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SECURITIES & EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
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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.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
New York 13-4007862
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(State or 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 principal 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 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, 2002
----- -----------------------------------
Class A Common Stock, .001 par value 6,694,243
Class B Common Stock, .001 par value 23,450,000
1
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INDEX
GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Operations:
- Three months ended June 30, 2001 and 2002
- Six months ended June 30, 2001 and 2002
Condensed Consolidated Statements of Financial Condition:
- June 30, 2002
- December 31, 2001 (Audited)
Condensed Consolidated Statements of Cash Flows:
- Three months ended June 30, 2001 and 2002
- Six months ended June 30, 2001 and 2002
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Including Quantitative and Qualitative Disclosures about
Market Risk)
PART II. OTHER INFORMATION
- --------------------------
Item 4. Submission of Matters to Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
- ----------
2
GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
(In thousands, except per share data)
THREE MONTHS ENDED
JUNE 30,
----------------------
2001 2002
-------- --------
REVENUES
Investment advisory and incentive fees ........... $ 47,718 $ 48,356
Commission revenue ............................... 3,580 3,682
Distribution fees and other income ............... 5,719 5,364
-------- --------
Total revenues ................................ 57,017 57,402
EXPENSES
Compensation and related costs ................... 22,619 22,291
Management fee ................................... 2,961 2,483
Other operating expenses ......................... 9,483 8,242
-------- --------
Total expenses ................................ 35,063 33,016
Operating income ................................... 21,954 24,386
OTHER INCOME (EXPENSE)
Net gain (loss) from investments ................. 2,808 (636)
Interest and dividend income ..................... 2,840 1,780
Interest expense ................................. (956) (3,186)
-------- --------
Total other income (expense), net ............. 4,692 (2,042)
-------- --------
Income before income taxes and minority interest ... 26,646 22,344
Income tax provision ............................. 10,285 8,401
Minority interest ................................ 520 2
-------- --------
Net income ..................................... $ 15,841 $ 13,941
======== ========
Net income per share:
Basic ............................................ $ 0.54 $ 0.46
======== ========
Diluted .......................................... $ 0.53 $ 0.46
======== ========
Weighted average shares outstanding:
Basic ............................................ 29,527 30,222
======== ========
Diluted .......................................... 29,932 32,327
======== ========
See accompanying notes.
3
GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
(In thousands, except per share data)
SIX MONTHS ENDED
JUNE 30,
------------------------
2001 2002
--------- ---------
REVENUES
Investment advisory and incentive fees ........... $ 95,905 $ 97,216
Commission revenue ............................... 7,967 7,613
Distribution fees and other income ............... 11,489 10,605
--------- ---------
Total revenues ................................ 115,361 115,434
EXPENSES
Compensation and related costs ................... 45,732 44,721
Management fee ................................... 5,754 5,231
Other operating expenses ......................... 17,920 15,727
--------- ---------
Total expenses ................................ 69,406 65,679
Operating income ................................... 45,955 49,755
OTHER INCOME (EXPENSE)
Net gain from investments ........................ 3,242 78
Interest and dividend income ..................... 4,473 3,159
Interest expense ................................. (1,887) (5,914)
--------- ---------
Total other income (expense), net ............. 5,828 (2,677)
--------- ---------
Income before income taxes and minority interest ... 51,783 47,078
Income tax provision ............................. 19,988 17,701
Minority interest ................................ 1,058 47
--------- ---------
Net income ..................................... $ 30,737 $ 29,330
========= =========
Net income per share:
Basic ............................................ $ 1.04 $ 0.97
========= =========
Diluted .......................................... $ 1.03 $ 0.97
========= =========
Weighted average shares outstanding:
Basic ............................................ 29,517 30,083
========= =========
Diluted .......................................... 29,887 32,246
========= =========
See accompanying notes.
