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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 September 30, 2003
------------------
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
GABELLI ASSET MANAGEMENT INC.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
New York 13-4007862
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Corporate Center, Rye, New York 10580
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(914)921-3700
- --------------------------------------------------------------------------------
Registrant's telephone number, including area code
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X] No [_]
Indicate the number of shares outstanding of each of the Registrant's classes of
Common Stock, as of the latest practical date.
Class Outstanding at October 31, 2003
----- -------------------------------
Class A Common Stock, .001 par value 6,947,856
Class B Common Stock, .001 par value 23,130,000
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INDEX
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GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
- --------------------------------
Item 1. Financial Statements (Unaudited) 3
Condensed Consolidated Statements of Operations: 3-4
- Three months ended September 30, 2003 and 2002
- Nine months ended September 30, 2003 and 2002
Condensed Consolidated Statements of Financial Condition: 5
- September 30, 2003
- September 30, 2002
- December 31, 2002 (Audited)
Condensed Consolidated Statements of Cash Flows: 6
- Three months ended September 30, 2003 and 2002
- Nine months ended September 30, 2003 and 2002
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Including Quantitative and Qualitative
Disclosures about Market Risk) 11
Item 4. Controls and Procedures 17
PART II. OTHER INFORMATION
- ----------------------------
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 19
- ----------
2
GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
(In thousands, except per share data)
THREE MONTHS ENDED
SEPTEMBER 30,
------------------------------
2003 2002
------------ ------------
REVENUES
Investment advisory and incentive fees .................. $ 44,207 $ 39,707
Commission revenue ...................................... 3,327 3,199
Distribution fees and other income ...................... 4,289 4,414
------------ ------------
Total revenues ...................................... 51,823 47,320
EXPENSES
Compensation and related costs .......................... 21,792 17,474
Management fee .......................................... 2,193 2,055
Other operating expenses ................................ 8,435 7,571
------------ ------------
Total expenses ...................................... 32,420 27,100
Operating income .......................................... 19,403 20,220
OTHER INCOME (EXPENSE)
Net gain (loss) from investments ........................ 2,804 (390)
Interest and dividend income ............................ 1,704 1,720
Interest expense ........................................ (4,174) (3,057)
------------ ------------
Total other income (expense), net ................... 334 (1,727)
------------ ------------
Income before income taxes and minority interest .......... 19,737 18,493
Income tax provision .................................... 7,298 6,954
Minority interest ....................................... 137 46
------------ ------------
Net income .......................................... $ 12,302 $ 11,493
============ ============
Net income per share:
Basic ................................................... $ 0.41 $ 0.38
============ ============
Diluted ................................................. $ 0.41 $ 0.38
============ ============
Weighted average shares outstanding:
Basic ................................................... 30,061 30,141
============ ============
Diluted ................................................. 32,170 30,296
============ ============
See accompanying notes.
3
GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
(In thousands, except per share data)
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
2003 2002
------------ ------------
REVENUES
Investment advisory and incentive fees .................. $ 124,467 $ 136,923
Commission revenue ...................................... 8,518 10,812
Distribution fees and other income ...................... 12,847 15,019
------------ ------------
Total revenues ...................................... 145,832 162,754
EXPENSES
Compensation and related costs .......................... 63,191 62,195
Management fee .......................................... 5,959 7,286
Other operating expenses ................................ 24,534 23,298
------------ ------------
Total expenses ...................................... 93,684 92,779
Operating income .......................................... 52,148 69,975
OTHER INCOME (EXPENSE)
Net gain (loss) from investments ........................ 7,949 (312)
Interest and dividend income ............................ 4,328 4,879
Interest expense ........................................ (10,790) (8,971)
------------ ------------
Total other income (expense), net ................... 1,487 (4,404)
------------ ------------
Income before income taxes and minority interest .......... 53,635 65,571
Income tax provision .................................... 20,044 24,655
Minority interest ....................................... 405 93
------------ ------------
Net income .......................................... $ 33,186 $ 40,823
============ ============
Net income per share:
Basic ................................................... $ 1.11 $ 1.36
============ ============
Diluted ................................................. $ 1.10 $ 1.35
============ ============
Weighted average shares outstanding:
Basic ................................................... 30,002 30,102
============ ============
Diluted ................................................. 30,134 30,337
============ ============
See accompanying notes.
