our common stock, he will have the
ability to elect all of the members of our Board of Directors and thereby
control our management and affairs, including determinations with respect to
acquisitions, dispositions, borrowings, issuances of common stock or other
securities, and the declaration and payment of dividends on the common stock. In
addition, Mr. Gabelli will be able to determine the outcome of matters submitted
to a vote of our shareholders for approval and will be able to cause or prevent
a change in control of our company. As a result of Mr. Gabelli's control, none
of our agreements with Mr. Gabelli and other companies controlled by him have
been arrived at through "arm's-length" negotiations, although we believe that
the parties endeavor to implement market-based terms. There can be no assurance
that we would not have received more favorable terms from an unaffiliated party.
In order to minimize conflicts and potential competition with our investment
management business, in 1999 and as part of our initial public offering, Mr.
Gabelli entered into a written agreement to limit his activities outside of GBL.
Mr. Gabelli has undertaken that so long as he is associated with GBL or for a
period of five years from our initial public offering, whichever is longer, he
will not provide investment management services for compensation other than in
his capacity as an officer or employee of GBL except for (a) those investment
funds and accounts managed by Mr. Gabelli outside the company under performance
fee arrangements, but only to the extent that any such investment fund or
account consists solely of one or more of the persons who were investors as of
the date of the consummation of the initial public offering or such additional
investors to the extent that all revenues attributable to such additional
investors are paid to GBL, and (b) successor funds and accounts which serve no
investors other than those in the funds and accounts referred to in (a) or those
investors' successors, heirs, donees or immediate families, which funds and
accounts operate according to an investment style similar to such other accounts
or funds, which style we did not use at the time of our initial public offering,
and which are subject to performance fee arrangements. To the extent that such
activities are not prohibited under this agreement, Mr. Gabelli intends to
continue devoting time to activities outside GBL, including managing his own
assets and his family's assets, managing or controlling companies in other
industries and managing assets for other investors through the permissible
accounts, which are the funds and accounts managed outside GBL that are
permitted under the agreement between us and Mr. Gabelli (these assets were
approximately $71.3 million in February 1999 and approximately $98.3 million as
the end of 2005). These activities may present conflicts of interest or compete
with the company. Our Certificate of Incorporation expressly provides in general
that Mr. Gabelli, members of his immediate family who are officers or directors
of GBL and entities controlled by such persons have an obligation to present
corporate opportunities to us and resolve conflicts of interest through one of
the processes described in the Certificate of Incorporation, which include
independent director or independent shareholder approval.
31
We will not derive any income from activities outside GBL by Mr. Gabelli (except
as described above) or members of his immediate family who are officers or
directors of the company and may not be able to take advantage of business and
investment opportunities that could later prove to be beneficial to us and our
shareholders, either because such opportunities were not company opportunities
at the time they arose or because we did not pursue them. Where a conflict of
interest involves a transaction between Mr. Gabelli or members of his immediate
family who are officers or directors of GBL or their affiliates and the company,
there can be no assurance that we would not receive more favorable terms if it
were dealing with an unaffiliated party, although we will seek to achieve
market-based terms in all such transactions.
We depend on Mario J. Gabelli and other key personnel.
We are dependent on the efforts of Mr. Gabelli, our Chairman of the Board, Chief
Executive Officer and the primary portfolio manager for a significant majority
of our assets under management. The loss of Mr. Gabelli's services would have a
material adverse effect on us.
In addition to Mr. Gabelli, our future success depends to a substantial degree
on our ability to retain and attract other qualified personnel to conduct our
investment management business. The market for qualified portfolio managers is
extremely competitive and has grown more so in recent periods as the investment
management industry has experienced growth. We anticipate that it will be
necessary for us to add portfolio managers and investment analysts as we further
diversify our investment products and strategies. There can be no assurance,
however, that we will be successful in our efforts to recruit and retain the
required personnel. In addition, our investment professionals and senior
marketing personnel have direct contact with our Separate Account clients, which
can lead to strong client relationships. The loss of these personnel could
jeopardize our relationships with certain Separate Account clients, and result
in the loss of such accounts. The loss of key management professionals or the
inability to recruit and retain sufficient portfolio managers and marketing
personnel could have a material adverse effect on our business.
Potential adverse effects on our performance prospects from a decline in the
performance of the securities markets.
Our results of operations are affected by many economic factors, including the
performance of the securities markets. During the 1990s, unusually favorable and
sustained performance of the U.S. securities markets, and the U.S. equity
market, in particular, attracted substantial inflows of new investments in these
markets and has contributed to significant market appreciation which has, in
turn, led to an increase in our assets under management and revenues. At
December 31, 2005, approximately 97% of our assets under management were
invested in portfolios consisting primarily of equity securities. More recently,
the securities markets in general have experienced significant volatility, with
declines in value experienced during the years 2001 and 2002. Any decline in the
securities markets, in general, and the equity markets, in particular, could
reduce our assets under management and consequently reduce our revenues. In
addition, any such decline in the equity markets, failure of these markets to
sustain their prior levels of growth, or continued short-term volatility in
these markets could result in investors withdrawing from the equity markets or
decreasing their rate of investment, either of which would be likely to
adversely affect us. From time to time, a relatively high proportion of the
assets we manage may be concentrated in particular industry sectors. A general
decline in the performance of securities in those industry sectors could have an
adverse effect on our assets under management and revenues.
Possibility of losses associated with proprietary investment activities.
We may from time to time make or maintain large proprietary investment positions
in securities. Market fluctuations and other factors may result in substantial
losses in our proprietary accounts which could reduce our ability or willingness
to make new investments or impair our credit ratings.
32
Future investment performance could reduce revenues and other income.
Success in the investment management and mutual fund businesses is dependent on
investment performance as well as distribution and client servicing. Good
performance generally stimulates sales of our investment products and tends to
keep withdrawals and redemptions low, which generates higher management fees
(which are based on the amount of assets under management). Conversely,
relatively poor performance tends to result in decreased sales, increased
withdrawals and redemptions in the case of the open-end Mutual Funds, and in the
loss of Separate Accounts, with corresponding decreases in revenues to us. Many
analysts of the mutual fund industry believe that investment performance is the
most important factor for the growth of no-load Mutual Funds, such as those we
offer. Failure of our investment products to perform well could, therefore, have
a material adverse effect on us.
Loss of significant Separate Accounts could affect our revenues.
We had approximately 1,800 Separate Accounts as of December 31, 2005, of which
the ten largest accounts generated approximately 23% of our total revenues
during the year ended December 31, 2005. Loss of these accounts for any reason
would have an adverse effect on our revenues. Notwithstanding performance, we
have from time to time lost large Separate Accounts as a result of corporate
mergers and restructurings, and we could continue to lose accounts under these
or other circumstances.
Our sources of revenue are subject to termination on short notice.
A substantial majority of all of our revenues are derived from investment
management agreements and distribution arrangements. Investment management
agreements and distribution arrangements with the Mutual Funds are terminable
without penalty on 60 days' notice (subject to certain additional procedural
requirements in the case of termination by a Mutual Fund) and must be
specifically approved at least annually, as required by law. Such annual renewal
requires, among other things, approval by the disinterested members of each
Mutual Fund's board of directors or trustees. Investment advisory agreements
with the Separate Accounts are typically terminable by the client without
penalty on 30 days' notice or less. Any failure to renew or termination of a
significant number of these agreements or arrangements would have a material
adverse effect on us.
We rely on third-party distribution programs.
We have since 1996 experienced significant growth in sales of our open-end
Mutual Funds through Third-Party Distribution Programs, which are programs
sponsored by third-party intermediaries that offer their mutual fund customers a
variety of competing products and administrative services. Most of the sales
growth from our Third-Party Distribution Programs is from programs with no
transaction fees payable by the customer, which we refer to as NTF Programs.
Approximately $1.5 billion of our assets under management in the open-end Mutual
Funds as of December 31, 2005 were obtained through NTF Programs. The cost of
participating in Third-Party Distribution Programs is higher than our direct
distribution costs, and it is anticipated that the cost of Third-Party
Distribution Programs will increase in the future. Any increase would be likely
to have an adverse effect on our profit margins and results of operations. In
addition, there can be no assurance that the Third-Party Distribution Programs
will continue to distribute the Mutual Funds. At December 31, 2005,
approximately 93.0% of the NTF Program net assets in the Gabelli and Westwood
families of funds are attributable to two NTF Programs. The decision by these
Third-Party Distribution Programs to discontinue distribution of the Mutual
Funds, or a decision by us to withdraw one or more of the Mutual Funds from the
programs, could have an adverse effect on our growth of assets under management.
Possibility of losses associated with underwriting, trading and market-making
activities.
Our underwriting, trading and market-making activities are primarily conducted
through our subsidiary, Gabelli & Company, Inc., both as principal and agent.
Such activities subject our capital to significant risks of loss. The risks of
loss include those resulting from ownership of securities, extension of credit,
leverage, liquidity, counterparty failure to meet commitments, client fraud,
employee errors, misconduct and fraud (including unauthorized transactions by
traders), failures in connection with the processing of securities transactions
and litigation. We have procedures and internal controls to address such risks
but there can be no assurance that these procedures and controls will prevent
losses from occurring.
33
We may have liability as a general partner or otherwise with respect to our
alternative investment products.
Certain of our subsidiaries act as general partner for investment partnerships,
including arbitrage, event-driven long/short, sector focused and merchant
banking limited partnerships. As a general partner of these partnerships, we may
be held liable for the partnerships' liabilities in excess of their ability to
pay such liabilities. In addition, in certain circumstances, we may be liable as
a control person for the acts of our investment partnerships. As of December 31,
2005, our assets under management included approximately $634 million in
investment partnerships. A substantial adverse judgment or other liability with
respect to our investment partnerships could have a material adverse effect on
us.
Operational risks may disrupt our businesses, result in regulatory action
against us or limit our growth.
We face operational risk arising from errors made in the execution, confirmation
or settlement of transactions or from transactions not being properly recorded,
evaluated or accounted for. Our business is highly dependent on our ability to
process, on a daily basis, transactions across markets in an efficient and
accurate manner. Consequently, we rely heavily on our financial, accounting and
other data processing systems. If any of these systems do not operate properly
or are disabled, we could suffer financial loss, a disruption of our businesses,
liability to clients, regulatory intervention or reputational damage.
Dependence on information systems.
We operate in an industry that is highly dependent on its information systems
and technology. We outsource a significant portion of our information systems
operations to third parties who are responsible for providing the management,
maintenance and updating of such systems. There can be no assurance, however,
that our information systems and technology will continue to be able to
accommodate our growth, or that the cost of maintaining such outsourcing
arrangements will not increase from its current level. Such a failure to
accommodate growth, or an increase in costs related to these information
systems, could have a material adverse effect on us.
We may not be able to refinance or have the funds necessary to repurchase our
existing indebtedness.
On August 10, 2001, we and certain of our affiliates entered into a note
purchase agreement with Cascade Investment, L.L.C., pursuant to which Cascade
purchased $100 million in principal amount of a convertible promissory note.
Pursuant to the terms of the Ned Davis Research Asset Allocation Fund.
24note, Cascade may require us, or upon a change in
control or Mr. Gabelli ceasing to provide our predominant executive leadership,
to repurchase the note (i.e., put option) at par plus accrued and unpaid
interest on the note. In March 2005, we announced an agreement with Cascade to
amend the terms of the note. The new terms extend the exercise date of Cascade's
put option to September 15, 2006, reduce the principal of the convertible note
to $50 million, effective April 1, 2005, and remove limitations on the issuance
of additional debt. If Cascade exercises its right under the note to require us
to repurchase the note, we may not be able to obtain new financing on similar
terms to the note and may not have sufficient funds, or we may not be able to
arrange financing on acceptable terms, to pay the repurchase price for the note.
If we could not obtain sufficient cash to repurchase the note, we would be in
default on our obligation under the note purchase agreement.
Our 5.22% senior notes, consisting of approximately $82.3 million of principal,
are due on February 17, 2007. We may not be able to obtain new financing on
similar terms to the note and may not have sufficient funds, or we may not be
able to arrange financing on acceptable terms, to pay the repurchase price for
the note.
34
Our credit ratings affect our borrowing costs.
Our borrowing costs and our access to the debt capital markets depend
significantly on our credit ratings. A reduction in our credit ratings could
increase our borrowing costs and limit our access to the capital markets.
We face exposure to litigation within our business.
The volume of litigation against financial services firms and the amount of
damages claimed has increased over the past several years. The types of claims
that we may face are varied. For example, we may face claims against us for
purchasing securities that are inconsistent with a client's investment
objectives or guidelines, in connection with the operation of the Mutual Funds
or arising from an employment dispute. The risk of litigation is difficult to
assess or quantify, and may occur years after the activities or events at issue.
Even if we prevail in a legal action brought against us, the costs alone of
defending against the action could have a material adverse effect on us.
Compliance failures and changes in regulation could adversely affect us.
Our investment management activities are subject to client guidelines and our
Mutual Fund business involves compliance with numerous investment, asset
valuation, distribution and tax requirements. A failure to adhere to these
guidelines or satisfy these requirements could result in losses which could be
recovered by the client from us in certain circumstances. Although we have
installed procedures and utilize the services of experienced administrators,
accountants and lawyers to assist us in adhering to these guidelines and
satisfying these requirements, and maintain insurance to protect ourselves in
the case of client losses, there can be no assurance that such precautions or
insurance will protect us from potential liabilities.
Our businesses are subject to extensive regulation in the United States,
including by the SEC and the NASD. We are also subject to the laws of non-U.S.
jurisdictions and non-U.S. regulatory agencies or bodies. Our failure to comply
with applicable laws or regulations could result in fines, suspensions of
personnel or other sanctions, including revocation of our registration or any of
our subsidiaries as an investment adviser or broker-dealer. Changes in laws or
regulations or in governmental policies could have a material adverse effect on
us.
Our reputation is critical to our success.
Our reputation is critical to maintaining and developing relationships with our
clients, Mutual Fund shareholders and third-party intermediaries. In recent
years, there have been a number of well publicized cases involving fraud,
conflicts of interest or other misconduct by individuals in the financial
services industry. Misconduct by our staff, or even unsubstantiated allegations,
could result not only in direct financial harm but also harm to our reputation,
causing injury to the value of our brands and our ability to retain or attract
assets under management. In addition, in certain circumstances, misconduct on
the part of our clients or other parties could damage our reputation. Harm to
our reputation could have a material adverse effect on us.
We face strong competition from numerous and sometimes larger companies.
We compete with numerous investment management companies, stock brokerage and
investment banking firms, insurance companies, banks, savings and loan
associations and other financial institutions. Continuing consolidation in the
financial services industry has created stronger competitors with greater
financial resources and broader distribution channels than our own.
Additionally, competing securities dealers whom we rely upon to distribute our
mutual funds also sell their own proprietary funds and investment products,
which could limit the distribution of our investment products. To the extent
that existing or potential customers, including securities dealers, decide to
invest in or distribute the products of our competitors, the sales of our
products as well as our market share, revenues and net income could decline.
35
Fee pressures could reduce our profit margins.
There has been a trend toward lower fees in some segments of the investment
management industry. In order for us to maintain our fee structure in a
competitive environment, we must be able to provide clients with investment
returns and service that will encourage them to be willing to pay such fees.
Accordingly, there can be no assurance that we will be able to maintain our
current fee structure. Fee reductions on existing or future new business could
have an adverse impact on our profit margins and results of operations.
Risks Related to the Company
The disparity in the voting rights among the classes of shares may have a
potential adverse effect on the price of our class A common stock.
The holders of class A common stock and class B common stock have identical
rights except that (i) holders of class A common stock are entitled to one vote
per share, while holders of class B common stock are entitled to ten votes per
share on all matters to be voted on by shareholders in general, and (ii) holders
of class A common stock are not eligible to vote on matters relating exclusively
to class B common stock and vice versa. The differential in voting rights and
the ability of our company to issue additional class B common stock could
adversely affect the value of the class A common stock to the extent the
investors, or any potential future purchaser of our company, view the superior
voting rights of the class B common stock to have value.
Future sales of our class A common stock in the public market or sales or
distributions of our class B commons stock could lower our stock price, and any
additional capital raised by us through the sale of equity or convertible
securities may dilute our stockholders ownership in us.
We may sell additional shares of class A common stock in subsequent public
offerings. We also may issue additional shares of class A common stock or
convertible debt securities. As of December 31, 2005, we had 6,414,517
outstanding shares of class A common stock.
No prediction can be made as to the effect, if any, that future sales or
distributions of class B common stock owned by GGCP will have on the market
price of the class A common stock prevailing from time to time. Sales or
distributions of substantial amounts of class A or class B common stock , or the
perception that such sales or distributions could occur, could adversely affect
the prevailing market price for the class A common stock.
ITEM 1B: UNRESOLVED STAFF COMMENTS
None.
36
ITEM 2: PROPERTIES
At December 31, 2004,2005, we leased our principal offices which consisted of a
single 60,000 square foot building located at 401 Theodore Fremd Avenue, Rye,
New York. This building was leased in December 1997 (prior to our 1999 IPO) from
an entity controlled by members of Mr. Gabelli's immediate family, and
approximately 9,000 square feet are currently subleased to other tenants. We
receive rental payments under the sublease agreements, which totaled
approximately $282,000$281,000 in 20042005 and were used to offset operating expenses
incurred for the property. The lease provides that all operating expenses
related to the property, which are estimated at $675,000$720,000 annually, are to be
paid by us.
We have also entered into leases for office space in both the U.S. and overseas
principally for portfolio management, research, sales and marketing personnel.
These offices are generally less than 4,000 square feet and leased for periods
of five years or less.
ITEM 3: LEGAL PROCEEDINGS
From time to time, we are a defendant in various lawsuits incidental to our
business. We do not believe that the outcome of any current litigation will have
a material effect on our financial condition.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders during the fourth
quarter of 2004.2005.
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY, AND RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Our shares of class A common stock have been traded on the New York Stock
Exchange (NYSE)("NYSE") under the symbol GBL since our initial public offering on
February 11, 1999. Prior to that, there was no public market for our common
stock.
As of March 1, 2005,2006, there were 7366 class A common stockholders of record and 3
class B common stockholders of record (GGCP, Inc., formerly Gabelli Group
Capital Partners, Inc., and two of its wholly-owned subsidiaries). These figures
do not include stockholders with shares held under beneficial ownership in
nominee name, which are estimated to be approximately 5,000.2,700.
The following table sets forth the high and low prices of our class A common
stock for each quarter of 20042005 and 20032004 as reported by the New York Stock
Exchange.
QUARTER ENDED HIGH LOW
------------- ---- ---NYSE.
Quarter Ended High Low
March 31, 2005 $ 49.20 $ 43.60
June 30, 2005 $ 46.03 $ 38.60
September 30, 2005 $ 48.55 $ 41.88
December 31, 2005 $ 47.88 $ 42.23
March 31, 2004 $ 45.00 $ 38.49
June 30, 2004 $ 42.97 $ 38.30
September 30, 2004 $ 43.60 $ 37.22
December 31, 2004 $ 50.50 $ 42.55
March 31, 2003 $ 33.50 $ 25.60
June 30, 2003 $ 36.24 $ 26.25
September 30, 2003 $ 39.00 $ 34.61
December 31, 2003 $ 40.80 $ 33.50
We paid our first dividend, a $.02 per share dividend, on December 15, 2003 to
our class A shareholders of record December 1, 2003. Our class B shareholders
elected to waive receipt of this dividend.
2537
WeIn 2004, we paid $1.16 per share in dividends to our common shareholders in 2004.shareholders. This
included three quarterly dividends of $0.02 per share on June 30, 2004,
September 30, 2004 and December 28, 2004 to all shareholders of record on June
15, 2004, September 15, 2004 and December 14, 2004, respectively. We also paid
two special dividends, a $0.10 per share dividend on June 30, 2004 to all
shareholders of record on June 15, 2004 and a $1.00 per share dividend on
November 30, 2004 to class A shareholders of record on November 15, 2004 and on
December 23, 2004 to our class B shareholders of record on that date.
Our BoardWe paid $0.69 per share in dividends to our common shareholders in 2005. This
included three quarterly dividends of Directors$0.02 per share on March 28, 2005, June
28, 2005, September 28, 2005 to all shareholders of record on March 14, 2005,
June 15, 2005 and September 15, 2005, respectively and a quarterly dividend of
$0.03 per share on December 28, 2005 to all shareholders of record on December
15, 2005. We also declaredpaid a special dividend of $0.60 per share in November
2004 which was payable on January 18, 2005
to all shareholders of record on January 3, 2005.
The information set forth under the caption "Equity Compensation Plan
Information" in the Proxy Statement is incorporated herein by reference.
ITEM 5(C): CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
PURCHASERS
The following table provides information with respect to the shares of our class
A common stock we repurchased during the three months ended December 31, 2004:2005:
(d) Maximum (c)Total Number of
(c) Total Number of Shares (or
(b)Average Price Shares Repurchased Approximate Dollar
(a)Total Number Paid Per Share,(b) Average Price as Part of Publicly Value) That May Yet Be
of Shares Paid Per Share, net of Announced Plans Beor Purchased Under the
Period Repurchased Commissions or Programs the Plans or Programs
------------------------- ------------------- ------------ -------------- ------------------- ---------------------
GBL----------------------- ---------------------- ----------------------- -----
10/01/0405 - 10/31/04 184,10005 247,300 $ 44.65 184,100 $ 62,736,06544.61 247,300 662,293
11/01/0405 - 11/30/04 720,950 46.89 720,95005 29,700 $ 53,929,32244.56 29,700 1,132,593
12/01/0405 - 12/31/04 118,500 49.24 118,500 1,071,658 (a)
------------ -------------------05 48,900 $ 45.27 48,900 1,083,693
------ ------
Totals 1,023,550 1,023,550
============ ===================325,900 325,900
======= =======
In October 2004,November 2005, we announced an increase in the number of shares of GBL to be
repurchased of 1 million500,000 shares. In November 2004,
we announced an increase in the dollar value of GBL shares
available to repurchase under ourOur stock repurchase program of
$25.0 million to be used for an accelerated stock repurchase
program ("ASR"). Our stock repurchase programs areis not subject to an
expiration dates.
We made no repurchases of GBL.I (mandatory convertible
securities) during the three months ended December 31, 2004.
(a) Authorization for the period 12/1/04 through 12/31/04 is denoted in
shares.
26date.
38
ITEM 6: SELECTED FINANCIAL DATA
GENERALGeneral
The selected historical financial data presented below has been derived in part
from, and should be read in conjunction with Management's Discussion and
Analysis included in Item 7 and the audited Consolidated Financial Statements of
Gabelli Asset ManagementGAMCO Investors, Inc. and subsidiaries and related notes included in Item 8 of
this report.
YEAR ENDED DECEMBER
Year Ended December 31,
(In thousands, except per share data)
2000 2001 2002 2003 2004 --------- --------- --------- --------- ---------
INCOME STATEMENT DATA2005
---------- ---------- ---------- ---------- -------
Income Statement Data
Revenues:
Investment advisory and incentive fees............. $ 190,200fees $ 186,124 $ 177,077 $ 176,943 $ 219,939 $ 219,495
Commission revenue........... 16,805revenue 15,939 13,883 12,863 15,573 12,195
Distribution fees and other income............... 26,913income 22,351 18,999 17,631 19,651 20,673
--------- --------- --------- --------- ---------
Total revenues............. 233,918revenues 224,414 209,959 207,437 255,163 252,363
--------- --------- --------- --------- ---------
Expenses:
Compensation costs........... 97,055 85,754 80,387 89,169 104,091costs 85,198 79,826 88,339 103,276 106,238
Management fee............... 11,296fees 11,325 9,533 9,002 11,017 11,356
Distribution costs 16,189 16,164 16,510 20,347 21,512
Other operating expenses................... 36,653 33,887 30,377 34,552 40,987expenses 18,254 14,774 18,872 21,455 26,665
--------- --------- --------- --------- -----------------
Total expenses............. 145,004expenses 130,966 120,297 132,723 156,095 165,771
--------- --------- --------- --------- ---------
Operating income............... 88,914income 93,448 89,662 74,714 99,068 86,592
--------- --------- --------- --------- ---------
Other income (expense), net:
Net gain from investments.... 6,716investments 5,187 1,353 15,610 5,627 10,912
Interest and dividend income..................... 9,745income 9,461 6,757 5,530 10,481 18,483
Interest expense............. (3,714)expense (6,174) (11,977) (14,838) (16,027) (13,782)
---------- ---------- --------- --------- ------------------- ---------- ----------
Total other income (expense), net........... 12,747net. 8,474 (3,867) 6,302 81 15,613
--------- ------------------- --------- --------- ---------
Income before income taxes and minority
interest........ 101,661interest 101,922 85,795 81,016 99,149 102,205
Income taxes................. 40,257taxes 39,342 32,259 30,339 36,097 38,327
Minority interest............ 3,409interest 1,482 224 833 493 487
--------- --------- --------- --------- ---------
Net income..................... $ 57,995income $ 61,098 $ 53,312 $ 49,844 $ 62,559 $ 63,391
========= ========= ========= ========= =========
Net income per share:
Basic........................ $ 1.96Basic $ 2.06 $ 1.77 $ 1.66 $ 2.11 $ 2.13
========== ========== ========= ========= =========
========= =========
Diluted...................... $ 1.94Diluted $ 2.03 $ 1.76 $ 1.65 $ 2.06 ========= =========$ 2.09
========== ========== ========= ========= =========
Weighted average shares outstanding:
Basic........................ 29,575Basic 29,666 30,092 30,018 29,673 29,805
========= ========= ========= ========= =========
Diluted...................... 29,914Diluted 30,783 30,302 32,081 31,804 31,155
========= ========= ========= ========= =========
Actual shares outstanding at
December 31st............. 29,51931st 29,828 29,881 30,050 28,837 29,544
========= ========= ========= ========= =========
Dividends declared $ - $ - $ 0.02 $ 1.76 $ 0.09
========= ========= ========= ========= =========
2739
DECEMBER 31,
2000 2001 2002 2003 2004
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT ASSETS UNDER MANAGEMENT)
BALANCE SHEET DATADecember 31,
2001 2002 2003 2004 2005
---------- ---------- ---------- ---------- -------
(In thousands, except assets under management)
Balance Sheet Data
Total assets................. $ 317,804 $ 486,394 $ 582,731 $ 736,511 $ 698,972assets $486,394 $582,731 $736,511 $698,972 $721,094
Total liabilities and minority interest.......... 115,607interests 211,097 260,938 358,200 364,094 296,965
--------- --------- --------- --------- ---------
Total stockholders' equity... $ 202,197 $ 275,297 $ 321,793 $ 378,311 $ 334,878
========= ========= ========= ========= =========
ASSETS UNDER MANAGEMENT (UNAUDITED)equity $275,297 $321,793 $378,311 $334,878 $424,129
======== ======== ======== ======== ========
Assets Under Management (unaudited)
(at year end, in millions):
Separate Accounts $ 11,001 $ 12,233 $ 10,603 $ 13,535 $ 13,975 $ 12,466
Mutual Funds 12,113 11,955 10,068 13,332 13,870 13,698
Investment Partnerships 437 573 578 692 814 634
--------- --------- --------- --------- ---------
Total $ 23,551 $ 24,761 $ 21,249 $ 27,559 $ 28,659 ========= ========= ========= ========= =========$ 26,798
========== ========== ========== ========== ==========
2840
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements and the notes thereto included in Item 8 to this report.
