SECURITIES & EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File No. 1-106
GABELLI ASSET MANAGEMENT INC.
- ----------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
New York 13-4007862
- ----------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Corporate Center, Rye, New York 10580
- ----------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(914) 921-3700
- ----------------------------------------------------------------------------
Registrant's telephone number, including area code
----------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the Registrant's
classes of Common Stock, as of the latest practical date.
Class Outstanding at July 31, 1999
----- ----------------------------
Class A Common Stock, .001 par value 5,870,200
Class B Common Stock, .001 par value 24,000,000
INDEX
GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Statements of Operations:
- Three months ended June 30, 1998 and 1999
- Six months ended June 30, 1998 and 1999
Condensed Consolidated Statements of Financial Condition:
- June 30, 1999
- December 31, 1998
Condensed Consolidated Statements of Cash Flows:
- Six months ended June 30, 1998 and 1999
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Including Quantitative and Qualitative
Disclosures about Market Risk)
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
(In thousands, except per share data)
THREE MONTHS ENDED
JUNE 30,
--------------------------
1998 1999
--------- ------
REVENUES
Investment advisory and incentive fees. . . . . . . . . $ 30,155 $ 35,440
Commission revenue. . . . . . . . . . . . . . . . . . . 2,133 3,333
Distribution fees and other income. . . . . . . . . . . 3,743 3,850
--------- ---------
Total revenues . . . . . . . . . . . . . . . . . . . 36,031 42,623
EXPENSES
Compensation costs. . . . . . . . . . . . . . . . . . . 14,187 17,504
Management fee. . . . . . . . . . . . . . . . . . . . . 2,624 2,318
Other operating expenses. . . . . . . . . . . . . . . . 6,030 8,297
--------- ---------
Total expenses . . . . . . . . . . . . . . . . . . . 22,841 28,119
Operating income. . . . . . . . . . . . . . . . . . . . . 13,190 14,504
OTHER INCOME (EXPENSE)
Net gain from investments . . . . . . . . . . . . . . . 14,594 5,904
Interest and dividend income. . . . . . . . . . . . . . 1,026 1,323
Interest expense. . . . . . . . . . . . . . . . . . . . (836) (872)
--------- ---------
Total other income, net. . . . . . . . . . . . . . . 14,784 6,355
Income before income taxes and
minority interest . . . . . . . . . . . . . . . . . . . 27,974 20,859
Income tax provision. . . . . . . . . . . . . . . . . . 970 8,260
Minority interest. . . . . . . . . . . . . . . . . . . 247 944
--------- ---------
Net income . . . . . . . . . . . . . . . . . . . . . $ 26,757 $ 11,655
========= =========
Net income per share: . . . . . . . . . . . . . . . . . .
Basic and diluted . . . . . . . . . . . . . . . . . . . $ 0.39
=========
Weighted average shares outstanding:. . . . . . . . . . .
Basic and diluted . . . . . . . . . . . . . . . . . . . 29,949
=========
Pro forma data:
Income before income taxes and minority interest,
as reported . . . . . . . . . . . . . . . . . . . . . $ 27,974
Pro forma interest expense on $50 million note
payable . . . . . . . . . . . . . . . . . . . . . . . (750)
Pro forma management fee adjustment from 20% to
10% of pre tax profits . . . . . . . . . . . . . . . 1,287
Pro forma reallocations to the new parent company . . . (260)
Pro forma effect on income and expenses of
distribution of assets and liabilities . . . . . . . (16,213)
Pro forma provision for income taxes. . . . . . . . . . (4,771)
Pro forma minority interest . . . . . . . . . . . . . . (247)
---------
Pro forma net income. . . . . . . . . . . . . . . . . . $ 7,020
=========
Pro forma net income per share:
Basic and diluted . . . . . . . . . . . . . . . . . $ 0.23
=========
Pro forma weighted average shares outstanding:
Basic and diluted . . . . . . . . . . . . . . . . . 30,000
=========
See accompanying notes.
GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
(In thousands, except per share data)
SIX MONTHS ENDED
JUNE 30,
------------------------
1998 1999
-------- ------
REVENUES
Investment advisory and incentive fees. . . . . . . . . $ 57,244 $ 68,357
Commission revenue. . . . . . . . . . . . . . . . . . . 4,177 6,253
Distribution fees and other income. . . . . . . . . . . 6,538 7,704
------- --------
Total revenues . . . . . . . . . . . . . . . . . . . 67,959 82,314
EXPENSES
Compensation costs. . . . . . . . . . . . . . . . . . . 27,607 34,279
Management fee. . . . . . . . . . . . . . . . . . . . . 6,111 5,300
Other operating expenses. . . . . . . . . . . . . . . . 11,383 14,482
Non recurring charge. . . . . . . . . . . . . . . . . . - 50,725
------- --------
Total expenses . . . . . . . . . . . . . . . . . . . 45,101 104,786
Operating income (loss) . . . . . . . . . . . . . . . . . 22,858 (22,472)
OTHER INCOME (EXPENSE)
Net gain from investments . . . . . . . . . . . . . . . 18,652 10,153
Interest and dividend income. . . . . . . . . . . . . . 1,815 2,481
Interest expense. . . . . . . . . . . . . . . . . . . . (1,695) (1,588)
------- --------
Total other income, net. . . . . . . . . . . . . . . 18,772 11,046
Income (loss) before income taxes and
minority interest . . . . . . . . . . . . . . . . . . . 41,630 (11,426)
Income tax provision(benefit) . . . . . . . . . . . . . 2,453 (6,858)
Minority interest. . . . . . . . . . . . . . . . . . . 639 1,658
------- --------
Net income (loss) . . . . . . . . . . . . . . . . . $ 38,538 $ (6,226)
======= =======
Net loss per share:
Basic and diluted . . . . . . . . . . . . . . . . . . . $ (0.22)
=========
Weighted average shares outstanding:
Basic and diluted . . . . . . . . . . . . . . . . . . . 28,416
========
Pro forma data:
Income (loss) before income taxes and minority
interest, as reported . . . . . . . . . . . . . . . . $ 41,630 $(11,426)
Pro forma interest expense on $50 million note
payable . . . . . . . . . . . . . . . . . . . . . . . (1,500) (338)
Pro forma management fee adjustment from 20% to
10% of pre tax profits . . . . . . . . . . . . . . . 3,352 1,097
Pro forma reallocations to the new parent company . . . 83 23
Pro forma effect on income and expenses of
distribution of assets and liabilities . . . . . . . (18,726) (2,256)
Pro forma(provision) benefit for income taxes.. . . . . (9,846) 4,597
Pro forma minority interest . . . . . . . . . . . . . . (639) (1,658)
------- --------
Pro forma net income (loss) . . . . . . . . . . . . . . $ 14,354 $( 9,961)
======= =======
Pro forma net income (loss) per share:
Basic and diluted . . . . . . . . . . . . . . . . . $ 0.48 $ (0.33)
======= =======
Pro forma weighted average shares outstanding:
Basic and diluted. . . . . . . . . . . . . . . . . 30,000 29,974
======= =======
See accompanying notes.
GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands)
December 31, June 30,
1998 1999
------------- ------------
(Unaudited)
ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . 50,222 $ 96,886
Investments in securities . . . . . . . . . . . . . . . . . 83,802 38,812
Investments in partnerships and affiliates. . . . . . . . . 49,795 17,198
PCS licenses. . . . . . . . . . . . . . . . . . . . . . . . 33,311 -
Receivable from broker. . . . . . . . . . . . . . . . . . . 13,463 22,982
Investment advisory fees receivable . . . . . . . . . . . . 8,851 12,036
Deferred tax asset. . . . . . . . . . . . . . . . . . . . . - 19,830
Other assets. . . . . . . . . . . . . . . . . . . . . . . . 15,231 14,944
-------- -------
Total assets . . . . . . . . . . . . . . . . . . . . . $ 254,675 $ 222,688
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Securities sold, but not yet purchased. . . . . . . . . . . 13,011 $ -
Distributions payable to shareholders . . . . . . . . . . . 11,616 -
Note payable. . . . . . . . . . . . . . . . . . . . . . . . 5,876 50,000
Income taxes payable (including deferred income taxes). . . 3,300 6,760
Compensation payable. . . . . . . . . . . . . . . . . . . . 5,118 16,059
Accrued expenses and other liabilities. . . . . . . . . . . 8,727 9,569
------- -------
Total liabilities. . . . . . . . . . . . . . . . . . . 47,648 82,388
Minority interest . . . . . . . . . . . . . . . . . . . . . 12,127 14,404
Stockholders' equity. . . . . . . . . . . . . . . . . . . . 194,900 125,896
------- -------
Total liabilities and stockholders' equity. . . . . . . . . $ 254,675 $ 222,688
======== =======
See accompanying notes.
GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(In thousands)
SIX MONTHS ENDED
JUNE 30,
------------------------
1998 1999
---- ----
OPERATING ACTIVITIES
Net income (loss) . . . . . . . . . . . . . . . . . . . . . $ 38,538 $ (6,226)
Adjustments to reconcile net income (loss) to net cash
provided by (used in)operating activities:
Equity in earnings of partnerships and affiliates . . . . (4,446) (4,002)
Depreciation and amortization . . . . . . . . . . . . . . 478 397
Deferred income taxes . . . . . . . . . . . . . . . . . . - (19,830)
Minority interest in net income of consolidated
subsidiaries . . . . . . . . . . . . . . . . . . . . . 639 1,658
Gain on sale of PCS Licenses . . . . . . . . . . . . . . (17,430) -
Non recurring charge. . . . . . . . . . . . . . . . . . . - 50,725
Changes in operating assets and liabilities . . . . . . . 4,749 (47,675)
------- -------
Total adjustments . . . . . . . . . . . . . . . . . . . . . (16,010) (18,727)
------- -------
Net cash provided by (used in)operating activities . . . . 22,528 (24,953)
------- -------
INVESTING ACTIVITIES
Sale of PCS Licenses. . . . . . . . . . . . . . . . . . . . 68,307 -
Distributions from partnerships and affiliates. . . . . . . 2,756 5,187
Investments in partnerships and affiliates. . . . . . . . . (4,320) (25)
------- -------
Net cash provided by investing activities . . . . . . . . . 66,743 5,162
------- -------
FINANCING ACTIVITIES
Repayment of common stock . . . . . . . . . . . . . . . . . 1,530 -
Cash included in deemed distribution. . . . . . . . . . . . - (18,170)
Purchase of treasury stock. . . . . . . . . . . . . . . . . - (2,039)
Issuance of notes payable . . . . . . . . . . . . . . . . . (1,412) -
(Purchase) sale of minority stockholders' interests . . . . (526) 619
Net proceeds from issuance of common stock. . . . . . . . . - 96,068
Distribution payable to shareholders. . . . . . . . . . . . (19,020) (10,023)
Repayment of bank loan. . . . . . . . . . . . . . . . . . . (30,000) -
------- -------
Net cash (used in) provided by financing activities . . . . (49,428) 66,455
------- -------
Net increase in cash and cash equivalents . . . . . . . . . 39,843 46,664
Cash and cash equivalents at beginning of period. . . . . . 12,610 50,222
------- -------
Cash and cash equivalents at end of period. . . . . . . . . $ 52,453 $ 96,886
======= =======
See footnote C regarding non-cash financing transactions.
