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SECURITIES & EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
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or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File No. 1-106
GABELLI ASSET MANAGEMENT INC.
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(Exact name of Registrant as specified in its charter)
New York 13-4007862
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Corporate Center, Rye, New York 10580
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(Address of principal executive offices) (Zip Code)
(914)921-3700
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Registrant's telephone number, including area code
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes X No
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Indicate the number of shares outstanding of each of the Registrant's classes of
Common Stock, as of the latest practical date.
Class Outstanding at April 30, 2004
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Class A Common Stock, .001 par value 6,799,653
Class B Common Stock, .001 par value 23,128,500
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1
INDEX
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GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Operations:
- Three months ended March 31, 2004 and 2003
Condensed Consolidated Statements of Financial Condition:
- March 31, 2004
- March 31, 2003
- December 31, 2003 (Audited)
Condensed Consolidated Statements of Cash Flows:
- Three months ended March 31, 2004 and 2003
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Including Quantitative and
Qualitative Disclosures about Market Risk)
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
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Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
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2
GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
(In thousands, except per share data)
THREE MONTHS ENDED
MARCH 31,
-----------------------------
2004 2003
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REVENUES
Investment advisory and incentive fees ................... $ 53,928 $ 39,501
Commission revenue ....................................... 4,284 2,420
Distribution fees and other income ....................... 5,327 4,132
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Total revenues ........................................ 63,539 46,053
EXPENSES
Compensation and related costs ........................... 25,944 20,525
Management fee ........................................... 2,836 1,669
Other operating expenses ................................. 9,482 7,519
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Total expenses ........................................ 38,262 29,713
Operating income ........................................... 25,277 16,340
OTHER INCOME (EXPENSE)
Net gain (loss) from investments ......................... 2,610 434
Interest and dividend income ............................. 1,680 1,256
Interest expense ......................................... (4,046) (3,011)
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Total other income (expense), net ..................... 244 (1,321)
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Income before income taxes and minority interest ........... 25,521 15,019
Income tax provision ..................................... 9,296 5,647
Minority interest ........................................ 154 45
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Net income ............................................. $ 16,071 $ 9,327
========== ==========
Net income per share:
Basic .................................................... $ 0.53 $ 0.31
========== ==========
Diluted .................................................. $ 0.52 $ 0.31
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Weighted average shares outstanding:
Basic .................................................... 30,064 29,918
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Diluted .................................................. 32,202 30,031
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See accompanying notes.
3
GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands)
March 31, March 31, December 31,
2004 2003 2003
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(Unaudited)
ASSETS
Cash and cash equivalents ..................................... $ 371,355 $ 327,099 $ 386,511
Investments in securities ..................................... 246,805 158,319 231,400
Investments in partnerships and affiliates .................... 81,258 52,294 64,012
Receivable from brokers ....................................... 15,037 2,675 1,232
Investment advisory fees receivable ........................... 18,746 14,400 21,565
Other assets .................................................. 28,609 27,065 31,791
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Total assets ............................................. $ 761,810 $ 581,852 $ 736,511
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Payable to brokers ............................................ $ 5,772 6,515 $ 5,691
Income taxes payable .......................................... 15,688 8,457 12,323
Compensation payable .......................................... 26,964 20,554 25,552
Capital lease obligation ...................................... 2,957 3,342 3,058
Securities sold, not yet purchased ............................ 9,372 2,833 664
Accrued expenses and other liabilities ........................ 17,802 14,142 18,487
---------- ---------- ----------
Total operating liabilities .............................. 78,555 55,843 65,775
5.5% Senior notes (due May 15, 2013) ......................... 100,000 -- 100,000
5% Convertible note (conversion price,
$52.00 per share; note due August 14,
2011)(a) ..................................................... 100,000 100,000 100,000
6.95% Mandatory convertible securities
(purchase contract settlement date,
February 17, 2005; notes due February 17,
2007) ....................................................... 83,825 84,163 84,030
---------- ---------- ----------
Total liabilities ........................................ 362,380 240,006 349,805
Minority interest ............................................. 5,831 7,607 8,395
Stockholders' equity
Class A Common Stock, $0.001 par value;
100,000,000 shares authorized; 7,738,025,
7,596,111 and 7,697,600 issued and
outstanding, respectively .................................... 8 8 8
Class B Common Stock, $0.001 par value; 100,000,000 shares
authorized; 23,128,500, 23,150,000 and 23,128,500 issued
and outstanding, respectively ................................ 23 23 23
Additional paid-in capital .................................... 145,219 140,185 143,475
Retained earnings ............................................. 273,339 216,887 257,266
Accumulated comprehensive gain / (loss) ....................... 137 (665) 1,480
Treasury stock, at cost (806,472, 719,622
and 776,544 shares, respectively) ........................... (25,127) (22,199) (23,941)
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Total stockholders' equity ............................... 393,599 334,239 378,311
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Total liabilities and stockholders' equity .................... $ 761,810 $ 581,852 $ 736,511
========== ========== ==========
(a) Terms of note changed from 6% to 5% in mid-August 2003.
