SECURITIES & EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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
(914) 921-3700
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
Class Outstanding at October 31, 1999
----- ----------------------------------
Class A Common Stock, .001 par value 5,751,900
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 September 30, 1998 and 1999
- Nine months ended September 30, 1998 and 1999
Condensed Consolidated Statements of Financial Condition:
- September 30, 1999
- December 31, 1998
Condensed Consolidated Statements of Cash Flows:
- Nine months ended September 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
September 30,
-------------------
1998 1999
-------- ---------
Revenues
Investment advisory and incentive fees ................ $ 29,058 $ 37,337
Commission revenue .................................... 2,020 2,199
Distribution fees and other income .................... 3,272 4,555
-------- --------
Total revenues ..................................... 34,350 44,091
Expenses
Compensation costs .................................... 14,095 17,900
Management fee ........................................ 2,422 2,040
Other operating expenses .............................. 6,175 6,723
-------- --------
Total expenses ..................................... 22,692 26,663
Operating income ........................................ 11,658 17,428
Other income (expense)
Net (loss) gain from investments ...................... (5,053) 279
Interest and dividend income .......................... 1,437 1,583
Interest expense ...................................... (175) (926)
-------- --------
Total other (expense) income, net .................. (3,791) 936
Income before income taxes and
minority interest ..................................... 7,867 18,364
Income tax provision .................................. 1,195 7,297
Minority interest ..................................... 404 830
-------- --------
Net income ......................................... $ 6,268 $ 10,237
======== ========
Net income per share: ...................................
Basic and diluted ..................................... $ 0.34
========
Weighted average shares outstanding: ...................
Basic and diluted ..................................... 29,861
========
Pro forma data:
Income before income taxes and minority interest,
as reported ......................................... $ 7,867
Pro forma interest expense on $50 million note payable (750)
Pro forma management fee adjustment from 20% to 10% of
pre tax profits ..................................... 966
Pro forma reallocations to the new parent company ..... 447
Pro forma effect on income and expenses of distribution
of assets and liabilities ........................... 4,577
Pro forma provision for income taxes .................. (5,197)
Pro forma minority interest ........................... (404)
--------
Pro forma net income .................................. $ 7,506
========
Pro forma net income per share:
Basic and diluted ................................... $ 0.25
========
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)
Nine Months Ended
September 30,
-------------------------
1998 1999
--------- ---------
Revenues
Investment advisory and incentive fees ............................. $ 86,302 $ 105,694
Commission revenue ................................................. 6,197 8,452
Distribution fees and other income ................................. 9,810 12,259
--------- ---------
Total revenues .................................................. 102,309 126,405
Expenses
Compensation costs ................................................. 41,702 52,179
Management fee ..................................................... 8,533 7,339
Other operating expenses ........................................... 17,558 21,205
Non recurring charge ............................................... -- 50,725
--------- ---------
Total expenses .................................................. 67,793 131,448
Operating income (loss) .............................................. 34,516 (5,043)
Other income (expense)
Net gain from investments .......................................... 13,599 10,432
Interest and dividend income ....................................... 3,252 4,064
Interest expense ................................................... (1,870) (2,514)
--------- ---------
Total other income, net ......................................... 14,981 11,982
Income before income taxes and
minority interest .................................................. 49,497 6,939
Income tax provision ............................................... 3,648 439
Minority interest .................................................. 1,043 2,488
--------- ---------
Net income ...................................................... $ 44,806 $ 4,012
========= =========
Net income per share:
Basic and diluted .................................................. $ 0.14
=========
Weighted average shares outstanding:
Basic and diluted .................................................. 28,903
=========
Pro forma data:
Income before income taxes and minority interest,
as reported ...................................................... $ 49,497 $ 6,939
Pro forma interest expense on $50 million note payable ............. (2,250) (338)
Pro forma management fee adjustment from 20% to 10% of
pre tax profits .................................................. 4,318 1,096
Pro forma reallocations to the new parent company .................. 358 23
Pro forma effect on income and expenses of distribution
of assets and liabilities. ....................................... (13,978) (2,256)
Pro forma provision for income taxes ............................... (15,043) (2,700)
Pro forma minority interest ........................................ (1,043) (2,488)
--------- ---------
Pro forma net income ............................................... $ 21,859 $ 276
========= =========
Pro forma net income per share:
Basic and diluted ................................................ $ 0.73 $ 0.01
========= =========
Pro forma weighted average shares outstanding:
Basic and diluted ................................................ 30,000 29,936
========= =========
See accompanying notes.
GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands)
December 31, September 30,
1998 1999
------------ -------------
(Unaudited)
ASSETS
Cash and cash equivalents ................ $ 50,222 $115,311
Investments in securities ................ 83,802 51,410
Investments in partnerships and affiliates 49,795 18,558
PCS licenses ............................. 33,311 --
Receivable from broker ................... 13,463 5,785
Investment advisory fees receivable ...... 8,851 11,087
Deferred tax asset ....................... -- 19,830
Other assets ............................. 15,231 15,768
-------- --------
Total assets ............................. $254,675 $237,749
======== ========
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 ..................... 3,300 5,460
Compensation payable ..................... 5,118 22,740
Accrued expenses and other liabilities ... 8,727 10,627
-------- --------
Total liabilities ........................ 47,648 88,827
Minority interest ........................ 12,127 14,066
Stockholders' equity ..................... 194,900 134,856
-------- --------
Total liabilities and stockholders' equity $254,675 $237,749
======== ========
See accompanying notes.
GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(In thousands)
Nine Months Ended
September 30,
-----------------------
1998 1999
-------- ---------
Operating activities
Net income ....................................................................... $ 44,806 $ 4,012
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Equity in earnings of partnerships and affiliates .............................. 2,104 (5,060)
Depreciation and amortization .................................................. 662 572
Deferred income taxes .......................................................... -- (19,830)
Minority interest in net income of consolidated subsidiaries ................... 1,043 2,488
Gain on sale of PCS Licenses ................................................... (28,449) --
Non recurring charge ........................................................... -- 50,725
Changes in operating assets and liabilities .................................... 5,487 (36,687)
-------- ---------
Total adjustments ................................................................ (19,153) (7,792)
-------- ---------
Net cash provided by (used in)operating activities ............................... 25,653 (3,780)
-------- ---------
Investing activities
Sale of PCS Licenses ............................................................. 80,000 --
Distributions from partnerships and affiliates ................................... 2,914 5,554
Investments in partnerships and affiliates ....................................... (4,792) (694)
-------- ---------
Net cash provided by investing activities ........................................ 78,122 4,860
-------- ---------
Financing activities
Cash included in deemed distribution ............................................. -- (18,170)
Purchase of treasury stock ....................................................... -- (2,868)
Issuance of notes payable ........................................................ (1,232) --
Purchase of minority stockholders' interests ..................................... (592) (549)
Net proceeds from issuance of common stock ....................................... -- 95,619
Distribution payable to shareholders ............................................. (19,020) (10,023)
Repayment of bank loan ........................................................... (30,000) --
-------- ---------
Net cash (used in) provided by financing activities .............................. (50,844) 64,009
-------- ---------
Net increase in cash and cash equivalents ........................................ 52,931 65,089
Cash and cash equivalents at beginning of period ................................. 12,610 50,222
-------- ---------
Cash and cash equivalents at end of period ....................................... $ 65,541 $ 115,311
======== =========
Supplemental disclosure of cash flow information:
Cash paid for interest ......................................................... $ 1,862 $ 2,513
-------- ---------
Cash paid for income taxes ..................................................... $ 3,401 $ 17,804
-------- ---------
See footnote C regarding non-cash financing transactions.
See accompanying notes.
GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 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 owned 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 September 30, 1999 there were
393,000 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 nine months ended September 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
The Board of Directors has authorized the Company to repurchase up to
$6 million of its Class A common stock through the open market or through
privately negotiated transactions. Under the program the Company has repurchased
182,800 shares of common stock through September 30, 1999, at an aggregate cost
of $2.9 million, 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 September 30, 1998
(In thousands, except per share data)
Pro Forma Pro Forma
As Reported Adjustments Consolidated
----------- ----------- ------------
Revenues
Investment advisory and incentive fees ................... $ 29,058 $ 29,058
Commission revenue ....................................... 2,020 2,020
Distribution fees and other income ....................... 3,272 3,272
-------- --------
Total revenues ........................................ 34,350 34,350
Expenses
Compensation costs ....................................... 14,095 14,095
Management fee ........................................... 2,422 $ (966)(a) 1,456
Other operating expenses ................................. 6,175 (447)(b) 5,728
-------- -------- --------
Total expenses ........................................ 22,692 (1,413) 21,279
-------- -------- --------
Operating income ........................................... 11,658 1,413 13,071
Other income (expense)
Net gain (loss) from investments ......................... (5,053) 5,877 (b) 824
Interest and dividend income ............................. 1,437 (1,294)(b) 143
Interest expense ......................................... (175) (6)(b)
(750)(c) (931)
-------- -------- --------
Total other income (expense), net ..................... (3,791) 3,827 36
-------- -------- --------
Income before income taxes and minority interest............ 7,867 5,240 13,107
Income tax provision ..................................... 1,195 4,002 (d) 5,197
Minority interest ........................................ 404 -- 404
-------- -------- --------
Net income ............................................ $ 6,268 $ 1,238 $ 7,506
======== ======== ========
Pro forma net income per share:
Basic and diluted .................................... $ 0.25
========
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) To reflect interest on $50 million note payable.
(d) To record additional taxes to reflect the conversion from an "S" Corporation
to a "C" Corporation and the tax effects of other 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 nine
months ended September 30, 1998 and nine months ended September 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 to net income on a pro forma basis for the third quarter and first
nine months of 1998 was an increase of $1.2 million and a decrease of $22.9
million, respectively, and $3.7 million for the first nine months of 1999. For
the third quarter of 1998 these adjustments principally consisted of $4.6
million of investment losses from assets distributed as part of the
Reorganization and a $1.0 million decrease in the pro forma management fee,
partially offset by a $4.0 million increase in the pro forma tax provision due
to the conversion from an S corporation to a C corporation. For the first nine
months of 1998 these adjustments principally consisted of $14.0 million of
investment earnings and $11.4 million in the pro forma tax provision partially
offset by a $4.3 million decrease in the pro forma management fee. For the first
nine 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 September 30, 1999 as Compared to
Three Months Ended September 30, 1998
Consolidated Results - Three Months Ended September 30:
(unaudited; in thousands, except per share data)
% Change
1998 1998 vs.
As reported Pro forma 1999 Pro forma
----------- --------- ---- ---------
Revenues ...................................................... $ 34,350 $34,350 $44,091 28.4
Expenses ...................................................... 22,692 21,279 26,663 25.3
-------- ------- -------
Operating income .............................................. 11,658 13,071 17,428 33.3
Other (expense) income, net ................................... (3,791) 36 936
-------- ------- -------
Income before taxes and minority interest ..................... 7,867 13,107 18,364 40.1
Income tax provision .......................................... 1,195 5,197 7,297
Minority interest ............................................. 404 404 830
-------- ------- -------
Net income .................................................... $ 6,268 $ 7,506 $10,237 36.4
======== ======= =======
Net income per share:
Basic and diluted .......................................... $ 0.25 $ 0.34 36.0
======= =======
Included in income before taxes and minority interest:
Depreciation and amortization ................................. $ 185 $ 175
Interest expense .............................................. 1,094 925
Adjusted EBITDA(a) ............................................ $ 14,386 $19,464 35.3
======== =======
(a) Adjusted EBITDA is defined as earnings before interest, taxes, depreciation
and amortization and minority interest.