See accompanying notes.
GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
A. ORGANIZATION
Gabelli Asset Management Inc. (the "Company") was incorporated in
April 1998 in the state of New York, with no significant assets or
liabilities and did not engage in any substantial business activities prior
to the public offering ("Offering") of its shares. On February 9, 1999, the
Company exchanged 24 million shares of its Class B Common Stock,
representing all of its issued and outstanding shares of Common Stock, with
Gabelli Funds, Inc. and two of its subsidiaries ("GFI") in consideration
for substantially all of the operating assets and liabilities of GFI
relating to its institutional and retail asset management, mutual fund
advisory, underwriting and brokerage business (the "Reorganization").
On February 17, 1999, the Company completed its sale of 6 million
shares of Class A Common Stock and received proceeds, after fees and
expenses, of approximately $96 million. After the Offering, GFI owns 80% of
the outstanding common stock of the Company. In addition, with the
completion of the Offering, the Company is now a "C" Corporation for
Federal and state income tax purposes and will be subject to substantially
higher income tax rates.
The accompanying condensed consolidated financial statements, for
periods prior to the date of the Reorganization, include the assets,
liabilities and earnings of GFI, its wholly-owned subsidiary GAMCO
Investors, Inc. ("GAMCO"), and GFI's majority-owned subsidiaries consisting
of Gabelli Securities, Inc. ("GSI"), Gabelli Fixed Income L.L.C. ("Fixed
Income") and Gabelli Advisers LLC ("Advisers"). After the Reorganization
these financial statements include the accounts of Gabelli Funds, LLC and
GAMCO and former GFI majority-owned subsidiaries GSI, Fixed Income and
Advisers.
B. BASIS OF PRESENTATION
The unaudited interim condensed consolidated financial statements
of the Company included herein have been prepared in accordance with
generally accepted accounting principles for interim financial information
and Rule 10-01 of Regulation S-X. Accordingly, they do not include all the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
the unaudited interim condensed consolidated financial statements reflect
all adjustments, which are of a normal recurring nature, necessary for a
fair presentation of financial position, results of operations and cash
flows of the Company for the interim periods presented and are not
necessarily indicative of a full year's results.
In preparing the unaudited interim condensed consolidated
financial statements, management is required to make estimates and
assumptions that affect the amounts reported in the financial statements.
Actual results could differ from those estimates.
These financial statements should be read in conjunction with the
Company's audited consolidated financial statements included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998,
from which the accompanying Statement of Financial Condition was derived.
C. FORMATION TRANSACTIONS
Reorganization
The exchange of approximately $169 million in net operating assets
and liabilities, including cash of approximately $18 million, has been
recorded as a deemed distribution. Accordingly, only the cash portion of
this deemed distribution has been reflected in the Condensed Consolidated
Statements of Cash Flows.
Employment Agreement
Immediately preceding the Offering and in conjunction with the
Reorganization, the Company and its Chairman and Chief Executive Officer
("Chairman") entered into an Employment Agreement ("Agreement"). The
Agreement provides that the Company will pay the Chairman 10% of the
Company's aggregate pre-tax profits, before consideration of the one-time
charge discussed below, while he remains an executive of the Company and
devotes the substantial majority of his working time to the business of the
Company.
Note Payable
The Agreement further provides the Chairman will be paid $50
million on January 2, 2002, plus interest payable quarterly at an annual
rate of 6% from the date of the Agreement. This payment, plus related costs
and net of a related deferred tax benefit of $19.8 million, has been
reflected as a one-time charge to earnings in the first quarter of 1999 and
the liability has been recorded as a note payable.
Stock Award and Incentive Plan
On February 5, 1999, the Board of Directors adopted the 1999
Gabelli Asset Management Inc. Stock Award and Incentive Plan (the "Plan"),
designed to provide incentives which will attract and retain individuals
key to the success of the Company through direct or indirect ownership of
the Company's common stock. Benefits under the Plan may be granted in any
one or a combination of stock options, stock appreciation rights,
restricted stock, restricted stock units, stock awards, dividend
equivalents and other stock or cash based awards. A maximum of 1,500,000
shares of Class A Common Stock has been reserved for issuance and the Plan
provides that the terms and conditions of each award are to be determined
by a committee of the Board of Directors charged with administering the
Plan. Under the Plan, the committee may grant either incentive or
nonqualified stock options with a term not to exceed ten years from the
grant date and at an exercise price that the committee may determine.
Options granted under the Plan vest 75% after three years and 100% after
four years from the date of grant and expire after ten years.
Options were granted to all full time employees to purchase
1,124,500 shares and to a non-employee director to purchase 10,000 shares
of common stock at an exercise price of $16.28 per share. At June 30, 1999
there were 380,000 shares available for future awards.
The Company has elected to account for stock options under the
intrinsic value method. Under the intrinsic value method, compensation
expense is recognized only if the exercise price of the employee stock
option is less than the market price of the underlying stock on the date of
grant. The estimated pro forma compensation expense attributable to options
granted to employees under the Plan is not presented as its effect is
immaterial.
Pro Forma Information
Pro forma information has been included which gives effect to the
Reorganization, including the reduction in other income as a result of the
deemed distribution of a proprietary investment portfolio, the lower
management fee and the increase in interest expense as if the Employment
Agreement had been in effect as of January 1, 1998 and the additional
income taxes which would have been recorded if GFI had been a "C"
corporation instead of an "S" corporation based on tax laws in effect. The
pro forma information does not give effect to the use of proceeds received
from the Offering.
