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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, 2003
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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 __________
Commission File No. 1-106
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 by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the Registrant's classes of
Common Stock, as of the latest practical date.
Class Outstanding at July 31, 2003
----- ------------------------------
Class A Common Stock, .001 par value 6,895,542
Class B Common Stock, .001 par value 23,150,000
1
INDEX
-----
GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Operations:
- Three months ended June 30, 2003 and 2002
- Six months ended June 30, 2003 and 2002
Condensed Consolidated Statements of Financial Condition:
- June 30, 2003
- June 30, 2002
- December 31, 2002 (Audited)
Condensed Consolidated Statements of Cash Flows:
- Three months ended June 30, 2003 and 2002
- Six months ended June 30, 2003 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)
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
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,
------------------------
2003 2002
---------- ----------
REVENUES
Investment advisory and incentive fees .......... $ 40,759 $ 48,356
Commission revenue .............................. 2,771 3,682
Distribution fees and other income .............. 4,426 5,364
---------- ----------
Total revenues ............................... 47,956 57,402
EXPENSES
Compensation and related costs .................. 20,874 22,291
Management fee .................................. 2,097 2,483
Other operating expenses ........................ 8,580 8,242
---------- ----------
Total expenses ............................... 31,551 33,016
Operating income .................................. 16,405 24,386
OTHER INCOME (EXPENSE)
Net gain (loss) from investments ................ 4,711 (636)
Interest and dividend income .................... 1,368 1,780
Interest expense ................................ (3,605) (3,186)
---------- ----------
Total other income (expense), net ............ 2,474 (2,042)
---------- ----------
Income before income taxes and minority interest .. 18,879 22,344
Income tax provision ............................ 7,099 8,401
Minority interest ............................... 223 2
---------- ----------
Net income .................................... $ 11,557 $ 13,941
========== ==========
Net income per share:
Basic ........................................... $ 0.38 $ 0.46
========== ==========
Diluted ......................................... $ 0.38 $ 0.46
========== ==========
Weighted average shares outstanding:
Basic ........................................... 30,025 30,222
========== ==========
Diluted ......................................... 30,139 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,
------------------------
2003 2002
---------- ----------
REVENUES
Investment advisory and incentive fees .......... $ 80,260 $ 97,216
Commission revenue .............................. 5,191 7,613
Distribution fees and other income .............. 8,558 10,605
---------- ----------
Total revenues ............................... 94,009 115,434
EXPENSES
Compensation and related costs .................. 41,399 44,721
Management fee .................................. 3,766 5,231
Other operating expenses ........................ 16,099 15,727
---------- ----------
Total expenses ............................... 61,264 65,679
Operating income .................................. 32,745 49,755
OTHER INCOME (EXPENSE)
Net gain from investments ....................... 5,145 78
Interest and dividend income .................... 2,624 3,159
Interest expense ................................ (6,616) (5,914)
---------- ----------
Total other income (expense), net ............ 1,153 (2,677)
---------- ----------
Income before income taxes and minority interest .. 33,898 47,078
Income tax provision ............................ 12,746 17,701
Minority interest ............................... 268 47
---------- ----------
Net income .................................... $ 20,884 $ 29,330
========== ==========
Net income per share:
Basic ........................................... $ 0.70 $ 0.97
========== ==========
Diluted ......................................... $ 0.69 $ 0.97
========== ==========
Weighted average shares outstanding:
Basic ........................................... 29,972 30,083
========== ==========
Diluted ......................................... 30,082 32,246
========== ==========
See accompanying notes.
