SECURITIES & EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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(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, 2005
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File No. 1-106
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GABELLI ASSET MANAGEMENT INC.
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(Exact name of Registrant as specified in its charter)
New York 13-4007862
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(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Corporate Center, Rye, New York 10580
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(Address of principle executive offices) (Zip Code)
(914) 921-3700
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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 by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). 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, 2005
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Class A Common Stock, .001 par value 6,821,142
Class B Common Stock, .001 par value 23,128,500
1
INDEX
GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
- -----------------------------
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Income:
- Three months ended June 30, 2005 and 2004
- Six months ended June 30, 2005 and 2004
Condensed Consolidated Statements of Financial Condition:
- December 31, 2004 (Audited)
- June 30, 2005
- June 30, 2004
Condensed Consolidated Statements of Stockholders' Equity and
Comprehensive Income:
- Three months ended June 30, 2005 and 2004
- Six months ended June 30, 2005 and 2004
Condensed Consolidated Statements of Cash Flows:
- Three months ended June 30, 2005 and 2004
- Six months ended June 30, 2005 and 2004
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Including Quantitative and Qualitative Disclosure about
Market Risk)
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
- --------------------------
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
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2
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED
(In thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
2005 2004 2005 2004
-------- --------- ---------- ---------
Revenues
Investment advisory and incentive fees $ 52,359 $ 51,315 $ 106,290 $ 105,243
Commission revenue 2,574 4,066 5,039 8,350
Distribution fees and other income 4,908 4,823 10,043 10,150
--------- --------- --------- ---------
Total revenues 59,841 60,204 121,372 123,743
Expenses
Compensation and related costs 27,353 23,141 53,508 48,955
Management fee 2,322 2,438 4,577 5,274
Distribution costs 4,535 5,067 10,748 9,656
Other operating expenses 6,000 5,124 12,754 10,147
--------- --------- --------- ---------
Total expenses 40,210 35,770 81,587 74,032
Operating income 19,631 24,434 39,785 49,711
Other income (expense)
Net gain (loss) from investments 387 (365) 982 2,245
Interest and dividend income 4,157 1,914 7,629 3,594
Interest expense (3,275) (4,035) (7,204) (8,081)
--------- --------- --------- ---------
Total other income (expense), net 1,269 (2,486) 1,407 (2,242)
--------- --------- --------- ---------
Income before income taxes and minority interest 20,900 21,948 41,192 47,469
Income tax provision 7,838 7,989 15,447 17,285
Minority interest 107 41 108 195
--------- --------- --------- ---------
Net income $ 12,955 $ 13,918 $ 25,637 $ 29,989
--------- --------- --------- ---------
Net income per share:
Basic $ 0.43 $ 0.47 $ 0.86 $ 1.00
--------- --------- --------- ---------
Diluted $ 0.43 $ 0.46 $ 0.85 $ 0.98
--------- --------- --------- ---------
Weighted average shares outstanding:
Basic 30,079 29,890 29,821 29,977
--------- --------- --------- ---------
Diluted 31,211 32,010 31,447 32,108
--------- --------- --------- ---------
Dividends declared $ 0.02 $ 0.12 $ 0.04 $ 0.12
--------- --------- --------- ---------
See accompanying notes.
3
GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands)
December 31, June 30 June 30
2004 2005 2004
------------------------------------
ASSETS (Unaudited)
Cash and cash equivalents, including restricted cash of
$1,054, $1,508 and $1,102. $ 257,096 $ 191,413 $ 327,458
Investments in securities, including restricted securities of
$102,111, $52,270 and $102,447. 292,350 366,664 252,764
Investments in partnerships and affiliates 89,339 85,716 93,377
Receivable from brokers 5,539 24,274 16,825
Investment advisory fees receivable 26,567 16,581 16,647
Other assets 28,081 27,625 27,139
---------- ---------- ----------
Total assets $ 698,972 $ 712,273 $ 734,210
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Payable to brokers $ 302 $ 1 $ -
Income taxes payable 8,526 3,050 3,402
Compensation payable 27,645 31,914 29,290
Capital lease obligation 3,167 3,084 2,855
Securities sold, not yet purchased 1,088 3,357 1,068
Dividends payable 17,302 - -
Accrued expenses and other liabilities 17,585 15,506 16,050
---------- ---------- ----------
Total operating liabilities 75,615 56,912 52,665
5.5% Senior notes (due May 15, 2013) 100,000 100,000 100,000
5% Convertible note (conversion price, $52.00 per share;
note due August 14, 2011) 100,000 50,000 100,000
5.22% Senior notes (due February 17, 2007) - 82,308 -
Mandatory convertible securities (purchase contract settlement
date, February 17, 2005; notes due February 17, 2007) 82,308 - 82,870
---------- ---------- ----------
Total liabilities 357,923 289,220 335,535
Minority interest 6,171 5,735 5,872
Stockholders' equity
Class A Common Stock, $0.001 par value; 100,000,000
shares authorized; 8,081,356, 9,621,064 and 7,755,725
issued and outstanding, respectively 8 10 8
Class B Common Stock, $0.001 par value; 100,000,000
shares authorized; 23,128,500, 23,128,500 and 23,128,500
issued and outstanding, respectively 23 23 23
Additional paid-in capital 161,053 235,104 146,220
Retained earnings 268,519 292,821 283,679
Accumulated comprehensive gain / (loss) (53) 1,864 (1,992)
Treasury stock, at cost (2,372,822, 2,800,422 and 1,061,372
shares, respectively) (94,672) (112,504) (35,135)
---------- ---------- ----------
Total stockholders' equity 334,878 417,318 392,803
---------- ---------- ----------
Total liabilities and stockholders' equity $ 698,972 $ 712,273 $ 734,210
========== ========== ==========
See accompanying notes.
4
GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
UNAUDITED
(In thousands)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------------------
2005 2004 2005 2004
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Stockholders' equity - beginning of period $ 417,445 $ 393,599 $ 334,878 $ 378,311
Comprehensive income:
Net income 12,955 13,918 25,637 29,989
Translation adjustments (16) - 34 -
Net unrealized gain (loss) on securities available for sale 741 (2,129) 1,883 (3,472)
--------- --------- --------- ---------
Comprehensive income 13,680 11,789 27,554 26,517
--------- --------- --------- ---------
Dividends declared (599) (3,578) (1,334) (3,578)
Stock option expense 2,275 451 2,760 885
Proceeds from settlement of purchase contracts - - 70,568 -
Purchase and retirement of mandatory convertible securities - 24 - 30
Capitalized costs (15) - (15) -
Exercise of stock options including tax benefit 304 526 739 1,832
Purchase of treasury stock (15,772) (10,008) (17,832) (11,194)
--------- --------- --------- ---------
Stockholders' equity - end of period $ 417,318 $ 392,803 $ 417,318 $ 392,803
========= ========= ========= =========
See accompanying notes.