See accompanying notes.
4
GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(In thousands)
THREE MONTHS ENDED
MARCH 31,
-----------------------------
2004 2003
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OPERATING ACTIVITIES
Net income ............................................. $ 16,071 $ 9,327
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in gains from partnerships and .................. (2,143) (555)
affiliates ..........................................
Depreciation and amortization .......................... 240 242
Stock-based compensation expense ....................... 434 215
Tax benefit from exercise of stock options ............. 248 620
Minority interest in net income of consolidated ........
subsidiaries ........................................ 154 45
Realized gains on available for sale securities ........ (101) --
(Increase) decrease in operating assets:
Investments in securities ........................... (15,548) 17,303
Investment advisory fees receivable ................. 2,820 1,203
Receivables from affiliates ......................... 4,219 445
Other receivables ................................... 63 (187)
Receivable from brokers ............................. (13,805) 2,244
Other assets ........................................ (1,341) (185)
Increase (decrease) in operating liabilities:
Payable to brokers .................................. 81 (10,623)
Income taxes payable ................................ 4,175 (723)
Compensation payable ................................ 1,651 2,100
Accrued expenses and other liabilities .............. (783) (1,531)
Securities sold, not yet purchased .................. 8,707 (2,189)
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Total adjustments ...................................... (10,929) 8,424
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Net cash provided by operating activities .............. 5,142 17,751
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INVESTING ACTIVITIES
Purchases of available for sale securities ............. (2,748) (204)
Proceeds from sales of available for sale
securities .......................................... 600 --
Distributions from partnerships and affiliates ......... 7,067 7,349
Investments in partnerships and affiliates ............. (22,170) (11,155)
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Net cash (used in) investing activities ................ (17,251) (4,010)
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FINANCING ACTIVITIES
Dividend paid to minority stockholders ................. (2,718) --
Proceeds from exercise of stock options ................ 1,057 2,505
Purchase of mandatory convertible securities ........... (200) (373)
Purchase of treasury stock ............................. (1,186) (204)
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Net cash (used in) provided by financing activities .... (3,047) 1,928
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Net (decrease)increase in cash and cash equivalents .... (15,156) 15,669
Cash and cash equivalents at beginning of period ....... 386,511 311,430
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Cash and cash equivalents at end of period ............. $ 371,355 $ 327,099
========== ==========
See accompanying notes.
5
GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
(UNAUDITED)
A. BASIS OF PRESENTATION
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.
The unaudited interim Condensed Consolidated Financial Statements of
Gabelli Asset Management Inc. included herein have been prepared in conformity
with accounting principles generally accepted in the United States for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the unaudited interim
condensed consolidated financial statements reflect all adjustments, which are
of a normal recurring nature, necessary for a fair presentation of financial
position, results of operations and cash flows of Gabelli for the interim
periods presented and are not necessarily indicative of a full year's results.
In preparing the unaudited interim condensed consolidated financial
statements, management is required to make estimates and assumptions that affect
the amounts reported in the financial statements. Actual results could differ
from those estimates.