4
GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands)
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
2003 2002 2002
------------ ------------ ------------
(Unaudited)
ASSETS
Cash and cash equivalents .................. $ 425,849 $ 316,351 $ 311,430
Investments in securities .................. 182,874 152,709 175,466
Investments in partnerships and affiliates.. 60,136 52,894 47,932
Receivables from affiliates ................ 11,842 10,053 10,340
Receivable from brokers .................... 1,216 1,052 4,919
Investment advisory fees receivable ........ 15,821 13,767 15,603
Income tax receivable ...................... -- 939 --
Other assets ............................... 17,946 16,218 17,041
------------ ------------ ------------
Total assets ......................... $ 715,684 $ 563,983 $ 582,731
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Payable to brokers ......................... $ 5,726 $ 4,245 $ 17,138
Income taxes payable ....................... 8,603 4,153 9,196
Compensation payable ....................... 27,291 28,395 18,459
Capital lease obligation ................... 3,154 3,449 3,433
Securities sold, not yet purchased ......... 669 782 5,022
Accrued expenses and other liabilities ..... 17,493 14,232 15,583
------------ ------------ ------------
Total operating liabilities .......... 62,936 55,256 68,831
5.5% Senior notes .......................... 100,000 -- --
5% Convertible note (a) .................... 100,000 100,000 100,000
Mandatory convertible securities ........... 84,163 84,748 84,545
------------ ------------ ------------
Total liabilities .................... 347,099 240,004 253,376
Minority interest .......................... 7,967 7,432 7,562
Stockholders' equity ....................... 360,618 316,547 321,793
------------ ------------ ------------
Total liabilities and stockholders' equity.. $ 715,684 $ 563,983 $ 582,731
============ ============ ============
(a) Terms of note changed from 6% to 5% in mid-August 2003.
See accompanying notes.
5
GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(In thousands)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
OPERATING ACTIVITIES
Net income .................................................. $ 12,302 $ 11,493 $ 33,186 $ 40,823
Adjustments to reconcile net income to net cash
provided by (used in)operating activities:
Equity in gains from partnerships and affiliates ............ (1,513) (94) (4,157) (439)
Depreciation and amortization ............................... 242 242 727 670
Stock-based compensation expense ............................ 434 -- 1,071 --
Deferred income taxes ....................................... -- -- -- 18,661
Tax benefit from exercise of stock options .................. 320 34 1,084 4,116
Minority interest in net income of consolidated subsidiaries. 137 46 405 93
Market value of donated securities .......................... -- -- -- 412
Realized gains on available for sale securities ............. (83) -- (97) (40)
(Increase) decrease in operating assets:
Investments in securities ................................. 13,027 (99,323) 337 (97,436)
Investment advisory fees receivable ....................... (1,976) 1,527 (218) 884
Receivables from affiliates ............................... (1,265) 924 (2,323) 1,690
Other receivables ......................................... 113 272 (309) 530
Receivable from brokers ................................... (760) (952) 3,702 (1,017)
Income tax receivable ..................................... -- 2,313 -- (939)
Other assets .............................................. 369 459 (499) (3,694)
Increase (decrease) in operating liabilities:
Payable to brokers ........................................ (469) (1,088) (11,412) (4,309)
Income taxes payable ...................................... 1,740 4,080 (652) (297)
Compensation payable ...................................... 5,951 (561) 8,814 7,297
Accrued expenses and other liabilities .................... (229) (1,901) 1,629 (2,903)
Securities sold, not yet purchased ........................ (73) 782 (4,353) --
------------ ------------ ------------ ------------
Total adjustments ........................................... 15,965 (93,240) (6,251) (76,721)
------------ ------------ ------------ ------------
Net cash provided by (used in)operating activities .......... 28,267 (81,747) 26,935 (35,898)
------------ ------------ ------------ ------------
INVESTING ACTIVITIES
Purchases of available for sale securities .................. (7,165) (243) (8,369) (801)
Proceeds from sales of available for sale securities ........ 800 -- 900 602
Distributions from partnerships and affiliates .............. 3,093 8,039 12,942 20,497
Investments in partnerships and affiliates .................. (4,695) (745) (20,989) (7,113)
------------ ------------ ------------ ------------
Net cash provided by (used in) investing activities ......... (7,967) 7,051 (15,516) 13,185
------------ ------------ ------------ ------------
FINANCING ACTIVITIES
Purchase of minority stockholders' interest ................. -- -- -- (273)
Issuance of mandatory convertible securities ................ -- (214) -- 87,738
Issuance of Senior notes .................................... -- -- 100,000 --
Repayment of note payable ................................... -- -- -- (50,000)
Proceeds from exercise of stock options ..................... 703 109 3,580 9,172
Purchase of mandatory convertible securities ................ -- (2,693) (373) (5,115)
Purchase of treasury stock .................................. (3) (2,083) (207) (7,905)
------------ ------------ ------------ ------------
Net cash provided by (used in) financing activities ......... 700 (4,881) 103,000 33,617
------------ ------------ ------------ ------------
Net increase (decrease)in cash and cash equivalents ......... 21,000 (79,577) 114,419 10,904
Cash and cash equivalents at beginning of period ............ 404,849 395,928 311,430 305,447
------------ ------------ ------------ ------------
Cash and cash equivalents at end of period .................. $ 425,849 $ 316,351 $ 425,849 $ 316,351
============ ============ ============ ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING
AND INVESTING ACTIVITY
Net present value of forward purchase contract .............. $ -- $ 2,353 $ -- $ 2,353
============ ============ ============ ============
Securities reclassified to available for sale ............... $ 3,788 $ -- $ 3,788 $ --
============ ============ ============ ============
See accompanying notes.