4
GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands)
December 31, June 30,
2001 2002
-------- --------
(Unaudited)
ASSETS
Cash and cash equivalents ........................... $305,447 $395,928
Investments in securities ........................... 56,293 53,803
Investments in partnerships and affiliates .......... 65,838 60,093
Receivable from brokers ............................. 36 101
Investment advisory fees receivable ................. 14,651 15,294
Income tax receivable ............................... -- 3,252
Deferred income taxes, net .......................... 18,661 --
Other assets ........................................ 25,468 28,170
-------- --------
Total assets ................................... $486,394 $556,641
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Note payable ........................................ $ 50,000 $ --
Income taxes payable ................................ 4,733 335
Capital lease obligation ............................ 3,492 3,464
Payable to brokers .................................. 8,554 5,331
Compensation payable ................................ 21,183 29,026
Accrued expenses and other liabilities .............. 15,524 16,126
-------- --------
Total liabilities .............................. 103,486 54,282
Convertible note .................................... 100,000 100,000
Mandatory convertible securities .................... -- 87,513
Minority interest ................................... 7,611 7,385
Stockholders' equity ................................ 275,297 307,461
-------- --------
Total liabilities and stockholders' equity .......... $486,394 $556,641
======== ========
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,
------------------------ ------------------------
2001 2002 2001 2002
--------- --------- --------- ---------
Operating activities
Net income ................................................... $ 15,841 $ 13,941 $ 30,737 $ 29,330
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in earnings of partnerships and affiliates ............ (1,024) (79) (1,987) (345)
Depreciation and amortization ................................ 187 216 372 428
Deferred income tax asset .................................... 78 -- (198) 18,661
Tax benefit from exercise of stock options ................... -- 269 -- 4,082
Minority interest in net income of consolidated
subsidiaries .............................................. 519 2 1,058 47
Market value of donated securities ........................... -- 412 -- 412
Realized losses on available for sale securities ............. -- (58) -- (40)
(Increase) decrease in operating assets:
Investments in securities ................................. 6,827 2,048 15,503 1,887
Investment advisory fees receivable ....................... 34 3,257 1,268 (643)
Receivables from affiliates ............................... (966) (613) 632 766
Other receivables ......................................... (318) 738 (184) 258
Receivable from brokers ................................... 3,686 1,922 2,761 (65)
Income tax receivable ..................................... -- 7,627 -- (3,252)
Other assets .............................................. (115) (388) (129) (4,153)
Increase (decrease) in operating liabilities:
Payable to brokers ........................................ -- 2,631 -- (3,223)
Income taxes payable ...................................... (7,702) (536) (2,682) (4,377)
Compensation payable ...................................... 5,275 2,612 5,778 7,858
Accrued expenses and other liabilities .................... (645) (77) 455 (1,782)
--------- --------- --------- ---------
Total adjustments ............................................ 5,836 19,983 22,647 16,519
--------- --------- --------- ---------
Net cash (used in) provided by operating activities .......... 21,677 33,924 53,384 45,849
--------- --------- --------- ---------
Investing activities
Purchases of available for sale securities ................... -- (456) -- (558)
Proceeds from sales of available for sale securities ......... -- 500 -- 602
Distributions from partnerships and affiliates ............... 121 1,487 7,135 12,458
Investments in partnerships and affiliates ................... (1,084) (128) (2,484) (6,368)
--------- --------- --------- ---------
Net cash (used in) provided by investing activities .......... (963) 1,403 4,651 6,134
--------- --------- --------- ---------
Financing activities
Purchase of minority stockholders' interest .................. (67) -- (106) (273)
Proceeds from issuance of Mandatory convertible
securities .................................................. -- -- -- 87,952
Repayment of note payable .................................... -- -- -- (50,000)
Proceeds from exercise of stock options ...................... -- 1,166 -- 9,063
Purchase of mandatory convertible securities ................. -- (2,422) -- (2,422)
Issuance (purchase) of treasury stock ........................ 3 (2,228) (852) (5,822)
--------- --------- --------- ---------
Net cash(used in)provided by financing activities ............ (64) (3,484) (958) 38,498
--------- --------- --------- ---------
Net increase in cash and cash equivalents .................... 20,650 31,843 57,077 90,481
Cash and cash equivalents at beginning of period ............. 105,698 364,085 69,271 305,447
--------- --------- --------- ---------
Cash and cash equivalents at end of period ................... $ 126,348 $ 395,928 $ 126,348 $ 395,928
========= ========= ========= =========
Supplemental disclosure of non-cash financing activity
Treasury stock exchanged for subsidiary stock held
by minority shareholders ..................................... $ 3,368 $ -- $ 3,368 $ --
========= ========= ========= =========
Net present value of forward purchase contract ............... $ -- $ 2,353 $ -- $ 2,353
========= ========= ========= =========
See accompanying notes.
