1
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, 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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GAMCO INVESTORS, INC.
- --------------------------------------------------------------------------------
(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
- --------------------------------------------------------------------------------
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 by check mark whether the registrant is a shell company (as defined in
Exchange Act Rule 12b-2). Yes [_] No [X]
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 October 31, 2005
----- -------------------------------
Class A Common Stock, .001 par value 6,487,517
Class B Common Stock, .001 par value 23,128,500
1
INDEX
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GAMCO INVESTORS, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
- -----------------------------------
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Income:
- Three months ended September 30, 2005 and 2004
- Nine months ended September 30, 2005 and 2004
Condensed Consolidated Statements of Financial Condition:
- December 31, 2004 (Audited)
- September 30, 2005
- September 30, 2004
Condensed Consolidated Statements of Stockholders' Equity and
Comprehensive Income:
- Three months ended September 30, 2005 and 2004
- Nine months ended September 30, 2005 and 2004
Condensed Consolidated Statements of Cash Flows:
- Three months ended September 30, 2005 and 2004
- Nine months ended September 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 6. Exhibits and Reports on Form 8-K
SIGNATURES
- -------------
2
GAMCO INVESTORS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED
(In thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------------------------
2005 2004 2005 2004
------- ------- -------- --------
Revenues
Investment advisory and incentive
fees $57,547 $49,685 $163,837 $154,928
Commission revenue 3,259 2,962 8,298 11,312
Distribution fees and other income 5,428 4,590 15,471 14,740
------- ------- -------- --------
Total revenues 66,234 57,237 187,606 180,980
Expenses
Compensation and related costs 28,189 23,380 81,697 72,335
Management fee 3,495 2,284 8,072 7,558
Distribution costs 4,931 4,537 15,679 14,193
Other operating expenses 7,021 5,085 19,775 15,232
------- ------- -------- --------
Total expenses 43,636 35,286 125,223 109,318
Operating income 22,598 21,951 62,383 71,662
Other income (expense)
Net gain (loss) from investments 6,937 (296) 7,919 1,949
Interest and dividend income 5,216 2,916 12,845 6,510
Interest expense (3,298) (4,014) (10,502) (12,095)
------- ------- -------- --------
Total other income (expense),
net 8,855 (1,394) 10,262 (3,636)
------- ------- -------- --------
Income before income taxes and
minority interest 31,453 20,557 72,645 68,026
Income tax provision 11,795 7,483 27,242 24,768
Minority interest 210 43 318 238
------- ------- -------- --------
Net income $19,448 $13,031 $ 45,085 $ 43,020
======= ======= ======== ========
Net income per share:
Basic $ 0.65 $ 0.44 $ 1.51 $ 1.44
======= ======= ======== ========
Diluted $ 0.64 $ 0.43 $ 1.48 $ 1.41
======= ======= ======== ========
Weighted average shares outstanding:
Basic 29,935 29,707 29,859 29,886
======= ======= ======== ========
Diluted 31,079 31,820 31,323 32,011
======= ======= ======== ========
Dividends declared:
Quarterly $ 0.02 $ 0.02 $ 0.06 $ 0.04
======= ======= ======== ========
Special $ - $ 1.00 $ - $ 1.10
======= ======= ======== ========
See accompanying notes.
3
GAMCO INVESTORS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands)
September 30 September 30 December 31,
2005 2004 2004
--------- --------- ----------
ASSETS (Unaudited)
Cash and cash equivalents, including restricted cash of
$2,483, $1,902 and $1,054. $ 205,050 $ 337,830 $ 257,096
Investments in securities, including restricted securities
of $51,731, $101,969 and $102,111. 391,484 249,779 292,350
Investments in partnerships and affiliates 90,241 91,149 89,339
Receivable from brokers 8,692 22,620 5,539
Investment advisory fees receivable 19,005 17,894 26,567
Other assets 26,827 25,051 28,081
--------- --------- ----------
Total assets $ 741,299 $ 744,323 $ 698,972
========= ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Payable to brokers $ 86 $ - $ 302
Income taxes payable, including deferred taxes of $1,713,
$2,016 and $938. 6,580 5,608 8,526
Compensation payable 41,388 33,871 27,645
Capital lease obligation 3,039 2,751 3,167
Securities sold, not yet purchased 337 1,084 1,088
Dividends payable - - 17,302
Accrued expenses and other liabilities 19,222 16,669 17,585
--------- --------- ----------
Total operating liabilities 70,652 59,983 75,615
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) 50,000 100,000 100,000
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 82,308
--------- --------- ----------
Total liabilities 302,960 342,291 357,923
Minority interest 5,981 5,916 6,171
Stockholders' equity
Class A Common Stock, $0.001 par value; 100,000,000
shares authorized; 9,640,339, 7,778,625 and 8,081,356
issued and outstanding, respectively 10 8 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 235,735 147,381 161,053
Retained earnings 311,671 296,116 268,519
Accumulated comprehensive gain / (loss) 2,171 (624) (53)
Treasury stock, at cost (2,907,022, 1,349,272 and
2,372,822
shares, respectively) (117,252) (46,788) (94,672)
--------- --------- ----------
Total stockholders' equity 432,358 396,116 334,878
--------- --------- ----------
Total liabilities and stockholders' equity $ 741,299 $ 744,323 $ 698,972
========= ========= ==========
See accompanying notes.