6
GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 period's financial statement presentation.
B. INVESTMENT IN SECURITIES
Management determines the appropriate classification of debt and equity
securities at the time of purchase and reevaluates such designation as of each
balance sheet date. 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 September 30, 2003 and 2002 the market value of investments
available for sale was $17.5 million and $5.7 million, respectively. An
unrealized loss in market value, net of taxes, of $538,000 and $646,000 has been
included in stockholders' equity for September 30, 2003 and 2002, respectively.
Proceeds from sales of investments available for sale were
approximately $0.9 million for the nine month period ended September 30, 2003.
Gross gains on the sale of investments available for sale amounted to $97,000;
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 nine month period ended September 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
(in thousands, except per share amounts) 2003 2002 2003 2002
---------- ---------- ---------- ----------
Basic:
Net income .............................. $ 12,302 $ 11,493 $ 33,186 $ 40,823
========== ========== ========== ==========
Average shares outstanding .............. 30,061 30,141 30,002 30,102
========== ========== ========== ==========
Basic net income per share .............. $ 0.41 $ 0.38 $ 1.11 $ 1.36
========== ========== ========== ==========
Diluted:
Net income .............................. $ 12,302 $ 11,493 $ 33,186 $ 40,823
Add interest expense on convertible note,
net of management fee and taxes ...... 770 -- -- --
---------- ---------- ---------- ----------
Total ................................... $ 13,072 $ 11,493 $ 33,186 $ 40,823
========== ========== ========== ==========
Average shares outstanding .............. 30,061 30,141 30,002 30,102
Dilutive stock options .................. 186 155 132 235
Assumed conversion of convertible note .. 1,923 -- -- --
---------- ---------- ---------- ----------
Total ................................... 32,170 30,296 30,134 30,337
========== ========== ========== ==========
Diluted net income per share ............ $ 0.41 $ 0.38 $ 1.10 $ 1.35
========== ========== ========== ==========
For the nine months ended September 30, 2003 and 2002 and the three
months ended September 30, 2002 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 reflected 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
reflected the assumption that no payout will be made in the foreseeable future.
In the third quarter of 2003 the Company recognized $434,000 in stock-based
compensation expense and expect stock-based compensation expense for 2003 to
total $1.5 million.
Proceeds from the exercise of 40,389 and 6,250 stock options were
$703,000 and $109,000 for the three months ended September 30, 2003 and 2002,
respectively, resulting in a tax benefit to the Company of $320,000 and $34,000
for the three months ended September 30, 2003 and 2002, respectively.
Proceeds from the exercise of 207,156 and 524,194 stock options were
$3,580,000 and $9,172,000 for the nine months ended September 30, 2003 and 2002,
respectively, resulting in a tax benefit to the Company of $1,084,000 and
$4,116,000 for the nine months ended September 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 three
months ended September 30, 2003, the Company repurchased 105 shares at an
average cost of $31.75 per share. During the first nine months of 2003, the
Company repurchased 7,522 shares at an average cost of $27.54 per share. Since
the inception of the program the Company has repurchased 1,127,948 shares at an
average cost of $25.23 per share. At September 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 September 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 nine months ended September 30, 2003.