6
GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(UNAUDITED)
A. BASIS OF PRESENTATION
The unaudited interim condensed consolidated financial statements of
Gabelli Asset Management Inc. ("the Company") included herein have been prepared
in conformity with accounting principles generally accepted in the United States
for interim financial information and Rule 10-01 of Regulation S-X. Accordingly,
they do not include all the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, the unaudited interim condensed consolidated financial statements
reflect all adjustments, which are of a normal recurring nature, necessary for a
fair presentation of financial position, results of operations and cash flows of
the Company for the interim periods presented and are not necessarily indicative
of a full year's results.
In preparing the unaudited interim condensed consolidated financial
statements, management is required to make estimates and assumptions that affect
the amounts reported in the financial statements. Actual results could differ
from those estimates.
These financial statements should be read in conjunction with the
Company's audited consolidated financial statements included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2001, from which the
accompanying Statement of Financial Condition was derived.
Certain items previously reported have been reclassified to conform to
the current year'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. 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.
At June 30, 2002 the market value of investments available for sale was
$6.1 million. The change in market value, net of taxes, of $321,000 has been
included in stockholders' equity.
Proceeds from sales of investments available for sale were
approximately $0.6 million for the period ended June 30, 2002. Gross gains on
the sale of investments available for sale amounted to $58,000; gross losses on
the sale of investments available for sale amounted to $19,000.
7
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,
2001 2002 2001 2002
------- ------- ------- -------
(in thousands, except per share amounts)
Basic:
Net income $15,841 $13,941 $30,737 $29,330
======= ======= ======= =======
Average shares outstanding 29,527 30,222 29,517 30,083
======= ======= ======= =======
Basic net income per share $ 0.54 $ 0.46 $ 1.04 $ 0.97
======= ======= ======= =======
Diluted:
Net income $15,841 $13,941 $30,737 $29,330
Add interest expense on convertible note, net
of management fee and taxes -- 913 -- 1,825
------- ------- ------- -------
Total $15,841 $14,854 $30,737 $31,155
======= ======= ======= =======
Average shares outstanding 29,527 30,222 29,517 30,083
Dilutive stock options 405 218 370 276
Assumed conversion of convertible note -- 1,887 -- 1,887
------- ------- ------- -------
Total 29,932 32,327 29,887 32,246
======= ======= ======= =======
Diluted net income per share $ 0.53 $ 0.46 $ 1.03 $ 0.97
======= ======= ======= =======
D. MANDATORY CONVERTIBLE SECURITIES (" FELINE PRIDES ")
On February 6, 2002 the Company completed its public offering of 3.6
million mandatory convertible debt securities ("Feline PRIDES"). The securities
are listed on the New York Stock Exchange under the symbol "GBL.I". Each Feline
PRIDE initially consists of a unit referred to as an Income PRIDE that includes
(a) a purchase contract under which the holder will purchase shares of the
Company's Class A Common Stock on February 17, 2005 and (b) senior notes due
February 17, 2007 with a principal amount of $25 per share. The notes pay
interest quarterly at a rate of 6% per year, which rate is expected to be reset
on or about November 17, 2004. Each purchase contract obligates its holder to
purchase, on February 17, 2005, newly issued shares of the Company's Class A
Common Stock. The total number of shares to be issued will be between 1.9
million and 2.3 million, subject to adjustment in certain circumstances with the
number of shares to be determined based upon the average trading price of Common
Stock over a period preceding that date. In connection with the offering the
Company received $90 million before underwriting and other expenses of
approximately $3.1 million. For accounting purposes the net present value of the
purchase contract adjustments and their related offering costs have been
recorded as a reduction to additional paid in capital. Costs incurred in
connection with the issuance of the senior notes are capitalized as deferred
financing costs and amortized as an adjustment to interest expense over the term
of the notes.