These financial statements should be read in conjunction with our audited
consolidated financial statements included in our Annual Report on Form 10-K for
the year ended December 31, 2003, from which the accompanying Condensed
Consolidated Statement of Financial Condition was derived.
Certain items previously reported have been reclassified to conform to the
current period's financial statement presentation.
B. INVESTMENT IN SECURITIES
Management determines the appropriate classification of debt and equity
securities at the time of purchase and reevaluates such designation as of each
balance sheet date. A substantial portion of investments in securities are held
for resale in anticipation of short-term market movements and classified as
trading securities. Available for sale investments are stated at fair value,
with any unrealized gains or losses, net of deferred taxes, reported as a
component of stockholders' equity.
At March 31, 2004 and 2003 the market value of investments available for
sale was $67.3 million and $6.1 million, respectively. An unrealized gain in
market value, net of taxes, of $137,000 and an unrealized loss in market value,
net of taxes, of $665,000 has been included in stockholders' equity for March
31, 2004 and 2003, respectively.
Proceeds from sales of investments available for sale were approximately
$0.6 million for the three month period ended March 31, 2004. Gross gains on the
sale of investments available for sale amounted to $101,000; there were no gross
losses on the sale of investments available for sale. There were no sales of
investments available for sale for the three month period ended March 31, 2003.
6
C. EARNINGS PER SHARE
The computations of basic and diluted net income per share are as follows:
Three Months Ended
March 31,
(in thousands, except per share amounts) 2004 2003
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Basic:
Net income $ 16,071 $ 9,327
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Average shares outstanding 30,064 29,918
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Basic net income per share $ 0.53 $ 0.31
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Diluted:
Net income $ 16,071 $ 9,327
Add interest expense on convertible note, net
of management fee and taxes 716 --
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Total $ 16,787 $ 9,327
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Average shares outstanding 30,064 29,918
Dilutive stock options 215 113
Assumed conversion of convertible note 1,923 --
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Total 32,202 30,031
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Diluted net income per share $ 0.52 $ 0.31
======== ========
For the three months ended March 31, 2003 the assumed conversion of the
convertible note would not be dilutive and, accordingly, has not been used in
the computations of the weighted average diluted shares.
D. STOCKHOLDERS' EQUITY
STOCK AWARD AND INCENTIVE PLAN
On February 18, 2003 the Board of Directors approved stock option awards
totaling 633,000 shares under our Stock Award and Incentive Plan at an exercise
price to be equal to the closing market price on the date of grant. Of these
options 561,000 were granted on February 18, 2003 at an exercise price of $28.95
per share and 72,000 were granted on May 13, 2003 at an exercise price of $29.00
per share. These options will vest 75% after three years and 100% after four
years from the date of grant and expire after ten years. We adopted SFAS 123,
"Accounting for Stock-Based Compensation" ("SFAS 123") as of January 1, 2003 in
accordance with SFAS 148, "Accounting for Stock-Based Compensation - Transition
and Disclosure" ("SFAS 148") and used the prospective method for transition.
Under SFAS 123 we record compensation expense equal to the fair value of the
options on the date of grant based on the Black-Scholes option pricing model.
This model utilizes a number of assumptions in arriving at its results,
including an estimate of the life of the option, the risk-free interest rate at
the date of grant and the volatility of the underlying common stock. The
weighted average fair value of the options granted on the date of grant and the
assumptions used were as follows:
Weighted average fair value of
Options granted: $10.96
Assumptions made:
Expected volatility 38%
Risk-free interest rate 2.99%
Expected life 5 years
Dividend yield 0%
7
D. STOCKHOLDERS' EQUITY (CONTINUED)
The expected life reflected an estimate of the length of time the employees
are expected to hold the options, including the vesting period, and is based, in
part, on actual experience with other grants. The dividend yield reflected the
assumption that no or an immaterial payout would be made in the foreseeable
future at that time. For the three months ended March 31, 2004 and 2003, we
recognized $434,000 and $215,000, respectively, in stock-based compensation.
