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, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File No. 1-106
GABELLI ASSET MANAGEMENT INC.
(Exact name of Registrant as specified in its charter)
New York 13-4007862
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One Corporate Center, Rye, New York 10580
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(914) 921-3700
Registrant's telephone number, including area code
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the Registrant's classes of
Common Stock, as of the latest practical date.
Class Outstanding at June 30, 2000
----- -----------------------------------
Class A Common Stock, .001 par value 5,589,200
Class B Common Stock, .001 par value 24,000,000
1
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, 1999 and 2000
- Six months ended June 30, 1999 and 2000
Condensed Consolidated Statements of Financial Condition:
- June 30, 2000
- December 31, 1999 (Audited)
Condensed Consolidated Statements of Cash Flows:
- Six months ended June 30, 1999 and 2000
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Including Quantitative and
Qualitative Disclosures about Market Risk)
PART II. OTHER INFORMATION
Item 4. Submission of Matters to Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
2
GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
(In thousands, except per share data)
Three Months Ended
June 30,
------------------------------
1999 2000
-------- --------
Revenues
Investment advisory and incentive fees. . . . $ 35,440 $ 47,468
Commission revenue. . . . . . . . . . . . . . 3,333 3,915
Distribution fees and other income. . . . . . 3,850 5,737
------ ------
Total revenues . . . . . . . . . . . . . . 42,623 57,120
Expenses
Compensation costs. . . . . . . . . . . . . . 17,504 23,290
Management fee. . . . . . . . . . . . . . . . 2,318 2,783
Other operating expenses. . . . . . . . . . . 8,297 8,905
------ -----
Total expenses . . . . . . . . . . . . . . 28,119 34,978
Operating income. . . . . . . . . . . . . . . . 14,504 22,142
Other income (expense)
Net gain from investments . . . . . . . . . . 5,904 1,468
Interest and dividend income. . . . . . . . . 1,323 2,355
Interest expense. . . . . . . . . . . . . . . (872) (925)
------ ------
Total other income, net. . . . . . . . . . 6,355 2,898
------ ------
Income before income taxes and
minority interest . . . . . . . . . . . . . . 20,859 25,040
Income tax provision. . . . . . . . . . . . . 8,260 9,916
Minority interest. . . . . . . . . . . . . . 944 870
------ ------
Net income. . . . . . . . . . . . . . . . . $ 11,655 $ 14,254
====== ======
Net income per share:
Basic and diluted . . . . . . . . . . . . . . $ 0.39 $ 0.48
====== ======
Weighted average shares outstanding:
Basic . . . . . . . . . . . . . . . . . . . . 29,949 29,589
====== ======
Weighted average shares outstanding:
Diluted . . . . . . . . . . . . . . . . . . . 29,949 29,877
====== ======
3
GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
(In thousands, except per share data)
Six Months Ended
June 30,
----------------------------
1999 2000
-------- --------
Revenues
Investment advisory and incentive fees. . . . . . . . . $ 68,357 $ 92,657
Commission revenue. . . . . . . . . . . . . . . . . . . 6,253 7,693
Distribution fees and other income. . . . . . . . . . . 7,704 14,543
------- -------
Total revenues . . . . . . . . . . . . . . . . . . . 82,314 114,893
Expenses
Compensation costs. . . . . . . . . . . . . . . . . . . 34,279 47,019
Management fee. . . . . . . . . . . . . . . . . . . . . 5,300 5,532