On April 29, 2002 the Board of Directors approved the repurchase of up
to 100,000 shares of the mandatory convertible securities from time to time in
the open market. During the quarter ended June 30, 2002 the Company repurchased
99,500 shares at an average cost of $23.92 per share. A gain of approximately
$112,000 attributable to the debt component of each Feline PRIDE repurchased has
been included in other income.
On June 26, 2002 the Board of Directors authorized the repurchase of
an additional 100,000 shares.
8
E. STOCKHOLDERS' EQUITY
STOCK REPURCHASE PROGRAM
In March 1999 the Board of Directors established the Stock Repurchase
Program through which the Company is authorized to repurchase shares of its
Class A Common Stock from time to time in the open market. During the second
quarter of 2002, the Company repurchased 59,648 shares at an average cost of
$37.34 per share bringing the total shares repurchased under the program in 2002
to 152,805 at an average cost of $38.08 per share. Since the inception of the
program in March 1999 we have repurchased 725,705 shares at an average cost of
$23.28 per share.
F. SUBSEQUENT EVENT
CONVERTIBLE NOTE
On August 9, 2002 the Board of Directors authorized the Company to
establish a collateral account, consisting of cash or securities totaling $103.0
million, to secure a letter of credit issued in favor of Cascade Investment LLC,
the holder of the $100 million convertible note that was issued in a private
placement on August 14, 2001. When this note was first issued to Cascade an
affiliated entity put up the collateral and absorbed the cost of the letter of
credit which was approximately 0.375% per annum. The Company will pay a fee of
approximately $206,000 for the letter of credit which expires on August 14,
2003.
STOCK REPURCHASE PROGRAM
On July 18, 2002 the Board of Directors raised the amount authorized to
repurchase shares of the Company's Class A Common Stock by $5,000,000. On August
9, 2002 the Board further increased the amount authorized to repurchase shares
by an additional $3,000,000.
On August 9, 2002 the Board of Directors increased the number of shares
of the Company's mandatory convertible securities which may be repurchased by an
additional 200,000 shares.
STOCK OPTION ACCOUNTING
On July 26, 2002 the Company announced that it will expense the cost of
stock options issued beginning January 1, 2003 using the expense recognition
guidance provided by SFAS No. 123, "Accounting for Stock-Based Compensation".
The Company had previously accounted for stock options under the intrinsic value
method in which compensation expense is recognized only if the exercise price of
the stock option is less than the market price of the underlying stock on the
date of grant. If the Company had initially elected to expense stock options
under the fair value method of SFAS No. 123 the Company's diluted net income per
share would have been reduced by $0.03 and $0.01 for the six months ended June
30, 2001 and 2002, respectively. For the three years ended December 31, 1999,
2000 and 2001 diluted net income per share would have been reduced by $0.04,
$0.04 and $0.06, respectively.
9
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Gabelli Asset Management Inc. (the "Company") is a widely recognized
provider of investment advisory and brokerage services to mutual fund,
institutional and high net worth investors in the United States and
internationally. We generally manage assets on a discretionary basis and invest
in a wide variety of U.S. and international securities through various
investment styles.
The Company's revenues are largely based on the level of assets under
management in its business as well as the level of fees associated with its
various investment products. Growth in revenues generally depends on good
investment performance and the ability to attract additional investors while
maintaining current fee levels. The Company's largest source of revenues is
investment advisory fees which are based on the amount of assets under
management in its Mutual Funds and Separate Accounts business. Revenues derived
from the equity oriented portfolios generally have higher management fee rates
than fixed income portfolios.