4
GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands)
June 30, June 30, December 31,
2003 2002 2002
---------- ---------- ----------
(Unaudited)
ASSETS
Cash and cash equivalents ......................... $ 404,849 $ 395,928 $ 311,430
Investments in securities ......................... 190,083 53,803 175,466
Investments in partnerships and affiliates ........ 57,022 60,093 47,932
Receivable from brokers ........................... 456 101 4,919
Investment advisory fees receivable ............... 13,845 15,294 15,603
Income tax receivable ............................. -- 3,252 --
Other assets ...................................... 29,245 28,170 27,381
---------- ---------- ----------
Total assets ................................. $ 695,500 $ 556,641 $ 582,731
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Payable to brokers ................................ $ 6,195 $ 5,331 $ 17,138
Income taxes payable .............................. 7,077 335 9,196
Compensation payable .............................. 21,403 29,026 18,459
Capital lease obligation .......................... 3,249 3,464 3,433
Securities sold, not yet purchased ................ 742 -- 5,022
Accrued expenses and other liabilities ............ 17,624 16,126 15,583
---------- ---------- ----------
Total operating liabilities .................. 56,290 54,282 68,831
5.5% Senior notes ................................. 100,000 -- --
6% Convertible note ............................... 100,000 100,000 100,000
Mandatory convertible securities .................. 84,163 87,513 84,545
---------- ---------- ----------
Total liabilities ............................ 340,453 241,795 253,376
Minority interest ................................. 7,830 7,385 7,562
Stockholders' equity .............................. 347,217 307,461 321,793
---------- ---------- ----------
Total liabilities and stockholders' equity ........ $ 695,500 $ 556,641 $ 582,731
========== ========== ==========
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,
----------------------------------------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
OPERATING ACTIVITIES
Net income ........................................... $ 11,557 $ 13,941 $ 20,884 $ 29,330
Adjustments to reconcile net income to net cash
provided by (used in)operating activities:
Equity in losses from partnerships and
affiliates ........................................ (2,089) (79) (2,644) (345)
Depreciation and amortization ........................ 243 216 485 428
Stock-based compensation expense ..................... 422 -- 637 --
Deferred income taxes ................................ -- -- -- 18,661
Tax benefit from exercise of stock options ........... 144 269 764 4,082
Minority interest in net income of consolidated
subsidiaries ...................................... 223 2 268 47
Market value of donated securities ................... -- 412 -- 412
Realized gains on available for sale securities ...... (14) (58) (14) (40)
(Increase) decrease in operating assets:
Investments in securities ......................... (29,993) 2,048 (12,690) 1,887
Investment advisory fees receivable ............... 555 3,257 1,758 (643)
Receivables from affiliates ....................... (1,503) (613) (1,058) 766
Other receivables ................................. (235) 738 (422) 258
Receivable from brokers ........................... 2,218 1,922 4,462 (65)
Income tax receivable ............................. -- 7,627 -- (3,252)
Other assets ...................................... (683) (388) (868) (4,153)
Increase (decrease) in operating liabilities:
Payable to brokers ................................ (320) 2,631 (10,943) (3,223)
Income taxes payable .............................. (1,669) (536) (2,392) (4,377)
Compensation payable .............................. 763 2,612 2,863 7,858
Accrued expenses and other liabilities ............ 3,390 (77) 1,858 (1,782)
Securities sold, not yet purchased ................ (2,091) -- (4,280) --
---------- ---------- ---------- ----------
Total adjustments .................................... (30,639) 19,983 (22,216) 16,519
---------- ---------- ---------- ----------
Net cash provided by (used in)operating activities ... (19,082) 33,924 (1,332) 45,849
---------- ---------- ---------- ----------
INVESTING ACTIVITIES
Purchases of available for sale securities ........... (1,000) (456) (1,204) (558)
Proceeds from sales of available for sale
securities .......................................... 100 500 100 602
Distributions from partnerships and affiliates ....... 2,500 1,487 9,849 12,458
Investments in partnerships and affiliates ........... (5,139) (128) (16,294) (6,368)
---------- ---------- ---------- ----------
Net cash provided by (used in) investing activities .. (3,539) 1,403 (7,549) 6,134
---------- ---------- ---------- ----------
FINANCING ACTIVITIES
Purchase of minority stockholders' interest .......... -- -- -- (273)
Issuance of mandatory convertible securities ......... -- -- -- 87,952
Issuance of Senior notes ............................. 100,000 -- 100,000 --
Repayment of note payable ............................ -- -- -- (50,000)
Proceeds from exercise of stock options .............. 372 1,166 2,877 9,063
Purchase of mandatory convertible securities ......... -- (2,422) (373) (2,422)
Purchase of treasury stock ........................... -- (2,228) (204) (5,822)
---------- ---------- ---------- ----------
Net cash provided by (used in)financing activities ... 100,372 (3,484) 102,300 38,498
---------- ---------- ---------- ----------
Net increase in cash and cash equivalents ............ 77,751 31,843 93,419 90,481
Cash and cash equivalents at beginning of period ..... 327,098 364,085 311,430 305,447
---------- ---------- ---------- ----------
Cash and cash equivalents at end of period ........... $ 404,849 $ 395,928 $ 404,849 $ 395,928
========== ========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITY
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, 2003
(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, 2002, from which the
accompanying Condensed Consolidated 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, 2003 and 2002 the market value of investments
available-for-sale was $7.9 million and $6.1 million, respectively. This loss in
market value, net of taxes, of $184,000 and $321,000 has been included in
stockholders' equity for June 30, 2003 and 2002, respectively.