E. SUBSEQUENT EVENTS
The Company announced that it has elected to defer the application of
the implementation of Financial Accounting Standards Board ("FASB")
Interpretation No. 46 "Consolidation of Variable Interest Entities". This
decision was based on the recent FASB Staff Position issued on October 9, 2003
deferring the effective date for applying the provisions of FASB Interpretation
No. 46 until the fourth quarter of 2003.
During the fourth quarter of 2003, the Company repurchased 39,400
shares of its Class A Common Stock, under its Stock Repurchase Program, at an
average cost of $34.82 per share. The Company also repurchased 5,300 shares of
its mandatory convertible securities at an average investment of $24.49 per
share.
The Company announced a new closed-end fund, The Gabelli Dividend &
Income Trust (the "Fund"), which it plans to offer in November 2003. The Fund
will focus on investing primarily in dividend paying equity securities and will
seek a high after-tax total return through an emphasis on qualified dividend
income. The Fund's offering is being underwritten by Merrill Lynch & Co.,
Citigroup, A.G. Edwards & Sons, Inc., Gabelli & Company, Inc. and others.
9
During October 2003, the Company received a request from the New York
Attorney General's office (NYAG) in the form of a subpoena for information
relating to trading issues involving mutual fund shares. The Company also
previously received and responded to a request from the Securities and Exchange
Commission relating to the pricing and trading of shares of Gabelli mutual funds
with significant foreign holdings. The Company is now in the process of
gathering information requested by the NYAG's office and is fully cooperating
with these inquiries. The Company expects to incur additional legal and
administrative expenses in the fourth quarter of 2003 and in 2004 as a result of
regulatory requests and internal reviews relating to these issues. The Company
has determined that these additional costs are not estimable at this time.
10
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. The Company generally manages assets on a discretionary basis
and invests 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
products. 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 SEPTEMBER 30, 2003 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2002
Consolidated Results - Three Months Ended September 30:
(Unaudited; in thousands, except per share data)
------------------------------------------------
2003 2002
---------- ----------
Revenues ....................................... $ 51,823 $ 47,320
Expenses ....................................... 32,420 27,100
---------- ----------
Operating income ............................... 19,403 20,220
Investment income, net ......................... 4,508 1,330
Interest expense ............................... (4,174) (3,057)
---------- ----------
Total other income (expense), net .............. 334 (1,727)
---------- ----------
Income before taxes and minority interest ...... 19,737 18,493
Income tax provision ........................... 7,298 6,954
Minority interest .............................. 137 46
---------- ----------
Net income ..................................... $ 12,302 $ 11,493
========== ==========
Net income per share:
Basic ....................................... $ 0.41 $ 0.38
========== ==========
Diluted ..................................... $ 0.41 $ 0.38
========== ==========
Reconciliation of Net income to Adjusted EBITDA:
Net income ..................................... $ 12,302 $ 11,493
Interest Expense ............................... 4,174 3,057
Income tax provision and minority interest ..... 7,435 7,000
Depreciation and amortization .................. 242 243
---------- ----------
Adjusted EBITDA(a) ............................. $ 24,153 $ 21,793
---------- ----------
(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.
11
Total revenues were $51.8 million in the third quarter of 2003 up $4.5
million or 9.5% from total revenues of $47.3 million reported in the third
quarter of 2002. Investment advisory and incentive fees, which comprise 85.3% of
total revenues, were $44.2 million in the third quarter of 2003, $4.5 million or
11.3% higher than the $39.7 million reported in the third quarter of 2002. The
increase in investment advisory and incentive fees was principally the result of
higher levels of assets under management in our equity mutual funds and
increased performance fees from our alternative investment products. Revenues
from mutual funds increased $2.7 million or 13.4% from the prior year as assets
under management in mutual funds increased to $10.8 billion at September 30,
2003, or 11.6% ahead of the September 30, 2002 assets under management of $9.7
billion. Revenues from our alternative investment products were 114.5% higher at
$3.3 million resulting from both increased management and performance fees.
GAMCO fees, which are generally billed based on asset levels at the beginning of
a quarter, increased $0.1 million or 0.9% in the 2003 quarter as compared to the
third quarter of 2002.
Commissions were $3.3 million in the third quarter of 2003, up 4.0%
from $3.2 million in the same period a year earlier largely due to an increase
in overall trading volume.