INTRODUCTIONIntroduction
Our principal business is providing investment advisory services to mutual
funds, institutional and high net worth investors, and investment partnerships,
principally in the United States. Through Gabelli & Company, Inc., we provide
institutional research services to institutional clients and investment
partnerships. We generally manage assets on a discretionary basis and invest in
a variety of U.S. and international securities through various investment
styles.
Our revenues are highly correlated to the level of assets under management,
which are directly influenced by the value of the overall equity markets. Assets
under management can also increase through acquisitions and by the addition of
new accounts. Since various equity products have different fees, changes in our
business mix may also affect revenues. At times, the performance of our equity
products may differ markedly from popular market indices, and this can also
impact our revenues. It is our belief that general stock market trends will have
the greatest impact on our level of assets under management and hence, revenues.
This becomes increasingly likely as the base of assets grows.
ForIn 2005, U.S. large company stocks, as measured by the 78-yearS&P 500 produced a total
return of 4.91%. This marked the third straight year of positive returns for
large company stocks after a three year stretch of negative returns (2000-2002).
The 2005 return was well below the average total return of 10.36% for the
79-year period ended December 31, 2004, stocks provided an average total
return of about 10.4%,2005, according to Ibbotson Associates.
Management believes the market will continue to exhibit volatility in line with
historical experience. Over the next 10 years, our model for the U.S. stock
market envisions average annual returns of 7% to 9% from a combination of
nominal gross world product growth, stable profit margins and rising dividend
payout ratios, with an offsetting drag on P/E multiples from rising interest
rates. We expect that an increase in tax rates or inflation rates would reduce
stock market returns. Similarly, increased regulation of the mutual fund
industry, combined with growing fee pressures and our willingness to participate
in certain NTF programs, may impair our profit margins. As discussed in the Regulation section in Item 1 of this report, the SEC has
proposed and adopted a number of rules under the Investment Company Act and the
Investment Advisers Act and is currently studying potential major revisions of
other rules. In addition, several bills were introduced in the prior Congress
that, if adopted, would have amended the Investment Company Act. These
proposals, if reintroduced and enacted, or if adopted by the SEC, could have a
substantial impact on the regulation and operation of our registered and
unregistered funds. For example, certain of these proposals would, among other
things, limit or eliminate Rule 12b-1 distribution fees, limit or prohibit third
party soft dollar arrangements and restrict the management of hedge funds and
mutual funds by the same portfolio manager. Changeschanges in
laws, regulations, and administrative practices by regulatory authorities, and
the associated compliance costs, have increased our cost structure and could in
the future have a material impact.
OVERVIEWOverview
Income Statement
Investment advisory and incentive fees, which are based on the amount and
composition of assets under management in our Mutual Funds, Separate Accounts
and Investment Partnerships, represent our largest source of revenues. In
addition to the general level and trends of the stock market, growth in revenues
depends on good investment performance, which influences the value of existing
assets under management as well as contributing to higher investment and lower
redemption rates and facilitating the ability to attract additional investors
while maintaining current fee levels. Growth in assets under management is also
dependent on being able to access various distribution channels, which is
usually based on several factors, including performance and service.
Historically, we have depended primarily on direct distribution of our products
and services, but since 1995 have participated in Third-Party Distribution
Programs, including NTF Programs. A majority of our cash inflows to mutual fund
products have come through these channels since 1998. Attempts by some NTF
Program sponsors to increase their service or distribution fees may result in
several of our Mutual Funds being withdrawn from such programs. The effects of
this on our future financial results cannot be determined at this time, but
could be material. In recent years, we have been engaged to act as a sub-advisor
for other much larger financial services companies with much larger sales
distribution organizations. A substantial portion of the cash flows into our
Separate Accounts has come through this channel. These sub-advisory clients are
subject to business combinations that may result in the termination of the
relationship. The loss of a sub-advisory relationship could have a significant
impact on our financial results in the future.
41
Advisory fees from the Mutual Fundsopen-end mutual funds, closed-end funds and sub-advisory
accounts are computed daily or weekly advisorybased on average net assets. Advisory fees
from the Separate Accounts are generally computed quarterly based on account
values as of the end of the preceding quarter and accrued monthly. Management
fees from Investment Partnership fees are computed either monthly or quarterly.quarterly
and accrued monthly. These revenues vary depending upon the level of sales
compared with redemptions, financial market conditions and the fee structure for
assets under management. Revenues derived from the equity-oriented portfolios
generally have higher management fee rates than fixed income portfolios.
Revenues from 29
Investment Partnerships also generally include an incentive
allocation or fee of 20% of the economic profit, as defined. The incentive
allocation is generally based on the absolute gain in a portfolio and fees are
recordedis
recognized as earned with the related compensation expense accrued. The
incentive allocation and fees and related compensation expense may increase or
decrease during the year depending upon the performance of the underlying
investment partnerships. We also receive fulcrum fees from certain institutional
separate accounts, which are based upon meeting or exceeding certain contractual investment return
thresholds over a stipulated period of time.specific benchmark
index or indices. These fees are finalized andrecognized at the end of the stipulated
contract period for the respective account. Management fees on closed-end
preferred shares are received whenat year-end if the contract measurement period is completed. Fees ontotal return to common
shareholders of the closed-end fund for the calendar year exceeds the dividend
rate of the preferred shares in our closed-end fundsshares. These fees are onlyrecognized as earned ifduring the
fund's total
return is greater than a specified total return.year. A total of $873 million$1.1 billion of assets in closed-end funds are subject to such
arrangements.
Commission revenues consist of brokerage commissions derived from securities
transactions executed on an agency basis on behalf of mutual funds,
institutional and high net worth clients as well as investment banking revenue,
which consists of underwriting profits, selling concessions and management fees
associated with underwriting activities. Commission revenues vary directly with
account trading activity and new account generation. Investment banking revenues
are directly impacted by the overall market conditions, which affect the number
of public offerings which may take place.
Distribution fees and other income primarily include distribution fee revenue in
accordance with Rule 12b-1 ("12b-1") of the Investment Company Act of 1940, as
amended (the "Investment Company Act"), along with sales charges and
underwriting fees associated with the sale of the Mutual Funds plus other
revenues. Distribution fees fluctuate based on the level of assets under
management and the amount and type of Mutual Funds sold directly by Gabelli &
Company and through various distribution channels.
As discussed in the
Regulation section in Item 1 of this report, several bills were introduced in
the prior Congress that, if adopted, would, among other things, pose a risk to
Gabelli & Company's future distribution fee revenue as 12b-1 fees may be limited
or eliminated.
Compensation costs include variable and fixed compensation and related expenses
paid to officers, portfolio managers, sales, trading, research and all other
professional staff. Other operating expenses include marketing, product
distribution and promotion costs, clearing charges and fees for Gabelli &
Company's brokerage operation, and other general and administrative operating
costs.
Other Income and Expenses include net gain from investments (which includes both
realized and unrealized gains), interest and dividend income, and interest
expense. Net gains from investments are derived from our proprietary investment
portfolio consisting of various public and private investments.
Minority interest represents the share of net income attributable to the
minority stockholders, as reported on a separate company basis, of our
consolidated majority-owned subsidiaries.
ASSET HIGHLIGHTSBalance Sheet
We ended 2005 with $672.4 million in cash and investments in securities. Our
debt of $232.3 million consists of $100 million of 5.5% senior notes due May
2013, a $50 million 5% convertible note due August 2011 (putable to us in
September 2006), and $82.3 million of 5.22% senior notes due February 2007
issued in connection with our mandatory convertible securities.
Stockholders' equity was $424.1 million or $14.36 per share on December 31, 2005
compared with $334.9 million or $11.61 per share on December 31, 2004. The
increase in stockholder's equity from the end of 2004 is principally related to
the issuance of 1,517,483 shares of Class A common stock at $46.50 per share in
connection with the settlement of the purchase contracts issued pursuant to our
mandatory convertible securities in February 2005.
In June 2005, we filed a "shelf" registration statement on Form S-3. The shelf
is currently being reviewed by the staff of the Securities and Exchange
Commission. If and when declared effective, the shelf process will provide us
with opportunistic flexibility to sell any combination of senior and subordinate
debt securities, convertible debt securities and equity securities (including
common and preferred securities) up to a total amount of $400 million. This
authorization is in addition to the remaining $120 million available under our
"shelf" registration filed in 2001.
42
Our liquid balance sheet coupled with an investment grade credit rating provides
access to financial markets and the flexibility to opportunistically add to our
business, repurchase our stock and consider other strategic initiatives. Our
challenge remains converting our liquidity to growing operating income.
Our primary goal is to use our liquid resources to opportunistically and
strategically convert our interest income to operating income. While this goal
is our priority, if opportunities are not present with what we consider a margin
of safety, we will consider other ways to return capital to our shareholders
including stock repurchase and dividends.
Asset Highlights
We reported assets under management as follows (dollars in millions):
% Inc(Dec)
2000 2001 2002 2003 2004 2004/2003 % CAGR (a)
------- ------- ------- ------- ------- --------- ----------
% Inc(Dec)
2001 2002 2003 2004 2005 2005/2004 % CAGR (a)
---- ---- ---- ---- ---- ---------- ----------
Mutual Funds
Open-End $ 8,979 $ 8,334 $ 6,482 $ 8,088 $ 8,029 (0.7%$ 7,888 (1.8%) (1.2%(2.5%)
Closed-End 1,709 1,831 1,609 3,530 4,342 23.0 17.45,075 16.9 24.3
Fixed Income 1,425 1,790 1,977 1,714 1,499 735 (51.0) (12.5)
4.9
------- ------- ------- ------- ----------------- --------- --------- --------- ---------
Total Mutual Funds 12,113 11,955 10,068 13,332 13,870 4.0 3.613,698 (1.2) 2.5
Institutional & Separate Accounts
Equities 10,142 11,513 9,990 13,031 13,587 4.3 7.712,382 (8.9) 4.1
Fixed Income 859 720 613 504 388 (23.0) (11.0)
------- ------- ------- ------- -------84 (78.4) (37.2)
---------- --------- --------- --------- ---------
Total Institutional & Separate Accounts 11,001 12,233 10,603 13,535 13,975 3.3 6.812,466 (10.8) 2.5
Investment Partnerships 437 573 578 692 814 17.6 28.8
------- ------- ------- ------- -------634 (22.1) 7.7
---------- --------- --------- --------- ---------
Total Assets Under Management $23,551 $24,761 $21,249 $27,559 $28,659 4.0 5.5
======= ======= ======= ======= =======$ 24,761 $ 21,249 $ 27,559 $ 28,659 $ 26,798 (6.5) 2.6
========== ========= ========= ========= =========
(a) the % CAGR is computed for the five year period January 1, 2001 through December 31, 2005
(a) the % CAGR is computed for the five year period January 1, 2000 through
December 31, 2004
30
Net outflows in 20042005 totaled $2.3 billion compared to a net outflow of $1.7
billion compared toin 2004 and a net inflow of $1.1 billion in 2003 and a net outflow of $61 million in 2002. The 2002 cash flows do
not include $248 million in assets under management added through our
affiliation with Woodland Partners LLC in November 2002.2003.
Total net outflows from equities products were approximately $1.3$1.2 billion in
2004 with the loss of a sub-advised account in November 2004 being the most
significant contribution to net outflows of approximately $0.9 billion of
assets.2005. Total net outflows from fixed income products were $353 million$1.1 billion in 2004.2005.
For the three years ended December 31, 2002, 2003, 2004 and 20042005 our net cash inflows
and outflows by product line were as follows (in millions):
2002
2003 2004 2005
---- ---- ----
Mutual Funds
Equities $ 1,364 $ (261) $ 167
Fixed Income (276) (228) (788)
------- --------- ---------
Total Mutual Funds 1,088 (489) (621)
------- --------- ---------
Institutional & HNW Separate Accounts
Equities 52 (1,178) (1,155)
Fixed Income (115) (125) (310)
------- --------- ---------
Total Institutional & HNW Separate Accounts (63) (1,303) (1,465)
------- --------- ---------
Investment Partnerships
Equities 54 92 (208)
Fixed Income - - -
------- --------- ---------
Total Investment Partnerships 54 92 (208)
------- --------- ---------
Total Equities 1,470 (1,347) (1,196)
Total Fixed Income (391) (353) (1,098)
------- --------- ---------
Total Net Cash In (Out) Flows $ 1,079 $ (1,700) $ (2,294)
======= ========= =========
43
For the three years ended December 31, 2003, 2004 -------- -------- --------and 2005 our net appreciation
and depreciation by product line were as follows (in millions):
2003 2004 2005
---- ---- ----
Mutual Funds
Equities $ 2,163 $ 1,015 $ 425
Fixed Income 13 12 25
------- ------- -----
Total Mutual Funds 2,176 1,027 450
------- ------- -----
Institutional & HNW Separate Accounts
Equities 2,989 1,734 (51)
Fixed Income 6 9 6
------- ------- -----
Total Institutional & HNW Separate Accounts 2,995 1,743 (45)
------- ------- -----
Investment Partnerships
Equities 60 30 28
Fixed Income - - -
------- ------- -----
Total Investment Partnerships 60 30 28
------- ------- -----
Total Equities 5,212 2,779 402
Total Fixed Income 19 21 31
------- ------- -----
Total Net Appreciation $ 5,231 $ 2,800 $ 433
======= ======= =====
44
Operating Results for the Year Ended December 31, 2005 as Compared to the Year
Ended December 31, 2004
Revenues
Total revenues were $252.4 million in 2005, $2.8 million or 1.1% lower than the
total revenues of $255.2 million in 2004. The decrease in total revenues by
revenue component was as follows (in millions):
Increase (decrease)
-------------------
2004 2005 $ %
------ ------ ------- ------
Investment advisory and incentive fees $219.9 $219.5 ($ 0.4) (0.2%)
Commissions 15.6 12.2 (3.4) (21.7)
Distribution Fees and other income 19.7 20.7 1.0 5.2
------ ------ -------
Total revenues $255.2 $252.4 ($2.8) (1.1)
====== ====== =======
Investment Advisory and Incentive Fees: Investment advisory and incentive fees,
which comprised 87.0% of total revenues in 2005, are directly influenced by the
level and mix of assets under management ("AUM"). AUM ended the year at $26.8
billion, a 6.5% decrease from prior year-end AUM of $28.7 billion. Our equity
AUM were $26.0 billion on December 31, 2005 versus $26.8 billion on December 31,
2004. An increase in closed-end fund assets principally related to the initial
public offering of The Gabelli Global Gold, Natural Resources & Income Trust
(AMEX: GGN) (which generated gross proceeds of approximately $352 million), a
rights offering for The Gabelli Equity Trust Inc. (NYSE: GAB) ($144 million),
and a preferred stock offering for The Gabelli Dividend and Income Trust (NYSE:
GDV) ($197 million) were more than offset by decreases in AUM in our separate
accounts business ($1.2 billion), open-end mutual funds ($544 million) and
investment partnerships ($208 million). Our fixed income assets declined to $735
million at year-end 2005 from $1.5 billion at the end of 2004, principally
related to the withdrawal of assets from The Treasurer's Fund, which was closed
during the fourth quarter 2005.
Mutual fund revenues increased $3.9 million or 3.3%, as higher revenues from
closed-end funds were offset slightly by lower revenues from open-end equity
mutual funds and fixed income mutual funds. Revenue from open-end equity funds
decreased $0.4 million or 0.4% from the prior year as average assets under
management in 2005 and 2004 were essentially flat at $7.8 billion. The closing
of The Treasurer's Fund in the fourth quarter of 2005 contributed to lower
revenues from fixed income mutual funds of $1.5 million or 74.6% from the 2004
period. Closed-end fund revenues increased $5.8 million or 15.4% from the prior
year.
Revenue from Separate Accounts decreased $5.1 million or 5.9% principally due to
lower average asset levels and a decrease in fulcrum fees earned on certain
accounts. Assets in our equity Separate Accounts fell $1.2 billion or 8.9% for
the year.
Total advisory fees from Investment Partnerships increased to $13.9 million in
2005 from $13.0 million in 2004. Incentive allocations and fees from investment
partnerships, which generally represent 20% of the economic profit, increased to
$6.2 million in 2005 compared to $4.3 million in 2004, slightly offset by a
decrease in management fees of 11.6% to $7.7 million in 2005 from $8.7 million
in 2004.
Commissions: Commission revenues in 2005 were $12.2 million, $3.4 million or
21.7% lower than commission revenues of $15.6 million in 2004. The decrease in
revenues was due to a decrease in agency trading activity for accounts managed
by affiliated companies offset slightly by higher revenues from institutional
customers. Commission revenues derived from transactions on behalf of our Mutual
Funds Equities $ (188) $ 1,364 $ (261)and Separate Account clients totaled $9.7 million, or approximately 80% of
total commission revenues in 2005.
Distribution Fees and Other Income: Distribution fees and other income increased
5.2% or $1.0 million to $20.7 million in 2005 from $19.7 million in 2004. The
year-to-year increase was principally the result of higher average assets under
management in class C shares which have 12b-1 fees of 1%, in the 2005 period as
compared to the prior year's period.
Expenses
Total expenses were $165.8 million in 2005, an increase of $9.7 million or 6.2%
from total expenses of $156.1 million in 2004. Operating margin decreased to
34.3% in 2005 from 38.8% in 2004 as operating income decreased $12.5 million
year over year.
45
Compensation: Compensation costs, which are largely variable in nature,
increased approximately $2.9 million, or 2.9%, to $106.2 million in 2005 from
$103.3 million in 2004. Our variable compensation costs increased $1.4 million
to $77.4 million in 2005 from $76.0 million in 2004 and increased, as a percent
of revenues, to 30.7% in 2005 compared to 29.8% in 2004. The increase in total
variable compensation costs is principally due to higher revenues from Mutual
Funds and Investment Partnerships (an increase of $2.2 million) partially offset
by lower variable compensation costs related to Commissions (a decrease of $1.3
million). The increase, as a percent of revenues, is traceable to a shift in
revenue mix from Separate Accounts to Investment Partnerships and Mutual Funds.
Fixed compensation costs rose approximately $1.5 million to $28.8 million in
2005 from $27.3 million in 2004 principally due to increases in salaries and
stock option expense. The increase in stock option expense of approximately $1
million was related to the accelerated vesting of stock options during the year.
Management Fee: Management fee expense, for acting as CEO, is incentive-based
and entirely variable compensation in the amount of 10% of the aggregate pre-tax
profits which is paid to Mr. Gabelli pursuant to his Employment Agreement so
long as he is an executive of GBL and devoting the substantial majority of his
working time to the business. In 2005, management fee expense increased 3.1% to
$11.4 million versus $11.0 million in 2004.
Distribution Costs: Distribution costs, which include marketing, promotion and
distribution costs increased $1.2 million or 5.7% in 2005 from the 2004 period.
This increase related to the one-time launch costs of $1.5 million for our new
closed-end fund, GGN, as continuing distribution costs decreased $0.3 million in
2005 from the 2004 period.
Other Operating Expenses: Other operating expenses increased $5.2 million or
24.3% to $26.7 million in 2005. This increase includes a one-time charge of $1.1
million from the impairment of goodwill related to our fixed income business. In
addition, there was an increase in accounting and legal costs of approximately
$2.6 million as well as $1.2 million of higher costs directly related to the
elimination of soft dollars in our mutual fund business.
Other Income and Expense
Our proprietary investment portfolio consists of investments in mutual funds,
U.S. treasury bills, common stocks as well as other investments including
limited partnerships and offshore funds. Net gain from investments, which is
derived from our proprietary investment portfolio, was approximately $10.9
million for the year ended December 31, 2005 compared to $5.6 million in 2004.
The higher full year 2005 investment gains are mostly due to our $100,000
venture capital investment in optionsXpress (NASDAQ: OXPS) made in 2001 through
our 92% owned subsidiary, Gabelli Securities, Inc. OXPS completed its initial
public offering during the first quarter 2005. We recorded a total gain of $5.4
million for the full year 2005.
Interest and dividend income was $18.5 million in 2005 compared to $10.5 million
in 2004. Interest income rose $7.6 million to $12.4 million in 2005 and is a
result of higher short-term interest rates.
Interest expense fell $2.2 million to $13.8 million in 2005, from $16.0 million
in 2004. The decrease is a result of the April 1, 2005 repurchase of $50 million
of the $100 million 5% convertible note and the remarketing of the senior notes
in November 2004, which reduced the interest rate from 6.0% to 5.22%. The 5%
convertible note is convertible, at the holder's option, into shares of our
class A common stock at $52 per share.
Income Taxes
The effective tax rate for 2005 was 37.5% up from the 2004 effective tax rate of
36.4% as we adjusted the tax rate in 2005 to reflect our estimate of the current
year-end tax liability.
Minority Interest
Minority interest expense was essentially flat at $0.5 million in both 2005 and
2004. Minority interest expense was largely the result of increased earnings
from our Investment Partnerships and income from investments at our 92% owned
subsidiary, Gabelli Securities, Inc, offset by the losses at our previously 80%
owned Fixed Income 156 (276) (228)
-------- -------- --------
Total Mutual Funds (32) 1,088 (489)
-------- -------- --------
Institutional & HNW Separate Accounts
Equities
97 52 (1,178)
Fixedbusiness.
Net Income
(120) (115) (125)
-------- -------- --------
Total Institutional & HNW Separate Accounts (23) (63) (1,303)
-------- -------- --------
Investment Partnerships
Equities (6) 54 92
Fixed Income -- -- --
-------- -------- --------
Total Investment Partnerships (6) 54 92
-------- -------- --------
Total Equities (97) 1,470 (1,347)
Total Fixed Income 36 (391) (353)
-------- -------- --------
Total Net Cashincome for 2005 was $63.4 million or $2.09 per fully diluted share versus
$62.6 million or $2.06 per fully diluted share for 2004.
46
Shareholder Compensation and Initiatives
During 2005, we returned $57.3 million of our earnings to shareholders through
dividends and our stock repurchases. We paid $0.69 per share in dividends ($20.1
million) to our common shareholders in 2005 which included three quarterly
dividends of $0.02 per share paid on March 28, 2005, June 28, 2005, and
September 28, 2005 and one quarterly dividend of $0.03 per share paid on
December 28, 2005. In (Out) Flows $ (61) $ 1,079 $ (1,700)
======== ======== ========
OPERATING RESULTS FOR THE YEAR ENDED DECEMBERaddition, we paid a special dividend of $0.60 per share on
January 18, 2005 to all shareholders.
Through our stock buyback program, we repurchased approximately 861,000 shares
in 2005 for a total investment of $37.2 million. There remains approximately
1,083,000 shares authorized under our stock buyback program on December 31,
2005.
Shares outstanding on a diluted basis at December 31, 2005 were 30.7 million and
included 1.0 million shares from the assumed conversion of our 5% convertible
note for the full year 2005 as under the applicable accounting methodology used
to compute dilution, the convertible note was dilutive. The full number of
shares which may be issued upon conversion of this note is approximately 1.0
million. During 2005, we issued 49,500 shares from the exercise of stock options
and 1,517,483 shares from the settlement of the remaining purchase contracts
relating to the mandatory convertible securities.
At December 31, 2005, we had 226,325 options outstanding to purchase our class A
common stock which were granted under our Stock Award and Incentive Plans (the
"Plans").
Operating Results for the Year Ended December 31, 2004 AS COMPARED TO THE YEAR
ENDED DECEMBERas Compared to the Year
Ended December 31, 2003
REVENUESRevenues
Total revenues were $255.2 million in 2004, $47.7 million or 23.0% ahead of
total revenues of $207.4 million in 2003. The increase in total revenues by
revenue component was as follows (in millions):
INCREASE (DECREASE)
---------------
Increase (decrease)
-------------------
2003 2004 $ %
------ ------ ------ ------
Investment advisory and incentive fees $176.9 $219.9 $ 43.0 24.3%
Commissions 12.9 15.6 2.7 21.1
Distribution Fees and other income 17.6 19.7 2.1 11.5
------
------ ------ ------- ------
Investment advisory and incentive fees $176.9 $219.9 $ 43.0 24.3%
Commissions 12.9 15.6 2.7 21.1
Distribution Fees and other income 17.6 19.7 2.1 11.5
------ ------ -------
Total revenues $207.4 $255.2 $ 47.8 23.0
====== ====== ======
INVESTMENT ADVISORY AND INCENTIVE FEES:
Investment Advisory and Incentive Fees: Investment advisory and incentive fees,
which comprised 86% of total revenues in 2004, are directly influenced by the
level and mix of assets under management. Assets under management ended the year
at a record $28.7 billion, a 4.0% increase over prior year endyear-end assets under
management of $27.6 billion. The effect of a full twelve months of The Gabelli
Dividend and Income Trust ("GDV")GDV as well
as an increase in average assets under management of $5.5 billion to $27.9
billion in 2004 from $22.4 billion in 2003. The initial public offering of GDV
generated gross proceeds of approximately $1.46 billion in November 2003 and
added an additional $194 million of gross proceeds through the exercise of the
underwriters' over allotment option in January 2004.