Other operating expenses. . . . . . . . . . . . . . . . 14,482 17,567
Non recurring charge. . . . . . . . . . . . . . . . . . 50,725 -
------- -------
Total expenses . . . . . . . . . . . . . . . . . . . 104,786 70,118
Operating (loss)income. . . . . . . . . . . . . . . . . . (22,472) 44,775
Other income (expense)
Net gain from investments . . . . . . . . . . . . . . . 10,153 2,621
Interest and dividend income. . . . . . . . . . . . . . 2,481 4,246
Interest expense. . . . . . . . . . . . . . . . . . . . (1,588) (1,858)
------- -------
Total other income, net. . . . . . . . . . . . . . . 11,046 5,009
(Loss) income before income taxes and
minority interest . . . . . . . . . . . . . . . . . . . (11,426) 49,784
Income tax (benefit) provision. . . . . . . . . . . . . (6,858) 19,715
Minority interest . . . . . . . . . . . . . . . . . . . 1,658 1,819
------- -------
Net (loss) income . . . . . . . . . . . . . . . . . . $ (6,226) $ 28,250
======= =======
Net (loss) income per share:
Basic and diluted . . . . . . . . . . . . . . . . . . . $ (0.22) $ 0.95
======= =======
Weighted average shares outstanding:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . 28,416 29,616
======= =======
Weighted average shares outstanding:
Diluted . . . . . . . . . . . . . . . . . . . . . . . . 28,416 29,780
======= =======
Pro forma data:
(Loss) before income taxes and minority interest,
as reported . . . . . . . . . . . . . . . . . . . . . $(11,426)
Pro forma interest expense on $50 million note payable. (338)
Pro forma management fee adjustment from 20% to 10% of
pre tax profits . . . . . . . . . . . . . . . . . . . 1,097
Pro forma reallocations to the new parent company . . . 23
Pro forma effect on income and expenses of distribution
of assets and liabilities. . . . . . . . . . . . . . (2,256)
Pro forma benefit for income taxes. . . . . . . . . . . 4,597
Pro forma minority interest . . . . . . . . . . . . . . (1,658)
-------
Pro forma net (loss) . . . .. . . . . . . . . . . . . . $( 9,961)
=======
Pro forma net (loss) per share:
Basic and diluted . . . . . . . . . . . . . . . . . $ (0.33)
=======
Pro forma weighted average shares outstanding:
Basic and diluted. . . . . . . . . . . . . . . . . 29,974
=======
4
GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands)
December 31, June 30,
1999 2000
-------------- -----------
(Unaudited)
ASSETS
Cash and cash equivalents . . . . . . . . . . . . $ 103,032 $ 105,964
Investments in securities . . . . . . . . . . . . 69,791 84,097
Investments in partnerships and affiliates. . . . 21,018 36,940
Receivable from brokers . . . . . . . . . . . . . - 9,561
Investment advisory fees receivable . . . . . . . 14,269 14,703
Deferred income taxes, net. . . . . . . . . . . . 16,887 17,391
Other assets. . . . . . . . . . . . . . . . . . . 18,065 16,430
-------- -------
Total assets . . . . . . . . . . . . . . . . $ 243,062 $ 285,086
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Note payable. . . . . . . . . . . . . . . . . . . 50,000 50,000
Payable to brokers. . . . . . . . . . . . . . . . 5,637 -
Income taxes payable. . . . . . . . . . . . . . . 4,592 3,477
Compensation payable. . . . . . . . . . . . . . . 10,260 28,063
Accrued expenses and other liabilities. . . . . . 10,179 12,935
-------- -------
Total liabilities. . . . . . . . . . . . . . 80,668 94,475
Minority interest . . . . . . . . . . . . . . . . 14,818 16,547
Stockholders' equity: . . . . . . . . . . . . . . 147,576 174,064
-------- -------
Total liabilities and stockholders' equity. . . . $ 243,062 $ 285,086
======== =======
See accompanying notes.