5
GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(In thousands)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2005 2004 2005 2004
--------- --------- --------- ---------
Operating activities
Net income $ 12,955 $ 13,918 $ 25,637 $ 29,989
Adjustments to reconcile net income to net cash
used in operating activities:
Equity in losses / (gains) from partnerships and affiliates (538) 178 (2,696) (1,965)
Depreciation and amortization 237 239 471 479
Stock-based compensation expense 2,275 451 2,760 885
Tax benefit from exercise of stock options 52 131 154 379
Foreign currency (gain) / loss (9) - 202 -
Other-than-temporary loss on available for sale securities 122 - 3,301 -
Impairment of goodwill - - 1,127 -
Minority interest in net income of consolidated subsidiaries 107 41 108 195
Realized gains on available for sale securities - - - (101)
(Increase) decrease in operating assets:
Investments in securities (81,103) (3,395) (69,308) (18,943)
Investment advisory fees receivable 5,918 2,099 9,986 4,919
Receivables from affiliates (497) 364 580 4,583
Receivable from brokers (656) (1,788) (18,736) (15,593)
Other assets 532 866 (1,731) (412)
Increase (decrease) in operating liabilities:
Payable to brokers - (5,772) (301) (5,691)
Income taxes payable (5,456) (11,003) (6,602) (6,828)
Compensation payable (2,031) 2,706 3,934 4,357
Accrued expenses and other liabilities (3,500) (1,854) (2,279) (2,637)
Securities sold, not yet purchased 2,276 (8,303) 2,269 404
---------- ---------- ---------- ----------
Total adjustments (82,271) (25,040) (76,761) (35,969)
---------- ---------- ---------- ----------
Net cash used in operating activities (69,316) (11,122) (51,124) (5,980)
---------- ---------- ---------- ----------
Investing activities
Purchases of available for sale securities (1,116) (6,357) (4,960) (9,105)
Proceeds from sales of available for sale securities - - - 600
Distributions from partnerships and affiliates 4,248 2,890 17,002 9,957
Investments in partnerships and affiliates (4,126) (15,187) (10,683) (37,357)
---------- ---------- ---------- ----------
Net cash provided by (used in) investing activities (994) (18,654) 1,359 (35,905)
---------- ---------- ---------- ----------
Financing activities
Dividend paid to minority stockholders of subsidiary (544) - (544) (2,718)
Proceeds from exercise of stock options 252 395 585 1,452
Repurchase of 5% convertible note (50,000) - (50,000) -
Dividends paid (599) (3,578) (18,636) (3,578)
Purchase of mandatory convertible securities - (930) - (1,130)
Proceeds from settlement of purchase contracts - - 70,568 -
Capitalized costs (15) - (15) -
Purchase of treasury stock (15,772) (10,008) (17,832) (11,194)
---------- ---------- ---------- ----------
Net cash used in financing activities (66,678) (14,121) (15,874) (17,168)
---------- ---------- ---------- ----------
Net decrease in cash and cash equivalents (136,988) (43,897) (65,639) (59,053)
Effect of exchange rates on cash and cash equivalents (27) - (44) -
Cash and cash equivalents at beginning of period 328,428 371,355 257,096 386,511
---------- ---------- ---------- ----------
Cash and cash equivalents at end of period $ 191,413 $ 327,458 $ 191,413 $ 327,458
========== ========== ========== ==========
See accompanying notes.
6
GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
(Unaudited)
A. Basis of Presentation
Unless we have indicated otherwise, or the context otherwise requires,
references in this report to "Gabelli Asset Management Inc.," "Gabelli," "we,"
"us" and "our" or similar terms are to Gabelli Asset Management Inc., its
predecessors and its subsidiaries.
The unaudited interim Condensed Consolidated Financial Statements of
Gabelli Asset Management Inc. included herein have been prepared in conformity
with U.S. generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all the information and footnotes required
by U.S. 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 Gabelli 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 our audited
consolidated financial statements included in our Annual Report on Form 10-K for
the year ended December 31, 2004, from which the accompanying Condensed
Consolidated Statement of Financial Condition was derived.
Certain items previously reported have been reclassified to conform to the
current period's financial statement presentation.
B. Investment in Securities
Management determines the appropriate classification of debt and equity
securities at the time of purchase and reevaluates such designation as of each
balance sheet date. Investments in Treasury Bills and Notes with maturities of
greater than three months at the time of purchase are classified as Investments
in securities and in Cash and cash equivalents if three months or less at time
of purchase. A substantial portion of investments in securities are held for
resale in anticipation of short-term market movements and classified as trading
securities. Available for sale investments are stated at fair value, with any
unrealized gains or losses, net of deferred taxes, reported as a component of
stockholders' equity except for losses deemed to be other than temporary which
are recorded as realized losses in the statement of operations. For the three
and six month periods ended June 30, 2005 there were $0.1 million in losses and
$3.3 million in losses, respectively, on available for sale securities deemed to
be other than temporary which were recorded in the statement of operations.
There were no such losses recorded in the prior year's periods. These losses in
the six month period ended June 30, 2005 were partially offset by a $2.1 million
unrealized gain from our investment in optionsXpress Holdings, Inc. (Nasdaq:
OXPS). optionsXpress is an investment within our proprietary portfolio which
completed an initial public offering on January 27, 2005 at $16.50 per share.
Gabelli Securities, Inc., our 92% owned subsidiary, owns approximately 315,000
shares which are held for trading purposes. These shares have an original cost
basis of $0.23 per share and were written up to $3.11 per share in December 2003
concurrent with a second round of financing prior to the IPO. The carrying value
of the shares is currently below the June 30, 2005 market price. A lock-up
agreement with the underwriters restricted the disposition of or hedging of
these shares until July 26, 2005.
7
At June 30, 2005 and 2004 the market value of investments available for
sale was $80.9 million and $69.8 million, respectively. An unrealized gain in
market value, net of management fee and taxes, of $1.9 million and an unrealized
loss in market value, net of management fee and taxes, of $2.0 million has been
included in stockholders' equity for June 30, 2005 and 2004, respectively. The
unrealized gain in the six month period ended June 30, 2005 included an increase
of $1.9 million, net of management fee and taxes, from the write down of
available for sale securities as these losses are no longer included as
comprehensive loss within stockholders' equity at June 30, 2005.
There were no sales of investments available for sale for the three and six
month periods ended June 30, 2005. Proceeds from sales of investments available
for sale were approximately $0.6 million for both the three and six month
periods ended June 30, 2004. Gross gains on the sale of investments available
for sale amounted to $101,000; there were no gross losses on the sale of
investments available for sale.
C. Earnings Per Share
The computations of basic and diluted net income per share are as follows:
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands, except per share amounts) 2005 2004 2005 2004
-------- --------- --------- ---------
Basic:
Net income $ 12,955 $ 13,918 $ 25,637 $ 29,989
======== ========= ========= =========
Average shares outstanding 30,079 29,890 29,821 29,977
======== ========= ========= =========
Basic net income per share $ 0.43 $ 0.47 $ 0.86 $ 1.00
======== ========= ========= =========
Diluted:
Net income $ 12,955 $ 13,918 $ 25,637 $ 29,989
Add interest expense on 5% convertible note,
net of management fee and taxes 352 716 1,055 1,431
-------- --------- --------- ---------
Total $ 13,307 $ 14,634 $ 26,692 $ 31,420
======== ========= ========= =========
Average shares outstanding 30,079 29,890 29,821 29,977
Dilutive stock options 171 197 186 208
Assumed conversion of 5% convertible note 961 1,923 1,440 1,923
-------- --------- --------- ---------
Total 31,211 32,010 31,447 32,108
======== ========= ========= =========
Diluted net income per share $ 0.43 $ 0.46 $ 0.85 $ 0.98
======== ========= ========= =========
D. Stockholders' Equity
Stock Award and Incentive Plan
For the three months ended June 30, 2005 and 2004, we recognized $2,275,000
and $451,000, respectively, in stock-based compensation. For the six months
ended June 30, 2005 and 2004, we recognized $2,760,000 and $885,000,
respectively, in stock-based compensation. During June 2005 we announced that
our Board of Directors approved the accelerated vesting of all unvested stock
options. In accordance with Statement of Financial Accounting Standards ("SFAS")
123(R), the acceleration of vesting resulted in the recognition of approximately
$1.8 million of incremental compensation expense during the second quarter 2005.
For both the third and fourth quarters of 2005 compensation expense will be
lower by approximately $467,000 as compared to the prior year quarters as we
currently estimate there will be no stock option expense in the 2005 quarters.
8
D. Stockholders' Equity (continued)
Proceeds from the exercise of 8,750 and 17,700 stock options were $252,000
and $395,000 for the three months ended June 30, 2005 and 2004, respectively,
resulting in a tax benefit to Gabelli of $52,000 and $131,000 for the three
months ended June 30, 2005 and 2004, respectively. Proceeds from the exercise of
22,225 and 58,125 stock options were $585,000 and $1,452,000 for the six months
ended June 30, 2005 and 2004, respectively, resulting in a tax benefit to
Gabelli of $154,000 and $379,000 for the six months ended June 30, 2005 and
2004, respectively.
