================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
Or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number 1-14761
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 Identification No.)
incorporation or organization)
One Corporate Center, Rye, NY 10580-1422
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (914) 921-3700
-------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on which
Title of each class registered:
Class A Common Stock, $.001 Par Value New York Stock Exchange
Mandatory convertible securities New York Stock Exchange
- -------------------------------- -----------------------
Securities registered pursuant to Section 12(g) of the Act: None
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
not be contained herein, and will not be contained, to the best of registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K [X ].
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X] No [_].
As of March 1, 2004, 6,950,303 shares of class A common stock and 23,128,500
shares of class B common stock were outstanding. All of the shares of class B
common stock were held by Gabelli Group Capital Partners, Inc. and two of its
subsidiaries. The aggregate market value of the common stock held by
non-affiliates of the registrant as of March 1, 2004 was $294,029,789.
DOCUMENTS INCORPORATED BY REFERENCE: The definitive proxy statement for the 2004
Annual Meeting of Shareholders to be held May 11, 2004.
================================================================================
1
PART I
FORWARD-LOOKING INFORMATION
Our disclosure and analysis in this report and in documents that are
incorporated by reference 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 other public filings or in documents incorporated by
reference here or in prior filings or reports.
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.
ITEM 1: BUSINESS
Unless we have indicated otherwise, or the context otherwise requires,
references in this report to "Gabelli Asset Management Inc.," "Gabelli," "we,"
"us" and "our" or similar terms are to Gabelli Asset Management Inc., its
predecessors and its subsidiaries.
OVERVIEW
Gabelli Asset Management Inc. (NYSE: GBL) is a widely recognized provider of
investment advisory and brokerage services to mutual funds, institutional and
high net worth investors, principally in the United States. We generally manage
assets on a discretionary basis and invest in a variety of U.S. and
international securities through various investment styles. Our revenues are
based primarily on the firm's levels of assets under management and fees
associated with our various investment products, rather than our own corporate
assets.
We have focused on a simple mission since our founding in 1977: to earn a
superior risk-adjusted return for our clients over the long-term by providing
value-added products through fundamental research. Today, in addition to our
Gabelli value products, we offer our clients a broad array of investment
strategies that include value, growth, convertible, non-market correlated, and
fixed income strategies. By earning returns for our clients, we will be earning
returns for all our stakeholders.
As of December 31, 2003, we had a record $27.6 billion of assets under
management, 92% of which were invested in equity securities. We conduct our
investment advisory business principally through three subsidiaries: GAMCO
Investors, Inc. (Separate Accounts), Gabelli Funds, LLC (Mutual Funds) and
Gabelli Securities, Inc. (Alternative Investments). We also act as underwriter
and distributor of our open-end mutual funds and provide institutional research
through Gabelli & Company, Inc., our broker-dealer subsidiary.
2
Our assets under management are organized into three operating groups:
o SEPARATE ACCOUNTS: we currently provide advisory services to a broad
range of investors, including high net worth individuals, corporate
pension and profit sharing plans, foundations, endowments, jointly
trusteed plans and municipalities, and also serve as sub-adviser to
certain other third-party investment funds. Each separate account
portfolio is managed to meet the specific needs and objectives of the
particular client by utilizing investment strategies and techniques
within our areas of expertise. At December 31, 2003 we had $13.5
billion of separate account assets under management.
o MUTUAL FUNDS: we currently provide advisory services to (i) twenty-six
funds within the Gabelli family of funds; (ii) three money market
funds that comprise the Treasurer's Fund; and (iii) six mutual funds
within the Gabelli Westwood family of funds. The mutual funds have a
long-term record of achieving high returns, relative to similar
investment products and had $13.3 billion of total assets under
management at December 31, 2003.
o ALTERNATIVE INVESTMENTS: we also provide alternative investment
products consisting primarily of merger arbitrage, global and regional
long/short equity, and sector focused funds. We managed a total of
$692 million in alternative investment strategy assets at December 31,
2003.
Gabelli Asset Management Inc. is a holding company formed in connection with our
initial public offering ("Offering") in February 1999. Gabelli Group Capital
Partners, Inc., which is majority owned by Mr. Mario J. Gabelli ("Mr. Gabelli")
with the balance owned by our professional staff and other individuals, owns all
of the outstanding shares of class B common stock of Gabelli Asset Management
Inc., which represents approximately 97% of the combined voting power of the
outstanding common stock and 77% of the equity interest. Accordingly, Mr.
Gabelli could be deemed to control Gabelli Asset Management Inc.
Our principal executive offices are located at One Corporate Center, Rye, New
York 10580. Our telephone number is (914) 921-3700. On our website,
www.gabelli.com, we post the following filings as soon as reasonably practicable
after they are electronically filed with or furnished to the Securities and
Exchange Commission (SEC): our annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, and any amendments to those reports
filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange
Act of 1934. All such filings on our website are available free of charge.
2003 HIGHLIGHTS
We ended 2003 with a record $27.6 billion of assets under management, an
increase of 29.7% from the $21.2 billion on December 31, 2002. Assets of each of
our three investment advisory business segments, GAMCO Investors, Inc., Gabelli
Funds, LLC, and Gabelli Securities, Inc. were at record levels, bolstered by
strong performance in the broader market.
During 2003, the introduction and signing into law of The Jobs and Growth Tax
Reconciliation Act of 2003 (the "2003 Tax Act") by President George W. Bush
offered investors the potential opportunity to earn tax-advantaged returns on
their equity investments. Under the provisions of the 2003 Tax Act, qualifying
dividend income received by individual taxpayers will now be taxed at a maximum
Federal rate of 15%. In response to this tax change, we introduced The Gabelli
Dividend & Income Trust (NYSE: GDV) and generated $1.46 billion of gross
proceeds through the initial public offering of this new closed-end fund that
invests primarily in dividend-paying equity securities. We believe the 15% tax
rate for dividends and long-term capital gains provided by the 2003 Tax Act will
likely be a key driver of growth for our business. These two provisions sunset
in 2008 unless repealed or extended by Congress.
Assets under management in our separate account business at December 31, 2003
eclipsed the prior year end values by over $3.0 billion. The major factor
contributing to this accelerating asset growth was solid performance from our
equity portfolios. In 2003, our Alternative Investments business continued to
expand its sub-advisory relationships through the addition of a number of
significant new accounts.
Our class A common stock, which is traded on the New York Stock Exchange under
the symbol "GBL" ended the year at a market price of $39.80. Since its initial
public offering in February 1999, GBL for its shareholders has produced a total
return of 128% through December 31, 2003 versus a negative total return of
(4.5%) for the S&P 500 Index during the same period.
3
In May 2003 we sold $100 million of ten-year 5.5% senior notes. The notes carry
investment grade ratings of BBB from Standard & Poor's and Baa2 from Moody's.
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.
BUSINESS STRATEGY
Our business strategy targets global growth of the Gabelli franchise through
continued leveraging of our proven asset management strengths including our
brand name, long-term performance record, diverse product offerings and
experienced investment, research and client service professionals. In order to
achieve growth in assets under management and profitability, we are pursuing a
strategy which includes the following key elements:
o BROADENING AND STRENGTHENING THE GABELLI BRAND. We believe that the Gabelli
brand name is one of the more visible and widely recognized brands in the
U.S. investment management industry. We intend to strengthen and further
extend our brand identity by increasing our marketing to provide a uniform
global image.
o ESTABLISHING RELATIONSHIP CENTERS. In addition to our corporate office in
Rye NY, we have seven offices which conduct portfolio management, research
and marketing activities in the United States and abroad in the following
cities: Greenwich CT, Chicago IL, Minneapolis MN, Palm Beach FL, Reno NV,
Atlanta GA and London UK. Our offices in Chicago and Minneapolis were
established as the result of acquisitions of on-going investment advisory
operations. The London office was opened in January 2000 to provide a
geographic presence overseas and to coordinate investment research and
marketing activities for our investment product offerings in the European
markets.
o INTRODUCING NEW PRODUCTS AND SERVICES. We believe we have the capacity for
development of new products and services around the Gabelli brand to
complement our existing product offerings. New products since our initial
public offering include:
- Four open-end mutual funds: Gabelli Blue Chip Value Fund (1999),
Gabelli Utilities Fund (1999), Gabelli Woodland Small Cap Value
Fund (2003), and Ned Davis Research Asset Allocation Fund (2003).
- Two closed-end funds: The Gabelli Utility Trust and The Gabelli
Dividend & Income Trust.
- Six private limited partnerships: Gemini Global Partners, L.P.,
Gabelli European Partners, L.P., Gabelli Japanese Value Partners,
L.P., Gabelli Associates Fund II, L.P., GAMCO Performance Partners,
L.P., and GAMA Select Energy Plus, L.P.
- Five offshore funds: Gemini Global Partners, Ltd., Gabelli European
Partners, Ltd., Gabelli Japanese Value Partners, Ltd., GAMCO
Performance Partners, Ltd., and GAMCO Arbitrage Partners, Ltd.
o PROMOTING THE GABELLI "PRIVATE MARKET VALUE WITH A CATALYST" INVESTMENT
APPROACH. While we have expanded our investment product offerings, our
"value investing" approach is still the core of our business. This method
is based on the value investing principles articulated by Graham & Dodd in
1934, and further adapted by Mario J. Gabelli with his development of
private market value analysis. The development of private market value
("PMV") analysis combined with the concept of a catalyst has evolved into
our value investing approach, commonly referred to as "PMV with a Catalyst"
investing. Our approach encompasses the broad spectrum of event-driven
investing including arbitrage and special situations, implemented on a
global basis.
PMV with a Catalyst investing is a disciplined, research driven approach
based on the extensive use of security analysis. In this process, we
carefully select stocks whose intrinsic value, based on our estimate of
current asset value and future growth and earnings power, is significantly
different from the value as reflected in the public market. We then
calculate the firm's PMV, which is defined as the price an informed
industrial buyer would be likely to pay to acquire the business.
To limit the time horizon in which the PMV is likely to be realized, we
look for situations in which catalysts, "hard" and/or "soft", are working
to help eliminate the premium or realize the discount between the public
market price and the estimated PMV. Hard catalysts are company specific and
include but are not limited to: realization of hidden assets, recognition
of underperforming subsidiaries, share buybacks, spin-offs, mergers and
acquisitions, balance sheet changes, new products, accounting changes, new
management and cross-shareholder unwinding. Soft catalysts are industry
related or macroeconomic and include but are not limited to: industry
consolidation, deregulation, accounting, tax, pension and political
reforms, technological change and the macroeconomic backdrop. The time
horizons for catalysts to trigger change can either be short, medium or
long-term.
4
The table below compares the long-term performance record for our separate
accounts composite since 1977, using our flagship value product, the Gabelli
"PMV with a Catalyst" investment approach, versus various benchmarks.
GAMCO Value 1977 - 2003
Russell
GAMCO(1) S&P 500 2000* CPI + 10
-------- ------- ----- --------
Number of Up Years 23 21 19
Number of Down Years 3 5 7
Years GAMCO Beat Index 18 18 17
Total Return (CAGR) 18.4% 13.4% 13.3% 14.3%
Total Return 8,269% 2,594%
Beta 0.77
*Calculation of Russell 2000 commenced 1/1/79
The chart below illustrates how this methodology performed during recent market
cycles to capture the upside in bull markets while limiting the downside in the
most recent bear market.
Performance 1997 to 2003
GAMCO Value vs. S&P 500 Index
-Up Market- -Down Market- -Up Market-
30.6% 27.6% -4.4% -14.6% 33.9% 28.7%
Gabelli S&P 500 Gabelli S&P 500 Gabelli S&P 500
1997 - 1999 2000 - 2002 2003
CAGR CAGR
- --------------------------------------------------------------------------------
FOOTNOTES
Table
- -----
(1) The GAMCO composite represents fully discretionary, tax-exempt accounts
managed for at least one full quarter and meeting minimum account size
requirements. The minimum size requirement for inclusion in 1985 was $500,000;
1986, $1 million; and 1987 $5 million. The performance calculations include
accounts under management during the respective periods. As of 12/31/03 the
GAMCO composite included 49 accounts with aggregate market value of $3.6
billion. A complete list of composites is available upon request. No two
portfolios are identical. Accounts not within this size and type may have
experienced different results.
o GAMCO's performance results are computed on a total-return basis, which
includes all dividends, interest and accrued interest, and realized and
unrealized gains and losses. The summary of past performance is not intended as
a prediction of future results. Returns are presented in U.S. dollars. The
inception date of the GAMCO composite is 10/1/77.
o GAMCO's Compound Annualized Growth Rate is computed after actual
transaction costs, investment advisory fees and other expenses.
o GAMCO's Total Return represents the total net return of the composite
from 10/1/77 through 12/31/03.
o Beta is the measure of the GAMCO composite's risk in relation to the
S&P 500 Index.
o The S&P 500 is an unmanaged index of 500 U.S. stocks and performance
represents total return of index including reinvestment of dividends. The
Russell 2000 is an unmanaged index of 2000 small capitalization stocks and
performance represents total return of index including reinvestment of
dividends. The performance figures for the Russell 2000 are based on an
inception date of 1/1/79. The CPI is a widely used measure of inflation and the
CPI+10 measure is used to show the results that would have been achieved by
obtaining a rate of return that exceeded the CPI by a constant 10% as a basis of
comparison versus the results of the GAMCO composite.
Chart
- -----
o Up and down markets determined by the performance of the S&P 500 Index
during the respective periods.
5
o EXPANDING MUTUAL FUND DISTRIBUTION. We continue to expand our distribution
network primarily through national and regional brokerage firms and have
developed additional classes of shares for most of our mutual funds for
sale through these firms and other third-party distribution channels on a
commission basis. We intend to increase our wholesaling efforts to market
the multi-class shares, which have been designed to meet the needs of
investors who seek advice through financial consultants. During 2003, we
entered into an alliance with a third party wholesaling organization to
assist in the offering of The Gabelli Dividend & Income Trust, a closed-end
fund which generated gross proceeds of $1.46 billion in November 2003. We
will continue to seek and capitalize on similar opportunities.
o INCREASING PRESENCE IN HIGH NET WORTH MARKET. Our high net worth business
focuses, in general, on serving clients who have established an account
relationship of $1 million or more with us. According to industry
estimates, the number of households with over $1 million in investable
assets will continue to grow in the future, subject to ups and downs in the
equity and fixed income markets. With our 27-year history of serving this
segment, long-term performance record, customized portfolio approach,
dominant, tax-sensitive, buy-hold investment strategy, brand name
recognition and broad array of product offerings we believe that we are
well positioned to capitalize on the growth opportunities in this market.
o INCREASING MARKETING FOR INSTITUTIONAL SEPARATE ACCOUNTS. The institutional
Separate Accounts business has been principally developed through direct
marketing channels. Historically, pension and financial consultants have
not been a major source of new institutional Separate Accounts business for
us. We intend to add marketing personnel to target pension and financial
consultants and increase our efforts to add new accounts through our
traditional marketing channels.
o ATTRACTING AND RETAINING EXPERIENCED PROFESSIONALS. We have increased the
scope of our investment management capabilities by adding portfolio
managers and other investment personnel in order to expand our broad array
of products. The ability to attract and retain highly experienced
investment and other professionals with a long-term commitment to us and
our clients has been, and will continue to be, a significant factor in our
long-term growth. For example, we acquired the Mathers Fund in 1999,
managed by Henry Van der Eb, CFA (Chicago) and the Comstock Partners Funds
in 2000, managed by Charlie Minter and Martin Weiner. In addition,
Elizabeth Lilly, CFA (Minneapolis) joined us upon the acquisition of
Woodland Partners, LLC in November 2002.
The addition of investment, research and sales professionals has
strengthened our investment management and asset gathering capabilities and
positioned the firm for renewed growth as the markets recovered in 2003. We
plan to add more business professionals to assist in the execution of our
business strategy.
o SPONSORSHIP OF INDUSTRY CONFERENCES. Gabelli & Company, Inc., our
institutional research boutique, sponsors industry conferences and
management events throughout the year. At these conferences and events,
senior management from leading industry companies share their thoughts on
the industry, competition, regulatory issues and the challenges and
opportunities in their businesses with portfolio managers and securities
analysts. We currently host five annual conferences which include the
Automotive Aftermarket Symposium (27 years), Pump Valve & Motor Symposium
(14 years), Aircraft Supplier Conference (9 years) as well as the Dental
Conference and the Small Cap Orthopedic Conference for which we held our
first annual conferences within the past year.
o HOSTING OF INVESTOR SYMPOSIUMS. We have a Gabelli tradition of sponsoring
symposiums that bring together prominent portfolio managers, members of
academia and other leading business professionals to present, discuss and
debate current issues and topics in the investment industry.
During April of 2003, we held our fourth in a series of timely discussions
on topics that impact investor strategy:
- In 1997, we sponsored a debate on "Active vs. Passive Stock
Selection".
- 1998, we hosted a meeting on "The Role of Hedge Funds as a Way of
Generating Absolute Returns".
- 2001, we hosted a symposium extolling the "Virtues of Value
Investing".
- 2003, Dividends "Taxable versus Non-Taxable Issues" provided a
timely forum for the open discussion of the impact that the
dividend policy would have on stocks, markets and the economy.
Dividends were a timely consideration this year as an important component
of total return in a single digit or low double digit return environment as
well as their role as part of the tax cut proposals that were later
enacted. The initial public offering of The Gabelli Dividend & Income Trust
in November 2003 underscores this point.
We hold annual conferences for our alternative investment clients and
prospects in New York and London at which our portfolio management team
discusses the investment environment, our alternative investment strategies
and portfolios, and event-driven investment opportunities.
6
During 2003, we held our second annual Global Convertible Investing seminar
at which leading figures in convertible investing presented information on
convertible arbitrage, arbitrage opportunities in the U.S. and Europe, and
the use of credit default swaps.
o CAPITALIZING ON ACQUISITIONS AND STRATEGIC ALLIANCES. We intend to
selectively and opportunistically pursue acquisitions and alliances that
will broaden our product offerings and add new sources of distribution. In
November 2002 we completed our alliance with Woodland Partners LLC, a
Minneapolis based investment adviser of institutional, high-net-worth and
sub-advisory accounts. In March 2003 we launched the Ned Davis Research
Asset Allocation Fund, a quantitative style product. On October 1, 1999 we
completed our alliance with Mathers and Company, Inc. and now act as
investment advisor to the Mathers Fund (renamed Gabelli Mathers Fund) and
in May 2000 we added Comstock Partners Funds, Inc., (renamed Comstock
Funds, Inc.). The Mathers, Comstock and Ned Davis Research funds are part
of our Non-Market Correlated mutual fund product line, which also includes
our Gabelli ABC Fund and Gabelli Gold Fund. We believe that we are well
positioned to pursue acquisitions and alliances because of our flexibility
in structuring appropriate arrangements to meet the specific needs of all
parties.
o EXPANDING SUB-ADVISORY RELATIONSHIPS. Beginning with Global Asset
Management in 1987, globally renowned institutions have approached us
seeking Gabelli's research-driven investment management expertise and we
have actively pursued the strategic partnering of our investment products
with these prominent distribution firms. The resulting relationships
include American Express, American Skandia, Enterprise Funds, MainStay and
UBS funds. During 2003, we further extended our long-term relationship with
Global Asset Management (a subsidiary of Zurich-based UBS AG) with products
for both U.S. and non-U.S. investors seeking exposure to our distinctive
event-driven value style in a U. S. long/ short portfolio context. We
believe sub-advisory relationships provide a significant growth opportunity
for our business.
We believe that our growth to date is attributable to the following factors:
o STOCK MARKET GAINS: The S&P 500's compound annual total return is 13.4%
since Gabelli began managing institutional separate accounts in 1977. Since
our initial public offering in February 1999 through December 2003 the S&P
500's compound annual total return has been a negative (0.9%). Our
traditional value-oriented separate account performance for these periods
is 18.4% and 7.6%, respectively.
o LONG-TERM PERFORMANCE: We have a long-term record of achieving relatively
high returns for our Mutual Fund and Separate Account clients when compared
to similar investment products. We believe that our performance record is a
competitive advantage and a recognized component of our franchise.
o WIDELY RECOGNIZED "GABELLI" BRAND NAME: For much of our history, our
portfolio managers and investment products have been featured in a variety
of financial print media, including both U.S. and International
publications such as THE WALL STREET JOURNAL, FINANCIAL TIMES, MONEY
MAGAZINE, BARRON'S, FORTUNE, BUSINESS WEEK, NIKKEI FINANCIAL NEWS, FORBES
MAGAZINE and INVESTOR'S BUSINESS DAILY. We also underwrite publications
written by our investment professionals, including "DEALS...DEALS...AND
MORE DEALS" which examines the practice of merger arbitrage and "GLOBAL
CONVERTIBLE INVESTING: THE GABELLI WAY", a comprehensive guide to effective
investing in convertible securities.
o DIVERSIFIED PRODUCT OFFERINGS: Since the inception of our investment
management activities, we have sought to expand the breadth of our product
offerings. We currently offer a wide spectrum of investment products and
strategies, including product offerings in U.S. equities, U.S. fixed
income, global and international equities, convertible securities, U.S.
balanced and alternative investment products.
o STRONG INDUSTRY FUNDAMENTALS: According to data compiled by the U.S.
Federal Reserve, the investment management industry has grown faster than
more traditional segments of the financial services industry, including the
banking and insurance industries. Since Gabelli was founded in 1977, world
equity markets have grown at an 11.9% compounded annual growth rate through
December 31, 2003, including the net addition of new stocks in many
countries, to $30.1 trillion (est.). The U.S. equity market comprises about
$14.5 trillion or 48% of world equity markets. We believe that demographic
trends and the growing role of money managers in the placement of capital
compared to the traditional role played by banks and life insurance
companies will result in continued growth of the investment management
industry.
Gabelli's financial strength is underscored by having received investment grade
ratings from two well respected ratings agencies, Moody's Investors Services and
Standard and Poor's Ratings Services. We believe that maintaining investment
grade ratings will provide greater access to the capital markets, enhance
liquidity and lower overall borrowing costs.
7
BUSINESS DESCRIPTION
Gabelli was originally founded in 1976 as an institutional broker-dealer and
entered the separate accounts business in 1977, alternative investments in 1985
and the mutual fund business in 1986. Our initial product offering centered on
Gabelli's tax sensitive, buy-hold, value-oriented investment philosophy.
Starting in the mid-1980s, we began building on our core value-oriented equity
investment products by adding new investment strategies designed for a broad
array of clients seeking to invest in growth-oriented equities, convertible
securities and fixed income products. Since then, we have continued to build our
franchise by expanding our investment management capabilities through the
addition of industry specific, international, global, and non-market correlated
product offerings. Throughout our 27-year history, we have marketed most of our
products under the "Gabelli" and "GAMCO" brand names.
Our assets under management are organized principally in three groups: Separate
Accounts, Mutual Funds and Alternative Investments.