Total revenues climbed 28%, to $44.1 million in the third quarter of
1999 as compared to $34.4 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 the alternative investment partnership products.
Investment advisory fees, which comprise over 84% of total revenue,
were 28% higher, at $37.3 million in the third quarter of 1999 as compared to
$29.1 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 28% to $18.9 billion in the 1999 quarter as
compared to $14.7 billion in the third quarter of 1998.
Commission revenues were $2.2 million or 9% higher in the third 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 was 39% or $1.3 million higher in
the 1999 quarter as compared to the same quarter a year earlier, attributable
primarily to a $2.0 billion increase, to $7.9 billion, in average assets under
management in our open end mutual funds.
Total expenses increased by $5.4 million or 25% in the third quarter of
1999 as compared to the third quarter of 1998. As a percentage of revenues,
total expenses decreased to 60.5% in 1999 from 62.0% in 1998. Compensation
costs, which are largely variable in nature, rose $3.8 million or 27%, and were
impacted by higher commission payouts in 1999 as compared to the prior year.
Such payouts are associated with increased incentive fees from alternative
investment partnerships. Management fee expense, which is variable and based on
pre-tax profits, increased $0.6 million in the third quarter of 1999 as compared
to the 1998 quarter. Other operating expenses increased $1.0 million or 17%,
principally due to increased spending for mutual fund distribution.
Other income, net, which includes investment gains from our proprietary
portfolio, totaled $0.9 million in the third quarter of 1999 compared to $0.4
million in the 1998 quarter. These gains reflect the 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 the 1999 quarter is approximately 39.7%,
substantially the same as in the prior year. The increase in minority interest
of $ 0.4 million principally reflects the increased profits at the Company's 76%
owned subsidiary, Gabelli Securities, Inc.
Nine Months Ended September 30, 1999 as Compared to
Nine Months Ended September 30, 1998
Consolidated Results - Nine Months Ended September 30:
(unaudited; in thousands, except per share data)
------------------------------------------------
1999(a) % Change
1998 1999 1998 Adjusted vs.
As reported As reported Pro forma Pro forma Pro forma
----------- ----------- --------- --------- ---------
Revenues ............................................... $ 102,309 $ 126,405 $ 102,309 $ 126,405 23.6
Expenses ............................................... 67,793 131,448 62,945 79,604 26.5
--------- --------- --------- ---------
Operating income (loss) ................................ 34,516 (5,043) 39,364 46,801 18.9
Other income (expense), net ............................ 14,981 11,982 (1,419) 9,388
--------- --------- --------- ---------
Income before taxes and minority interest .............. 49,497 6,939 37,945 56,189 48.1
Income tax provision ................................... 3,648 439 15,043 22,530
Minority interest ...................................... 1,043 2,488 1,043 2,488
--------- --------- --------- ---------
Net income ............................................. $ 44,806 $ 4,012 $ 21,859 $ 31,171 42.6
========= ========= ========= =========
Net income per share:
Basic and diluted ................................... $ 0.14 $ 0.73 $ 1.04
======== ========= =========
Included in income before taxes and minority interest:
Depreciation and amortization .......................... $ 662 $ 572
Interest expense ....................................... 4,119 2,514
Adjusted EBITDA ........................................ $ 42,726 $ 59,275 38.7
========= =========
(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 net income of $0.01 per share for the nine
months ended September 30, 1999.
Total revenues for the first nine months of 1999 rose 23% to $126.4
million, an increase of $24.1 million over the same period in 1998. Average
assets under management were $17.9 billion during the first nine months of 1999,
21% higher than average assets under management of $14.8 billion during the
first nine months of 1998.
