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SECURITIES & EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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
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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 October 31, 2004
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Class A Common Stock, .001 par value 6,261,228
Class B Common Stock, .001 par value 23,128,500
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INDEX
GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
- ---------------------------------
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Operations:
- Three months ended September 30, 2004 and 2003
- Nine months ended September 30, 2004 and 2003
Condensed Consolidated Statements of Financial Condition:
- September 30, 2004
- September 30, 2003
- December 31, 2003 (Audited)
Condensed Consolidated Statements of Stockholders Equity and
Comprehensive Income:
- Three months ended September 30, 2004 and 2003
- Nine months ended September 30, 2004 and 2003
Condensed Consolidated Statements of Cash Flows:
- Three months ended September 30, 2004 and 2003
- Nine months ended September 30, 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 2. Changes in Securities, Use of Proceeds and Issuer Purchases
of Equity Securities
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
SEPTEMBER 30,
-----------------------------
2004 2003
---------- ----------
REVENUES
Investment advisory and incentive fees .......................... $ 49,685 $ 44,207
Commission revenue .............................................. 2,962 3,327
Distribution fees and other income .............................. 4,590 4,289
---------- ----------
Total revenues ............................................... 57,237 51,823
EXPENSES
Compensation and related costs .................................. 23,534 21,792
Management fee .................................................. 2,284 2,193
Other operating expenses ........................................ 9,468 8,435
---------- ----------
Total expenses ............................................... 35,286 32,420
Operating income .................................................. 21,951 19,403
OTHER INCOME (EXPENSE)
Net gain (loss) from investments ................................ (296) 2,804
Interest and dividend income .................................... 2,916 1,704
Interest expense ................................................ (4,014) (4,174)
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Total other income (expense), net ............................ (1,394) 334
---------- ----------
Income before income taxes and minority interest .................. 20,557 19,737
Income tax provision ............................................ 7,483 7,298
Minority interest ............................................... 43 137
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Net income .................................................... $ 13,031 $ 12,302
========== ==========
Net income per share:
Basic ........................................................... $ 0.44 $ 0.41
========== ==========
Diluted ......................................................... $ 0.43 $ 0.41
========== ==========
Weighted average shares outstanding:
Basic ........................................................... 29,707 30,061
========== ==========
Diluted ......................................................... 31,820 32,170
========== ==========
Dividends declared ................................................ $ 1.02 $ 0.00
========== ==========
See accompanying notes.
3
GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
(In thousands, except per share data)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
2004 2003
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REVENUES
Investment advisory and incentive fees .......................... $ 154,928 $ 124,467
Commission revenue .............................................. 11,312 8,518
Distribution fees and other income .............................. 14,740 12,847
---------- ----------
Total revenues ............................................... 180,980 145,832
EXPENSES
Compensation and related costs .................................. 72,728 63,191
Management fee .................................................. 7,558 5,959
Other operating expenses ........................................ 29,032 24,534
---------- ----------
Total expenses ............................................... 109,318 93,684
Operating income .................................................. 71,662 52,148
OTHER INCOME (EXPENSE)
Net gain (loss) from investments ................................ 1,949 7,949
Interest and dividend income .................................... 6,510 4,328
Interest expense ................................................ (12,095) (10,790)
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Total other income (expense), net ............................ (3,636) 1,487
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Income before income taxes and minority interest .................. 68,026 53,635
Income tax provision ............................................ 24,768 20,044
Minority interest ............................................... 238 405
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Net income .................................................... $ 43,020 $ 33,186
========== ==========
Net income per share:
Basic ........................................................... $ 1.44 $ 1.11
========== ==========
Diluted ......................................................... $ 1.41 $ 1.10
========== ==========
Weighted average shares outstanding:
Basic ........................................................... 29,886 30,002
========== ==========
Diluted ......................................................... 32,011 30,134
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Dividends declared ................................................ $ 1.14 $ 0.00
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See accompanying notes.