Shares outstanding on June 30, 2005 were 29,949,142, which is approximately
3.9% higher than shares outstanding of 28,837,034 at the end of 2004 and
approximately 0.4% above shares outstanding of 29,822,853 on June 30, 2004
reflecting the issuance of 1,517,483 shares of class A common stock in
settlement of the purchase contracts issued pursuant to our mandatory
convertible securities on February 17, 2005 and the repurchase of approximately
0.4 million shares and 1.7 million shares during the six and twelve month
periods, respectively. Fully diluted shares outstanding for the second quarter
2005 were 31,211,347 approximately 1.5% lower than first quarter 2005 fully
diluted shares of 31,684,268 and approximately 2.5% lower than our fully diluted
shares of 32,010,303 for the second quarter 2004.
Our Board of Directors declared a quarterly dividend of $0.02 per share
that was paid on June 28, 2005 to shareholders of record on June 15, 2005.
During the first half of 2005, we have paid total dividends of $0.64 per share
to all shareholders, which includes a special dividend of $0.60 per share on
January 18, 2005. This follows the $1.16 per share of dividends paid in 2004
which included special dividends of $0.10 per share in the second quarter 2004
and $1.00 per share in the fourth quarter 2004.
Prior to January 1, 2003 we applied Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," and related interpretations in
accounting for our stock option plan. Accordingly, no compensation expense was
recognized where the exercise price equals or exceeds the market price of the
underlying stock on the date of grant.
Effective January 1, 2003 we adopted the fair value recognition provisions
of SFAS No. 123 in accordance with the transition and disclosure provisions
under the recently issued SFAS No. 148, "Accounting for Stock Based Compensation
- - Transition and Disclosure".
We adopted SFAS 123 (R) on January 1, 2005. In light of our modified
prospective adoption of the fair value recognition provisions of SFAS 123 (R)
for all grants of employee stock options, the adoption of SFAS 123 (R) did not
have a material impact on our consolidated financial statements. During June the
Board of Directors authorized the accelerated vesting of all unvested stock
options as of July 1, 2005. This resulted in the expensing of an additional $1.8
million in stock option expense during the second quarter of 2005. All
compensation costs related to stock options granted have been recognized in our
consolidated financial statements.
9
D. Stockholders' Equity (continued)
If we had elected for 2001 and 2002 to account for our stock options under
the fair value method of SFAS No. 123 "Accounting for Stock Based Compensation,"
our net income and net income per share would have been reduced to the pro forma
amounts indicated below:
Three Months Ended Six Months Ended June 30,
June 30, June 30,
------------------------------- ------------------------------
2005 2004 2005 2004
---------- ----------- ---------- ----------
Net income (in thousands):
As reported $ 12,955 $ 13,918 $ 25,637 $ 29,989
Pro forma $ 12,955 $ 13,895 $ 25,637 $ 29,855
Net income per share - Basic
As reported $ 0.43 $ 0.47 $ 0.86 $ 1.00
Pro forma $ 0.43 $ 0.47 $ 0.86 $ 1.00
Net income per share - Diluted
As reported $ 0.43 $ 0.46 $ 0.85 $ 0.98
Pro forma $ 0.43 $ 0.46 $ 0.85 $ 0.98
Stock Repurchase Program
In March 1999 the Board of Directors established the Stock Repurchase
Program through which we are authorized to repurchase shares of our Class A
common stock. For the three and six months ended June 30, 2005, we repurchased
381,100 and 427,600 shares at an average investment of $41.25 and $41.58,
respectively. Since the inception of the program we have repurchased 3,201,226
shares at an average investment of $37.08 per share. At June 30, 2005 the total
shares available under the program was approximately 516,000.
Since May 2002 the Board of Directors has also approved the repurchase of
up to 900,000 shares of our mandatory convertible securities. During the second
quarter and first half of 2004, we repurchased 38,200 shares at an average
investment of $24.93 per share and 46,400 shares at an average investment of
$24.95 per share, respectively. A gain attributable to the debt component of the
mandatory convertible securities totaling $10,000 has been included in other
income (expense) for both the three and six months ended June 30, 2004. The
total shares repurchased were 307,700 at a total investment of $6.9 million. In
February 2005 we issued approximately 1,517,000 shares of class A common stock
in settlement of the 2,822,700 purchase contracts issued pursuant to our
mandatory convertible securities resulting in proceeds of $70.6 million. The
settlement rate of 0.5376 was determined based on the average closing price per
share of class A common stock for the twenty consecutive trading days ending
February 14, 2005.
In June 2005, the firm filed a "shelf" registration statement on Form S-3.
The shelf is currently being reviewed by the staff of the Securities and
Exchange Commission. If and when declared effective, the shelf process will
provide us opportunistic flexibility to sell any combination of senior and
subordinate debt securities, convertible debt securities and equity securities
(including common and preferred securities) up to a total amount of $400
million. This authorization is in addition to the remaining $120 million
available under our "shelf" registration filed in 2001.
10
E. Goodwill
In accordance with SFAS 142 "Accounting for Goodwill and Other Intangible
Assets," we assess the recoverability of goodwill and other intangible assets at
least annually, or more often should events warrant. During the first quarter of
2005, assets under management for our fixed income business decreased
approximately 42% from the beginning of the year, triggering under our
accounting policies the need to reassess goodwill for this 80% owned subsidiary.
Using a present value cash flow method, we reassessed goodwill for this entity
and determined that the value of the entity no longer justified the amount of
goodwill. Accordingly, we recorded a charge of $1.1 million for the impairment
of goodwill which represented the entire amount of goodwill for this entity
during the first quarter of 2005. There was no impairment charge recorded for
the three months ended June 30, 2005. There remains $3.5 million of goodwill
related to our 92% owned subsidiary, Gabelli Securities, Inc.
F. Subsequent Events
On July 26, 2005 the lockup agreement for Gabelli Securities, Inc.'s, our
92% owned subsidiary, investment in optionsXpress Holdings, Inc. (NYSE: OXPS)
expired. This investment had been recorded at a value which was at a discount to
the market price due to this agreement. However, upon expiry of that
restriction, the investment was marked to market without discount. Based on the
July 26, 2005 closing price for OXPS this results in the recording of an
unrealized gain of approximately $1.1 million, net of management fee, taxes and
minority interest, subject to future market fluctuations.
On August 1, 2005, Gabelli Advisers, Inc. ("Gabelli Advisers"), in which we
have an approximately 42% equity interest and Westwood Holdings Group, Inc.
("Westwood") has an approximately 19% equity interest, received a letter from
Westwood requesting that we enter into discussions with Westwood regarding its
purchase of our interest in Gabelli Advisers. If we are unwilling to enter into
such discussions, Westwood requested that we purchase its interest in Gabelli
Advisers using a mutually agreed upon valuation metric. Westwood subadvises five
of the six registered investment company portfolios managed by Gabelli Advisers.
We own approximately 19% of the outstanding shares of Westwood's common stock.
We may discuss with Westwood and others the repurchase of Westwood's interest in
Gabelli Advisers, the sale of our interest in Gabelli Advisers or other
alternatives.
Our Board of Directors authorized the repurchase of an additional 500,000
shares of our Class A common stock, bringing the total authorization to
approximately 1 million shares.
Our Board of Directors declared a quarterly dividend of $0.02 per share to
be paid on September 28, 2005 to shareholders of record on September 15, 2005.
Additionally, the Board of Directors approved an increase in the regular
quarterly dividend of 50% to $0.03 per share beginning in the fourth quarter
2005.