Proceeds from the exercise of 40,425 and 145,267 stock options were
$1,057,000 and $2,505,000 for the three months ended March 31, 2004 and 2003,
respectively, resulting in a tax benefit to Gabelli of $248,000 and $620,000 for
the three months ended March 31, 2004 and 2003, respectively.
STOCK REPURCHASE PROGRAM
In March 1999 the Board of Directors established the Stock Repurchase
Program through which we are authorized to repurchase shares of our Class A
Common Stock from time to time in the open market. During the three months ended
March 31, 2004, we repurchased 29,927 shares at an average cost of $39.57 per
share. Since the inception of the program we have repurchased 1,207,276 shares
at an average cost of $26.00 per share. At March 31, 2004 the total amount
available to repurchase shares under the program was $11.0 million.
Since May 2002 the Board of Directors has also approved the repurchase of
up to 700,000 shares of our mandatory convertible securities from time to time
in the open market. During the first quarter of 2004, we repurchased 8,200
shares at an average investment of $25.04 per share bringing the total shares
repurchased to 247,000 at a total investment of $5.4 million. A loss
attributable to the debt component of the mandatory convertible securities
totaling less than $1,000 has been included in other income (expense) for the
three months ended March 31, 2004.
Gabelli Securities, Inc., our 92% owned subsidiary, paid a cash dividend of
$50 per share on March 15, 2004. The dividend paid to minority shareholders
totaled $2,717,850.
E. SUBSEQUENT EVENTS
During the second quarter of 2004, we repurchased 203,400 shares of our
Class A Common Stock, under the Stock Repurchase Program, at an average cost of
$39.22 per share.
During the second quarter of 2004, we repurchased 37,100 shares of our
mandatory convertible securities at an average investment of $24.94 per share.
8
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (INCLUDING
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK)
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.
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 our proprietary Private Market Value (PMV) with a
Catalyst fundamental research. Today, in addition to our Gabelli value products,
we offer our clients a broad array of investment strategies that include growth,
convertible, non-market correlated and fixed income strategies. By earning
returns for our clients, we will be earning returns for all our stakeholders.
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.
As of March 31, 2004, we had a record $28.2 billion of assets under
management, approximately 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.
The following discussion should be read in conjunction with the Condensed
Consolidated Financial Statements and the notes thereto included in Item 1 to
this report.
9
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2004 COMPARED TO THREE MONTHS ENDED MARCH 31, 2003
Consolidated Results - Three Months Ended March 31:
(Unaudited; in thousands, except per share data)
2004 2003
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Revenues $ 63,539 $ 46,053
Expenses 38,262 29,713
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Operating income 25,277 16,340
Investment income, net 4,290 1,690
Interest expense (4,046) (3,011)
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Total other income (expense), net 244 (1,321)
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Income before taxes and minority interest 25,521 15,019
Income tax provision 9,296 5,647
Minority interest 154 45
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Net income $ 16,071 $ 9,327
========== ==========
Net income per share:
Basic $ 0.53 $ 0.31
========== ==========
Diluted $ 0.52 $ 0.31
========== ==========
Reconciliation of Net income to Adjusted EBITDA:
Net income $ 16,071 $ 9,327
Interest Expense 4,046 3,011
Income tax provision and minority interest 9,450 5,692
Depreciation and amortization 240 242
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Adjusted EBITDA(a) $ 29,807 $ 18,272
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(a) Adjusted EBITDA is defined as earnings before interest, taxes, depreciation
and amortization, and minority interest. Adjusted EBITDA is a Non-GAAP
measure and should not be considered as an alternative to any measure of
performance as promulgated under accounting principles generally accepted
in the United States nor should it be considered as an indicator of our
overall financial performance. We use Adjusted EBITDA as a supplemental
measure of performance as we believe it gives investors a more complete
understanding of our operating results before the impact of investing and
financing activities as a tool for determining the private market value of
an enterprise.