4
GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands)
September 30, September 30, December 31,
2004 2003 2003
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(Unaudited)
ASSETS
Cash and cash equivalents ...................... $ 337,830 $ 425,849 $ 386,511
Investments in securities ...................... 249,779 182,874 231,400
Investments in partnerships and affiliates ..... 91,149 60,136 64,012
Receivable from brokers ........................ 22,620 1,216 1,232
Investment advisory fees receivable ............ 17,894 15,821 21,565
Other assets ................................... 25,051 29,788 31,791
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Total assets .............................. $ 744,323 $ 715,684 $ 736,511
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Payable to brokers ............................. $ -- $ 5,726 $ 5,691
Income taxes payable ........................... 5,608 8,603 12,323
Compensation payable ........................... 33,871 27,291 25,552
Capital lease obligation ....................... 2,751 3,154 3,058
Securities sold, not yet purchased ............. 1,084 669 664
Accrued expenses and other liabilities ......... 16,669 17,493 18,487
---------- ---------- ----------
Total operating liabilities ............... 59,983 62,936 65,775
5.5% Senior notes (due May 15, 2013) .......... 100,000 100,000 100,000
5% Convertible note (conversion price,
$52.00 per share; note due August 14,
2011) ........................................ 100,000 100,000 100,000
6.95% Mandatory convertible securities
(purchase contract settlement date,
February 17, 2005; notes due February 17,
2007) ........................................ 82,308 84,163 84,030
---------- ---------- ----------
Total liabilities ......................... 342,291 347,099 349,805
Minority interest .............................. 5,916 7,967 8,395
Stockholders' equity
Class A Common Stock, $0.001 par value;
100,000,000 shares authorized; 7,772,525,
7,678,000 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,
23,130,000 and 23,128,500 issued and
outstanding, respectively ..................... 23 23 23
Additional paid-in capital ..................... 147,381 142,580 143,475
Retained earnings .............................. 296,116 240,748 257,266
Accumulated comprehensive gain / (loss) ........ (624) (538) 1,480
Treasury stock, at cost (1,349,272, 727,039
and 776,544 shares, respectively) ............ (46,788) (22,203) (23,941)
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Total stockholders' equity ................ 396,116 360,618 378,311
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Total liabilities and stockholders' equity ..... $ 744,323 $ 715,684 $ 736,511
========== ========== ==========
See accompanying notes.
5
GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND
COMPREHENSIVE INCOME
UNAUDITED
(In thousands)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------------------------------------------
2004 2003 2004 2003
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Stockholders' Equity - beginning of period ............. $ 392,803 $ 347,217 $ 378,311 $ 321,793
Comprehensive income:
Net income ........................................... 13,031 12,302 43,020 33,186
Net unrealized gain (loss) on securities
available for sale .................................. 1,368 (355) (2,104) 100
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Comprehensive income ................................... 14,399 11,947 40,916 33,286
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Dividends paid ......................................... (593) -- (4,171) --
Stock option expense ................................... 467 434 1,352 1,071
Purchase and retirement of mandatory convertible
securities ........................................... 15 -- 45 10
Exercise of stock options including tax benefit ........ 678 1,023 2,510 4,665
Purchase of treasury stock ............................. (11,653) (3) (22,847) (207)
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Stockholders' Equity - end of period ................... $ 396,116 $ 360,618 $ 396,116 $ 360,618
========== ========== ========== ==========
6
GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(In thousands)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------------------------------------
2004 2003 2004 2003
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OPERATING ACTIVITIES
Net income ............................................. $ 13,031 $ 12,302 $ 43,020 $ 33,186
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in losses and (gains) from partnerships and
affiliates .......................................... 403 (1,513) (1,562) (4,157)
Depreciation and amortization .......................... 241 242 720 727
Stock-based compensation expense ....................... 467 434 1,352 1,071
Tax benefit from exercise of stock options ............. 191 320 570 1,084
Minority interest in net income of consolidated
subsidiaries ........................................ 43 137 238 405
Realized gains on available for sale securities ........ -- (83) (101) (97)
(Increase) decrease in operating assets:
Investments in securities ........................... 6,263 13,027 (12,680) 337
Investment advisory fees receivable ................. (1,248) (1,976) 3,671 (218)
Receivables from affiliates ......................... 1,070 (1,265) 5,653 (2,323)
Other receivables ................................... 139 113 361 (309)
Receivable from brokers ............................. (5,795) (760) (21,388) 3,702
Other assets ........................................ 639 369 5 (499)
Increase (decrease) in operating liabilities:
Payable to brokers .................................. (1) (469) (5,692) (11,412)
Income taxes payable ................................ 1,365 1,740 (5,463) (652)
Compensation payable ................................ 4,335 5,951 8,692 8,814
Accrued expenses and other liabilities .............. 517 (229) (2,120) 1,629
Securities sold, not yet purchased .................. 15 (73) 419 (4,353)
---------- ---------- ---------- ----------
Total adjustments ...................................... 8,644 15,965 (27,325) (6,251)
---------- ---------- ---------- ----------
Net cash provided by operating activities .............. 21,675 28,267 15,695 26,935
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INVESTING ACTIVITIES
Purchases of available for sale securities ............. (822) (7,165) (9,927) (8,369)
Proceeds from sales of available for sale
securities .......................................... -- 800 600 900
Distributions from partnerships and affiliates ......... 2,552 3,093 12,509 12,942
Investments in partnerships and affiliates ............. (727) (4,695) (38,084) (20,989)
---------- ---------- ---------- ----------
Net cash provided by(used in) investing activities ..... 1,003 (7,967) (34,902) (15,516)
---------- ---------- ---------- ----------
FINANCING ACTIVITIES
Purchase of minority stockholders' interest ............ -- -- (2,718) --
Issuance of Senior notes ............................... -- -- -- 100,000
Dividends paid ......................................... (593) -- (4,171) --
Proceeds from exercise of stock options ................ 487 703 1,939 3,580
Purchase of mandatory convertible securities ........... (547) -- (1,677) (373)
Purchase of treasury stock ............................. (11,653) (3) (22,847) (207)
---------- ---------- ---------- ----------
Net cash provided by (used in)financing activities ..... (12,306) 700 (29,474) 103,000
---------- ---------- ---------- ----------
Net increase(decrease) in cash and cash equivalents .... 10,372 21,000 (48,681) 114,419
Cash and cash equivalents at beginning of period ....... 327,458 404,849 386,511 311,430
---------- ---------- ---------- ----------
Cash and cash equivalents at end of period ............. $ 337,830 $ 425,849 $ 337,830 $ 425,849
========== ========== ========== ==========
See accompanying notes.