D. EARNINGS PER SHARE
The Company has only presented historical earnings per share for
the three and six months ended June 30, 1999 due to the significant changes
in its operations which are not reflected in the historical financial
statements for other periods presented. The Company has presented pro forma
earnings per share for 1998 based upon the number of shares outstanding at
the close of the Offering. Pro forma earnings per share for 1999 are based
on the number of shares outstanding at the close of the Offering for the
period prior to the Offering and on the actual number of shares outstanding
subsequent thereto. Options outstanding for the period do not have a
dilutive effect and therefore are excluded from the computation of diluted
earnings per share.
E. STOCK REPURCHASE PROGRAM
On March 8, 1999, the Board of Directors authorized the Company to
repurchase up to $3 million of its Class A common stock through the open
market or through privately negotiated transactions. Under the program the
Company repurchased 129,800 shares of common stock at an aggregate cost of
$2 million in the second quarter of 1999 and which are held in treasury.
GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated financial
information gives effect to assets and liabilities assumed to be
distributed as part of the Reorganization and the resulting impact on
allocated income and expenses; the $50 million deferred payment to the
Chairman and Chief Executive Officer net of deferred tax benefit; the
reduction in the management fee from 20% to 10% pursuant to the Employment
Agreement; and the conversion from an "S" corporation to a "C" corporation.
The unaudited pro forma consolidated financial information does
not purport to represent the results of operations or the financial
position of the Company which actually would have occurred had the
Reorganization and Formation Transactions been previously consummated or
project the results of operations or the financial position of the Company
for any future date or period. The pro forma information does not reflect
the $96 million in net cash proceeds received upon completion of the
Offering.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA PRO FORMA
AS REPORTED ADJUSTMENTS CONSOLIDATED
----------- ----------- ------------
REVENUES
Investment advisory and incentive fees . . . . . . . . . $ 30,155 $ 30,155
Commission revenue . . . . . . . . . . . . . . . . . . . 2,133 2,133
Distribution fees and other income . . . . . . . . . . . 3,743 3,743
------ ------
Total revenues . . . . . . . . . . . . . . . . . . . 36,031 36,031
EXPENSES
Compensation costs. . . . . . . . . . . . . . . . . . . 14,187 14,187
Management fee. . . . . . . . . . . . . . . . . . . . . 2,624 $(1,287)(a) 1,337
Other operating expenses. . . . . . . . . . . . . . . . 6,030 260 (b) 6,290
------ ------ ------
Total expenses . . . . . . . . . . . . . . . . . . . 22,841 (1,027) 21,814
------ ------ ------
Operating income. . . . . . . . . . . . . . . . . . . . . 13,190 1,027 14,217
OTHER INCOME (EXPENSE)
Net gain (loss) from investments . . . . . . . . . . . . 14,594 (16,085)(b) (1,491)
Interest and dividend income. . . . . . . . . . . . . . 1,026 (790)(b) 236
Interest expense. . . . . . . . . . . . . . . . . . . . (836) 662 (b)
(750)(c) (924)
------ ------ ------
Total other income (expense), net. . . . . . . . . . 14,784 (16,963) (2,179)
------
Income before income taxes and
minority interest . . . . . . . . . . . . . . . . . . . 27,974 (15,936) 12,038
Income tax provision. . . . . . . . . . . . . . . . . . 970 3,801 (d) 4,771
Minority interest. . . . . . . . . . . . .. . . . . . . 247 247
------ ------- ------
Net income . . . . . . . . . . . . . . . . . . . . . $ 26,757 $(19,737) $ 7,020
====== ====== ======
Pro forma net income per share:
Basic and diluted . . . . . . . . . . . . . . . . . $ 0.23
======
Pro forma weighted average shares outstanding:
Basic and diluted. . . . . . . . . . . . . . . . . 30,000
======
Notes to Pro Forma Adjustments:
(a) Reflects reduction of the management fee from 20% to 10% of pre tax
profits.
(b) To reflect the effects on income and expenses related to the
distribution of assets and liabilities and reallocation to the new
parent company.
(c) Reflects interest on $50 million note payable for one quarter.
(d) To record additional taxes to reflect the conversion from an "S"
Corporation to a "C" Corporation and tax effects of adjustments.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
Gabelli Asset Management Inc. (the "Company"), incorporated in
April 1998, had no significant assets or liabilities and did not engage in
any business activities prior to the public offering ("Offering") of its
shares. On February 9, 1999, the Company exchanged 24 million shares of its
Class B Common Stock, representing all of its then issued and outstanding
common stock, to Gabelli Funds, Inc. ("GFI") and two of its subsidiaries in
consideration for substantially all of the operating assets and liabilities
of GFI related to its institutional and retail asset management, mutual
fund advisory, underwriting and brokerage business (the "Reorganization").
GFI was subsequently renamed Gabelli Group Capital Partners, Inc.
Immediately following the Reorganization, the Company sold 6
million shares of its Class A Common Stock in an initial public offering.
Proceeds from the Offering, net of fees and expenses, were approximately
$96 million. Following the Offering, GFI owns 80% of the outstanding common
stock of the Company. For periods after the Offering, the Company's
financial statements will reflect the financial condition and results of
operations of Gabelli Asset Management Inc. and the historical results of
GFI will be shown as predecessor financial statements.
The following discussion should be read in conjunction with the
Condensed Consolidated Financial Statements and the notes thereto included
in Item 1 to this report.