5
GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(In thousands)
Six Months Ended
June 30,
--------------------------
1999 2000
--------- ---------
Operating activities
Net (loss) income . . . . . . . . . . . . . . . . . . . . . $ (6,226) $ 28,250
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Equity in earnings of partnerships and affiliates . . . . (4,002) (3,401)
Depreciation and amortization . . . . . . . . . . . . . . 397 344
Non recurring charge. . . . . . . . . . . . . . . . . . . 50,725 -
Deferred income taxes, net. . . . . . . . . . . . . . . . (19,830) (504)
Minority interest in net income of consolidated
subsidiaries . . . . . . . . . . . . . . . . . . . . . 1,658 1,819
Changes in operating assets and liabilities . . . . . . . (47,675) (9,263)
-------- --------
Total adjustments . . . . . . . . . . . . . . . . . . . . . (18,727) (11,005)
-------- --------
Net cash (used in) provided by operating activities . . . . (24,953) 17,245
------- --------
Investing activities
Distributions from partnerships and affiliates. . . . . . . 5,187 3,436
Investments in partnerships and affiliates. . . . . . . . . (25) (15,897)
------- --------
Net cash provided by (used in) investing activities . . . . 5,162 (12,461)
------- --------
Financing activities
Distributions to shareholders . . . . . . . . . . . . . . . (10,023) -
Sale (purchase) of minority stockholders' interest. . . . . 619 (90)
Net proceeds from issuance of common stock. . . . . . . . . 96,068 -
Purchase of treasury stock. . . . . . . . . . . . . . . . . (2,039) (1,762)
Cash included in deemed distribution. . . . . . . . . . . . (18,170) -
-------- --------
Net cash provided by (used in) financing activities . . . . 66,455 (1,852)
------- --------
Net increase in cash and cash equivalents . . . . . . . . . 46,664 2,932
Cash and cash equivalents at beginning of period. . . . . . 50,222 103,032
------- --------
Cash and cash equivalents at end of period. . . . . . . . . $ 96,886 $ 105,964
======= ========
See footnote C regarding non-cash financing transactions.
See accompanying notes.
6
GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
(Unaudited)
A. Organization
Gabelli Asset Management Inc. (the "Company") was incorporated in April
1998 in the state of New York, with no significant assets or liabilities and did
not engage in any substantial business activities prior to the public offering
("Offering") of its shares. On February 9, 1999, the Company exchanged 24
million shares of its Class B Common Stock, representing all of its then issued
and outstanding shares of Common Stock, with Gabelli Group Capital Partners,
Inc. and two of its subsidiaries ("GGCP") in consideration for substantially all
of the operating assets and liabilities of GGCP relating to its institutional
and retail asset management, mutual fund advisory, underwriting and brokerage
business (the "Reorganization").
On February 17, 1999, the Company completed its sale of 6 million
shares of Class A Common Stock and received proceeds, after fees and expenses,
of approximately $96 million. After the Offering, GGCP owned 80% of the
outstanding common stock of the Company. In addition, with the completion of the
Offering, the Company is a "C" Corporation for Federal and state income tax
purposes and is subject to substantially higher income tax rates.
The accompanying condensed consolidated financial statements for
periods prior to the date of the Reorganization, include the assets, liabilities
and earnings of GGCP, its wholly-owned subsidiary GAMCO Investors, Inc.
("GAMCO"), and GGCP majority-owned subsidiaries consisting of Gabelli
Securities, Inc. ("GSI"), Gabelli Fixed Income L.L.C. ("Fixed Income") and
Gabelli Advisers LLC ("Advisers"). After the Reorganization, these financial
statements include the accounts of Gabelli Funds, LLC and GAMCO and former GGCP
majority-owned subsidiaries GSI, Fixed Income and Advisers.
B. Basis of Presentation
The unaudited interim condensed consolidated financial statements of
the Company included herein have been prepared in accordance with accounting
principles generally accepted in the United States for interim financial
information and Rule 10-01 of Regulation S-X. Accordingly, they do not include
all the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. In the opinion
of management, the unaudited interim condensed consolidated financial statements
reflect all adjustments, which are of a normal recurring nature, necessary for a
fair presentation of financial position, results of operations and cash flows of
the Company for the interim periods presented and are not necessarily indicative
of a full year's results.
In preparing the unaudited interim condensed consolidated financial
statements, management is required to make estimates and assumptions that affect
the amounts reported in the financial statements. Actual results could differ
from those estimates.