4
GAMCO INVESTORS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
UNAUDITED
(In thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
-----------------------------------------------------
2005 2004 2005 2004
-------- -------- -------- --------
Stockholders' equity - beginning of period $417,318 $392,803 $334,878 $378,311
Comprehensive income:
Net income 19,448 13,031 45,085 43,020
Translation adjustments (9) - 25 -
Net unrealized gain (loss) on securities available for
sale 316 1,368 2,199 (2,104)
-------- -------- -------- --------
Comprehensive income 19,755 14,399 47,309 40,916
-------- -------- -------- --------
Dividends declared (599) (593) (1,933) (4,171)
Stock option expense - 467 2,760 1,352
Proceeds from settlement of purchase contracts - - 70,568 -
Purchase and retirement of mandatory convertible securities - 15 - 45
Capitalized costs (16) - (31) -
Exercise of stock options including tax benefit 648 678 1,387 2,510
Purchase of treasury stock (4,748) (11,653) (22,580) (22,847)
-------- -------- -------- --------
Stockholders' equity - end of period $432,358 $396,116 $432,358 $396,116
======== ======== ======== ========
See accompanying notes.
5
GAMCO INVESTORS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(In thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
-----------------------------------------------------
2005 2004 2005 2004
-------- -------- -------- --------
Operating activities
Net income $ 19,448 $ 13,031 $ 45,085 $ 43,020
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Equity in losses / (gains) from partnerships and affiliates (2,540) 403 (5,236) (1,562)
Depreciation and amortization 298 241 769 720
Stock-based compensation expense - 467 2,760 1,352
Tax benefit from exercise of stock options 133 191 287 570
Foreign currency (gain) / loss (6) - 196 -
Other-than-temporary loss on available for sale securities - - 3,301 -
Impairment of goodwill - - 1,127 -
Minority interest in net income of consolidated subsidiaries 210 43 318 238
Realized gains on available for sale securities - - - (101)
(Increase) decrease in operating assets:
Investments in securities (23,699) 6,263 (93,007) (12,680)
Investment advisory fees receivable (2,423) (1,248) 7,563 3,671
Receivables from affiliates (216) 1,070 364 5,653
Receivable from brokers 15,582 (5,795) (3,154) (21,388)
Other assets 711 778 (1,020) 366
Increase (decrease) in operating liabilities:
Payable to brokers 85 (1) (216) (5,692)
Income taxes payable 3,342 1,365 (3,260) (5,463)
Compensation payable 9,418 4,335 13,352 8,692
Accrued expenses and other liabilities 3,686 517 1,407 (2,120)
Securities sold, not yet purchased (3,020) 15 (751) 419
-------- -------- -------- --------
Total adjustments 1,561 8,644 (75,200) (27,325)
-------- -------- -------- --------
Net cash provided by (used in) operating activities 21,009 21,675 (30,115) 15,695
-------- -------- -------- --------
Investing activities
Purchases of available for sale securities (560) (822) (5,520) (9,927)
Proceeds from sales of available for sale securities - - - 600
Distributions from partnerships and affiliates 1,074 2,552 18,076 12,509
Investments in partnerships and affiliates (3,058) (727) (13,741) (38,084)
-------- -------- -------- --------
Net cash (used in) provided by investing activities (2,544) 1,003 (1,185) (34,902)
-------- -------- -------- --------
Financing activities
Dividend paid to minority stockholders of subsidiary - - (544) (2,718)
Accrual for settlement of minority interest 36 - 36 -
Proceeds from exercise of stock options 515 487 1,100 1,939
Repurchase of 5% convertible note - - (50,000) -
Dividends paid (599) (593) (19,235) (4,171)
Purchase of mandatory convertible securities - (547) - (1,677)
Proceeds from settlement of purchase contracts - - 70,568 -
Capitalized costs (16) - (31) -
Purchase of treasury stock (4,748) (11,653) (22,580) (22,847)
-------- -------- -------- --------
Net cash used in financing activities (4,812) (12,306) (20,686) (29,474)
-------- -------- -------- --------
Net increase (decrease) in cash and cash equivalents 13,653 10,372 (51,986) (48,681)
Effect of exchange rates on cash and cash equivalents (16) - (60) -
Cash and cash equivalents at beginning of period 191,413 327,458 257,096 386,511
-------- -------- -------- --------
Cash and cash equivalents at end of period $205,050 $337,830 $205,050 $337,830
======== ======== ======== ========
See accompanying notes.
6
GAMCO INVESTORS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
(Unaudited)
A. Basis of Presentation
Unless we have indicated otherwise, or the context otherwise requires,
references in this report to "GAMCO Investors, Inc.," "GAMCO," "we," "us" and
"our" or similar terms are to GAMCO Investors, Inc. (formerly, Gabelli Asset
Management Inc.), its predecessors and its subsidiaries.
The unaudited interim Condensed Consolidated Financial Statements of
GAMCO Investors, 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 GAMCO 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 nine month period ended September 30, 2005, there were $3.3
million in losses on available for sale securities deemed to be other than
temporary which were recorded in the statement of income. There were no losses
in the three month period ended September 30, 2005 or in the prior year's three
month or nine month periods ended September 30, 2004.
7
B. Investment in Securities (continued)
The losses related to available for sale securities in the nine month
period ended September 30, 2005 were offset by gains related to our $100,000
venture capital investment in optionsXpress Holdings, Inc. (Nasdaq: OXPS) made
in 2001 through our 92% owned subsidiary, Gabelli Securities, Inc. OXPS
completed its initial public offering during the first quarter of 2005. We
recorded a total gain of $4.8 million on OXPS for the first nine months of 2005,
of which $2.7 million was recognized during the third quarter of 2005. In
addition we had previously recorded a gain of $0.9 million related to this
investment in the fourth quarter of 2003. During the third quarter of 2005, we
sold 155,000 shares for approximately $2.8 million. We recorded a total gain on
these shares of $2.3 million for the first nine months of 2005, of which $1.3
million was recorded in the third quarter. Gabelli Securities, Inc. owned
approximately 160,000 shares at September 30, 2005, 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, and were marked to market at $19.04 per share on
September 30, 2005.