Proceeds from sales of investments available-for-sale were
approximately $0.1 million for the six month period ended June 30, 2003. Gross
gains on the sale of investments available for sale amounted to $14,000; there
were no gross losses on the sale of investments available for sale. Proceeds
from sales of investments available-for-sale were approximately $0.6 million for
the six month 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,
(in thousands, except per share amounts) 2003 2002 2003 2002
-------- -------- -------- --------
Basic:
Net income $ 11,557 $ 13,941 $ 20,884 $ 29,330
======== ======== ======== ========
Average shares outstanding 30,025 30,222 29,972 30,083
======== ======== ======== ========
Basic net income per share $ 0.38 $ 0.46 $ 0.70 $ 0.97
======== ======== ======== ========
Diluted:
Net income $ 11,557 $ 13,941 $ 20,884 $ 29,330
Add interest expense on convertible note, net
of management fee and taxes -- 913 -- 1,825
-------- -------- -------- --------
Total $ 11,557 $ 14,854 $ 20,884 $ 31,155
======== ======== ======== ========
Average shares outstanding 30,025 30,222 29,972 30,083
Dilutive stock options 114 218 110 276
Assumed conversion of convertible note -- 1,887 -- 1,887
-------- -------- -------- --------
Total 30,139 32,327 30,082 32,246
======== ======== ======== ========
Diluted net income per share $ 0.38 $ 0.46 $ 0.69 $ 0.97
======== ======== ======== ========
For the three and six months ended June 30, 2003 the assumed conversion
of the convertible note would not be dilutive and, accordingly, has not been
used in the computations of the weighted average diluted shares.
D. STOCKHOLDERS' EQUITY
STOCK AWARD AND INCENTIVE PLAN
On February 18, 2003 the Board of Directors approved stock option
awards totaling 633,000 shares under the Company's Stock Award and Incentive
Plan at an exercise price to be equal to the closing market price on the date of
grant. Of these options 561,000 were granted on February 18 at an exercise price
of $28.95 per share and 72,000 were granted on May 13, 2003 at an exercise price
of $29.00 per share. These options will vest 75% after three years and 100%
after four years from the date of grant and expire after ten years. The Company
adopted SFAS 123, "Accounting for Stock-Based Compensation" ("SFAS 123") as of
January 1, 2003 in accordance with SFAS 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" ("SFAS 148") and will use the
Prospective method for transition. Under SFAS 123 the Company records
compensation expense equal to the fair value of the options on the date of grant
based on the Black-Scholes option pricing model. This model utilizes a number of
assumptions in arriving at its results, including an estimate of the life of the
option, the risk-free interest rate at the date of grant and the volatility of
the underlying common stock. The weighted average fair value of the options
granted on the date of grant and the assumptions used were as follows:
Weighted average fair value of
Options granted: $10.98
Assumptions made:
Expected volatility 38%
Risk-free interest rate 3.04%
Expected life 5 years
Dividend yield 0%
8
D. STOCKHOLDERS' EQUITY (CONTINUED)
The expected life reflects an estimate of the length of time the
employees are expected to hold the options, including the vesting period, and is
based, in part, on actual experience with other grants. The dividend yield
reflects the assumption that no payout will be made in the foreseeable future.