Mutual fund revenues increased $25.6 million or 27.4%, as higher revenues from
open-end equity mutual funds and closed-end funds were offset slightly by lower
revenues from fixed income mutual funds. Revenue from open-end equity funds
increased $7.1 million or 9.8% from the prior year as average assets under
management in 2004 increased to $7.8 billion from $7.1 billion in 2003.
Closed-end fund revenues increased $19.1 million or 103% from the prior year
principally due to fees earned from GDV.
31
Revenue from Separate Accounts increased $18.6 million or 26.9% principally due
to higher average asset levels and an increase in fulcrum fees earned on certain
accounts traceable to excellent performance relative to benchmark. Assets in our
equity Separate Accounts rose $600 million or 4.3% for the year despite a
sub-advisory client transferring management of the largest of its three
portfolios (approximately $900 million) to another asset manager in
mid-November. The loss of this sub-advisory portfolio will have a negative
impact on revenues in 2005.
Total advisory fees from Investment Partnerships decreased to $13.0 million in
2004 from $14.2 million in 2003. Higher overall assets under management led to
an increase in management fees of 42.5% to $8.7 million from $6.1 million in
2003. Incentive allocations and fees from investment partnerships, which
generally represent 20% of the economic profit, decreased to $4.3 million in
2004 compared to $8.1 million in 2003.
COMMISSIONS:47
Commissions: Commission revenues in 2004 were $15.6 million, $2.7 million or
21.1% higher than commission revenues of $12.9 million in 2003. The increase in
revenues was due to an increase agency trading activity for accounts managed by
affiliated companies and higher revenues from institutional customers.
Commission revenues derived from transactions on behalf of our Mutual Funds and
Separate Account clients totaled $13.3 million, or approximately 85% of total
commission revenues in 2004.
DISTRIBUTION FEES AND OTHER INCOME:Distribution Fees and Other Income: Distribution fees and other income increased
11.5% or $2.1 million to $19.7 million in 2004 from $17.6 million in 2003. The
year-to-year increase was principally the result of higher average assets under
management in our open-end equity mutual funds with distribution plans.
EXPENSESExpenses
Total expenses were $156.1 million in 2004, an increase of $23.4 million or
17.6% from total expenses of $132.7 million in 2003. Operating margin increased
to 38.8% in 2004 from 36.0% in 2003 as operating income increased $24.4 million
year over year.
COMPENSATION:Compensation: Compensation costs, which are largely variable in nature and
increase or decrease as revenues grow or decline, increased approximately $14.9
million, or 16.7%, to $104.1 million in 2004 from $89.2 million in 2003. Our
variable compensation costs increased $11.1 million to $78.1 million in 2004
from $67.0 million in 2003 but declined, as a percent of revenues, to 30.6% in
2004 compared to 32.3% in 2003. The increase in total variable compensation
costs is principally due to higher revenues from Separate Accounts and Mutual
Funds (an increase of $12.2 million) partially offset by lower variable
compensation costs related to Investment Partnerships (a decrease of $1.8
million). The decrease, as a percent of revenues, is traceable to a shift in
revenue mix from Investment Partnerships to Separate Accounts and Mutual Funds.
Fixed compensation costs rose approximately $3.8 million to $26.0 million in
2004 from $22.2 million in 2003 principally due to increases in salaries,
accruals for incentive compensation and stock option expense.
MANAGEMENT FEE:Management Fee: Management fee expense, for acting as CEO, is incentive-based
and entirely variable compensation in the amount of 10% of the aggregate pre-tax
profits which is paid to Mr. Gabelli pursuant to his Employment Agreement so
long as he is an executive of Gabelli and devoting the substantial majority of
his working time to the business. In 2004, management fee expense increased
22.4% to $11.0 million in 2004 versus $9.0 million in 2003.
OTHER OPERATING EXPENSES:Other Operating Expenses: Other operating expenses, which include marketing,
promotion and distribution costs as well as general operating expenses increased
$6.4 million or 18.6% to $41.0 million in 2004. A large portion of this increase
related to ongoing distribution costs for the two new closed end funds, GDV and
GLU ($4.1 million) as well as higher general operating expenses including
accounting, legal and insurance costs which include compliance costs with the
Sarbanes-Oxley Act of 2002 as well as other regulatory and governance
initiatives. These costs are expected to continue to have an impact in 2005 as
well as in subsequent years.
OTHER INCOME AND EXPENSEOther Income and Expense
Our proprietary investment portfolio consists of investments in mutual funds,
U.S. treasury bills, common stocks as well as other investments including
limited partnerships and offshore funds. Net gain from investments, which is
derived from our proprietary investment portfolio, was approximately $5.6
million for the year ended December 31, 2004 compared to $15.6 million in 2003.
In 2004 and 2003 gains of $34,000 and $96,000, respectively, were realized from
the repurchase of 68,900 shares and 20,600 shares, respectively, of our
mandatory convertible securities.
32
Interest and dividend income was $10.5 million in 2004 compared to $5.5 million
in 2003. The increase in 2004 dividend income was principally the result of our
investments in GDV and Westwood Holdings Group, Inc. ("WHG") as dividend income
for these investments increased $2.7 million and $0.3 million, respectively.
Interest income rose principally due to an increase in short-term interest
rates.
Interest expense rose $1.2 million to $16.0 million in 2004, from $14.8 million
in 2003. The increase was due an entire year of interest expense on our $100
million of 5.5% senior notes, which were issued in May 2003, offset partially by
the full year effect of a one percentage point decrease in the interest rate on
our convertible note from 6% to 5% (which occurred in August 2003) and the
decrease of the interest rate on the senior notes issued in connection with our
mandatory convertible securities to 5.22% from 6.0% due to the remarketing in
November 2004. The 5% convertible note is convertible, at the holder's option,
into shares of our class A common stock at $52 per share.
48
The mandatory convertible securities consist of both a purchase contract to
purchase shares of our class A common stock on February 17, 2005 and senior
notes due February 17, 2007. The purchase contract includes a contract
adjustment payment of 0.95% per year through February 17, 2005 and the notes
bear interest at 6% per year, which rate was reset on November 17, 2004 to
5.22%.
INCOME TAXESIncome Taxes
The effective tax rate for 2004 was 36.4% down from the 2003 effective tax rate
of 37.4% as we adjusted the tax rate in 2004 to reflect our estimate of the
current year-end tax liability.
MINORITY INTERESTMinority Interest
Minority interest expense was $0.5 million in 2004 lower by 40.8% from $0.8
million in 2003. The decrease in minority interest expense was largely the
result of decreased earnings from our Investment Partnerships and income from
investments at our 92% owned subsidiary, Gabelli Securities, Inc.
NET INCOMENet Income
Net income for 2004 was $62.6 million or $2.06 per fully diluted share versus
$49.8 million or $1.65 per fully diluted share for 2003.
SHAREHOLDER COMPENSATION AND INITIATIVESShareholder Compensation and Initiatives
During 2004, we returned over $100 million of our earnings to shareholders
through dividends and our stock buyback program. We paid $1.16 per share in
dividends to our common shareholders in 2004 which included three quarterly
dividends of $0.02 per share paid on June 30, September 30, and December 28. In
addition, we paid two special dividends, a $0.10 per share dividend on June 30
and a $1.00 per share dividend on November 30, 2004 to class A shareholders and
December 23, 2004 to class B shareholders. Our Board of Directors also declared
a special dividend of $0.60 per share in November 2004 which was payable on
January 18, 2005 to all shareholders of record on January 3, 2005. Through our
stock buyback program, we repurchased approximately 1,596,000 shares in 2004 for
a total investment of $70.7 million. There remainsremained approximately 944,000 shares
authorized under our stock buyback program, exclusive of the ASRaccelerated stock
repurchase ("ASR") authorization, on December 31, 2004.
Shares outstanding on a diluted basis at December 31, 2004 were 31.8 million and
included 1.9 million shares from the assumed conversion of our 5% convertible
note for the full year 2004 as under the applicable accounting methodology used
to compute dilution, the convertible note was dilutive. The full number of
shares which may be issued upon conversion of this note is approximately 1.9
million. Shares issuable under the mandatory convertible securities are excluded
from the diluted shares calculation under current accounting rules but will have
a dilutive effect on earnings per share upon settlement of the purchase
contracts on February 17, 2005. During 2004, we issued 131,300 shares from the
exercise of stock options and 252,456 shares from the early settlement of
purchase contracts relating to the mandatory convertible securities. The
settlement of the remaining purchase contracts in February 2005 resulted in the
issuance of 1,517,483 shares of our class A common stock and the receipt of
$70.6 million in proceeds. This will have a dilutive effect on earnings per
share in 2005.
At December 31, 2004, we had 799,325 options outstanding to purchase our class A
common stock which were granted under our Stock AwardPlans.
Liquidity and Incentive Plans (the
"Plans").
33
OPERATING RESULTS FOR THE YEAR ENDED DECEMBER 31, 2003 AS COMPARED TO THE YEAR
ENDED DECEMBER 31, 2002
REVENUES
Total revenues were $207.4 million in 2003, $2.6 million or 1.2% below total
revenues of $210.0 million in 2002. The decline in total revenues by revenue
component was as follows (in millions):
INCREASE (DECREASE)
---------------
2002 2003 $ %
------ ------ ------ ------
Investment advisory and incentive fees $177.1 $176.9 $ (0.2) (0.1%)
Commissions 13.9 12.9 (1.0) (7.3)
Distribution Fees and other income 19.0 17.6 (1.4) (7.2)
------ ------ ------
Total revenues $210.0 $207.4 $ (2.6) (1.2)
====== ====== ======
INVESTMENT ADVISORY AND INCENTIVE FEES: Investment advisory and incentive fees,
which comprised 85% of total revenues in 2003, are directly influenced by the
level and mix of assets under management. Assets under management ended the year
at a record $27.6 billion, a 29.7% increase over prior year end assets under
management of $21.2 billion. Despite reaching a record level of assets on
December 31, 2003, investment advisory fees in 2003 declined slightly from 2002
as average assets under management in 2003 declined to $22.4 billion from $23.6
billion in 2002. The initial public offering of GDV generated gross proceeds of
approximately $1.46 billion in November 2003 and added an additional $194
million of gross proceeds through the exercise of the underwriters'
overallotment option in January 2004.
Mutual fund revenues increased $1.4 million or 1.5%, as lower revenues from
open-end equity mutual funds were more than offset by higher revenues from
closed-end funds. Revenue from open-end equity funds decreased $4.5 million or
5.9% from the prior year as average assets under management in 2003 declined to
$7.1 billion from $7.4 billion in 2002. The increase in assets during the last
half of 2003 resulting from strong performance results did not offset the effect
on revenues of lower asset levels during the first six months. Closed-end fund
revenues increased $5.9 million or 47.1% from the prior year as fees from assets
subject to performance fee arrangements where the fees are earned based upon the
respective fund meeting or exceeding certain contractual investment thresholds
over a stipulated period of time contributed to the majority of this increase.
Closed-end fund assets and revenue also benefited from the launch of GDV during
the fourth quarter of 2003. GDV began trading on the New York Stock Exchange on
November 25, 2003 and commenced investment operations on November 28, 2003.
Revenue from our institutional and high net worth Separate Accounts decreased
$7.4 million or 10.3% as lower average asset levels and a lower average advisory
fee rate due to the effect of a shift in account mix were the principal reasons
for the decline. While revenue declined, assets in our equity Separate Accounts
rose $3 billion or 30.4% for the year of which $1.7 billion or 15.3% of this
increase occurred in the 4th quarter of 2003, principally through market
appreciation.
Total advisory fees from Investment Partnerships increased to $14.2 million in
2003 from $7.5 million in 2002. Higher overall assets under management led to an
increase in management fees of 8.0% to $6.1 million from $5.7 million in 2002.
Incentive allocations and fees from investment partnerships, which generally
represent 20% of the economic profit, increased to $8.1 million in 2003 compared
to $1.8 million in 2002.
COMMISSIONS: Commission revenues in 2003 were $12.9 million, $1.0 million or
7.3% lower than commission revenues of $13.9 million in 2002. Lower commission
revenues from a decline in agency trading activity for accounts managed by
affiliated companies and the implementation of a simplified commission structure
were partially offset by higher commission revenues from institutional and
retail customers. Commission revenues derived from transactions on behalf of our
Mutual Funds and Separate Account clients totaled $9.7 million, or approximately
75% of total commission revenues in 2003.
DISTRIBUTION FEES AND OTHER INCOME: Distribution fees and other income declined
7.2% or $1.4 million to $17.6 million in 2003 from $19.0 million in 2002. The
year-to-year decline was principally the result of lower average assets under
management in open-end equity mutual funds with distribution plans and the
waiver of the 12b-1 distribution fee on the ABC fund which began in January
2003.
34
EXPENSES
Total expenses were $132.7 million in 2003, an increase of $12.4 million or
10.3% from total expenses of $120.3 million in 2002. Operating margin declined
to 36.0% in 2003 from 42.7% in 2002 as operating income declined $14.9 million
year over year.
COMPENSATION: Compensation costs, which are largely variable in nature and
increase or decrease as revenues grow or decline, increased approximately $8.8
million, or 10.9%, to $89.2 million in 2003 from $80.4 million in 2002. The
majority of this increase was attributable to higher variable compensation
related to our Investment Partnerships (an increase of $2.5 million) and
compensation not directly tied to revenues which included stock option expense
(an increase of $1.3 million), higher costs related to research, sales and
investment professionals (an increase of $2.0 million) and the year-over-year
effect of a reversal of incentive compensation in 2002 ($2.2 million). While the
increase in staffing has impacted operating margins in the short-term, we have
strengthened our asset gathering capabilities and broadened our research and
investment expertise which is expected to increase asset and revenue growth and
improve operating margins over the longer term.
MANAGEMENT FEE: Management fee expense, for acting as CEO, is incentive-based
and entirely variable compensation in the amount of 10% of the aggregate pre-tax
profits which is paid to Mr. Gabelli pursuant to his Employment Agreement so
long as he is an executive of Gabelli and devoting the substantial majority of
his working time to the business. In 2003, management fee expense declined 5.6%
to $9.0 million in 2003 versus $9.5 million in 2002.
OTHER OPERATING EXPENSES: Other operating expenses, which include marketing,
promotion and distribution costs as well as general operating expenses increased
$4.1 million or 13.7% to $34.5 million in 2003. A large portion of this increase
related to higher general operating expenses including accounting, legal and
insurance costs which were partly related to complying to the requirements of
the Sarbanes-Oxley Act of 2002.
OTHER INCOME AND EXPENSE
Our proprietary investment portfolio consists of investments in mutual funds,
U.S. treasury bills, common stocks as well as private investments. Net gain from
investments, which is derived from our proprietary investment portfolio, was
approximately $15.6 million for the year ended December 31, 2003 compared to
$1.4 million in 2002. In 2003 a gain of $0.1 million was realized from the
repurchase of 20,600 shares of our mandatory convertible securities.
Interest and dividend income was $5.5 million in 2003 compared to $6.8 million
in 2002. The decrease in interest income was principally the result of a
decrease in short-term interest rates. Dividend income included a $518,000
dividend received in the third quarter of 2003 from our Westwood Holdings Group,
Inc. ("WHG") investment. Interest expense rose $2.8 million to $14.8 million in
2003, from $12.0 million in 2002. The increase in interest expense was
attributable to the issuance of $100 million 5.5% senior notes in May 2003
offset partially from the decrease of 1% on the convertible note from 6% to 5%
in August 2003. The note is convertible, at the holder's option, into shares of
our class A common stock at $52 per share.
The mandatory convertible securities consist of both a purchase contract to
purchase shares of our class A common stock on February 17, 2005 and senior
notes due February 17, 2007. The purchase contract includes a contract
adjustment payment of 0.95% per year through February 17, 2005 and the notes
bear interest at 6% per year, which rate is expected to be reset on November 17,
2004. The settlement of the purchase contract in February 2005 will result in
the issuance of between 1.8 million and 2.2 million shares of our class A common
stock which will have a dilutive effect on earnings per share.
INCOME TAXES
The effective tax rate for 2003 was 37.4% down from the 2002 effective tax rate
of 37.6% traceable to the effect of a dividend received deduction related to the
WHG dividend.
MINORITY INTEREST
Minority interest expense was $0.8 million in 2003 up 271.9% from $0.2 million
in 2002. The increase in minority interest expense was largely the result of
increased earnings from our Investment Partnerships and income from our
investments at our 92% owned subsidiary, Gabelli Securities, Inc.
35
NET INCOME
Net income for 2003 was $49.8 million or $1.65 per diluted share versus $53.3
million or $1.76 per diluted share for 2002. The decline in net income of 6.5%
in 2003 can be attributed to the impact of weak equity markets during the first
six months of the year on average assets under management, higher compensation
costs and an increase in other operating expenses.
Shares outstanding on a diluted basis at December 31, 2003 were 32.1 million and
included 1.9 million shares from the assumed conversion of our convertible note
for the full year 2003 as under the applicable accounting methodology used to
compute dilution, the convertible note was dilutive. The full number of shares
which may be issued upon conversion of this note is approximately 1.9 million.
Shares issuable under the mandatory convertible securities are excluded from the
diluted shares calculation under current accounting rules. During 2003, we
issued 225,256 shares from the exercise of stock options and repurchased 56,922
shares.
At December 31, 2003, we had 949,650 options outstanding to purchase our class A
common stock which were granted under our Stock Award and Incentive Plans (the
"Plans").
DIVIDEND
We paid our first dividend of $0.02 per share on December 15, 2003 to our class
A shareholders of record on December 1, 2003. The holders of our class B common
stock, Gabelli Group Capital Partners, Inc. and its two subsidiaries, agreed to
waive receipt of this dividend or $460,000.
LIQUIDITY AND CAPITAL RESOURCESResources
Our principal assets consist of cash, short-term investments, securities held
for investment purposes and investments in mutual funds, and investment
partnerships and offshore funds, both proprietary and external. Short-term
investments are comprised primarily of United States treasury securities with
maturities of less than one year and money market funds managed by GBL. Although
the investment partnerships and offshore funds are for the most part illiquid,
the underlying investments of such partnerships or funds are for the most part
liquid and the valuations of these products reflect that underlying liquidity.
49
Summary cash flow data is as follows:
2002 2003 2004 ---------- ---------- ----------2005
---- ---- ----
(in thousands)
Cash flows provided by (used in):
Operating activities $ (38,347)31,460 $ 38,021(23,879) $ (3,395)(33,531)
Investing activities 18,539 (64,252) (31,540)(57,691) (11,056) (7,205)
Financing activities 25,791 101,312 (94,480) ----------(45,626)
-------- ---------- ----------
Increase (decrease) in cash and cash equivalents 5,983 75,081 (129,415) (86,362)
Cash and cash equivalents at beginning of year 305,447 311,430 386,511 ----------257,096
Effect of exchange rates on cash and cash equivalents - - (75)
-------- ---------- ----------
Cash and cash equivalents at end of year $ 311,430 $ 386,511$386,511 $ 257,096 ==========$ 170,659
======== ========== ==========
Cash and liquidity requirements have historically been met through cash
generated by operating income and our borrowing capacity. At December 31, 2004,2005,
we had cash and cash equivalents of $257.1$170.7 million, a decrease of $129.4$86.4 million
from the prior year end. We have established a collateral account, consisting of
cash and cash equivalents and U.S. treasury securities totaling $103.2$54.7 million,
to secure an $102.5a $51.3 million letter of credit issued in favor of the holder of the
$100$50 million 5% convertible note. The $102.5 millionOn April 1, 2005 the letter of credit was
reduced to $51.3 million, from $102.5 million, and extended to September 22,
2006, which coincides with the date of a put option the note holder may
exercise. Additionally, the principal of the 5% convertible note was reduced to
$50 million, from $100 million, and expireslimitations on April 9, 2005.the issuance of additional
debt were removed. Cash and cash equivalents and investments in securities held
in the collateral account are restricted from other uses until the $102.5date of
expiration. Under the terms of the capital lease we are obligated to make
minimum total payments of $5.7 million letter of credit expires.
36
through April, 2013.
Cash used in operating activities of $3.4$33.5 million in 2005 results primarily
from purchases of trading investments in securities of $1,154.1 million,
investments in partnerships and affiliates of $16.0 million, equity in earnings
of partnerships and affiliates of $7.0 million and an increase in receivable
from broker of $3.0 million partially offset by proceeds from sales of trading
investments in securities of $1,063.1 million, $63.4 million of net income,
$20.3 million of distributions from partnerships and affiliates and a decrease
in investment advisory fees receivable of $4.3 million. Cash used in operating
activities of $23.9 million in 2004 results primarily from an increase inpurchases of trading
investments in securities of $52.5$928.5 million, investments in partnerships and
affiliates of $37.0 million, a reduction in payable to brokers of $5.4 million,
equity in earnings of partnerships and affiliates of $4.8 million and an
increase in investment advisory fees receivable of $5.0 million partially offset
by proceeds from sales of trading investments in securities of $873.2 million,
distributions from partnerships and affiliates of $20.8 million and $62.6
million of net income.
Cash provided by operatingused in investing activities of $38.0$7.2 million in 2003 results primarily from
$49.82005 is due to purchases of
available for sale securities of $9.3 million, of net income partially offset by a reduction in payable to
brokersproceeds from
sales of $11.4 million, a reduction inavailable for sale securities sold, not yet purchased of $4.4 million, equity in earnings of partnerships and affiliates of $5.7 million,
an increase in investment advisory fees receivable of $6.0 million and an
increase in notes and other receivables from affiliates of $4.1$2.1 million. Cash used in investing
activities of $31.5$11.1 million in 2004 is primarily due to an increase inpurchases of available for sale
securities of $11.7 million, and an increasepartially offset by proceeds from sales of
investments, net of distributions, in certain partnerships and affiliates of
$20.5 million. Cash used in investing activities of $64.3 million in 2003 is
primarily due to an increase in
available for sale securities of $55.9$0.6 million.
Cash used in financing activities of $45.6 million in 2005 was largely from the
repurchase of $50 million of the 5% convertible note, the purchase of an
additional $37.2 million of our class A common stock, $20.1 million from
dividend payments, $9.7 million for the tender offer of employee stock options
and an increase$0.5 million in dividends paid by one of investments, netour subsidiaries partially offset
by $70.6 million received for the settlement of distributions, in certain partnershipsforward contracts relating to
the mandatory convertible securities and affiliates$1.3 million received from the exercise
of $10.3 million.our stock options by employees. Cash used in financing activities of $94.5
million in 2004 was largely from the purchase of an additional $70.7 million of
our class A common stock, $1.7 million of mandatory convertible securities, $2.7
million in dividends paid by one of our subsidiaries and $34.0 million from
dividend payments partially offset by $11.7 million received for the early
settlement of forward contracts relating to the mandatory convertible securities
and $3.0 million received from the exercise of our stock options by employees.
Cash provided by financing
activitiesIf the holder of $101.3the $50 million 5% convertible note elects to exercise their
put option, we will be obligated to repay the principal and any accrued interest
in 2003 was largelySeptember 2006. Additionally, our 5.22% senior notes with total principal of
$82.3 million are due to the issuance of $100
million of Senior Notes and $3.9 million received from the exercise of our stock
options by employees partially offset by the purchase of an additional $1.9
million of our class A common stock, $0.5 million of mandatory convertible
securities and $0.1 million from our first dividend payment.February 2007.
We continue to maintain our investment grade ratings which we have received from
two ratings agencies, Moody's Investors Services and Standard and Poor's Ratings
Services. We believe that our ability to maintain our investment grade ratings
will provide greater access to the capital markets, enhance liquidity and lower
overall borrowing costs.
50
Gabelli & Company is registered with the Commission as a broker-dealer and is a
member of the NASD. As such, it is subject to the minimum net capital
requirements promulgated by the Commission. Gabelli & Company's net capital has
historically exceeded these minimum requirements. Gabelli & Company computes its
net capital under the alternative method permitted by the Commission, which
requires minimum net capital of $250,000. As of December 31, 20032004 and 2004,2005,
Gabelli & Company had net capital, as defined, of approximately $16.9$19.2 million
and $19.2$16.5 million, respectively, exceeding the regulatory requirement by
approximately $16.6$19.0 million and $19.0$16.2 million, respectively. Regulatory net
capital requirements increase when Gabelli & Company is involved in underwriting
activities.
Our subsidiary, Gabelli Asset Management (UK) Limited is a registered member of
the Financial Services Authority. In connection with this registration in the
United Kingdom, we have a minimum Liquid Capital Requirement of (pound)267,000,
($514,000459,000 at December 31, 2004)2005) and an Own Funds Requirement of (euro)50,000
($68,00059,000 at December 31, 2004)2005). We have consistently met or exceeded these
minimum requirements.
MARKET RISK
EQUITY PRICE RISKMarket Risk
Equity Price Risk
We are 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. Our exposure to market risk is
directly related to our role as financial intermediary and advisor for assets
under management in our Mutual Funds, Separate Accounts, and Investment
Partnerships as well as our proprietary investment and trading activities. At
December 31, 2004,2005, our primary market risk exposure was for changes in equity
prices and interest rates. At December 31, 20032004 and 2004,2005, we had equity
investments, including mutual funds largely invested in equity products, of
$127.7$143.7 million and $143.7$201.0 million, respectively. Investments in mutual funds,
$98.3$109.1 million and $109.1$101.3 million at December 31, 20032004 and 2004,2005, respectively,
generally lower market risk through the diversification of financial instruments
within their portfolios. In addition, we may alter our investment holdings from
time to time in response to changes in market risks and other factors considered
appropriate by management. We also hold investments in partnerships and
affiliates which invest primarily in equity securities and which are subject to
changes in equity prices. Investments in partnerships and affiliates totaled
$64.0$89.3 million and $89.3$92.0 million at December 31, 20032004 and 2004,2005, respectively, of
which $29.1$43.1 million and $43.1$36.4 million were invested in partnerships and
affiliates which invest in event-driven merger arbitrage strategies. These
strategies are primarily dependent upon deal closure rather than the overall
market environment.