At September 30, 2005 and 2004, the market value of investments
available for sale was $82.0 million and $73.1 million, respectively. An
unrealized gain in market value, net of management fee and taxes, of $2.1
million and an unrealized loss in market value, net of management fee and taxes,
of $624,000 has been included in stockholders' equity for September 30, 2005 and
2004, respectively.
There were no sales of investments available for sale for the three and
nine month periods ended September 30, 2005. Proceeds from sales of investments
available for sale were approximately $0.6 million for the nine month period
ended September 30, 2004. For the first nine months of 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 Nine Months Ended
September 30, September 30,
(in thousands, except per share amounts) 2005 2004 2005 2004
------- ------- ------- -------
Basic:
Net income $19,448 $13,031 $45,085 $43,020
======= ======= ======= =======
Average shares outstanding 29,935 29,707 29,859 29,886
======= ======= ======= =======
Basic net income per share $ 0.65 $ 0.44 $ 1.51 $ 1.44
======= ======= ======= =======
Diluted:
Net income $19,448 $13,031 $45,085 $43,020
Add interest expense on 5% convertible
note,
net of management fee and taxes 352 716 1,406 2,147
------- ------- ------- -------
Total $19,800 $13,747 $46,491 $45,167
======= ======= ======= =======
Average shares outstanding 29,935 29,707 29,859 29,886
Dilutive stock options 182 190 185 202
Assumed conversion of 5% convertible note 962 1,923 1,279 1,923
------- ------- ------- -------
Total 31,079 31,820 31,323 32,011
======= ======= ======= =======
Diluted net income per share $ 0.64 $ 0.43 $ 1.48 $ 1.41
======= ======= ======= =======
8
D. Stockholders' Equity
Shares outstanding on September 30, 2005 were 29,861,817, which is
approximately 3.6% higher than shares outstanding of 28,837,034 at the end of
2004 and approximately 1.0% above shares outstanding of 29,557,853 on September
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
0.5 million shares and 1.6 million shares during the nine and twelve month
periods, respectively. Fully diluted shares outstanding for the third quarter
2005 were 31,079,413 approximately 0.4% lower than second quarter 2005 fully
diluted shares of 31,211,347 and approximately 2.3% lower than our fully diluted
shares of 31,820,157 for the third quarter 2004.
Our Board of Directors has announced that the regular quarterly
dividend will be increased 50% to $0.03 per share beginning with the fourth
quarter 2005. The Board of Directors also declared a quarterly dividend of $0.02
per share that was paid on September 28, 2005 to shareholders of record on
September 15, 2005. During the first nine months of 2005, we have paid total
dividends of $0.66 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.
Stock Award and Incentive Plan
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. As a result, we did not
recognize any stock-based compensation expense for the three months ended
September 30, 2005. For the three months ended September 30, 2004, we recognized
stock-based compensation expense of $467,000. For the nine months ended
September 30, 2005 and 2004, we recognized $2,760,000 and $1,352,000,
respectively, in stock-based compensation. For the fourth quarter of 2005
compensation expense will be lower by approximately $467,000 as compared to the
prior year quarter as we currently estimate there will be no stock option
expense in the 2005 quarter.
Proceeds from the exercise of 19,275 and 22,900 stock options were
$515,000 and $487,000 for the three months ended September 30, 2005 and 2004,
respectively, resulting in a tax benefit to GAMCO of $133,000 and $191,000 for
the three months ended September 30, 2005 and 2004, respectively. Proceeds from
the exercise of 41,500 and 81,025 stock options were $1,100,000 and $1,939,000
for the nine months ended September 30, 2005 and 2004, respectively, resulting
in a tax benefit to GAMCO of $287,000 and $570,000 for the nine months ended
September 30, 2005 and 2004, respectively.
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
2005, the Board of Directors authorized the accelerated vesting of all unvested
stock options as of July 1, 2005. This resulted in the expensing of an
additional $1.8 million in stock option expense during the second quarter of
2005. 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 Nine Months Ended
September 30, September 30,
2005 2004 2005 2004
------- ------- ------- -------
Net income (in thousands):
As reported $19,448 $13,031 $45,085 $43,020
Pro forma $19,448 $13,009 $45,085 $42,864
Net income per share - Basic
As reported $ 0.65 $ 0.44 $ 1.51 $ 1.44
Pro forma $ 0.65 $ 0.44 $ 1.51 $ 1.44
Net income per share -
Diluted
As reported $ 0.64 $ 0.43 $ 1.48 $ 1.41
Pro forma $ 0.64 $ 0.43 $ 1.48 $ 1.41
Stock Repurchase Program
In March 1999, the Board of Directors established the Stock Repurchase
Program to grant us authority to repurchase shares of our Class A common stock.
For the three and nine months ended September 30, 2005, we repurchased 106,600
and 534,200 shares at an average investment of $44.93 and $42.25, respectively.
Since the inception of the program we have repurchased 3,307,826 shares at an
average investment of $37.33 per share. During August 2005, the Board of
Directors authorized an additional 500,000 shares to be repurchased. At
September 30, 2005 the total shares available under the program to be
repurchased was approximately 910,000.