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, 2002 AS COMPARED TO THREE MONTHS ENDED JUNE 30, 2001
Consolidated Results - Three Months Ended June 30:
(unaudited; in thousands, except per share data)
----------------------------------------------
2001 2002 % CHANGE
-------- -------- --------
Revenues $ 57,017 $ 57,402 0.7
Expenses 35,063 33,016 (5.8)
-------- --------
Operating income 21,954 24,386 11.1
Net investment income 5,648 1,144
Interest expense (956) (3,186)
-------- --------
Total other income (expense), net 4,692 (2,042)
-------- --------
Income before taxes and minority interest 26,646 22,344 (16.1)
Income tax provision 10,285 8,401
Minority interest 520 2
-------- --------
Net income $ 15,841 $ 13,941 (12.0)
======== ========
Net income per share:
Basic $ 0.54 $ 0.46 (14.8)
======== ========
Diluted $ 0.53 $ 0.46 (13.2)
======== ========
Included in income before taxes and minority interest:
Depreciation and amortization $ 187 $ 216
Adjusted EBITDA(a) $ 27,789 $ 25,746
(a) Adjusted EBITDA is defined as earnings before interest, taxes, depreciation
and amortization and minority interest.
10
Total revenues were $57.4 million in the second quarter of 2002 versus
$57.0 million in the second quarter of 2001.
Investment advisory and incentive fees, which comprise 84% of total
revenues, were $48.4 million in the second quarter of 2002, $0.6 million or 1.3%
higher than the $47.7 million reported in the second quarter of 2001. The
increase in investment advisory and incentive fees was the result of increased
revenues from our GAMCO institutional and high net worth business. GAMCO fees,
which are generally billed based on asset levels at the beginning of a quarter,
rose $3.0 million or 16.1% in the 2002 quarter as compared to the second quarter
of 2001. This increase was largely offset by a 7.6% or $1.7 million decline in
revenues from open-end equity mutual funds. Average assets under management in
open-end equity funds during the second quarter of 2002 were $8.2 billion, 8.6%
below the prior year's second quarter average of $8.9 billion. At June 30, 2002
assets in open-end equity funds were $7.4 billion, 18.0% lower than the prior
year quarter end balance of $9.0 billion.
Commissions were $3.7 million in the second quarter of 2002, up 2.8%
from $3.6 million in the same period a year earlier largely due to an increase
in overall trading volume.
Distribution fees and other income were $5.4 million in the second
quarter of 2002 versus $5.7 million in the second quarter of 2001. The decrease
in distribution fees results from the decline in average assets managed in
open-end equity mutual funds, which generate distribution fees under 12b-1
compensation plans.
Total expenses were $33.0 million in the second quarter of 2002, a 5.8%
decrease from total expenses of $35.1 million reported in the second quarter of
2001. Total expenses declined as a percentage of total revenues to 57.5% in 2002
from 61.5% in the prior year quarter. Compensation and related costs, which are
largely variable in nature, was $22.3 million, 1.5% lower than the same period a
year earlier. The decrease in compensation was principally due to lower
incentive compensation accruals and costs associated with benefit programs.
Management fee expense, which is totally variable and based on pretax income,
was 16.1% lower at $2.5 million in the second quarter of 2002 versus $3.0
million in the second quarter of 2001. Other operating expenses were $8.2
million in the second quarter of 2002, a 13.1% reduction from the $9.5 million
reported in the second quarter of 2001. Lower mutual fund administration and
distribution costs and marketing costs comprised the largest components of
expense reductions.
Interest expense increased $2.2 million to $3.2 million in the second
quarter of 2002 from $1.0 million in the second quarter of 2001. The increase
reflects the issuance of two convertible securities, in August 2001 and February
2002, with proceeds totaling $190 million and is offset by the repayment of a
$50 million note in the beginning of the 2002 quarter. Earnings from the firm's
cash and investments were $1.1 million in the second quarter of 2002, lower by
$4.5 million, or 79.7% than the second quarter of 2001 as higher average
balances in the firm's investment accounts in 2002 were offset by lower interest
rates.