These financial statements should be read in conjunction with the
Company's audited consolidated financial statements included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1999, from which the
accompanying Statement of Financial Condition was derived.
Certain items previously reported have been reclassified to conform
with the current year's financial statement presentation.
7
C. Stockholder's Equity
Stock Award and Incentive Plan
On February 15, 2000, the Compensation Committee of the Board of
Directors approved a second option grant of 135,000 shares under the Stock Award
and Incentive Plan at an exercise price, equal to the market price on that date,
of $16.00 per share. At June 30, 2000, there were 335,500 shares available for
future awards.
Stock Repurchase Program
During 1999 the Board of Directors authorized the repurchase of up to
$6,000,000 of the Company's Class A Common Stock. The Company completed the
stock buyback during the quarter ended March 31, 2000. During the first quarter
of 2000 the Board of Directors authorized the repurchase of an additional
$3,000,000 of shares in open market transactions. Through June 30, 2000, the
Company has repurchased 410,900 shares, including 110,000 in the first quarter
of 2000, at an average cost of $15.61 per share, which are held in treasury.
D. Pro Forma Information
Pro forma information has been included which gives effect to the
Reorganization, including the reduction in other income as a result of the
deemed distribution of a proprietary investment portfolio, the lower management
fee and the increase in interest expense as if the Employment Agreement had been
in effect as of January 1, 1999 and the additional income taxes which would have
been recorded if GGCP had been a "C" corporation instead of an "S" corporation
based on tax laws in effect. The pro forma information does not give effect to
the use of proceeds received from the Offering prior to the date received.
E. Earnings Per Share
Net income per share is computed in accordance with the Statement of
Financial Accounting Standards No. 128 "Earnings Per Share." Basic net income
per common share is calculated by dividing net income applicable to common
shareholders by the weighted average number of common shares outstanding.
Diluted net income per share is computed using the treasury stock method and
includes the effect of the assumed exercise of dilutive stock options.
Pro forma earnings per share for 1999 are based on the number of shares
outstanding at the close of the Offering for the period prior to the Offering
and on the actual number of shares outstanding subsequent thereto.
8
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
Gabelli Asset Management Inc. (the "Company"), incorporated in April
1998, had no significant assets or liabilities and did not engage in any
business activities prior to its reorganization and the public offering
("Offering") of its shares. On February 9, 1999, the Company exchanged 24
million shares of its Class B Common Stock, representing all of its then issued
and outstanding common stock, to Gabelli Group Capital Partners, Inc. ("GGCP")
and two of its subsidiaries in consideration for substantially all of the
operating assets and liabilities of GGCP related to its institutional and retail
asset management, mutual fund advisory, underwriting and brokerage business (the
"Reorganization").
Immediately following the Reorganization, the Company sold 6 million
shares of its Class A Common Stock in an initial public offering. Proceeds from
the Offering, net of fees and expenses, were approximately $96 million.
Following the Offering, GGCP owned 80% of the outstanding common stock of the
Company. For periods after the Offering, the Company's financial statements
reflect the financial condition and results of operations of Gabelli Asset
Management Inc. and the historical results of GGCP are shown as predecessor
financial statements.
The following discussion should be read in conjunction with the
Condensed Consolidated Financial Statements and the notes thereto included in
Item 1 to this report.
The Company's revenues are largely based on the level of assets under
management in its business as well as the level of fees associated with its
various investment products. Growth in revenues generally depends on good
investment performance and the ability to attract additional investors while
maintaining current fee levels. The Company's largest source of revenues is
investment advisory fees which are based on the amount of assets under
management in its Mutual Funds and Separate Accounts business. Revenues derived
from the equity oriented portfolios generally have higher management fee rates
than fixed income portfolios.
RESULTS OF OPERATIONS
The pro forma information presented herein for the six months ended
June 30, 1999 presents results of operations as if the Reorganization and
Offering had occurred at the beginning of 1999. The Company believes the pro
forma results provide more meaningful information for comparing operating
results and earnings trends. The pro forma information is not necessarily
indicative of the results that the Company would have reported had these events
occurred at the beginning of the year.