11
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (INCLUDING QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK)
Overview
Gabelli Asset Management Inc. (NYSE: GBL) is a widely recognized provider
of investment advisory services to mutual funds, institutional and high net
worth investors, and investment partnerships. Through Gabelli & Company, Inc.,
we provide institutional research services to institutional clients and
investment partnerships. We generally manage assets on a discretionary basis and
invest in a variety of U.S. and international securities through various
investment styles. Our revenues are based primarily on the firm's levels of
assets under management and fees associated with our various investment
products, rather than our own corporate assets.
Since 1977, we have been identified with and enhanced the "value" style
approach to investing. Our investment objective is to earn a superior
risk-adjusted return for our clients over the long-term through our proprietary
fundamental research. In addition to our value products, we offer our clients a
broad array of investment strategies that include growth, international and
convertible products. We also offer non-market correlated, and fixed income
strategies. By earning returns for our clients, we will be earning returns for
all our constituents.
Shareholders approved the re-naming of the company to GAMCO Investors, Inc
at our May 10th annual meeting. This step was taken as part of a branding
initiative to more accurately reflect the broader product offerings of the firm
and to focus the Gabelli brand with the Private Market with a Catalyst(TM)
investment approach. This name change should become effective during the third
quarter of this year. The company's common stock will continue to trade on the
New York Stock Exchange under the GBL ticker symbol.
Our revenues are highly correlated to the level of assets under management,
which are directly influenced by the level and changes of the overall equity
markets. Assets under management can also fluctuate through acquisitions, the
creation of new products, the addition of new accounts or the loss of existing
accounts. Since various equity products have different fees, changes in our
business mix may also affect revenues. At times, the performance of our equity
products may differ markedly from popular market indices, and this can also
impact our revenues. It is our belief that general stock market trends will have
the greatest impact on our level of assets under management and hence, revenues.
This becomes increasingly likely as the base of assets grows.
We conduct our investment advisory business principally through: GAMCO
Investors, Inc. (Separate Accounts), Gabelli Funds, LLC (Mutual Funds) and
Gabelli Securities, Inc. (Investment Partnerships). We also act as an
underwriter, are a distributor of our open-end mutual funds and provide
institutional research through Gabelli & Company, Inc., our broker-dealer
subsidiary.
As of June 30, 2005, we had $27.6 billion of assets under management (AUM),
approximately 96% of which were in equity products. Our equity open-end mutual
funds and closed-end funds had a record $12.5 billion in AUM at quarter end,
slightly ahead of the $12.4 billion on March 31, 2005 and 7.5% ahead of the
$11.6 billion on June 30, 2004, reflecting the first full quarter of The Gabelli
Global Gold, Natural Resources & Income Trust (AMEX: GGN). In the institutional
and high net worth segment of our business, GAMCO had AUM of $13.2 billion in
separately managed equity accounts on June 30, 2005, down 1.3% from the $13.4
billion on March 31, 2005 and down 3.2% from the $13.6 billion on June 30, 2004.
Assets in our investment partnerships were $831 million, down 2.7% from first
quarter-end 2005 assets of $854 million and 21.7% below the $1.1 billion on June
30, 2004. Fixed income assets, primarily money market mutual funds, totaled $1.1
billion on June 30, 2005, down 21.1% from first quarter-end 2005 assets of $1.4
billion and 41.5% lower than assets of $1.9 billion on June 30, 2004.
12
Assets Under Management
The company reported assets under management as follows:
Table I:
Assets Under Management
------------------------------
(in millions)
-------------
June 30
------- %
2004 2005 Inc.(Dec.)
--------- --------- ----------
Mutual Funds:
Equities
Open End $ 7,852 $ 7,798 (0.7%)
Closed-End 3,764 4,684 24.4
Fixed Income 1,563 852 (45.5)
--------- ---------
Total Mutual Funds 13,179 13,334 1.2
--------- ---------
Institutional & High Net Worth Separate Accounts:
Equities 13,628 13,189 (3.2)
Fixed Income 354 269 (24.0)
--------- ---------
Total Institutional & High Net Worth Separate
Accounts 13,982 13,458 (3.7)
--------- ---------
Investment Partnerships 1,061 831 (21.7)
--------- ---------
Total Assets Under Management $ 28,222 $ 27,623 (2.1)
========= =========
Table II: Fund Flows - 2nd Quarter 2005 (in millions)
-------------------------------------------
Market
March 31, Net Appreciation/ June 30,
2005 Cash Flows (Depreciation) 2005
--------- ---------- --------------- ---------
Mutual Funds:
Equities $ 12,410 ($ 140) $ 212 $ 12,482
Fixed Income 1,154 (308) 6 852
--------- ---------- --------------- ---------
Total Mutual Funds 13,564 (448) 218 13,334
--------- ---------- --------------- ---------
Institutional & HNW Separate Accounts
Equities 13,364 (478) 303 13,189
Fixed Income 266 1 2 269
--------- ---------- --------------- ---------
Total Institutional & HNW Separate Accounts 13,630 (477) 305 13,458
--------- ---------- --------------- ---------
Investment Partnerships 854 (31) 8 831
--------- ---------- --------------- ---------
Total Assets Under Management $ 28,048 ($ 956) $ 531 $ 27,623
========= ========== =============== =========
Table III: Assets Under Management (in millions)
-------------------------------------------------
% Increase/
(decrease)
6/04 9/04 12/04 3/05 6/05 3/05 6/04
--------- --------- --------- --------- --------- ------- -------
Mutual Funds
Open end $ 7,852 $ 7,534 $ 8,029 $ 7,808 $ 7,798 (0.1%) (0.7%)
Closed-end 3,764 3,727 4,342 4,602 4,684 1.8 24.4
Fixed income 1,563 1,524 1,499 1,154 852 (26.2) (45.5)
--------- --------- --------- --------- ---------
Total Mutual Funds 13,179 12,785 13,870 13,564 13,334 (1.7) 1.2
--------- --------- --------- --------- ---------
Institutional & HNW Separate Accounts:
Equities 13,628 13,185 13,587 13,364 13,189 (1.3) (3.2)
Fixed Income 354 344 388 266 269 1.1 (24.0)
--------- --------- --------- --------- ---------
Total Institutional & HNW Separate Accounts 13,982 13,529 13,975 13,630 13,458 (1.3) (3.7)
--------- --------- --------- --------- ---------
Investment Partnerships 1,061 934 814 854 831 (2.7) (21.7)
--------- --------- --------- --------- ---------
Total Assets Under Management $ 28,222 $ 27,248 $ 28,659 $ 28,048 $ 27,623 (1.5) (2.1)
========= ========= ========= ========= =========
13
Recent regulatory developments
On September 3, 2003, the New York Attorney General's office ("NYAG")
announced that it had found evidence of widespread improper trading involving
mutual fund shares. These transactions included the "late trading" of mutual
fund shares after the 4:00 p.m. pricing cutoff and "time zone arbitrage" of
mutual fund shares designed to exploit pricing inefficiencies. Since the NYAG's
announcement, the NASD, the SEC, the NYAG and officials of other states have
been conducting inquiries into and bringing enforcement actions related to
trading abuses in mutual fund shares. We have received information requests and
subpoenas from the SEC and the NYAG in connection with their inquiries. We are
complying with these requests for documents and testimony and have been
conducting an internal review of our mutual fund practices and procedures in a
variety of areas with the guidance of outside counsel. A special committee of
all of our independent directors was also formed to review various issues
involving mutual fund share transactions and was assisted by independent
counsel.
As part of our review, hundreds of documents were examined and
approximately fifteen individuals were interviewed. We have found no evidence
that any employee participated in or facilitated any "late trading". We also
have found no evidence of any improper trading in our mutual funds by our
investment professionals or senior executives. As we previously reported, we did
find that in August of 2002, we banned an account, which had been engaging in
frequent trading in our Global Growth Fund (the prospectus of which did not
impose limits on frequent trading) and which had made a small investment in one
of our hedge funds, from further transactions with our firm. Certain other
investors had been banned prior to that. Since our internal review and requests
from regulators for documents and testimony are ongoing, we can make no
assurances that additional information will not become available or that we will
not become subject to disciplinary action.