37
The following table provides a sensitivity analysis for our investments in
equity securities and partnerships and affiliates which invest primarily in
equity securities excluding arbitrage products, for which the principal exposure
is to deal closure and not overall market conditions, as of December 31, 20032004
and 2004.2005. The sensitivity analysis assumes a 10% increase or decrease in the
value of these investments.
(IN THOUSANDS)
FAIR VALUE ASSUMING FAIR VALUE ASSUMING
10% DECREASE IN 10% INCREASE IN
FAIR VALUE EQUITY PRICES EQUITY PRICES
----------- ------------- -------------
AT DECEMBER 31, 2003:
Equity price sensitive investments,
at fair value.......................... $ 156,328.3 $ 140,695.4 $ 171,961.1
----------- ----------- -----------
AT DECEMBER(In thousands)
Fair Value assuming Fair Value assuming
10% decrease in 10% increase in
Fair Value equity prices equity prices
At December 31, 2004:
Equity price sensitive investments,
at fair value..........................value $ 188,753.8 $ 169,878.4 $ 207,629.2
----------- ----------- -----------
At December 31, 2005:
Equity price sensitive investments,
at fair value $ 256,094.5 $ 230,485.0 $ 281,703.9
----------- ----------- -----------
Our revenues are largely driven by the market value of our assets under
management and are therefore exposed to fluctuations in market prices of these
assets, which are largely readily marketable equity securities. Investment
advisory fees for mutual funds are based on average daily or weekly asset
values. Advisory fees earned on institutional and high net worth separate
accounts, for any given quarter, are generally determined based on asset values
at the beginning of a quarter. Any significant increases or decreases in market
value of assets managed which occur during a quarter will result in a relative
increase or decrease in revenues for the following quarter.
51
Investment Partnership advisory fees are computed based on monthly or quarterly
asset values. The incentive allocation or fee of 20% of the economic profit from
Investment Partnerships is impacted by changes in the market prices of the
underlying investments of these products.
INTEREST RATE RISKInterest Rate Risk
Our exposure to interest rate risk results, principally, from our investment of
excess cash in government obligations and money market funds. These investments
are primarily short term in nature and the fair value of these investments
generally approximates market value. Our mandatory convertible securities
included a provision to reset the interest rate in November 2004. The reset rate
was determined by the rates the notes should bear in order for each note to have
an aggregate market value of 100.5% of the principal amount of the note. The
reset rate was determined to be 5.22%.
COMMITMENTS AND CONTINGENCIESCommitments and Contingencies
We are obligated to make future payments under various contracts such as debt
agreements and capital and operating lease agreements. The following table sets
forth our significant contractual cash obligations as of December 31, 20042005 (in
thousands):
Total 2005 2006 2007 2008 2009 Thereafter
-------- -------- -------- -------- -------- -------- --------
Total 2006 2007 2008 2009 2010 Thereafter
--------- ------- -------- ------ ----- ------ ---------
Contractual Obligations:
5.5% Senior notes $100,000 $ --100,000 $ --- $ --- $ --- $ -- $100,000- $ - $ 100,000
5% Convertible note 100,000 -- -- -- -- -- 100,000
Mandatory convertible securities
(5.22%50,000 - - - - - 50,000
5.22% Senior Notes)Notes 82,308 -- --- 82,308 -- -- --- - - -
Capital lease obligations 6,412 8025,679 834 765 765 765 765 2,5501,785
Non-cancelable operating
lease obligations 1,294 576 480 218 20 -- --800 538 226 35 1 - -
--------- ------- -------- -------- -------- -------- -------- -------- -------------- ----- ------ ---------
Total $290,014 $ 1,378238,787 $ 1,2451,372 $ 83,29183,299 $ 785800 $ 765 $202,550$ 765 $ 151,785
========= ======= ======== ======== ======== ======== ======== ======== ============== ===== ====== =========
In addition, the 5% convertible note provides the holder certain put rights, at
par plus accrued interest, on April 1, 2005.September 15, 2006. If exercised, we will be
required to pay down the entire principal balance at that time. A collateral
account consisting of cash and securities has been established in the amount of
$103.2$54.7 million to secure an $102.5a $51.3 million letter of credit in favor of the
convertible note holder. The $102.5$51.3 million letter of credit will expire on
April 9, 2005.
38
Subsequent to December 31, 2004, we announced an agreement with Cascade
Investment, L.L.C. to amend the terms of the convertible note issued by Gabelli.
The new terms extend the exercise date of Cascade's put option to September 15,
2006, reduce the principal of the convertible note to $50 million from $100
million and remove limitations on the issuance of additional debt. In connection
with this amendment, we will repurchase $50 million of the principal of the
convertible note on April 1, 2005. The $102.5 million letter of credit was
reduced to a $51.3 million letter of credit and extended to September 22, 2006.
In November 2004 we entered into an accelerated stock repurchase program ("ASR")
whereby we repurchased 400,000 shares of stock from an investment bank for
approximately $18.8 million. The ASR permits us to repurchase the shares
immediately, while the investment bank will purchase the shares in the market
over time. The 400,000 shares repurchased under the agreement are subject to a
future contingent price adjustment based on the actual prices paid by the
investment bank to purchase our stock in the market over time. At December 31,
2004 the investment bank had purchased 203,500 shares resulting in a contingent
purchase liability of approximately $120,000 for the Company.
OFF-BALANCE SHEET ARRANGEMENTSOff-Balance Sheet Arrangements
We are the General Partner or co-General Partner of various limited partnerships
whose underlying assets consist primarily of marketable securities. As General
Partner or co-General Partner, we are contingently liable for all of the limited
partnerships' liabilities.
Our income from these limited partnerships consists of our share of the
management fee and the 20% incentive allocation from the limited partners. We
also receive our pro-rata return on any investment made in the limited
partnership. We earned management fees of $2.3 million in 2003 and $2.0 million in 2004 and $1.9 million
in 2005 and incentive fees of $1.5$0.8 million and $0.8$1.6 million in 20032004 and 2004,2005,
respectively. Our pro-rata gain on investments in these limited partnerships
totaled $2.3$1.5 million in 20032004 as compared to a gain of $1.5$0.8 million in 2004.2005.
We do not invest in any other off-balance sheet vehicles that provide financing,
liquidity, market or credit risk support or engage in any leasing activities
that expose us to any liability that is not reflected in the Consolidated
Financial Statements.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSCertain Relationships and Related Transactions
The following is a summary of certain related party transactions. Further
details regarding these and other relationships appear in our Proxy Statement
for our 20052006 Annual Meeting of Shareholders.
GGCP, Inc. ("GGCP"), formerly known as Gabelli Group Capital Partners, Inc., and
two of its subsidiaries own all of GBL's Class B Stock, representing
approximately 97% of the combined voting power and 80%78.3% of the outstanding
shares of GBL common stock.stock on December 31, 2005.
52
Prior to its initial public offering in February 1999, GBL and GGCP entered into
a Management Services Agreement, with a one-year term and renewable annually,
under which GBL provides certain services for GGCP, including furnishing office
space and equipment, providing insurance coverage, overseeing the administration
of its business and providing personnel to perform certain administrative
services. Pursuant to the Management Services Agreement, GGCP pays GBL for
services provided.
As of December 5, 1997, GGCP entered into a master lease agreement with M4E,
LLC, which is ownedan
entity controlled by the childrenmembers of Mr. Gabelli,Gabelli's immediate family, for a 60,000
square foot building, of which approximately 9,000 square feet are currently
subleased to other tenants. The master lease for the building and property,
which is located at 401 Theodore Fremd Avenue, Rye, New York (the "Building"),
expires on April 30, 2013. As of February 9, 1999, GGCP assigned all of its
rights and obligations under the master lease to GBL. GBL leases space in the
Building to a company for which Mr. Gabelli serves as Chairman and is a
significant stockholder.
Pursuant to the Employment Agreement, Mr. Gabelli has agreed that while he is
employed by GBL he will not provide investment management services outside of
GBL, except for certain permitted accounts managed by MJG Associates, Inc., for
which he serves as Chairman. MJG Associates, Inc., which is wholly-owned by Mr.
Gabelli, serves as a general partner or investment manager of various investment
funds and other accounts. 39
For these investment funds and other accounts, any
management or incentive fees related to new investors after the date of GBL's
initial public offering in 1999 are due to GBL in accordance with a resolution
adopted by GBL's Board of Directors in 1999.
GAMCO Investors, Inc. ("GAMCO"), a wholly-owned subsidiary of GBL has entered into agreements to provide advisory and administrative
services to MJG Associates, Inc. and to Gabelli Securities, Inc. ("GSI"), a majority-owned
subsidiary of GBL,GSI, with respect to the private
investment funds managed by each of them. Pursuant to such agreements, GSI and
MJG Associates, Inc. pay GAMCO for services provided.
Mr. Gabelli and Gabelli Securities, Inc. serve as co-general partners of Gabelli
Associates Fund. Mr. Gabelli receives relationship manager and portfolio
manager compensation through an incentive fee allocation directly from the
partnership.
Gabelli Securities International Limited ("Gabelli Securities International")
was formed in 1994 to provide management and investment advisory services to
offshore funds and accounts. Marc Gabelli, a son of Mr. Gabelli, owns 55% of
Gabelli Securities International and GSI owns the remaining 45%.
In April 1999, Gabelli Global Partners, Ltd., an offshore investment fund, was
incorporated. Gabelli Securities International and Gemini Capital Management,
LLC ("Gemini"), an entity owned by Marc Gabelli, were engaged by the fund as
investment advisors as of July 1, 1999. Gemini receives half of the investment
advisorymanagement
and incentive fees as co-investment advisor.
In April 1999, GSI formed Gabelli Global Partners, L.P., an investment limited
partnership for which GSI and Gemini are the general partners. In March 2002,
Gabelli Global Partners, L.P. changed its name to Gemini Global Partners, L.P.
Gemini receives half of the management fee and incentive allocation paid by the
partnership to the general partners.
GBL reimburses GGCP for GGCP's incremental costs (but not the fixed costs)
relating to GBL's use of an airplane in which GGCP owns a fractional interest.
Mr. Gabelli's brother, spouse has beenand three children were employed by GBL since 1984 and has been his spouse
since 2002.
CRITICAL ACCOUNTING POLICIESduring
2005.
Critical Accounting Policies
In the ordinary course of business, we make a number of estimates and
assumptions relating to the reporting of results of operations and financial
condition in the preparation of our financial statements in conformity with U.S.
generally accepted accounting principles. We base our estimates on historical
experience, when available, and on other various assumptions that are believed
to be reasonable under the circumstances. Actual results could differ
significantly from those estimates under different assumptions and conditions.
We believe the following critical assumptions and estimates are those applied to
revenue recognition, the valuation of investments, goodwill and other long-lived
intangibles, income taxes, stock based compensation accounting and the possible
impact of Financial Interpretation No. 46 ("FIN 46") "Consolidation of Variable
Interest Entities."
4053
REVENUE RECOGNITIONRevenue Recognition
Advisory fees from the Mutual Fundsopen-end mutual funds, closed-end funds and sub-advisory
accounts are computed daily or weekly advisorybased on average net assets. Advisory fees
from the Separate Accounts are generally computed quarterly based on account
values as of the beginningend of athe preceding quarter and accrued monthly. Management
fees from Investment Partnership feesPartnerships are computed either monthly or quarterly.quarterly and
accrued monthly and amounts receivable are included in other receivables from
affiliates in the statement of financial condition.
Revenues from our Investment Partnerships also generally include an incentive
allocation or a fee of 20% of the economic profit, as defined, which is recorded as earned.profit. The incentive allocation or
fee is generally based on the absolute gain in a portfolio and fees may increase or decreaseis recognized as
earned during the year asand amounts receivable are included in other receivables
from affiliates in the profitsstatement of the product increase or decrease. Revenues may also include
performance fees and fulcrumfinancial condition. Fulcrum fees from
certain Separate Accounts and closed-end
fundsinstitutional separate accounts, which are based upon meeting or
exceeding certain contractual investment return
thresholds over aspecific benchmark index or indices are recognized at the end of the
stipulated contract period of time. Performancefor the respective account and receivables due from
fulcrum fees are finalizedincluded in investment advisory fees on the statement of
financial condition. There were no fulcrum fees receivable as of December 31,
2005. Management fees on closed-end preferred shares are received at year-end if
the total return to common shareholders of the closed-end fund for the calendar
year exceeds the dividend rate of the preferred shares. These fees are
recognized as earned during the year. Receivables due on management fees on
closed-end funds are included in investment advisory fees receivable on the
statement of financial condition.
Distribution fees from the open-end mutual funds are computed daily based on
average net assets and received whenare accrued monthly and amounts receivable are included
in other receivables from affiliates on the contract period is completed.
INVESTMENTSstatement of financial condition.
Investments in Partnerships and Affiliates
We hold investments in limited partnerships and offshore funds including
affiliates, whose underlying assets consist mainly of marketable securities,
which are accounted for using the equity method, under which we record our share
of the earnings or losses into income as earned. While most of the underlying
investments of these entities are publicly traded and have readily available
market valuations, some of their investments are non-publicly traded whose value
may be difficult to determine. Investments are written down when management
believes an investment has experienced a decline in value that is other than
temporary. Future adverse changes in market conditions or poor operating results
of the underlying investment could result in an inability to recover the
carrying value of the investment and thereby require an impairment charge to
earnings.
GOODWILL AND OTHER LONG-LIVED INTANGIBLE ASSETSSee "Recent Accounting Developments" for further detail on the accounting for
Investments in Partnerships and Affiliates.
Goodwill and Other Long-Lived Intangible Assets
Prior to the issuance of Statement of Financial Accounting Standards ("SFAS")
No. 142, goodwill and other long-lived intangible assets were amortized each
year. The adoption of SFAS No. 142 at the beginning of 2002 eliminated the
amortization of these assets and established requirements for having them tested
for impairment at least annually. During the first quarter of 2005, assets under
management for our fixed income business decreased approximately 42% from the
beginning of the year, triggering under our accounting policies the need to
reassess goodwill for this previously 80% owned subsidiary. Using a present
value cash flow method, we reassessed goodwill for this entity and determined
that the value of the entity no longer justified the amount of goodwill.
Accordingly, we recorded a charge of $1.1 million for the impairment of goodwill
which represented the entire amount of goodwill for this entity during 2005.
At November 30, 20042005 management conducted its annual assessment and assessed the
recoverability of goodwill and other intangible assets and determined that there
was no impairment.further impairment of the remaining goodwill on GBL's consolidated
financial statements. In assessing the recoverability of goodwill and other
intangible assets, projections regarding estimated future cash flows and other
factors are made to determine the fair value of the respective assets. If these
estimates or related projections change in the future, it may result in an
impairment charge for these assets to income.
INCOME TAXESIncome Taxes
In the ordinary course of business, we prepare a number of tax returns, which
are regularly audited by Federal, stateState and foreign tax authorities. The
inherent complications in the various tax codes often create the need for
subjective judgments in applying its provisions. While management believes that
tax positions taken comply with tax law and are both reasonable and supported by
the facts and circumstances of the situation, upon audit additional taxes may be
assessed. While assessments may be proposed in the future, both the extent of
and potential impact on financial results cannot be determined at this time.
STOCK BASED COMPENSATION54
Stock Based Compensation
Effective January 1, 2003, we use a fair value based method of accounting for
stock-based compensation provided to our employees in accordance with SFAS No.
123, "Accounting for Stock Based Compensation." The estimated fair value of
option awards is determined using the Black Scholes option-pricing model. This
sophisticated model utilizes a number of assumptions in arriving at its results,
including the estimated life of the option, the risk free interest rate at the
date of grant and the volatility of the underlying common stock. There may be
other factors, which have not been considered, which may have an effect on the
value of the options as well. The effects of changing any of the assumptions or
factors employed by the Black Scholes model may result in a significantly
different valuation for the options and a resulting difference inoptions. We adopted Statement 123 (R) on January 1,
2005. In light of our net
income.
41
RECENT ACCOUNTING DEVELOPMENTS
In April 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No.
145, which rescinded SFAS No. 4 "Reporting Gains and Losses from Extinguishment
of Debt". Under SFAS No. 4, all gains and losses from extinguishment of debt
were required to be aggregated and, if material, classified as an extraordinary
item. As a resultmodified prospective adoption of the rescission,fair value
recognition provisions of Statement 123 (R) for all grants of employee stock
options, the criteria in APB Opinion No. 30 is used
to classify gains and losses from debt extinguishments. Since the issuance of
SFAS No. 4, the use of debt extinguishments has become a part of the risk
management strategy of many companies, particularly those who participate in the
secondary lending markets. Debt extinguishment no longer meets the criteria for
classification as extraordinary items in APB Opinion No. 30. Accordingly, gains
from the repurchase of our mandatory convertible securities in 2002, 2003 and
2004 of $613,000, $96,000 and $34,000, respectively, have been included in net
gain from investments and not as an extraordinary item. The adoption of SFAS No.
145Statement 123 (R) did not have a material impact on our
consolidated financial statements in
2002, 2003 and 2004 and is not expected to have a material impact on future
consolidated financial statements.
Recent Accounting Developments
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others" ("FIN 45"), which provides accounting, and disclosure
requirements for certain guarantees. The disclosure requirements are effective
for financial statements of interim or annual periods ending after December 15,
2002. The Interpretation's initial recognition and initial measurement
provisions are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002. We indemnify our clearing brokers for losses
they may sustain from the customer accounts introduced by our broker-dealer
subsidiaries. In accordance with New York Stock Exchange rules customer balances
are typically collateralized by customer securities or supported by other
recourse provisions. In addition, we further limit margin balances to a maximum
of 25% versus 50% permitted under exchange regulations. At December 31, 20042005 the
total amount of customer balances subject to indemnification (i.e. margin
debits) was immaterial. The Company also has entered into arrangements with
various other third parties which provide for indemnification against losses,
costs, claims and liabilities arising from the performance of their obligations
under our agreement, except for gross negligence or bad faith. The Company has
had no claims or payments pursuant to these or prior agreements, and we believe
the likelihood of a claim being made is remote. Utilizing the methodology in FIN
45, our estimate of the value of such agreements is de minimis, and therefore an
accrual has not been made in the financial statements.
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46, "Consolidation of Variable Interest Entities" which was
subsequently revised in December 2003 by FASB Interpretation No. 46(R)
("FIN46R"). FIN46R provides new criteria for determining whether or not
consolidation accounting is required for off-balance sheet activities conducted
through certain types of entities. This interpretation focuses on financial
interests in entities (i.e., variable interests) that indicate control despite
the absence of clear control through voting interest. It concludes that a
company's exposure (variable interest) to the economic risks and rewards from
the entity's assets and activities are the best evidence of control. The
interpretation requires that these variable interest entities (VIEs) be subject
to consolidation if the company holding the variable interest is subject to a
majority of the expected losses or will receive a majority of the expected
residual returns of the VIE (the "primary beneficiary"). As the primary
beneficiary it would be required to include the variable interest entity's
assets, liabilities and results of operations in its own financial statements.
In June 2005, the FASB ratified the consensus EITF 04-5, "Determining Whether a
General Partner, or the General Partners as a Group, Controls a Limited
Partnership or Similar Entity When the Limited Partners Have Certain Rights",
which provides guidance in determining whether a general partner controls a
limited partnership. The provisions of EITF 04-5 are not applicable to limited
partnerships or similar entities accounted for as VIEs pursuant to FIN46R.
We have reviewed the provisions of FIN46R and EITF 04-5 and have determined
that, beginning on January 1, 2006, we will consolidate the majority of our
investment partnerships and offshore funds which are managed by our subsidiaries
and are not determined to be VIEs. For those entities managed by our
subsidiaries and classified as VIEs, we have determined that we were not the
primary beneficiary or a holder of a significant variable interest in five of
the six VIEs on December 31, 2005.
We will apply the provisions of EITF 04-5 beginning on January 1, 2006 utilizing
the method similar to a cumulative effect of a change in accounting principle.
We have determined that there will be no cumulative effect on the amount of
retained earnings at the beginning of the period in which EITF 04-5 will be
adopted.
In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
is effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
after June 15, 2003. Under SFAS No. 150 certain financial instruments shall be
classified as a liability on the issuer's financials statements. The Company has
adopted this statement, which did not have a material impact on the Company's
financial statements.
55
On December 16, 2004, the Financial Accounting Standards Board (FASB)FASB issued FASB Statement No. 123 (R) (revised 2004),
Share-Based Payment, which is a revision of FASB Statement No. 123, "Accounting
for Stock-Based Compensation." Statement 123(R) supersedes APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and amends FASB Statement No. 95,
"Statement of Cash Flows." Generally, the approach in Statement 123(R) is
similar to the approach described in Statement 123. However, Statement 123(R)
requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the statement of operations based on their
fair values. Pro forma disclosure is no longer an alternative. Statement 123(R)
mustwas required to be adopted no later than July 1,at the beginning of the first interim or annual
period beginning after June 15, 2005. We expect to adoptadopted Statement 123(R) on January 1,
2005. In light of our prospective adoption of the fair value recognition
provisions of Statement 123(R) for all grants of employee stock options
subsequent to January 1, 2002, the adoption of Statement 123(R) did not have a
material impact on our consolidated financial statements.
In December 2004, the FASB issued Statement No. 153, "Exchanges of Nonmonetary
Assets, an amendment of APB Opinion No. 29." This Statement relates to
nonmonetary exchanges and requires that one record the exchange at fair value
unless the exchange lacks commercial substance. The Statement is effective for
nonmonetary asset exchanges occurring in fiscal periods beginning after June 15,
2005. The Statement is not expected to have a material impact on the Company's
future consolidated financial statements.
In January 2003,March 2005, the FASB issued FIN 47 which interprets FASB Statement No. 143,
"Asset Retirement Obligations (ARO's)," which was issued in June 2001. FIN 47
was issued to address the diverse accounting practices that have developed with
regard to the timing of conditional ARO's. Under the Interpretation, No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46") addressessuch ARO's
even if conditional upon some future event must be recognized as liabilities.
The Company does not have any such obligations at the application of Accounting
Research Bulletin No. 51, "Consolidated Financial Statements," to variable
interest entities ("VIE")present time, and generally would require that the
assets,
liabilities and results of operations of a VIE be consolidated into the
financial statementsadoption of the enterprise that has a controlling financial interest
in it. The interpretation provides a framework for determining whether an entity
should be evaluated for consolidation based on voting interests or significant
financial support provided to the entity (i.e., variable interests).
An entity is classified as a VIE if total equityInterpretation is not sufficientexpected to permit the
entity to finance its activities without additional subordinated financial
support or its equity investors lack the direct or indirect ability to make
decisions about an entity's activities through voting rights, absorb the
expected losses of the entity if they occur or receive the expected residual
returns of the entity if they occur. Once an entity is determined to be a VIE,
its assets, liabilities and results of operations should be consolidated with
those of its primary beneficiary. The primary beneficiary of a VIE is the entity
which either will absorb a majority of the VIE's expected losses or has the
right to receive a majority of the VIE's expected residual returns. The expected
losses and residual returns of a VIE include expected variability in its net
income or loss, fees to decision makers and fees to guarantors of substantially
all VIE assets or liabilities and are calculated in accordance with Statement of
Financial Accounting Concept No. 7, "Using Cash Flow Information and Present
Value in Accounting Measurements."
42
On December 24, 2003, the FASB issued a revision to FIN 46 to clarify some of
the provisions of this Interpretation and to exempt certain entities from its
requirements. Application by public entities, other than small business issuers,
for all other types of variable interest entities was required in financial
statements for periods ending after March 15, 2004.
While GBL is generally not subject to a majority of the risks of the VIEs, it
may be determined, for certain entities, that we receive a majority of the
expected residual returns based on the methodology for determining the primary
beneficiary. Therefore, when implemented, the Interpretation may require
consolidation of certain of our investment in partnerships and affiliates'
assets and liabilities and results of operations with minority interest recorded
for the ownership share applicable to other investors. The difference between
consolidation and the equity method will impact detailed line items reported
within the consolidated financial statements but not overall consolidated net
income or stockholders' equity. Where consolidation is not required additional
disclosures may be required.
In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
is effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
after June 15, 2003. Under SFAS No. 150 certain financial instruments shall be
classified as a liability on the issuer's financials statements. The Company has
adopted this statement, which did not have a material impact on the
Company's future consolidated financial statements. SEASONALITY AND INFLATIONIt is effective for fiscal
years ending after December 15, 2005.
In May 2005, the FASB issued FASB Statement No. 154, "Accounting Changes and
Errors Corrections," which is a replacement of APB Opinion No. 20, "Accounting
Changes," and FASB Statement No. 3, "Reporting Accounting Changes in Interim
Financial Statements." The Statement applies to all voluntary changes in
accounting principles, and changes the requirements for accounting for and
reporting of a change in accounting principle. Statement 154 requires
retrospective application to prior periods' financial statements of a voluntary
change in accounting principles unless it is impracticable. The Statement is
effective for accounting changes and corrections for errors made in fiscal years
beginning after December 15, 2005. The Statement does not change the transition
provisions of any existing accounting pronouncements. The Company plans to adopt
this Statement on January 1, 2006. The adoption is not expected to have a
material impact on the Company's future consolidated financial statements.
Seasonality and Inflation
We do not believe our operations are subject to significant seasonal
fluctuations. We do not believe inflation will significantly affect our
compensation costs, as they are substantially variable in nature. However, the
rate of inflation may affect our expenses such as information technology and
occupancy costs. To the extent inflation results in rising interest rates and
has other effects upon the securities markets, it may adversely affect our
financial position and results of operations by reducing our assets under
management, revenues or otherwise.