Total revenues were $63.5 million in the first quarter of 2004 up $17.4
million or 38.0% from total revenues of $46.1 million reported in the first
quarter of 2003. Investment advisory and incentive fees, which comprise 84.9% of
total revenues, were $53.9 million in the first quarter of 2004, $14.4 million
or 36.5% higher than the $39.5 million reported in the first quarter of 2003.
The increase in investment advisory and incentive fees was principally the
result of higher levels of assets under management in our equity mutual funds,
separate accounts and alternative investment products. This included the
addition of our new closed-end fund, The Gabelli Dividend & Income Trust in the
fourth quarter of 2003. Revenues from mutual funds increased $9.4 million or
48.0% from the prior year as assets under management in mutual funds increased
to $13.6 billion at March 31, 2004, or 40.2% ahead of the March 31, 2003 assets
under management of $9.7 billion. Our fees from GAMCO separate accounts, which
are generally billed based on asset levels at the beginning of a quarter,
increased $4.6 million or 25.8% in the 2004 quarter as compared to the first
quarter of 2003. Revenues from our alternative investment products increased
$425,000 or 20.5% as a result of increased management fees.
Commission revenue, driven mostly by institutional research, was $4.3
million in the first quarter of 2004, up 77.0% from $2.4 million in the same
period a year earlier largely due to an increase in overall trading volume.
10
Revenues from distribution of mutual funds and other income were $5.3
million in the first quarter of 2004 versus $4.1 million in the first quarter of
2003. This increase was a result of a 27.8% increase in average assets for
open-end equity funds for the first quarter of 2004 versus the prior year first
quarter, which generate distribution revenues under 12b-1 compensation plans.
The effect of the Mutual Fund Reform Act of 2004 if enacted and other
congressional and SEC actions pose a risk to our future distribution fee revenue
as 12b-1 fees may be repealed or restricted.
Total expenses, excluding management fee, were $35.4 million in the first
quarter of 2004, a 26.3% increase from total expenses of $28.0 million reported
in the first quarter of 2003. Compensation and related costs, which are largely
variable, were $25.9 million, 26.4% higher than the same period a year earlier.
The increase in compensation was due to increased variable compensation related
to our Mutual Fund products of $3.1 million, an increase in variable
compensation related to our GAMCO separate accounts of $1.3 million and an
increase in salaries, accruals for incentive compensation and stock option
expense totaling $0.7 million. Management fee expense, which is totally variable
and based on pretax income, was 69.9% higher at $2.8 million in the first
quarter of 2004 versus $1.7 million in the first quarter of 2003. Other
operating expenses were higher by $2.0 million, a 26.1% increase to $9.5 million
in the first quarter of 2004 from the prior year first quarter of $7.5 million
due to higher costs related to insurance, legal and accounting.
Investment income was $4.3 million in the first quarter of 2004 higher by
$2.6 million, or 154% from $1.7 million reported in the first quarter of 2003
due to improved results from our corporate investment portfolio. Interest
expense increased to $4.0 million in the first quarter of 2004 from $3.0 million
in the comparable prior year quarter. This increase is a result of our issuance
of $100 million of 5.5% non-callable senior notes due May 15, 2013 during the
second quarter of 2003, offset in part by a one percent decrease in the interest
rate on the $100 million convertible note from 6% to 5% in August 2003.
The estimated effective tax rate for the first quarter of 2004 decreased to
36.4% from 37.6% for the first quarter of 2003 as we adjusted the tax rate to
reflect our estimate of the current year end tax liability.
LIQUIDITY AND CAPITAL RESOURCES
Our assets are primarily liquid, consisting mainly of cash, short term
investments, securities held for investment purposes and investments in
partnerships and affiliates in which we are a general partner, limited partner
or investment manager. Investments in partnerships and affiliates are generally
illiquid, however the underlying investments in such entities are generally
liquid and the valuations of the investment partnerships and affiliates reflect
this underlying liquidity.