The Board of Directors had also previously approved the repurchase of
up to 900,000 shares of our mandatory convertible securities. During the third
quarter and first nine months of 2004, we repurchased 22,500 shares at an
average investment of $24.10 per share and 68,900 shares at an average
investment of $24.67 per share, respectively. A gain attributable to the debt
component of the mandatory convertible securities totaling $24,000 and $34,000
has been included in other income (expense) for both the three and nine months
ended September 30, 2004, respectively. 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 with opportunistic flexibility to sell any combination of senior and
subordinate debt securities, convertible debt securities and equity securities
(including common and preferred securities) up to a total amount of $400
million. This authorization is in addition to the remaining $120 million
available under our "shelf" registration filed in 2001.
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 that 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 September 30, 2005. There remains $3.5 million of
goodwill related to our 92% owned subsidiary, Gabelli Securities, Inc.
F. Subsequent Events
On October 5, 2005, the Company announced that a total of approximately
110 option holders elected to tender options to purchase an aggregate of
approximately 522,000 shares of its Class A common stock. These option holders
received an aggregate of approximately $9.7 million in cash (less any
withholding taxes). As a result of the completion of the tender offer, there
will be a reduction in fully diluted shares outstanding of approximately 130,000
shares for the fourth quarter 2005.
From October 1 through October 31, 2005, we repurchased 247,300 shares
of our class A common stock, under the Stock Repurchase Program, at an average
investment of $44.61 per share.
11
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (INCLUDING
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK)
Overview
GAMCO Investors, Inc. (formerly, Gabelli Asset Management Inc.) (NYSE:
GBL) is a widely recognized provider of investment advisory services to mutual
funds, institutional and high net worth investors, and investment partnerships.
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.
As part of our re-branding initiative to accelerate growth, our
corporate name change to GAMCO Investors, Inc. became effective August 29, 2005.
Since the firm was founded in 1977, GAMCO has been the name of our asset
management business, representing our institutional and high net worth effort.
We believe changing our corporate name to GAMCO helps us achieve our vision for
assets entrusted to us, that is, to earn a superior return for our clients by
providing various value-added (alpha) products. GAMCO is a more inclusive parent
company name, and more appropriately represents the various investment
strategies and asset management brands contributing to the continued growth of
our company. The Gabelli brand will continue to represent our absolute return,
research driven Value style that focuses on our unique Private Market Value with
a Catalyst (TM) investment approach. Our class A common stock will continue to
trade on the New York Stock Exchange under the ticker symbol "GBL". As part of
this initiative, we will ask the directors of our mutual funds at the next board
meeting to approve the name change of the Growth, the Global Series, the Mathers
and the International Growth funds (amongst others) to GAMCO from Gabelli. The
funds that reflect the Private Market Value with a Catalyst approach will
continue under the Gabelli brand.
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
Asset Management Inc. (Separate Accounts), Gabelli Funds, LLC (Mutual Funds) and
Gabelli Securities, Inc. (Investment Partnerships). We also act as an
underwriter, are a distributor of our open-end mutual funds and provide
institutional research through Gabelli & Company, Inc., our broker-dealer
12
As of September 30, 2005, we had $27.6 billion of assets under
management (AUM), approximately 96.5% of which were in equity products. Our
equity open-end mutual funds and closed-end funds had a record $12.8 billion in
AUM at quarter end, 2.6% above the $12.5 billion on June 30, 2005 and 13.8%
ahead of the $11.3 billion on September 30, 2004. In the institutional and high
net worth segment of our business, GAMCO Asset Management Inc. had AUM of $13.1
billion in separately managed equity accounts on September 30, 2005, down 0.5%
from the $13.2 billion on June 30, 2005 and down 0.4% from the $13.2 billion on
September 30, 2004. Assets in our investment partnerships were $745 million,
down 10.3% from second quarter-end 2005 assets of $831 million and 20.2% below
the $934 million on September 30, 2004. Fixed income assets, primarily money
market mutual funds, totaled $954 million on September 30, 2005, down 14.9% from
second quarter-end 2005 assets of $1.1 billion and 48.9% lower than assets of
$1.9 billion on September 30, 2004.
13
Assets Under Management
The company reported assets under management as follows:
Table I:
Assets Under Management (in millions)
-------------------------------------
September 30
------------ %
2004 2005 Inc. (Dec.)