In response to industry wide inquiries and enforcement actions, a
number of regulatory and legislative initiatives were introduced. The SEC has
proposed and adopted a number of rules under the Investment Company Act and the
Investment Advisers Act and is currently studying potential major revisions of
other rules. The SEC adopted rules requiring written compliance programs for
registered investment advisors and registered investment companies and
additional disclosures regarding portfolio management and advisory contract
renewals. In addition, several bills were introduced in the prior Congress that,
if adopted, would have amended the Investment Company Act. These proposals, if
reintroduced and enacted, or if adopted by the SEC, could have a substantial
impact on the regulation and operation of our registered and unregistered funds.
For example, certain of these proposals would, among other things, limit or
eliminate Rule 12b-1 distribution fees, limit or prohibit third party soft
dollar arrangements and restrict the management of hedge funds and mutual funds
by the same portfolio manager.
In the coming months, the investment management industry is likely to
continue facing a high level of regulatory scrutiny and become subject to
additional rules designed to increase disclosure, tighten controls and reduce
potential conflicts of interest. In addition, the SEC has substantially
increased its use of focused inquiries in which it requests information from a
number of fund complexes regarding particular practices or provisions of the
securities laws. We participate in some of these inquiries in the normal course
of our business. Changes in laws, regulations and administrative practices by
regulatory authorities, and the associated compliance costs, have increased our
cost structure and could in the future have a material impact.
14
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.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2005 Compared To Three Months Ended June 30, 2004
..........
Consolidated Results - Three Months Ended June 30:
(Unaudited; in thousands, except per share data)
2005 2004
--------- -------
Revenues $ 59,841 $60,204
Expenses 40,210 35,770
-------- -------
Operating income 19,631 24,434
Investment income, net 4,544 1,549
Interest expense (3,275) (4,035)
-------- -------
Total other income (expense), net 1,269 (2,486)
-------- -------
Income before taxes and minority interest 20,900 21,948
Income tax provision 7,838 7,989
Minority interest 107 41
-------- -------
Net income $ 12,955 $13,918
======== =======
Net income per share:
Basic $ 0.43 $ 0.47
======== =======
Diluted $ 0.43 $ 0.46
======== =======
Reconciliation of Net income to Adjusted EBITDA:
Net income $ 12,955 $13,918
Interest Expense 3,275 4,035
Income tax provision and minority interest 7,945 8,030
Depreciation and amortization 237 239
-------- -------
Adjusted EBITDA(a) $ 24,412 $26,222
-------- -------
(a) Adjusted EBITDA is defined as earnings before interest, taxes, depreciation
and amortization, and minority interest. Adjusted EBITDA is a Non-GAAP
measure and should not be considered as an alternative to any measure of
performance as promulgated under accounting principles generally accepted in
the United States nor should it be considered as an indicator of our overall
financial performance. We use Adjusted EBITDA as a supplemental measure of
performance as we believe it gives investors a more complete understanding of
our operating results before the impact of investing and financing activities
as a tool for determining the private market value of an enterprise.
Total revenues were $59.8 million in the second quarter of 2005 down
$0.4 million or 0.6% from total revenues of $60.2 million reported in the second
quarter of 2004. Operating income declined $4.8 million to $19.6 million down
19.7% from the $24.4 million reported in last year's second quarter. A
significant part of this decline was the incremental $1.8 million in stock
option expense recorded in the 2005 quarter for the accelerated vesting of stock
options. Net income for the quarter was $13.0 million or $0.43 per fully diluted
share versus $13.9 million or $0.46 per fully diluted share in the prior year's
quarter.
15
Investment advisory and incentive fees, which comprised 85.2% of total
revenues, were $52.4 million in the second quarter of 2005 up $1.0 million or
2.0% from the $51.3 million reported in the prior year's quarter. The higher
revenues from our closed-end funds and investment partnerships were offset by
lower revenues from our open-end mutual funds and separate accounts. Closed-end
fund revenues increased 16.2% to $9.5 million in the second quarter 2005 up from
$8.1 million in the prior year's quarter. The increase in revenues from
closed-end funds in the 2005 periods principally resulted from our new
closed-end fund, The Gabelli Global Gold, Natural Resources & Income Trust
(AMEX: GGN) which launched on March 29, 2005 and the inclusion of The Gabelli
Global Utility and Income Trust (AMEX: GLU), which launched at the end of May
2004, for the entire 2005 period. Advisory fees from investment partnerships
increased 56.5% in the second quarter 2005 versus the prior year's quarter as
the increase in performance fees more than offset the lower management fee
revenue as the second quarter of 2004 included a clawback in incentive fees that
decreased revenues. For the second quarter 2005, our revenues of $19.5 million
from open-end mutual funds were 4.7% lower than the $20.5 million recorded in
the 2004 quarter. Our fees from GAMCO separate accounts, which are generally
billed based on asset levels at the beginning of a quarter, decreased $0.4
million or 2.1% in the 2005 quarter as compared to the second quarter of 2004.
Commission revenue, due to lower trading volume, was $2.6 million in
the second quarter of 2005, down 36.7% from $4.1 million in the same period a
year earlier.
Revenues from distribution of mutual funds and other income were $4.9
million in the second quarter of 2005 versus $4.8 million in the second quarter
of 2004. This increase was the result of an increase in underwriting revenue, as
distribution revenues were essentially flat. As previously discussed, several
bills were introduced in the prior Congress that, if adopted, would, among other
things, pose a risk to our future distribution fee revenue as Rule 12b-1
distribution fees may be limited or eliminated.
Total expenses, excluding management fee, were $37.9 million in the
second quarter of 2005, a 13.7% increase from total expenses of $33.3 million
reported in the second quarter of 2004.
Compensation and related costs, which are largely variable, were $27.4
million or 18.2% higher than the $23.1 million recorded in the same period a
year earlier. The increase in compensation was due mostly to a one-time charge
of $1.8 million relating to the accelerated vesting of stock options as well as
increased variable compensation related to our GAMCO separate accounts of $1.1
million, Investment Partnerships of $1.0 million and Mutual Funds of $0.8.
Distribution costs were $4.5 million, a decrease of 10.5% from $5.1 million in
the prior year's period as the 2004 quarter included $0.4 million in launch
costs for GLU. Other operating expenses were higher by $0.9 million, a 17.1%
increase to $6.0 million in the second quarter of 2005 from the prior year
second quarter of $5.1 million. This increase included an increase in costs to
comply with Sarbanes-Oxley as well as other regulatory and corporate governance
initiatives. Management fee expense, which is totally variable and based on
pretax income, was 4.8% lower at $2.3 million in the second quarter of 2005
versus $2.4 million in the second quarter of 2004.
Other income, net of interest expense, was $1.3 million in the second
quarter of 2005, a positive swing of $3.8 million from the $2.5 million loss
reported in the second quarter of 2004. The net return from our corporate
investment portfolio improved to $4.5 million in the 2005 second quarter from
$1.5 million in the prior year's quarter. This included $4.2 million in interest
and dividend income, $2.2 million or 117.2% higher than the $1.9 million
reported in previous year's quarter.
Interest expense fell to $3.3 million in the second quarter of 2005
from $4.0 million in the comparable prior year quarter. This decrease is a
result of the April 1, 2005 repurchase of $50 million of the $100 million 5%
convertible note and the remarketing of the senior notes in November 2004, which
reduced the interest rate from 6.0% to 5.22%.
The estimated effective tax rate for the second quarter of 2005
increased to 37.5% from 36.4% for the second quarter of 2004 as we adjusted the
tax rate to reflect our estimate of the current year end tax liability.