Information for the six months ended June 30, 1999 is also presented
herein on an "as reported" basis to meet certain disclosure requirements. This
information does not give effect to assets and liabilities assumed to be
distributed as part of the Reorganization and the resulting impact on allocated
income and expenses; the $50 million deferred payment to the Chairman and Chief
Executive Officer net of deferred tax benefit; the reduction in the management
fee from 20% to 10% and the conversion from an "S" corporation to a "C"
corporation for tax purposes. The net effect of these adjustments was to lower
net income on a pro forma basis for the six months of 1999 by $3.7 million.
These adjustments principally consisted of $2.3 million of investment earnings
from assets distributed as part of the Reorganization and a $2.3 million
increase in the pro forma tax provision due to the conversion from an S
corporation to a C corporation partially offset by a $1.1 million decrease in
the pro forma management fee.
9
Three Months Ended June 30, 2000 as Compared to the
Three Months Ended June 30, 1999
Consolidated Results - Three Months Ended June 30:
(unaudited; in thousands, except per share data)
1999 2000 % Change
---------- ---------- --------
Revenues $ 42,623 $ 57,120 34.0
Expenses 28,119 34,978 24.4
---------- ----------
Operating income 14,504 22,142 52.7
Other income, net 6,355 2,898
---------- ----------
Income before taxes and minority interest 20,859 25,040 20.0
Income tax provision 8,260 9,916
Minority interest 944 870
---------- ----------
Net income $ 11,655 $ 14,254 22.3
========== ==========
Net income per share:
Basic and diluted $ 0.39 $ 0.48 23.1
========== ==========
Included in income before taxes and minority interest:
Depreciation and amortization $ 223 $ 175
Interest expense $ 872 $ 925
Adjusted EBITDA(a) $ 21,954 $ 26,140 19.1
(a) Adjusted EBITDA is defined as earnings before interest, taxes, depreciation
and amortization and minority interest.
Total revenues rose 34% in the second quarter of 2000, to $57.1
million, up $14.5 million from $42.6 million in the second quarter of 1999. The
increase in revenues results from the increase in assets under management, which
drive investment advisory fees, commission revenues and incentive fees earned as
General Partner of the alternative investment partnerships.
Investment advisory and incentive fees, which comprise 83% of total
revenues, were $47.5 million in the second quarter of 2000, 34% higher than the
same period a year earlier. The growth in investment advisory and incentive fees
is based on the growth in average assets under management, for mutual funds and
partnerships and asset values on the last day of the preceding quarter for
institutional and separate accounts. For the second quarter of 2000 average
assets under management in open end equity funds was $9.2 billion, a 46%
increase from the prior year average open end equity assets managed of $6.3
billion. Assets under management used in computing fees from institutional and
separate accounts rose 14% for the second quarter of 2000 versus the same period
a year earlier.
Commission revenue was $3.9 million in the second quarter of 2000, 17%
higher than the same period a year earlier, largely the result of increased
trading volume associated with our mutual fund business.
10
Distribution fees and other income were $5.7 million, an increase of
49% from the $3.9 million reported in the second quarter of 1999. This increase
results from the growth in average assets managed in open end mutual funds which
generate distribution fees under 12b-1 compensation plans.
Total expenses were $35.0 million in the second quarter of 2000, a 24%
increase as compared to $28.1 million in the second quarter of 1999. The 1999
quarter had included $0.6 million of additional compensation costs and $0.9
million of other additional operating costs which were directly related to
investment earnings reflected as part of other income. Excluding these costs,
total expenses rose $8.4 million or 32% in 2000 versus the prior year quarter.