The Company's revenues are largely based on the level of assets
under management in its business as well as the level of fees associated
with its various investment products. Growth in revenues generally depends
on good investment performance and the ability to attract additional
investors while maintaining current fee levels. The Company's largest
source of revenues is investment advisory fees which are based on the
amount of assets under management in its Mutual Funds and Separate Accounts
businesses. Revenues derived from equity oriented portfolios generally have
higher management fee rates than fixed income portfolios.
RESULTS OF OPERATIONS
The pro forma information presented herein for the three and six
months ended June 30, 1998 and six months ended June 30, 1999 presents
results of operations as if the Reorganization and Offering had occurred at
the beginning of 1998. The Company believes the pro forma results provide
more meaningful information for comparing operating results and earnings
trends. The pro forma information is not necessarily indicative of the
results that the Company would have reported had these events occurred at
the beginning of the year.
Information is also presented herein on an "as reported" basis to
meet certain disclosure requirements. This information does not give effect
to assets and liabilities assumed to be distributed as part of the
Reorganization and the resulting impact on allocated income and expenses;
the $50 million deferred payment to the Chairman and Chief Executive
Officer net of deferred tax benefit; the reduction in the management fee
from 20% to 10% and the conversion from an "S" corporation to a "C"
corporation for tax purposes. The net effect of these adjustments was to
lower net income on a pro forma basis for the second quarter and first six
months of 1998 by $19.7 million and $24.2 million, respectively, and $3.7
million for the first six months of 1999. For the second quarter of 1998
these adjustments principally consisted of $16.2 million of investment
earnings from assets distributed as part of the Reorganization and a $3.8
million increase in the pro forma tax provision due to the conversion
from an S corporation to a C corporation partially offset by a $1.3
million decrease in the pro forma management fee. For the first six months
of 1998 these adjustments principally consisted of $18.7 million of
investment earnings and $7.4 million in the pro forma tax provision
partially offset by a $3.4 million decrease in the pro forma management
fee. For the first six months of 1999 these adjustments principally
consisted of $2.3 million of investment earnings and $2.3 million in the
pro forma tax provision partially offset by a $1.1 million decrease in the
pro forma management fee.
THREE MONTHS ENDED JUNE 30, 1999 AS COMPARED TO
THREE MONTHS ENDED JUNE 30, 1998
Consolidated Results - Three Months Ended June 30:
(unaudited; in thousands, except per share data)
------------------------------------------------
% CHANGE
1998 1998 1999 ---------
(AS REPORTED) (PRO FORMA) (VS. PRO FORMA)
------------- ------------ ----------- ---------------
Revenues $ 36,031 $ 36,031 $ 42,623 18.3 %
Expenses 22,841 21,814 28,119 28.9
------------- ------------ -----------
Operating income 13,190 14,217 14,504 2.0
Other income (expense), net 14,784 (2,179) 6,355
------------- ------------ -----------
Income before taxes and minority interest 27,974 12,038 20,859 73.3
Income tax provision 970 4,771 8,260
Minority interest 247 247 944
------------- ------------ -----------
Net income $ 26,757 $ 7,020 $ 11,655 66.0
============= ============ ===========
Net income per share:
Basic and diluted $ 0.23 $ 0.39 69.6
============ ============
Included in income before taxes and minority interest:
Depreciation and amortization $ 312 $ 223
Interest expense $ 924 $ 872
Adjusted EBITDA(a) $ 13,274 $ 21,954 65.4%
(a) Adjusted EBITDA is defined as earnings before interest, taxes,
depreciation and amortization and minority interest.
Total revenues rose 18%, to $42.6 million in the second quarter of
1999 as compared to $36.0 million in the 1998 quarter. The increase in
revenues results from an increase in assets under management, which drive
investment advisory fees, commission revenues and incentive fees earned as
General Partner in several alternative investment partnerships.
Investment advisory fees, which comprise over 83% of total
revenue, were 18% higher, at $35.4 million in the second quarter of 1999 as
compared to $30.2 million in 1998. The growth in investment advisory fees
is attributable to the growth in average assets under management during the
respective periods. Average assets under management rose 17% to $18.0
billion in the 1999 quarter as compared to $15.4 billion in the second
quarter of 1998. Incentive fees from alternative investment partnerships
increased $1.5 million to $1.7 million in the 1999 quarter as compared to
$0.2 million in 1998, benefiting from a wave of merger activity and initial
public offerings.
Commission revenues were $1.2 million or 56% higher in the second
quarter of 1999 as compared to the 1998 quarter principally as a result of
increased trading activities for accounts managed by affiliated companies.
Distribution fees and other income were 3% or $0.1 million higher
in the 1999 quarter as compared to the same quarter a year earlier. A 20%
increase in distribution fees generated from increased assets under
management in our open end mutual funds was largely offset by a
decline in other income from the year earlier period.
Total expenses increased by $6.3 million or 29% in the second
quarter of 1999 as compared to the second quarter of 1998. The 1999 quarter
included $0.6 million of additional bonus accruals and $0.9 million of
contribution costs which are related to the increase in investment earnings
from our proprietary portfolio reflected as part of other income. Excluding
these costs, total expenses rose $4.8 million or 22% over the prior year
quarter. Compensation costs, which are largely variable in nature, rose
$3.3 million or 23% ($2.7 million or 19% excluding the additional bonus
accruals of $0.6 million). Compensation costs were further impacted by the
higher commission payouts associated with incentive fees from alternative
investment partnerships which offset the benefit of spreading the
non-variable portion of compensation over a larger revenue base. Management
fee expense, which is variable and based on pre tax profits, increased $1.0
million in the second quarter of 1999 as compared to the 1998 quarter.