In the second quarter of 2003 we recognized $422,000 in compensation expense and
expect total stock-based compensation expense for 2003 to total $1.5 million.
Proceeds from the exercise of 166,767 and 517,944 stock options were
$2,877,000 and $9,063,000 for the six months ended June 30, 2003 and 2002,
respectively, resulting in a tax benefit to the Company of $764,000 and
$4,082,000 for the six months ended June 30, 2003 and 2002, respectively.
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 first
quarter of 2003, the Company repurchased 7,417 shares at an average cost of
$27.75 per share. Since the inception of the program the Company has repurchased
1,127,843 shares at an average cost of $25.23 per share. At June 30, 2003 the
total amount available to repurchase shares under the program was $14.2 million.
Since May 2002 the Board of Directors has also approved the repurchase
of up to 700,000 shares of the Company's mandatory convertible securities from
time to time in the open market. During the first quarter of 2003, the Company
repurchased 15,300 shares at an average investment of $19.02 per share bringing
the total shares repurchased to 233,500 at a total investment of $5.1 million.
No shares were repurchased in the open market during the three month period
ended June 30, 2003. A gain attributable to the debt component of the mandatory
convertible securities totaling $87,000 has been included in other income
(expense) for the six months ended June 30, 2003.
E. SUBSEQUENT EVENTS
On June 5, 2003, the Company commenced a tender offer to purchase up to
800,000 shares of its outstanding Class A common stock under a modified "Dutch
Auction." The price offered was in the range of $28.00 to $31.75 per share,
which reflected the price of Gabelli's shares on the New York Stock Exchange
shortly before the announcement of the offer. On July 7, 2003, one hundred and
five shares were properly tendered and accepted for purchase by the Company at a
purchase price of $31.75 per share.
On June 19, 2003, the Company announced that Robert S. Zuccaro resigned
as Chief Financial Officer of the Company to pursue another professional
opportunity. The Company has not yet named a new Chief Financial Officer.
On July 9, 2003 the Company announced that it had agreed with Cascade
Investment LLC to modify the terms of the $100 million convertible note
previously issued in August 2001 to Cascade by the Company. The parties have
agreed to lower the interest rate from 6% to 5%, reduce the conversion price by
$1 per share to $52 per share of the Company's Class A Common Stock and extend
Cascade's put option for an additional year to August 2004. In each case the
changes become effective in August 2003. As a result of these modifications the
Company's calculation of diluted EPS will change slightly. The shares that would
be issued if converted changes to 1,923,000 from 1,887,000 while the interest
that is added back for the calculation would be reduced from $1,500,000 per
quarter to $1,250,000 per quarter less management fee and taxes.
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, Separate Accounts and Alternative Investment
Partnerships. 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, 2003 COMPARED TO THREE MONTHS ENDED JUNE 30, 2002
Consolidated Results - Three Months Ended June 30:
(Unaudited; in thousands, except per share data)
2003 2002
-------- --------
Revenues $ 47,956 $ 57,402
Expenses 31,551 33,016
-------- --------
Operating income 16,405 24,386
Investment income, net 6,079 1,144
Interest expense (3,605) (3,186)
-------- --------
Total other income (expense), net 2,474 (2,042)
-------- --------
Income before taxes and minority interest 18,879 22,344
Income tax provision 7,099 8,401
Minority interest 223 2
-------- --------
Net income $ 11,557 $ 13,941
======== ========
Net income per share:
Basic $ 0.38 $ 0.46
======== ========
Diluted $ 0.38 $ 0.46
======== ========
Reconciliation of Operating income to Adjusted EBITDA:
Operating income $ 16,405 $ 24,386
Depreciation and amortization 243 216
Investment income, net 6,079 1,144
-------- --------
Adjusted EBITDA(a) $ 22,727 $ 25,746
-------- --------
(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.