Revenues from distribution of mutual funds and other income were $4.3
million in the third quarter of 2003 versus $4.4 million in the third quarter of
2002. The decrease in distribution fees largely results from the refunding of
12b-1 fees totaling $0.4 million pertaining to the first nine months of 2003 to
the shareholders of our Gabelli ABC Fund during the third quarter. Excluding the
effect of this refund, revenue from distribution of mutual funds and other
income increased 5.9%. This increase was a result of a 6.4% increase in average
assets for open-end funds for the third quarter of 2003 versus the prior year
third quarter, which generate distribution revenues under 12b-1 compensation
plans.
Total expenses were $32.4 million in the third quarter of 2003, a 19.6%
increase from total expenses of $27.1 million reported in the third quarter of
2002. Compensation and related costs, which are largely variable, were $21.8
million, 24.7% higher than the same period a year earlier. The increase in
compensation was due to increased variable compensation related to our
Alternative Investment products of $1.4 million, the acquisition of Woodland
Partners ("Woodland") and Grove Investment Advisors ("Grove") of $0.5 million
(which we acquired in the 4th quarter of 2002), an increase in salaries and
stock option expense totaling $0.8 million and the negative year-over-year
effect of a reversal of incentive compensation in the 2002 quarter of $1.3
million. Management fee expense, which is totally variable and based on pretax
income, was 6.7% higher at $2.2 million in the third quarter of 2003 versus $2.1
million in the third quarter of 2002. Other operating expenses were higher by
$0.9 million, an 11.4% increase to $8.4 million in the third quarter of 2003
from the prior year third quarter of $7.6 million due to higher costs related to
promotional activities, insurance premiums, and legal and accounting.
Investment income was $4.5 million in the third quarter of 2003 higher
by $3.2 million, or 239% from $1.3 million reported in the third quarter of 2002
as the rising equity markets resulted in increased earnings from our proprietary
investment accounts. Interest expense increased $1.1 million to $4.2 million in
the third quarter of 2003 from $3.1 million in the comparable prior year
quarter. This increase is 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, offset in part by a one percent decrease in the interest rate
on the $100 million convertible note from 6% to 5% effective August 2003.
The estimated effective tax rate for the third quarter of 2003
decreased to 37.0% from 37.6% for the third quarter of 2002 due to the effect of
a dividend received deduction from our Westwood Holdings Group, Inc.
("Westwood") investment. Westwood paid a special cash dividend of $1.00 per
share on October 1, 2003 to shareholders of record on September 15, 2003. The
Company owned 514,850 shares as of September 30, 2003. Minority interest was
higher by $0.1 million over the prior year quarter.
12
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO NINE MONTHS
ENDED SEPTEMBER 30, 2002
Consolidated Results - Nine Months Ended September 30:
(Unaudited; in thousands, except per share data)
------------------------------------------------
2003 2002
---------- ----------
Revenues ....................................... $ 145,832 $ 162,754
Expenses ....................................... 93,684 92,779
---------- ----------
Operating income ............................... 52,148 69,975
Investment income, net ......................... 12,277 4,567
Interest expense ............................... (10,790) (8,971)
---------- ----------
Total other income (expense), net .............. 1,487 (4,404)
---------- ----------
Income before taxes and minority interest ...... 53,635 65,571
Income tax provision ........................... 20,044 24,655
Minority interest .............................. 405 93
---------- ----------
Net income ..................................... $ 33,186 $ 40,823
========== ==========
Net income per share:
Basic ....................................... $ 1.11 $ 1.36
========== ==========
Diluted ..................................... $ 1.10 $ 1.35
========== ==========
Reconciliation of Net income to Adjusted EBITDA:
Net income ..................................... $ 33,186 $ 40,823
Interest Expense ............................... 10,790 8,971
Income tax provision and minority interest ..... 20,449 24,748
Depreciation and amortization .................. 727 670
---------- ----------
Adjusted EBITDA(a) ............................. $ 65,152 $ 75,212
---------- ----------
(a) Adjusted EBITDA is defined as earnings before interest, taxes, depreciation
and amortization and minority interest. Adjusted EBITDA is a Non-GAAP
measure and should not be considered as an alternative to any measure of
performance as promulgated under accounting principles generally accepted
in the United States nor should it be considered as an indicator of our
overall financial performance. We use Adjusted EBITDA as a supplemental
measure of performance as we believe it gives investors a more complete
understanding of our operating results before the impact of investing and
financing activities as a tool for determining the private market value of
an enterprise.