SEPARATE ACCOUNTS - INSTITUTIONAL AND HIGH NET WORTH: Since 1977, we have
provided investment management services through our subsidiary GAMCO Investors,
Inc. ("GAMCO") to a broad spectrum of institutional and high net worth
investors. At December 31, 2003, we had $13.5 billion of assets in approximately
1,760 separate accounts, representing approximately 49% of our total assets
under management. We currently provide advisory services to a broad range of
investors, the majority of which (in total number of accounts) are high-net
worth client accounts - defined as individuals and their retirement assets
generally having minimum account balances of $1 million. As of December 31,
2003, high net worth accounts comprised approximately 84% of the total number of
Separate Accounts and approximately 23% of the assets.
These clients are typically long-term relationships, aided in part by the
buy-hold and tax efficient nature of the underlying investment process in these
traditional products. Foundation and endowment fund assets represented an
additional 4% of the number of Separate Accounts and approximately 5% of the
assets. The sub-advisory portion of the Separate Accounts (where GAMCO acts as
sub-adviser to certain other third-party investment funds) held approximately
$3.9 billion or 29% of total Separate Account assets with 1% of the number of
accounts. Institutional client accounts, which include corporate pension and
profit sharing plans, jointly-trusteed plans and public funds, comprised the
balance. The ten largest Separate Accounts comprised approximately 20% of our
total separate account assets under management and approximately 12% of our
total separate account revenues as of and for the period ended December 31,
2003.
In general, our separate accounts are managed to meet the specific needs and
objectives of each client by utilizing investment strategies - traditional
"value", "large cap growth", "large cap value", "global", "international growth"
and convertible bonds - and techniques that are within our areas of expertise.
We distinguish between taxable and tax-free assets and manage client portfolios
for the greatest tax benefit within given investment strategies.
At December 31, 2003, over 95% of our assets in Separate Accounts (excluding
sub-advisory assets) were obtained through direct sales relationships. Sales
efforts are conducted on a regional and product specialist basis. A team of
professionals (who generally remain assigned to a specific client from the onset
of the relationship) focus on client service. Members of the sales and marketing
staff for the Separate Accounts business have an average of more than 10 years
of experience with us and focus on developing and maintaining direct, long-term
relationships with their Separate Account clients. This enables the service team
to understand and focus on the individual client's needs. We believe that an
important element of future growth in the Separate Accounts is dependent on
client relationships and retention. As we have for the past eighteen years, the
firm will host its Annual Client conference in May. This two-day event will kick
off with a gathering at the American Museum of Natural History followed by
presentations by our portfolio managers and analysts the following day. Along
with these client seminars, we continue to establish and staff relationship
offices around the country.
Sub-advisory relationships are a growing source of assets under management and
require above average operational, trading and marketing support. We act as a
sub-adviser on certain funds for several large and well known fund managers
including American Express, American Skandia, Enterprise Funds, MainStay and UBS
funds. These relationships contributed substantially to the firm's cash flows in
recent years. Similar to corporate clients, sub-advisory clients are subject to
business combinations which may result in the curtailment of product
distribution or the termination of the relationship.
Investment advisory agreements for our Separate Accounts are typically subject
to termination by the client without penalty on 30 days' notice or less.
8
MUTUAL FUNDS: We currently provide advisory services to (a) the Gabelli family
of funds, which consists of twenty-one open-end mutual funds and five closed-end
funds of which one open-end fund is managed by an unaffiliated sub-adviser; (b)
The Treasurer's Fund, consisting of three open-end money market funds (the
"Treasurer's Funds"); and (c) the Gabelli Westwood family of funds, consisting
of six open-end mutual funds, five of which are managed on a day-to-day basis by
Westwood Management (collectively, the "Mutual Funds"). At December 31, 2003, we
had $13.3 billion of assets under management in open-end mutual funds and
closed-end funds, representing approximately 48% of our total assets under
management. The Mutual Funds have a long-term record of achieving high returns,
relative to similar investment products. At December 31, 2003, 95% of the assets
under management in the open-end Mutual Funds having an overall rating from
Morningstar, Inc. ("Morningstar") were in open-end Mutual Funds ranked "three
stars" or better, with approximately 38% of such assets in open-end Mutual Funds
ranked "five stars" and or "four stars" on an overall basis (I.E., derived from
a weighted average of the performance figures associated with its three-, five-,
and ten-year Morningstar Rating metrics). There can be no assurance, however,
that these funds will be able to maintain such ratings or that past performance
will be indicative of future results. At December 31, 2003, approximately 38% of
our assets under management in open-end, no-load equity Mutual Funds had been
obtained through direct sales relationships. We also sell our open-end Mutual
Funds through Third-Party Distribution Programs, particularly No-Transaction Fee
("NTF") Programs, and have developed additional classes of shares for many of
our mutual funds for sale through additional third-party distribution channels
on a commission basis. At December 31, 2003, Third Party Distribution Programs
accounted for approximately 62% of all assets in open-end funds. Five closed end
funds represent 26% of the total assets in the mutual funds business, including
the newly organized The Gabelli Dividend & Income Trust, which generated gross
proceeds of $1.46 billion in November 2003 and subsequent to year-end generated
an additional $194 million in gross proceeds through the exercise of the
underwriters' overallotment option.
A detailed description of our Mutual Funds is provided within this Item 1
beginning on page 11.
ALTERNATIVE INVESTMENTS: We provide alternative investment products through our
rapidly growing (32% CAGR since 1999) majority-owned subsidiary, Gabelli
Securities, Inc. ("GSI"). The alternative investment products consist primarily
of partnerships, offshore funds, separate accounts and sub-advisory
relationships within the following strategies: merger arbitrage, event-driven
long/short equity funds, sector focused funds and merchant banking. We had $692
million of alternative investment assets under management, or approximately 3%
of total assets under management, at December 31, 2003.
We introduced our first targeted portfolio, a merger arbitrage fund in 1985. A
second fund was added in 1986 focusing on U.S. special situations, followed by
two offshore funds in 1989. Building on our strengths in global event-driven
value investing, several new hedge funds have been added to balance investors'
geographic, strategy and sector needs. Today we offer a broad range of absolute
return products. Within our merger arbitrage strategy, we manage approximately
$393 million of assets for investors who seek positive returns not correlated to
fluctuations of the general market. These funds seek to drive returns by
investing in announced merger and acquisition transactions that are primarily
dependent on the deal closure and less on the overall market environment. In
event-driven long/short strategies, we manage $268 million of assets focused on
the U.S., Japanese, and global markets. Recently we introduced the GAMA Select
portfolios, a series of sector-focused absolute return funds designed to offer
investors a mechanism to diversify their portfolios by global economic sector
rather than by geographic region. We currently offer two GAMA Select portfolios:
the Gabelli International Gold Fund Ltd. and GAMA Select Energy Plus, L.P.
Merchant banking activities are carried out through ALCE Partners, L.P. and
Gabelli Multimedia Partners, L.P., both of which are closed to new investors.
Our alternative investment products have been marketed primarily by our direct
sales force to high-net-worth individuals and institutions. During 2003,
sub-advisory relationships have become an increasingly important aspect of our
alternative investment business and now account for approximately 40% of our
alternative investment assets under management. We intend to expand product
offerings, both domestic and international, and the geographic composition of
our customer base in alternative investment products. It is our expectation that
the assets invested in these products will provide a growing source of revenues
in the future.
9
ASSETS UNDER MANAGEMENT
The following table sets forth total assets under management by product type as
of the dates shown and their compound annual growth rates ("CAGR").
Assets Under Management
By Product Type
(Dollars in millions)
JANUARY 1,
1999 TO
DECEMBER 31,
AT DECEMBER 31, 2003
----------------------------------------------------
1999 2000 2001 2002 2003 CAGR(A)
-------- -------- -------- -------- --------
EQUITY:
Mutual Funds ................................. $ 10,459 $ 10,680 $ 10,165 $ 8,091 $ 11,618 2.7%
Institutional & HNW Separate Accounts ........ 9,370 10,142 11,513 9,990 13,031 8.6
-------- -------- -------- -------- --------
Total Equity ............................... 19,829 20,822 21,678 18,081 24,649 5.6
-------- -------- -------- -------- --------
FIXED INCOME:
Money Market Mutual Funds .................... 1,175 1,425 1,781 1,963 1,703 9.7
Bond Mutual Funds ............................ 6 8 9 14 11 16.4
Institutional & HNW Separate Accounts ........ 694 859 720 613 504 (7.7)
-------- -------- -------- -------- --------
Total Fixed Income ......................... 1,875 2,292 2,510 2,590 2,218 4.3
-------- -------- -------- -------- --------
ALTERNATIVE INVESTMENTS:
Alternative Investments ...................... 230 437 573 578 692 31.7
-------- -------- -------- -------- --------
Total Assets Under Management .............. $ 21,934 $ 23,551 $ 24,761 $ 21,249 $ 27,559 5.9
======== ======== ======== ======== ========
BREAKDOWN OF TOTAL ASSETS UNDER MANAGEMENT:
Mutual Funds ................................. $ 11,640 $ 12,113 $ 11,955 $ 10,068 $ 13,332 3.5
Institutional & HNW Separate Accounts ........ 10,064 11,001 12,233 10,603 13,535 7.7
Alternative Investments ...................... 230 437 573 578 692 31.7
-------- -------- -------- -------- --------
Total Assets Under Management .............. $ 21,934 $ 23,551 $ 24,761 $ 21,249 $ 27,559 5.9
======== ======== ======== ======== ========
(a) Compound annual growth rate.
SUMMARY OF INVESTMENT PRODUCTS
We manage assets in the following wide spectrum of investment products and
strategies, many of which are focused on fast-growing areas:
U.S. EQUITIES: GLOBAL AND INTERNATIONAL EQUITIES: ALTERNATIVE PRODUCTS:
-------------- ---------------------------------- ---------------------
All Cap Value International Growth Merger Arbitrage
Large Cap Value Global Growth U.S. Long/Short
Large Cap Growth Global Value Global Long/Short
Mid Cap Value Global Telecommunications European Arbitrage
Small Cap Value Global Multimedia Japanese Long/Short
Small Cap Growth Gold "GAMA Select" Sector Funds
Micro Cap Merchant Banking
Real Estate
Utilities
Non-Market Correlated
CONVERTIBLE SECURITIES: U.S. BALANCED: U.S. FIXED INCOME:
----------------------- -------------- -----------------
U.S. Convertible Securities Asset Allocation Corporate
Global Convertible Securities Balanced Growth Government
Balanced Value Municipals
Asset-backed
Intermediate
Short-term
10
ADDITIONAL INFORMATION ON MUTUAL FUNDS
The Mutual Funds include 30 open-end mutual funds and 5 closed-end funds which
had total assets as of December 31, 2003 of $13.3 billion. The open-end Mutual
Funds are available to individuals and institutions on both a no-load and
commission basis, while the closed-end funds are listed and traded on the New
York Stock Exchange ("NYSE"). At December 31, 2003, the open-end funds had total
net assets of $9.8 billion and the closed-end funds had total net assets of $3.5
billion. The assets managed in the closed-end funds represent approximately
26.5% of the assets in the Mutual Funds and 12.8% of the total assets under
management at December 31, 2003. Our assets under management consist of a broad
range of U.S. and international stock, bond and money market mutual funds that
meet the varied needs and objectives of our Mutual Fund shareholders. At
December 31, 2003, approximately 38% of our assets under management in open-end
Mutual Funds had been obtained through direct sales relationships.
We, through our affiliates, act as adviser to all of the Mutual Funds, except
with respect to the Gabelli Capital Asset Fund for which we act as a sub-adviser
and Guardian Investment Services Corporation, an unaffiliated company, acts as
manager. As sub-adviser, we make day-to-day investment decisions for the Gabelli
Capital Asset Fund.
Gabelli Funds, LLC ("Funds Adviser"), a wholly-owned subsidiary of Gabelli Asset
Management Inc., acts as the investment adviser for all of the Mutual Funds
other than the Gabelli Westwood family of funds and the Treasurer's Fund. Funds
Adviser has retained Ned Davis Research, Inc. ("NDR") to act as sub-adviser for
the Ned Davis Research Asset Allocation Fund ("NDR Fund"). As sub-adviser, NDR
makes day-to-day investment decisions for the NDR Fund utilizing a team
investment approach.
Gabelli Advisers, Inc., a subsidiary controlled by Gabelli Asset Management Inc.
and our affiliates, acts as investment adviser to the Gabelli Westwood family of
funds and has retained Westwood Management to act as sub-adviser for five of the
six portfolios. Westwood Management is a wholly-owned subsidiary of Westwood
Holdings Group (NYSE: WHG). In its capacity as sub-adviser, Westwood Management
makes day-to-day investment decisions and provides the portfolio management
services for five of the six current Gabelli Westwood portfolios. The Gabelli
Westwood Mighty MitesSM Fund, launched in May 1998, is advised solely by Gabelli
Advisers, Inc., using a team investment approach, without any sub-advisers.
Westwood Management owns an 18.8% equity interest in Gabelli Advisers, Inc.
Gabelli Asset Management Inc. owns approximately 12% of Westwood Holdings Group.
Gabelli Fixed Income LLC, a majority owned subsidiary of Gabelli Asset
Management Inc., currently manages short-term and short-intermediate term fixed
income securities for the Treasurer's Fund as well as for Separate Accounts. We
plan to further increase and diversify the number of fixed income products
offered. Certain members of senior management of Gabelli Fixed Income LLC own a
19.9% equity interest in Gabelli Fixed Income LLC.
11
The following table lists the Mutual Funds, together with the December 31, 2003
Morningstar overall rating, where rated (ratings are not available for the
money-market mutual funds and other mutual funds, which collectively represent
40.7% of the assets under management in the Mutual Funds), provides a
description of the primary investment objective, fund characteristics, fees, the
date that the mutual fund was initially offered to investors and the assets
under management in the Mutual Funds as of December 31, 2003.
NET ASSETS
AS OF
DECEMBER 31,
FUND PRIMARY ADVISORY 12B-1 INITIAL 2003
(MORNINGSTAR OVERALL INVESTMENT FUND FEES FEES OFFER (ALL CLASSES)
RATING) (1) OBJECTIVE CHARACTERISTICS (%) (%) DATE ($ IN MILLIONS)
----------- --------- --------------- --- --- ---- ---------------
GABELLI OPEN-END FUNDS:
VALUE:
The Gabelli Asset Growth of capital as Class AAA: 1.00 .25 03/03/86 $ 1,959.9
Fund a primary investment No-load,
**** objective, with Open-end,
current income as a Diversified
secondary investment Multi-class
objective. Invests in shares (2)
equity securities of
companies selling at
a significant
discount to their
private market value.
Gabelli Westwood Capital appreciation Class AAA: 1.00 .25 01/02/87 $ 220.4
Equity Fund through a diversified No-load,
**** portfolio of equity Open-end,
securities using bottom-up Diversified
fundamental research Multi-class
with a focus on shares (2)
identifying well-seasoned
companies.
The Gabelli Blue Chip Capital appreciation through Class AAA: 1.00 .25 08/26/99 $ 48.3
Value Fund investments in equity securities No-load,
* of established companies, which Open-end,
are temporarily out of favor and Diversified
which have market capitalizations Multi-class
in excess of $5 billion. shares (2)
Gabelli Capital Asset Capital appreciation No-load, .75 n/a 05/01/95 $ 214.4
Fund from equity Open-end,
(not rated) (7) securities of Diversified,
companies selling at Variable
a significant Annuity
discount to their
private market value.
FOCUSED VALUE:
The Gabelli Value High level of capital Class A: 1.00 .25 09/29/89 $ 1,289.2
Fund appreciation from Front end-load,
*** undervalued equity Open-end
securities that are Non-diversified
held in a concentrated Multi-class
portfolio. shares (2)
SMALL CAP VALUE:
The Gabelli Small Cap High level of capital Class AAA: 1.00 .25 10/22/91 $ 621.5
Growth Fund appreciation from No-load,
*** equity securities of Open-end,
smaller companies Diversified
with market Multi-Class
capitalization of Shares (2)
$1 billion or less.
12
NET ASSETS
AS OF
DECEMBER 31,
FUND PRIMARY ADVISORY 12B-1 INITIAL 2003
(MORNINGSTAR OVERALL INVESTMENT FUND FEES FEES OFFER (ALL CLASSES)
RATING) (1) OBJECTIVE CHARACTERISTICS (%) (%) DATE ($ IN MILLIONS)
----------- --------- --------------- --- --- ---- ---------------
The Gabelli Woodland Long Tern capital appreciation Class AAA: 1.00 .25 12/31/02 $ 2.7
Small Cap Value Fund investing at least 80% of its assets No-load,
(not rated) (7) in equity securities of companies Open-end,
with market capitalizations of Non-diversified
$1.5 billion or less. Multi-class
shares (2)
GROWTH:
Gabelli International Capital appreciation Class AAA: 1.00 .25 06/30/95 $ 42.1
Growth Fund by investing No-load,
**** primarily in equity Open-end,
securities of foreign Diversified
companies with rapid Multi-class
growth in revenues and earnings. shares (2)
The Gabelli Growth Capital appreciation Class AAA: 1.00 .25 04/10/87 $ 1,883.8
Fund from companies that No-load,
*** have favorable, yet Open-end,
undervalued, Diversified
prospects for Multi-Class
earnings growth. Shares (2)
Invests in equity securities
of companies that have above-
average or expanding market
shares and profit margins.
AGGRESSIVE GROWTH:
The Gabelli Global High level of Class AAA: 1.00 .25 02/07/94 $ 133.8
capital
Growth Fund appreciation through No load,
** investment in a Open-end,
portfolio of equity Non-diversified
securities focused on Multi-class
companies involved shares (2)
in the global marketplace.
MICRO-CAP:
Gabelli Westwood Long-term capital Class AAA:, 1.00 .25 05/11/98 $ 59.9
Mighty MitesSM Fund appreciation by No-load,
**** investing primarily Open-end,
in equity securities Diversified
with market Multi-class
capitalization of shares (2)
$300 million or less.
EQUITY INCOME:
Gabelli Westwood Both capital Class AAA: .75 .25 10/01/91 $ 153.9
Balanced Fund appreciation and No-load,
**** current income using Open-end,
portfolios containing Diversified
stocks, bonds, and Multi-class
cash as appropriate in light shares (2)
of current economic and
business conditions.
The Gabelli Equity High level of total Class AAA: 1.00 .25 01/02/92 $ 301.3
Income Fund return with an No-load,
*** emphasis on income Open-end,
producing equities Diversified
with yields greater Multi-Class
than the S&P 500 Shares (2)
average.
13
NET ASSETS
AS OF
DECEMBER 31,
FUND PRIMARY ADVISORY 12B-1 INITIAL 2003
(MORNINGSTAR OVERALL INVESTMENT FUND FEES FEES OFFER (ALL CLASSES)
RATING) (1) OBJECTIVE CHARACTERISTICS (%) (%) DATE ($ IN MILLIONS)
----------- --------- --------------- --- --- ---- ---------------
Gabelli Westwood Long-term capital Class AAA: 1.00 .25 09/30/97 $ 15.3
Realty Fund appreciation as well No-load,
*** as current income, Open-end,
investing in equity Diversified
securities that are Multi-class
primarily engaged in shares (2)
or related to the
real estate industry.
SPECIALTY EQUITY:
The Gabelli Global High level of capital Class AAA: 1.00 .25 05/11/98 $ 19.4
Opportunity Fund appreciation through No-load,
**** worldwide investments Open-end,
in equity securities. Non-diversified
Multi-class
shares (2)
The Gabelli Global High level of total Class AAA: 1.00 .25 02/03/94 $ 17.5
Convertible return through a No-load,
Securities Fund combination of Open-end,
*** current income and Non-diversified
capital appreciation Multi-class
through investment in shares (2)
convertible
securities of U.S.
and non-U.S. issuers.
SECTOR:
The Gabelli Utilities High level of total return through Class AAA: 1.00 .25 08/31/99 $ 44.3
Fund a combination of capital No-load,
***** appreciation and current income Open-end,
from investments in utility Diversified
companies. Multi-class
shares (2)
The Gabelli Global High level of capital Class AAA: 1.00 .25 11/01/93 $ 187.2
Telecommunications appreciation through No-load,
Fund worldwide investments Open-end,
**** in equity securities, Non-diversified
including the U.S., Multi-class
primarily in the shares (2)
telecommunications
industry.
Gabelli Gold Seeks capital Class AAA: 1.00 .25 07/11/94 $ 362.3
Fund appreciation and No-load,
**** employs a value Open-end,
approach to investing Diversified
primarily in equity Multi-class
securities of gold- shares (2)
related companies
worldwide.
MERGER AND ARBITRAGE:
The Gabelli ABC Fund Total returns from No-load, 0.50(6) n/a(6) 05/14/93 $ 293.8
**** equity and debt Open-end,
securities that are Non-
diversified attractive to
investors in various market
conditions without excessive
risk of capital loss.
QUANTITATIVE:
The Ned Davis Research Seeks to provide capital Class AAA: 1.00 .25 03/31/03 $ 11.6
Asset Allocation Fund appreciation as its primary No-load,
(not rated) (7) objective with a secondary Open-end,
objective of current income. Diversified
Multi-class
shares (2)
14
NET ASSETS
AS OF
DECEMBER 31,
FUND PRIMARY ADVISORY 12B-1 INITIAL 2003
(MORNINGSTAR OVERALL INVESTMENT FUND FEES FEES OFFER (ALL CLASSES)
RATING) (1) OBJECTIVE CHARACTERISTICS (%) (%) DATE ($ IN MILLIONS)
----------- --------- --------------- --- --- ---- ---------------
CONTRARIAN:
The Comstock Capital appreciation and current Class A 1.00 .25 10/10/85 $ 105.7
Capital Value Fund income through investment in a Load,
(not rated) (7) highly diversified portfolio of Open-end,
securities. Diversified
Multi-class
shares
(2)
The Comstock Capital appreciation and current Class A .85 .25 05/5/88 $ 19.5
Strategy Fund income through investment in a Load,
(not rated) (7) portfolio of debt securities. Open-end,
Non-Diversified
Multi-class
shares (2)
The Gabelli Mathers Long-term capital appreciation Class AAA: 1.00 .25 8/19/65 $ 60.9
Fund in various market conditions No-load,
* without excess risk of capital loss. Open-end,
Diversified
SMALL CAP GROWTH:
Gabelli Westwood Long-term capital Class AAA: 1.00 .25 04/15/97 $ 18.6
SmallCap appreciation, No-load,
Equity Fund investing at least Open-end,
** 80% of its assets in Diversified
equity securities of Multi-class
companies with market shares (2)
capitalizations of $1.5
billion or less.
FIXED INCOME:
Gabelli Westwood Total return and Class AAA: .60 .25 04/06/93 $ 11.2
Intermediate Bond current income, while No-load,
Fund limiting risk to Open-end,
*** principal. Pursues Diversified
higher yields than Multi-class
shorter maturity funds, shares (2)
and has more price
stability than generally
higher yielding
long-term funds.
CASH MANAGEMENT-MONEY MARKET:
Gabelli U.S. Treasury High current income Money Market, .30 n/a 10/01/92 $ 970.6
Money Market Fund with preservation of Open-end,
(not rated) (7) principal and Diversified
liquidity, while
striving to keep
expenses among the
lowest of all U.S.