---- ---- -----------
Mutual Funds:
Equities
Open End $ 7,534 $ 7,959 5.6%
Closed-End 3,727 4,851 30.2
Fixed Income 1,524 796 (47.8)
------- ------
Total Mutual Funds 12,785 13,606 6.4
------- ------
Institutional & High Net Worth Separate
Accounts:
Equities 13,185 13,129 (0.4)
Fixed Income 344 158 (54.1)
------- ------
Total Institutional & High Net Worth Separate
Accounts 13,529 13,287 (1.8)
------- ------
Investment Partnerships 934 745 (20.2)
------- ------
Total Assets Under Management $27,248 $27,638 1.4
======= ======
Table II:
Fund Flows - 3rd Quarter 2005 (in millions)
-------------------------------------------
Market
June 30, Net Appreciation / September 30,
2005 Cash Flows (Depreciation) 2005
-------------- ----------- --------------- --------------
Mutual Funds:
Equities $12,482 ($ 212) $540 $12,810
Fixed Income 852 (62) 6 796
------- ----- ---- -------
Total Mutual Funds 13,334 (274) 546 13,606
------- ----- ---- -------
Institutional & HNW Separate Accounts
Equities 13,189 (340) 280 13,129
Fixed Income 269 (113) 2 158
------- ----- ---- -------
Total Institutional & HNW Separate
Accounts 13,458 (453) 282 13,287
------- ----- ---- -------
Investment Partnerships 831 (103) 17 745
------- ----- ---- -------
Total Assets Under Management $27,623 ($ 830) $845 $27,638
======= ===== ==== =======
Table III:
Assets Under Management (in millions)
-------------------------------------
%Increase/(decrease)
9/04 12/04 3/05 6/05 9/05 6/05 9/04
---- ----- ---- ---- ---- ---- ----
Mutual Funds
Open end $ 7,534 $ 8,029 $ 7,808 $ 7,798 $ 7,959 2.1% 5.6%
Closed-end 3,727 4,342 4,602 4,684 4,851 3.6 30.2
Fixed income 1,524 1,499 1,154 852 796 (6.6) (47.8)
------- ------- ------- ------- -------
Total Mutual Funds 12,785 13,870 13,564 13,334 13,606 2.0 6.4
------- ------- ------- ------- -------
Institutional & HNW Separate
Accounts:
Equities 13,185 13,587 13,364 13,189 13,129 (0.5) (0.4)
Fixed Income 344 388 266 269 158 (41.3) (54.1)
------- ------- ------- ------- -------
Total Institutional & HNW Separate
Accounts 13,529 13,975 13,630 13,458 13,287 (1.3) (1.8)
------- ------- ------- ------- -------
Investment Partnerships 934 814 854 831 745 (10.3) (20.2)
------- ------- ------- ------- -------
Total Assets Under Management $27,248 $28,659 $28,048 $27,623 $27,638 0.1 1.4
======= ======= ======= ======= =======
14
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 advisers 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.
In September 2005, we were informed by the staff of the Securities and
Exchange Commission that they may recommend to the Commission that one of our
advisory subsidiaries be held accountable for the actions of two of the seven
closed-end funds managed by the subsidiary relating to Section 19(a) and Rule
19a-1 of the Investment Company Act of 1940. These provisions require registered
investment companies to provide written statements to shareholders when a
dividend is made from a source other than net investment income. While the funds
sent annual statements containing the required information and 1099 statements
as required by the IRS, the funds did not send written statements to
shareholders with each distribution in 2002 and 2003. The staff indicated that
they may recommend to the Commission that administrative remedies be sought,
including a monetary penalty. The closed-end funds changed their notification
procedures and GAMCO believes that all of the funds are now in compliance.
15
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 September 30, 2005 Compared To Three Months Ended
September 30, 2004
Consolidated Results - Three Months Ended September 30th:
(Unaudited; in thousands, except per share data)
2005 2004
------- -------
Revenues $66,234 $ 57,237
Expenses 43,636 35,286
------- -------
Operating income 22,598 21,951
Investment income, net 12,153 2,620
Interest expense (3,298) (4,014)
------- -------
Total other income (expense), net 8,855 (1,394)
------- -------
Income before taxes and minority interest 31,453 20,557
Income tax provision 11,795 7,483
Minority interest 210 43
------- -------
Net income $19,448 $ 13,031
======= =======
Net income per share:
Basic $ 0.65 $ 0.44
======= =======
Diluted $ 0.64 $ 0.43
======= =======
Reconciliation of Net income to Adjusted
EBITDA:
Net income $19,448 $ 13,031
Interest Expense 3,298 4,014
Income tax provision and minority interest 12,005 7,526
Depreciation and amortization 298 241
------- -------
Adjusted EBITDA(a) $35,049 $ 24,812
------- -------
(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 $66.2 million in the third quarter of 2005 up $9.0
million or 15.7% from total revenues of $57.2 million reported in the third
quarter of 2004. Operating income improved $0.6 million to $22.6 million up 2.9%
from the $21.9 million reported in last year's third quarter. Net income for the
quarter was $19.4 million or $0.64 per fully diluted share versus $13.0 million
or $0.43 per fully diluted share in the prior year's quarter. The 2005 quarter
was boosted by a $10.2 million swing in net investment income. In the short-run,
our results remain sensitive to changes in the equity market.
16
Investment advisory and incentive fees, which comprised 86.9% of total
revenues, were $57.5 million in the third quarter of 2005 up $7.8 million or
15.8% from the $49.7 million reported in the prior year's quarter. The higher
revenues during the quarter were primarily driven by our closed-end funds as
revenues jumped 67.3% to $12.8 million in the third quarter 2005 up from $7.6
million in the prior year's quarter. This increase was principally due to
management fees of $2.9 million recorded for preferred shares in the third
quarter 2005 covering the first nine of months of 2005 versus a reversal of
$200,000 in revenue from preferred shares in the prior year's quarter. In
addition, we recorded approximately $0.9 million of revenues from the inclusion
of The Gabelli Global Gold, Natural Resources & Income Trust (AMEX: GGN), our
new closed-end fund, which started on March 29, 2005.
Unlike most money management firms, we do not earn a management fee on
closed-end preferred shares (approximately $875 million in total assets) unless
the total return to common shareholders of the closed-end fund at year-end
exceeds the dividend rate of the preferred shares. As a result, management fees
accrued for preferred shares are affected by current weak market conditions and
may be subject to reversal in the fourth quarter of 2005.
Incentive fees from investment partnerships increased by $2.9 million
in the third quarter 2005 from the prior year as the 2004 quarter included a
clawback in incentive fees that reduced revenues. For the third quarter 2005,
our revenues of $20.4 million from open-end mutual funds were 3.9% higher than
the $19.6 million recorded in the 2004 quarter. Revenues from our institutional
and high net worth separate accounts business, which are generally billed based
on asset levels at the beginning of a quarter, declined by 2.3% to $19.9 million
in the third quarter 2005, down from $20.4 million in the 2004 quarter.