Total revenues were $145.8 million for the first nine months of 2003
down $16.9 million or 10.4% from total revenues of $162.8 million reported for
the first nine months of 2002. Investment advisory and incentive fees, which
comprise 85.3% of total revenues, were $124.5 million in the first nine months
of 2003, $12.5 million or 9.1% lower than the $136.9 million reported in the
first nine months 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 during the first half of 2003. GAMCO fees, which are generally
billed based on asset levels at the beginning of a quarter, declined $11.1
million or 18.5% in the first nine months of 2003 as compared to the first nine
months of 2002. Revenues from open-end equity mutual funds decreased $6.1
million or 10.2% from the prior year as average assets under management in
open-end equity funds declined to $6.9 billion, 11.0% below the prior year's
first nine months average of $7.7 billion. Revenues from open-end mutual funds
are based on average assets and should improve over the full year 2003 versus
full year 2002 as September 30, 2003 assets in open-end equity funds were $7.3
billion, 17.4% higher than the prior year first nine months ending balance of
$6.2 billion. Revenues from our alternative investment products were 68.7%
higher at $8.7 million resulting from both increased management and performance
fees.
Commissions were $8.5 million in the first nine months of 2003, down
21.2% from $10.8 million in the same period a year earlier largely due to a
decrease in overall trading volume.
13
Revenues from distribution of mutual funds and other income were $12.8
million in the first nine months of 2003 versus $15.0 million in the first nine
months of 2002. The decrease in distribution fees results from the lower average
assets under management in open-end equity mutual funds during 2003, which
generate distribution revenues under 12b-1 compensation plans.
Total expenses were $93.7 million in the first nine months of 2003, a
1.0% increase from total expenses of $92.8 million reported in the first nine
months of 2002. Compensation and related costs, which are largely variable, were
$63.2 million, 1.6% higher than the same period a year earlier. The increase in
compensation was due to increased variable compensation related to our
Alternative Investment products of $2.5 million, the acquisition of Woodland and
Grove of $1.5 million, an increase in salaries of $1.7 million primarily
attributable to the addition of research analysts, marketing and investment
professionals, the negative year-over-year effect of a reversal of incentive
compensation in the 2002 period of $0.9 million and an increase of $0.9 million
in stock option expense offset in part by a decrease in variable compensation
payouts of $6.6 million. Management fee expense, which is totally variable and
based on pretax income, was 18.2% lower at $6.0 million in the first nine months
of 2003 versus $7.3 million in the first nine months of 2002. Other operating
expenses were higher by $1.2 million, a 5.3% increase over $23.3 million in the
first nine months of 2003 from the prior year first nine months as higher costs
related to promotional activities, insurance premiums, reimbursing clients for
trading costs or losses, and legal and accounting were partially offset by lower
mutual fund administration and distribution costs and brokerage costs.
Investment income was $12.3 million in the first nine months of 2003
higher by $7.7 million, or 169% from $4.6 million reported in the first nine
months of 2002 as the rising equity markets resulted in increased earnings from
our proprietary investment accounts. Interest expense increased $1.8 million to
$10.8 million in the first nine months of 2003 from $9.0 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 2003.
The estimated effective tax rate for the first nine months of 2003 was
37.4% and 37.6% the first nine months of 2002. Minority interest was higher by
$0.3 million over the prior first nine months 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 and affiliates in which the Company is a general partner,
limited partner or investment manager. Investments in partnerships and
affiliates are generally illiquid, however, the underlying investments in such
entities are generally liquid and the valuations of the investment partnerships
and affiliates reflect this underlying liquidity.
Summary cash flow data is as follows: NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
2003 2002
---------- ----------
Cash flows provided by (used in): (in thousands)
Operating activities $ 26,935 $ (35,898)
Investing activities (15,516) 13,185
Financing activities 103,000 33,617
---------- ----------
Increase 114,419 10,904
Cash and cash equivalents at beginning of period 311,430 305,447
---------- ----------
Cash and cash equivalents at end of period $ 425,849 $ 316,351
========== ==========
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 September 30, 2003, the Company had total cash and cash equivalents
of $425.8 million, an increase of $109.5 million from September 30, 2002
primarily the result of the Company's issuance of $100 million of ten year
non-callable senior notes in May 2003. The Company has established a collateral
account, consisting of cash and cash equivalents totaling $102.5 million, to
14
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 September
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.