10
Total revenues were $48.0 million in the second quarter of 2003 down
$9.4 million or 16.5% from total revenues of $57.4 million reported in the
second quarter of 2002.
Investment advisory and incentive fees, which comprise 85.0% of total
revenues, were $40.8 million in the second quarter of 2003, $7.6 million or
15.7% lower than the $48.4 million reported in the second quarter of 2002. The
decrease in investment advisory and incentive fees was principally the result of
lower levels of assets under management in our GAMCO institutional and high net
worth business and in our open-end equity mutual funds. GAMCO fees, which are
generally billed based on asset levels at the beginning of a quarter, declined
$7.4 million or 34.6% in the 2003 quarter as compared to the second quarter of
2002. Revenues from open-end equity mutual funds decreased $3.5 million or 16.6%
from the prior year as average assets under management in open-end equity funds
declined to $6.8 billion, 16.1% below the prior year's second quarter average of
$8.2 billion. At June 30, 2003 assets in open-end equity funds were $7.1
billion, 3.2% lower than the prior year second quarter end balance of $7.4
billion. Revenues from our alternative investment products were 83.0% higher at
$3.3 million resulting from both increased management and performance fees.
Commissions were $2.8 million in the second quarter of 2003, down 24.7%
from $3.7 million in the same period a year earlier largely due to a decrease in
overall trading volume.
Revenues from distribution of mutual funds and other income were $4.4
million in the second quarter of 2003 versus $5.4 million in the second quarter
of 2002. The decrease in distribution fees results from the decline in average
assets managed in open-end equity mutual funds, which generate distribution
revenues under 12b-1 compensation plans.
Total expenses were $31.6 million in the second quarter of 2003, a 4.4%
decrease from total expenses of $33.0 million reported in the second quarter of
2002. Compensation and related costs, which are largely variable, were $20.9
million, 6.4% lower than the same period a year earlier. The decrease in
compensation was due to lower variable incentive compensation. Salaries, which
are not variable in nature, increased by $0.7 million as we have added to our
research, sales and marketing staffs as planned since the second quarter of
2002. Management fee expense, which is totally variable and based on pretax
income, was 15.5% lower at $2.1 million in the second quarter of 2003 versus
$2.5 million in the second quarter of 2002. Other operating expenses were higher
by $0.4 million, a 4.1% increase to $8.6 million in the second quarter of 2003
from the prior year second quarter of $8.2 million as higher costs from new
product initiatives, insurance premiums, reimbursing clients for trading costs
or losses, benefit programs, and our most recent acquisitions (Woodland Partners
and Grove) were partially offset by lower mutual fund administration and
distribution costs and brokerage clearing costs.
Investment income was $6.1 million in the second quarter of 2003 higher
by $5.0 million, or 431.4% from $1.1 million reported in the second quarter of
2002 as the rising equity markets resulted in increased earnings from our
proprietary investment accounts. Interest expense increased $0.4 million to $3.6
million in the second quarter of 2003 from $3.2 million in the comparable prior
year quarter largely as a result of the Company's issuance of $100 million of
ten-year 5.5% non-callable senior notes due May 15, 2013 during the second
quarter of 2003.
The estimated effective tax rate for the second quarter of 2003 and the
second quarter of 2002 was approximately 37.6%. Minority interest was higher by
$0.2 million over the prior year quarter.
11
SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO SIX MONTHS ENDED JUNE 30, 2002
Consolidated Results - Six Months Ended June 30:
(Unaudited; in thousands, except per share data)
2003 2002
-------- --------
Revenues $ 94,009 $115,434
Expenses 61,264 65,679
-------- --------
Operating income 32,745 49,755
Investment income, net 7,769 3,237
Interest expense (6,616) (5,914)
-------- --------
Total other income (expense), net 1,153 (2,677)
-------- --------
Income before taxes and minority interest 33,898 47,078
Income tax provision 12,746 17,701
Minority interest 268 47
-------- --------
Net income $ 20,884 $ 29,330
======== ========
Net income per share:
Basic $ 0.70 $ 0.97
======== ========
Diluted $ 0.69 $ 0.97
======== ========
Reconciliation of Operating income to Adjusted EBITDA:
Operating income $ 32,745 $ 49,755
Depreciation and amortization 485 428
Investment income, net 7,769 3,237
-------- --------
Adjusted EBITDA(a) $ 40,999 $ 53,420
-------- --------
(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 $94.0 million in the first half of 2003 down $21.4
million or 18.6% from total revenues of $115.4 million reported in the first
half of 2002.