Treasury money market
funds.
The Treasurer's Fund, Current income with No-load, .30 n/a 01/01/88 $ 433.7
Inc.-- Domestic preservation of Open-end,
Prime Money Market principal and Diversified
Portfolio liquidity through Dual class
(not rated) (7) investment in U.S.
Treasury securities and
corporate bonds.
15
NET ASSETS
AS OF
DECEMBER 31,
FUND PRIMARY ADVISORY 12B-1 INITIAL 2003
(MORNINGSTAR OVERALL INVESTMENT FUND FEES FEES OFFER (ALL CLASSES)
RATING) (1) OBJECTIVE CHARACTERISTICS (%) (%) DATE ($ IN MILLIONS)
----------- --------- --------------- --- --- ---- ---------------
The Treasurer's Current income with No-load, .30 n/a 12/18/87 $ 233.1
Fund, Inc.-- Tax preservation of Open-end,
Exempt Money Market principal and Diversified
Portfolio liquidity through Dual class
(not rated) (7) investment in U.S.
municipal bond
securities.
The Treasurer's Current income with No-load, .30 n/a 07/25/90 $ 63.2
Fund, Inc.-- U.S. preservation of Open-end,
Treasury Money Market principal and Diversified
Portfolio liquidity through Dual class
(not rated) (7) investment in U.S.
Treasury securities.
GABELLI CLOSED-END FUNDS:
The Gabelli Equity Long-term growth of Closed-end, 1.00 n/a 08/14/86 $ 1,514.8
Trust Inc. capital by investing Non-diversified
(not rated) (7) in equity securities. NYSE Symbol: GAB
The Gabelli High total return Closed-end, 1.00 n/a 07/03/89 $ 151.7
Convertible and Income from investing Diversified
Securities Fund Inc. (4) primarily in NYSE Symbol: GCV
**** convertible
instruments.
The Gabelli Global Long-term capital Closed-end, 1.00 n/a 11/15/94 $ 200.2
Multimedia Trust Inc. (3) appreciation from Non-diversified
(not rated) (7) equity investments in NYSE Symbol: GGT
global telecommunications,
media, publishing and
entertainment holdings.
The Gabelli High total return from Closed-end, 1.00 n/a 07/09/99 $ 211.5
Utility Trust (5) investments primarily in Non-Diversified
(not rated) (7) securities of companies NYSE Symbol: GUT
involved in gas, electricity
and water industries.
The Gabelli Qualified dividend income Closed-end, 1.00 n/a 11/24/03 $ 1,451.7
Dividend & Income and capital appreciation Non-Diversified
Trust potential. NYSE Symbol: GDV
(not rated) (7)
(1) For each fund with at least a three-year history, Morningstar calculates a
Morningstar RatingTM based on a Morningstar risk-adjusted return measure
that accounts for variation in a fund's monthly performance (including the
effects of sales charges, loads and redemption fees) placing more emphasis
on downward variations and rewarding consistent performance. The top 10%
of the funds in an investment category receive five stars, the next 22.5%
receive four stars, the next 35% receive three stars, the next 22.5%
receive two stars and the bottom 10% receive one star. The Overall
Morningstar Rating for a fund is derived from a weighted average of the
performance figures associated with its three, five, and ten-year (if
applicable) Morningstar Rating metrics. Morningstar Ratings are shown for
the respective class shown; other classes may have different performance
characteristics. There were 177 Conservative Allocation funds rated for
three years, 140 funds for five years and 35 funds for ten years (Gabelli
ABC Fund, Gabelli Mathers Fund). There were 237 Mid-Cap Blend funds rated
for three years, 147 funds for five years and 44 funds for ten years
(Gabelli Asset Fund, Gabelli Value Fund). There were 655 Large Value funds
rated for three years, 516 funds for five years and 190 funds for ten
years (Gabelli Blue Chip Value Fund, Gabelli Westwood Equity Fund). There
were 173 Mid-Cap Value funds rated for three years, 136 funds for five
years and 49 funds for ten years (Gabelli Equity Income Fund). There were
63 Convertibles funds rated for three years, and 55 funds for five years
(Gabelli Global Convertible Securities Fund). There were 268 World Stock
funds rated for three years and 211 funds for five years (Gabelli Global
Growth Fund, Gabelli Global Opportunity Fund).
16
There were 36 Specialty-Communications funds rated for three years, 17
funds for five years and 9 funds for ten years (Gabelli Global
Telecommunications Fund). There were 34 Specialty-Precious Metals funds
rated for three years and 30 funds for five years (Gabelli Gold Fund).
There were 959 Large Growth funds rated for three years, 615 funds for
five years and 219 funds for ten years (Gabelli Growth Fund). There were
164 Foreign Large Growth funds rated for three years and 127 funds for
five years (Gabelli International Growth Fund). There were 188 Small Value
funds rated for three years, 137 funds for five years and 34 funds for ten
years (Gabelli Small Cap Growth Fund, Gabelli Westwood Mighty Mites Fund).
There were 70 Specialty-Utilities funds rated for three years (Gabelli
Utilities Fund). There were 632 Moderate Allocation funds rated for three
years, 508 funds for five years and 166 funds for ten years (Gabelli
Westwood Balanced Fund). There were 655 Intermediate-Term Bond funds rated
for three years, 512 funds for five years and 224 funds for ten years
(Gabelli Westwood Intermediate Bond Fund). There were 134 Specialty-Real
Estate funds rated for three years and 101 funds for five years (Gabelli
Westwood Realty Fund). There were 506 Small Growth funds rated for three
years and 344 funds for five years (Gabelli Westwood Small Cap Equity
Fund). (a) 2003 Morningstar, Inc. All Rights reserved. This information is
(1) proprietary to Morningstar and/or its content providers (2) may not be
copied or distributed; and (3) is not warranted to be accurate, complete
or timely. Neither Morningstar nor its content providers are responsible
for any damages or losses arising from any use of this information. Past
performance is no guarantee of future results. Other share classes may
have different performance characteristics.
(2) These funds have multi-classes of shares available. Multi-class shares
include Class A shares with a front-end sales charge; Class B shares are
subject to a back-end contingent deferred sales charge for up to 6 years
and Class C shares are subject to a 1% back-end contingent deferred sales
charge for up to two years. Comstock Strategy Fund Class R shares, which
are no-load, are available only for retirement and certain institutional
accounts. Comstock Strategy Fund class O shares are no longer offered to
the public. Ned Davis Research Asset Allocation Fund class I shares are
available to institutional and certain other accounts. Net assets include
all shares classes.
(3) The Gabelli Multimedia Trust was formed in 1994 through a spin-off of
assets previously held in the Gabelli Equity Trust.
(4) The Gabelli Convertible and Income Securities Fund Inc was originally
formed in 1989 as an open end investment company and was converted to a
closed end investment company in March 1995.
(5) The Gabelli Utility Trust was formed in 1999 through a spin off of assets
from the Gabelli Equity Trust.
(6) Funds Adviser has voluntarily reduced the Advisory fee from 1.00% to 0.50%
since April 1, 2002. Gabelli & Company, Inc. has waived receipt of the
12b-1 Plan distribution fees as of January 1, 2003 and on February 25,
2004 the Fund's Board of Directors agreed with the Funds Advisers' request
to terminate the 12b-1 Plan.
(7) Certain funds are not rated because they don't have a three year history
or there are not enough similar funds in the category determined by
Morningstar.
17
Shareholders of the no-load open-end Mutual Funds are allowed to exchange shares
among the open-end funds as economic and market conditions and investor needs
change at no additional cost. However, certain Mutual Funds impose a 2%
redemption fee for shares redeemed within 60 days. We periodically introduce new
mutual funds designed to complement and expand our investment product offerings,
respond to competitive developments in the financial marketplace and meet the
changing needs of clients.
Our marketing efforts for the Mutual Funds are currently focused on increasing
the distribution and sales of our existing funds as well as creating new
products for sale through our distribution channels. We believe that our
marketing efforts for the Mutual Funds will continue to generate additional
revenues from investment advisory fees. We have traditionally distributed most
of our open-end Mutual Funds by using a variety of direct response marketing
techniques, including telemarketing and advertising, and as a result we maintain
direct relationships with a high percentage of our no-load open-end Mutual Fund
customers. Beginning in late 1995, we expanded our product distribution by
offering several of our open-end Mutual Funds through Third-Party Distribution
Programs, including NTF Programs. In 1998 and 1999, we further expanded these
efforts to include substantially all of our open-end Mutual Funds in Third-Party
Distribution Programs. More than 38% of the assets under management in the
open-end Mutual Funds are still attributable to our direct response marketing
efforts. Third-Party Distribution Programs have become an increasingly important
source of asset growth for us. Of the $8.1 billion of assets under management in
the open-end equity Mutual Funds as of December 31, 2003, approximately 62% were
generated through Third-Party Distribution Programs. We are responsible for
service and distribution fees charged by many of the Third-Party Distribution
Programs. Legislation currently introduced by Congress may result in the
elimination or restriction of distribution fees paid by mutual funds. In light
of such legislation and efforts by some of the program sponsors to increase fees
beyond what we deem to be acceptable may result in several of our Mutual Funds
being withdrawn from such programs. During 2000, we completed development of
additional classes of shares for many of our mutual funds for sale through
national brokerage and investment houses and other third-party distribution
channels on a commission basis. The multi-class shares are available in all of
Gabelli mutual funds except for the Gabelli ABC Fund and the Gabelli Mathers
Fund. The use of multi-class share products will expand the distribution of all
Gabelli Fund products into the advised sector of the mutual fund investment
community. During 2003, we introduced Class I shares, which are no load shares
with higher minimum initial investment and without distribution fees available
to Institutional and Retirement Plan Accounts directly through Gabelli &
Company. The no-load shares are designated as Class AAA shares and are available
for new and current investors. In general, distribution through Third-Party
Distribution Programs has greater variable cost components and lower fixed cost
components than distribution through our traditional direct sales methods.
We provide investment advisory and management services pursuant to an investment
management agreement with each Mutual Fund. The investment management agreements
with the Mutual Funds generally provide that we are responsible for the overall
investment and administrative services, subject to the oversight of each Mutual
Fund's board of directors or trustees and in accordance with each Mutual Fund's
fundamental investment objectives and policies. The investment management
agreements permit us to enter into separate agreements for administrative and
accounting services on behalf of the respective Mutual Funds.
We provide the Mutual Funds with administrative services pursuant to the
management contracts. Most of these administrative services are provided through
sub-contracts with unaffiliated third parties. Such services include, without
limitation, supervision of the calculation of net asset value, preparation of
financial reports for shareholders of the Mutual Funds, internal accounting, tax
accounting and reporting, regulatory filings and other services. Transfer agency
and custodial services are provided directly to the Mutual Funds by unaffiliated
third parties.
Our Mutual Fund investment management agreements may continue in effect from
year to year only if specifically approved at least annually by (i) the Mutual
Fund's board of directors or trustees or (ii) the Mutual Fund's shareholders
and, in either case, the vote of a majority of the Mutual Fund's directors or
trustees who are not parties to the agreement or "interested persons" of any
such party, within the meaning of the Investment Company Act of 1940 as amended
(the "Investment Company Act"). Each Mutual Fund may terminate its investment
management agreement at any time upon 60 days' written notice by (i) a vote of
the majority of the board of directors or trustees cast in person at a meeting
called for the purpose of voting on such termination or (ii) a vote at a meeting
of shareholders of the lesser of either 67% of the voting shares represented in
person or by proxy or 50% of the outstanding voting shares of such Mutual Fund.
Each investment management agreement automatically terminates in the event of
its assignment, as defined in the Investment Company Act. We may terminate an
investment management agreement without penalty on 60 days' written notice.
18
MUTUAL FUND DISTRIBUTION, INSTITUTIONAL RESEARCH, BROKERAGE AND UNDERWRITING
Gabelli & Company, Inc. ("Gabelli & Company"), the wholly-owned subsidiary of
our 92% owned subsidiary Gabelli Securities, Inc., is a broker-dealer registered
under the Securities Exchange Act of 1934 and a member of the National
Association of Securities Dealers, Inc. ("NASD"). Gabelli & Company's revenues
are derived primarily from distribution of our Mutual Funds, brokerage
commissions on transactions in equity securities from institutional research as
well as from Gabelli clients, and from underwriting fees and selling
concessions.
MUTUAL FUND DISTRIBUTION
Gabelli & Company distributes our open-end Mutual Funds pursuant to distribution
agreements with each Mutual Fund. Under each distribution agreement with an
open-end Mutual Fund, Gabelli & Company offers and sells such open-end Mutual
Fund's shares on a continuous basis and pays all of the costs of marketing and
selling the shares, including printing and mailing prospectuses and sales
literature, advertising and maintaining sales and customer service personnel and
sales and services fulfillment systems, and payments to the sponsors of
Third-Party Distribution Programs, financial intermediaries and Gabelli sales
personnel. Gabelli & Company receives fees for such services pursuant to
distribution plans adopted under provisions of Rule 12b-1 ("12b-1") of the
Investment Company Act. Distribution fees from the open-end Mutual Funds
amounted to $21.4 million, $18.4 million and $17.1 million for the years ended
December 31, 2001, 2002 and 2003, respectively. Gabelli & Company is the
principal underwriter for funds distributed in multiple classes of shares which
carry either a front end or back end sales charge. Underwriting and sales
charges amounted to $419,000, $356,000 and $268,000 for the years ended December
31, 2001, 2002 and 2003, respectively.
Under the distribution plans, the open-end no load (Class AAA shares) Mutual
Funds (except the Treasurer's Fund and the Gabelli ABC Fund) and the Class A
shares of various funds pay Gabelli & Company a distribution fee of .25% per
year (except the Class A shares of the Gabelli Westwood Funds which pay .50% per
year) on the average daily net assets of the fund. Class B and Class C shares
have a 12b-1 distribution plan with a service and distribution fee totaling 1%.
Gabelli & Company's distribution agreements with the Mutual Funds may continue
in effect from year to year only if specifically approved at least annually by
(i) the Mutual Fund's board of directors or trustees or (ii) the Mutual Fund's
shareholders and, in either case, the vote of a majority of the Mutual Fund's
directors or trustees who are not parties to the agreement or "interested
persons" of any such party, within the meaning of the Investment Company Act.
Each Mutual Fund may terminate its distribution agreement, or any agreement
thereunder, at any time upon 60 days' written notice by (i) a vote of the
majority of its directors or trustees cast in person at a meeting called for the
purpose of voting on such termination or (ii) a vote at a meeting of
shareholders of the lesser of either 67% of the voting shares represented in
person or by proxy or 50% of the outstanding voting shares of such Mutual Fund.
Each distribution agreement automatically terminates in the event of its
assignment, as defined in the Investment Company Act. Gabelli & Company may
terminate a distribution agreement without penalty upon 60 days' written notice.
Gabelli & Company also offers our open-end mutual fund products through our
website, www.gabelli.com, where mutual fund investors can access their personal
account information and buy, sell and exchange Fund shares. Fund prospectuses,
quarterly reports, fund applications, daily net asset values and performance
charts are all available. As part of our efforts to educate investors, we
introduced Gabelli University with our initial publications "DEALS, DEALS... AND
MORE DEALS" and "GLOBAL CONVERTIBLE INVESTING: THE GABELLI WAY." Our website is
an active, informative and valuable resource which we believe has become an
increasingly important feature of our client service efforts.
INSTITUTIONAL RESEARCH
Gabelli & Company provides institutional investors with investment ideas on
numerous industries and special situations, with a particular focus on small and
midcap companies. Our team of over 25 sell-side analysts follow economic sectors
on a global basis, and are bottom-up stock pickers, recommending companies that
trade at significant differences to Private Market Value. Our research focuses
on company fundamentals, cash flow statistics, and catalysts that will help
realize returns.
COMMISSIONS
Gabelli & Company generates brokerage commission revenues from securities
transactions executed on an agency basis on behalf of our mutual funds,
institutional and high net worth clients as well as from institutional and
retail customers. Commission revenues totaled $15.9 million, $13.9 million, and
$12.9 for the years ended December 31, 2001, 2002 and 2003, respectively.
19
UNDERWRITING
Gabelli & Company is involved in external syndicated underwriting activities. In
November 2003 Gabelli & Company was a leader in the underwriting group that led
the initial public offering of GDV. In 2001, 2002 and 2003 Gabelli & Company
participated in 7, 10 and 9 syndicated underwritings of public equity and debt
offerings managed by major investment banks with commitments of $33.7 million,
$34.9 million and $24.7 million, respectively.
COMPETITION
We compete with other investment management firms and mutual fund companies,
insurance companies, banks, brokerage firms and other financial institutions
that offer products that have similar features and investment objectives to
those offered by us. Many of the investment management firms with which we
compete are subsidiaries of large diversified financial companies and many
others are much larger in terms of assets under management and revenues and,
accordingly, have much larger sales organizations and marketing budgets.
Historically, we have competed primarily on the basis of the long-term
investment performance of many of our funds. However, we have taken steps to
increase our distribution channels, brand name awareness and marketing efforts.
Although there can be no assurance that we will be successful in these efforts,
our market share of Mutual Funds has increased over the past few years.
The market for providing investment management services to institutional and
high net worth Separate Accounts is also highly competitive. Approximately 39%
of our investment advisory fee revenue for the year ended December 31, 2003 was
derived from our Separate Accounts. Selection of investment advisers by U.S.
institutional investors is often subject to a screening process and to favorable
recommendations by investment industry consultants. Many of these investors
require their investment advisers to have a successful and sustained performance
record, often five years or longer, and also focus on one and three year
performance records. We have significantly increased our assets under management
on behalf of U.S. institutional investors since our entry into the institutional
asset management business in 1977. At the current time, we believe that our
investment performance record would be attractive to potential new institutional
and high net worth clients. However, no assurance can be given that our efforts
to obtain new business will be successful.
INTELLECTUAL PROPERTY
Service marks and brand name recognition are important to our business. We have
rights to the service marks under which our products are offered. We have
registered certain service marks in the United States and will continue to do so
as new trademarks and service marks are developed or acquired. We have rights to
use (i) the "Gabelli" name, (ii) the "GAMCO" name, (iii) the research triangle
logo, and (iv) the "Mighty Mites" name. Pursuant to an assignment agreement, Mr.
Gabelli has assigned to us all of his rights, title and interests in and to the
"Gabelli" name for use in connection with investment management services, mutual
funds and securities brokerage services. However, under the agreement, Mr.
Gabelli will retain any and all right, title and interest he has or may have in
the "Gabelli" name for use in connection with (i) charitable foundations
controlled by Mr. Gabelli or members of his family or (ii) entities engaged in
private investment activities for Mr. Gabelli or members of his family. In
addition, the funds managed by Mr. Gabelli outside Gabelli have entered into a
license agreement with us permitting them to continue limited use of the
"Gabelli" name under specified circumstances. We have taken, and will continue
to take, action to protect our interests in these service marks.
REGULATION
Virtually all aspects of our businesses are subject to various Federal and state
laws and regulations. These laws and regulations are primarily intended to
protect investment advisory clients and shareholders of registered investment
companies. Under such laws and regulations, agencies that regulate investment
advisers and broker-dealers such as us have broad administrative powers,
including the power to limit, restrict or prohibit such an adviser or
broker-dealer from carrying on its business in the event that it fails to comply
with such laws and regulations. In such event, the possible sanctions that may
be imposed include the suspension of individual employees, limitations on
engaging in certain lines of business for specified periods of time, revocation
of investment adviser and other registrations, censures, and fines. We believe
that we are in substantial compliance with all material laws and regulations.
Our business is subject to regulation at both the federal and state level by the
Securities and Exchange Commission ("Commission") and other regulatory bodies.
Certain of our subsidiaries are registered with the Commission under the
Investment Advisers Act, and the Mutual Funds are registered with the Commission
under the Investment Company Act. Three of our subsidiaries are also registered
as broker-dealers with the Commission and are subject to regulation by the NASD
and various states.
20
The subsidiaries of Gabelli that are registered with the Commission under the
Investment Advisers Act (Gabelli Funds LLC, Gabelli Advisers, Inc., Gabelli
Fixed Income LLC and GAMCO) are regulated by and subject to examination by the
Commission. The Investment Advisers Act imposes numerous obligations on
registered investment advisers including fiduciary duties, record keeping
requirements, operational requirements, marketing requirements and disclosure
obligations. The Commission is authorized to institute proceedings and impose
sanctions for violations of the Investment Advisers Act, ranging from censure to
termination of an investment adviser's registration. The failure of a subsidiary
to comply with the requirements of the Commission could have a material adverse
effect on us. We believe that we are in substantial compliance with the
requirements of the regulations under the Investment Advisers Act.
We derive a substantial majority of our revenues from investment advisory
services through our investment management agreements. Under the Investment
Advisers Act, our investment management agreements terminate automatically if
assigned without the client's consent. Under the Investment Company Act,
advisory agreements with registered investment companies such as the Mutual
Funds terminate automatically upon assignment. The term "assignment" is broadly
defined and includes direct assignments as well as assignments that may be
deemed to occur, under certain circumstances, upon the transfer, directly or
indirectly, of a controlling interest in Gabelli.
In their capacity as broker-dealers, Gabelli & Company, Inc., Gabelli Fixed
Income Distributors, Inc. and Gabelli Direct, Inc. are required to maintain
certain minimum net capital and cash reserves for the benefit of our customers.
Gabelli & Company, Inc.'s and Gabelli Fixed Income Distributors, Inc.'s net
capital, as defined, has consistently met or exceeded all minimum requirements.
Gabelli Direct, Inc., which was acquired on December 22, 2000 and is currently
dormant, has also consistently met or exceeded all minimum requirements. Gabelli
& Company, Inc., Gabelli Fixed Income Distributors, Inc. and Gabelli Direct,
Inc. are also subject to periodic examination by the NASD.
Subsidiaries of Gabelli are subject to the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"), and to regulations promulgated there under,
insofar as they are "fiduciaries" under ERISA with respect to certain of their
clients. ERISA and applicable provisions of the Internal Revenue Code of 1986,
as amended (the "Code"), impose certain duties on persons who are fiduciaries
under ERISA and prohibit certain transactions involving ERISA plan clients. Our
failure to comply with these requirements could have a material adverse effect
on us.
Investments by Gabelli on behalf of our clients often represent a significant
equity ownership position in an issuer's class of stock. As of December 31,
2003, we had five percent or more beneficial ownership with respect to 126
equity securities. This activity raises frequent regulatory and legal issues
regarding our aggregate beneficial ownership level with respect to portfolio
securities, including issues relating to issuers' shareholder rights plans or
"poison pills," state gaming laws and regulations, federal communications laws
and regulations, public utility holding company laws and regulations, federal
proxy rules governing shareholder communications and federal laws and
regulations regarding the reporting of beneficial ownership positions. Our
failure to comply with these requirements could have a material adverse effect
on us.