Other operating expenses increased $2.0 million or 32% ($1.1 million or 18%
excluding the additional contribution costs of $ 0.9 million). The
remaining increase was primarily due to an increase of $0.8 million in
spending for mutual fund distribution.
Other income (expense), net, which includes investment gains from
our proprietary portfolio, totaled $6.4 million in the second quarter of
1999 compared to investment losses of $2.2 million in the 1998 quarter.
These gains reflect the strong market performance in the 1999 quarter as
well as profits from venture capital investments and investment income on
the $96 million in net proceeds received from the Offering.
The effective tax rate for both the 1999 and 1998 quarters is
approximately 39.6%. The increase in minority interest of $ 0.7 million
principally reflects the increased profits at the Company's 76% owned
subsidiary, Gabelli Securities, Inc.
SIX MONTHS ENDED JUNE 30, 1999 AS COMPARED TO
SIX MONTHS ENDED JUNE 30, 1998
Consolidated Results - Six Months Ended June 30:
(unaudited; in thousands, except per share data)
------------------------------------------------
1999(A) % CHANGE
1998 1999 1998 (ADJUSTED --------
(AS REPORTED) (AS REPORTED) (PRO FORMA) PRO FORMA) (VS. PRO FORMA)
------------- ----------- --------------- ----------- ---------------
Revenues $ 67,959 $ 82,314 $ 67,959 $ 82,314 21.1%
Expenses 45,101 104,786 41,666 52,941 27.1
------------- ----------- ------------ --------------- -------------
Operating income 22,858 (22,472) 26,293 29,373 11.7
Other income (expense), net 18,772 11,046 (1,454) 8,452
------------- ---------- ------------ ---------------
Income before taxes and minority interest 41,630 (11,426) 24,839 37,825 52.3
Income tax provision 2,453 (6,858) 9,846 15,233
Minority interest 639 1,658 639 1,658
------------- ---------- ------------ ---------------
Net income $ 38,538 $ (6,226) $ 14,354 $ 20,934 45.8
============= ========== ============ ===============
Net income per share:
Basic and diluted $ 0.48 $ 0.70
============ ===============
Included in income (loss) before taxes
and minority interest:
Depreciation and amortization $ 478 $ 397
Interest expense $ 1,853 $ 1,803
Adjusted EBITDA $ 27,170 $ 40,025 47.3%
(a) The 1999 adjusted pro forma results above do not include the $50.7
million nonrecurring charge ($30.9 million net of tax benefit or $1.03
per share) recorded in the first quarter of 1999 and related to a note
payable due to the Company's Chairman and Chief Executive Officer.
After giving effect to this charge the Company had a net loss of $0.33
per share for the six months ended June 30, 1999.
Total revenues for the first six months of 1999 rose 21% to $82.3
million, or an increase of $14.4 million over the same period in 1998.
Average assets under management were $17.4 billion during the first half of
1999, 19% higher than average assets under management of $14.6 billion
during the first half of 1998.
Investment advisory and incentive fees increased 19%, to $68.4
million in the second quarter of 1999 from $57.2 million in 1998 primarily
as a result of a 19% increase in average assets under management and an
increase in incentive fees received from its alternative investment
partnerships.
Commission revenues rose 50%, to $6.3 million in the first half of
1999, up $2.1 million from the first half of 1998. Approximately, $1.3
million or 60% of this increase was due to increased trading activities for
accounts managed by affiliated companies with the remainder coming from
increased syndicate activities.
Distribution fees and other income were 18% higher at $7.7 million
in the first half of 1999 compared to $6.5 million in the first half of
1998. Distribution fees, payable in accordance with Rule 12b-1 compensation
plans on our open end mutual funds, increased 28% to $7.3 million in 1999
as compared to $5.7 million in 1998. Average assets under management in our
open end mutual funds grew 26% during these same periods.
Total expenses increased 27%, to $52.9 million (excluding the
$50.7 million nonrecurring charge recorded in the first quarter of 1999) in
the first half of 1999 as compared to $41.7 million in the first half of
1998. Compensation costs rose $6.7 million or 24% ($6.1 million or 22%
excluding additional bonus accruals of $0.6 million in the second quarter).
Management fee expense increased $1.4 million or 52% largely as a result of
the strong increase in investment gains in 1999 as compared to 1998 and
included in other income. Other operating expenses grew $3.2 million or 28%
in 1999 as compared to 1998 largely as a result of $0.9 million of
additional contribution costs in the second quarter and $1.7 million in
increased mutual fund distribution costs.
Other income, net, was $8.5 million in the first half of 1999
compared to a loss of $1.5 million in the first half of 1998. This
turnaround was the result of improved performance in the investment
portfolio and investment income on the $96 million in net proceeds received
from the Offering.
The effective tax rate for the six months ended June 30, 1999 was
40.3% as compared to 39.6% in the first half of 1998. The increase in
minority interest of more than $1.0 million reflects increased profits at
Gabelli Securities, Inc., a 76% owned subsidiary.
LIQUIDITY AND CAPITAL RESOURCES
The Company's assets are primarily liquid, consisting mainly of
cash, short term investments, securities held for investment purposes and
investments in partnerships in which the Company is a general or limited
partner. Investments in partnerships are generally illiquid, however the
underlying investments in such partnerships are generally liquid and the
valuations of the investment partnerships reflect this underlying
liquidity.