The estimated effective tax rate for the second quarter of 2002 was
37.6%, down from 38.6% in calendar 2001 as we benefit from lower state tax
rates. In 2002, the New York State corporate tax rate was lowered to 9.0% from
9.5%. Minority interest was lower as a result of the share exchange program,
completed in August 2001, through which we increased our ownership in Gabelli
Securities, Inc. to 92% from 77%.
11
SIX MONTHS ENDED JUNE 30, 2002 AS COMPARED TO SIX MONTHS ENDED JUNE 30, 2001
Consolidated Results - Six Months Ended June 30:
(unaudited; in thousands, except per share data)
----------------------------------------------
2001 2002 % CHANGE
--------- --------- ---------
Revenues $ 115,361 $ 115,434 0.1
Expenses 69,406 65,679 (5.4)
--------- ---------
Operating income 45,955 49,755 8.3
Net investment income 7,715 3,237
Interest expense (1,887) (5,914)
--------- ---------
Total other income (expense), net 5,828 (2,677)
--------- ---------
Income before taxes and minority interest 51,783 47,078 (9.1)
Income tax provision 17,701 19,988
Minority interest 1,058 47
--------- ---------
Net income $ 30,737 $ 29,330 (4.6)
========= =========
Net income per share:
Basic $ 1.04 $ 0.97 (6.7)
========= =========
Diluted $ 1.03 $ 0.97 5.8)
========= =========
Included in income before taxes and minority interest:
Depreciation and amortization $ 372 $ 428
Adjusted EBITDA(a) $ 54,042 $ 53,420
(a) Adjusted EBITDA is defined as earnings before interest, taxes, depreciation
and amortization and minority interest.
Total revenues were $115.4 million in both the first half of 2002 and
2001.
Investment advisory and incentive fees, which comprise 84% of total
revenues, were $97.2 million in the first half of 2002, $1.3 million or 1.4%
higher than the $95.9 million reported in the first half of 2001. The increase
in investment advisory and incentive fees was the result of increased revenues
from our GAMCO institutional and high net worth business. GAMCO fees, which are
generally billed based on asset levels at the beginning of a quarter, rose $5.7
million or 15.3% in the 2002 quarter as compared to the first half of 2001. This
increase was largely offset by a 7.2%, or $3.3 million, decline in revenues from
open-end equity mutual funds. Average assets under management in open-end equity
funds during the first half of 2002 was $8.2 billion, 8.3% below the prior
year's first half average of $9.0 billion.
Commissions were $7.6 million in the first half of 2002, a decrease of
4.4% from $8.0 million in the same period a year earlier largely due to lower
overall trading volume.
Distribution fees and other income were $10.6 million in the first half
of 2002 versus $11.5 million in the first half of 2001. A 7.7% decrease in
distribution fees resulted from the 8.3% decline in average assets managed in
open-end equity mutual funds.
12
Total expenses were $65.7 million in the first half of 2002, a 5.4%
decrease from total expenses of $69.4 million reported in the first half of
2001. Total expenses declined as a percentage of total revenues to 56.9% in 2002
from 60.2% in the prior year quarter. Compensation and related costs, which are
largely variable in nature, were $44.7 million, 2.2% lower than the same period
a year earlier. The decrease in compensation was principally due to lower
incentive compensation accruals and costs associated with benefit programs.
Management fee expense, which is totally variable and based on pretax income,
was 9.1% lower at $5.2 million in the first half of 2002 versus $5.8 million in
the first half of 2001. Other operating expenses were $15.7 million in the first
half of 2002 a 12.2% reduction from the $17.9 million reported in the first half
of 2001. Lower mutual fund administration and distribution costs and marketing
costs comprised the largest components of expense reductions.
Interest expense increased $4.0 million to $5.9 million in the first
half of 2002 from $1.9 million in the first half of 2001. The increase reflects
the issuance of two convertible securities, in August 2001 and February 2002,
with proceeds totaling $190 million and is offset by the repayment of a $50
million note in the beginning of the 2002 quarter. Earnings from the firm's cash
and investments were $3.2 million in the first half of 2002, lower by $4.5
million, or 58.0% than the first half of 2001 as higher average balances in the
firm's investment accounts in 2002 were offset by lower interest rates.