16
Six Months Ended June 30, 2005 Compared To Six Months Ended June 30, 2004
Consolidated Results - Six Months Ended June 30:
(Unaudited; in thousands, except per share data)
2005 2004
--------- ---------
Revenues $ 121,372 $ 123,743
Expenses 81,587 74,032
--------- ---------
Operating income 39,785 49,711
Investment income, net 8,611 5,839
Interest expense (7,204) (8,081)
--------- ---------
Total other income (expense), net 1,407 (2,242)
--------- ---------
Income before taxes and minority interest 41,192 47,469
Income tax provision 15,447 17,285
Minority interest 108 195
--------- ---------
Net income $ 25,637 $ 29,989
========= =========
Net income per share:
Basic $ 0.86 $ 1.00
========= =========
Diluted $ 0.85 $ 0.98
========= =========
Reconciliation of Net income to Adjusted EBITDA:
Net income $ 25,637 $ 29,989
Interest Expense 7,204 8,081
Income tax provision and minority interest 15,555 17,480
Depreciation and amortization 471 479
--------- ---------
Adjusted EBITDA(a) $ 48,867 $ 56,029
--------- ---------
(b) Adjusted EBITDA is defined as earnings before interest, taxes, depreciation
and amortization, and minority interest. Adjusted EBITDA is a Non-GAAP
measure and should not be considered as an alternative to any measure of
performance as promulgated under accounting principles generally accepted in
the United States nor should it be considered as an indicator of our overall
financial performance. We use Adjusted EBITDA as a supplemental measure of
performance as we believe it gives investors a more complete understanding of
our operating results before the impact of investing and financing activities
as a tool for determining the private market value of an enterprise.
Total revenues were $121.4 million in the first half of 2005 down $2.4
million or 1.9% from total revenues of $123.7 million reported in the first half
of 2004. Operating income declined $9.9 million to $39.8 million down 20.0% from
the $49.7 million reported in last year's first six months. Net income for the
six months was $25.6 million or $0.85 per fully diluted share versus $30.0
million or $0.98 per fully diluted share in the prior year's six months.
One-time charges of $2.6 million related to the launch of our new closed-end
fund and the impairment of goodwill at our 80% owned fixed income subsidiary and
$1.8 million in incremental costs relating to the accelerated vesting of stock
options contributed to the decline in operating income. In addition, other
income included a $3.3 million loss recorded for the write down to fair value of
certain securities held as available for sale partially offset by a $2.1 million
unrealized gain from an investment within our proprietary portfolio which
completed an initial public offering during the year. In total, these items
reduced earnings by approximately $0.09 per share.
Investment advisory and incentive fees, which comprised 87.6% of total
revenues, were $106.3 million in the first half of 2005 up $1.0 million or 1.0%
from the $105.2 million reported in the first half of 2004. The higher revenues
from our closed-end funds and investment partnerships were offset by lower
revenues from our open-end mutual funds and separate accounts. Closed-end fund
revenues increased 12.0% to $17.9 million in the first half of 2005 up from
$16.0 million in the prior year's period. The increase in revenues from
closed-end funds in the 2005 periods principally resulted from our new
closed-end fund, The Gabelli Global Gold, Natural Resources & Income Trust
(AMEX: GGN) which launched on March 29, 2005 and the inclusion of The Gabelli
Global Utility and Income Trust (AMEX: GLU), which launched at the end of May
2004, for the entire 2005 period. Advisory fees from investment partnerships
increased 42.0% in the first half of 2005 versus the prior year's first half due
principally to an increase in performance fees as the second quarter of 2004
included a clawback in incentive fees
17
that decreased revenues. For the first six months of 2005, our revenues of $39.6
million from open-end mutual funds were 5.0% lower than the $41.7 million
recorded in the 2004 period. Our fees from GAMCO separate accounts, which are
generally billed based on asset levels at the beginning of a quarter, decreased
$0.6 million or 1.5% in the 2005 period as compared to the first half of 2004.
Commission revenue, due to lower trading volume, was $5.0 million in
the first six months of 2005, down 39.7% from $8.4 million in the same period a
year earlier.
Revenues from distribution of mutual funds and other income were $10.0
million in the first half of 2005 versus $10.2 million in the first half of
2004. This decrease was a result of a 3.4% decrease in average assets for
open-end equity funds for the first six months of 2005 versus the prior year
first six months, which generate distribution revenues under 12b-1 compensation
plans. As previously discussed, several bills were introduced in the prior
Congress that, if adopted, would, among other things, pose a risk to our future
distribution fee revenue as Rule 12b-1 distribution fees may be limited or
eliminated.
Total expenses, excluding management fee, were $77.0 million in the
first half of 2005, a 12.0% increase from total expenses of $68.8 million
reported in the first half of 2004. The increase in expenses included one-time
charges of $4.4 million which consisted of launch costs of $1.5 million related
to our new closed-end fund, The Gabelli Global Gold, Natural Resources & Income
Trust, a $1.1 million charge recorded for the impairment of goodwill related to
our 80% owned fixed income subsidiary and $1.8 million in incremental costs
relating to the accelerated vesting of stock options.
Compensation and related costs, which are largely variable, were $53.5
million, 9.3% higher than the same period a year earlier. The increase in
compensation was due mostly to a one-time charge of $1.8 million relating to the
accelerated vesting of stock options as well as increased variable compensation
related to our GAMCO separate accounts of $1.8 million and Investment
Partnerships of $1.4 million and slightly offset by a decrease in commission
payouts of $0.9 million. Distribution costs were $10.7 million, an increase of
11.3% from $9.7 million in the prior year's period. This increase was largely
the result of launch costs of $1.5 million for our new closed-end fund, The
Gabelli Global Gold, Natural Resources & Income Trust. Other operating expenses
were higher by $2.6 million, a 25.7% increase to $12.8 million in the first half
of 2005 from the prior year first half of $10.1 million. This increase included
an increase in costs to comply with Sarbanes-Oxley as well as other regulatory
and corporate governance initiatives. Management fee expense, which is totally
variable and based on pretax income, was 13.2% lower at $4.6 million in the
first six months of 2005 versus $5.3 million in the first six months of 2004.
Other income, net of interest expense, was $1.4 million in the first
half of 2005, higher by $3.6 million from the $2.2 million loss reported in the
first half of 2004. The 2005 period included the $3.3 million write down to fair
value of certain securities held as available for sale as discussed above in
Item 1. In accordance with SFAS No. 115, the available for sale securities were
written down to fair value from their cost basis for declines which were
considered to be other than temporary based on interpretive guidance provided by
the SEC's Staff Accounting Bulletin No. 59. Of this amount, $3.1 million was
previously recorded as comprehensive loss and resulted in a $1.8 million
reduction, net of management fee and taxes, of stockholders' equity at the end
of 2004. As these losses are no longer included as comprehensive loss at June
30, 2005, there was a $1.8 million increase, net of management fee and taxes,
included in stockholders' equity recorded in the first half of 2005.
Interest expense decreased to $7.2 million in the first six months of
2005 from $8.1 million in the comparable prior year period. This decrease is a
result of the April 1, 2005 repurchase of $50 million of the $100 million 5%
convertible note and the remarketing of the senior notes in November 2004, which
reduced the interest rate from 6.0% to 5.22%.
The estimated effective tax rate for the second quarter of 2005
increased to 37.5% from 36.4% for the second quarter of 2004 as we adjusted the
tax rate to reflect our estimate of the current year end tax liability.
18
LIQUIDITY AND CAPITAL RESOURCES
Our assets are primarily liquid, consisting mainly of cash, short term
investments, securities held for investment purposes and investments in
partnerships and affiliates in which we are a general partner, limited partner
or investment manager. Investments in partnerships and affiliates are generally
illiquid, however the underlying investments in such entities are generally
liquid and the valuations of the investment partnerships and affiliates reflect
this underlying liquidity.