Cash provided by operating activities was $26.9 million in the first
nine months of 2003 principally resulting from $33.2 million in net income and
$8.8 million increase in compensation payable partially offset by a $11.4
million reduction in payable to brokers and $4.4 million reduction in securities
sold, not yet purchased. Cash used by operating activities was $35.9 million in
the first nine months of 2002 principally resulting from an increase in
investments in securities of $97.4 million offset by $40.8 million in net
income.
Cash used by investing activities, related to investments in and
distributions from partnerships and affiliates, was $15.5 million in the first
nine months of 2003. Cash provided by investing activities, related to
investments in and distributions from partnerships and affiliates, was $13.2
million in the first nine months of 2002.
Cash provided by financing activities in the first nine months of 2003
was $103.0 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
$3.6 million received from the exercise of non-qualified stock options that
further generated cash tax savings of $1.1 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 nine months of 2002
was $33.6 million. The increase in cash primarily results from the issuance of
$87.7 million, net of expenses, of mandatory convertible debt securities less
the repayment of a $50 million note payable. Other significant financing
activities which provided cash includes the $9.2 million received from the
exercise of non-qualified stock options which further generated cash tax savings
of $4.1 million. Other significant financing activities which used cash included
$7.9 million to repurchase shares of our Class A Common Stock and $5.1 million
to repurchase shares of the mandatory convertible securities under the Company's
respective Stock Repurchase Programs.
The Company would like to establish a history of paying dividends.
Accordingly, management is planning to recommend a nominal initial dividend to
its Board of Directors for consideration at its next meeting. If approved, the
Company may pay its first dividend in 2003. The holders of the Company's Class B
stock have, under certain conditions, waived their right to receive any cash
dividend that may be payable in 2003.
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
September 30, 2003, Gabelli & Company had net capital, as defined, of
approximately $14.6 million, exceeding the regulatory requirement by
approximately $14.4 million. Regulatory net capital requirements increase when
Gabelli & Company is involved in underwriting activities.
15
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 September 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 $182.9 million at September 30, 2003
were investments in Treasury Bills and Notes of $103.6 million, in mutual funds,
largely invested in equity products, of $56.2 million, a selection of common and
preferred stocks totaling $19.9 million and other investments of approximately
$3.2 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 $19.9 million invested in common and preferred
stocks at September 30, 2003, $8.7 million is related to our investment in
Westwood and $3.6 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 $60.1
million at September 30, 2003 and consisted principally of alternative
investment products which invest in risk arbitrage opportunities. These
transactions generally involve announced deals with agreed upon terms and
conditions, including pricing, which typically involve less market risk than
common stocks held in a trading portfolio. The principal risk associated with
risk arbitrage transactions is the inability of the companies involved to
complete the transaction.
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 September 30, 2003 the total amount of customer
balances subject to indemnification (i.e. margin debits) was immaterial.
16
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities" (the "Interpretation"), which provides new
criteria for determining whether or not consolidation accounting is required for
off-balance sheet activities conducted through certain types of entities. This
interpretation focuses on financial interests in entities (i.e., variable
interests) that indicate control despite the absence of clear control through
voting interest. It concludes that a company's exposure (variable interest) to
the economic risks and rewards from the entity's assets and activities are the
best evidence of control. The interpretation requires that these variable
interest entities (VIEs) be subject to consolidation if the company holding the
variable interest is subject to a majority of the expected losses or will
receive a majority of the expected residual returns of the VIE (the "primary
beneficiary"). As the primary beneficiary it would be required to include the
variable interest entity's assets, liabilities and results of operations in its
own financial statements.
During October 2003, the FASB issued a Staff Position deferring the
effective date for applying the provisions of Interpretation No. 46 until the
fourth quarter of 2003 for variable interests held by public companies in all
entities that were acquired prior to February 1, 2003. The Interpretation
remains effective for variable interests held by public companies in entities
created after January 31, 2003. The Company has elected to defer the
implementation of the Interpretation in accordance with this guidance.