Cash requirements and liquidity needs have historically been met
through cash generated by operating activities and the Company's borrowing
capacity. At June 30, 1999, the Company had cash and cash equivalents of
$97 million, an increase of $47 million from December 31, 1998. Included in
cash and investments at June 30, 1999 were net proceeds of approximately
$96 million received from the sale of the Company's Class A Common Stock in
an initial public offering completed on February 17, 1999. Proceeds from
the Offering will be used for general corporate purposes, including working
capital, and achieving its strategic growth plans which call for expanding
product offerings, accessing new distribution channels and pursuing
strategic acquisitions or alliances, as opportunities arise.
Cash used in operating activities was $25.0 million for the first
six months of 1999. Net cash used results principally from the loss for the
period of $6.2 million and $33 million of investment securities purchased
partially offset by an increase in trade, compensation and taxes payable.
For the first six months of 1998 cash provided by operating activities was
$22.5 million.
Cash provided by investing activities, related to investments in
and distributions from partnerships and affiliates, was $5.2 million in the
first six months of 1999. Cash provided by these investing activities in
the first six months of 1998 was $67 million primarily due to the $68
million in net proceeds received from the sale of PCS licenses.
Cash provided by financing activities in the first six months of
1999 was $66.5 million principally resulting from the receipt of the net
proceeds from the Offering of $96 million partially offset by distributions
to shareholders of $10 million and $18 million of cash included in the
deemed distribution. Cash used in the first six months of 1998 was $49.4
million principally for the repayment of a bank loan and distributions to
shareholders.
Based upon the Company's current level of operations and
anticipated growth the Company expects that cash flows from operating
activities plus its borrowing capacity and the net proceeds from its
Offering will be sufficient to finance its working capital needs for the
foreseeable future. The Company has no material commitments for capital
expenditures.
Gabelli & Company is registered with the Commission as a
broker-dealer and is a member of the National Association of Securities
Dealers. As such, it is subject to the minimum net capital requirements
promulgated by the Commission. Gabelli & Company's net capital has
historically exceeded these minimum requirements. Gabelli & Company
computes its net capital under the alternative method permitted by the
Commission, which requires minimum net capital of $250,000. At June 30,
1999, Gabelli & Company had net capital, as defined, of approximately $8.8
million exceeding the regulatory requirement by approximately $8.6 million.
Regulatory net capital requirements increase when Gabelli & Company is
involved in underwriting activities.
MARKET RISK
The Company is subject to potential losses from certain market
risks as a result of absolute and relative price movements in financial
instruments due to changes in interest rates, equity prices and other
factors. The Company's exposure to market risk is directly related to its
role as financial intermediary and advisor for assets under management in
its mutual funds, institutional and separate accounts business and its
proprietary trading activities. Since December 31, 1998, the Company has
substantially increased its positions in cash and cash equivalents and
reduced its positions in securities held for investment purposes and
investment in partnerships, effectively reducing its exposure to market
risk. At June 30, 1999, the Company's primary market risk exposure was for
changes in equity prices and interest rates. Included in investments in
securities of $38.8 million at June 30, 1999 were investments in mutual
funds, largely invested in equity products, of $24.4 million and a diverse
selection of common stocks totaling $6 million and $8.4 million invested in
government obligations. Investments in mutual funds generally lower market
risk through the diversification of financial instruments within their
portfolio. In addition, the Company may alter its investment holdings from
time to time in response to changes in market risks and other factors
considered appropriate by management. The majority invested in common
stocks at June 30, 1999, represent the Company's participation in risk
arbitrage opportunities in connection with mergers, consolidations,
acquisitions, tender offers or other similar transactions. These
transactions involve announced deals with agreed upon terms and conditions,
including pricing, which generally involve less market risk than common
stocks held in a trading portfolio. The principal risk associated with risk
arbitrage transactions is the inability of the companies involved to
complete the transaction.
The Company's exposure to interest rate risk results, principally,
from its investment of excess cash in government obligations. These
investments are primarily short term in nature and the fair value of these
investments generally approximate market value.
The Company's revenues are largely driven by the market value of
its assets under management and are therefore exposed to fluctuations in
market prices. Investment advisory fees for mutual funds are based on
average daily asset values. Management fees earned on institutional and
separate accounts, for any given quarter, are determined based on asset
values on the last day of the preceding quarter. Any significant increases
or decreases in market value of assets managed which occur on the last day
of the quarter will result in a relative increase or decrease in revenues
for the following quarter.
YEAR 2000 PROGRAM
With the new millennium approaching, many institutions around the
world are reviewing and modifying their computer systems to ensure that
they are Year 2000 compliant. The issue, in general terms, is that many
existing computer systems and microprocessors with date functions
(including those in non-information technology equipment and systems) use
only two digits to identify a year in the date field with the assumption
that the first two digits of the year are always "19". Consequently, on
January 1, 2000, computers that are not Year 2000 compliant may read the
year as 1900. Systems that calculate, compare or sort using the incorrect
date may malfunction.
Because the Company is dependent, to a very substantial degree,
upon the proper functioning of its computer systems, a failure of its
systems to be Year 2000 compliant could have a material adverse effect on
the Company. For example, a failure of this kind could lead to incomplete
or inaccurate accounting or recording of trades in securities or result in
the generation of erroneous results or give rise to uncertainty about the
Company's exposure to trading risks and its need for liquidity. If not
remedied, potential risks include business interruption or shutdown,
financial loss, regulatory actions, reputational harm and legal liability.
In addition, the Company depends primarily upon the proper
functioning of third-party computer and non-information technology systems.