Investment advisory and incentive fees, which comprise 85.4% of total
revenues, were $80.3 million in the first half of 2003, $16.9 million or 17.4%
lower than the $97.2 million reported in the first half of 2002. The decrease in
investment advisory and incentive fees was principally the result of lower
levels of assets under management in our GAMCO institutional and high net worth
business and in our open-end equity mutual funds. GAMCO fees, which are
generally billed based on asset levels at the beginning of a quarter, declined
$11.2 million or 26.2% in the first half of 2003 as compared to the first half
of 2002. Revenues from open-end equity mutual funds decreased $8.5 million or
20.1% from the prior year as average assets under management in open-end equity
funds declined to $6.6 billion, 19.7% below the prior year's first half average
of $8.2 billion. At June 30, 2003 assets in open-end equity funds were $7.1
billion, 3.2% lower than the prior year first half end balance of $7.4 billion.
Revenues from our alternative investment products were 49.1% higher at $5.4
million resulting from both increased management and performance fees.
Commissions were $5.2 million in the first half of 2003, down 31.8%
from $7.6 million in the same period a year earlier largely due to a decrease in
overall trading volume.
Revenues from distribution of mutual funds and other income were $8.6
million in the first half of 2003 versus $10.6 million in the first half of
2002. The decrease in distribution fees results from the decline in average
assets managed in open-end equity mutual funds, which generate distribution
revenues under 12b-1 compensation plans.
12
Total expenses were $61.3 million in the first half of 2003, a 6.7%
decrease from total expenses of $65.7 million reported in the first half of
2002. Compensation and related costs, which are largely variable, were $41.4
million, 7.4% lower than the same period a year earlier. The decrease in
compensation was due to lower variable incentive compensation. Salaries, which
are not variable in nature, increased by $1.7 million as we have added to our
research, sales and marketing staffs as planned since the second quarter of
2002. Management fee expense, which is totally variable and based on pretax
income, was 28.0% lower at $3.8 million in the first half of 2003 versus $5.2
million in the first half of 2002. Other operating expenses were higher by $0.4
million, a 2.4% increase over $15.7 million in the first half of 2003 from the
prior year first half as higher costs from new product initiatives, insurance
premiums, reimbursing clients for trading costs or losses, benefit programs, and
our most recent acquisitions (Woodland Partners and Grove) were partially offset
by lower mutual fund administration and distribution costs and brokerage costs.
Investment income was $7.8 million in the first half of 2003 higher by
$4.6 million, or 140.0% from $3.2 million reported in the first half of 2002 as
a combination of lower interest rates and the declining equity markets resulted
in lower proprietary investment earnings. Interest expense increased $0.7
million to $6.6 million in the first half of 2003 from $5.9 million in the
comparable prior year quarter largely as a result of the Company's issuance of
$100 million of ten-year 5.5% non-callable senior notes in May.
The estimated effective tax rate for the first half of 2003 and the
first half of 2002 was approximately 37.6%. Minority interest was higher by $0.2
million over the prior first half of the year.