The USA Patriot Act of 2001, enacted in response to the terrorist attacks on
September 11, 2001, contains anti-money laundering and financial transparency
laws and mandates the implementation of various new regulations applicable to
broker-dealers, mutual funds and other financial services companies, including
standards for verifying client identification at account opening, and
obligations to monitor client transactions and report suspicious activities.
Anti-money-laundering laws outside of the U.S. contain some similar provisions.
Our failure to comply with these requirements could have a material adverse
effect on us.
We, and certain of our affiliates, are subject to the laws of non-U.S.
jurisdictions and non-U.S. regulatory agencies or bodies. In particular, we are
subject to requirements in numerous jurisdictions regarding reporting of
beneficial ownership positions in securities issued by companies whose
securities are publicly traded in those countries. In addition, GAMCO is
registered as an international adviser, investment counsel and portfolio manager
with the Ontario Securities Commission in Canada in order to market our services
to prospective clients which reside in Ontario. Several of our Alternative
Investment products are organized under the laws of foreign jurisdictions. In
connection with our opening of an office in London and our plans to market
certain products in Europe we are required to comply with the laws of the United
Kingdom and other European countries regarding these activities. Our subsidiary,
Gabelli Asset Management (UK) Limited is regulated by the Financial Services
Authority. In connection with our registration in the United Kingdom we have
minimum capital requirements that have been consistently met or exceeded.
21
RECENT REGULATORY DEVELOPMENTS
On September 3, 2003, the New York Attorney General's office ("NYAG") announced
that it had found evidence of widespread improper trading involving mutual fund
shares. These transactions included the "late trading" of mutual fund shares
after the 4:00 p.m. pricing cutoff and "time zone arbitrage" of mutual fund
shares designed to exploit pricing inefficiencies. Since the NYAG's
announcement, the NASD, the SEC, the NYAG and officials of other states have
been conducting inquiries into and bringing enforcement actions related to
trading abuses in mutual fund shares. We received information requests from the
SEC and a subpoena from the NYAG in connection with their inquiries. We are
complying with these requests and have been conducting an internal review of our
mutual fund practices and procedures in a variety of areas with the guidance of
outside counsel. A special committee of all of our independent directors was
also formed to review various issues involving mutual fund share transactions
and is being assisted by independent counsel.
As part of our review, hundreds of documents were examined and approximately
fifteen individuals were interviewed. We found no evidence that any employee
participated in or facilitated any "late trading". We also found no evidence of
any improper trading in our mutual funds by our investment professionals or
senior executives. As we previously reported, we did find that in August of
2002, we banned an account, which had been engaging in frequent trading in our
Global Growth Fund (the prospectus of which did not impose limits on frequent
trading) and which had made a small investment in one of our hedge funds, from
further transactions with our firm. Certain other investors had been banned
prior to that. Since our internal review and requests from regulators are
ongoing, we can make no assurances that additional information will not become
available or that we will not become subject to disciplinary action.
In response to industry wide inquiries and enforcement actions, a number of
regulatory and legislative initiatives have been recently introduced. The SEC
has adopted and proposed a number of rules under the Investment Company Act and
the Investment Advisers Act. For example, the SEC adopted final rules requiring
written compliance programs for registered investment advisers and registered
investment companies. Several bills have also been introduced in Congress and
one has passed the House of Representatives. These proposals, if enacted or
adopted, could have a substantial impact on the regulation and operation of our
registered and unregistered funds. For example, the Mutual Fund Reform Act of
2004 would, among other things, eliminate Rule 12b-1 distribution fees, prohibit
soft dollar arrangements and restrict the management of hedge funds and mutual
funds by the same manager. In the coming months, the investment management
industry is likely to continue facing a high level of regulatory scrutiny and
become subject to additional rules designed to improve disclosure, strengthen
controls and reduce conflicts of interest.
PERSONNEL
At March 1, 2004, we had a full-time staff of approximately 197 individuals, of
whom 83 served in the portfolio management, research and trading areas, 71
served in the marketing and shareholder servicing areas and 43 served in the
administrative area. As part of our staff, we employ 18 portfolio managers for
the Mutual Funds, Separate Accounts and Alternate Investment products.
Additionally, Westwood Management employs three portfolio managers who advise
five of the six portfolios of the Gabelli Westwood family of funds, and Ned
Davis Research, Inc. employs five portfolio managers who are responsible for the
management of the Ned Davis Research Asset Allocation Fund.
ITEM 2: PROPERTIES
At December 31, 2003 we leased our principal offices which consisted of a single
60,000 square foot building located at 401 Theodore Fremd Avenue, Rye, New York.
This building was leased in December 1997 (prior to our 1999 IPO) from an entity
controlled by members of Mr. Gabelli's family, and approximately 9,000 square
feet are currently subleased to other tenants. We receive rental payments under
the sublease agreements, which totaled approximately $260,000 in 2003 and were
used to offset operating expenses incurred for the property. The lease provides
that all operating expenses related to the property, which are estimated at
$650,000 annually, are to be paid by us.
We have also entered into leases for office space in both the U.S. and overseas
principally for portfolio management, research, sales and marketing personnel.
These offices are generally less than 4,000 square feet and leased for periods
of five years or less.
22
ITEM 3: LEGAL PROCEEDINGS
From time to time, we are a defendant in various lawsuits incidental to our
business. We do not believe that the outcome of any current litigation will have
a material effect on our financial condition.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders during the fourth
quarter of 2003.
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our shares of class A common stock have been traded on the New York Stock
Exchange (NYSE) under the symbol GBL since our initial public offering on
February 11, 1999. Prior to that there was no public market for our common
stock.
As of March 1, 2004 there were 133 class A common stockholders of record and 3
class B common stockholders of record (Gabelli Group Capital Partners, Inc. and
two of its wholly-owned subsidiaries). These figures do not include stockholders
with shares held under beneficial ownership in nominee name which are estimated
to be in excess of 4,000.
The following table sets forth the high and low prices of our class A common
stock for each quarter of 2003 and 2002 as reported by the New York Stock
Exchange.
QUARTER ENDED HIGH LOW
------------- ---- ---
March 31, 2003 $ 33.50 $ 25.60
June 30, 2003 $ 36.24 $ 26.25
September 30, 2003 $ 39.00 $ 34.61
December 31, 2003 $ 40.80 $ 33.50
March 31, 2002 $ 44.45 $ 35.60
June 30, 2002 $ 41.05 $ 35.22
September 30, 2002 $ 36.65 $ 24.40
December 31, 2002 $ 33.92 $ 27.20
We paid our first dividend, a $.02 per share dividend on December 15, 2003 to
our class A shareholders of record December 1, 2003. The class B shareholders
elected to waive receipt of this dividend in 2003.
The information set forth under the caption "Equity Compensation Plan
Information" in the Proxy Statement is incorporated herein by reference.
23
ITEM 6: SELECTED FINANCIAL DATA
GENERAL
The selected historical financial data presented below has been derived in part
from, and should be read in conjunction with Management's Discussion and
Analysis included in Item 7 and the audited Consolidated Financial Statements of
Gabelli Asset Management Inc. and subsidiaries and related notes included in
Item 8 of this report.
YEAR ENDED DECEMBER 31,
(In thousands, except per share data)
1999 2000 2001 2002 2003
---------- ---------- ---------- ---------- ----------
INCOME STATEMENT DATA
Revenues:
Investment advisory and
incentive fees ........................ $ 147,414 $ 190,200 $ 186,124 $ 177,077 $ 176,943
Commission revenue ...................... 11,856 16,805 15,939 13,883 12,863
Distribution fees and other income ...... 16,992 26,913 22,351 18,999 17,631
---------- ---------- ---------- ---------- ----------
Total revenues ........................ 176,262 233,918 224,414 209,959 207,437
---------- ---------- ---------- ---------- ----------
Expenses:
Compensation costs ...................... 71,860 97,055 85,754 80,387 89,169
Management fee .......................... 10,153 11,296 11,325 9,533 9,002
Other operating expenses ................ 28,917 36,653 33,887 30,377 34,552
Non-recurring charge .................... 50,725 -- -- -- --
---------- ---------- ---------- ---------- ----------
Total expenses ........................ 161,655 145,004 130,966 120,297 132,723
---------- ---------- ---------- ---------- ----------
Operating income .......................... 14,607 88,914 93,448 89,662 74,714
---------- ---------- ---------- ---------- ----------
Other income (expense), net:
Net gain from investments ............... 14,253 6,716 5,187 1,353 15,610
Interest and dividend income ............ 6,850 9,745 9,461 6,757 5,530
Interest expense ........................ (3,438) (3,714) (6,174) (11,977) (14,838)
---------- ---------- ---------- ---------- ----------
Total other income (expense), net ..... 17,665 12,747 8,474 (3,867) 6,302
---------- ---------- ---------- ---------- ----------
Income before income taxes
and minority interest ................... 32,272 101,661 101,922 85,795 81,016
Income taxes ............................ 10,467 40,257 39,342 32,259 30,339
Minority interest ....................... 3,270 3,409 1,482 224 833
---------- ---------- ---------- ---------- ----------
Net income ................................ $ 18,535 $ 57,995 $ 61,098 $ 53,312 $ 49,844
========== ========== ========== ========== ==========
Net income per share:
Basic .................................. $ 0.64 $ 1.96 $ 2.06 $ 1.77 $ 1.66
========== ========== ========== ========== ==========
Diluted ................................ $ 0.64 $ 1.94 $ 2.03 $ 1.76 $ 1.65
========== ========== ========== ========== ==========
Weighted average shares outstanding:
Basic .................................. 29,117 29,575 29,666 30,092 30,018
========== ========== ========== ========== ==========
Diluted ................................ 29,117 29,914 30,783 30,302 32,081
========== ========== ========== ========== ==========
Actual shares outstanding at
December 31st .......................... 29,699 29,519 29,828 29,881 30,050
========== ========== ========== ========== ==========
24
DECEMBER 31,
1999 2000 2001 2002 2003
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT ASSETS UNDER MANAGEMENT)
BALANCE SHEET DATA
Total assets ............................ $ 243,062 $ 317,804 $ 486,394 $ 582,731 $ 736,511
Total liabilities and
minority interest .................... 95,486 115,607 211,097 260,938 358,200
---------- ---------- ---------- ---------- ----------
Total stockholders' equity .............. $ 147,576 $ 202,197 $ 275,297 $ 321,793 $ 378,311
========== ========== ========== ========== ==========
ASSETS UNDER MANAGEMENT (UNAUDITED)
(at year end, in millions):
Separate Accounts ................... $ 10,064 $ 11,001 $ 12,233 $ 10,603 $ 13,535
Mutual Funds ........................ 11,640 12,113 11,955 10,068 13,332
Alternative Investments ............. 230 437 573 578 692
---------- ---------- ---------- ---------- ----------
Total ........................... $ 21,934 $ 23,551 $ 24,761 $ 21,249 $ 27,559
========== ========== ========== ========== ==========
YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
UNAUDITED PRO FORMA INCOME STATEMENT DATA
Revenues:
Investment advisory and incentive fees ........................ $ 147,414
Commission revenue ............................................ 11,856
Distribution fees and other income ............................ 16,992
----------
Total revenues ............................................ 176,262
----------
Expenses:
Compensation costs ............................................ 71,860
Management fee ................................................ 9,057
Other operating expenses ...................................... 28,894
Non-recurring charge .......................................... 50,725
----------
Total expenses ............................................ 160,536
----------
Operating income .............................................. 15,726
----------
Other income:
Net gain from investments ..................................... 12,350
Interest and dividend income .................................. 6,374
Interest expense .............................................. (3,653)
----------
Total other income, net ................................... 15,071
----------
Income before income taxes and minority interest ................. 30,797
Income taxes .................................................. 12,728
Minority interest ............................................. 3,270
----------
Net income ....................................................... $ 14,799(a)
==========
Net income per share:
Basic and diluted ............................................. $ 0.50(a)
==========
Weighted average shares outstanding:
Basic and diluted ............................................. 29,890
==========
25
The foregoing unaudited pro forma income statement data gives effect to (i) the
Reorganization, including the gain from investments, the reduction in interest
and dividend income, the lower management fee and the increase in interest
expense as if the Employment Agreement (see Note I to the Consolidated Financial
Statements) had been in effect for the full year ended December 31, 1999 and
(ii) the additional income taxes which would have been recorded if GFI had been
a "C" corporation instead of an "S" corporation based on tax laws in effect. The
unaudited pro forma data does not give effect to the use of proceeds received
from the Offering for the period prior to the Offering.
The unaudited pro forma adjustments are based upon available information and
certain assumptions that our management believed were reasonable under the
circumstances. The pro forma financial data does not purport to represent the
results of operations or the financial position of Gabelli which actually would
have occurred had the Reorganization been consummated on the aforesaid dates, or
project the results of operations or the financial position of Gabelli for any
future date or period.
- --------------------------------------------------------------------------------
(a) Excluding the non-recurring charge related to the note payable ($30.9
million, net of tax benefit of $19.8 million, or $1.03 per share) net
income and net income per share for the year ended December 31, 1999 were
$45.7 million and $1.53, respectively.
26
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements and the notes thereto included in Item 8 to this report.
INTRODUCTION
Our principal business is providing investment advisory and brokerage services
to mutual fund, institutional and high net worth investors, primarily in the
United States. We generally manage assets on a discretionary basis and invest in
a variety of U.S. and international securities through various investment
styles.
Our revenues are highly correlated to the level of assets under management,
which are directly influenced by the value of the overall equity markets. Assets
under management can also increase through acquisitions and by the addition of
new accounts. Since various equity products have different fees, changes in our
business mix may also affect revenues. At times, the performance of our equity
products may differ markedly from popular market indices, and this can also
impact our revenues. It is our belief that general stock market trends will have
the greatest impact on our level of assets under management and hence, revenues.
This becomes increasingly likely as the base of assets grows.
For the 77-year period ended December 31, 2003, stocks provided an average total
return of about 10.4%, according to Ibbotson Associates. Management believes the
market will continue to exhibit volatility in line with historical experience
and believes the 28.7% return registered by the S&P 500 Index in 2003 must be
taken in the context of a market that declined in the 3 prior years. For
planning purposes, we are estimating stock market gains of 6% to 8% for the next
3 to 5 year period, driven by a similar magnitude of growth in corporate
profits. We expect that an increase in tax rates or inflation rates would reduce
stock market returns. Similarly, increased regulation of the mutual fund
industry, combined with growing fee pressures and our willingness to participate
in certain NTF programs, may impair our profit margins.
As discussed in the Regulation section in Item 1 of this report, the Mutual Fund
Reform Act of 2004 (the "Mutual Fund Act") if enacted would impact Rule 12b-1
distribution fees, prohibit soft dollar arrangements and restrict the management
of hedge funds and mutual funds by the same portfolio manager. The effects of
the Mutual Fund Act and potentially other regulatory actions pose a risk to our
future revenues and operating margins. While we are unable to quantity the
effects at this time, the impact may be material to our business.
OVERVIEW
Investment advisory and incentive fees, which are based on the amount and
composition of assets under management in our Mutual Funds, Separate Accounts
and Alternative Investments, represent our largest source of revenues. In
addition to the general level and trends of the stock market, growth in revenues
depends on good investment performance, which influences the value of existing
assets under management as well as contributing to higher investment and lower
redemption rates and facilitating the ability to attract additional investors
while maintaining current fee levels. Growth in assets under management is also
dependent on being able to access various distribution channels, which is
usually based on several factors, including performance and service.
Historically, we have depended primarily on direct distribution of our products
and services, but since 1995 have participated in Third-Party Distribution
Programs, including NTF Programs. A majority of our cash inflows to mutual fund
products have come through these channels since 1998. Attempts by some NTF
Program sponsors to increase their service or distribution fees may result in
several of our Mutual Funds being withdrawn from such programs. The effects of
this on our future financial results cannot be determined at this time, but
could be material. In recent years, we have been engaged to act as a sub-adviser
for other much larger financial services companies with much larger sales
distribution organizations. A substantial portion of the cash flows into our
institutional and separate accounts business has come through this channel.
These sub-advisory clients are subject to business combinations that may result
in the termination of the relationship. The loss of a sub-advisory relationship
could have a significant impact on our financial results in the future.
Advisory fees from the Mutual Funds and sub-advisory accounts are computed daily
or weekly, advisory fees from the Separate Accounts are generally computed
quarterly based on account values as of the end of the preceding quarter, and
Alternative Investment fees are computed either monthly or quarterly. These
revenues vary depending upon the level of sales compared with redemptions,
financial market conditions and the fee structure for assets under management.
Revenues derived from the equity-oriented portfolios generally have higher
management fee rates than fixed income portfolios. Revenues from our Alternative
Investments also generally include an incentive allocation or fee of 20% of the
economic profit, as defined. The
27
incentive allocation and fees are recorded as earned with the related
compensation expense accrued. The incentive allocation and fees and related
compensation expense may increase or decrease during the year depending upon the
performance of the underlying Alternative Investment products. We also receive
fulcrum fees from certain Separate Accounts based upon meeting or exceeding
certain contractual investment return thresholds over a stipulated period of
time. These fees are finalized and received when the contract period is
completed. Certain fees in our closed end funds are only earned if the fund's
total return is greater than a specified total return. A total of $575 million
of assets in closed-end funds are subject to such arrangements.
Commission revenues consist of brokerage commissions derived from securities
transactions executed on an agency basis on behalf of mutual funds,
institutional and high net worth clients as well as investment banking revenue,
which consists of underwriting profits, selling concessions and management fees
associated with underwriting activities. Commission revenues vary directly with
account trading activity and new account generation. Investment banking revenues
are directly impacted by the overall market conditions, which affect the number
of public offerings which may take place.
Distribution fees and other income primarily include distribution fee revenue in
accordance with Rule 12b-1 ("12b-1") of the Investment Company Act of 1940, as
amended (the "Investment Company Act"), along with sales charges and
underwriting fees associated with the sale of the Mutual Funds plus other
revenues. Distribution fees fluctuate based on the level of assets under
management and the amount and type of Mutual Funds sold directly by Gabelli &
Company and through various distribution channels. As discussed in the
Regulation section in Item 1 of this report, the effects of the Mutual Fund
Reform Act of 2004 if enacted and other congressional and SEC actions pose a
risk to Gabelli & Company's future distribution fee revenue as 12b-1 fees may be
repealed or restricted.
Compensation costs include variable and fixed compensation and related expenses
paid to officers, portfolio managers, sales, trading, research and all other
professional staff. Other operating expenses include marketing, product
distribution and promotion costs, clearing charges and fees for Gabelli &
Company's brokerage operation, and other general and administrative operating
costs.
Other Income and Expenses include net gain from investments (which includes both
realized and unrealized gains), interest and dividend income, and interest
expense. Net gain from investments are derived from our proprietary investment
portfolio consisting of various public and private investments.
Minority interest represents the share of net income attributable to the
minority stockholders, as reported on a separate company basis, of our
consolidated majority-owned subsidiaries.
ASSET HIGHLIGHTS
We reported assets under management as follows (dollars in millions):
%Inc(Dec)
1999 2000 2001 2002 2003 2003/2002 %CAGR(a)
-------- -------- -------- -------- -------- --------- -------
Mutual Funds
Open-End $ 8,509 $ 8,979 $ 8,334 $ 6,482 $ 8,088 24.8% (1.3%)
Closed-End 1,950 1,709 1,831 1,609 3,530 119.4 16.0
Fixed Income 1,181 1,425 1,790 1,977 1,714 (13.3) 9.8
-------- -------- -------- -------- --------
Total Mutual Funds 11,640 12,113 11,955 10,068 13,332 32.4 3.5
Institutional & Separate Accounts
Equities 9,370 10,142 11,513 9,990 13,031 30.4 8.6
Fixed Income 694 859 720 613 504 (17.8) (7.7)
-------- -------- -------- -------- --------
Total Institutional & Separate Accounts 10,064 11,001 12,233 10,603 13,535 27.7 7.7
Alternative Investments 230 437 573 578 692 19.7 31.7
-------- -------- -------- -------- --------
Total Assets Under Management $ 21,934 $ 23,551 $ 24,761 $ 21,249 $ 27,559 29.7 5.9
======== ======== ======== ======== ========
(a) the % CAGR is computed for the five year period December 31, 1998 through
December 31, 2003
Net inflows in 2003 totaled $1.1 billion compared to a net outflow of $61
million in 2002 and a net inflow of $2.7 billion in 2001. The 2002 cash flows do
not include $248 million in assets under management added through our
affiliation with Woodland Partners LLC in November 2002.
28
Total net inflows from equities products were approximately $1.5 billion in 2003
with the initial public offering of The Gabelli Dividend & Income Trust ("GDV")
in November 2003 being the most significant contribution to net inflows as the
offering added approximately $1.46 billion of assets. Total net outflows from
fixed income products were $391,000 in 2003.
For the three years ended December 31, 2001, 2002 and 2003 our net cash inflows
and outflows by product line were as follows (in millions):
2001 2002 2003
------- ------ -------
Mutual Funds
Equities $ 846 $ (188) $ 1,364
Fixed Income 310 156 (276)
------- ------ -------
Total Mutual Funds 1,156 (32) 1,088
------- ------ -------
Institutional HNW & Separate Accounts
Equities 1,600 97 52
Fixed Income (171) (120) (115)
------- ------ -------
Total Institutional HNW & Separate Accounts 1,429 (23) (63)
------- ------ -------
Alternative Investments
Equities 136 (6) 54
Fixed Income -- -- --
------- ------ -------
Total Alternative Investments 136 (6) 54
------- ------ -------
Total Equities 2,582 (97) 1,470
Total Fixed Income 139 36 (391)
------- ------ -------
Total Net Cash In (Out) Flows $ 2,721 $ (61) $ 1,079
======= ====== =======
OPERATING RESULTS FOR THE YEAR ENDED DECEMBER 31, 2003 AS COMPARED TO THE YEAR
ENDED DECEMBER 31, 2002
REVENUES
Total revenues were $207.4 million in 2003, $2.6 million or 1.2% below total
revenues of $210.0 million in 2002. The decline in total revenues by revenue
component was as follows (in millions):
INCREASE (DECREASE)
2002 2003 $ %
------ ------ ------ ------
Investment advisory and incentive fees $177.1 $176.9 $ (0.2) (0.1%)
Commissions 13.9 12.9 (1.0) (7.3)
Distribution Fees and other income 19.0 17.6 (1.4) (7.2)
------ ------ ------
Total revenues $210.0 $207.4 $ (2.6) (1.2)
====== ====== ======
INVESTMENT ADVISORY AND INCENTIVE FEES: Investment advisory and incentive fees,
which comprised 85% of total revenues in 2003, are directly influenced by the
level and mix of assets under management. Assets under management ended the year
at a record $27.6 billion, a 29.7% increase over prior year end assets under
management of $21.2 billion. Despite reaching a record level of assets on
December 31, 2003, investment advisory fees in 2003 declined slightly from 2002
as average assets under management in 2003 declined to $22.4 billion from $23.6
billion in 2002. As we look forward to 2004, investment advisory fees will
benefit from a full twelve months of revenue from GDV. The initial public
offering of GDV generated gross proceeds of approximately $1.46 billion in
November 2003 and added an additional $194 million of gross proceeds through the
exercise of the underwriters' overallotment option in January 2004.