Compensation costs, which are largely variable in nature, were $23.3 million in
2000, 33% ahead of the second quarter of 1999. Excluding the additional
compensation costs referred to previously compensation costs rose $6.4 million
or 38% in 2000 versus 1999. Management fee expense, which is totally variable
and based on pretax income, increased 20% to $2.8 million in 2000 versus $2.3
million a year earlier. Other operating expenses increased $0.6 million, or 7%,
to $8.9 million in the current year versus $8.3 million in the second quarter of
1999. This increase, principally resulting from the increased mutual fund
distribution costs associated with the 46% increase in average open end equity
mutual fund assets under management, was partially offset by lower mutual fund
administration costs and the $0.9 million of additional other operating costs
related to investment earnings in the prior year.
Other income, net, which includes investment gains from our proprietary
portfolio was $2.9 million in 2000 as compared to $6.4 million in the second
quarter of 1999. Included in the 1999 quarter were $3.1 million in profits from
venture capital investments.
The effective tax rate for both the 2000 and 1999 quarters was
approximately 39.6%.
Six Months Ended June 30, 2000 as Compared to the
Six Months Ended June 30, 1999
Consolidated Results - Six Months Ended June 30:
(unaudited; in thousands, except per share data)
1999 (a)
1999 Adjusted % Change
(as reported) (pro forma) 2000 (vs. pro forma)
------------- ----------- ------ ---------------
Revenues $ 82,314 $ 82,314 $ 114,893 39.6
Expenses 104,786 52,941 70,118 32.4
----------- ---------- ---------
Operating (loss) income (22,472) 29,373 44,775 52.4
Other income, net 11,046 8,452 5,009
----------- ---------- ---------
(Loss) income before taxes and minority interest (11,426) 37,825 49,784 31.6
Income tax (benefit) provision (6,858) 15,233 19,715
Minority interest 1,658 1,658 1,819
----------- ---------- ---------
Net (loss) income $ ( 6,226) $ 20,934 $ 28,250 34.9
=========== ========== =========
Net income per share:
Basic and diluted $ 0.70 $ 0.95 35.7
============ =========
Included in income before taxes and minority interest:
Depreciation and amortization $ 397 $ 344
Interest expense $ 1,803 $ 1,858
Adjusted EBITDA(b) $ 40,025 $ 51,986 29.9
11
(a) The 1999 adjusted pro forma results above do not include the $50.7 million
non-recurring charge ($30.9 million net of tax benefit or $1.03 per share)
recorded in the first quarter of 1999. After giving effect to this charge,
net of tax, the Company had a net loss of $0.33 per share for the six
months ended June 30, 1999.
(b) Adjusted EBITDA is defined as earnings before interest, taxes, depreciation
and amortization and minority interest.
Total revenues rose 40% in the first half of 2000, to $114.9 million, up
$32.6 million from $82.3 million in the first half of 1999. Included in total
revenue is a $3.1 million investment banking fee earned by a subsidiary in the
first quarter of 2000. Excluding this fee total revenues were $111.8 million, a
36% increase over the prior year first half.
Investment advisory and incentive fees, which comprise 81% of total
revenues, were $92.7 million in the first half of 2000, 36% higher than the same
period a year earlier. The growth in investment advisory and incentive fees is
based on the growth in average assets under management, principally in the open
end equity mutual funds, during the respective periods. Average assets under
management were $22.4 billion during the first half of 2000, 28% higher than
average assets of $17.4 billion during the first half of 1999. Average assets
under management in open end equity mutual funds climbed 49%, to $9.0 billion,
in the first half of 2000 compared to $6.0 billion during the first half of
1999.
Commission revenue was $7.7 million in the first half of 2000, 23% higher
than the same period a year earlier.
Distribution fees and other income were $14.5 million for the first six
months of 2000 including a $3.1 million investment banking fee, as compared to
$7.7 million in 1999. Excluding this fee, distribution fees and other income
were $11.4 million in 2000, an increase of 48% from the $7.7 million reported in
the first half of 1999 largely resulting from the growth in average assets
managed in open end mutual funds which generate distribution fees under 12b-1
compensation plans.