Summary cash flow data is as follows:
Three Months Ended March 31,
---------------------------
2004 2003
--------- ---------
Cash flows provided by (used in): (in thousands)
Operating activities $ 5,142 $ 17,751
Investing activities (17,251) (4,010)
Financing activities (3,047) 1,928
--------- ---------
(Decrease) Increase (15,156) 15,669
Cash and cash equivalents at beginning of period 386,511 311,430
--------- ---------
Cash and cash equivalents at end of period $ 371,355 $ 327,099
========= =========
Cash requirements and liquidity needs have historically been met through
cash generated by operating activities and through our borrowing capacity. We
have received investment grade ratings from both Moody's Investors Services and
Standard & Poor's Rating Services. These investment grade ratings expand our
ability to attract both public and private capital. At March 31, 2004, we had
total cash and cash equivalents of $371.4 million, a decrease of $15.2 million
from December 31, 2003. Gabelli has established a collateral account, consisting
of cash and cash equivalents and investments in securities totaling $103.2
million, to secure a letter of credit issued in favor of the holder of the $100
million convertible note. The letter of credit was extended and expires on
August 14, 2004, which coincides with the date of a put option the note holder
may exercise. Cash and cash equivalents and investments in securities held in
the collateral account are restricted from other uses until the
11
date of expiration. Total debt at March 31, 2004 was $283.8 million, consisting
of a $100 million 5% convertible note, $100 million of 5.5% non-callable senior
notes due May 15, 2013 and $83.8 million in mandatory convertible securities.
The mandatory convertible securities consist of both a forward contract to
purchase shares of our class A common stock on February 17, 2005 and senior
notes due February 17, 2007. The forward 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 receipt of additional proceeds and
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.
Cash provided by operating activities was $5.1 million in the first three
months of 2004 principally resulting from $16.1 million in net income, an $8.7
million increase in securities sold, not yet purchased, a $4.2 million decrease
in receivable from affiliates, a $4.2 million increase in income taxes payable
and a $2.8 million decrease in investment advisory fees receivable partially
offset by a $13.8 million increase in receivable from brokers and $15.5 million
increase in investments in securities. Cash provided by operating activities was
$17.8 million in the first quarter of 2003 principally resulting from a decrease
in investments in securities of $17.3 million and a $10.6 million reduction in
payable to brokers partially offset by $9.3 million in net income.
Cash used in investing activities, related to investments in and
distributions from partnerships and affiliates and purchases and sales of
available for sale securities, was $17.3 million in the first three months of
2004. Cash used in investing activities, related to investments in and
distributions from partnerships and affiliates and proceeds from sales of
available for sale securities, was $4.0 million in the first quarter of 2003.
Cash used in financing activities in the first three months of 2004 was
$3.0 million. The decrease in cash principally resulted from the $50 per share
dividend paid by our 92% owned subsidiary, Gabelli Securities, Inc., to its
shareholders resulting in a payment to minority shareholders of $2.7 million and
the repurchase of our Class A Common Stock and mandatory convertible securities
under the respective Stock Repurchase Programs of $1.4 million partially offset
by the $1.1 million received from the exercise of non-qualified stock options
that further generated cash tax savings of $0.2 million.
Cash provided by financing activities in the first quarter of 2003 was $1.9
million. The increase in cash primarily results from $2.4 million received from
the exercise of non-qualified stock options which further generated cash tax
savings of $0.6 million. Other significant financing activities which used cash
included $0.5 million to repurchase shares of our Class A Common Stock and
mandatory convertible securities under the respective Stock Repurchase Programs.
Based upon our current level of operations and anticipated growth, we
expect that our current cash balances plus cash flows from operating activities
and our borrowing capacity will be sufficient to finance our working capital
needs for the foreseeable future. We have no material commitments for capital
expenditures.
Gabelli & Company, Inc., a subsidiary of Gabelli, is registered with the
Securities and Exchange Commission as a broker-dealer and is a member of the
National Association of Securities Dealers. As such, it is subject to the
minimum net capital requirements promulgated by the Commission. Gabelli &
Company's net capital has historically exceeded these minimum requirements.