Mutual fund revenues increased $1.4 million or 1.5%, as lower revenues from
open-end equity mutual funds were more than offset by higher revenues from
closed-end funds. Revenue from open-end equity funds decreased $4.5 million or
5.9% from the prior year as average assets under management in 2003 declined to
$7.1 billion from $7.4 billion in 2002. The increase in assets during the last
half of 2003 resulting from strong performance results did not offset the effect
on revenues of lower asset levels during the first six months. Closed-end fund
revenues increased $5.9 million or 47.1% from the prior year as fees from assets
subject to performance fee arrangements where the fees are earned based upon the
respective fund meeting or exceeding certain contractual investment thresholds
over a stipulated period of time contributed to the majority of this increase.
Closed-end fund assets and revenue also benefited from the launch of GDV during
the fourth quarter of 2003. GDV began trading on the New York Stock Exchange on
November 25, 2003 and commenced investment operations on November 28, 2003.
29
Revenue from our institutional and high net worth Separate Accounts decreased
$7.4 million or 10.3% as lower average asset levels and a lower average advisory
fee rate due to the effect of a shift in account mix were the principal reasons
for the decline. While revenue declined, assets in our equity Separate Accounts
rose $3 billion or 30.4% for the year of which $1.7 billion or 15.3% of this
increase occurred in the 4th quarter of 2003, principally through market
appreciation. As our Separate Account revenues are largely based on values at
the beginning of a quarter, the impact of the fourth quarter increase will be
more fully realized in 2004. The strong historical performance of our Separate
Accounts coupled with renewed interest from investors seeking to rebalance their
portfolios and reallocate from fixed income to tax-sensitive, separately managed
equity accounts should provide additional benefits in 2004.
Total advisory fees from alternative investments increased to $14.2 million in
2003 from $7.5 million in 2002. Higher overall assets under management led to an
increase in management fees of 8.0% to $6.1 million from $5.7 million in 2002.
Incentive allocations and fees from alternative investment products, which
generally represent 20% of the economic profit, increased to $8.1 million in
2003 compared to $1.8 million in 2002.
COMMISSIONS: Commission revenues in 2003 were $12.9 million, $1.0 million or
7.3% lower than commission revenues of $13.9 million in 2002. Lower commission
revenues from a decline in agency trading activity for accounts managed by
affiliated companies and the implementation of a simplified commission structure
were partially offset by higher commission revenues from institutional and
retail customers. Commission revenues derived from transactions on behalf of our
Mutual Funds and Separate Account clients totaled $9.7 million, or approximately
75% of total commission revenues in 2003.
DISTRIBUTION FEES AND OTHER INCOME: Distribution fees and other income declined
7.2% or $1.4 million to $17.6 million in 2003 from $19.0 million in 2002. The
year-to-year decline was principally the result of lower average assets under
management in open-end equity mutual funds with distribution plans and the
waiver of the 12b-1 distribution fee on the ABC fund which began in January
2003.
EXPENSES
Total expenses were $132.7 million in 2003, an increase of $12.4 million or
10.3% from total expenses of $120.3 million in 2002. Operating margin declined
to 36.0% in 2003 from 42.7% in 2002 as operating income declined $14.9 million
year over year.
COMPENSATION: Compensation costs, which are largely variable in nature and
increase or decrease as revenues grow or decline, increased approximately $8.8
million, or 10.9%, to $89.2 million in 2003 from $80.4 million in 2002. The
majority of this increase was attributable to higher variable compensation
related to our alternative investments (an increase of $2.5 million) and
compensation not directly tied to revenues which included stock option expense
(an increase of $1.3 million), higher costs related to research, sales and
investment professionals (an increase of $2.0 million) and the year-over-year
effect of a reversal of incentive compensation in 2002 ($2.2 million). While the
increase in staffing has impacted operating margins in the short-term, we have
strengthened our asset gathering capabilities and broadened our research and
investment expertise which is expected to increase asset and revenue growth and
improve operating margins over the longer term. In 2004, we also expect to add
professional staff to assist in the execution of our business strategy.
MANAGEMENT FEE: Management fee expense, a totally variable cost based on pre-tax
profits, declined 5.6% to $9.0 million in 2003 versus $9.5 million in 2002.
OTHER OPERATING EXPENSES: Other operating expenses, which include marketing,
promotion and distribution costs as well as general operating expenses increased
$4.1 million or 13.7% to $34.5 million in 2003. A large portion of this increase
related to higher general operating expenses including accounting, legal and
insurance costs which were partly related to complying to the requirements of
the Sarbanes-Oxley Act of 2002. These costs are expected to continue to have an
impact in 2004 as well as in subsequent years.
OTHER INCOME AND EXPENSE
Our proprietary investment portfolio consists of investments in mutual funds,
U.S. treasury bills, common stocks as well as private investments. Net gain from
investments, which is derived from our proprietary investment portfolio, was
approximately $15.6 million for the year ended December 31, 2003 compared to
$1.4 million in 2002. In 2003 a gain of $0.1 million was realized from the
repurchase of 20,600 shares of our mandatory convertible securities.
Interest and dividend income was $5.5 million in 2003 compared to $6.8 million
in 2002. The decrease in interest income was principally the result of a
decrease in short-term interest rates. Dividend income included a $518,000
dividend received in the third quarter of 2003 from our Westwood Holdings Group,
Inc. ("WHG") investment.
30
Interest expense rose $2.8 million to $14.8 million in 2003, from $12.0 million
in 2002. The increase in interest expense was attributable to the issuance of
$100 million 5.5% senior notes in May 2003 offset partially from the decrease of
1% on the convertible note from 6% to 5% in August 2003. The note is
convertible, at the holder's option, into shares of our class A common stock at
$52 per share.
The mandatory convertible securities consist of both a purchase contract to
purchase shares of our class A common stock on February 17, 2005 and senior
notes due February 17, 2007. The purchase contract includes a contract
adjustment payment of 0.95% per year and the notes bear interest at 6% per year,
which rate is expected to be reset on November 17, 2004. The settlement of the
purchase contract in February 2005 will result in the issuance of between 1.8
million and 2.2 million shares of our class A common stock which will have a
dilutive effect on earnings per share.
INCOME TAXES
The effective tax rate for 2003 was 37.4% down from the 2002 effective tax rate
of 37.6% traceable to the effect of a dividend received deduction related to the
WHG dividend.
MINORITY INTEREST
Minority interest expense was $0.8 million in 2003 up 271.9% from $0.2 million
in 2002. The increase in minority interest expense was largely the result of
increased earnings from our alternative investment products and income from our
investments at our 92% owned subsidiary, Gabelli Securities, Inc.
NET INCOME
Net income for 2003 was $49.8 million or $1.65 per diluted share versus $53.3
million or $1.76 per diluted share for 2002. The decline in net income of 6.5%
in 2003 can be attributed to the impact of weak equity markets during the first
six months of the year on average assets under management, higher compensation
costs and an increase in other operating expenses.
Shares outstanding on a diluted basis at December 31, 2003 were 32.1 million and
included 1.9 million shares from the assumed conversion of our convertible note
for the full year 2003 as under the applicable accounting methodology used to
compute dilution, the convertible note was dilutive. The full number of shares
which may be issued upon conversion of this note is approximately 1.9 million.
Shares issuable under the mandatory convertible securities are excluded from the
diluted shares calculation under current accounting rules. Shares of our class A
common stock issuable under the mandatory convertible securities pursuant to the
settlement of the purchase contract in February 2005 will be between 1.8 million
and 2.2 million and will have a dilutive effect on earnings per share. During
2003, we issued 225,256 shares from the exercise of stock options and
repurchased 56,922 shares.
At December 31, 2003, we had 949,650 options outstanding to purchase our class A
common stock which were granted under our Stock Award and Incentive Plans (the
"Plans"). Management may recommend to the Board of Directors to commence a
tender offer in 2004 to purchase the options granted in 2003 under the Plans. As
of December 31, 2003, there were 570,500 options outstanding that would be
eligible to participate in the tender offer. If the tender offer is consummated,
it will result in the acceleration of compensation and other expenses in our
consolidated statement of operations in the period in which the tender offer is
completed rather than over the remaining life of the options and will result in
a decline in earnings in 2004.
DIVIDEND
We paid our first dividend of $0.02 per share on December 15, 2003 to our class
A shareholders of record on December 1, 2003. The holders of our class B common
stock, Gabelli Group Capital Partners, Inc. and its two subsidiaries, agreed to
waive receipt of this dividend or $460,000.
OPERATING RESULTS FOR THE YEAR ENDED DECEMBER 31, 2002 AS COMPARED TO THE YEAR
ENDED DECEMBER 31, 2001
REVENUES
Total revenues were $210.0 million in 2002, $14.4 million or 6.4% below total
revenues of $224.4 million in 2001. The decline in total revenues by revenue
component was as follows (in millions):
INCREASE (DECREASE)
------------------
2001 2002 $ %
------ ------ ------- -----
Investment advisory and incentive fees $186.1 $177.1 $ (9.0) (4.9%)
Commissions 15.9 13.9 (2.0) (12.9)
Distribution Fees and other income 22.4 19.0 (3.4) (15.0)
------ ------ -------
Total revenues $224.4 $210.0 $ (14.4) (6.4)
====== ====== =======
31
INVESTMENT ADVISORY FEES AND INCENTIVE FEES: Investment advisory fees are
directly influenced by the level and mix of assets under management. Nearly 88%
of assets managed by Gabelli are in equity products. Average assets managed, and
therefore investment advisory fees, continued to be impacted by the overall
decline in the world equity markets during 2002. Equity markets were down for a
third straight year as the S&P 500, Russell 2002 and NASDAQ indices fell 22.1%,
20.5% and 31.1%, respectively. Against this backdrop, assets managed in our
open-end equity mutual funds declined 22.2% to $6.5 billion in 2002, from $8.3
billion in 2001. Substantially all of this $1.8 billion decline was due to
market performance as equity mutual fund cash outflows were less than $ 0.2
billion in 2002. The decline in equity-managed assets was largely offset by an
increase in assets managed in our fixed income products. The result of lower
equity valuations and a shift in mix to lower margin fixed income products led
to a decline in mutual fund revenues of 12.8%, or $13.5 million, to $92.2
million in 2002 from $105.7 million in 2001. Investment advisory fees from our
institutional and high-net-worth Separate Accounts rose $4.9 million to $77.4
million in 2002 compared to $72.5 million in 2001, benefiting from nearly $100
million in net new cash flows into its equity portfolios during the year.
Advisory fees from alternative investment products increased 16% to $5.7 million
from $4.9 million in 2001 due to higher overall levels of assets under
management. Incentive allocations from alternative investment products, which
generally represent 20% of the absolute gain in a portfolio, were lower at $1.8
million in 2002 compared with $3.0 million in 2001 as portfolio gains were
impacted by the world equity markets.
COMMISSIONS: Commission revenues in 2002 were $13.9 million, $2.0 million, or
12.9% lower than commission revenues of $15.9 million in 2001. The lower
commission revenues result from a decline in agency trading activity for
accounts managed by affiliated companies. Commission revenues derived from
transactions on behalf of our Mutual Funds and Separate Accounts clients totaled
$11.9 million, or approximately 86% of total commission revenues in 2002.
DISTRIBUTION FEES AND OTHER INCOME: Distribution fees and other income declined
15.0% or $3.4 million to $19.0 million in 2002 from $22.4 million in 2001. The
year-to-year decline was principally the result of lower average assets under
management in open-end equity mutual funds.
EXPENSES
Total expenses were $120.3 million in 2002, a decrease of $10.7 million, or
8.1%, from total expenses of $131.0 million in 2001. Operating income as a
percentage of total revenues rose to 43% in 2002 from 42% in 2001.
COMPENSATION: Compensation costs, which are largely variable in nature and
increase or decrease as revenues grow or decline, decreased approximately $5.4
million, or 6.3%, to $80.4 million in 2002 from $85.8 million in 2001. We began
to increase staffing in portfolio management, research and marketing during the
second half of 2002 to further strengthen and expand our core competencies in
these areas. This will impact operating margins in the short-term but are
expected to strengthen our asset gathering capabilities and increase asset and
revenue growth and improve operating margins over the longer term.
MANAGEMENT FEE: Management fee expense, which is totally variable and increases
or decreases as pre-tax profits grow or decline, was $9.5 million in 2002 and
$11.3 in 2001.
OTHER OPERATING EXPENSES: Other operating expenses, which include marketing,
promotion and distribution costs as well as general operating expenses were
$30.4 million in 2002, a decrease of approximately $3.5 million, or 10.4%, from
$33.9 million in 2001. Included in other operating costs are distribution
payments to third party intermediaries, which totaled $10.8 million in 2002, a
decrease of $1.5 million, or 11.9%, from $12.3 million in 2001.
OTHER INCOME AND EXPENSE
Net gain from investments, which is principally derived from our proprietary
investment portfolio, was approximately $1.4 million for the year ended December
31, 2002 compared to $5.2 million in 2001. In 2002 a gain of $0.6 million was
realized from the repurchase of 218,200 shares of the mandatory convertible
securities.
Interest and dividend income was $6.8 million in 2002 compared to $9.5 million
in 2001.
Interest expense rose $5.8 million to $12.0 million in 2002, from $6.2 million
in 2001. The increase in interest expense is attributable to the issuance of a
$100 million convertible note in August 2001 and $90 million of mandatory
convertible securities (NYSE: GBL.I) issued in February 2002. The convertible
note paid interest at a rate of 6.5% per year through August 2002 and pays 6%
thereafter. The note is convertible, at the holder's option, into shares of our
class A common stock at $53 per share. The mandatory convertible securities pay
interest at 6% and consist of both a contract to purchase shares of GBL on
February 17, 2005 and 6% senior notes due February 17, 2007.
32
INCOME TAXES
The effective tax rate for 2002 was 37.6% down from the 2001 effective tax rate
of 38.6% primarily from lower applicable state and local income taxes.
MINORITY INTEREST
Minority interest expense was $0.2 million in 2002 down 84.9% from $1.5 million
in 2001. The decrease in expense is primarily attributable to our increased
ownership in Gabelli Securities, Inc. During 2001 we raised our ownership
interest to 92% from 77% through the issuance of approximately 400,000 shares of
our class A common stock.
NET INCOME
Net income for 2002 was $53.3 million or $1.76 per diluted share versus $61.1
million or $2.03 per diluted share for 2001.
Shares outstanding on a diluted basis at December 31, 2002 were 30.3 million and
did not include any shares from the assumed conversion of our convertible note
for the full year 2002 as under the applicable accounting methodology used to
compute dilution the convertible note was anti-dilutive. The full number of
shares which may be issued upon conversion of this note is approximately 1.9
million. Shares issuable under the mandatory convertible securities are excluded
from the diluted shares calculation under current accounting rules. Shares of
our class A common stock issuable under the mandatory convertible securities
pursuant to the settlement of the purchase contract in February 2005 will be
between 1.8 million and 2.2 million. During 2002, we issued 600,844 shares from
the exercise of stock options and repurchased 547,526 shares.
LIQUIDITY AND CAPITAL RESOURCES
Our principal assets consist of cash, short-term investments, securities held
for investment purposes and investments in mutual funds and alternative
products, both proprietary and external. Short-term investments are comprised
primarily of United States treasury securities with maturities of less than one
year and money market funds managed by Gabelli. Although the alternative
investments are for the most part illiquid, the underlying investments of such
partnerships or funds are for the most part liquid and the valuations of these
products reflect that underlying liquidity.
Summary cash flow data is as follows:
2001 2002 2003
---------- ---------- ----------
(in thousands)
Cash flows provided by (used in):
Operating activities $ 139,573 $ (38,347) $ 38,021
Investing activities (375) 18,539 (64,252)
Financing activities 96,978 25,791 101,312
---------- ---------- ----------
Increase in cash and cash equivalents 236,176 5,983 75,081
Cash and cash equivalents at beginning of year 69,271 305,447 311,430
---------- ---------- ----------
Cash and cash equivalents at end of year $ 305,447 $ 311,430 $ 386,511
========== ========== ==========
Cash and liquidity requirements have historically been met through cash
generated by operating income and our borrowing capacity. At December 31, 2003,
we had cash and cash equivalents of $386.5 million, an increase of $75.1 million
from the prior year end. We have established a collateral account, consisting of
cash and cash equivalents totaling $102.8 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 securities held in
the collateral account are restricted from other uses until the letter of credit
expires.
Cash provided by operating activities of $38.0 million in 2003 results primarily
from $49.8 million of net income partially offset by a reduction in payable to
brokers of $11.4 million, a reduction in securities sold, not yet purchased of
$4.4 million, equity in earnings of partnerships and affiliates of $5.7 million,
an increase in investment advisory fees receivable of $6.0 million and an
increase in notes and other receivables from affiliates of $4.1 million. Cash
used in operating activities of $38.3 million in 2002 results primarily from
$120.0 million used to purchase equity securities and U.S. Government
obligations which, due to their maturities, are not classified as cash
equivalents, offset by net income of $53.3 million, the cash savings from
recognizing $18.7 million in deferred tax assets related to the repayment of the
$50 million note payable and the tax benefit related to the exercise of
non-qualified stock options of $4.5 million.
33
Cash used in investing activities of $64.3 million in 2003 is primarily due to
an increase in available for sale securities of $55.9 million and an increase of
investments, net of distributions, in certain partnerships and affiliates of
$10.3 million. Cash provided by investing activities of $18.5 million in 2002 is
primarily due to distributions from certain partnerships and affiliates of $27.2
million, offset by investments in certain partnerships and affiliates of $8.1
million.
Cash provided by financing activities of $101.3 million in 2003 was largely due
to the issuance of $100 million of Senior Notes and $3.9 million received from
the exercise of our stock options by employees partially offset by the purchase
of an additional $1.9 million of our class A common stock, $0.5 million of
mandatory convertible securities and $0.1 million from our first dividend
payment. Cash provided by financing activities of $25.8 million in 2002 was
largely due to the issuance of $90 million of mandatory convertible securities
and $10.8 million received from the exercise of stock options on our class A
common stock by employees partially offset by the payment of a $50 million note
in January 2002, the purchase of an additional $17.2 million of our class A
common stock and $5.3 million of mandatory convertible securities.
We continue to maintain our investment grade rating which we have received from
two ratings agencies, Moody's Investors Services and Standard and Poor's Ratings
Services. We believe that our ability to maintain our investment grade rating
will provide greater access to the capital markets, enhance liquidity and lower
overall borrowing costs.
Gabelli & Company is registered with the Commission as a broker-dealer and is a
member of the NASD. 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. As of December 31, 2003 and 2002,
Gabelli & Company had net capital, as defined, of approximately $16.9 million
and $13.5 million, respectively, exceeding the regulatory requirement by
approximately $16.6 million and $13.2 million, respectively. Regulatory net
capital requirements increase when Gabelli & Company is involved in underwriting
activities.
Our subsidiary, Gabelli Asset Management (UK) Limited is a registered member of
the Financial Services Authority. In connection with this registration in the
United Kingdom, we have a minimum Liquid Capital Requirement of (pound)267,000,
($475,000 at December 31, 2003) and an Own Funds Requirement of (euro)50,000
($63,000 at December 31, 2003). We have consistently met or exceeded these
minimum requirements.
MARKET RISK
EQUITY PRICE RISK
We are subject to potential losses from certain market risks as a result of
absolute and relative price movements in financial instruments due to changes in
interest rates, equity prices and other factors. Our exposure to market risk is
directly related to our role as financial intermediary and adviser for assets
under management in our Mutual Funds, Separate Accounts, and Alternative
Investments as well as our proprietary investment and trading activities. At
December 31, 2003, our primary market risk exposure was for changes in equity
prices and interest rates. At December 31, 2002 and 2003, we had equity
investments, including mutual funds largely invested in equity products, of
$69.2 million and $127.7 million, respectively. Investments in mutual funds,
$38.5 million and $98.3 million at December 31, 2002 and 2003, respectively,
generally lower market risk through the diversification of financial instruments
within their portfolios. In addition, we may alter our investment holdings from
time to time in response to changes in market risks and other factors considered
appropriate by management. We also hold investments in partnerships and
affiliates which invest primarily in equity securities and which are subject to
changes in equity prices. Investments in partnerships and affiliates totaled
$47.9 million and $64.0 million at December 31, 2002 and 2003, respectively, of
which $35.7 million and $29.1 million were invested in partnerships and
affiliates which invest in event-driven merger arbitrage strategies. These
strategies are primarily dependent upon deal closure rather than the overall
market environment.
The following table provides a sensitivity analysis for our investments in
equity securities and partnerships and affiliates which invest primarily in
equity securities excluding arbitrage products, for which the principal exposure
is to deal closure and not overall market conditions, as of December 31, 2002
and 2003. The sensitivity analysis assumes a 10% increase or decrease in the
value of these investments.
34
(IN THOUSANDS)
FAIR VALUE ASSUMING FAIR VALUE ASSUMING
10% DECREASE IN 10% INCREASE IN
FAIR VALUE EQUITY PRICES EQUITY PRICES
---------- ------------- -------------
AT DECEMBER 31, 2002:
Equity price sensitive
investments, at fair value $ 78,905.4 $ 71,014.9 $ 86,795.9
---------- ---------- ----------
AT DECEMBER 31, 2003:
Equity price sensitive
investments, at fair value $156,328.3 $140,695.4 $171,961.1
---------- ---------- ----------
Our revenues are largely driven by the market value of our assets under
management and are therefore exposed to fluctuations in market prices of these
assets, which are largely readily marketable equity securities. Investment
advisory fees for mutual funds are based on average daily or weekly asset
values. Advisory fees earned on institutional and separate accounts, for any
given quarter, are determined based on asset values at the beginning of a
quarter. Any significant increases or decreases in market value of assets
managed which occur during a quarter will result in a relative increase or
decrease in revenues for the following quarter.
Alternative Investment advisory fees are computed based on monthly or quarterly
asset values. The incentive allocation or fee of 20% of the economic profit from
alternative investments is impacted by changes in the market prices of the
underlying investments of these products.
INTEREST RATE RISK
Our exposure to interest rate risk results, principally, from our investment of
excess cash in government obligations. These investments are primarily short
term in nature and the fair value of these investments generally approximates
market value. Our mandatory convertible securities include a provision to reset
the interest rate in November 2004. The reset rate will be determined by the
rates the notes should bear in order for each note to have an aggregate market
value of 100.5% of the principal amount of the note. If the reset rate were
determined at December 31, 2003 the interest rate would have been approximately
5%.