Total expenses were $70.1 million in the first half of 2000, a 32% increase
over total expenses, excluding the $50.7 million non-recurring charge, of $52.9
million in 1999. Included in total expenses in 1999 were $1.5 million of
additional compensation ($0.6 million) and other operating costs ($0.9 million)
directly related to investment earnings. Excluding these costs total expenses
increased $18.7 million or 36% from the prior year and declined, as a percentage
of revenues, to 61% in 2000 from 62% in 1999. Compensation costs were $47.0
million in 2000, 37% ahead of the first half of 1999. Management fee expense,
which is totally variable and based on pretax income, increased 32% to $5.5
million in 2000 versus $4.2 million a year earlier. Other operating expenses
increased $0.9 million, or 5%, to $17.6 million in the current year versus $16.7
million in the first half of 1999. This increase, principally resulting from the
increased mutual fund distribution costs associated with the more than 49%
increase in average open end equity mutual fund assets under management, was
partially offset by lower mutual fund administration costs and the $0.9 million
of additional costs related to investment earnings in the prior year.
Other income, net, which includes investment gains from our proprietary
portfolio was $5.0 million during the first half of 2000 as compared to $10.7
million during the first half of 1999. During the first half of 1999 the Company
realized $3.1 million in profits from several venture capital investments.
12
The effective tax rate for the first half of 2000 was approximately 39.6%.
In the first half of 1999, the Company had recorded a tax benefit of $15.2
million, which included a deferred tax benefit of $19.8 million related to a
non-recurring charge of $50.7 million. On a pro forma basis and excluding this
deferred tax benefit, the effective tax rate for the first half of 1999 was
40.3%.
LIQUIDITY AND CAPITAL RESOURCES
The Company's assets are primarily liquid, consisting mainly of cash, short
term investments, securities held for investment purposes and investments in
partnerships in which the Company is a general or limited partner. Although
investments in partnerships are generally illiquid, the underlying investments
in such partnerships are generally liquid and the valuations of the investment
partnerships reflect this underlying liquidity.
Summary cash flow data is as follows:
Six Months Ended June 30,
--------------------------------
1999 2000
---- ----
(in thousands)
Cash flows provided by (used in):
Operating activities $ (24,953) $ 17,245
Investing activities 5,162 (12,461)
Financing activities 66,455 ( 1,852)
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Increase 46,664 2,932
Cash and cash equivalents at beginning of year 50,222 103,032
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Cash and cash equivalents at end of year $ 96,886 $ 105,964
========= =========
Cash requirements and liquidity needs have historically been met through
cash generated by operating activities and through the Company's borrowing
capacity. At June 30, 2000, the Company had cash and cash equivalents of $106.0
million, an increase of $2.9 million from December 31, 1999.
Cash provided by operating activities of $17.2 million in the first half of
2000 resulting from $28.3 million in net income partially offset by the net
increase of $9.3 million in other operating assets. In the first half of 1999,
cash used in operating activities was $25.0 million.
Cash used by investing activities, principally related to increased
investments in partnerships and affiliates, was $12.5 million in the first half
of 2000. Cash provided by investing activities in the first half of 1999 was
$5.2 million largely due to distributions received from partnerships and
affiliates.
Cash used in financing activities in the first half of 2000 of $1.9 was
million principally due to the purchase of the Company's Class A Common Stock
under its Stock Repurchase Program. Cash provided by financing activities in the
first half of 1999 was $66.5 million and principally resulting from the net
proceeds received from the Offering of $96 million partially offset by
distributions to shareholders of $10 million and $18.2 million of cash included
in the deemed distribution.
Based upon the Company's current level of operations and its anticipated
growth, the Company expects that its current cash balances plus cash flows from
operating activities and its borrowing capacity will be sufficient to finance
its working capital needs for the foreseeable future. The Company has no
material commitments for capital expenditures.