Commission revenues from our institutional research affiliate, Gabelli
& Company, Inc., were $3.3 million in the third quarter of 2005, up 10.0% from
$3.0 million in the same period a year earlier.
Revenues from the distribution of mutual funds and other income were
$5.4 million in the third quarter of 2005 versus $4.6 million in the third
quarter of 2004. This increase was the result of increases in both underwriting
revenue and distribution revenue. 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 $40.1 million in the
third quarter of 2005, a 21.6% increase from total expenses of $33.0 million
reported in the third quarter of 2004.
Compensation and related costs, which are largely variable, were $28.2
million or 20.6% higher than the $23.4 million recorded in the same period a
year earlier. This increase was primarily due to higher revenues versus the
prior's year's quarter and accruals for variable compensation costs related to
management fees on closed-end preferred shares and investment partnership
incentive fees in the 2005 quarter. Revenues related to investment partnership
incentive fees have higher variable compensation costs, as a percent of revenue,
as compared to our other investment advisory fees.
Distribution costs were $4.9 million, an increase of 8.7% from $4.5
million in the prior year's period. Other operating expenses were higher by $1.9
million, a 38.1% increase to $7.0 million in the third quarter of 2005 from the
prior year third quarter of $5.1 million. This increase included legal and
accounting costs related to regulatory and corporate governance dynamics,
including Sarbanes-Oxley compliance, and the incremental costs incurred due to
the elimination of soft dollar usage, which took effect in the fourth quarter of
2004, for our mutual fund business. Management fee expense, which is totally
variable and based on pretax income, was $3.5 million in the third quarter of
2005 versus $2.3 million in the third quarter of 2004.
Other income, net of interest expense, was $8.9 million in the third
quarter of 2005, a positive swing of $10.2 million from the $1.4 million loss
reported in the third quarter of 2004. The net return from our corporate
investment portfolio improved to $12.2 million in the 2005 third quarter from
$2.6 million in the prior year's quarter as we benefited from the strength of
the equity markets in the third quarter of 2005 as well as an increase in
interest rates from the prior year. We recorded a total gain of $2.7 million on
our investment in OXPS during the third quarter of 2005 and $5.2 million in
interest and dividend income, $2.3 million or 78.9% higher than the $2.9 million
reported in previous year's quarter.
17
Interest expense fell to $3.3 million in the third 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 third quarter of 2005
increased to 37.5% from 36.4% for the third quarter of 2004 as we adjusted the
tax rate to reflect our estimate of the current year end tax liability.
Nine Months Ended September 30, 2005 Compared To Nine Months Ended
September 30, 2004
Consolidated Results - Nine Months Ended September 30th:
(Unaudited; in thousands, except per share data)
2005 2004
-------- --------
Revenues $187,606 $ 180,980
Expenses 125,223 109,318
-------- --------
Operating income 62,383 71,662
Investment income, net 20,764 8,459
Interest expense (10,502) (12,095)
-------- --------
Total other income (expense), net 10,262 (3,636)
-------- --------
Income before taxes and minority interest 72,645 68,026
Income tax provision 27,242 24,768
Minority interest 318 238
-------- --------
Net income $ 45,085 $ 43,020
======== ========
Net income per share:
Basic $ 1.51 $ 1.44
======== ========
Diluted $ 1.48 $ 1.41
======== ========
Reconciliation of Net income to Adjusted
EBITDA:
Net income $ 45,085 $ 43,020
Interest Expense 10,502 12,095
Income tax provision and minority interest 27,560 25,006
Impairment of goodwill 1,127 -
Depreciation and amortization 769 720
-------- --------
Adjusted EBITDA(a) $ 85,043 $ 80,841
-------- --------
(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 $187.6 million in the first nine months of 2005 an
increase of $6.6 million or 3.7% from total revenues of $181.0 million reported
in the first nine months of 2004. Operating income declined $9.3 million to
$62.4 million down 12.9% from the $71.7 million reported in last year's first
nine months. Net income for the nine months was $45.1 million or $1.48 per fully
diluted share versus $43.0 million or $1.41 per fully diluted share in the prior
year's nine months. One-time charges of $1.5 million related to the launch of
our new closed-end fund, The Gabelli Global Gold, Natural Resources & Income
Trust (AMEX: GGN), and $1.1 million for the impairment of goodwill at our 80%
owned fixed income subsidiary as well as $1.8 million in incremental costs
relating to the accelerated vesting of stock options contributed to the decline
in operating income.
18
Investment advisory and incentive fees, which comprised 87.3% of total
revenues, were $163.8 million in the first nine months of 2005 up $8.9 million
or 5.8% from the $154.9 million reported in the first nine months of 2004. The
higher revenues during the year were primarily driven by our closed-end funds as
revenues increased 29.9% to $30.7 million in the first nine months of 2005 up
from $23.6 million in the prior year's period. The increase in revenues from
closed-end funds for the first nine months of 2005 resulted principally from an
increase in management fees accrued on preferred shares, revenues from GGN, 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 66.1% in the first
nine months of 2005 versus the prior year's first nine months due principally to
an increase in performance fees as the third quarter of 2004 included a clawback
in incentive fees that decreased revenues. For the first nine months of 2005,
our revenues of $60.0 million from open-end mutual funds were 2.2% lower than
the $61.3 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 $1.1 million or 1.8% in the 2005 period as compared to the
first nine months of 2004.