COMMITMENTS AND CONTINGENCIES
We are obligated to make future payments under various contracts such as debt
agreements and capital and operating lease agreements. The following table sets
forth our significant contractual cash obligations as of December 31, 2003. (In
thousands)
Total 2004 2005 2006 2007 2008 Thereafter
--------- --------- --------- --------- --------- --------- ---------
Contractual Obligations:
5.5% Senior notes $ 100,000 $ -- $ -- $ -- $ -- $ -- $ 100,000
5% Convertible note 100,000 -- -- -- -- -- 100,000
6.95%-Mandatory
convertible securities 84,030 -- -- -- 84,030 -- --
Capital lease obligations 7,140 765 765 765 765 765 3,315
Non-cancelable operating
lease obligations 1,434 486 425 334 168 21 --
--------- --------- --------- --------- --------- --------- ---------
Total $ 292,604 $ 1,251 $ 1,190 $ 1,099 $ 84,963 $ 786 $ 203,315
========= ========= ========= ========= ========= ========= =========
In addition, the 5% convertible note provides the holder certain put rights, at
par plus accrued interest, on August 13, 2004. If exercised, we will be required
to pay down the entire principal balance at that time. A collateral account
consisting of cash and securities has been established in the amount of $102.8
million to secure a letter of credit in favor of the convertible note holder.
The letter of credit will expire on August 14, 2004.
OFF-BALANCE SHEET ARRANGEMENTS
We are the General Partner or co-General Partner of various limited partnerships
whose underlying assets consist primarily of marketable securities. As General
Partner or co-General Partner, we are contingently liable for all of the limited
partnerships' liabilities.
35
Our income from these limited partnerships consists of our share of the
management fee and the 20% incentive allocation from the limited partners. We
also receive our pro-rata return on any investment made in the limited
partnership. We earned management fees of $2.0 million in 2002 and $2.3 million
in 2003 and incentive fees of $0.3 million and $1.5 million in 2002 and 2003,
respectively. Our pro-rata loss on investments in these limited partnerships
totaled $0.3 million in 2002 as compared to a gain of $2.3 million in 2003.
We do not invest in any other off-balance sheet vehicles that provide financing,
liquidity, market or credit risk support or engage in any leasing activities
that expose us to any liability that is not reflected in the Consolidated
Financial Statements.
CRITICAL ACCOUNTING POLICIES
In the ordinary course of business we make a number of estimates and assumptions
relating to the reporting of results of operations and financial condition in
the preparation of our financial statements in conformity with accounting
principles. We base our estimates on historical experience, when available, and
on other various assumptions that are believed to be reasonable under the
circumstances. Actual results could differ significantly from those estimates
under different assumptions and conditions.
We believe the following critical assumptions and estimates are those applied to
revenue recognition, the valuation of investments, goodwill and other long-lived
intangibles, income taxes, stock option accounting and the possible impact of
Financial Interpretation No. 46 ("FIN 46") "Consolidation of Variable Interest
Entities."
REVENUE RECOGNITION
Advisory fees from the Mutual Funds and sub-advisory accounts are computed daily
or weekly, advisory fees from the Separate Accounts are generally computed
quarterly based on account values as of the beginning of a quarter, and
Alternative Investment fees are computed either monthly or quarterly. Revenues
from our Alternative Investment products also generally include an incentive
allocation or fee of 20% of the economic profit, as defined, which is recorded
as earned. The incentive allocation and fees may increase or decrease during the
year as the profits of the product increase or decrease. Revenues may also
include performance fees and fulcrum fees from certain Separate Accounts and
closed-end funds based upon meeting or exceeding certain contractual investment
return thresholds over a stipulated period of time. Performance and fulcrum fees
are finalized and received when the contract period is completed.
INVESTMENTS
We hold investments in investment partnerships and affiliates, whose underlying
assets consist mainly of marketable securities, which are accounted for using
the equity method, under which we record our share of the earnings or losses
into income as earned. While many of these underlying investments are publicly
traded and have readily available market valuations, some of their investments
are non-publicly traded whose value may be difficult to determine. Investments
are written down when management believes an investment has experienced a
decline in value that is other than temporary. Future adverse changes in market
conditions or poor operating results of the underlying investment could result
in an inability to recover the carrying value of the investment and thereby
require an impairment charge to earnings.
GOODWILL AND OTHER LONG-LIVED INTANGIBLE ASSETS
Prior to the issuance of Statement of Financial Accounting Standards ("SFAS")
No. 142, goodwill and other long-lived intangible assets were amortized each
year. The adoption of SFAS No. 142 at the beginning of 2002, eliminated the
amortization of these assets and established requirements for having them tested
for impairment at least annually. At December 31, 2003 management assessed the
recoverability of goodwill and other intangible assets and determined that there
was no impairment. In assessing the recoverability of goodwill and other
intangible assets, projections regarding estimated future cash flows and other
factors are made to determine the fair value of the respective assets. If these
estimates or related projections change in the future, it may result in an
impairment charge for these assets to income.
INCOME TAXES
In the ordinary course of business, we prepare a number of tax returns, which
are regularly audited by Federal, state and foreign tax authorities. The
inherent complications in the various tax codes often create the need for
subjective judgments in applying its provisions. While management believes that
tax positions taken comply with tax law and are both reasonable and supported by
the facts and circumstances of the situation, upon audit additional taxes may be
assessed. While assessments may be proposed in the future, both the extent of
and potential impact on financial results cannot be determined at this time.
36
STOCK BASED COMPENSATION
Effective January 1, 2003, we use a fair value based method of accounting for
stock-based compensation provided to our employees in accordance with SFAS No.
123, "Accounting for Stock Based Compensation." The estimated fair value of
option awards is determined using the Black Scholes option-pricing model. This
sophisticated model utilizes a number of assumptions in arriving at its results,
including the estimated life of the option, the risk free interest rate at the
date of grant and the volatility of the underlying common stock. There may be
other factors, which have not been considered, which may have an effect on the
value of the options as well. The effects of changing any of the assumptions or
factors employed by the Black Scholes model may result in a significantly
different valuation for the options and a resulting difference in our net
income.
RECENT ACCOUNTING DEVELOPMENTS
In April 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No.
145, which rescinded SFAS No. 4 "Reporting Gains and Losses from Extinguishment
of Debt". Under SFAS No. 4, all gains and losses from extinguishment of debt
were required to be aggregated and, if material, classified as an extraordinary
item. As a result of the rescission, the criteria in APB Opinion No. 30 is used
to classify gains and losses from debt extinguishments. Since the issuance of
SFAS No. 4, the use of debt extinguishments has become a part of the risk
management strategy of many companies, particularly those who participate in the
secondary lending markets. Debt extinguishment no longer meets the criteria for
classification as extraordinary items in APB Opinion No. 30. Accordingly, gains
from the repurchase of our mandatory convertible securities in 2002 and 2003 of
$613,000 and $96,000, respectively, have been included in net gain from
investments and not as an extraordinary item. The adoption of SFAS No. 145 did
not have a material impact on our consolidated financial statements in 2002 and
2003 and is not expected to have a material impact on future consolidated
financial statements.
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 disclosure requirements are effective
for financial statements of interim or annual periods ending after December 15,
2002. The Interpretation's initial recognition and initial measurement
provisions are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002. We indemnify our clearing brokers for losses
they may sustain from the customer accounts introduced by our 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, we further limit margin balances to a maximum
of 25% versus 50% permitted under exchange regulations. At December 31, 2003 the
total amount of customer balances subject to indemnification (i.e. margin
debits) was immaterial. The Company also has entered into arrangements with
various other third parties which provide for indemnification against losses,
costs, claims and liabilities arising from the performance of their obligations
under our agreement, except for gross negligence or bad faith. The Company has
had no claims or payments pursuant to these or prior agreements, and we believe
the likelihood of a claim being made is remote. Utilizing the methodology in FIN
45, our estimate of the value of such agreements is de minimis, and therefore an
accrual has not been made in the consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" which provides alternative methods of
transition to SFAS No. 123, "Accounting for Stock-Based Compensation" and also
amends its disclosure provisions. In addition to the Prospective method
originally provided under SFAS No. 123, SFAS No. 148 provides for a modified
prospective and a retroactive restatement method. SFAS No. 148 further expands
the disclosure requirements to require disclosure in condensed consolidated
interim financial statements for any period in which stock-based awards are
outstanding and accounted for using the intrinsic value method of APB Opinion
No. 25. Effective January 1, 2003, we began expensing options on a modified
prospective method using the fair value recognition provisions of SFAS No. 123.
In January 2003, the FASB issued Intepretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46") addresses the application of Accounting
Research Bulletin No. 51, "Consolidated Financial Statements," to variable
interest entities ("VIE") and generally would require that the assets,
liabilities and results of operations of a VIE be consolidated into the
financial statements of the enterprise that has a controlling financial interest
in it. The interpretation provides a framework for determining whether an entity
should be evaluated for consolidation based on voting interests or significant
financial support provided to the entity (i.e., variable interests).
37
An entity is classified as a VIE if total equity is not sufficient to permit the
entity to finance its activities without additional subordinated financial
support or its equity investors lack the direct or indirect ability to make
decisions about an entity's activities through voting rights, absorb the
expected losses of the entity if they occur or receive the expected residual
returns of the entity if they occur. Once an entity is determined to be a VIE,
its assets, liabilities and results of operations should be consolidated with
those of its primary beneficiary. The primary beneficiary of a VIE is the entity
which either will absorb a majority of the VIE's expected losses or has the
right to receive a majority of the VIE's expected residual returns. The expected
losses and residual returns of a VIE include expected variability in its net
income or loss, fees to decision makers and fees to guarantors of substantially
all VIE assets or liabilities and are calculated in accordance with Statement of
Financial Accounting Concept No. 7, "Using Cash Flow Information and Present
Value in Accounting Measurements."
On December 24, 2003, the FASB issued a revision to FIN 46 to clarify some of
the provisions of this Interpretation and to exempt certain entities from its
requirements.
Application by public entities, other than small business issuers, for all other
types of variable interest entities is required in financial statements for
periods ending after March 15, 2004.
While Gabelli is generally not subject to a majority of the risks of the VIEs,
we may be determined, for certain entities, to receive a majority of the
expected residual returns based on the methodology for determining the primary
beneficiary. Therefore, when implemented, the Interpretation may require
consolidation of certain of our 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, which are deemed to be VIEs and for which we are
the primary beneficiary, in our 10-Q for the quarter ended March 31, 2004.
In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
is effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
after June 15, 2003. Under SFAS No. 150 certain financial instruments shall be
classified as a liability on the issuer's financials statements. The Company has
adopted this statement, which did not have a material impact on the Company's
financial statements.
SEASONALITY AND INFLATION
We do not believe our operations are subject to significant seasonal
fluctuations. We do not believe inflation will significantly affect our
compensation costs, as they are substantially variable in nature. However, the
rate of inflation may affect our expenses such as information technology and
occupancy costs. To the extent inflation results in rising interest rates and
has other effects upon the securities markets, it may adversely affect our
financial position and results of operations by reducing our assets under
management, revenues or otherwise.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Reference is made to the information contained under the heading "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Market Risk."
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the Index on page F-1 of the Consolidated Financial
Statements of Gabelli and the Notes thereto contained herein.
38
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
GABELLI ASSET MANANAGEMENT INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Auditors........................................... F-2
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Statements of Operations for the years
ended December 31, 2001, 2002 and 2003................................. F-3
Consolidated Statements of Financial Condition at
December 31, 2002 and 2003............................................. F-4
Consolidated Statements of Stockholders' Equity for
the years ended December 31, 2001, 2002 and 2003....................... F-5
Consolidated Statements of Cash Flows for the years
ended December 31, 2001, 2002 and 2003................................. F-6
Notes to Consolidated Financial Statements............................... F-7
- --------
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission that are not required
under the related instructions or are inapplicable have been omitted.
F-1
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Gabelli Asset Management Inc. and Subsidiaries
We have audited the accompanying consolidated statements of financial condition
of Gabelli Asset Management Inc. and Subsidiaries as of December 31, 2002 and
2003 and the related consolidated statements of operations, stockholders' equity
and cash flows for each of the three years in the period ended December 31,
2003. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Gabelli Asset
Management Inc. and Subsidiaries at December 31, 2002 and 2003, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States.
As discussed in Note A to the financial statements, in 2003, the Company changed
its method of accounting for stock-based employee compensation.
ERNST & YOUNG LLP
New York, New York
March 11, 2004
F-2
GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
------------------------------------------------
2001 2002 2003
------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
REVENUES
Investment advisory and incentive fees ......... $ 186,124 $ 177,077 $ 176,943
Commission revenue ............................. 15,939 13,883 12,863
Distribution fees and other income ............. 22,351 18,999 17,631
------------ ------------ ------------
Total revenues ............................ 224,414 209,959 207,437
------------ ------------ ------------
EXPENSES
Compensation costs ............................. 85,754 80,387 89,169
Management fee ................................. 11,325 9,533 9,002
Other operating expenses ....................... 33,887 30,377 34,552
------------ ------------ ------------
Total expenses ............................ 130,966 120,297 132,723
------------ ------------ ------------
Operating income ............................... 93,448 89,662 74,714
------------ ------------ ------------
OTHER INCOME (EXPENSE)
Net gain from investments ...................... 5,187 1,353 15,610
Interest and dividend income ................... 9,461 6,757 5,530
Interest expense ............................... (6,174) (11,977) (14,838)
------------ ------------ ------------
Total other income (expense), net ......... 8,474 (3,867) 6,302
------------ ------------ ------------
Income before income taxes and minority
interest...................................... 101,922 85,795 81,016
Income taxes ................................... 39,342 32,259 30,339
Minority interest .............................. 1,482 224 833
------------ ------------ ------------
Net income ..................................... $ 61,098 $ 53,312 $ 49,844
============ ============ ============
Net income per share:
Basic .......................................... $ 2.06 $ 1.77 $ 1.66
============ ============ ============
Diluted ........................................ $ 2.03 $ 1.76 $ 1.65
============ ============ ============
Weighted average shares outstanding:
Basic .......................................... 29,666 30,092 30,018
============ ============ ============
Diluted ........................................ 30,783 30,302 32,081
============ ============ ============
See accompanying notes.
F-3
GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31,
------------------------------
2002 2003
------------ ------------
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
Cash and cash equivalents, including restricted cash of $265 and $682 ...... $ 311,430 $ 386,511
Investments in securities, including restricted securities of $102,768
and $102,132 .......................................................... 175,466 231,400
Investments in partnerships and affiliates ................................. 47,932 64,012
Receivable from brokers .................................................... 4,919 1,232
Investment advisory fees receivable ........................................ 15,603 21,565
Notes and other receivables from affiliates ................................ 10,440 14,547
Capital lease .............................................................. 2,446 2,199
Intangible assets .......................................................... 4,650 4,650
Other assets ............................................................... 9,845 10,395
------------ ------------
Total assets .......................................................... $ 582,731 $ 736,511
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Payable to brokers ......................................................... $ 17,138 $ 5,691
Income taxes payable ....................................................... 9,196 12,323
Capital lease obligation ................................................... 3,433 3,058
Compensation payable ....................................................... 18,459 25,552
Securities sold, not yet purchased ......................................... 5,022 664
Accrued expenses and other liabilities ..................................... 15,583 18,487
------------ ------------
Total operating liabilities ........................................... 68,831 65,775
------------ ------------
5.5% Senior notes .......................................................... -- 100,000
5% Convertible note ........................................................ 100,000 100,000
6.95% Mandatory convertible securities ..................................... 84,545 84,030
------------ ------------
Total liabilities ..................................................... 253,376 349,805
Minority interest .......................................................... 7,562 8,395
Stockholders' equity:
Class A Common Stock, $.001 par value; 100,000,000 shares authorized;
7,450,844 and 7,697,600 shares issued and outstanding, respectively..... 8 8
Class B Common Stock, $.001 par value; 100,000,000 shares authorized;
23,150,000 and 23,128,500 shares issued and outstanding, respectively... 23 23
Additional paid-in capital ............................................... 136,835 143,475
Retained earnings ........................................................ 207,561 257,266
Accumulated comprehensive (loss) / gain .................................. (638) 1,480
Treasury stock, at cost (719,622 and 776,544 shares, respectively) ....... (21,996) (23,941)
------------ ------------
Total stockholders' equity ............................................ 321,793 378,311
------------ ------------
Total liabilities and stockholders' equity ............................ $ 582,731 $ 736,511
============ ============
See accompanying notes.
F-4
GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003
(DOLLARS IN THOUSANDS)
ACCUMULATED
OTHER
ADDITIONAL COMPRE-
COMMON PAID-IN RETAINED HENSIVE TREASURY
STOCK CAPITAL EARNINGS (LOSS)/GAIN STOCK TOTAL
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 2000 ......... $ 30 $ 117,046 $ 93,151 $ -- $ (8,030) $ 202,197
---------- ---------- ---------- ---------- ---------- ----------
Comprehensive income:
Net income ....................... -- -- 61,098 -- -- 61,098
Other comprehensive loss:
Net unrealized losses on
securities available for sale,
net of management fees and
income tax benefit of $136 ... -- -- -- (168) -- (168)
----------
Total comprehensive income ....... 60,930
Exchange of treasury stock for
minority interests in a
subsidiary ................... -- 8,955 -- -- 6,268 15,223
Purchase of treasury stock ......... -- -- -- -- (3,053) (3,053)
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 2001 ......... 30 126,001 154,249 (168) (4,815) 275,297
---------- ---------- ---------- ---------- ---------- ----------
Comprehensive income:
Net income ....................... -- -- 53,312 -- -- 53,312
Other comprehensive loss:
Net unrealized losses on
securities available for sale,
net of management fees and
income tax benefit of $362.... -- -- -- (470) -- (470)
----------
Total comprehensive income ....... 52,842
Issuance of mandatory convertible
securities ................... -- (4,615) -- -- -- (4,615)
Purchase and retirement of mandatory
convertible securities ....... -- 143 -- -- -- 143
Exercise of stock options including
tax benefit .................. 1 15,306 -- -- -- 15,307
Purchase of treasury stock ......... -- -- -- -- (17,181) (17,181)
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 2002 ......... 31 136,835 207,561 (638) (21,996) 321,793
---------- ---------- ---------- ---------- ---------- ----------
Comprehensive income:
Net income ....................... -- -- 49,844 -- -- 49,844
Other comprehensive gain:
Net unrealized gains on
securities available for sale,
net of management fees and
income tax expense of $1,656.. -- -- -- 2,118 -- 2,118
----------
Total comprehensive income ....... 51,962
Dividends paid ..................... -- -- (139) -- -- (139)
Stock option expense ............... -- 1,506 -- -- -- 1,506
Purchase and retirement of mandatory
convertible securities ....... -- 13 -- -- -- 13
Exercise of stock options including
tax benefit .................. -- 5,121 -- -- -- 5,121
Purchase of treasury stock ......... -- -- -- -- (1,945) (1,945)
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 2003 ......... $ 31 $ 143,475 $ 257,266 $ 1,480 $ (23,941) $ 378,311
========== ========== ========== ========== ========== ==========
See accompanying notes.
F-5
GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31
--------------------------------------------
2001 2002 2003
------------ ------------ ------------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income ...................................................... $ 61,098 $ 53,312 $ 49,844
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Equity in earnings of partnerships and affiliates ............. (1,949) (1,135) (5,729)
Depreciation and amortization ................................. 769 897 967
Stock based compensation expense .............................. -- -- 1,506
Deferred income taxes ......................................... 721 19,882 1,079
Tax benefit from stock options exercised ...................... -- 4,488 1,223
Minority interest in income of subsidiaries ................... 1,482 224 833
Realized losses (gains) on available for sale securities....... 320 20 (31)
Market value of donated securities ............................ -- 412 --
(Increase) decrease in operating assets:
Investments in securities .................................. 70,635 (119,935) 1,774
Investment advisory fees receivable ........................ 656 (953) (5,962)
Notes and other receivables from affiliates ................ (276) 1,419 (4,107)
Other receivables .......................................... (650) 417 (1,046)
Receivable from broker ..................................... 3,817 (4,883) 3,686
Other assets ............................................... (2,919) (4,647) (223)
Increase (decrease) in operating liabilities:
Payable to broker .......................................... 8,554 8,584 (11,447)
Income taxes payable ....................................... (2,629) 3,521 771
Compensation payable ....................................... (4,457) (2,641) 6,716
Securities sold, but not yet purchased ..................... -- 5,022 (4,358)
Accrued expenses and other liabilities ..................... 4,401 (2,351) 2,525
------------ ------------ ------------
Total adjustments ............................................... 78,475 (91,659) (11,823)
------------ ------------ ------------
Net cash provided by (used in) operating activities ............. 139,573 (38,347) 38,021
------------ ------------ ------------
INVESTING ACTIVITIES
Purchases of available for sale securities ...................... (1,394) (1,237) (55,851)
Proceeds from sales of available for sale securities ... ........ 8,362 735 1,949
Distributions from partnerships and affiliates .................. 26,241 27,154 15,180
Investments in partnerships and affiliates ...................... (33,584) (8,113) (25,530)
------------ ------------ ------------
Net cash provided by (used in) investing activities ............. (375) 18,539 (64,252)
------------ ------------ ------------
FINANCING ACTIVITIES
Purchase of minority stockholders' interest ..................... 31 (273) --
Proceeds from issuance of convertible note ...................... 100,000 -- --
Proceeds from issuance of mandatory convertible securities....... -- 87,738 --
Repayment of note payable ....................................... -- (50,000) --
Issuance of Senior Notes ........................................ -- -- 100,000
Proceeds from exercise of stock options ......................... -- 10,819 3,898
Dividends paid .................................................. -- -- (139)
Purchase of mandatory convertible securities .................... -- (5,312) (502)
Purchase of treasury stock ...................................... (3,053) (17,181) (1,945)
------------ ------------ ------------
Net cash provided by financing activities ....................... 96,978 25,791 101,312
------------ ------------ ------------
Net increase in cash and cash equivalents ....................... 236,176 5,983 75,081
Cash and cash equivalents at beginning of year .................. 69,271 305,447 311,430
------------ ------------ ------------
Cash and cash equivalents at end of year ........................ $ 305,447 $ 311,430 $ 386,511
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest .......................................... $ 6,174 $ 11,977 $ 14,838
------------ ------------ ------------
Cash paid for income taxes ...................................... $ 41,421 $ 4,464 $ 27,345
------------ ------------ ------------
SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING ACTIVITIES
Treasury stock exchanged for subsidiary stock held by
minority stockholders ......................................... $ 15,223 $ -- $ --
------------ ------------ ------------
Securities reclassified to available for sale ................... $ 14,278 $ -- $ 3,788
------------ ------------ ------------
See accompanying notes
F-6
A. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Gabelli was incorporated in April 1998 in the state of New York, with no
significant assets or liabilities and did not engage in any substantial business
activities prior to the initial public offering ("Offering") of our shares. On
February 9, 1999, we exchanged 24 million shares of our class B common stock,
representing all of our then issued and outstanding common stock, with Gabelli
Funds, Inc. ("GFI") and two of its subsidiaries in consideration for
substantially all of the operating assets and liabilities of GFI, relating to
its institutional and retail asset management, mutual fund advisory,
underwriting and brokerage business (the "Reorganization"). Gabelli distributed
net assets and liabilities, principally a proprietary investment portfolio, of
approximately $165 million, including cash of $18 million, which has been
recorded for accounting purposes as a deemed distribution to GFI. GFI was later
renamed Gabelli Group Capital Partners, Inc. ("GGCP").