Six Months Ended June 30,
----------------------------------
2005 2004
------------- -----------
Cash flows provided by (used in): (in thousands)
Operating activities $ (51,124) $ (5,980)
Investing activities 1,359 (35,905)
Financing activities (15,874) (17,168)
------------- -----------
Decrease (65,639) (59,053)
Effect of exchange rates on cash and cash
equivalents (44) -
Cash and cash equivalents at beginning of period 257,096 386,511
------------- -----------
Cash and cash equivalents at end of period $ 191,413 $ 327,458
============ ===========
Cash requirements and liquidity needs have historically been met
through cash generated by operating activities and through our borrowing
capacity. We have received investment grade ratings from both Moody's Investors
Services and Standard & Poor's Rating Services. These investment grade ratings
expand our ability to attract both public and private capital. In February, our
Board of Directors authorized a plan to file a "shelf" registration statement on
Form S-3, which was filed on June 13th. If and when declared effective, the
shelf process will provide us opportunistic flexibility to sell any combination
of senior and subordinate debt securities, convertible debt securities and
equity securities (including common and preferred securities) up to a total
amount of $400 million. This authorization is in addition to the remaining $120
million available under our "shelf" registration filed in 2001.
At June 30, 2005, we had total cash and cash equivalents of $191.4
million, a decrease of $65.7 million from December 31, 2004. Gabelli has
established a collateral account, consisting of cash and cash equivalents and
investments in securities totaling $53.8 million, to secure a letter of credit
issued in favor of the holder of the $50 million 5% convertible note. On April
1, 2005 the letter of credit was reduced to $51.3 million and extended to
September 22, 2006, which coincides with the date of a put option the note
holder may exercise. Additionally, the principal of the convertible note was
reduced to $50 million and limitations on the issuance of additional debt were
removed. Cash and cash equivalents and investments in securities held in the
collateral account are restricted from other uses until the date of expiration.
Total debt at June 30, 2005 was $232.3 million, consisting of the $50 million 5%
convertible note, $100 million of 5.5% non-callable senior notes due May 15,
2013 and $82.3 million in 5.22% senior notes due February 17, 2007, issued
pursuant to our mandatory convertible securities. On February 17, 2005, we
issued approximately 1,517,000 shares of class A common stock in settlement of
the 2,822,700 purchase contracts issued pursuant to our mandatory convertible
securities resulting in proceeds of $70.6 million. The settlement rate of 0.5376
was determined based on the average closing price per share of class A common
stock for the twenty consecutive trading days ending February 14, 2005.
Cash used in operating activities was $51.1 million in the first six
months of 2005 principally resulting from a $69.3 million increase in
investments in securities, a $18.7 million increase in receivable from brokers
and a $6.6 million decrease in income taxes payable partially offset by $25.6
million in net income, a $10.0 million decrease in investment advisory fees
receivable and a $3.9 million increase in compensation payable. Cash used in
operating activities was $6.0 million in the first six months of 2004
principally from an $18.9 million increase in investments in securities, a $15.6
million increase in receivable from brokers, a $6.8 million decrease in income
taxes payable and a $5.7 million reduction in payable to brokers partially
offset by $30.0 million in net income, a $4.9 million decrease in investment
advisory fees receivable and a $4.6 million decrease in receivables from
affiliates.
19
Cash provided by investing activities, related to investments in and
distributions from partnerships and affiliates and purchases and sales of
available for sale securities, was $1.4 million in the first six months of 2005.
Cash used in investing activities, related to investments in and distributions
from partnerships and affiliates and purchases and sales of available for sale
securities, was $35.9 million in the first six months of 2004.
Cash used in financing activities in the first six months of 2005 was
$15.9 million. The decrease in cash principally resulted from the repurchase of
$50 million of our $100 million 5% convertible note on April 1, 2005, $18.6
million in dividends paid and the repurchase of our class A common stock under
the Stock Repurchase Program. This was partially offset by $70.6 million in
proceeds from the issuance of 1.5 million shares of class A common stock in
settlement of the purchase contracts issued pursuant to our mandatory
convertible securities and $0.6 million received from the exercise of
non-qualified stock options that further generated cash tax savings of $0.2
million.
Cash used in financing activities in the first six months of 2004 was
$17.2 million. The decrease in cash principally resulted from the repurchase of
our class A common stock and mandatory convertible securities under the
respective Stock Repurchase Programs of $12.3 million, the payments of the $0.02
per share quarterly dividend and $0.10 per share special dividend that were paid
to all shareholders on record of June 15, 2004 that totaled $3.6 million and the
$50 per share dividend paid by our 92% owned subsidiary, Gabelli Securities,
Inc., to its shareholders resulting in a payment to minority shareholders of
$2.7 million. This was partially offset by the $1.5 million received from the
exercise of non-qualified stock options that further generated cash tax savings
of $0.4 million.
Based upon our current level of operations and anticipated growth, we
expect that our current cash balances plus cash flows from operating activities
and our borrowing capacity will be sufficient to finance our working capital
needs for the foreseeable future. We have no material commitments for capital
expenditures.
Gabelli & Company, Inc., a subsidiary of Gabelli, is registered with
the Securities and Exchange 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, 2005, Gabelli & Company had net capital, as defined, of approximately
$14.2 million, exceeding the regulatory requirement by approximately $14.0
million. Regulatory net capital requirements increase when Gabelli & Company is
involved in underwriting activities.
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Market Risk
We are subject to potential losses from certain market risks as a
result of absolute and relative price movements in financial instruments due to
changes in interest rates, equity prices and other factors. Our exposure to
market risk is directly related to our role as financial intermediary, advisor
and general partner for assets under management in our mutual funds,
institutional and separate accounts business, alternative investment products
and our proprietary investment activities. At June 30, 2005, our primary market
risk exposure was to changes in equity prices and interest rates.
With respect to our proprietary investment activities included in
investments in securities of $366.7 million at June 30, 2005 were investments in
Treasury Bills and Notes of $201.5 million, in mutual funds, largely invested in
equity products, of $109.5 million, a selection of common and preferred stocks
totaling $55.4 million and other investments of approximately $0.2 million.
Investments in mutual funds generally lower market risk through the
diversification of financial instruments within their portfolio. In addition, we
may alter our investment holdings from time to time in response to changes in
market risks and other factors considered appropriate by management. Of the
approximately $55.4 million invested in common and preferred stocks at June 30,
2005, $19.4 million is related to our investment in Westwood Holdings Group Inc.
and $21.3 million is invested in risk arbitrage opportunities in connection with
mergers, consolidations, acquisitions, tender offers or other similar
transactions. Investments in partnerships and affiliates totaled $85.7 million
at June 30, 2005, the majority of which consisted of alternative investment
products which invest in risk arbitrage opportunities. These transactions
generally involve announced deals with agreed upon terms and conditions,
including pricing, which typically 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.
Gabelli's exposure to interest rate risk results, principally, from its
investment of excess cash in U.S. Government obligations. These investments are
primarily short term in nature and the carrying value of these investments
generally approximates market value.
Our revenues are largely driven by the market value of our 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 high net worth separate
accounts, for any given quarter, are generally determined based on asset values
on the last day of the preceding quarter. Any significant increases or decreases
in market value of institutional and high net worth separate accounts assets
managed which occur on the last day of the quarter will generally result in a
relative increase or decrease in revenues for the following quarter.
Recent Accounting Developments
We adopted SFAS 123 (R) on January 1, 2005. In light of our modified
prospective adoption of the fair value recognition provisions of SFAS 123 (R)
for all grants of employee stock options, the adoption of SFAS 123 (R) did not
have a material impact on our consolidated financial statements.