Commission revenues from our institutional research affiliate, Gabelli
& Company, Inc., were $8.3 million in the first nine months of 2005, down 26.6%
from $11.3 million in the same period a year earlier.
Revenues from distribution of mutual funds and other income were $15.5
million in the first nine months of 2005 versus $14.7 million in the first nine
months of 2004. This increase was the result of increases in both underwriting
revenue and distribution revenue. 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 $117.2 million in the
first nine months of 2005, a 15.1% increase from total expenses of $101.8
million reported in the first nine months of 2004. The increase in expenses
included one-time charges of $4.4 million recorded during the first nine months
of 2005.
Compensation and related costs, which are largely variable, increased
$9.4 million to $81.7 million, 12.9% higher than the same period a year earlier.
This increase was primarily due to higher revenues versus the prior's year's
period, higher variable compensation costs for our separate accounts business,
and accruals for variable compensation costs related to management fees on
closed-end preferred shares and investment partnership incentive fees in the
2005 period. Revenues related to investment partnership incentive fees have
higher variable compensation costs, as a percent of revenue, as compared to our
other investment advisory fees. In addition, a one-time charge of $1.8 million
relating to the accelerated vesting of stock options and higher fixed
compensation costs contributed to the increase.
Distribution costs were $15.7 million, an increase of 10.5% from $14.2
million in the prior year's period. This increase was largely the result of
one-time launch costs of $1.5 million for GGN, our new closed-end fund. These
launch costs included a $1.2 million structuring fee paid to one of the lead
underwriters for GGN's initial public offering. Other operating expenses were
higher by $4.5 million, a 29.8% increase to $19.8 million in the first nine
months of 2005 from the prior year first nine months of $15.2 million. This
increase included legal and accounting costs related to regulatory and corporate
governance dynamics, including Sarbanes-Oxley compliance, and the incremental
costs incurred due to the elimination of soft dollar usage, which took effect in
the fourth quarter of 2004, for our mutual fund business. In addition, we
recorded a $1.1 million charge for the impairment of goodwill related to our 80%
owned fixed income subsidiary. Management fee expense, which is totally variable
and based on pretax income, was $8.1 million in the first nine months of 2005
versus $7.6 million in the first nine months of 2004.
19
Other income, net of interest expense, was $10.3 million in the first
nine months of 2005, higher by $13.9 million from the $3.6 million loss reported
in the first nine months of 2004. We have benefited from a rise in short-term
interest rates as interest and dividend income for the first nine months of 2005
was $12.8 million, $6.3 million or 97.3% higher than the $6.5 million reported
in previous year's period. In addition, we recorded a total gain of $4.8 million
on our investment in OXPS during the first nine months of 2005. The 2005 period
also 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.
Interest expense decreased to $10.5 million in the first nine months of
2005 from $12.1 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 first nine months of 2005
increased to 37.5% from 36.4% for the first nine months of 2004 as we adjusted
the tax rate to reflect our estimate of the current year end tax liability.
20
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.
Summary cash flow data is as follows:
Nine Months Ended September 30,
-------------------------------
2005 2004
-------- --------
Cash flows provided by (used in): (in thousands)
Operating activities $(30,115) $ 15,695
Investing activities (1,185) (34,902)
Financing activities (20,686) (29,474)
-------- --------
Decrease (51,986) (48,681)
Effect of exchange rates on cash and cash
equivalents (60) -
Cash and cash equivalents at beginning of
period 257,096 386,511
-------- --------
Cash and cash equivalents at end of period $205,050 $337,830
======== ========
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 September 30, 2005, we had total cash and cash equivalents of $205.1
million, a decrease of $52.0 million from December 31, 2004. Gabelli has
established a collateral account, consisting of cash and cash equivalents and
investments in securities totaling $54.2 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 September 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 $30.1 million in the first nine
months of 2005 principally resulting from a $93.0 million increase in
investments in securities, a $3.2 million increase in receivable from brokers
and a $3.3 million decrease in income taxes payable partially offset by $45.1
million in net income, a $7.6 million decrease in investment advisory fees
receivable and a $13.4 million increase in compensation payable. Cash provided
by operating activities was $15.7 million in the first nine months of 2004
principally from a $8.7 million increase in compensation payable and $43.0
million in net income partially offset by a $12.7 million increase in
investments in securities and a $21.4 million increase in receivable from
brokers.
21
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 $1.2 million in the first nine 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 $34.9 million in the first nine months of
2004.
Cash used in financing activities in the first nine months of 2005 was
$20.7 million. The decrease in cash principally resulted from the repurchase of
$50 million of our $100 million 5% convertible note on April 1, 2005, $41.8
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 $1.1 million received from the exercise of
non-qualified stock options that further generated cash tax savings of $0.3
million.
Cash used in financing activities in the first nine months of 2004 was
$29.5 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 $24.5 million, dividend payments of $4.2
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 and partially offset by the $1.9 million received
from the exercise of non-qualified stock options that further generated cash tax
savings of $0.6 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
September 30, 2005, Gabelli & Company had net capital, as defined, of
approximately $14.6 million, exceeding the regulatory requirement by
approximately $14.3 million. Regulatory net capital requirements increase when
Gabelli & Company is involved in underwriting activities.
22
Market Risk
Our primary market risk exposure is to changes in equity prices and
interest rates. Since over 95% of our AUM are equities, our financial results
are subject to equity-market risk as revenues from our money management services
are sensitive to stock market dynamics. In addition, returns from our
proprietary investment portfolio are exposed to interest rate and equity 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, investment partnerships and our
proprietary investment activities.