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,
2003 2002
-------- --------
(in thousands)
Cash flows provided by (used in):
Operating activities $ (1,332) $ 45,849
Investing activities (7,549) 6,134
Financing activities 102,300 38,498
-------- --------
Increase 93,419 90,481
Cash and cash equivalents at beginning of period 311,430 305,447
-------- --------
Cash and cash equivalents at end of period $404,849 $395,928
======== ========
Cash requirements and liquidity needs have historically been met
through cash generated by operating activities and through the Company's
borrowing capacity. The Company has 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. At June 30, 2003, the Company had total cash and cash equivalents of
$404.8 million, an increase of $8.9 million from June 30, 2002. The Company has
established a collateral account, consisting of cash and cash equivalents
totaling $102.5 million, to secure a letter of credit issued in favor of the
holder of the $100 million convertible note. The letter of credit was extended
and expires on August 14, 2004, which coincides with the date of a put option
the note holder may exercise. Cash and cash equivalents held in the collateral
account are restricted from other uses until the date of expiration. Total debt
at June 30, 2003 was $284.2 million, consisting of a $100 million convertible
note, $100 million of ten-year 5.5% non-callable senior notes due May 15, 2013
and $84.2 million in mandatory convertible securities. The mandatory convertible
securities consist of two components, a forward exchange contract to purchase
shares of Class A common stock in February 2005 and an equivalent amount of
senior notes due in February 2007. At the time of the mandatory exercise of the
forward contract and purchase of common stock in February 2005 the Company will
receive additional proceeds equal to the amount required to repay the senior
notes in 2007. The interest rate on the senior notes will be reset in November
2004 and will be based upon the rates for treasury bills maturing on or about
February 2007.
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Cash used in operating activities was $1.3 million in the first half of
2003 principally resulting from an increase in investments in securities of
$12.7 million and a $10.9 million reduction in payable to brokers partially
offset by $20.9 million in net income. 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 used by investing activities, related to investments in and
distributions from partnerships and affiliates, was $7.5 million in the first
half of 2003. Cash provided by investing activities, related to investments in
and distributions from partnerships and affiliates, was $6.1 million in the
first half of 2002.
Cash provided by financing activities in the first half of 2003 was
$102.3 million. The increase in cash primarily results from the $100 million
issuance of ten-year, 5.5% non-callable and non-convertible senior notes and
$2.9 million received from the exercise of non-qualified stock options that
further generated cash tax savings of $0.8 million. Other significant financing
activities which used cash included $0.6 million to repurchase shares of our
Class A Common Stock and mandatory convertible securities under the Company's
respective Stock Repurchase Programs.
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 generated cash tax savings of $4.1 million and $19.8 million,
respectively, which has been included in income tax receivable.
On May 8, 2003 the Company sold $100 million of ten-year, 5.5%
non-callable and non-convertible senior notes. The net proceeds to the Company
was $99.2 million and is being used for general corporate purposes. The notes
were issued under a $400 million shelf registration statement filed in December
2001. There remains $120 million available under the shelf registration
statement.
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, Inc., a subsidiary of the 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, 2003, Gabelli & Company had net capital, as defined, of approximately
$12.0 million, exceeding the regulatory requirement by approximately $11.7
million. Regulatory net capital requirements increase when Gabelli & Company is
involved in underwriting activities.
14
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, advisor and general partner for assets under management in its
mutual funds, institutional and separate accounts business, alternative
investment products and its proprietary investment activities. At June 30, 2003,
the Company's primary market risk exposure was to changes in equity prices and
interest rates.
With respect to the Company's proprietary investment activities
included in investments in securities of $190.1 million at June 30, 2003 were
investments in Treasury Bills and Notes of $104.7 million, in mutual funds,
largely invested in equity products, of $69.6 million, a selection of common and
preferred stocks totaling $13.0 million and other investments of approximately
$2.8 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. Of the approximately $13.0 million invested in common and preferred
stocks at June 30, 2003, $2.1 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 $57.0 million at June 30, 2003 and consisted principally of partnerships
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.
The Company'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.