The estimated effective tax rate for the first half of 2002 was 37.6%,
down from 38.6% in calendar 2001. Minority interest was lower as a result of the
share exchange program, completed in August 2001, through which we increased our
ownership in Gabelli Securities, Inc. to 92% from 77%.
LIQUIDITY AND CAPITAL RESOURCES
The Company's assets are primarily liquid, consisting mainly of cash,
short term investments, securities held for investment purposes and investments
in partnerships in which the Company is a general or limited partner.
Investments in partnerships are generally illiquid, however, the underlying
investments in such partnerships are generally liquid and the valuations of the
investment partnerships reflect this underlying liquidity.
Summary cash flow data is as follows:
Six Months Ended June 30,
----------------------------------
2001 2002
----------- -----------
Cash flows provided by (used in): (in thousands)
Operating activities $ 53,384 $ 45,849
Investing activities 4,651 6,134
Financing activities (958) 38,498
----------- -----------
Increase 57,077 90,481
Cash and cash equivalents at beginning of period 69,271 305,447
----------- -----------
Cash and cash equivalents at end of period $ 126,348 $ 395,928
=========== ===========
Cash requirements and liquidity needs have historically been met
through cash generated by operating activities and through the Company's
borrowing capacity. During the first quarter of 2002 Moody's Investors Services
issued an investment grade rating to the Company. Together with a prior rating
from Standard & Poors Rating Services, the Company possesses investment grade
ratings from two large, well respected ratings agencies. The addition of
investment grade ratings serves to expand our ability to attract both public and
private capital. In February 2002, the Company completed a $90 million offering
of 3.6 million mandatory convertible debt securities. Total debt at June 30,
2002 was $187.5 million, consisting of a $100 million convertible note and $87.5
million in mandatory convertible debt securities. At June 30, 2002, the Company
had total cash and investments of $509.8 million, an increase of $82.2 million
from December 31, 2001. On August 14, 2002 the Company established a collateral
account, consisting of cash or securities totaling $103.0 million, to secure a
letter of credit issued in favor of Cascade Investment LLC, the holder of the
$100.0 million convertible note. The letter of credit expires on August 14,
2003.
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Cash provided by operating activities was $45.8 million in the first
half of 2002 principally resulting from $29.3 million in net income and offset
by changes in other assets and liabilities. Cash provided by operating
activities was $53.4 million in the first half of 2001 principally resulting
from $30.7 million in net income and decreases in investments in securities and
various receivables of $15.5 million and $4.5 million, respectively.
Cash provided by investing activities, related to investments in and
distributions from partnerships and affiliates, was $6.1 million and $4.7
million in the first half of 2002 and 2001, respectively.
Cash provided by financing activities in the first half of 2002 was
$38.5 million. The increase in cash results from the issuance of $90 million of
mandatory convertible debt securities before offering expenses and $9.1 million
from the exercise of stock options less the repayment of a $50 million note
payable and $5.8 million used to repurchase 152,805 shares of our Class A Common
Stock under the Company's Stock Repurchase Program. The exercise of
non-qualified stock options and the repayment of the note payable during the
first half of 2002 will generate cash tax savings of $4.1 million and $19.8
million, respectively, which has been included in income tax receivable. Cash
used in financing activities in the first half of 2001 was $1.0 million,
primarily from the purchase of treasury stock.
Based upon the Company's current level of operations and its
anticipated growth, the Company expects that its current cash balances plus cash
flows from operating activities and its borrowing capacity will be sufficient to
finance its working capital needs for the foreseeable future. The Company has no
material commitments for capital expenditures.
Gabelli & Company 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, 2002, Gabelli & Company
had net capital, as defined, of approximately $12.5 million, exceeding the
regulatory requirement by approximately $12.2 million. Regulatory net capital
requirements increase when Gabelli & Company is involved in underwriting
activities.