Investment advisory and incentive fees increased 22%, to $105.7 million
in the first nine months of 1999 from $86.3 million in 1998, primarily as a
result of the aforementioned increase in average assets under management, as
well as an increase in incentive fees received from its alternative investment
partnerships.
Commission revenues rose 36%, to $8.5 million in the first nine months
of 1999, up $2.3 million from the same period of 1998. Approximately, $1.5
million or 65% of this increase was due to increased trading activities for
accounts managed by affiliated companies with the balance coming from increased
syndicate activities.
Distribution fees and other income was 25% higher at $12.3 million in
the first nine months of 1999 compared to $9.8 million in 1998. Distribution
fees, payable in accordance with Rule 12b-1 compensation plans on our open end
mutual funds, increased 28% to $11.9 million in 1999 as compared to $9.3 million
in 1998. Average assets under management in our open end mutual funds grew 30%
during these same periods.
Total expenses increased 27%, to $79.6 million (excluding the $50.7
million nonrecurring charge recorded in the first quarter of 1999) in the first
nine months of 1999, as compared to $62.9 million in 1998. Compensation costs
rose $10.5 million or 25% to $52.2 million in 1999, in line with revenue growth
on which a large portion of compensation costs are based. Management fee expense
increased $2.0 million or 48% as a result of the increase in pre-tax profits in
1999 as compared to 1998. Other operating expenses grew $4.1 million or 24% in
1999 as compared to 1998 largely as a result of increased spending for mutual
fund distribution and information technology.
Other income, net, was $9.4 million in the first nine months of 1999
compared to a loss of $1.4 million in the same period 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 first nine months ended September 30,
1999 was 40.1% as compared to 39.6% in 1998. The increase in minority interest
of more than $1.4 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 September 30, 1999, the Company had cash and cash equivalents of
$115 million, an increase of $65 million from December 31, 1998. Included in
cash and investments at September 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 are being used for general corporate purposes, including working
capital, and for achieving 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 $3.8 million for the first nine
months of 1999. Net cash used results principally from $45.1 million of
investment securities purchased partially offset by an increase in trade,
compensation and taxes payable. For the first nine months of 1998 cash provided
by operating activities was $25.7 million.
Cash provided by investing activities was $4.9 million in the first
nine months of 1999, largely from distributions received from partnerships and
affiliates. Cash provided by these investing activities in the nine months of
1998 was $78.1 million, primarily due to the $80 million in proceeds received
from the sale of PCS licenses.
Cash provided by financing activities in the first nine months of 1999
was $64.0 million principally resulting from the receipt of the net proceeds
from the Offering of $96 million partially offset by distributions to
shareholders of $10.0 million and $18.2 million of cash included in the deemed
distribution of the net assets distributed to the holding company. Cash used in
the first nine months of 1998 was $50.8 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 September 30, 1999, Gabelli & Company had net capital,
as defined, of approximately $10.6 million exceeding the regulatory requirement
by approximately $10.4 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 September 30, 1999, the Company's
primary market risk exposure was for changes in equity prices and interest
rates. Included in investments in securities of $51.4 million at September 30,
1999 were investments in mutual funds, largely invested in equity products, of
$39.3 million and a diverse selection of common stocks totaling $12.1 million.
Investments in mutual funds generally lower market risk through the
diversification of financial instruments within their portfolio. In addition,
the Company may alter its investment holdings from time to time in response to
changes in market risks and other factors considered appropriate by management.
The majority invested in common stocks at September 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 established a comprehensive Year 2000 program in
1998 and began 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 61
counterparties, intermediaries, subcontractors and vendors with whom it has
important financial or operational relationships (14 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 57 of them (14 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 September 30, 1999, the
Company has applied less than $1.0 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
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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 September 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.
November 11, 1999 /s/ Robert S. Zuccaro
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Robert S. Zuccaro
Vice President and Chief Financial Officer