Gabelli & Company computes its net capital under the alternative method
permitted by the Commission, which requires minimum net capital of $250,000. At
March 31, 2004, Gabelli & Company had net capital, as defined, of approximately
$14.6 million, exceeding the regulatory requirement by approximately $14.3
million. Regulatory net capital requirements increase when Gabelli & Company is
involved in underwriting activities.
MARKET RISK
We are subject to potential losses from certain market risks as a result of
absolute and relative price movements in financial instruments due to changes in
interest rates, equity prices and other factors. Our exposure to market risk is
directly related to our role as financial intermediary, advisor and general
partner for assets under management in our mutual funds, institutional and
separate accounts business, alternative investment products and our proprietary
investment activities. At March 31, 2004, our primary market risk exposure was
to changes in equity prices and interest rates.
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With respect to our proprietary investment activities included in
investments in securities of $246.8 million at March 31, 2004 were investments
in Treasury Bills and Notes of $103.7 million, in mutual funds, largely invested
in equity products, of $104.9 million, a selection of common and preferred
stocks totaling $32.7 million and other investments of approximately $5.5
million. Investments in mutual funds generally lower market risk through the
diversification of financial instruments within their portfolio. In addition, we
may alter our investment holdings from time to time in response to changes in
market risks and other factors considered appropriate by management. Of the
approximately $32.7 million invested in common and preferred stocks at March 31,
2004, $13.7 million is related to our investment in Westwood Holdings Group Inc.
and $10.3 million is invested in risk arbitrage opportunities in connection with
mergers, consolidations, acquisitions, tender offers or other similar
transactions. Investments in partnerships and affiliates totaled $81.3 million
at March 31, 2004, the majority of which consisted of alternative investment
products which invest in risk arbitrage opportunities. These transactions
generally involve announced deals with agreed upon terms and conditions,
including pricing, which typically involve less market risk than common stocks
held in a trading portfolio. The principal risk associated with risk arbitrage
transactions is the inability of the companies involved to complete the
transaction.
Gabelli's exposure to interest rate risk results, principally, from its
investment of excess cash in U.S. Government obligations. These investments are
primarily short term in nature and the carrying value of these investments
generally approximates market value.
Our revenues are largely driven by the market value of our assets under
management and are therefore exposed to fluctuations in market prices.
Investment advisory fees for mutual funds are based on average daily asset
values. Management fees earned on institutional and high-net-worth separate
accounts, for any given quarter, are generally determined based on asset values
on the last day of the preceding quarter. Any significant increases or decreases
in market value of institutional and high-net-worth separate accounts assets
managed which occur on the last day of the quarter will generally result in a
relative increase or decrease in revenues for the following quarter.
RECENT ACCOUNTING DEVELOPMENTS
In December 2002, the FASB issued SFAS 148 which provides alternative
methods of transition to SFAS 123 and also amends its disclosure provisions. We
elected to begin expensing options using the fair value recognition provisions
of SFAS 123 effective January 1, 2003 using the prospective method of
transition. Under the prospective transition method there are no changes to
previously issued financial statements and only options granted subsequent to
January 1, 2003 are expensed.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others" ("FIN 45"), which provides accounting and
disclosure requirements for certain guarantees. Gabelli indemnifies its clearing
broker for losses it 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, Gabelli further limits
margin balances to a maximum of 25% versus 50% permitted under exchange
regulations. At March 31, 2004 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.
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In January 2003 the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" which was subsequently revised in December 2003 by
FASB Interpretation No. 46(R) ("FIN No. 46"). FIN No. 46 provides new criteria
for determining whether or not consolidation accounting is required for
off-balance sheet activities conducted through certain types of entities. This
interpretation focuses on financial interests in entities (i.e., variable
interests) that indicate control despite the absence of clear control through
voting interest. It concludes that a company's exposure (variable interest) to
the economic risks and rewards from the entity's assets and activities are the
best evidence of control. The interpretation requires that these variable
interest entities (VIEs) be subject to consolidation if the company holding the
variable interest is subject to a majority of the expected losses or will
receive a majority of the expected residual returns of the VIE (the "primary
beneficiary"). As the primary beneficiary it would be required to include the
variable interest entity's assets, liabilities and results of operations in its
own financial statements.