MARKET RISK
The Company is subject to potential losses from certain market risks as
a result of absolute and relative price movements in financial instruments due
to changes in interest rates, equity prices and other factors. The Company's
exposure to market risk is directly related to its role as financial
intermediary and advisor for assets under management in its mutual funds,
institutional and separate accounts business and its proprietary trading
activities. At June 30, 2002, the Company's primary market risk exposure was for
changes in equity prices and interest rates. Included in investments in
securities of $53.8 million at June 30, 2002 were investments in Treasury Bills
and Notes of $1.6 million, in mutual funds, largely invested in equity products,
of $38.4 million, a diverse selection of common stocks totaling $10.9 million
and other investments of approximately $2.9 million. Investments in mutual funds
generally lower market risk through the diversification of financial instruments
within their portfolio. In addition, the Company may alter its investment
holdings from time to time in response to changes in market risks and other
factors considered appropriate by management. Approximately $5.4 million of the
$10.9 million invested in common stocks at June 30, 2002, represents the
Company's participation in risk arbitrage opportunities in connection with
mergers, consolidations, acquisitions, tender offers or other similar
transactions. These transactions involve announced deals with agreed upon terms
and conditions, including pricing, which generally involve less market risk than
common stocks held in a trading portfolio. The principal risk associated with
risk arbitrage transactions is the inability of the companies involved to
complete the transaction.
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The Company's exposure to interest rate risk results, principally, from
its investment of excess cash in government obligations. These investments are
primarily short term in nature and the fair value of these investments generally
approximates market value. The Company's revenues are largely driven by the
market value of its assets under management and are therefore exposed to
fluctuations in market prices. Investment advisory fees for mutual funds are
based on average daily asset values. Management fees earned on institutional and
high-net-worth separate accounts, for any given quarter, are determined based on
asset values on the last day of the preceding quarter. Any significant increases
or decreases in market value of institutional and high-net-worth separate
accounts assets managed which occur on the last day of the quarter will result
in a relative increase or decrease in revenues for the following quarter.
RECENT ACCOUNTING DEVELOPMENTS
On July 26, 2002 the Company announced it will expense the cost of
stock options issued beginning January 1, 2003 using the expense recognition
guidance provided by SFAS No. 123, "Accounting for Stock-Based Compensation".
The Company had previously elected to account for stock options using the
intrinsic value method in which compensation expense is only recognized if the
exercise price of the option is less than the market price of the underlying
stock on the date of grant. The company does not expect the change to the fair
value method of expensing options to have a material impact on its financial
position or its results of operations.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and
SFAS No. 142 "Goodwill and Other Intangible Assets." SFAS 141 requires all
business combinations initiated after June 30, 2001 to be accounted for using
the purchase method. Under SFAS 142, intangible assets with indefinite lives and
goodwill will no longer be required to be amortized. Instead, these assets will
be evaluated annually for impairment. The Company adopted the provisions of SFAS
142 at the beginning of 2002 and the adoption did not have a material impact to
the Company's financial position or its results of operations.
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 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 21, 2002. At
that meeting, the stockholders considered and acted upon the
following proposals:
A. THE ELECTION OF DIRECTORS. The stockholders elected
the following individuals to serve as directors until
the 2003 annual meeting of stockholders and until
their respective successors are duly elected and
qualified. All the directors were elected with more
than 99.7% of the total votes cast.
Raymond C. Avansino, Jr.
John C. Ferrara
Mario J. Gabelli
Paul B. Guenther
Eamon M. Kelly
Karl Otto Pohl
B. APPROVAL OF THE 2002 STOCK AWARD AND INCENTIVE PLAN
(the "Plan"). The stockholders approved the Plan
which authorizes grants of stock options, stock
appreciation rights, stock awards, performance shares
and stock units. The Plan was approved with more than
99.8% of the total votes cast.
ITEM 6. (a) Exhibits
Exhibits 99.1. Certification of CEO pursuant
to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Exhibits 99.2 Certification of CFO 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 did not file any reports on Form
8-K during the three months ended June 30,
2002.
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 14, 2002 /s/ Robert S. Zuccaro
---------------- ----------------------------
Date Robert S. Zuccaro
Vice President and Chief Financial Officer
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