56
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Reference is made to the information contained under the heading "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Market Risk."
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the Index on page F-1 of the Consolidated Financial
Statements of Gabelli and the Notes thereto contained herein.
4357
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
GABELLI ASSET MANANAGEMENTGAMCO INVESTORS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Page
Report of Independent Registered Public Accounting Firm......................Firm F-2
Report of Independent Registered Public Accounting Firm on Effectiveness of Internal
Control over Financial Reporting.................Reporting F-3
Management's Assessment of Internal Control over Financial Reporting ........ F-4
CONSOLIDATED FINANCIAL STATEMENTS:Consolidated Financial Statements:
Consolidated Statements of Income for the years ended December 31, 2002, 2003, 2004
and 2004...........................................2005 F-5
Consolidated Statements of Financial Condition at December 31, 20032004 and 2004...................................................................2005 F-6
Consolidated Statements of Stockholders' Equity for the years ended December 31,
2002, 2003, 2004 and 2004...........................................2005 F-7
Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2003, 2004
and 2004....................................................2005 F-8
Notes to Consolidated Financial Statements...................................Statements F-9
- --------
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission that are not required
under the related instructions or are inapplicable have been omitted.
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Gabelli Asset ManagementGAMCO Investors, Inc. and Subsidiaries
We have audited the accompanying consolidated statements of financial condition
of GAMCO Investors, Inc. and Subsidiaries ("GAMCO") (formerly Gabelli Asset
Management Inc. and Subsidiaries ("Gabelli")Subsidiaries) as of December 31, 20042005 and 2003,2004, and the
related consolidated statements of income, changes in stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 2004.2005. These
financial statements are the responsibility of Gabelli'sGAMCO's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Gabelli Asset
ManagementGAMCO Investors,
Inc. and Subsidiaries at December 31, 20042005 and 2003,2004, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2004,2005, in conformity with U.S. generally accepted
accounting principles.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Gabelli Asset
ManagementGAMCO
Investors, Inc.'s and Subsidiaries' internal control over financial reporting as
of December 31, 2004,2005, based on criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated March 10, 2005,2006,
expressed an unqualified opinion thereon.
ERNST & YOUNG LLP
New York, New York
March 10, 20052006
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON EFFECTIVENESS OF
INTERNAL CONTROL OVER FINANCIAL REPORTING
The Board of Directors and Stockholders
Gabelli Asset ManagementGAMCO Investors, Inc. and Subsidiaries
We have audited management's assessment, included in the accompanying
Management's Report,Assessment of Internal Control Over Financial Reporting, that GAMCO
Investors, Inc. and Subsidiaries (the "Company") (formerly Gabelli Asset
Management Inc. and Subsidiaries (the
"Company")Subsidiaries) maintained effective internal control over
financial reporting as of December 31, 2004,2005, based on criteria established in
Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria)"COSO criteria"). Gabelli Asset ManagementGAMCO Investors,
Inc. and Subsidiaries' management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility
is to express an opinion on management's assessment and an opinion on the
effectiveness of the Company's internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that Gabelli Asset ManagementGAMCO Investors, Inc. and
Subsidiaries maintained effective internal control over financial reporting as
of December 31, 2004,2005, is fairly stated, in all material respects, based on the
COSO criteria. Also, in our opinion, Gabelli Asset ManagementGAMCO Investors, Inc. and Subsidiaries
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2004,2005, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated statements of
financial condition of Gabelli Asset ManagementGAMCO Investors, Inc. and Subsidiaries as of December 31,
20042005 and 2003,2004, and the related consolidated statements of income,
changes in stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 2004,2005, of Gabelli Asset ManagementGAMCO Investors, Inc. and Subsidiaries and our report dated March
10, 2005,2006, expressed an unqualified opinion thereon.
ERNST & YOUNG LLP
New York, New York
March 10, 20052006
F-3
MANAGEMENT'S ASSESSMENT OF INTERNAL CONTROL OVER FINANCIAL REPORTING
Gabelli Asset ManagementGAMCO Investors, Inc.'s ("GBL") management is responsible for the preparation,
integrity and fair presentation of the consolidated financial statements. These
consolidated financial statements and notes have been prepared in conformity
with U.S. generally accepted accounting principles from accounting records which
management believes fairly and accurately reflect GBL's operations and financial
position. The consolidated financial statements include amounts based on
management's best estimates and judgments considering currently available
information and management's view of current conditions and circumstances.
Management is responsible for establishing and maintaining adequate internal
control over financial reporting that is designed to provide reasonable
assurance of the reliability of financial reporting and the preparation of
financial statements in accordance with U.S. generally accepted accounting
principles. The system of internal control over financial reporting as it
relates to the financial statements is evaluated for effectiveness by management
and tested for reliability. Actions are taken to correct potential deficiencies
as they are identified. Any system of internal control, no matter how well
designed, has inherent limitations, including the possibility that a control can
be circumvented or overridden and misstatements due to error or fraud may occur
and not be detected. Also, because of changes in conditions, internal control
effectiveness may vary over time. Accordingly, even an effective system of
internal control will provide only reasonable assurance with respect to
financial statement preparation.
Management assessed the effectiveness of GBL's internal control over financial
reporting as of December 31, 2004,2005, in relation to criteria for effective
internal control over financial reporting as described in "Internal Control -
Integrated Framework," issued by the Committee of Sponsoring Organizations of
the Treadway Commission. Based on this assessment, management concluded that, as
of December 31, 2004,2005, its systems of internal control over financial reporting
is properly designed and operating effectively to achieve the criteria of the
"Internal Control - Integrated Framework." Ernst & Young LLP, independent
registered public accounting firm, has audited the consolidated financial
statements included in this annual report and has issued an audit report on
management's assessment of GBL's internal control over financial reporting.
Mario J. Gabelli Michael R. Anastasio
Chairman and Chief Executive Officer Vice President and Chief
Financial Officer
March 10, 20052006
F-4
GABELLI ASSET MANAGEMENTGAMCO INVESTORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
--------------------------------------
2002 2003 2004
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
REVENUESYear ended December 31,
2003 2004 2005
----------- ----------- --------
(In thousands, except per share data)
Revenues
Investment advisory and incentive fees ................ $ 177,077 $ 176,943 $ 219,939 $ 219,495
Commission revenue .................................... 13,883 12,863 15,573 12,195
Distribution fees and other income .................... 18,999 17,631 19,651 ---------- ---------- ----------20,673
----------- ----------- --------
Total revenues ................................... 209,959 207,437 255,163 ---------- ---------- ----------
EXPENSES252,363
----------- ----------- --------
Expenses
Compensation costs .................................... 80,387 89,169 104,09188,339 103,276 106,238
Management fee ........................................ 9,533 9,002 11,017 11,356
Distribution costs .................................... 14,979 16,096 20,00416,510 20,347 21,512
Other operating expenses .............................. 15,398 18,456 20,983
---------- ---------- ----------18,872 21,455 26,665
----------- ----------- --------
Total expenses ................................... 120,297 132,723 156,095 ---------- ---------- ----------165,771
----------- ----------- --------
Operating income ...................................... 89,662 74,714 99,068 ---------- ---------- ----------
OTHER INCOME (EXPENSE)86,592
----------- ----------- --------
Other Income (Expense)
Net gain from investments ............................. 1,353 15,610 5,627 10,912
Interest and dividend income .......................... 6,757 5,530 10,481 18,483
Interest expense ...................................... (11,977)expenses (14,838) (16,027) ---------- ---------- ----------(13,782)
----------- ----------- --------
Total other income (expense), net ................ (3,867) 6,302 81 ---------- ---------- ----------15,613
----------- ----------- --------
Income before income taxes and minority interest....... 85,795interest 81,016 99,149 102,205
Income taxes .......................................... 32,259 30,339 36,097 38,327
Minority interest ..................................... 224 833 493 ---------- ---------- ----------487
----------- ----------- --------
Net income ............................................ $ 53,312 $ 49,844 $ 62,559 ========== ========== ==========$ 63,391
=========== =========== ========
Net income per share:
Basic ............................................ $ 1.77 $ 1.66 $ 2.11 ========== ========== ==========$ 2.13
=========== =========== ========
Diluted .......................................... $ 1.76 $ 1.65 $ 2.06 ========== ========== ==========$ 2.09
=========== =========== ========
Weighted average shares outstanding:
Basic ............................................ 30,092 30,018 29,673 ========== ========== ==========29,805
=========== =========== ========
Diluted .......................................... 30,302 32,081 31,804 ========== ========== ==========31,155
=========== =========== ========
Dividends declared ............................... $ 0.00 $ 0.02 $ 1.76 ========== ========== ==========
$ 0.09
=========== =========== ========
See accompanying notes.
F-5
GABELLI ASSET MANAGEMENTGAMCO INVESTORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31,
------------------------
2003 2004
---------- ----------
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
Cash and cash equivalents, including restricted cash of $682 and $1,054......... $ 386,511 $ 257,096
Investments in securities, including restricted securities of $102,132
and $102,111 .............................................................. 231,400 292,350
Investments in partnerships and affiliates ..................................... 64,012 89,339
Receivable from brokers ........................................................ 1,232 5,539
Investment advisory fees receivable ............................................ 21,565 26,567
Other receivables from affiliates .............................................. 14,547 13,169
Capital lease .................................................................. 2,199 1,953
Intangible assets .............................................................. 4,650 4,650
Other assets ................................................................... 10,395 8,309
---------- ----------
Total assets .............................................................. $ 736,511 $ 698,972
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Payable to brokers ............................................................. $ 5,691 $ 302
Income taxes payable ........................................................... 12,323 8,526
Capital lease obligation ....................................................... 3,058 3,167
Compensation payable ........................................................... 25,552 27,645
Securities sold, not yet purchased ............................................. 664 1,088
Dividends payable .............................................................. -- 17,302
Accrued expenses and other liabilities ......................................... 18,487 17,585
---------- ----------
Total operating liabilities ............................................... 65,775 75,615
---------- ----------
5.5% Senior notes .............................................................. 100,000 100,000
5% Convertible note ............................................................ 100,000 100,000
Mandatory convertible securities ............................................... 84,030 82,308
---------- ----------
Total liabilities ......................................................... 349,805 357,923
Minority interest .............................................................. 8,395 6,171
Stockholders' equity:
Class A Common Stock, $.001 par value; 100,000,000 shares authorized;
7,697,600 and 8,081,356 shares issued and outstanding, respectively ....... 8 8
Class B Common Stock, $.001 par value; 100,000,000 shares authorized;
23,128,500 shares issued and outstanding, ................................. 23 23
Additional paid-in capital ................................................... 143,475 161,053
Retained earnings ............................................................ 257,266 268,519
Accumulated other comprehensive gain / (loss) ............................... 1,480 (53)
Treasury stock, at cost (776,544 and 2,372,822 shares, respectively) ......... (23,941) (94,672)
---------- ----------
Total stockholders' equity ................................................ 378,311 334,878
---------- ----------
Total liabilities and stockholders' equity ................................ $ 736,511 $ 698,972
========== ==========
December 31,
-------------------
2004 2005
--------- ---------
(In thousands,
except share data)
ASSETS
Cash and cash equivalents, including restricted
cash of $1,054 and $2,503 $257,096 $170,659
Investments in securities, including restricted
securities of $102,111 and $52,219 292,350 401,216
Investments in partnerships and affiliates 89,339 91,971
Receivable from brokers 5,539 8,545
Investment advisory fees receivable 26,567 22,260
Other receivables from affiliates 13,169 12,888
Capital lease 1,953 1,706
Intangible assets 4,650 3,523
Other assets 8,309 8,326
--------- ---------
Total assets $698,972 $721,094
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Payable to brokers $302 $4
Income taxes payable 8,526 10,132
Capital lease obligation 3,167 2,992
Compensation payable 27,645 27,889
Securities sold, not yet purchased 1,088 -
Dividends payable 17,302 -
Accrued expenses and other liabilities 17,585 17,489
--------- ---------
Total operating liabilities 75,615 58,506
--------- ---------
5.5% Senior notes (due May 15, 2013) 100,000 100,000
5% Convertible note (conversion price, $52.00 per
share; note due August 14, 2011) 100,000 50,000
5.22% Senior notes (due February 17, 2007) - 82,308
Mandatory convertible securities (purchase contract
settlement date, February 17, 2005; notes due
February 17, 2007) 82,308 -
--------- ---------
Total liabilities 357,923 290,814
Minority interest 6,171 6,151
Stockholders' equity:
Class A Common Stock, $.001 par value;
100,000,000 shares authorized; 8,081,356 and
9,648,339 shares issued, respectively; 5,708,534
and 6,414,517 outstanding, respectively 8 10
Class B Common Stock, $.001 par value;
100,000,000 shares authorized; 24,000,000
shares issued and 23,128,500 outstanding, 23 23
Additional paid-in capital 161,053 226,353
Retained earnings 268,519 329,090
Accumulated other comprehensive (loss) / gain (53) 526
Treasury stock, class A, at cost (2,372,822 and
3,233,822 shares, respectively) (94,672)(131,873)
--------- ---------
Total stockholders' equity 334,878 424,129
--------- ---------
Total liabilities and stockholders' equity $698,972 $721,094
========= =========
See accompanying notes.
F-6
GABELLI ASSET MANAGEMENTGAMCO INVESTORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBERYears ended December 31, 2002, 2003, AND 2004 (DOLLARS IN THOUSANDS)and 2005
(Dollars in thousands)
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY
STOCK CAPITAL EARNINGS (LOSS)/GAIN STOCK TOTAL
--------- --------- --------- --------- --------- ---------
Common Additional Retained Accumulated Treasury Total
Stock Paid-in Earnings Other Stock
Capital Compre-
hensive
(Loss) /
Gain
------------------------------------------------------------------
Balance at December 31, 2001 ..................... $ 30 $ 126,001 $ 154,249 $ (168) $ (4,815) $ 275,297
--------- --------- --------- --------- --------- ---------2002 $31 $136,835 $207,561 $(638) $(21,996) $321,793
------------------------------------------------------------------
Comprehensive income:
Net income ................................... -- -- 53,312 -- -- 53,312- - 49,844 - - 49,844
Other comprehensive loss:
Net unrealized lossesgains on securities
available for sale, net of management
Fees and income tax benefitexpense of $362 ...... -- -- -- (470) -- (470)
---------$1,656 - - - 2,118 - 2,118
------------
Total comprehensive income ................... 52,842
Issuance of mandatory convertible securities.... -- (4,615) -- -- -- (4,615)
Purchase and retirement of mandatory
convertible securities ................... -- 143 -- -- -- 143
Exercise of stock options including tax
benefit .................................. 1 15,306 -- -- -- 15,307
Purchase of treasury stock ..................... -- -- -- -- (17,181) (17,181)
--------- --------- --------- --------- --------- ---------
Balance at December 31, 2002 ..................... 31 136,835 207,561 (638) (21,996) 321,793
========= ========= ========= ========= ========= =========
Comprehensive income:
Net income ................................... -- -- 49,844 -- -- 49,844
Other comprehensive gain:
Net unrealized gains on securities
available for sale, net of management
fees and income tax expense of $1,656 .... -- -- -- 2,118 -- 2,118
---------
Total comprehensive income ................... 51,962
Dividends paid ................................. -- --declared - - (139) -- --- - (139)
Stock based compensation expense ............... --- 1,506 -- -- --- - - 1,506
Purchase and retirement of mandatory
convertible securities ................... --- 13 -- -- --- - - 13
Exercise of stock options including tax
benefit .................................. --- 5,121 -- -- --- - - 5,121
Purchase of treasury stock ..................... -- -- -- --- - - - (1,945) (1,945)
--------- --------- --------- --------- --------- ---------------------------------------------------------------------------
Balance at December 31, 2003 ..................... 31 143,475 257,266 1,480 (23,941) 378,311
========= ========= ========= ========= ========= =========------------------------------------------------------------------
Comprehensive income:
Net income ................................... -- --- - 62,559 -- --- - 62,559
Other comprehensive gain:
Net unrealized losses on securities
available for sale, net of management
fees and income tax benefit of $1,198 .... -- -- --- - - (1,533) --- (1,533)
---------------------
Total comprehensive income ................... 61,026
Dividends paid and declared .................... -- --- - (51,306) -- --- - (51,306)
Stock based compensation expense ............... --- 1,819 -- -- --- - - 1,819
Purchase and retirement of mandatory
convertible securities ................... --- 45 -- -- --- - - 45
Exercise of stock options including tax
benefit .................................. --- 4,090 -- -- --- - - 4,090
Proceeds from early settlement of
purchase contracts ................................ --- 11,740 -- -- --- - - 11,740
Capitalized costs .............................. --- (116) -- -- --- - - (116)
Purchase of treasury stock ..................... -- -- -- --- - - - (70,731) (70,731)
--------- --------- --------- --------- --------- ---------------------------------------------------------------------------
Balance at December 31, 2004 ..................... $$31 $161,053 $268,519 $(53) $(94,672) $334,878
==================================================================
Comprehensive income:
Net income - - 63,391 - - 63,391
Other comprehensive gain:
Net unrealized gains on securities
available for sale, net of management
fees and income tax expense of $438 - - - 564 - 564
Foreign currency translation - - - 15 - 15
------------
Total comprehensive income 63,970
Dividends declared - - (2,820) - - (2,820)
Tender for employee stock options - (9,665) - - - (9,665)
Stock based compensation expense - 2,770 - - - 2,770
Exercise of stock options including tax
benefit - 1,659 - - - 1,659
Proceeds from settlement of
purchase contracts 2 70,567 - - - 70,569
Capitalized costs - (31) - - - (31)
Purchase of treasury stock - - - - (37,201) (37,201)
------------------------------------------------------------------
Balance at December 31, $ 161,053 $ 268,519 $ (53) $ (94,672) $ 334,878
========= ========= ========= ========= ========= =========2005 $33 $226,353 $329,090 $526 $(131,873) $424,129
==================================================================
See accompanying notes.
F-7
GABELLI ASSET MANAGEMENTGAMCO INVESTORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31
--------------------------------------
2002 2003 2004
---------- ---------- ----------
(IN THOUSANDS)
OPERATING ACTIVITIESYear ended December 31
------------------------------------
2003 2004 2005
------------------------------------
(In thousands)
Operating activities
Net income ..................................................... $ 53,312 $ 49,844 $ 62,559$49,844 $62,559 $63,391
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Equity in earnings of partnerships and affiliates ............ (1,135) (5,729) (4,843) (6,967)
Realized gains on available for sale securities (31) (101) (482)
Realized gains on trading investments in
securities (3,999) (960) (10,676)
Change in unrealized on trading investments in
securities (6,513) (46) (2,872)
Depreciation and amortization ................................ 897 967 980 911
Stock based compensation expense ............................. -- 1,506 1,819 2,770
Deferred income taxes ........................................ 19,882 1,079 (1,769) 1,088
Tax benefit from stock options exercised ..................... 4,488 1,223 1,064 328
Minority interest in income of subsidiaries .................. 224 833 493 Realized losses (gains) on487
Foreign currency loss - - 191
Other-than-temporary impairment of available for
sale securities ..... 20 (31) (101)
Market value of donated securities ........................... 412 -- --- - 3,301
Goodwill impairment - - 1,191
(Increase) decrease in operating assets:
Purchases of trading investments in securities (678,752) (928,522) (1,154,114)
Proceeds from sales of trading investments in
securities 690,469 873,185 1,063,096
Distributions from partnerships and affiliates 15,180 20,793 20,304
Investments in securities ................................. (119,935) 1,774 (52,525)partnerships and affiliates (25,530) (37,035) (15,969)
Investment advisory fees receivable ....................... (953) (5,962) (5,002) 4,307
Other receivables from affiliates ......................... 1,419 (4,107) 1,378 126
Receivable from broker .................................... (4,883)brokers 3,686 (4,307) (3,006)
Other assets .............................................. (4,230) (1,269) 1,351 (607)
Increase (decrease) in operating liabilities:
Payable to broker ......................................... 8,584brokers (11,447) (5,389) (298)
Income taxes payable ...................................... 3,521 771 (1,103) 186
Compensation payable ...................................... (2,641) 6,716 2,366 Securities sold, not yet purchased ........................ 5,022 (4,358) 424144
Accrued expenses and other liabilities .................... (2,351) 2,525 (790) ---------- ---------- ----------(361)
------------------------------------
Total adjustments .............................................. (91,659) (11,823) (65,954)
---------- ---------- ----------(18,384) (86,438) (96,922)
------------------------------------
Net cash provided by (used in) operating activities ............ (38,347) 38,021 (3,395)
---------- ---------- ----------
INVESTING ACTIVITIES31,460 (23,879) (33,531)
------------------------------------
Investing activities
Purchases of available for sale securities ..................... (1,237) (55,851)(59,640) (11,656) (9,290)
Proceeds from sales of available for sale securities ........... 735 1,949 600 Distributions from partnerships and affiliates ................. 27,154 15,180 20,793
Investments in partnerships and affiliates ..................... (8,113) (25,530) (41,277)
---------- ---------- ----------2,085
------------------------------------
Net cash provided by (used in) investing activities ............ 18,539 (64,252) (31,540)
---------- ---------- ----------
FINANCING ACTIVITIES(57,691) (11,056) (7,205)
------------------------------------
Financing activities
Distributions to minority stockholders ......................... (273) --- (2,718) Proceeds from issuance(507)
Partial repayment of mandatory5% convertible securities ..... 87,738 -- --
Repayment of note payable ......................................- - (50,000) -- --
Issuance of 5.5% Senior notes .................................. -- 100,000 --- -
Proceeds from exercise of stock options ........................ 10,819 3,898 3,026 Dividends payable .............................................. -- -- 17,3021,331
Dividends paid and declared .................................... -- (139) (51,306)(34,004) (20,122)
Purchase and retirement of mandatory convertible
securities..... (5,312)securities (502) (1,677) -
Proceeds from earlythe settlement of purchase contracts ........... -- --- 11,740 70,569
Capitalized costs .............................................. -- --- (116) (31)
Tender for employee stock options - - (9,665)
Purchase of treasury stock ..................................... (17,181) (1,945) (70,731) ---------- ---------- ----------(37,201)
------------------------------------
Net cash provided by (used in) financing activities ............ 25,791 101,312 (94,480) ---------- ---------- ----------(45,626)
------------------------------------
Net increase (decrease) in cash and cash equivalents ........... 5,983 75,081 (129,415) (86,362)
Cash and cash equivalents at beginning of year ................. 305,447 311,430 386,511 ---------- ---------- ----------257,096
Effect of foreign exchange rates on cash and cash
equivalents - - (75)
------------------------------------
Cash and cash equivalents at end of year ....................... $ 311,430 $ 386,511 $ 257,096
========== ========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION$386,511 $257,096 $170,659
====================================
Supplemental disclosures of cash flow information
Cash paid for interest ......................................... $ 11,908 $ 15,116 $ 16,662
---------- ---------- ----------$15,116 $16,662 $14,692
------------------------------------
Cash paid for income taxes ..................................... $ 4,464 $ 27,345 $ 37,881
---------- ---------- ----------
SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING ACTIVITIES$27,345 $37,881 $36,779
------------------------------------
Supplemental disclosures of non-cash financing
activities
Securities reclassified to available for sale .................. $ -- $ 3,788 $ --
---------- ---------- ----------$3,788 $- $-
------------------------------------
See accompanying notesnotes.
F-8
A. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATIONSignificant Accounting Policies
Basis of Presentation
GAMCO Investors, Inc. ("GBL" or the "Company") (formerly Gabelli Asset
Management Inc.) 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 initial public offering ("Offering") of our
shares. On February 9, 1999, we exchanged 24 million shares of our class B
common stock, representing all of our then issued and outstanding common stock,
with Gabelli Funds, Inc. ("GFI") and two of its subsidiaries 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"). GabelliGBL distributed net
assets and liabilities, principally a proprietary investment portfolio, of
approximately $165 million, including cash of $18 million, which has been
recorded for accounting purposes as a deemed distribution to GFI. GFI, which was later
renamed Gabelli Group Capital Partners, Inc. in 1999, was renamed GGCP, Inc.
("GGCP"). during 2005.
On February 17, 1999, we completed our sale of 6 million shares of class A
common stock in the Offering and received proceeds, after fees and expenses, of
approximately $96 million. Immediately after the Offering, GFI owned 80% of the
outstanding common stock of Gabelli.GBL and as of December 31, 2005 their ownership is
78.3%. In addition, with the completion of the Offering, we became a "C"
Corporation for Federal and state income tax purposes and are subject to
substantially higher income tax rates. Our corporate name change to GAMCO
Investors, Inc. became effective August 29, 2005.
The accompanying consolidated financial statements include the assets,
liabilities and earnings of:
o Gabelli;GBL; and
o Our wholly-owned subsidiaries: Gabelli Funds, LLC ("Funds Adviser"),
GAMCO Investors,Asset Management Inc. ("GAMCO" and formerly GAMCO Investors,
Inc.), Gabelli Asset Management (UK) Limited, Gabelli Fixed Income,
Inc. ("Fixed Income") and its subsidiaries; and
o Our majority-owned or majority-controlled subsidiaries: Gabelli
Securities, Inc. ("GSI") and its subsidiaries and Gabelli Advisers,
Inc. ("Advisers").
At December 31, 2002, 2003, 2004 and 2004,2005, we owned approximately 92% of GSI and had a
51% voting interest in Advisers (41% economic interest.) The consolidated
financial statements comprise the financial statements of GBL and its
subsidiaries as of December 31 of each year. The financial statements of the
subsidiaries are prepared for the same reporting year as the parent company,
using consistent accounting policies. All significant intercompany transactions
and balances have been eliminated. USE OF ESTIMATESSubsidiaries are fully consolidated from the
date of acquisition, being the date on which GBL obtains control, and continue
to be consolidated until the date that such control ceases.
Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S.
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
NATURE OF OPERATIONSNature of Operations
GAMCO, Funds Adviser, Gabelli Fixed Income LLC ("Fixed Income LLC)LLC"), a
majority-ownedwholly-owned subsidiary of Fixed Income, Advisers and AdvisersGSI (effective January 19,
2006) are registered investment advisors under the Investment Advisers Act of
1940. Gabelli & Company, Inc. ("Gabelli & Company") and Gabelli Direct, Inc.
("Gabelli Direct"), both wholly-owned subsidiaries of GSI, and Gabelli Fixed
Income Distributors, Inc. ("Fixed Income Distributors"), a wholly-owned
subsidiary of Fixed Income LLC, are registered broker-dealers with the
Securities and Exchange Commission ("SEC") and are members of the National
Association of Securities Dealers, Inc. ("NASD"). Gabelli & Company acts as an
introducing broker and all transactions for its customers are cleared through
New York Stock Exchange ("NYSE") member firms on a fully disclosed basis.
Accordingly, open customer transactions are not reflected in the accompanying
consolidated statements of financial condition. Gabelli & Company is exposed to
credit losses on these open positions in the event of nonperformance by its
customers.customers, pursuant to conditions of its clearing agreements with its clearing
brokers. This exposure is reduced by the clearing brokers' policy of obtaining
and maintaining adequate collateral and credit of the counterparties until the
open transaction is completed. Gabelli Direct and Fixed Income Distributors do
not currently have any customers.
CASH AND CASH EQUIVALENTSF-9
Cash and Cash Equivalents
Cash equivalents primarily consist of affiliated money market mutual funds which
are highly liquid investments with a maturity of three
months or less at the time of purchase.liquid. At December 31, 2004 and 2005, approximately $1.1 million and
$2.5 million, respectively, of cash and cash equivalents was held as part of the
collateral to secure a $102.5$51.3 million letter of credit originally issued August
14, 2002, in favor of the holder of the $100$50 million 5% convertible note. The
$102.5$51.3 million letter of credit is due to expire on April 9, 2005.
F-9
SECURITIES TRANSACTIONSSeptember 22, 2006.
Securities Transactions and Commissions Revenue and Clearing Charges
Investments in securities are accounted for as either "trading securities" or
"available for sale" and are stated at quoted market values. Securities that are
not readily marketable are stated at their estimated fair values as determined
by our management. The resulting unrealized gains and losses for trading
securities are included in net gain from investments and the unrealized gains
and losses for available for sale securities, net of management fees and tax,
are reported as a separate component of stockholders' equity. Securities
transactions and any related gains and losses are recorded on a trade date
basis. Realized gains and losses from securities transactions are recorded on
the identified cost basis. Commissions revenue and related clearing charges are
recorded on a trade date basis.
At December 31, 2004 and 2005, approximately $102.1 million and $52.2 million,
respectively, of investments in securities were held as collateral to secure a
$102.5$51.3 million letter of credit originally issued August 14, 2002 in favor of the
holder of the $100$50 million 5% convertible note. The $102.5$51.3 million letter of
credit is due to expire on April 9, 2005.September 22, 2006.
Securities sold, but not yet purchased are recorded at trade date, stated at
quoted market values and represent obligations of GabelliGBL to purchase the securities
at prevailing market prices. Therefore, the future satisfaction of such
obligations may be for an amount greater or less than the amounts recorded on
the consolidated statements of financial condition. The ultimate gains or losses
recognized are dependent upon the prices at which these securities are purchased
to settle the obligations under the sales commitments.
INVESTMENTS IN PARTNERSHIPS AND AFFILIATESInvestments in Partnerships and Affiliates
Investments in partnerships and affiliates, whose underlying assets consist
mainly of marketable securities, are accounted for using the equity method under
which our share of net earnings or losses of these partnerships and affiliated
entities is reflected in income as earned, capital contributions are recorded
when paid, and distributions received are reductions of the investments.
Investments in partnerships and affiliates for which market values are not
readily available are stated at their estimated fair values as determined by our
management. RECEIVABLES FROM AND PAYABLES TO BROKERSDepending on the terms of the investment, the Company may be
restricted as to the timing and amounts of withdrawals.
Receivables from and Payables to Brokers
Receivables from and payables to brokers consist of amounts arising primarily
from the purchases and sales of securities.
REVENUE RECOGNITION
Investment advisory and distribution fees are based on predetermined percentages
of the market values of the portfolios under management and are recognized as
revenues as the related services are performed. Investment advisory and
distributionRevenue Recognition
Advisory fees from the open-end mutual funds and closed-end mutual funds ("Mutual Funds"(collectively,
the "Funds") and sub-advisory accounts are computed daily or weekly based on
average daily net assets and charged to the Funds monthly.assets. Advisory fees earned from institutional and high net worth separate accounts
("the Separate Accounts")Accounts are generally
computed quarterly based on account values as of the end of the preceding
quarter. Performancequarter and accrued monthly. Management fees from Investment Partnerships are
computed either monthly or quarterly and accrued monthly and amounts receivable
are included in other receivables from affiliates in the statement of financial
condition.
Revenues from Investment Partnerships also generally include an incentive
allocation or a fee of 20% of the economic profit. The incentive allocation or
fee is generally based upon eitheron the absolute gain in a portfolio and is recognized as
earned during the year and amounts receivable are included in other receivables
from affiliates in the statement of financial condition. Fulcrum fees from
certain institutional separate accounts, which are based upon meeting or
the amount in excess of aexceeding specific benchmark index or indices are recognized at the end of the
stipulated contract period for the respective account and receivables due from
fulcrum fees are included in investment advisory fees on the statement of
financial condition. There were no fulcrum fees receivable as of December 31,
2005. Management fees on closed-end preferred shares are received at year-end if
the total return to common shareholders of the closed-end fund for the calendar
year exceeds the dividend rate of the preferred shares. These fees are
recognized when earned.
DISTRIBUTION COSTSas earned during the year. Receivables due on management fees on
closed-end funds are included in investment advisory fees receivable on the
statement of financial condition. At December 31, 2005 there was $156,000 in
incentive allocations that have been recorded for offshore funds with Fiscal
year-ends of June 30th, which potentially could be reversed out in 2006, prior
to the end of the Fiscal year-end of the offshore fund.
F-10
Distribution fees from the open-end mutual funds are computed daily based on
average net assets and are accrued monthly. The amounts receivable for
distribution fees are included in other receivables from affiliates on the
statement of financial condition.
Distribution Costs
We incur certain promotion and distribution costs, which are expensed as
incurred, principally related to the sale of shares of open-end mutual funds,
shares sold in the initial public offerings of our closed-end funds, and
after-market support services related to our closed-end funds. Distribution
costs relating to closed-end funds were approximately $298,000, $4,365,000 and
$4,365,000$5,576,000 for 2003, 2004 and 2004,2005, respectively.
DIVIDENDS AND INTEREST INCOME AND INTEREST EXPENSEDividends and Interest Income and Interest Expense
Dividends are recorded on the ex-dividend date. Interest income and interest
expense are accrued as earned or incurred.
F-10
DEPRECIATION AND AMORTIZATIONDepreciation and Amortization
Fixed assets, which are included in other assets, are recorded at cost and
depreciated using the straight-line method over their estimated useful lives.
Leasehold improvements, which are included in other assets, are recorded at cost
and amortized using the straight-line method over their estimated useful lives
or lease terms, whichever is shorter. Amortization of the capital lease
obligation is computed on the interest rate method while the leased property is
depreciated utilizing the straight-line method over the term of the lease, which
expires on April 30, 2013. Property under our capital lease is amortized using
the straight-line method over the life of the lease.
INTANGIBLE ASSETSIntangible Assets
Intangible assets consist primarily of the cost in excess of net assets acquired
(i.e., goodwill). Goodwill and other intangible assets are deemed to have
indefinite lives and, therefore, are not subject to amortization, but are
instead reviewed at least annually for impairment in accordance with SFASStatement
of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other
Intangible Assets".
INCOME TAXESAssets." During the first quarter of 2005, assets under management
for our fixed income business decreased approximately 42% from the beginning of
the year, triggering under our accounting policies the need to reassess goodwill
for this previously 80% owned subsidiary. Using a present value cash flow
method, we reassessed goodwill for this entity and determined that the value of
the entity no longer justified the amount of goodwill. Accordingly, we recorded
a charge of $1.1 million for the impairment of goodwill which represented the
entire amount of goodwill for this entity during 2005.
At November 30, 2005 management conducted its annual assessment and assessed the
recoverability of goodwill and other intangible assets and determined that there
was no further impairment for the remaining goodwill in GBL's consolidated
financial statements. In assessing the recoverability of goodwill and other
intangible assets, projections regarding estimated future cash flows and other
factors are made to determine the fair value of the respective assets. If these
estimates or related projections change in the future, it may result in an
impairment charge for these assets to income.
Income Taxes
We account for income taxes under the liability method prescribed by SFAS No.
109, "Accounting for Income Taxes." Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to the differences
between the financial statement carrying amount of existing assets and
liabilities and their respective tax basis. Future tax benefits are recognized
only to the extent that realization of such benefits is more likely than not.
MINORITY INTEREST
Minority Interest
For the year ended December 31, 2005, minority interest on the statement of
income represents income attributable to the minority stockholders' ownership of Fixed
Income, GSI and Advisers. With the exception of GSI, these minority stockholders
are principally employees, officers and directors of Gabelli.
FAIR VALUES OF FINANCIAL INSTRUMENTSGBL.
On December 31, 2005, minority interest on the statement of financial condition
represents amounts attributable to the minority stockholders' of GSI and
Advisers. These minority stockholders are principally employees, officers and
directors of GBL, except that the minority stockholders of GSI also include
other outside investors.
F-11
On December 31, 2005, the minority interest of Fixed Income was eliminated as
the Company acquired the remaining interest it did not own through a settlement
with the minority interest stockholders.
Fair Values of Financial Instruments
The carrying amount of all assets and liabilities, other than intangible assets,
capital lease and fixed assets, in the consolidated statements of financial
condition approximate their fair values.
EARNINGS PER SHAREEarnings Per Share
Net income per share is computed in accordance with SFAS No. 128, "Earnings Per
Share". Basic net income per common share is calculated by dividing net income
applicable to common stockholders by the weighted average number of shares of
common stock outstanding in the period.
Diluted net income per share, in addition to the weighted average determined for
basic net income per share, includes common stock equivalents which would arise
from the exercise of stock options using the treasury stock method and, if
dilutive, assumes the conversion of our convertible note for the period
outstanding since its issuance in August 2001. An average of 210,000, 141,000, 208,000
and 208,000151,000 incremental shares were included as the dilutive effect of stock
options in 2002, 2003, 2004 and 2004,2005, respectively. In 2002 the assumed conversion of
the convertible note would be anti-dilutive and, accordingly, has not been
included in computing diluted net income per share. In 2003, net income is adjusted
for interest expense, net of management fees and taxes, of $3,157,000 and the
weighted average shares outstanding includes 1,923,000 incremental shares as the
convertible note had a dilutive effect. In 2004, net income is adjusted for
interest expense, net of management fees and taxes, of $2,862,000 and the
weighted average shares outstanding includes 1,923,000 incremental shares as the
convertible note had a dilutive effect. STOCK BASED COMPENSATIONIn 2005, net income is adjusted for
interest expense, net of management fees and taxes, of $1,758,000 and the
weighted average shares outstanding includes 1,199,000 incremental shares as the
convertible note had a dilutive effect.
Stock Based Compensation
We currently sponsor stock option plans previously adopted and approved by our
shareholders as a means to attract, retain and motivate employees. Effective
January 1, 2003, we adopted the fair value recognition provisions of SFAS No.
123 in accordance with the transition and disclosure provisions under the
recently issued SFAS No. 148, "Accounting for Stock Based Compensation -
Transition and Disclosure". Previously we had elected to use the intrinsic value
method prescribed in Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations.
Accordingly, no compensation expense was recognized where the exercise price
equaled or exceeded the market price of the underlying stock on the date of
grant. We adopted Statement 123 (R) on January 1, 2005. In light of our modified
prospective adoption of the fair value recognition provisions of Statement 123
(R) for all grants of employee stock options, the adoption of Statement 123 (R)
did not have a material impact on our consolidated financial statements. In
2003, 2004 and 2005 we have recognized $1,819,000a total of $1,555,000, $1,817,000 and
$2,770,000, respectively, in option expense. We expense stock option
compensation over the vesting period of the option in line with the vesting
characteristics. Refer also to Note F.
F-11
BUSINESS SEGMENTSBusiness Segments
We operate predominantly in one business segment, the investment advisory and
asset management industry. RECLASSIFICATIONSWe conduct our investment advisory business
principally through: GAMCO (Separate Accounts), Funds Adviser (Mutual Funds) and
GSI (Investment Partnerships). We also act as an underwriter, are a distributor
of our open-end mutual funds and provide institutional research through Gabelli
& Company, our broker-dealer subsidiary.
Reclassifications
Certain prior period amounts reflect reclassifications to conform towith the
current year's presentation.
RECENTLY ISSUED ACCOUNTING STANDARDSF-12
Recently Issued Accounting Standards
In AprilNovember 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No.
145, which rescinded SFAS No. 4 "Reporting Gains and Losses from Extinguishment
of Debt". Under SFAS No. 4, all gains and losses from extinguishment of debt
were required to be aggregated and, if material, classified as an extraordinary
item. As a result of the rescission, the criteria in APB Opinion No. 30 is used
to classify gains and losses from debt extinguishments. Since the issuance of
SFAS No. 4, the use of debt extinguishments has become a part of the risk
management strategy of many companies, particularly those who participate in the
secondary lending markets. Debt extinguishment no longer meets the criteria for
classification as extraordinary items in APB Opinion No. 30. Accordingly, gains
from the repurchase of our mandatory convertible securities in 2002, 2003 and
2004 of $613,000, $96,000 and $34,000, respectively, have been included in net
gain from investments and not as an extraordinary item. The adoption of SFAS No.
145 did not have a material impact on our consolidated financial statements in
2002, 2003 and 2004 and is not expected to have a material impact on future
consolidated financial statements.
In November 2002, the FASB issued
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness to Others" ("FIN 45"),
which provides accounting, and disclosure requirements for certain guarantees.
The disclosure requirements are effective for financial statements of interim or
annual periods ending after December 15, 2002. The Interpretation's initial
recognition and initial measurement provisions are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002. We indemnify our
clearing brokers for losses they may sustain from the customer accounts
introduced by our broker-dealer subsidiaries. In accordance with New York Stock ExchangeNYSE rules
customer balances are typically collateralized by customer securities or
supported by other recourse provisions. In addition, we further limit margin
balances to a maximum of 25% versus 50% permitted under exchange regulations. At
December 31, 2004 and 2005 the total amount of customer balances subject to
indemnification (i.e. margin debits) was immaterial. The Company also has
entered into arrangements with various other third parties which provide for
indemnification against losses, costs, claims and liabilities arising from the
performance of their obligations under our agreement, except for gross
negligence or bad faith. The Company has had no claims or payments pursuant to
these or prior agreements, and we believe the likelihood of a claim being made
is remote. Utilizing the methodology in FIN 45, our estimate of the value of
such agreements is de minimis, and therefore an accrual has not been made in the
financial statements.
On December 16, 2004, the Financial Accounting Standards Board (FASB) issued
FASB Statement No. 123 (R) (revised 2004), Share-Based Payment, which is a
revision of FASB Statement No. 123, "Accounting for Stock-Based Compensation."
Statement 123(R) supersedes APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and amends FASB Statement No. 95, "Statement of Cash Flows."
Generally, the approach in Statement 123(R) is similar to the approach described
in Statement 123. However, Statement 123(R) requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
statement of operations based on their fair values. Pro forma disclosure is no
longer an alternative. Statement 123(R) must be adopted no later than July 1,
2005. We expect to adopt Statement 123(R) on January 1, 2005. In light of our
prospective adoption of the fair value recognition provisions of Statement
123(R) for all grants of employee stock options subsequent to January 1, 2002,
the adoption of Statement 123(R) is not expected to have a material impact on
future consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" which was subsequently revised in December 2003 by
FASB Interpretation No. 46(R) ("FIN 46"FIN46R") addresses. FIN46R provides new criteria for
determining whether or not consolidation accounting is required for off-balance
sheet activities conducted through certain types of entities. This
interpretation focuses on financial interests in entities (i.e., variable
interests) that indicate control despite the applicationabsence of Accounting
Research Bulletin No. 51, "Consolidated Financial Statements,"clear control through
voting interest. It concludes that a company's exposure (variable interest) to
the economic risks and rewards from the entity's assets and activities are the
best evidence of control. The interpretation requires that these variable
interest entities ("VIE") and generally would require that(VIEs) be subject to consolidation if the assets,
liabilities and results of operations of a VIE be consolidated intocompany holding the
financial statements of the enterprise that has a controlling financial interest
in it. The interpretation provides a framework for determining whether an entity
should be evaluated for consolidation based on voting interests or significant
financial support provided to the entity (i.e., variable interests).
F-12
An entity is classified as a VIE if total equity is not sufficient to permit the
entity to finance its activities without additional subordinated financial
support or its equity investors lack the direct or indirect ability to make
decisions about an entity's activities through voting rights, absorb the
expected losses of the entity if they occur or receive the expected residual
returns of the entity if they occur. Once an entity is determined to be a VIE,
its assets, liabilities and results of operations should be consolidated with
those of its primary beneficiary. The primary beneficiary of a VIE is the entity
which either will absorb a majority of the VIE's expected losses or has the
right to receive a majority of the VIE's expected residual returns. The expected
losses and residual returns of a VIE include expected variability in its net
income or loss, fees to decision makers and fees to guarantors of substantially
all VIE assets or liabilities and are calculated in accordance with Statement of
Financial Accounting Concept No. 7, "Using Cash Flow Information and Present
Value in Accounting Measurements."
On December 24, 2003, the FASB issued a revision to FIN 46 to clarify some of
the provisions of this Interpretation and to exempt certain entities from its
requirements. Application by public entities, other than small business issuers,
for all other types of
variable interest entities was required in financial
statements for periods ending after March 15, 2004.
While Gabelli is generally not subject to a majority of the risks of the VIEs,
it may be determined, for certain entities, that weexpected losses or will
receive a majority of the expected residual returns based onof the methodology for determiningVIE (the "primary
beneficiary"). As the primary beneficiary. Therefore, when implemented,beneficiary it would be required to consolidate
the Interpretation may require
consolidation of certain of our investment in partnerships and affiliates'variable interest entity's assets, and liabilities and results of operations with minority interest recorded
forin
its own consolidated financial statements.
In June 2005, the ownership shareFASB ratified the consensus EITF 04-5, "Determining Whether a
General Partner, or the General Partners as a Group, Controls a Limited
Partnership or Similar Entity When the Limited Partners Have Certain Rights",
which provides guidance in determining whether a general partner controls a
limited partnership. The provisions of EITF 04-5 are not applicable to other investors. The difference betweenlimited
partnerships or similar entities accounted for as VIEs pursuant to FIN46R.
We have reviewed the provisions of FIN46R and EITF 04-5 and have determined that
we will be required to consolidate the majority of our investment partnerships
and offshore funds managed by our subsidiaries beginning on January 1, 2006. If
consolidation of these investment partnerships and offshore funds were made as
of December 31, 2005, the equity method will impact detailed line items reported
within theeffect on our consolidated financial statements would
have been as follows:
Consolidated Statement of Financial Condition (unaudited)
December 31, 2005
Effects of (Pro Forma)
Reported consolidation Post consolidation
Assets $ 721,094 $ 403,112 $ 1,124,206
Liabilities 290,814 86,485 377,299
Minority Interest 6,151 316,627 322,778
Stockholders' Equity 424,129 - 424,129
F-13
Consolidated Statement of Income (unaudited)
For the year ended December 31, 2005
Effects of (Pro Forma)
Reported consolidation Post consolidation
Revenues $ 252,363 ($ 7,122) $ 245,241
Expenses 165,771 1,408 167,179
Other Income, net 15,613 28,838 44,451
Minority Interest 487 20,308 20,795
Net Income $ 63,391 $ - $ 63,391
We will apply the provisions of EITF 04-5 beginning on January 1, 2006 utilizing
the method similar to a cumulative effect of a change in accounting principle.
We have determined that there will be no cumulative effect on the amount of
retained earnings at the beginning of the period in which EITF 04-5 will be
adopted.
We also serve as the investment manager or co-investment manager of five
offshore funds and the general partner for one partnership, which are classified
as VIEs. These offshore funds seek to earn absolute returns for investors and
are primarily focused within our event-driven long/short equity and
sector-focused strategies. The partnership seeks to generate absolute returns by
investing in, and optimizing, a portfolio of several investment partnerships
managed and advised by us. Our involvement with one of these offshore funds
began in 1994 but the majority of the offshore funds were launched between 1999
and 2002. The partnership began in 2005.
The total net assets of the five offshore funds and one partnership, which are
classified as VIEs, were approximately $40.0 million on December 31, 2005 and
the total net assets of the five offshore funds on December 31, 2004 were
approximately $42.5 million. On December 31, 2005, we were not overallthe primary
beneficiary or a holder of a significant variable interest in five of the six
VIEs. In the other instance, an unconsolidated related party held an interest in
an offshore fund which, when combined with the Company's cash flows from the
incentive fee allocation and the management fee as co-investment manager results
in the Company being considered the primary beneficiary of such entity. This
offshore fund is a global event-driven long/short equity fund with total assets
of $13,164,000 and $10,078,000 and total liabilities of $975,000 and $979,000 at
December 31, 2004 and 2005, respectively. This fund has not been consolidated net
income or stockholders' equity. Where consolidationas
of and for the year ended December 31, 2005 and 2004. As co-investment manager
of this fund, we earned approximately $110,000, $98,000 and $72,000 in
management and incentive fees in 2003, 2004 and 2005, respectively. However, we
are not exposed to losses as a result of our involvement with this fund because
we have had no direct investment.
Our maximum exposure to loss as a result of our involvement with the offshore
funds classified as VIEs is limited to our investment in the respective VIEs. On
December 31, 2004 and 2005, we did not required, additional
disclosures may be required.have any direct investments in these
offshore funds. Our maximum exposure to loss as a result of our involvement with
the partnership classified as a VIE includes our investment as well as being
contingently liable for all of the partnership's liabilities in our capacity as
general partner. On December 31, 2005 and 2004, we did not have an investment in
this partnership. Financial information pertaining to our investments in
partnerships and affiliates is presented in Note C.
In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
is effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
after June 15, 2003. Under SFAS No. 150, certain financial instruments shall be
classified as a liability on the issuer's financials statements. The Company has
adopted this statement, which did not have a material impact on the Company's
financial statements.
On December 16, 2004, the FASB issued FASB Statement No. 123 (R) (revised 2004),
Share-Based Payment, which is a revision of FASB Statement No. 123, "Accounting
for Stock-Based Compensation." Statement 123(R) supersedes APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and amends FASB Statement No. 95,
"Statement of Cash Flows." Generally, the approach in Statement 123(R) is
similar to the approach described in Statement 123. However, Statement 123(R)
requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the statement of income based on their fair
values. Pro forma disclosure is no longer an alternative. Statement 123(R) must
be adopted no later than July 1, 2005. We adopted Statement 123(R) on January 1,
2005. In light of our prospective adoption of the fair value recognition
provisions of Statement 123(R) for all grants of employee stock options
subsequent to January 1, 2002, the adoption of Statement 123(R) did not have a
material impact on our consolidated financial statements.
F-14
In March 2005, the FASB issued FIN 47 which interprets FASB Statement No. 143,
"Asset Retirement Obligations (ARO's)," which was issued in June 2001. FIN 47
was issued to address the diverse accounting practices that have developed with
regard to the timing of conditional ARO's. Under the Interpretation, such ARO's
even if conditional upon some future event must be recognized as liabilities.
The Company does not have any such obligations at the present time, and the
adoption of the Interpretation is not expected to have a material impact on the
Company's future consolidated financial statements. It is effective for fiscal
years ending after December 15, 2005.
In May 2005, the FASB issued FASB Statement No. 154, "Accounting Changes and
Errors Corrections," which is a replacement of APB Opinion No. 20, "Accounting
Changes," and FASB Statement No. 3, "Reporting Accounting Changes in Interim
Financial Statements." The Statement applies to all voluntary changes in
accounting principles, and changes the requirements for accounting for and
reporting of a change in accounting principle. Statement 154 requires
retrospective application to prior periods' financial statements of a voluntary
change in accounting principles unless it is impracticable. The Statement is
effective for accounting changes and corrections for errors made in fiscal years
beginning after December 15, 2005. The Statement does not change the transition
provisions of any existing accounting pronouncements. The Company plans to adopt
this Statement on January 1, 2006. The adoption is not expected to have a
material impact on the Company's future consolidated financial statements.