On February 17, 1999, we completed our sale of 6 million shares of class A
common stock in the Offering and received proceeds, after fees and expenses, of
approximately $96 million. Immediately after the Offering GFI owned 80% of the
outstanding common stock of Gabelli. In addition, with the completion of the
Offering, we became a "C" Corporation for Federal and state income tax purposes
and are subject to substantially higher income tax rates.
The accompanying consolidated financial statements include the assets,
liabilities and earnings of Gabelli our wholly-owned subsidiaries Gabelli Funds,
LLC ("Funds Adviser"), GAMCO Investors, Inc. ("GAMCO"), and Gabelli's
majority-owned subsidiaries consisting of Gabelli Securities, Inc. ("GSI"),
Gabelli Fixed Income LLC ("Fixed Income") and Gabelli Advisers, Inc.
("Advisers").
At December 31, 2001, 2002 and 2003, we owned approximately 92% of GSI, 80% of
Fixed Income and a 51% voting interest in Advisers (41% economic interest.) All
significant intercompany transactions and balances have been eliminated.
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes. Actual results
could differ from those estimates.
NATURE OF OPERATIONS
GAMCO, Funds Adviser, Fixed Income and Advisers are registered investment
advisers under the Investment Advisers Act of 1940. Gabelli & Company, Inc.
("Gabelli & Company") and Gabelli Direct Inc. ("Gabelli Direct"), both
wholly-owned subsidiaries of GSI, and Gabelli Fixed Income Distributors, Inc.
("Fixed Income Distributors"), a majority owned subsidiary of Fixed Income, are
registered broker-dealers with the Securities and Exchange Commission ("SEC")
and are members of the National Association of Securities Dealers, Inc.
("NASD"). Gabelli & Company acts as an introducing broker and all transactions
for its customers are cleared through New York Stock Exchange member firms on a
fully disclosed basis. Accordingly, open customer transactions are not reflected
in the accompanying consolidated statements of financial condition. Gabelli &
Company is exposed to credit losses on these open positions in the event of
nonperformance by its customers. This exposure is reduced by the clearing
brokers' policy of obtaining and maintaining adequate collateral until the open
transaction is completed. Gabelli Direct and Fixed Income Distributors do not
currently have any customers.
CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments with a maturity of three
months or less at the time of purchase. At December 31, 2003 approximately $0.7
million of cash and cash equivalents was held as collateral to secure a letter
of credit issued August 14, 2002 in favor of the holder of the $100 million
convertible note. The letter of credit is due to expire on August 14, 2004.
F-7
SECURITIES TRANSACTIONS
Investments in securities are accounted for as either "trading securities" or
"available for sale" and are stated at quoted market values. Securities that are
not readily marketable are stated at their estimated fair values as determined
by our management. The resulting unrealized gains and losses for trading
securities are included in net gain from investments and the unrealized gains
and losses for available for sale securities, net of management fees and tax,
are reported as a separate component of stockholders' equity. Securities
transactions and any related gains and losses are recorded on a trade date
basis. Realized gains and losses from securities transactions are recorded on
the identified cost basis. Commissions and related clearing charges are recorded
on a trade date basis.
At December 31, 2003 approximately $102.1 million of investments in securities
was held as collateral to secure a letter of credit issued August 14, 2002 in
favor of the holder of the $100 million convertible note. The letter of credit
is due to expire on August 14, 2004.
Securities sold, but not yet purchased are stated at quoted market values and
represent obligations of Gabelli to purchase the securities at prevailing market
prices. Therefore, the future satisfaction of such obligations may be for an
amount greater or less than the amounts recorded on the consolidated statements
of financial condition. The ultimate gains or losses recognized are dependent
upon the prices at which these securities are purchased to settle the
obligations under the sales commitments.
INVESTMENTS IN PARTNERSHIPS AND AFFILIATES
Investments in partnerships and affiliates, whose underlying assets consist
mainly of marketable securities, are accounted for using the equity method,
under which our share of net earnings or losses of these partnerships and
affiliated entities is reflected in income as earned and distributions received
are reductions of the investments. Investments in partnerships and affiliates
for which market values are not readily available are stated at their estimated
fair values as determined by our management.
RECEIVABLES FROM AND PAYABLES TO BROKERS
Receivables from and payables to brokers consist of amounts arising primarily
from the purchases and sales of securities.
REVENUE RECOGNITION
Investment advisory fees are based on predetermined percentages of the market
values of the portfolios under management and are recognized as revenues as the
related services are performed. Investment advisory and distribution fees from
the Mutual Funds are computed on average daily net assets and charged to the
Funds monthly. Advisory fees earned from institutional and high net worth
Separate Accounts are generally computed quarterly based on account values as of
the end of the preceding quarter. Performance fees are based upon either the
absolute gain in a portfolio or the amount in excess of a specific benchmark
index or indices and recognized when earned.
DEPRECIATION AND AMORTIZATION
Fixed assets are recorded at cost and depreciated using the straight-line method
over their estimated useful lives. Leasehold improvements are recorded at cost
and amortized using the straight-line method over their estimated useful lives
or lease terms, whichever is shorter.
INTANGIBLE ASSETS
Intangible assets consist primarily of the cost in excess of net assets acquired
(i.e. goodwill). In July 2001, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 142, "Goodwill and Other Intangible Assets," which established
new accounting and reporting standards for goodwill and other intangible assets.
Under the new rules, goodwill and other intangible assets deemed to have
indefinite lives are no longer amortized, but are instead reviewed at least
annually for impairment in accordance with the provisions of the Statement.
Those intangibles which are separately identifiable and have finite lives will
continue to be amortized over their useful lives. The adoption of SFAS No. 142
did not have a material impact on our consolidated financial statements.
F-8
INCOME TAXES
We account for income taxes under the liability method prescribed by SFAS No.
109, "Accounting for Income Taxes." Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to the differences
between the financial statement carrying amount of existing assets and
liabilities and their respective tax basis. Future tax benefits are recognized
only to the extent that realization of such benefits is more likely than not.
MINORITY INTEREST
Minority interest represents the minority stockholders' ownership of Fixed
Income, GSI and Advisers. With the exception of GSI, these minority stockholders
are principally employees, officers and directors of Gabelli.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amount of all assets and liabilities, other than goodwill and fixed
assets, in the consolidated statements of financial condition approximate their
fair values.
EARNINGS PER SHARE
Net income per share is computed in accordance with SFAS No. 128, "Earnings Per
Share". Basic net income per common share is calculated by dividing net income
applicable to common stockholders by the weighted average number of shares of
common stock outstanding in the period.
Diluted net income per share, in addition to the weighted average determined for
basic net income per share, includes common stock equivalents which would arise
from the exercise of stock options using the treasury stock method and, if
dilutive, assumes the conversion of our convertible note for the period
outstanding since its issuance in August 2001. An average of 398,000, 210,000
and 141,000 incremental shares were included as the dilutive effect of stock
options in 2001, 2002 and 2003, respectively. In 2001 net income is adjusted for
interest expense, net of management fees and taxes, of $1,365,000 and the
weighted average shares outstanding includes 719,000 incremental shares as the
dilutive effect of the convertible note from its date of issuance in August
2001. In 2002 the assumed conversion of the convertible note would be
anti-dilutive and, accordingly, has not been included in computing diluted net
income per share. In 2003 net income is adjusted for interest expense, net of
management fees and taxes, of $3,157,000 and the weighted average shares
outstanding includes 1,923,000 incremental shares as the dilutive effect of the
convertible note from its date of issuance in August 2001.
STOCK BASED COMPENSATION
We currently sponsor stock option plans previously adopted and approved by our
shareholders as a means to attract, retain and motivate employees. Effective
January 1, 2003 we adopted the fair value recognition provisions of SFAS No. 123
in accordance with the transition and disclosure provisions under the recently
issued SFAS No. 148, "Accounting for Stock Based Compensation - Transition and
Disclosure". Previously we had elected to use the intrinsic value method
prescribed in Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees" and related interpretations. Accordingly, no
compensation expense was recognized where the exercise price equaled or exceeded
the market price of the underlying stock on the date of grant. In 2003 we have
recognized $1,554,000 in option expense. Refer also to Notes F and O.
BUSINESS SEGMENTS
We operate predominantly in one business segment, the investment advisory and
asset management industry.
DISTRIBUTION COSTS
We incur certain promotion and distribution costs, which are expensed as
incurred, related to the sale of shares of mutual funds advised by us (the
"Funds").
F-9
RECENTLY ISSUED ACCOUNTING STANDARDS
In April 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No.
145, which rescinded SFAS No. 4 "Reporting Gains and Losses from Extinguishment
of Debt". Under SFAS No. 4, all gains and losses from extinguishment of debt
were required to be aggregated and, if material, classified as an extraordinary
item. As a result of the rescission, the criteria in APB Opinion No. 30 is used
to classify gains and losses from debt extinguishments. Since the issuance of
SFAS No. 4, the use of debt extinguishments has become a part of the risk
management strategy of many companies, particularly those who participate in the
secondary lending markets. Debt extinguishment no longer meets the criteria for
classification as extraordinary items in APB Opinion No. 30. Accordingly, gains
from the repurchase of our mandatory convertible securities in 2002 and 2003 of
$613,000 and $96,000, respectively, have been included in net gain from
investments and not as an extraordinary item. The adoption of SFAS No. 145 did
not have a material impact on our consolidated financial statements in 2002 and
2003 and is not expected to have a material impact on future consolidated
financial statements.
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 disclosure requirements are effective
for financial statements of interim or annual periods ending after December 15,
2002. The Interpretation's initial recognition and initial measurement
provisions are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002. We indemnify our clearing brokers for losses
they may sustain from the customer accounts introduced by our 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, we further limit margin balances to a maximum
of 25% versus 50% permitted under exchange regulations. At December 31, 2003 the
total amount of customer balances subject to indemnification (i.e. margin
debits) was immaterial. The Company also has entered into arrangements with
various other third parties which provide for indemnification against losses,
costs, claims and liabilities arising from the performance of their obligations
under our agreement, except for gross negligence or bad faith. The Company has
had no claims or payments pursuant to these or prior agreements, and we believe
the likelihood of a claim being made is remote. Utilizing the methodology in FIN
45, our estimate of the value of such agreements is de minimis, and therefore an
accrual has not been made in the financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" which provides alternative methods of
transition to SFAS No. 123, "Accounting for Stock-Based Compensation" and also
amends its disclosure provisions. In addition to the Prospective method
originally provided under SFAS No. 123, SFAS No. 148 provides for a modified
prospective and a retroactive restatement method. SFAS No. 148 further expands
the disclosure requirements to require disclosure in condensed consolidated
interim financial statements for any period in which stock-based awards are
outstanding and accounted for using the intrinsic value method of APB Opinion
No. 25. Effective January 1, 2003, we began expensing options on a modified
prospective method using the fair value recognition provisions of SFAS No. 123.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46") addresses the application of Accounting
Research Bulletin No. 51, "Consolidated Financial Statements," to variable
interest entities ("VIE") and generally would require that the assets,
liabilities and results of operations of a VIE be consolidated into the
financial statements of the enterprise that has a controlling financial interest
in it. The interpretation provides a framework for determining whether an entity
should be evaluated for consolidation based on voting interests or significant
financial support provided to the entity (i.e., variable interests).
An entity is classified as a VIE if total equity is not sufficient to permit the
entity to finance its activities without additional subordinated financial
support or its equity investors lack the direct or indirect ability to make
decisions about an entity's activities through voting rights, absorb the
expected losses of the entity if they occur or receive the expected residual
returns of the entity if they occur. Once an entity is determined to be a VIE,
its assets, liabilities and results of operations should be consolidated with
those of its primary beneficiary. The primary beneficiary of a VIE is the entity
which either will absorb a majority of the VIE's expected losses or has the
right to receive a majority of the VIE's expected residual returns. The expected
losses and residual returns of a VIE include expected variability in its net
income or loss, fees to decision makers and fees to guarantors of substantially
all VIE assets or liabilities and are calculated in accordance with Statement of
Financial Accounting Concept No. 7, "Using Cash Flow Information and Present
Value in Accounting Measurements."
On December 24, 2003, the FASB issued a revision to FIN 46 to clarify some of
the provisions of this Interpretation and to exempt certain entities from its
requirements.
Application by public entities, other than small business issuers, for all other
types of variable interest entities is required in financial statements for
periods ending after March 15, 2004.
F-10
While Gabelli is generally not subject to a majority of the risks of the VIEs,
we may be determined, for certain entities, to receive a majority of the
expected residual returns based on the methodology for determining the primary
beneficiary. Therefore, when implemented, the Interpretation may require
consolidation of certain of our 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. Financial information pertaining to our investments
in partnerships and affiliates is presented in Note C.
In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
is effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
after June 15, 2003. Under SFAS No. 150 certain financial instruments shall be
classified as a liability on the issuer's financials statements. The Company has
adopted this statement, which did not have a material impact on the Company's
financial statements.
B. INVESTMENTS IN SECURITIES
Investments in securities at December 31, 2002 and 2003 consisted of the
following:
2002 2003
----------------------- -----------------------
MARKET MARKET
COST VALUE COST VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
Trading securities:
U.S. Government obligations ....... $ 104,323 $ 104,706 $ 103,412 $ 103,684
Common stocks ..................... 28,859 28,231 10,204 11,584
Mutual funds ...................... 32,726 32,582 41,806 42,415
Corporate bonds ................... 1,598 1,599 -- --
Other investments ................. 2,425 2,425 2,425 6,297
---------- ---------- ---------- ----------
Total trading securities .......... 169,931 169,543 157,847 163,980
---------- ---------- ---------- ----------
Available for sale securities:
Common stocks ..................... -- -- 10,781 11,570
Mutual funds ...................... 7,059 5,923 52,829 55,850
---------- ---------- ---------- ----------
Total available for sale securities 7,059 5,923 63,610 67,420
---------- ---------- ---------- ----------
Total investments in securities ... $ 176,990 $ 175,466 $ 221,457 $ 231,400
========== ========== ========== ==========
At December 31, 2002 and 2003 the market value of investments available for sale
was $5.9 million and $67.4 million, respectively. An unrealized holding loss,
net of management fees and taxes, of $0.6 million in 2002 and an unrealized
holding gain, net of management fees and taxes of $1.5 million in 2003 has been
included in stockholders' equity. Proceeds from sales of investments available
for sale were approximately $0.7 million and $1.9 million for the years ended
December 31, 2002 and 2003, respectively. Realized gains on the sale of
investments available for sale amounted to $0.1 million and $0.2 million and
realized losses were $0.1 million and $0.2 million during 2002 and 2003,
respectively.
C. INVESTMENTS IN PARTNERSHIPS AND AFFILIATES
We are General Partner or co-General Partner of various limited partnerships
whose underlying assets consist primarily of marketable securities. As General
Partner or co-General Partner, we are contingently liable for all of the
partnerships' liabilities. Summary financial information, including our carrying
value and income from these partnerships at December 31, 2002 and 2003 and for
the years then ended, is as follows (in thousands):
2002 2003
---------- ----------
Total assets.................................. $ 271,764 $ 285,024
Total liabilities............................. 44,577 52,447
Equity........................................ 227,187 232,577
Net earnings.................................. 774 18,989
Company's carrying value...................... 28,300 30,575
Company's income.............................. 25 3,635
Income from the above partnerships for the year ended December 31, 2001 was
approximately $94,000.
F-11
Our income from these partnerships consists of our pro rata capital allocation
and our share of a 20% incentive allocation from the limited partners. The
general partners also receive an annual administrative fee based on a percentage
of each partnership's net assets. For the years ended December 31, 2001, 2002
and 2003, we earned administrative fees of approximately $2,193,000, $2,041,000,
and $2,259,000, respectively.
At December 31, 2002 and 2003, we had various limited partner interests in
unaffiliated limited partnerships aggregating approximately $1,596,000 and
$21,564,000, respectively. For the years ended December 31, 2001, 2002 and 2003,
the net gains recorded by us in these investments approximated $100,000,
$423,000, and $1,112,000, respectively.
At December 31, 2002 and 2003, we had investments in various affiliated offshore
funds aggregating $18,036,000 and $11,873,000, respectively. As the investment
manager, we earn an annual administrative fee based on a percentage of net
assets and are entitled to a performance fee based on the absolute gain in the
portfolio. For the years ended December 31, 2001, 2002 and 2003, we earned
administrative and performance fees of $4,311,000, $3,613,000 and $4,718,000,
respectively.
D. INCOME TAXES
We account for income taxes under the liability method prescribed by Financial
Accounting Standards Board Statement No. 109 ("SFAS 109"). Under SFAS 109,
deferred income taxes reflect the net effects of temporary differences between
the carrying amounts of assets and liabilities for financial accounting purposes
and the amounts used for income tax purposes.
Gabelli and our greater than 80% owned subsidiaries file a consolidated federal
income tax return. Advisers, our less than 80% owned subsidiary files a separate
federal income tax return. Accordingly, the income tax provision represents the
aggregate of the amounts provided for all companies.
The provision (benefit) for income taxes for the years ended December 31, 2001,
2002 and 2003 consisted of the following:
2001 2002 2003
---------- ---------- ----------
(IN THOUSANDS)
Federal:
Current ...................... $ 33,089 $ 10,284 $ 24,915
Deferred ..................... 842 17,027 1,108
State and local:
Current ...................... 5,426 2,093 4,345
Deferred ..................... (15) 2,855 (29)
---------- ---------- ----------
$ 39,342 $ 32,259 $ 30,339
========== ========== ==========
Our effective tax rate for each of the years ended December 31, 2001, 2002 and
2003 was 38.6%, 37.6% and 37.4%, respectively. A reconciliation of the Federal
statutory income tax rate to the effective tax rate is set forth below:
2001 2002 2003
-------- -------- --------
Statutory Federal income tax rate........... 35.0% 35.0% 35.0%
State income tax, net of Federal benefit.... 3.4 3.7 3.4
Other....................................... 0.2 (1.1) (1.0)
-------- -------- --------
Effective income tax rate................... 38.6% 37.6% 37.4%
======== ======== ========
Significant components of our deferred tax assets and liabilities were as
follows:
2002 2003
-------- --------
(in thousands)
Deferred tax assets:
Investments in securities available for sale....... $ (400) $ 1,426
Other ............................................. (523) (1,344)
-------- --------
Total deferred tax assets ......................... (923) 82
-------- --------
Deferred tax liabilities:
Investments in securities and partnerships......... 1,290 2,677
Other ............................................. 470 983
-------- --------
Total deferred tax liabilities .................... 1,760 3,660
-------- --------
Net deferred tax liabilities ......................... $ 837 $ 3,742
======== ========
F-12
E. DEBT
Debt consists of the following:
2002 2003
---------- ----------
Senior Notes...................................... $ -- $ 100,000
Convertible note ................................. 100,000 100,000
Mandatory convertible securities ................. 84,545 84,030
---------- ----------
Total............................................. $ 184,545 $ 284,030
========== ==========
NOTE PAYABLE
In conjunction with the Reorganization, we entered into an Employment Agreement
with our Chairman and Chief Executive Officer ("Chairman") which, in part,
provides that the Chairman would be paid $50 million on January 2, 2002.
Interest was payable quarterly at an annual rate of 6% from the date of the
Agreement. This payment, plus related costs and net of a related deferred tax
benefit of $19.8 million, has been reflected as a one time charge to earnings in
the first quarter of 1999 and the liability has been recorded as a note payable.
The note was paid in full on January 2, 2002. Interest expense recorded on this
note was $3,000,000 for the year ended December 31, 2001.
SENIOR NOTES
On May 15, 2003, we issued 10-year, $100 million senior notes. The senior notes,
due May 15, 2013, pay interest semi-annually at 5.5%.
CONVERTIBLE NOTE
On August 13, 2001, we issued a 10-year, $100 million convertible note to
Cascade Investment LLC ("Cascade"). The convertible note, due August 14, 2011,
pays interest semi-annually at 6.5% for the first year and 6% thereafter and is
convertible into our class A common stock at $53 per share. In August 2003 the
interest rate on the note was lowered to 5% and the conversion price was lowered
by $1 per share to $52 per share. The note provides the holder with certain put
rights, at par plus accrued interest, on August 13, 2004. If this note were
converted, Cascade would own approximately 6% of our aggregate outstanding
common stock.
On August 9, 2002, the Board of Directors authorized Gabelli to establish a
collateral account consisting of cash or securities totaling $103 million,
lowered to $102.5 million in August 2003, to secure a letter of credit in favor
of Cascade. We have paid $79,000 in 2002, $234,000 in 2003 and expect to pay
fees of approximately $175,000 in 2004 for the letter of credit which will
expire August 14, 2004. At that time the collateral account will be closed and
any cash or securities held will be available for general corporate use.
COMPANY OBLIGATIONS UNDER MANDATORY CONVERTIBLE SECURITIES
On February 6, 2002 we completed our public offering of 3.6 million mandatory
convertible securities. The securities are listed on the New York Stock Exchange
under the symbol "GBL.I". These securities initially consist of (a) a purchase
contract under which the holder will purchase shares of our class A common stock
on February 17, 2005 and (b) senior notes due February 17, 2007. The notes pay
interest quarterly at a rate of 6% per year, which rate is expected to be reset
on or about November 17, 2004. Each purchase contract obligates its holder to
purchase, on February 17, 2005, newly issued shares of our class A common stock.
The total number of shares to be issued will be between 1.8 million and 2.2
million, subject to adjustment in certain circumstances and depends upon the
applicable market value at that date. In connection with the offering we
received $90,000,000 before underwriting and other expenses of approximately
$3,100,000. For accounting purposes the net present value of the purchase
contract adjustments and their related offering costs, totaling $4.6 million,
have been recorded as a reduction to additional paid in capital. Costs incurred
in connection with the issuance of the senior notes have been capitalized as
deferred financing costs and will be amortized as an adjustment to interest
expense over the term of the notes. During 2002 and 2003 approximately $81,000
and $93,000, respectively, have been amortized to interest expense.
F-13
In May 2002 the Board of Directors approved the repurchase of up to 200,000
shares of the mandatory convertible securities from time to time in the open
market. On August 9, 2002 the Board of Directors increased the number of shares
authorized to be repurchased by an additional 200,000. Through December 31, 2003
we repurchased 238,800 shares at an average price of $21.92 per share and an
aggregate cost of $5.2 million. In 2002 and 2003 a gain of approximately
$613,000 and $96,000, respectively, attributable to the extinguishment of the
debt component of each mandatory convertible security repurchased has been
included in net gain from investments.
F. STOCKHOLDERS' EQUITY
STOCK AWARD AND INCENTIVE PLAN
We maintain two Stock Award and Incentive Plans (the "Plans"), approved by the
shareholders, which are designed to provide incentives which will attract and
retain individuals key to the success of Gabelli through direct or indirect
ownership of our common stock. Benefits under the Plans may be granted in any
one or a combination of stock options, stock appreciation rights, restricted
stock, restricted stock units, stock awards, dividend equivalents and other
stock or cash based awards. A maximum of 1,500,000 shares of class A common
stock have been reserved for issuance under each of the Plans by a committee of
the Board of Directors responsible for administering the Plans. Under the Plans,
the committee may grant either incentive or nonqualified stock options with a
term not to exceed ten years from the grant date and at an exercise price that
the committee may determine. Options granted under the Plans vest 75% after
three years and 100% after four years from the date of grant and expire after
ten years.