With respect to our proprietary investment activities included in
investments in securities of $391.5 million at September 30, 2005 were
investments in Treasury Bills and Notes of $233.0 million, in mutual funds,
largely invested in equity products, of $102.5 million, a selection of common
and preferred stocks totaling $55.7 million and other investments of
approximately $0.3 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 $55.7 million invested in common and
preferred stocks at September 30, 2005, $20.2 million is related to our
investment in Westwood Holdings Group Inc. and $16.1 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 $90.2 million at September 30, 2005, the
majority of which consisted of investment partnerships and offshore funds 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.
GAMCO'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.
23
In January 2003 the Financial Accounting Standards Board ("FASB")
issued Interpretation No. 46, "Consolidation of Variable Interest Entities"
which was subsequently revised in December 2003 by FASB Interpretation No. 46(R)
("FIN46R"). FIN46R provides new criteria for determining whether or not
consolidation accounting is required for off-balance sheet activities conducted
through certain types of entities. This interpretation focuses on financial
interests in entities (i.e., variable interests) that indicate control despite
the absence of clear control through voting interest. It concludes that a
company's exposure (variable interest) to the economic risks and rewards from
the entity's assets and activities are the best evidence of control. The
interpretation requires that these variable interest entities (VIEs) be subject
to consolidation if the company holding the variable interest is subject to a
majority of the expected losses or will receive a majority of the expected
residual returns of the VIE (the "primary beneficiary"). As the primary
beneficiary it would be required to include the variable interest entity's
assets, liabilities and results of operations in its own financial statements.
In June 2005, the FASB ratified the consensus EITF 04-5, "Determining
Whether a General Partner, or the General Partners as a Group, Controls a
Limited Partnership or Similar Entity When the Limited Partners Have Certain
Rights", which provides guidance in determining whether a general partner
controls a limited partnership. The provisions of EITF 04-5 are not applicable
to limited partnerships or similar entities accounted for as VIEs pursuant to
FIN46R.
We have further reviewed the provisions of FIN46R and EITF 04-5 and
have determined that we will be required to consolidate the majority of our
investment partnerships and offshore funds managed by our subsidiaries beginning
on January 1, 2006. If consolidation of these investment partnerships and
offshore funds were required as of September 30, 2005, the effect on our
consolidated financial statements would have been as follows:
Consolidated Statement of Financial Condition
September 30, 2005
Effects of (Pro Forma)
Reported consolidation Post consolidation
Assets $ 741,299 $ 405,196 $ 1,146,495
Liabilities 302,960 74,899 377,859
Minority Interest 5,981 330,298 336,279
Stockholders' Equity $ 432,358 $ - $ 432,358
Consolidated Income Statement
For the nine months ended September 30, 2005
Effects of (Pro Forma)
Reported consolidation Post consolidation
Revenues $ 187,606 ($ 5,046) $ 182,560
Expenses 125,223 220 125,443
Other Income, net 10,262 21,466 31,728
Minority Interest 318 16,200 16,518
Net Income $ 45,085 $ - $ 45,085
We also serve as the Investment Manager of five offshore funds and one
investment partnership that are classified as VIEs. The offshore funds seek to
earn absolute returns for investors and are primarily focused within our
event-driven long/short equity and sector-focused strategies. Our involvement
with one of these offshore funds began in 1994 but the majority were launched
between 1999 and 2002. The investment partnership, which was started in 2005, is
a fund of hedge funds which is currently invested in four other investment
partnerships managed by GAMCO.
24
The total net assets of the five offshore funds and one investment
partnership classified as VIEs were approximately $39.5 million on September 30,
2005. However, we are not the primary beneficiary or a holder of a significant
variable interest in these VIEs. Our maximum exposure to loss as result of our
involvement with the offshore funds classified as VIEs is limited to our
investment while we are contingently liable for all of the liabilities of the
investment partnership that is classified as a VIE. On September 30, 2005, we
did not have any investments in these VIEs.
Item 4. Controls and Procedures
Management, including the Chief Executive Officer and the Chief
Financial Officer has 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.
25
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 September 30, 2005:
(c) Total Number
of Shares
(b) Average Repurchased as (d) Maximum Number
(a) Total Price Paid Part of of Shares That May
Number of Per Share, Publicly Yet Be Purchased
Shares net of Announced Plans Under the Plans or
Period Repurchased Commissions or Programs Programs
- --------------------------------------------------------------------------------------------------
GBL
7/01/05 - 7/31/05 - $- - 516,193
8/01/05 - 8/31/05 12,600 $42.82 12,600 1,003,593
9/01/05 - 9/30/05 94,000 $45.22 94,000 909,593
------------ ----------------
Totals 106,600 106,600
============ ================
In August 2005 we announced an increase of 500,000 shares of GBL available
to be repurchased under our stock repurchase program. Our stock repurchase
programs are not subject to expiration dates.
Item 6. (a) Exhibits
3.0 Restated Certificate of Incorporation of GAMCO Investors,
Inc.
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 September 30, 2005.
1. Current Report on Form 8-K dated July 21, 2005
containing the press release disclosing the Company's
operating results for the second quarter ended June 30,
2005.
2. Current Report on Form 8-K dated September 23, 2005
containing the press release disclosing the Company's
initial update on the SEC's industry wide review of
Closed-End Fund distribution notices.
26
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.
GAMCO INVESTORS, INC.
-------------------------
(Registrant)
November 9, 2005 /s/ Michael R. Anastasio
- ---------------- ----------------------------------
Date Michael R. Anastasio
Chief Financial Officer
27