During February 2004, the FASB issued further guidance through FASB Staff
Positions related to FIN No. 46. We have implemented FIN No. 46 for the quarter
ended March 31, 2004 based on the provisions of the interpretation and the
related staff positions and concluded that certain of the partnerships and
offshore funds managed by Gabelli are VIEs. However, in most cases, it was
concluded based on the provisions of the interpretation and related staff
positions that Gabelli was not the primary beneficiary of these entities. As a
result, the effect of the implementation of FIN No. 46 for the quarter ended
March 31, 2004 did not have a material impact to our consolidated financial
statements.
We serve as General Partner, co-General Partner or Investment Manager for a
number of partnerships and offshore funds classified as VIEs. As General Partner
or co-General Partner, we are contingently liable for all of the partnerships'
liabilities. Our exposure to the activities of VIEs which are not partnerships
is limited to our investment in each respective VIE.
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ITEM 4. CONTROLS AND PROCEDURES
Management, including the Chief Executive Officer and the Chief Accounting
Officer have conducted an evaluation of the effectiveness of disclosure controls
and procedures pursuant to Exchange Act Rule 13a-14. Based on the evaluation,
the Chief Executive Officer and the Chief Accounting Officer concluded that the
disclosure controls and procedures are effective in ensuring that all material
information required to be filed in this quarterly report has been made known to
them in a timely fashion. There have been no significant changes in internal
controls, or in factors that could significantly affect internal controls,
subsequent to the date the Chief Executive Officer and the Chief Accounting
Officer completed their evaluation.
FORWARD-LOOKING INFORMATION
Our disclosure and analysis in this report contain some forward-looking
statements. Forward-looking statements give our current expectations or
forecasts of future events. You can identify these statements because they do
not relate strictly to historical or current facts. They use words such as
"anticipate," "estimate," "expect," "project," "intend," "plan," "believe," and
other words and terms of similar meaning. They also appear in any discussion of
future operating or financial performance. In particular, these include
statements relating to future actions, future performance of our products,
expenses, the outcome of any legal proceedings, and financial results. Although
we believe that we are basing our expectations and beliefs on reasonable
assumptions within the bounds of what we currently know about our business and
operations, there can be no assurance that our actual results will not differ
materially from what we expect or believe. Some of the factors that could cause
our actual results to differ from our expectations or beliefs include, without
limitation: the adverse effect from a decline in the securities markets; a
decline in the performance of our products; a general downturn in the economy;
changes in government policy or regulation; changes in our ability to attract or
retain key employees; and unforeseen costs and other effects related to legal
proceedings or investigations of governmental and self-regulatory organizations.
We also direct your attention to any more specific discussions of risk contained
in our Form 10-K and other public filings. We are providing these statements as
permitted by the Private Litigation Reform Act of 1995. We do not undertake to
update publicly any forward-looking statements if we subsequently learn that we
are unlikely to achieve our expectations or if we receive any additional
information relating to the subject matters of our forward-looking statements.
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PART II: OTHER INFORMATION
ITEM 6. (a) Exhibits
31.1 Certification by Chief Executive Officer
Pursuant to Rule 13a-14 (a) and 15d-14 (a)
as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification by Chief Accounting Officer
Pursuant to Rule 13a-14 (a) and 15d-14 (a)
as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of CEO pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002
32.2 Certification of Chief Accounting Officer
pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K.
The Company filed the following Current Reports on
Form 8-K during the three months ended March 31,
2004.
1. Current Report on Form 8-K dated January
29, 2004 containing the press release
disclosing the Company's operating
results for the fourth quarter and full
year ended December 31, 2003.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GABELLI ASSET MANAGEMENT INC.
-----------------------------
(Registrant)
MAY 10, 2004 /s/ Michael R. Anastasio
------------ --------------------------------------
Date Michael R. Anastasio
Chief Accounting Officer
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