While the Company is generally not subject to a majority of the risks
of the VIEs, the Company was determined, for certain entities, to receive a
majority of the expected residual returns based on the methodology for
determining the primary beneficiary primarily due to the necessary inclusion of
the management and performance fees in these calculations. Therefore, when
implemented, 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 will
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-K
for the quarter ended December 31, 2003. Financial information pertaining to the
investments in partnerships and affiliates which would have been classified as
VIEs and consolidated if the Interpretation was adopted as of September 30, 2003
is as follows:
SEPTEMBER 30, 2003
AS REPORTED ADJUSTMENT PRO FORMA
---------- ---------- ----------
Total assets .................... $ 715,684 $ 413,604 $1,129,288
Total liabilities ............... 347,099 101,134 448,233
Minority interest payable ....... 7,967 312,470 320,437
NINE MONTHS ENDED
SEPTEMBER 30, 2003
AS REPORTED ADJUSTMENT PRO FORMA
---------- ---------- ----------
Revenue ......................... 145,832 (1,461) 144,371
Total other income, net ......... 1,487 7,740 9,227
Total expenses .................. 93,684 1,015 94,699
Minority interest expense ....... 405 5,263 5,668
The Company's investments in these VIEs represented approximately 11.6%
of the combined equity of these VIEs at September 30, 2003.
The Company serves as General Partner or co-General Partner for a
number of partnerships classified as VIEs. As General Partner or co-General
Partner, the Company is contingently liable for all of the partnerships'
liabilities. The Company's exposure to the activities of VIEs which are not
partnerships is limited to its investment in each respective VIE.
17
ITEM 4. CONTROLS AND PROCEDURES
Management, including the Chief Executive Officer and the Chief
Accounting Officer have conducted an evaluation of the effectiveness of
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based
on the evaluation, the Chief Executive Officer and the Chief Accounting 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 Accounting Officer completed their evaluation.
FORWARD-LOOKING INFORMATION
Our disclosure and analysis in this report contain some forward-looking
statements. Forward-looking statements give our current expectations or
forecasts of future events. You can identify these statements because they do
not relate strictly to historical or current facts. They use words such as
"anticipate," "estimate," "expect," "project," "intend," "plan," "believe," and
other words and terms of similar meaning. They also appear in any discussion of
future operating or financial performance. In particular, these include
statements relating to future actions, future performance of our products,
expenses, the outcome of any legal proceedings, and financial results. Although
we believe that we are basing our expectations and beliefs on reasonable
assumptions within the bounds of what we currently know about our business and
operations, there can be no assurance that our actual results will not differ
materially from what we expect or believe. Some of the factors that could cause
our actual results to differ from our expectations or beliefs include, without
limitation: the adverse effect from a decline in the securities markets; a
decline in the performance of our products; a general downturn in the economy;
changes in government policy or regulation; changes in our ability to attract or
retain key employees; and unforeseen costs and other effects related to legal
proceedings or investigations of governmental and self-regulatory organizations.
We also direct your attention to any more specific discussions of risk contained
in our Form 10-K and other public filings. We are providing these statements as
permitted by the Private Litigation Reform Act of 1995. We do not undertake to
update publicly any forward-looking statements if we subsequently learn that we
are unlikely to achieve our expectations or if we receive any additional
information relating to the subject matters of our forward-looking statements.
18
PART II: OTHER INFORMATION
ITEM 6. (a) Exhibits
31.1 Certification by Chief Executive Officer
Pursuant to Rule 13a-14 (a) and 15d-14 (a) as
Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification by Chief Accounting Officer
Pursuant to Rule 13a-14 (a) and 15d-14 (a) as
Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of 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 Chief Accounting Officer
pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
(b) Reports on Form 8-K.
The Company filed the following Current Reports on Form
8-K during the three months ended September 30, 2003.
1. Current Report on Form 8-K dated July 8,2003
containing the press release disclosing the
Company's final results of its modified Dutch
Auction self-tender offer announced June 5,
2003.
2. Current Report on Form 8-K dated August 7,2003
containing the press release disclosing the
Company's operating results for the second
quarter ended June 30, 2003.
3. Current Report on Form 8-K dated September 13,
2003 containing the press release disclosing the
Company's announcement that it will consolidate
certain variable interest entities beginning
with its September 30, 2003 quarterly report
using the guidance provided by FASB
Interpretation No. 46, "Consolidation of
Variable Interest Entities".
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)
NOVEMBER 14, 2003 /s/ Michael R. Anastasio
- ------------------ -----------------------------
Date Michael R. Anastasio
Chief Accounting Officer
19