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 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
In December 2002, the FASB issued SFAS 148 which provides alternative
methods of transition to SFAS 123 and also amends its disclosure provisions. The
Company elected to begin expensing options using the fair value recognition
provisions of SFAS 123 effective January 1, 2003 using the Prospective method of
transition. Under the Prospective transition method there are no changes to
previously issued financial statements and only options granted subsequent to
January 1, 2003 are expensed.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others" ("FIN 45"), which provides accounting and
disclosure requirements for certain guarantees. The Company indemnifies its
clearing broker for losses it may sustain from the customer accounts introduced
by the Company's broker dealer subsidiaries. In accordance with New York Stock
Exchange rules, customer balances are typically collateralized by customer
securities or supported by other recourse provisions. In addition, the Company
further limits margin balances to a maximum of 25% versus 50% permitted under
exchange regulations. At June 30, 2003 the total amount of customer balances
subject to indemnification (i.e. margin debits) was immaterial.
15
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities" ("FIN 46"), which provides new criteria for
determining whether or not consolidation accounting is required. This
interpretation focuses on financial 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 variable
interest entity's assets and activities are the best evidence of control. If the
company holds the largest variable interest it could be considered 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. This interpretation is effective for variable interest
entities created after January 31, 2003; otherwise it is applicable for the
first interim or annual reporting period after June 15, 2003. The Interpretation
will require consolidation of certain of the investment in partnerships and
affiliates' assets and liabilities and results of operations with minority
interest recorded for the ownership share applicable to other investors. The
difference between consolidation and the equity method would impact detailed
line items reported within the consolidated financial statements but not overall
consolidated net income or stockholders' equity. Where consolidation is not
required additional disclosures may be required. We anticipate consolidating
investments in partnerships and affiliates in the 10-Q for the quarterly period
ended September 30, 2003. Financial information pertaining to the investments in
partnerships and affiliates as of June 30, 2003 is as follows:
JUNE 30, 2003
-------------
As reported Adjustment Pro Forma
Total assets.................. $ 695,500 $ 494,527 $1,190,027
Total liabilities............. 340,453 136,811 477,264
Minority interest payable..... 7,830 357,716 365,546
Total other income, net....... 1,153 15,598 16,751
Total expenses................ 61,264 3,895 65,159
Minority interest expense..... 268 11,703 11,971
ITEM 4. CONTROLS AND PROCEDURES
Management, including the Chief Executive Officer and the Chief
Financial Officer (who left the Company in the 3rd quarter), have conducted an
evaluation of the effectiveness of disclosure controls and procedures pursuant
to Exchange Act Rule 13a-14. Based on the evaluation, the Chief Executive
Officer and the Chief Financial Officer concluded that the disclosure controls
and procedures are effective in ensuring that all material information required
to be filed in this quarterly report has been made known to them in a timely
fashion. There have been no significant changes in internal controls, or in
factors that could significantly affect internal controls, subsequent to the
date the Chief Executive Officer and the Chief Financial Officer completed their
evaluation.
16
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.
17
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 13, 2003. At that
meeting, the stockholders considered and acted upon the following
matter:
THE ELECTION OF DIRECTORS. The stockholders elected
the following individuals to serve as directors until
the 2004 annual meeting of stockholders and until
their respective successors are duly elected and
qualified. All the directors were elected with more
than 99% of the total votes cast.
Raymond C. Avansino, Jr.
John C. Ferrara
Mario J. Gabelli
Paul B. Guenther
Eamon M. Kelly
Karl Otto Pohl
ITEM 6. (a) Exhibits
4.1 First Amendment to the Note Purchase
Agreement, dated as of July 1, 2003.
4.2 Convertible Promissory Note, dated August
14, 2001.
4.3 Senior Note, dated May 15, 2003.
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 Controller 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 CEO 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 Controller pursuant to 18
U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002
(b) Reports on Form 8-K.
The Company filed the following Current Reports
on Form 8-K during the three months ended June
30, 2003.
1. Current Report on Form 8-K dated May 6,2003
containing the press release disclosing the
Company's operating results for the first
quarter ended March 31, 2003.
2. Current Report on Form 8-K/A dated May 8,
2003 to correct and supersede the Current
Report on Form 8K filed on May 6, 2003.
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, 2003 /s/ Mario J. Gabelli
---------------- -----------------------------
Date Mario J. Gabelli
Chief Executive Officer
18