B. INVESTMENTS IN SECURITIESInvestments in Securities
Investments in securities at December 31, 20032004 and 20042005 consisted of the
following:
2003 2004
---- ----
MARKET MARKET
COST VALUE COST VALUE
--------- --------- --------- ---------
(IN THOUSANDS)
Trading securities:
U.S. Government obligations .............. $ 103,412 $ 103,684 $ 148,344 $ 148,610
Common stocks ............................ 10,204 11,584 12,406 14,509
Mutual funds ............................. 41,806 42,415 50,774 51,560
Preferred stocks ......................... -- -- 497 585
Other investments ........................ 2,425 6,297 543 1,241
--------- --------- --------- ---------
Total trading securities ................. 157,847 163,980 212,564 216,505
--------- --------- --------- ---------
Available for sale securities:
Common stocks ............................ 10,781 11,570 15,692 18,271
Mutual funds ............................. 52,829 55,850 59,075 57,574
--------- --------- --------- ---------
Total available for sale securities ...... 63,610 67,420 74,767 75,845
--------- --------- --------- ---------
Total investments in securities .......... $ 221,457 $ 231,400 $ 287,331 $ 292,350
========= ========= ========= =========
2004 2005
-----------------------------------------
Market Market
Cost Value Cost Value
-----------------------------------------
(In thousands)
Trading securities:
U.S. Government obligations $148,344 $148,610 $198,395 $200,242
Common stocks 12,406 14,509 72,201 77,218
Mutual funds 50,774 51,560 40,964 41,530
Preferred stocks 497 585 470 503
Other investments 543 1,241 602 490
-----------------------------------------
Total trading securities 212,564 216,505 312,632 319,983
-----------------------------------------
Available for sale securities:
Common stocks 15,692 18,271 20,028 21,435
Mutual funds 59,075 57,574 59,125 59,798
-----------------------------------------
Total available for sale
securities 74,767 75,845 79,153 81,233
-----------------------------------------
Total investments in
securities $287,331 $292,350 $391,785 $401,216
=========================================
At December 31, 20032004 and 2004,2005, the market value of investments available for
sale was $67.4$75.8 million and $75.8$81.2 million, respectively. At December 31, 20032004 and
2004,2005, there were fivesix and sixfour holdings in loss positions, respectively.respectively, which
were not deemed to be other than temporarily impaired due to the length of time
that they have been in a loss position. An
unrealized holding gain, net of management fees and taxes, of $1.5 million in
2003 and an unrealized holding loss, net of
management fees and taxes, of $0.1 million in 2004 and an unrealized holding
gain, net of management fees and taxes of $0.5 million in 2005 has been included
in stockholders' equity. Proceeds from sales of investments available for sale
were approximately $1.9 million, $0.6 million and $0.6$2.1 million for the years
ended December 31, 2003, 2004 and 2004,2005, respectively. Realized gains on the sale
of investments available for sale amounted to $0.2 million, and
$0.1 million and
realized$0.5 million for the years ended December 31, 2003, 2004 and 2005, respectively.
Realized losses were $0.2 million in 2003. There were no realized losses in 2004
or 2005.
For the year ended December 31, 2005, there were $3.3 million in losses on
available for sale securities deemed to be other than temporary, which were
recorded in the statement of income. There were no losses recorded for the years
ended December 31, 2003 or 2004.
F-13
Management determines the appropriate classification of debt and equity
securities at the time of purchase and reevaluates such designation as of each
balance sheet date. A substantial portion of investments in securities are held
for resale in anticipation of short-term market movements and classified as
trading securities. Available for sale investments are stated at fair value,
with any unrealized gains or losses, net of deferred taxes, reported as a
component of stockholders' equity. Trading investments are stated at fair value,
with any unrealized gains or losses reported as net gain from investments in the
statement of income.
F-15
C. INVESTMENTS IN PARTNERSHIPS AND AFFILIATESInvestments in Partnerships and Affiliates
We are General Partnergeneral partner or co-General Partnerco-general partner of various limited partnerships and
the Investment Manager of various offshore funds whose underlying assets consist
primarily of marketable securities. As General
Partnergeneral partner or co-General Partner,co-general partner, we
are contingently liable for all of the partnerships' liabilities. Summary
financial information, including our carrying value and income from these
partnerships at December 31, 20032004 and 20042005 and for the years then ended, is as
follows (in thousands):
2003 2004 2005
---- ----
Total assets ................ $ 285,024assets.................. $ 272,533 $ 250,129
Total liabilities ........... 52,447liabilities............. 65,754 Equity ...................... 232,57748,164
Equity........................ 206,779 201,965
Net earnings ................ 18,989earnings.................. 13,244 13,804
Company's carrying value .... 30,575value...... 25,722 Company's income ............ 3,635 2,04724,642
Income from our investments in the above partnerships for the year ended
December 31, 20022003, 2004 and 2005 was approximately $25,000.
Our income from these$2,182,000, $1,217,000,
$747,000.
As general partner or co-general partner of various limited partnerships, consists of our pro rata capital allocation
and our share ofwe
receive a 20% incentive allocation from the limited partners. The
general partners also receive an annual administrativemanagement fee based on a percentage of each partnership's net assets.assets
and a 20% incentive allocation based on economic profits. For the years ended
December 31, 2002, 2003, 2004 and 2004,2005, we earned administrativemanagement fees of approximately
$2,041,000, $2,259,000, $2,029,000, and $2,029,000, respectively.
At December 31, 2003$1,865,000, respectively and 2004, we had various limited partner interests in
unaffiliated limited partnerships, offshore fundsearned incentive
allocations of $1,462,000, $830,000 and other investments
aggregating approximately $21,564,000 and $33,818,000, respectively. For the
years ended December 31, 2002, 2003 and 2004, the net gains recorded by us in
these investments approximated $423,000, $1,112,000, and $2,047,000,
respectively.
At December 31, 2003 and 2004, we had investments in$1,585,000.
We also serve as investment manager or co-investment manager for various
affiliated offshore funds aggregating $11,873,000 and $29,780,000, respectively.whose underlying assets consist primarily of
marketable securities. As the investment manager or co-investment manager, we
earn an annual administrativea management fee based on a percentage of net assets and are entitled to ana
20% incentive fee based on the absolute gain in the portfolio. For the years ended
December 31, 2002, 2003, 2004 and 2004,2005, we earned administrativemanagement fees of $1,773,000,
$2,448,000 and $2,306,000, respectively and recorded incentive fees of
$3,613,000, $4,718,000$2,945,000, $1,423,000 and $3,871,000,$3,013,000, respectively. At December 31, 2004 and
2005, we had investments in these affiliated offshore funds aggregating
$29,800,000 and $27,790,000, respectively and earned $901,000, $643,000, and
$2,083,000 from these investments in 2003, 2004 and 2005, respectively.
At December 31, 2004 and 2005, we had various interests in unaffiliated limited
partnerships, offshore funds and other investments aggregating approximately
$33,818,000 and $39,540,000, respectively. For the years ended December 31,
2003, 2004 and 2005, we recorded net gains related to these investments of
approximately $1,112,000, $2,047,000, and $1,482,000, respectively.
D. INCOME TAXESIncome Taxes
We account for income taxes under the liability method prescribed by Financial
Accounting Standards BoardFASB
Statement No. 109 ("SFAS 109"). Under SFAS 109, deferred income taxes reflect
the net effects of temporary differences between the carrying amounts of assets
and liabilities for financial accounting purposes and the amounts used for
income tax purposes.
GabelliGBL and our greater than 80% owned subsidiaries file a consolidated federal
income tax return. Advisers, our less than 80% owned subsidiary files a separate
federal income tax return. Accordingly, the income tax provision represents the
aggregate of the amounts provided for all companies.companies
The provision (benefit) for (benefit from) income taxes for the years ended December 31,
2002,
2003, 2004 and 20042005 consisted of the following:
2002 2003 2004 ---------- ---------- ----------
(IN THOUSANDS)2005
---- ---- ----
(In thousands)
Federal:
Current .......... $ 10,284 $ 24,915 $ 31,778 $ 31,692
Deferred ......... 17,027 1,108 (1,198) 1,183
State and local:
Current .......... 2,093 4,345 6,088 5,547
Deferred ......... 2,855 (29) (571) ---------- ---------- ----------
$ 32,259(95)
--------- --------- ---------
$ 30,339 $ 36,097 $ 38,327
========== ========== ==========
F-14F-16
Our effective tax rate for each of the years ended December 31, 2002, 2003, 2004 and
20042005 was 37.6%37.4%, 37.4%36.4% and 36.4%37.5%, respectively. A reconciliation of the Federal
statutory income tax rate to the effective tax rate is set forth below:
2002 2003 2004
-------- -------- --------
2003 2004 2005
---- ---- ----
Statutory Federal income tax rate ........... 35.0% 35.0% 35.0%
State income tax, net of Federal benefit .... 3.7 3.4 3.6 3.5
Other ....................................... (1.1) (1.0) (2.2) -------- -------- --------(1.0)
------ ------- -------
Effective income tax rate ................... 37.6% 37.4% 36.4% ======== ======== ========37.5%
====== ====== ======
Significant components of our deferred tax assets and liabilities were as
follows:
2003
2004 ---------- ----------2005
---- ----
Deferred tax assets: (IN THOUSANDS)
(in thousands)
Stock option expense ............................ $ -- $ (1,268) $ (650)
Deferred compensation ........................... -- (2,298) (3,362)
Other ........................................... (1,344) (442) ----------(482)
----------- ----------
Total deferred tax assets ....................... (1,344) (4,008) ----------(4,494)
----------- ----------
Deferred tax liabilities:
Investments in securities available for sale .... 1,426 392 64
Investments in securities and partnerships ...... 2,677 3,721 5,733
Other ........................................... 983 834 ----------396
----------- ----------
Total deferred tax liabilities .................. 5,086 4,947 6,193
---------- ----------
Net deferred tax liabilities ....................... $ 3,742 $ 939 $ 1,699
========== ==========
E. DEBTDebt
Debt consists of the following:
2003 2004 ---------- ----------2005
---- ----
5.5% Senior notes ................... $ 100,000 $ 100,000
5% Convertible note ................. 100,000 100,00050,000
5.22% Senior notes - 82,308
Mandatory convertible securities .... 84,030 82,308 -
---------- -------------------
Total ............................... $ 284,030 $ 282,308 $ 232,308
========== ==========
NOTE PAYABLE
In conjunction with the Reorganization, we entered into an Employment Agreement
with our Chairman and Chief Executive Officer ("Chairman") which, in part,
provides that the Chairman would be paid $50 million on January 2, 2002.
Interest was 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.
The note was paid in full on January 2, 2002.=========
5.5% SENIOR NOTESSenior Notes
On May 15, 2003, we issued 10-year, $100 million senior notes. The senior notes,
due May 15, 2013, pay interest semi-annually at 5.5%.
F-15
CONVERTIBLE NOTEConvertible Note
On August 13, 2001, we issued a 10-year, $100 million convertible note to
Cascade Investment LLC ("Cascade"). The convertible note, due August 14, 2011,
paid interest semi-annually at 6.5% for the first year and 6% thereafter and was
convertible into our class A common stock at $53 per share. In August 2003, the
interest rate on the note was lowered to 5% and the conversion price was lowered
by $1 per share to $52 per share. On April 1, 2005 we repurchased $50 million,
plus accrued interest. The note provides the holder with certain put rights, at
par plus accrued interest, on April 1, 2005.September 15, 2006. If this note were converted,
Cascade would own approximately 6%13% of our aggregate outstanding class A common
stock.stock as of December 31, 2005. GBL is required to reserve and keep available
free from pre-emptive right shares of common stock out of its authorized stock
for purpose of conversion of the note.
F-17
On August 9, 2002, the Board of Directors authorized GabelliGBL to establish a
collateral account consisting of cash or securities totaling $103 million,
lowered to $102.5 million in August 2003, lowered again to $51.3 million in
April 2005, to secure a $102.5$51.3 million letter of credit in favor of Cascade. We
have paid $79,000 in 2002, $234,000 in 2003, $282,000 in 2004, $148,000 in 2005 and expect to pay
fees of approximately $63,000$93,000 in 20052006 for the $102.5$51.3 million letter of credit
which will expire April 9, 2005.September 22, 2006. At that time the collateral account will
be closed and any cash or securities held will be available for general
corporate use.
COMPANY OBLIGATIONS UNDER MANDATORY CONVERTIBLE SECURITIESCompany Obligations under Mandatory Convertible Securities
On February 6, 2002, we completed our public offering of 3.6 million mandatory
convertible securities. The securities arewere listed on the New York Stock ExchangeNYSE under the symbol
"GBL.I". until February 2005. These securities initially consistconsisted of (a) a
purchase contract under which the holder will purchasepurchased shares of our class A common
stock on February 17, 2005 and (b) senior notes due February 17, 2007. In
connection with the offering, we received $90,000,000 before underwriting and
other expenses of approximately $3,100,000. For accounting purposes, the net
present value of the purchase contract adjustments and their related offering
costs, totaling $4.6 million, have been recorded as a reduction to additional
paid in capital. Costs incurred in connection with the issuance of the senior
notes have been capitalized as deferred financing costs and will be amortized as
an adjustment to interest expense over the term of the notes. During 2002, 2003, 2004
and 2004,2005, approximately $81,000, $93,000, $95,000 and $95,000,$97,000, respectively, have been
amortized to interest expense.
The notes pay interest quarterly at a rate of 6% per year, which rate was reset
on November 17, 2004 to 5.22%. Each purchase contract obligatesobligated its holder to
purchase, on February 17, 2005, newly issued shares of our class A common stock.
During December 2004, a holder of 469,600 purchase contracts purchased 252,456
shares of our class A common stock through early settlement. The total numberIn February 2005,
the remaining holders of the 2,822,700 purchase contracts outstanding at December 31, 2004 was 2,822,700. The total
number ofpurchased 1,517,483
shares to be issued will be between 1.5 million and 1.8 million,
subject to adjustment in certain circumstances and depends upon the "applicable
market value" at that date. The "applicable market value" is determined by
taking the average of the closing price per share of our class A common stock on
each of the twenty consecutive trading days ending on the third trading day
immediately preceding February 17, 2005. At December 31, 2004, the Company would
have had to issue approximately 1,517,000 shares to settle the purchase
contracts.for $70,569,000.
In May 2002, the Board of Directors approved the repurchase of up to 200,000
shares of the mandatory convertible securities from time to time in the open
market. On August 9, 2002, the Board of Directors increased the number of shares
authorized to be repurchased by an additional 200,000. In May 2004, the Board of
Directors increased the number of shares authorized to be repurchased by an
additional 200,000. In August 2004, the Board of Directors changed the
authorization to $25 million. Through December 31, 2004, we repurchased 307,700
shares at an average price of $22.54 per share and an aggregate cost of $6.9
million. In 2002, 2003 and 2004, a gain of approximately $613,000, $96,000 and $34,000,
respectively, attributable to the extinguishment of the debt component of each
mandatory convertible security repurchased has been included in net gain from
investments. There were no repurchases during 2005.
F. STOCKHOLDERS' EQUITY
STOCK AWARD AND INCENTIVE PLANStockholders' Equity
Stock Award and Incentive Plan
We maintain two Stock Award and Incentive Plans (the "Plans"), approved by the
shareholders, which are designed to provide incentives which will attract and
retain individuals key to the success of GabelliGBL through direct or indirect
ownership of our common stock. Benefits under the Plans 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 of class A common
stock have been reserved for issuance under each of the Plans by a committee of
the Board of Directors responsible for administering the Plans. Under the Plans,
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 Plans vest 75% after
three years and 100% after four years from the date of grant and expire after
ten years.
F-16F-18
A summary of the stock option activity for the years ended December 31, 20032004 and
20042005 is as follows:
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
---------- --------------
Outstanding, December 31, 2002 .......... 615,406 $ 20.21
Granted ................................. 633,000 $ 28.96
Forfeited ............................... (73,500) $ 29.36
Exercised ............................... (225,256) $ 16.24
----------
Weighted Average
Shares Exercise Price
---------------- -----------------
Outstanding, December 31, 2003 .......... 949,650 $ 26.27
Granted ................................. 40,000 $ 39.65
Forfeited ............................... (59,025) $ 29.06
Exercised ............................... (131,300) $ 22.57
----------------------
Outstanding, December 31, 2004 .......... 799,325 $ 27.34
==========Granted 20,000 $ 44.90
Forfeited (21,500) $ 28.95
Tendered (522,000) $ 26.68
Exercised (49,500) $ 26.77
------------
Outstanding, December 31, 2005 226,325 $ 30.38
============
Shares available for future issuance
at December 31, 2004 .................. 1,243,275
==========2005 1,244,775
============
At December 31, 20032004 and 20042005 there were 211,444212,431 and 212,431,206,325, respectively,
exercisable outstanding stock options with a weighted average exercise price of
$16.44$20.62 per share and $20.62$28.98 per share, respectively.
The table below represents for various prices, weighted average characteristics
of outstanding employee stock options at December 31, 2005.
Weighted average Options Exercise Price of
Exercise Price Options remaining currently options currently
Outstanding contractual life exercisable exercisable
----------- ---------------- ----------- -----------
$ 16.00 16,000 4.08 16,000 $ 16.00
$ 16.28 21,325 3.08 21,325 $ 16.28
$ 28.95 86,750 7.17 86,750 $ 28.95
$ 29.00 22,000 7.42 22,000 $ 29.00
$ 31.62 20,250 5.08 20,250 $ 31.62
$ 39.65 40,000 8.42 40,000 $ 39.65
$ 44.90 20,000 9.83 - N/A
The weighted average estimated fair value of the options granted at their grant
date using the Black-Scholes option-pricing model was as follows:
2002 2003 2004
-------- -------- --------
2003 2004 2005
---- ---- ----
Weighted average fair value of
options granted: ............... $ 15.19 $ 10.96 $ 13.04$13.04 $11.99
Assumptions made:
Expected volatility ............ 39% 38% 33% 23%
Risk free interest rate ........ 3.54% 2.99% 2.50% 3.50%
Expected life .................. 85 years 5 years 5 years
Dividend yield ................. 0% 0% 0.2%0.20% 0.27%
The expected volatility reflects the volatility of GBL stock over a period of
approximately four years, prior to each respective grant date, based on
month-end prices. The expected life reflected an estimate of the length of time
the employees are expected to hold the options, including the vesting period,
and is based, in part, on actual experience with other grants. The dividend
yield for the February 18, 2003 and May 13, 2003 grants reflected the assumption
that no or an immaterial payout would be made in the foreseeable future at that
time. The dividend yield for the May 11, 2004 grant reflected the assumption
that we would continue our current policy of a $0.02 per share quarterly
dividend. The dividend yield for the November 11, 2005 grant reflected the
assumption of an increase to $0.03 per share quarterly dividend. The weighted
average remaining contractual life of the outstanding options at December 31,
20042005 was 7.346.86 years.
F-19
Prior to January 1, 2003, we applied Accounting Principles BoardAPB Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations in accounting for our stock
option plan. Accordingly, no compensation expense was recognized where the
exercise price equals or exceeds the market price of the underlying stock on the
date of grant.
Effective January 1, 2003, we adopted the fair value recognition provisions of
SFAS No. 123 in accordance with the transition and disclosure provisions under
the recently issued SFAS No. 148, "Accounting for Stock Based Compensation -
Transition and Disclosure".
F-17We adopted Statement 123 (R) on January 1, 2005. In light of our modified
prospective adoption of the fair value recognition provisions of Statement 123
(R) for all grants of employee stock options, the adoption of Statement 123 (R)
did not have a material impact on our consolidated financial statements. During
June 2005, the Board of Directors authorized the accelerated vesting of all
unvested stock options as of July 1, 2005. This resulted in the expensing of an
additional $1.8 million in stock option expense during the second quarter of
2005. The total compensation costs related to non-vested awards not yet
recognized is approximately $182,000 as of December 31, 2005. This will be
recognized as expense in the following periods:
2006 2007 2008 2009
---- ---- ---- ----
$60,000 $60,000 $52,000 $10,000
In August 2005, the Company commenced a tender offer to repurchase all
outstanding options to purchase its class A common stock. The tender offer was
completed in October 2005 and approximately 110 option holders elected to tender
options to purchase an aggregate of approximately 522,000 shares of its class A
common stock. These option holders received an aggregate of approximately $9.7
million in cash (less any withholding taxes). As a result of the completion of
the tender offer, there was a reduction in fully diluted shares outstanding of
approximately 130,000 shares.
F-20
If we had elected for 2001 and 2002 to account for our stock options under the
fair value method of SFAS No. 123 "Accounting for Stock Based Compensation," our
net income and net income per share would have been reduced to the pro forma
amounts indicated below:
2002 2003 2004 2005
----------- ----------- ---------- ---------- ----------
Net income (in thousands):
As reported ..................... $ 53,312 $ 49,844 $ 62,559 $ 63,391
Pro forma $ 49,414 $ 62,473 $ 63,391
Net income per share -
Basic
As reported $ 1.66 $ 2.11 $ 2.13
Pro forma $ 1.65 $ 2.11 $ 2.13
Net income per share -
Diluted
As reported $ 1.65 $ 2.06 $ 2.09
Pro forma ....................... $ 52,614 $ 49,414 $ 62,473
Net income per share - Basic
As reported ..................... $ 1.77 $ 1.66 $ 2.11
Pro forma ....................... $ 1.74 $ 1.65 $ 2.11
Net income per share - Diluted
As reported ..................... $ 1.76 $ 1.65 $ 2.06
Pro forma ....................... $ 1.73 $ 1.64 $ 2.06
STOCK REPURCHASE PROGRAM$ 2.09
Stock Repurchase Program
In 1999, the Board of Directors established the Stock Repurchase Program through
which we have been authorized to purchase up to $9 million of our class A common
stock. We completed the Stock Repurchase Program during the first quarter of
2001 and on March 2, 2001 the Board of Directors authorized the repurchase of an
additional $3 million of our class A common stock. On September 17, 2001, the
Board of Directors raised the amount authorized to repurchase shares to $10
million. In 2002, the Board of Directors raised the amount authorized by $5
million in July and an additional $10 million in December. In 2004, the Board of
Directors raised the amount authorized by $12 million in May, an additional $25
million in August and by an additional 1 million shares in October. In addition,
the Board of Directors also authorized $25 million to be used for an accelerated
stock repurchase program. During 2005, the Board of Directors authorized
additional repurchases of 500,000 shares each in August and November. We also
repurchased 300,000 shares of our class B common stock held by GGCP, our parent,
which was converted to class A common stock in December 2002 at $28.20 per share
and an aggregate cost of $8.46 million. The repurchase of these shares are not
included in determining the total dollars available under the Stock Repurchase
Program. In 20032004 and 20042005, we repurchased 56,9221,596,277 and 1,596,277861,000 shares at an
average price of $34.20$44.29 per share and $44.29$43.22 per share, respectively. There
remain approximately 944,0001,083,000 shares available under this program exclusive of any ASR authorization, at December
31, 2004.2005. Under the program, we have repurchased 2,473,6263,334,626 shares at an average
price of $37.37$38.88 per share and an aggregate cost of $92.4$129.6 million through
December 31, 2004.2005.
In November 2004, we entered into an accelerated stock repurchase program
("ASR") whereby we repurchased 400,000 shares of stock from an investment bank
for approximately $18.8 million. The ASR permitspermitted us to repurchase the shares
immediately, while the investment bank willwould purchase the shares in the market
over time. The 400,000 shares repurchased under the agreement arewere subject to a
future contingent price adjustment based on the actual prices paid by the
investment bank to purchase our stock in the market over time. At December 31,
2004, the investment bank had purchased 203,500 shares resulting in a contingent
purchase liability of approximately $120,000 for the Company. There remainsDuring 2005, the
investment bank completed its share repurchases resulting in a reduction to the
original purchase agreement of approximately $6.2 million authorized for future purchases under ASRs.
DIVIDENDS$35,000.
Dividends
During 2003, we paid dividends of $0.02 per share to all class A shareholders
totaling $138,537. During 2004, we paid dividends of $1.16 per share to class A
and class B shareholders totaling $33,600,810. Our Board$34,006,352. During 2005, we paid dividends of
Directors also
declared a special dividend of $0.60$0.69 per share in November 2004 which was
payable on January 18, 2005 to allclass A and class B shareholders of record on January 3, 2005.
SHELF REGISTRATIONtotaling $20,121,556.
F-21
Shelf Registration
On December 28, 2001, we filed a "shelf" registration statement registering $400
million in aggregate amount of debt and other securities. The issuance of the
mandatory convertible securities used $180 million and the issuance of the 5.5%
Senior Notes used $100 million of the shelf registration leaving $120 million
for future use. Such securities may be issued as debt securities, trust
preferred securities or class A common stock.
F-18
In June 2005, the firm filed a "shelf" registration statement on Form S-3. The
shelf is currently being reviewed by the staff of the SEC. If and when declared
effective, the shelf process will provide us with opportunistic flexibility to
sell any combination of senior and subordinate debt securities, convertible debt
securities and equity securities (including common and preferred securities) up
to a total amount of $400 million. This authorization is in addition to the
remaining $120 million available under our "shelf" registration filed in 2001.
G. CAPITAL LEASECapital Lease
We lease office space from an entity controlled by members of the Chairman's
family. We have recorded a capital lease asset and liability for the fair value
of the leased property. Amortization of the capital lease obligation is computed
on the interest rate method while the leased property is depreciated utilizing
the straight-line method over the term of the lease, which expires on April 30,
2013. The lease provides that all operating expenses relating
to the property (such as property taxes, utilities and maintenance) are to be
paid by the lessee, Gabelli.GBL. Accumulated amortization on the leased property was
approximately $1,501,000$1,747,000 and $1,747,000$1,994,000 at December 31, 20032004 and 2004,2005,
respectively.
Future minimum lease payments for this capitalized lease at December 31, 20042005
are as follows:
(IN THOUSANDS)
2005....................................(In thousands)
2006 $ 802
2006....................................834
2007 765
2007....................................2008 765
2008....................................2009 765
2009....................................2010 765
Thereafter.............................. 2,550Thereafter 1,785
--------
Total minimum obligations............... 6,412
Interest................................ 3,231obligations 5,679
Interest 2,670
--------
Present value of net obligations........obligations $ 3,1813,009
========
Lease payments under this agreement amounted to approximately $756,000$772,000 and
$772,000$802,000 for each of the years ended December 31, 20032004 and 2004,2005, respectively.
The capital lease contains an escalation clause tied to the change in the CPI
which may cause the future minimum payments to exceed $765,000 annually. Future
minimum lease payments have not been reduced by related minimum future sublease
rentals of approximately $619,000,$343,000, of which approximately $320,000$213,000 is due from
an affiliated entity. Total minimum obligations exclude the operating expenses
to be borne by us, which are estimated to be approximately $675,000$720,000 per year.