In January 2003 the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities" which was subsequently revised in December 2003
by FASB Interpretation No. 46(R) ("FIN46R"). FIN46R provides new criteria for
determining whether or not consolidation accounting is required for off-balance
sheet activities conducted through certain types of entities. This
interpretation focuses on financial interests in entities (i.e., variable
interests) that indicate control despite the absence of clear control through
voting interest. It concludes that a company's exposure (variable interest) to
the economic risks and rewards from the entity's assets and activities are the
best evidence of control. The interpretation requires that these variable
interest entities (VIEs) be subject to consolidation if the company holding the
variable interest is subject to a majority of the expected losses or will
receive a majority of the expected residual returns of the VIE (the "primary
beneficiary"). As the primary beneficiary it would be required to include the
variable interest entity's assets, liabilities and results of operations in its
own financial statements.
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We implemented FIN46R for the quarter ended March 31, 2004 based on the
provisions of the interpretation and concluded that the limited partnerships and
offshore funds managed by Gabelli are VIEs. However, in most cases, it was
concluded based on the provisions of the interpretation that Gabelli was not the
primary beneficiary of these entities. For those entities for which it was
determined that Gabelli was the primary beneficiary, we concluded that the
effect of consolidating these entities would not have a material impact on our
consolidated financial statements and, therefore, we did not consolidate these
entities.
We serve as General Partner, co-General Partner or Investment Manager
of certain limited partnerships and offshore funds which are classified as VIEs.
These limited partnerships and offshore funds seek to earn absolute returns for
investors and are primarily focused within the following strategies: merger
arbitrage, event-driven long/short equity funds, sector-focused funds and
merchant banking. Our involvement with limited partnerships and offshore funds
began in 1985 and 1989, respectively, but the majority of these VIEs were
launched between 1999 and 2004.
The gross assets, gross liabilities, total net assets and our
investments in limited partnerships and offshore funds classified as VIEs for
which we are the primary beneficiary were as follows on June 30, 2005:
Gross Assets of Gross Liabilities Total Net Assets GBL Investments
VIEs of VIEs of VIEs in VIEs
------------------ ----------------- ---------------- ----------------
Limited Partnerships $ 17,349,023 $ 50,883 $ 17,298,140 $ 12,103,875
Offshore Funds $ 4,870,879 $ 1,160,532 $ 3,710,347 $ 3,710,347
If we had chosen to consolidate the above VIEs for which we are the
primary beneficiary we would have increased total assets by $6.4 million, total
liabilities by $1.2 million and minority interest payable by $5.2 million. There
would have been no change to net income.
The total net assets and our investments in limited partnerships and
offshore funds classified as VIEs for which we are not the primary beneficiary
were as follows on June 30, 2005:
Total Net Assets GBL Investments
of VIEs in VIEs
---------------- ----------------
Limited Partnerships $ 186,418,516 $ 7,989,416
Offshore Funds $ 206,620,286 $ 25,077,062
As General Partner or co-General Partner of a limited partnership, we
are contingently liable for all of the limited partnerships' liabilities. On
June 30, 2005 this contingent liability was $0.4 million. For offshore funds
classified as VIEs where we serve as Investment Manager, our exposure to the
activities of these funds is limited to our investment in each respective VIE.
In June 2005, the FASB ratified the consensus EITF 04-5, "Determining
Whether a General Partner, or the General Partners as a Group, Controls a
Limited Partnership or Similar Entity When the Limited Partners Have Certain
Rights", which provides guidance in determining whether a general partner
controls a limited partnership. The provisions of EITF 04-5 are not applicable
to limited partnerships or similar entities accounted for as VIEs pursuant to
FIN46R. Therefore, we have determined that EITF 04-5 will have no impact on our
consolidated financial statements as of June 30, 2005 as our investment in
partnerships and offshore funds where we are the General Partner, co-General
Partner or Investment Manager have been determined to be VIEs and have been
accounted for pursuant to the provisions of FIN46R.
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Item 4. Controls and Procedures
Management, including the Chief Executive Officer and the Chief
Financial Officer have conducted an evaluation of the effectiveness of
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based
on the evaluation, the Chief Executive Officer and the Chief Financial Officer
concluded that the disclosure controls and procedures are effective in ensuring
that all material information required to be filed in this quarterly report has
been made known to them in a timely fashion. There have been no significant
changes in internal controls, or in factors that could significantly affect
internal controls, subsequent to the date the Chief Executive Officer and the
Chief Financial Officer completed their evaluation.
Forward-Looking Information
Our disclosure and analysis in this report contain some forward-looking
statements. Forward-looking statements give our current expectations or
forecasts of future events. You can identify these statements because they do
not relate strictly to historical or current facts. They use words such as
"anticipate," "estimate," "expect," "project," "intend," "plan," "believe," and
other words and terms of similar meaning. They also appear in any discussion of
future operating or financial performance. In particular, these include
statements relating to future actions, future performance of our products,
expenses, the outcome of any legal proceedings, and financial results. Although
we believe that we are basing our expectations and beliefs on reasonable
assumptions within the bounds of what we currently know about our business and
operations, there can be no assurance that our actual results will not differ
materially from what we expect or believe. Some of the factors that could cause
our actual results to differ from our expectations or beliefs include, without
limitation: the adverse effect from a decline in the securities markets; a
decline in the performance of our products; a general downturn in the economy;
changes in government policy or regulation; changes in our ability to attract or
retain key employees; and unforeseen costs and other effects related to legal
proceedings or investigations of governmental and self-regulatory organizations.
We also direct your attention to any more specific discussions of risk contained
in our Form 10-K and other public filings. We are providing these statements as
permitted by the Private Litigation Reform Act of 1995. We do not undertake to
update publicly any forward-looking statements if we subsequently learn that we
are unlikely to achieve our expectations or if we receive any additional
information relating to the subject matters of our forward-looking statements.
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Part II: Other Information
Item 2. Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities
The following table provides information with respect to the shares of common
stock we repurchased during the three months ended June 30, 2005:
(c) Total Number of
Shares Repurchased as (d) Maximum
(a) Total (b) Average Part of Publicly Number of Shares
Number of Price Paid Per Announced That May Yet Be
Shares Share, net of Plans or Purchased Under the
Period Repurchased Commissions Programs Plans or Programs
- ----------------------------------------------------------------------------------------------------------------------------
GBL
4/01/05 - 4/30/05 202,300 $ 40.77 202,300 694,993
5/01/05 - 5/31/05 138,400 $ 41.17 138,400 556,593
6/01/05 - 6/30/05 40,400 $ 43.91 40,400 516,193
------- -------
Totals 381,100 381,100
======= =======
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 10, 2005. At that meeting, the stockholders
considered and acted upon the following matters:
THE ELECTION OF DIRECTORS. The stockholders elected the following individuals to
serve as directors until the 2006 annual meeting of stockholders and until their
respective successors are duly elected and qualified. All the directors were
elected with more than 98% of the total votes cast.
Edwin L. Artzt
Raymond C. Avansino, Jr.
John C. Ferrara
John D. Gabelli
Mario J. Gabelli
Alan C. Heuberger
Robert S. Prather, Jr.
Karl Otto Pohl
Frederic V. Salerno
Vincent S. Tese
NAME CHANGE. The stockholders approved an amendment to Article I of our Restated
Certificate of Incorporation to change the name of the corporation to "GAMCO
Investors, Inc." This proposal was approved by more than 98% of the votes cast.
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Item 6. (a) Exhibits
31.1 Certification by Chief Executive Officer Pursuant to Rule 13a-14 (a) and
15d-14 (a) as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
31.2 Certification by Chief Financial Officer Pursuant to Rule 13a-14 (a) and
15d-14 (a) as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K.
The Company filed the following Current Reports on Form 8-K during the three
months ended June 30, 2005.
1. Current Report on Form 8-K dated April 28, 2005 containing the press
release disclosing the Company's operating results for the first quarter
ended March 31, 2005.
2. Current Report on Form 8-K dated June 15, 2005 containing the press release
disclosing that the Company's Board of Directors approved the accelerated
vesting of all unvested stock options.
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 9, 2005 /s/ Michael R. Anastasio
-------------------- --------------------------------------------
Date Michael R. Anastasio
Chief Financial Officer
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