A summary of the stock option activity for the years ended December 31, 2002 and
2003 is as follows:
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
---------- ----------
Outstanding, December 31, 2001................. 1,246,000 $ 18.34
Granted........................................ 10,000 $ 30.40
Forfeited...................................... (39,750) $ 23.73
Exercised...................................... (600,844) $ 16.28
----------
Outstanding, December 31, 2002................. 615,406 $ 20.21
Granted........................................ 633,000 $ 28.96
Forfeited...................................... (73,500) $ 29.36
Exercised...................................... (225,256) $ 16.24
----------
Outstanding, December 31, 2003................. 949,650 $ 22.45
==========
Shares available for future issuance
at December 31, 2003......................... 1,224,250
==========
At December 31, 2002 and 2003 there were 104,344 and 211,444, respectively,
exercisable outstanding stock options with a weighted average exercise price of
$16.28 per share and $16.44 per share, respectively.
The weighted average estimated fair value of the options granted at their grant
date using the Black-Scholes option-pricing model was as follows:
2001 2002 2003
---- ---- ----
Weighted average fair value of
options granted: $ 18.29 $ 15.19 $ 10.96
Assumptions made:
Expected volatility................... 45% 39% 38%
Risk free interest rate............... 5.00% 3.54% 2.99%
Expected life......................... 8 years 8 years 5 years
Dividend yield........................ 0% 0% 0%
F-14
The dividend yield reflected the assumption at that time that no payout would be
made in the foreseeable future. The expected life is an estimate established at
the date of grant and is not necessarily indicative of exercise patterns which
may, in fact, occur. The weighted average remaining contractual life of the
outstanding options at December 31, 2003 was 7.9 years.
Prior to January 1, 2003 we applied Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for our stock option plan. Accordingly, no compensation expense was
recognized where the exercise price equals or exceeds the market price of the
underlying stock on the date of grant.
Effective January 1, 2003 we adopted the fair value recognition provisions of
SFAS No. 123 in accordance with the transition and disclosure provisions under
the recently issued SFAS No. 148, "Accounting for Stock Based Compensation -
Transition and Disclosure".
If we had elected for 2001 and 2002 to account for our stock options under the
fair value method of SFAS No. 123 "Accounting for Stock Based Compensation," our
net income and net income per share would have been reduced to the pro forma
amounts indicated below:
2001 2002
---------- ----------
Net income (in thousands):
As reported............................. $ 61,098 $ 53,312
Pro forma............................... $ 59,318 $ 52,614
Net income per share - Basic
As reported............................. $ 2.06 $ 1.77
Pro forma............................... $ 2.00 $ 1.74
Net income per share - Diluted
As reported............................. $ 2.03 $ 1.76
Pro forma............................... $ 1.97 $ 1.73
STOCK REPURCHASE PROGRAM
In 1999 the Board of Directors established the Stock Repurchase Program through
which we have been authorized to purchase up to $9 million of our class A common
stock. We completed the Stock Repurchase Program during the first quarter of
2001 and on March 2, 2001 the Board of Directors authorized the repurchase of an
additional $3 million of our class A common stock. On September 17, 2001 the
Board of Directors raised the amount authorized to repurchase shares to $10
million. In 2002 the Board of Directors raised the amount authorized by $5
million in July and an additional $10 million in December. We also repurchased
300,000 shares of our class B common stock held by GGCP, our parent, which was
converted to class A common stock in December 2002 at $28.20 per share and an
aggregate cost of $8.46 million. The repurchase of these shares are not included
in determining the total dollars available under the Stock Repurchase Program.
There remains $12.1 million available under this program at December 31, 2003.
Under the program we have repurchased 877,348 shares at an average price of
$24.78 per share and an aggregate cost of $21.7 million through December 31,
2003.
SHELF REGISTRATION
On December 28, 2001, we filed a "shelf" registration statement registering $400
million in aggregate amount of debt and other securities. The issuance of the
mandatory convertible securities used $180 million and the issuance of the 5.5%
Senior Notes used $100 million of the shelf registration leaving $120 million
for future use. Such securities may be issued as debt securities, trust
preferred securities or class A common stock.
F-15
EXCHANGE OF COMMON STOCK FOR MINORITY STOCKHOLDERS' INTERESTS IN SUBSIDIARY
In May 2001, the Board of Directors, in an effort to simplify our capital
structure, authorized an offer to exchange four shares of our class A common
stock for each share of Common Stock of our majority owned subsidiary GSI we did
not already own. Under the terms of the exchange offer, which ended on August
31, 2001, all shares of Gabelli issued were restricted from sale for two years
from the date of issuance. In connection with this offer we issued 400,504
shares of our class A common stock held in treasury and increased our ownership
interest in GSI from 77% to 92%. The transaction was accounted for under the
purchase method of accounting. The cost in excess of net assets acquired was
approximately $3.5 million and has been included in intangible assets.
Certain shareholders of GSI are required to sell, upon disassociation with us,
their shares to GSI at book value (approximately $2.1 million at December 31,
2003).
G. CAPITAL LEASE
We lease office space from a company owned by stockholders of GGCP. We have
recorded a capital lease asset and liability for the fair value of the leased
property. Amortization of the capital lease is computed on the straight-line
method over the term of the lease, which expires on April 30, 2013. The lease
provides that all operating expenses relating to the property (such as property
taxes, utilities and maintenance) are to be paid by the lessee, Gabelli.
Future minimum lease payments for this capitalized lease at December 31, 2003
are as follows:
(IN THOUSANDS)
2004.................................................. $ 765
2005.................................................. 765
2006.................................................. 765
2007.................................................. 765
2008.................................................. 765
Thereafter............................................ 3,315
-------
Total minimum obligations............................. 7,140
Interest.............................................. 1,908
-------
Present value of net obligations...................... $ 5,232
=======
Lease payments under this agreement amounted to approximately $720,000 and
$756,000 for each of the years ended December 31, 2002 and 2003, respectively.
Future minimum lease payments have not been reduced by related minimum future
sublease rentals of approximately $260,000, of which approximately $103,000 is
due from an affiliated entity. Total minimum obligations exclude the operating
expenses to be borne by us, which are estimated to be approximately $650,000 per
year.
H. COMMITMENTS
We rent office space under leases which expire at various dates through May
2008. Future minimum lease commitments under these operating leases as of
December 31, 2003 are as follows:
(IN THOUSANDS)
2004.................................................. $ 486
2005.................................................. 425
2006.................................................. 334
2007.................................................. 168
2008.................................................. 21
Thereafter............................................ --
-------
$ 1,434
=======
Equipment rentals and occupancy expense amounted to approximately $1,656,000,
$1,165,000 and $1,143,000, respectively, for the years ended December 31, 2001,
2002 and 2003.
F-16
I. RELATED PARTY TRANSACTIONS
We serve as the investment adviser for the Funds and earn advisory fees based on
predetermined percentages of the average net assets of the Funds. In addition,
Gabelli & Company has entered into distribution agreements with each of the
Funds. As principal distributor, Gabelli & Company incurs certain promotional
and distribution costs related to the sale of Fund shares, for which it receives
a fee from the Funds or reimbursement from the investment adviser. Gabelli &
Company earns a majority of its commission revenue from transactions executed on
behalf of clients of affiliated companies.
We had an aggregate investment in the Funds of approximately $342,153,000 and
$475,384,000 at December 31, 2002 and 2003, respectively, of which approximately
$305,339,000 and $378,637,000 is invested in money market mutual funds at
December 31, 2002 and 2003, respectively.
Prior to the Reorganization, we were required to pay the Chairman a management
fee, which was equal to 20% of the pretax profits of each of our operating
divisions before consideration of this management fee. Immediately preceding the
Offering and in conjunction with the Reorganization, Gabelli and our Chairman
entered into an Employment Agreement. We have an Employment Agreement with our
Chairman, which provides that we will pay the Chairman 10% of our aggregate
pre-tax profits while he is an executive of Gabelli and devoting the substantial
majority of his working time to the business of Gabelli. The Employment
Agreement further provided that we pay the Chairman $50 million on January 2,
2002. The management fee was approximately $11,325,000, $9,533,000, and
$9,002,000 for the years ended December 31, 2001, 2002 and 2003, respectively.
The Chairman also received portfolio management compensation and account
executive fees of approximately $35,790,000, $28,195,000, and $28,618,000,
respectively, for the years ended December 31, 2001, 2002 and 2003, which have
been included in compensation costs.
We had approximately $1,216,000 in various notes receivable (including accrued
interest) outstanding at December 31, 2001 from certain executive officers and
employees in connection with the acquisition of ownership interests in our
various subsidiaries and affiliates. Interest rates on these notes ranged from
5% to 10%. All employee notes receivable (including accrued interest) were
repaid in full during 2002.
J. FINANCIAL REQUIREMENTS
As a registered broker-dealer, Gabelli & Company is subject to Uniform Net
Capital Rule 15c3-1 (the "Rule") of the Securities and Exchange Commission.
Gabelli & Company computes its net capital under the alternative method
permitted by the Rule which requires minimum net capital of $250,000. We have
consistently met or exceeded this requirement.
In connection with the registration of our subsidiary, Gabelli Asset Management
(UK) Limited with the Financial Services Authority we are required to maintain a
minimum Liquid Capital Requirement of (pound)267,000, ($475,000 at December 31,
2003) and an Own Funds Requirement of (euro)50,000 ($63,000 at December 31,
2003). We have consistently met or exceeded these requirements.
K. ADMINISTRATION FEES
We have entered into administration agreements with other companies (the
"Administrators"), whereby the Administrators provide certain services on behalf
of several of the Funds. Such services do not include the investment advisory
and portfolio management services provided by Gabelli. The fees are negotiated
based on predetermined percentages of the net assets of each of the Funds.
L. PROFIT SHARING PLAN AND INCENTIVE SAVINGS PLAN
We have a qualified contributory employee profit sharing plan and incentive
savings plan covering substantially all employees. Company contributions to the
plans are determined annually by the Board of Directors but may not exceed the
amount permitted as a deductible expense under the Internal Revenue Code. We
accrued contributions of approximately $60,000, $50,000 and $63,000, to the
plans for the years ended December 31, 2001, 2002 and 2003, respectively.
F-17
M. DERIVATIVE FINANCIAL INSTRUMENTS
In 2002 our trading activities included transactions in domestic equity index
futures contracts and foreign currency contracts. These financial instruments
represent future commitments to purchase or sell an underlying index or currency
for specified amounts at specified future dates. Such contracts create
off-balance sheet risk for us as the future satisfaction of these contracts may
be for amounts in excess of the amounts recognized in the consolidated
statements of financial condition.
In connection with these activities, we incurred gains of approximately
$122,000, during the year ended December 31, 2002. There were no gains or losses
for the years ended December 31, 2001 and 2003. Such gains and losses were
reflected as part of net gain from investments in the consolidated statements of
operations.
N. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for the years ended December 31, 2003 and 2002
is presented below.
2003 QUARTER
-----------------------------------------------------
(in thousands, except per share data) 1ST 2ND 3RD 4TH FULL YEAR
--------- --------- --------- --------- ---------
Revenues................................ $ 46,053 $ 47,956 $ 51,823 $ 61,605 $ 207,437
Operating income (a).................... 18,009 18,502 21,596 25,609 83,716
Net income.............................. 9,327 11,557 12,302 16,658 49,844
Net income per share:
Basic................................ 0.31 0.38 0.41 0.55 1.66
Diluted.............................. 0.31 0.38 0.41 0.54 1.65
2002 QUARTER
-----------------------------------------------------
Revenues................................ $ 58,032 $ 57,402 $ 47,320 $ 47,205 $ 209,959
Operating income (a).................... 28,117 26,869 22,275 21,934 99,195
Net income.............................. 15,389 13,941 11,493 12,489 53,312
Net income per share:
Basic................................ 0.51 0.46 0.38 0.42 1.77
Diluted.............................. 0.51 0.46 0.38 0.41 1.76
(a) Excludes management fee expense which is based on income before income taxes
and minority interest.
O. SUBSEQUENT EVENTS
In January 2004, the Board of Directors of GSI, our majority owned subsidiary,
authorized a dividend of $50 per share which was paid on March 15, 2004 to
shareholders of record on March 1, 2004.
F-18
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A: CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing of this report, an evaluation was
carried out under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Accounting Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-14(c) under the Securities Exchange Act of
1934). Based upon that evaluation, the Chief Executive Officer and Chief
Accounting Officer concluded that the design and operation of these disclosure
controls and procedures were effective. No significant changes were made in our
internal controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the Directors and Executive Officers of Gabelli and
compliance with Section 16(a) of the Securities Exchange Act of 1934 is
incorporated herein by reference from the sections captioned "Election of
Directors", "Information Regarding Executive Officers", "Section 16(a)
Beneficial Ownership Reporting Compliance" in our definitive proxy statement for
our 2004 Annual Meeting of Shareholders (the "Proxy Statement").
Gabelli has adopted a Code of Business Conduct (the "Code of Conduct") that
applies to our principal executive officer, principal financial officer,
principal accounting officer or controller, or persons performing similar
functions. The Code of Conduct is posted on our website (www.gabelli.com) and
available in print free of charge to any shareholder who requests a copy.
Interested parties may address a written request for a printed copy of the Code
of Conduct to: Secretary, Gabelli Asset Management Inc., One Corporate Center,
Rye, New York 10580-1422. We intend to satisfy the disclosure requirement
regarding any amendment to, or a waiver of, a provision of the Code of Conduct
by posting such information on our website.
ITEM 11: EXECUTIVE COMPENSATION
The information set forth under the captions "Compensation of Executive
Officers" and "Election of Directors - Compensation of Directors" in the Proxy
Statement is incorporated herein by reference.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "Certain Ownership of Gabelli's
Stock" in the Proxy Statement is incorporated herein by reference.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Certain Relationships and Related
Transactions" in the Proxy Statement is incorporated herein by reference.
ITEM 14: PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information set forth under the caption "Independent Accountants" in the
Proxy Statement is incorporated herein by reference.
II-1
PART IV
ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT:
(1) Consolidated Financial Statements and Independent Auditors'
Report included herein: See Index on page F-1
(2) Financial Statement Schedules: Financial statement schedules are
omitted as not required or not applicable or because the
information is included in the Financial Statements or notes
thereto.
(3) List of Exhibits:
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
3.1 -- Restated Certificate of Incorporation of the Company. (Incorporated by
reference to Exhibit 3.2 to Amendment No. 4 to the Company's
Registration Statement on Form S-1 (File No. 333-51023) filed with the
Securities and Exchange Commission on February 10, 1999).
3.2 -- Amended Bylaws of the Company. (Incorporated by reference to Exhibit
3.4 to Amendment No. 4 to the Company's Registration Statement on Form
S-1 (File No. 333-51023) filed with the Securities and Exchange
Commission on February 10, 1999).
4.1 -- Specimen of class A common stock Certificate. (Incorporated by
reference to Exhibit 4.1 to Amendment No. 3 to the Company's
Registration Statement on Form S-1 (File No. 333-51023) filed with the
Securities and Exchange Commission on January 29, 1999).
4.2 -- Promissory Note, dated August 14, 2001, of the Company (Incorporated
by reference to Exhibit 1.2 to the Company's Form 10-Q/A for the
quarter ended September 30, 2001 filed with the Securities and
Exchange Commission on November 16, 2001) and as amended (Incorporated
by reference to Exhibit 4.2 to the Company's Form 10-Q for the quarter
ended June 31, 2003 filed with the Securities and Exchange Commission
on August 14, 2003).
4.3 -- Indenture, dated as of February 6, 2002, between Gabelli Asset
Management Inc. and The Bank of New York, as Trustee. (Incorporated by
reference to Exhibit 4.1 to the Company's Report on Form 8-K dated
February 8, 2002 filed with the Securities and Exchange Commission on
February 8, 2002).
4.4 -- First Supplemental Indenture, dated as of February 6, 2002, between
Gabelli Asset Management Inc. and The Bank of New York, as Trustee.
(Incorporated by reference to Exhibit 4.2 to the Company's Report on
Form 8-K dated February 8, 2002 filed with the Securities and Exchange
Commission on February 8, 2002).
4.5 -- Form of Note (included in Exhibit 4.4). (Incorporated by reference to
Exhibit 4.3 to the Company's Report on Form 8-K dated February 8, 2002
filed with the Securities and Exchange Commission on February 8,
2002).
4.6 -- Purchase Contract Agreement, dated as of February 6, 2002, between
Gabelli Asset Management Inc. and The Bank of New York, as Purchase
Contract Agent. (Incorporated by reference to Exhibit 4.4 to the
Company's Report on Form 8-K dated February 8, 2002 filed with the
Securities and Exchange Commission on February 8, 2002).
4.7 -- Form of Income PRIDES Certificate (included in Exhibit 4.6).
(Incorporated by reference to Exhibit 4.5 to the Company's Report on
Form 8-K dated February 8, 2002 filed with the Securities and Exchange
Commission on February 8, 2002).
4.8 -- Form of Growth PRIDES Certificate (included in Exhibit 4.6).
(Incorporated by reference to Exhibit 4.6 to the Company's Report on
Form 8-K dated February 8, 2002 filed with the Securities and Exchange
Commission on February 8, 2002).
4.9 -- Pledge Agreement, dated as of February 6, 2002, among Gabelli Asset
Management Inc., JPMorgan Chase Bank, as Collateral Agent, and The
Bank of New York, as Purchase Contract Agent. (Incorporated by
reference to Exhibit 4.7 to the Company's Report on Form 8-K dated
February 8, 2002 filed with the Securities and Exchange Commission on
February 8, 2002).
II-2
4.10 -- Remarketing Agreement, dated as of February 6, 2002, among Gabelli
Asset Management Inc., The Bank of New York, as Purchase Contract
Agent, and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, as Remarketing Agent. (Incorporated by reference to
Exhibit 4.8 to the Company's Report on Form 8-K dated February 8, 2002
filed with the Securities and Exchange Commission on February 8,
2002).
10.1 -- Management Services Agreement between the Company and GFI dated as of
February 9, 1999. (Incorporated by reference to Exhibit 10.1 to
Amendment No. 4 to the Company's Registration Statement on Form S-1
(File No. 333-51023) filed with the Securities and Exchange Commission
on February 10, 1999).
10.2 -- Tax Indemnification Agreement between the Company and GFI.
(Incorporated by reference to Exhibit 10.2 to Amendment No. 4 to the
Company's Registration Statement on Form S-1 (File No. 333-51023)
filed with the Securities and Exchange Commission on February 10,
1999).
10.3 -- Lock-Up Agreement between the Company and GFI. (Incorporated by
reference to Exhibit 10.3 to Amendment No. 4 to the Company's
Registration Statement on Form S-1 (File No. 333-51023) filed with the
Securities and Exchange Commission on February 10, 1999).
10.4 -- Gabelli Asset Management Inc. 1999 Stock Award and Incentive Plan.
(Incorporated by reference to Exhibit 10.4 to Amendment No. 4 to the
Company's Registration Statement on Form S-1 (File No. 333-51023)
filed with the Securities and Exchange Commission on February 10,
1999).
10.5 -- Gabelli Asset Management Inc. 1999 Annual Performance Incentive Plan.
(Incorporated by reference to Exhibit 10.5 to Amendment No. 4 to the
Company's Registration Statement on Form S-1 (File No. 333-51023)
filed with the Securities and Exchange Commission on February 10,
1999).
10.6 -- Employment Agreement between the Company and Mario J. Gabelli.
(Incorporated by reference to Exhibit 10.6 to Amendment No. 4 to the
Company's Registration Statement on Form S-1 (File No. 333-51023)
filed with the Securities and Exchange Commission on February 10,
1999).
10.7 -- Registration Rights Agreement, dated August 14, 2001, between the
Company and Cascade Investment LLC. (Incorporated by reference to
Exhibit 4.1 to the Company's Form 10-Q/A for the quarter ended
September 30, 2001 filed with the Securities and Exchange Commission
on November 16, 2001).
10.8 -- FIRST AMENDMENT, dated as of July 1, 2003, to the Note Purchase
Agreement, dated as of August 10, 2001 by and among Cascade Investment
LLC, a Washington limited liability company, Gabelli Asset Management
Inc., a New York corporation, Mario J. Gabelli , Gabelli Group Capital
Partners, Inc., a New York corporation and Rye Holdings, Inc., a New
York corporation and Rye Capital Partners, Inc. (Incorporated by
reference to Exhibit 4.1 to the Company's Form 10-Q for the quarter
ended June 30, 2003, filed with the Securities and Exchange Commission
on August 14, 2003).
12.1 -- Computation of Ratios of Earnings to Fixed Charges.
21.1 -- Subsidiaries of the Company.
23.1 -- Consent of Ernst & Young, LLP.
24.1 -- Powers of Attorney (included on page II-3 of this Report).
31.1 -- Certification of CEO pursuant to Rule 13a-14(a).
31.2 -- Certification of CAO pursuant to Rule 13a-14(a).
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 CAO 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:
We filed the following Current Reports on Form 8-K during the three months ended
December 31, 2003.
1. Current Report on Form 8-K dated October 15, 2003
containing the press release disclosing our operating
results for the third quarter ended September 30, 2003.
II-3
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Rye, State
of New York, on March 15, 2004.
GABELLI ASSET MANAGEMENT INC.
By:/s/ Michael R. Anastasio
Name: Michael R. Anastasio
Title: Chief Accounting Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
Michael R. Anastasio and James E. McKee and each of them, his true and lawful
attorney-in-fact and agent with full power of substitution and resubstitution,
for him in his name, place and stead, in any and all capacities, to sign any and
all amendments to this report and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, and hereby grants to such attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and agent
or his substitute or substitutes may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons in the capacities and on the dates
indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Mario J. Gabelli Chairman of the Board, March 15, 2004
- ------------------------- Chief Executive Officer
Mario J. Gabelli and Chief Investment Officer
(Principal Executive Officer)
/s/ Michael R. Anastasio Chief Accounting Officer March 15, 2004
- ------------------------- (Principal Financial Officer
Michael R. Anastasio and Principal Accounting
Officer)
/s/ Raymond C. Avansino Director March 15, 2004
- -------------------------
Raymond C. Avansino
/s/ John C. Ferrara Director March 15, 2004
- -------------------------
John C. Ferrara
/s/ John D. Gabelli Director March 15, 2004
- -------------------------
John D. Gabelli
/s/ Paul B. Guenther Director March 15, 2004
- -------------------------
Paul B. Guenther
/s/ Eamon M. Kelly Director March 15, 2004
- -------------------------
Eamon M. Kelly
/s/ Karl Otto Pohl Director March 15, 2004
- -------------------------
Karl Otto Pohl
/s/ Frederic V. Salerno Director March 15, 2004
- -------------------------
Frederic V. Salerno
/s/ Vincent Tese Director March 15, 2004
- -------------------------
Vincent Tese
II-4