These parties include trading counterparties; financial intermediaries such
as stock exchanges, depositories, clearing agencies, clearing houses and
commercial banks; subcontractors such as third-party administrators; and
vendors such as providers of telecommunication services, quotation
equipment and other utilities. If the third parties with whom the Company
interacts have Year 2000 problems that are not remedied, the following
problems could result: (i) in the case of subcontractors, in disruption of
critical services such as administration, valuation and record keeping
services for its mutual funds; (ii) in the case of vendors, in disruption
of important services upon which the Company depends, such as
telecommunications and electrical power; (iii) in the case of third-party
data providers, in the receipt of inaccurate or out-of-date information
that would impair the Company's ability to perform critical data functions,
such as pricing its securities or other assets; (iv) in the case of
financial intermediaries such as exchanges and clearing agents, in failed
trade settlements, an inability to trade in certain markets and disruption
of funding flows; (v) in the case of banks and other financial
institutions, in the disruption of capital flows potentially resulting in
liquidity stress; and (vi) in the case of counterparties and customers, in
financial and accounting difficulties for those parties that expose the
Company to increased credit risk and lost business. Disruption or
suspension of activity in the world's financial markets is also possible.
In addition, uncertainty about the success of remediation efforts generally
may cause many market participants to reduce the level of their market
activities temporarily as they assess the effectiveness of these efforts
during a "phase-in" period beginning in late 1999. This in turn could
result in a general reduction in trading and other market activities (and
thus, lost revenues). Management cannot predict the impact that such
reduction would have on the Company's business.
In order to ensure that the Company will continue to operate
successfully and be able to meet its fiduciary obligations to its clients
after December 31, 1999, the Company has taken numerous steps toward
becoming Year 2000 compliant in respect to both its information technology
and non-information technology systems. The Company has established a
comprehensive Year 2000 program and has begun to implement it. To date, the
Company has (i) taken inventory of all its technology systems; (ii)
performed an analysis of all internal systems, all facilities and
communications systems, and all third-party providers' software and
hardware products; and (iii) updated its internal system, which is its only
in-house developed system, for Year 2000 compliance.
In addition, the Company has identified and contacted 58
counterparties, intermediaries, subcontractors and vendors with whom it has
important financial or operational relationships (18 of which the Company
has identified as mission critical) and has requested from them assurances
that those systems either are already Year 2000 compliant or that they are
taking the necessary steps to make such systems Year 2000 compliant. The
Company has received both oral and written responses to these requests from
all third-party providers and 53 of them (16 of which the Company has
identified as mission critical) have advised the Company that their systems
are Year 2000 compliant. The remaining third parties have advised the
Company that they are in the process of achieving compliance and are
currently in the testing phase.
The Company intends to maintain ongoing communications with its
third-party providers and continue to monitor their compliance progress.
The Company is also currently in the process of testing its own updated
internal system to ensure Year 2000 compliance. The Company's subsidiaries
which are registered with the Commission as broker-dealers or investment
advisers have made certain filings with the Commission and other regulatory
agencies regarding their Year 2000 compliance efforts and will be making
additional filings in 1999.
The Company currently estimates that the total cost of
implementing its Year 2000 program will not have a material impact on the
Company's results of operations, liquidity or capital resources. There can
be no assurance, however, that the Company's Year 2000 program will be
effective or that the Company's estimates about the cost of completing its
program will be accurate. Neither the Company nor any of its affiliates has
been reviewed by federal or state regulators for Year 2000 compliance.
FORWARD LOOKING INFORMATION
Statements included in the Management's Discussion and Analysis of
Financial Condition and Results of Operations may contain "forward-looking
information", including information relating to anticipated growth in
assets under management, revenues or earnings, strategies to bring about
anticipated growth, anticipated expense levels and expectations regarding
market risk. The Company cautions readers that any forward-looking
information provided by or on behalf of the Company is not a guarantee of
future performance or events. Actual results may differ materially from
those in forward-looking information as a result of many risk factors
including, but not limited to, economic, competitive, governmental and
technological, many of which are beyond the Company's control or are
subject to change. Further, such forward-looking information speaks only as
of the date on which such statements are made and the Company undertakes no
obligation to update any forward-looking information to reflect changes in
events or circumstances subsequent to the date made or to reflect the
occurrence of unanticipated events.
PART II: OTHER INFORMATION
ITEM 2. Changes in Securities and Use of Proceeds
On February 10, 1999, the Company's Registration
Statement on Form S-1 (No. 333-51023) relating
to the initial public offering of 6,000,000
shares of the Company's Class A Common Stock was
declared effective by the Securities and
Exchange Commission. All of the 6,000,000 shares
of Class A Common Stock that were registered
were sold in the Offering at an initial public
offering price of $17.50 per share ($105 million
in the aggregate). The Offering was completed on
February 17, 1999 and was lead managed by
Merrill Lynch & Co., Salomon Smith Barney and
Gabelli & Company (an affiliate of the Company).
The net proceeds to the Company were
approximately $96 million, after payment of
underwriting discount of $7.35 million and other
estimated expenses of $1.65 million. As of June
30, 1999, the Company has applied approximately
$0.2 million of the net proceeds of the Offering
for its intended uses (namely, general corporate
purposes, including working capital, and
achieving its strategic growth plans which call
for expanding product offerings, accessing new
distribution channels and pursuing strategic
acquisitions or alliances, as opportunities
arise), and has invested the remaining net
proceeds from the Offering in short-term
marketable securities pending such application.
ITEM 6. (a) Exhibits
Exhibit No. Description
----------- -----------
27-1 Financial Data Schedule
(b) Reports on Form 8-K.
The Company did not file any reports on
Form 8-K during the three months ended
June 30, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
GABELLI ASSET MANAGEMENT INC.
-----------------------------
(Registrant)
AUGUST 11, 1999 /s/ Robert S. Zuccaro
--------------------- -----------------------------
Date Robert S. Zuccaro
Vice President and
Chief Financial Officer