H. COMMITMENTSCommitments
We rent office space under leases which expire at various dates through May
2008.January
2009. Future minimum lease commitments under these operating leases as of
December 31, 20042005 are as follows:
(IN THOUSANDS)
2005.........(In thousands)
2006 $ 576
2006......... 480
2007......... 218
2008......... 20
Thereafter... -
-------538
2007 226
2008 35
2009 1
------
$ 1,294
=======800
======
Equipment rentals and occupancy expense amounted to approximately $1,165,000,
$1,143,000,
$1,752,000 and $1,752,000,$2,662,000, respectively, for the years ended December 31, 2002,
2003,
2004 and 2004.
F-192005.
F-22
I. RELATED PARTY TRANSACTIONSRelated Party Transactions
We serve as the investment advisor for the Funds and earn advisory fees based on
predetermined percentages of the average net assets of the Funds. In addition,
Gabelli & Company has entered into distribution agreements with each of the
Funds. As principal distributor, Gabelli & Company incurs certain promotional
and distribution costs related to the sale of Fund shares, for which it receives
a fee from the Funds or reimbursement from the investment advisor. Gabelli &
Company earns a majority of its commission revenue from transactions executed on
behalf of clients of affiliated companies. Advisory and distribution fees
receivable from the Funds were approximately $15,135,000$17,330,000 and $17,330,000$17,630,000 at
December 31, 20032004 and 2004,2005, respectively.
We had an aggregate investment in the Funds of approximately $475,384,000$363,518,000 and
$363,518,000$268,713,000 at December 31, 20032004 and 2004,2005, respectively, of which approximately
$378,637,000$254,614,000 and $254,614,000$167,706,000 was invested in money market mutual funds,
included in cash and cash equivalents, at December 31, 20032004 and 2004,2005,
respectively.
Prior to the Reorganization, we were required to pay the Chairman a management
fee, which was equal to 20% of the pretax profits of each of our operating
divisions before consideration of this management fee.
Immediately preceding the Offering and in conjunction with the Reorganization,
GabelliGBL and our Chairman entered into an Employment Agreement. Under the Employment
Agreement, we will pay the Chairman 10% of our aggregate pre-tax profits while
he is an executive of GabelliGBL and devoting the substantial majority of his working
time to the business of Gabelli. The Employment Agreement further provided that we pay the
Chairman $50 million on January 2, 2002.GBL. The management fee was approximately $9,533,000, $9,002,000,
$11,017,000, and $11,017,000$11,356,000 for the years ended December 31, 2002,
2003, 2004 and
2004,2005, respectively. The Chairman also earned portfolio management compensation
and account executiverelationship manager fees of approximately $28,453,000,
$29,641,000, $43,961,000, and
$43,961,000,$44,186,000, respectively, for the years ended December 31, 2002, 2003, 2004 and 2004,2005,
which have been included in compensation costs.
We had approximately $1,216,000 in various notes receivable (including accrued
interest) outstandingcosts, of which $6,180,000 and
$2,454,000 was payable at December 31, 2001 from certain executive officers2004 and employees in connection with the acquisition of ownership interests in our
various subsidiaries2005, respectively. Refer also
to Notes C and affiliates. Interest rates on these notes ranged from
5% to 10%. All employee notes receivable (including accrued interest) were
repaid in full during 2002.G.
J. FINANCIAL REQUIREMENTSFinancial Requirements
As a registered broker-dealer, Gabelli & Company is subject to Uniform Net
Capital Rule 15c3-1 (the "Rule") of the Securities and Exchange Commission.
Gabelli & Company computes its net capital under the alternative method
permitted by the Rule which requires minimum net capital of $250,000. We have
consistently met or exceeded this requirement.
In connection with the registration of our subsidiary, Gabelli Asset Management
(UK) Limited with the Financial Services Authority, we are required to maintain
a minimum Liquid Capital Requirement of (pound)267,000 ($514,000459,000 at December 31,
2004)2005), and an Own Funds Requirement of (euro)50,000 ($68,00059,000 at December 31,
2004)2005). We have consistently met or exceeded these requirements.
K. ADMINISTRATION FEESAdministration Fees
We have entered into administration agreements with other companies (the
"Administrators"), whereby the Administrators provide certain services on behalf
of several of the Funds and Investment Partnerships. Such services do not
include the investment advisory and portfolio management services provided by
Gabelli.GBL. The fees are negotiated based on predetermined percentages of the net
assets of each of the Funds.
L. PROFIT SHARING PLAN AND INCENTIVE SAVINGS PLANProfit Sharing Plan and Incentive Savings Plan
We have a qualified contributory employee profit sharing plan and incentive
savings plan covering substantially all employees. Company contributions to the
plans are determined annually by the Board of Directors but may not exceed the
amount permitted as a deductible expense under the Internal Revenue Code. We
accrued contributions of approximately $50,000, $63,000, $62,000 and $62,000,$32,000, to the
plans for the years ended December 31, 2002, 2003, 2004 and 2004,2005, respectively.
F-20During 2005 the qualified contributory employee profit sharing plan was
terminated and the proceeds were distributed to the plan participants. No
contributions were made to the qualified contributory employee profit sharing
plan for 2005.
F-23
M. DERIVATIVE FINANCIAL INSTRUMENTS
In 2002, our trading activities included transactions in domestic equity index
futures contracts and foreign currency contracts. These financial instruments
represent future commitments to purchase or sell an underlying index or currency
for specified amounts at specified future dates. Such contracts create
off-balance sheet risk for us as the future satisfaction of these contracts may
be for amounts in excess of the amounts recognized in the consolidated
statements of financial condition.
In connection with these activities, we had gains of approximately $122,000,
during the year ended December 31, 2002. There were no gains or losses for the
years ended December 31, 2003 and 2004. Such gains and losses were reflected as
part of net gain from investments in the consolidated statements of operations.
N. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)Quarterly Financial Information (Unaudited)
Quarterly financial information for the years ended December 31, 20042005 and 20032004
is presented below.
2004 QUARTER
----------------------------------------------------------------------
(in thousands, except per share data) 1ST 2ND 3RD 4TH FULL YEAR
--- --- --- --- ---------
2005 Quarter
----------------------------------------------------------------
(in thousands, except per share 1st 2nd 3rd 4th Full Year
data)
----------------------------------------------------------------
Revenues ................................. $ 63,539 $ 60,204 $ 57,237 $ 74,183 $ 255,163$61,531 $59,841 $66,234 $64,757 $252,363
Operating income .........................20,154 19,631 22,598 24,209 86,592
Net income 12,682 12,955 19,448 18,306 63,391
Net income per share:
Basic 0.43 0.43 0.65 0.62 2.13
Diluted 0.42 0.43 0.64 0.61 2.09
2004 Quarter
----------------------------------------------------------------
Revenues $63,539 $60,204 $57,237 $74,183 $255,163
Operating income 25,277 24,434 21,951 27,406 99,068
Net income ............................... 16,071 13,918 13,031 19,539 62,559
Net income per share:
Basic ................................. 0.53 0.47 0.44 0.67 2.11
Diluted ............................... 0.52 0.46 0.43 0.65 2.06
2003 QUARTER (a)
----------------------------------------------------------------------
Revenues ................................. $ 46,053 $ 47,956 $ 51,823 $ 61,605 $ 207,437
Operating income ......................... 16,340 16,405 19,403 22,566 74,714
Net income ............................... 9,327 11,557 12,302 16,658 49,844
Net income per share:
Basic ................................. 0.31 0.38 0.41 0.55 1.66
Diluted ............................... 0.31 0.38 0.41 0.54 1.65
(a) Results for the fourth quarter 2003 included a $1.8 million gain from the
partial harvesting of a $100,000 venture capital investment made in 2001.
O. OTHER MATTERS
Gabelli Asset Management Inc.N. Other Matters
GBL and certain of its subsidiaries have received, and have been responding to,
information requests and subpoenas from the Attorney General of the State of New York Attorney General's Office
and the SEC requesting informationdocuments and testimony on mutual fund share trading
practices. GabelliSince this matter is responding to these requests and does not believe that these matters willongoing, we cannot determine at this time what
effect, if any, this matter may have a
material adverse effect on Gabelli'sGBL's financial position or the results
of its operations.
F-21
P. SUBSEQUENT EVENTSO. Subsequent Events
On January 18, 2005,February 7, 2006, the Company paid a special dividend of $0.60 per share to
all of its Class A and Class B shareholders of record on January 3, 2005.
On February 10, 2005, the Company announced that the Board of Directors declared
a regular quarterly dividend of $0.02$0.03 per share to all of its Classclass A and Classclass
B shareholders, payable on March 28, 20052006 to shareholders of record on March 14,
2005.15,
2006.
On February 14, 2005,March 9, 2006, the Company announced that the Board of Directors authorized
a
planan additional 500,000 shares to file a "shelf" registration statement on Form S-3. The shelf process
will enable Gabelli to sell any combination of senior and subordinate debt
securities, convertible debt securities and equity securities (including common
and preferred securities) up to a total amount to $400 million. This
authorization is in addition tobe repurchased under the remaining $120 million available under
Gabelli's "shelf" registration filed in 2001.
During February 2005, the Board of Directors approved a corporate name change to
GAMCO Investors, Inc., which is subject to shareholder approval at Gabelli's
annual meeting of shareholders on May 10, 2005. The Company's ticker symbol on
the New York Stock
Exchange will remain GBL. Additionally, our existing
subsidiary named GAMCO Investors, Inc. will be renamed.
On February 17, 2005, the Company issued approximately 1,517,000 shares of class
A common stock in settlement of the 2,822,700 purchase contracts issued pursuant
to its mandatory convertible securities resulting in proceeds of $70.6 million
to the Company. The settlement rate of 0.5376 was determined based on the
average closing price per share of class A common stock for the twenty
consecutive trading days ending February 14, 2005.
On March 1, 2005, the Company announced an agreement with Cascade Investment,
L.L.C. to amend the terms of the convertible note issued by Gabelli. The new
terms extend the exercise date of Cascade's put option to September 15, 2006,
reduce the principal of the convertible note to $50 million from $100 million
and remove limitations on the issuance of additional debt. In connection with
this amendment, Gabelli will repurchase $50 million of the principal of the
convertible note on April 1, 2005. Effective April 1, 2005, the $102.5 million
letter of credit will be reduced to $51.3 million and extended to September 22,
2006. The Company expects to pay total fees of approximately $160,000 relating
to the letters of credit for 2005 versus $282,000 in 2004.Repurchase Program.
The Company has repurchased 8,800636,232 shares at an average investment of $44.84$44.50
per share as of March 1, 2005.10, 2006. This brings the remaining authorization under
the stock repurchase program to approximately 935,000947,000 shares at March 1, 2005.
As of March 1, 2005, the investment bank had purchased 290,900 shares relating
to the ASR of which 87,400 were purchased in 2005 reducing the contingent
purchase liability to approximately $57,000.
During January 2005, one of the companies within GSI's proprietary investment
portfolio completed an initial public offering. As a result, the market value of
the investment has increased from December 31, 2004 by approximately $2.5
million as of March 1, 2005. This investment is held as available for sale and
the resulting change in market value will be reflected in stockholders' equity
in 2005.
F-2210, 2006.
F-24
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.None.
ITEM 9A: CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing of this report, an evaluation was
carried out under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-14(c) under the Securities Exchange Act of
1934). Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the design and operation of these disclosure
controls and procedures were effective. No significant changes were made in our
internal controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation.
ITEM 9B: OTHER INFORMATION
None.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the Directors and Executive Officers of GBL and compliance
with Section 16(a) of the Securities Exchange Act of 1934 is incorporated herein
by reference from the sections captioned "Election of Directors", "Information
Regarding Executive Officers", "Section 16(a) Beneficial Ownership Reporting
Compliance" in our definitive proxy statement for our 20042006 Annual Meeting of
Shareholders (the "Proxy Statement").
GBL has adopted a Code of Business Conduct that applies to all of our officers,
directors, full-time and part-time employees and a Code of Conduct that sets
forth additional requirements for our principal executive officer, principal
financial officer, principal accounting officer or controller, or persons
performing similar functions (together, the "Codes of Conduct"). The Codes of
Conduct are posted on our website (www.gabelli.com) and available in print free
of charge to any shareholder who requests a copy. Interested parties may address
a written request for a printed copy of the Codes of Conduct to: Secretary,
Gabelli Asset ManagementGAMCO Investors, Inc., One Corporate Center, Rye, New York 10580-1422. We intend
to satisfy the disclosure requirement regarding any amendment to, or a waiver
of, a provision of the Codes of Conduct by posting such information on our
website.
In addition to the certifications attached as Exhibits to this Form 10-K,
following its 20042005 Annual Meeting, GBL also submitted to the New York Stock
Exchange ("NYSE") a certification by its Chief Executive Officer that he is not
aware of any violations by GBL of the NYSE corporate governance listing
standards as of the date of the certification.
ITEM 11: EXECUTIVE COMPENSATION
The information set forth under the captions "Compensation of Executive
Officers" and "Election of Directors - Compensation of Directors" in the Proxy
Statement is incorporated herein by reference.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information set forth under the caption "Certain Ownership of Gabelli'sOur Stock" in
the Proxy Statement is incorporated herein by reference.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Certain Relationships and Related
Transactions" in the Proxy Statement is incorporated herein by reference.
ITEM 14: PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information set forth under the caption "Independent Registered Public
Accounting Firm" in the Proxy Statement is incorporated herein by reference.
II-1
PART IV
ITEMItem 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT:(a) List of documents filed as part of this Report:
(1) Consolidated Financial Statements and Independent Registered Public
Accounting Firm's Report included herein: See Index on page F-1
(2) Financial Statement Schedules: Financial statement schedules are
omitted as not required or not applicable or because the information
is included in the Financial Statements or notes thereto.
(3) List of Exhibits:
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITExhibit
Number Description of Exhibit
- ------------- ----------------------
3.1 -- Restated Certificate of Incorporation of the Company.
(Incorporated by reference to Exhibit 3.2 to Amendment No. 4 to
the Company's Registration Statement on Form S-1 (File No.
333-51023) filed with the Securities and Exchange Commission on
February 10, 1999).
3.2 -- Amended Bylaws of the Company. (Incorporated by reference to
Exhibit 3.4 to Amendment No. 4 to the Company's Registration
Statement on Form S-1 (File No. 333-51023) filed with the
Securities and Exchange Commission on February 10, 1999).
4.1 -- Specimen of class A common stock Certificate. (Incorporated by
reference to Exhibit 4.1 to Amendment No. 3 to the Company's
Registration Statement on Form S-1 (File No. 333-51023) filed
with the Securities and Exchange Commission on January 29,
1999).
4.2 -- Convertible Promissory Note, dated August 14, 2001, of the
Company (Incorporated by reference to Exhibit 99.4 to the
Company's Report on Form 8-K dated March 1, 2005 filed with the
Securities and Exchange Commission on March 2, 2005).
4.3 -- Indenture, dated as of February 6, 2002, between Gabelli Asset
Management Inc. and The Bank of New York, as Trustee.
(Incorporated by reference to Exhibit 4.1 to the Company's
Report on Form 8-K dated February 8, 2002 filed with the
Securities and Exchange Commission on February 8, 2002).
4.4 -- First Supplemental Indenture, dated as of February 6, 2002,
between Gabelli Asset Management
3.1 -- Restated Certificate of Incorporation of the Company. (Incorporated by
reference to Exhibit 3.0 to the Company's Form 10-Q for the quarter ended
September 30, 2005 filed with the Securities and Exchange Commission on
November 9, 2005).
3.2 -- Amended Bylaws of the Company. (Incorporated by reference to Exhibit 3.4
to Amendment No. 4 to the Company's Registration Statement on Form S-1
(File No. 333-51023) filed with the Securities and Exchange Commission on
February 10, 1999).
4.1 -- Specimen of class A common stock Certificate. (Incorporated by reference
to Exhibit 4.1 to Amendment No. 3 to the Company's Registration Statement
on Form S-1 (File No. 333-51023) filed with the Securities and Exchange
Commission on January 29, 1999).
4.2 -- Convertible Promissory Note, dated August 14, 2001, of the Company
(Incorporated by reference to Exhibit 99.4 to the Company's Report on Form
8-K dated March 1, 2005 filed with the Securities and Exchange Commission
on March 2, 2005).
4.3 -- Indenture, dated as of February 6, 2002, between GAMCO Investors, Inc.
and The Bank of New York, as Trustee. (Incorporated by reference to Exhibit
4.1 to the Company's Report on Form 8-K dated February 8, 2002 filed with
the Securities and Exchange Commission on February 8, 2002).
4.4 -- First Supplemental Indenture, dated as of February 6, 2002, between
GAMCO Investors, Inc. and The Bank of New York, as Trustee. (Incorporated
by reference to Exhibit 4.2 to the Company's Report on Form 8-K dated
February 8, 2002 filed with the Securities and Exchange Commission on
February 8, 2002).
4.5 -- Form of Note (included in Exhibit 4.4). (Incorporated by reference to
Exhibit 4.3 to the Company's Report on Form 8-K dated February 8, 2002
filed with the Securities and Exchange Commission on February 8, 2002).
10.1 -- Management Services Agreement between the Company and GFI dated
as of February 9, 1999. (Incorporated by reference to Exhibit
10.1 to Amendment No. 4 to the Company's Registration Statement
on Form S-1 (File No. 333-51023) filed with the Securities and
Exchange Commission on February 10, 1999).
10.2 -- Tax Indemnification Agreement between the Company and GFI.
(Incorporated by reference to Exhibit 10.2 to Amendment No. 4 to
the Company's Registration Statement on Form S-1 (File No.
333-51023) filed with the Securities and Exchange Commission on
February 10, 1999).
10.3 -- Gabelli Asset Management Inc. 1999 Stock Award and Incentive
Plan. (Incorporated by reference to Exhibit 10.4 to Amendment
No. 4 to the Company's Registration Statement on Form S-1 (File
No. 333-51023) filed with the Securities and Exchange Commission
on February 10, 1999).
10.4 -- Gabelli Asset Management Inc. 1999 Annual Performance Incentive
Plan. (Incorporated by reference to Exhibit 10.5 to Amendment
No. 4 to the Company's Registration Statement on Form S-1 (File
No. 333-51023) filed with the Securities and Exchange Commission
on February 10, 1999).
II-2
10.5 -- Gabelli Asset Management Services Agreement between the Company and GFI dated as of
February 9, 1999. (Incorporated by reference to Exhibit 10.1 to Amendment
No. 4 to the Company's Registration Statement on Form S-1 (File No.
333-51023) filed with the Securities and Exchange Commission on February
10, 1999).
10.2 -- Tax Indemnification Agreement between the Company and GFI. (Incorporated
by reference to Exhibit 10.2 to Amendment No. 4 to the Company's
Registration Statement on Form S-1 (File No. 333-51023) filed with the
Securities and Exchange Commission on February 10, 1999).
10.3 -- GAMCO Investors, Inc. 1999 Stock Award and Incentive Plan. (Incorporated
by reference to Exhibit 10.4 to Amendment No. 4 to the Company's
Registration Statement on Form S-1 (File No. 333-51023) filed with the
Securities and Exchange Commission on February 10, 1999).
10.4 -- GAMCO Investors, Inc. 1999 Annual Performance Incentive Plan.
(Incorporated by reference to Exhibit 10.5 to Amendment No. 4 to the
Company's Registration Statement on Form S-1 (File No. 333-51023) filed
with the Securities and Exchange Commission on February 10, 1999).
10.5 -- GAMCO Investors, Inc. 2002 Stock Award and Incentive Plan (Incorporated
by reference to Exhibit A to the Company's definitive proxy statement on
Schedule 14A filed with the Securities and Exchange Commission on April 30,
2002).
10.6 -- Employment Agreement between the Company and Mario J. Gabelli.
(Incorporated by reference to Exhibit 10.6 to Amendment No. 4 to the
Company's Registration Statement on Form S-1 (File No. 333-51023) filed
with the Securities and Exchange Commission on February 10, 1999).
10.7 -- Registration Rights Agreement, dated August 14, 2001, between
the Company and Cascade Investment LLC. (Incorporated by
reference to Exhibit 4.1 to the Company's Form 10-Q/A for the
quarter ended September 30, 2001 filed with the Securities and
Exchange Commission on November 16, 2001).
10.8 -- Note Purchase Agreement, dated as of August 10, 2001, by and
among Cascade Investment LLC, a Washington limited liability
company, Gabelli Asset Management Inc., a New York corporation,
Mario J. Gabelli, Gabelli Group Capital Partners, Inc., a New
York corporation, and Rye Holdings, Inc., a New York
corporation, and Rye Capital Partners, Inc., a Delaware
corporation (Incorporated by reference to Exhibit 1.1 to the
Company's Form 10-Q/A for the quarter ended September 30, 2001,
filed with the Securities and Exchange Commission on November
16, 2001), as amended by the Third Amendment, dated as of
February 28, 2005 (Incorporated by reference to Exhibit 99.2 to
the Company's Report on Form 8-K dated March 1, 2005 filed with
the Securities and Exchange Commission on March 2, 2005).
12.1 -- Computation of Ratios of Earnings to Fixed Charges.
21.1 -- Subsidiaries of the Company.
23.1 -- Consent of Independent Registered Public Accounting Firm
24.1 -- Powers of Attorney (included on page II-3 of this Report).
31.1 -- Certification of CEO pursuant to Rule 13a-14(a).
31.2 -- Certification of CFO pursuant to Rule 13a-14(a).
32.1 -- Certification of CEO pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.2 -- Certification of CFO pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes- Oxley Act of
2002.
- -------------------
(B) REPORTS ON FORM 8-K:
We filed the following Current Reports on Form 8-K during the three months ended
December 31, 2004.
1. Current Report on Form 8-K dated October 5, 2004 containing
the press release disclosing our preliminary estimates for
the third quarter ended September 30, 2004.
2. Current Report on Form 8-K/A dated October 6, 2004
containing the press release disclosing our preliminary
estimates for the third quarter ended September 30, 2004.
3. Current Report on Form 8-K dated October 25, 2004 containing
the press release disclosing our operating results for the
third quarter ended September 30,2004.
II-2
10.7 -- Registration Rights Agreement, dated August 14, 2001, between the
Company and Cascade Investment LLC. (Incorporated by reference to Exhibit
4.1 to the Company's Form 10-Q/A for the quarter ended September 30, 2001
filed with the Securities and Exchange Commission on November 16, 2001).
10.8 -- Note Purchase Agreement, dated as of August 10, 2001, by and among
Cascade Investment LLC, a Washington limited liability company, GAMCO
Investors, Inc., a New York corporation, Mario J. Gabelli, Gabelli Group
Capital Partners, Inc., a New York corporation, and Rye Holdings, Inc., a
New York corporation, and Rye Capital Partners, Inc., a Delaware
corporation (Incorporated by reference to Exhibit 1.1 to the Company's Form
10-Q/A for the quarter ended September 30, 2001, filed with the Securities
and Exchange Commission on November 16, 2001), as amended by the Third
Amendment, dated as of February 28, 2005 (Incorporated by reference to
Exhibit 99.2 to the Company's Report on Form 8-K dated March 1, 2005 filed
with the Securities and Exchange Commission on March 2, 2005).
12.1 -- Computation of Ratios of Earnings to Fixed Charges.
21.1 -- Subsidiaries of the Company.
23.1 -- Consent of Independent Registered Public Accounting Firm
24.1 -- Powers of Attorney (included on page II-3 of this Report).
31.1 -- Certification of CEO pursuant to Rule 13a-14(a).
31.2 -- Certification of CFO pursuant to Rule 13a-14(a).
32.1 -- Certification of CEO pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 -- Certification of CFO pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes- Oxley Act of 2002.
- ------------------
(b) Reports on Form 8-K:
We filed the following Current Reports on Form 8-K during the three months ended
December 31, 2005.
1. Current Report on Form 8-K, dated October 21, 2005 containing the
press release disclosing our operating results for the third quarter
ended September 30,2005.
II-3
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Rye, State
of New York, on March 12, 2005.
GABELLI ASSET MANAGEMENT15, 2006.
GAMCO INVESTORS, INC.
By: /s//s/ Michael R. Anastasio
-------------------------------------
Name: Michael R. Anastasio
Title: Chief Financial Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
Michael R. Anastasio and James E. McKee and each of them, his true and lawful
attorney-in-fact and agent with full power of substitution and resubstitution,
for him in his name, place and stead, in any and all capacities, to sign any and
all amendments to this report and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, and hereby grants to such attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and agent
or his substitute or substitutes may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons in the capacities and on the dates
indicated.
SIGNATURE TITLE DATE
Signature Title Date
--------- ----- ----
/s/ Mario J. Gabelli Chairman of the Board, March 16, 200515, 2006
- ----------------------------------------------------------------------- Chief Executive Officer
Mario J. Gabelli and Chief Investment Officer
(Principal Executive Officer)
/s/ Michael R. Anastasio Chief Financial Officer March 16, 200515, 2006
- ------------------------------------------------------------------- (Principal Financial Officer and
Michael R. Anastasio Principal Accounting Officer)
/s/ Edwin L. Artzt Director March 16, 200515, 2006
- -----------------------------------------------------------------
Edwin L. Artzt
/s/ Raymond C. Avansino Director March 16, 200515, 2006
- ----------------------------------------------------------------
Raymond C. Avansino
/s/ John C. Ferrara Director March 16, 200515, 2006
- ------------------------------------------------------------------
John C. Ferrara
/s/ John D. Gabelli Director March 16, 200515, 2006
- ------------------------------------------------------------------
John D. Gabelli
/s/ Alan C. Heuberger Director March 16, 200515, 2006
- -----------------------------------------------------------------
Alan C. Heuberger
/s/ Robert S. Prather Director March 16, 200515, 2006
- -----------------------------------------------------------------
Robert S. Prather
/s/ Karl Otto Pohl Director March 16, 200515, 2006
- ------------------------------------
Karl Otto Pohl
/s/ Frederic V. Salerno Director March 16, 2005
- ------------------------------------
Frederic V. Salerno
II-4
/s/ Vincent S. Tese Director March 16, 200515, 2006
- ---------------------------------------------------------------------------
Vincent S. Tese
II-5II-4