13
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, 2000, Gabelli & Company had net capital, as defined, of
approximately $11.2 million exceeding the regulatory requirement by
approximately $10.9 million. Regulatory net capital requirements increase when
Gabelli & Company is involved in underwriting activities.
Market Risk
The Company is subject to potential losses from certain market risks as a
result of absolute and relative price movements in financial instruments due to
changes in interest rates, equity prices and other factors. The Company's
exposure to market risk is directly related to its role as financial
intermediary and advisor for assets under management in its mutual funds,
institutional and separate accounts business and its proprietary trading
activities. Since December 31, 1999, the Company has increased its positions in
securities held for investment purposes effectively increasing its exposure to
market risk. At June 30, 2000, the Company's primary market risk exposure was
for changes in equity prices and interest rates. Included in investments in
securities of $84.1 million at June 30, 2000 were investments in government
obligations of $32.5 million, in mutual funds, largely invested in equity
products, of $29.0 million, a diverse selection of common stocks totaling $21.6
million and other investments of approximately $1.0 million. Investments in
mutual funds generally lower market risk through the diversification of
financial instruments within their portfolio. In addition, the Company may alter
its investment holdings from time to time in response to changes in market risks
and other factors considered appropriate by management. More than $18.4 million
of the $21.6 million invested in common stocks at June 30, 2000, represents the
Company's participation in risk arbitrage opportunities in connection with
mergers, consolidations, acquisitions, tender offers or other similar
transactions. These transactions involve announced deals with agreed upon terms
and conditions, including pricing, which generally involve less market risk than
common stocks held in a trading portfolio. The principal risk associated with
risk arbitrage transactions is the inability of the companies involved to
complete the transaction.
The Company's exposure to interest rate risk results, principally, from its
investment of excess cash in government obligations. These investments are
primarily short term in nature and the fair value of these investments generally
approximates market value.
The Company's revenues are largely driven by the market value of its assets
under management and are therefore exposed to fluctuations in market prices.
Investment advisory fees for mutual funds are based on average daily asset
values. Management fees earned on institutional and separate accounts, for any
given quarter, are determined based on asset values on the last day of the
preceding quarter. Any significant increases or decreases in market value of
institutional and separate accounts assets managed which occur on the last day
of the quarter will result in a relative increase or decrease in revenues for
the following quarter.
14
Forward Looking Information
Statements included in Management's Discussion and Analysis of Financial
Condition and Results of Operations may contain "forward-looking information",
including information relating to anticipated growth in assets under management,
revenues or earnings, strategies to bring about anticipated growth, anticipated
expense levels and expectations regarding market risk. The Company cautions
readers that any forward-looking information provided by or on behalf of the
Company is not a guarantee of future performance or events. Actual results may
differ materially from those in forward-looking information as a result of many
risk factors including, but not limited to, economic, competitive, governmental
and technological, many of which are beyond the Company's control or are subject
to change. Further, such forward-looking information speaks only as of the date
on which such statements are made and the Company undertakes no obligation to
update any forward-looking information to reflect changes in events or
circumstances subsequent to the date made or to reflect the occurrence of
unanticipated events.
15
Part II: Other Information
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders of Gabelli Asset
Management Inc. was held in Greenwich, Connecticut on May
16, 2000. At that meeting, the stockholders considered and
acted upon the following proposals:
A. THE ELECTION OF DIRECTORS. The stockholders elected the
following individuals to serve as directors until the
2001 annual meeting of stockholders and until their
respective successors are duly elected and qualified.
All the directors were elected with more than 99.7% of
the total votes cast.
Raymond C. Avansino
John C. Ferrara
Mario J. Gabelli
Eamon M. Kelly
Karl Otto Pohl
Item 6. (a) Exhibits
Exhibit No. Description
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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, 2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
GABELLI ASSET MANAGEMENT INC.
-----------------------------
(Registrant)
August 4, 2000 /s/ Robert S. Zuccaro
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Date Robert S. Zuccaro
Vice President and Chief Financial Officer