7
GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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 U.S. generally accepted accounting principles 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 U.S. 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.
B. INVESTMENTS IN SECURITIES
Management determines the appropriate classification of debt and equity
securities at the time of purchase and reevaluates such designation as of each
balance sheet date. A substantial portion of investments in securities are held
for resale in anticipation of short-term market movements and classified as
trading securities. Available for sale investments are stated at fair value,
with any unrealized gains or losses, net of deferred taxes, reported as a
component of stockholders' equity.
At September 30, 2004 and 2003 the market value of investments
available for sale was $73.1 million and $17.5 million, respectively. An
unrealized loss in market value, net of taxes, of $624,000 and $538,000 has been
included in stockholders' equity for September 30, 2004 and 2003, respectively.
There were no sales of investments available for sale for the three
month period ended September 30, 2004. Proceeds from sales of investments
available for sale were approximately $0.6 million for the nine month period
ended September 30, 2004. For the first nine months of 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. Proceeds from sales of
investments available for sale were approximately $0.8 million for the three
month period ended September 30, 2003. For the first three months of 2003, gross
gains on the sale of investments available for sale amounted to $83,000; there
were no gross losses on the sale of investments available for sale. Proceeds
from sales of investments available for sale were approximately $0.9 million for
the nine month period ended September 30, 2003. For the first nine months of
2003, gross gains on the sale of investments available for sale amounted to
$97,000; there were no gross losses on the sale of investments available for
sale.
8
C. EARNINGS PER SHARE
The computations of basic and diluted net income per share are as
follows:
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands, except per share amounts) 2004 2003 2004 2003
-------- -------- -------- --------
Basic:
Net income ....................................... $ 13,031 $ 12,302 $ 43,020 $ 33,186
======== ======== ======== ========
Average shares outstanding ....................... 29,707 30,061 29,886 30,002
======== ======== ======== ========
Basic net income per share ....................... $ 0.44 $ 0.41 $ 1.44 $ 1.11
======== ======== ======== ========
Diluted:
Net income ....................................... $ 13,031 $ 12,302 $ 43,020 $ 33,186
Add interest expense on convertible note, net
of management fee and taxes ................... 716 770 2,147 --
-------- -------- -------- --------
Total ............................................ $ 13,747 $ 13,072 $ 45,167 $ 33,186
======== ======== ======== ========
Average shares outstanding ....................... 29,707 30,061 29,886 30,002
Dilutive stock options ........................... 190 186 202 132
Assumed conversion of convertible note ........... 1,923 1,923 1,923 --
-------- -------- -------- --------
Total ............................................ 31,820 32,170 32,011 30,134
======== ======== ======== ========
Diluted net income per share ..................... $ 0.43 $ 0.41 $ 1.41 $ 1.10
======== ======== ======== ========
For the nine months ended September 30, 2003 the assumed conversion of
the convertible note would not be dilutive and, accordingly, has not been used
in the computation 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. On May 11, 2004, the Board of Directors approved stock option
awards totaling 40,000 shares under our Stock Award and Incentive Plan at an
exercise price of $39.65 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 February 18, 2003 May 11, 2004
Options granted: $10.96 $13.04
Assumptions made:
Expected volatility 38% 33%
Risk-free interest rate 2.99% 2.50%
Expected life 5 years 5 years
Dividend yield 0% 0.20%
9
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 for
the February 18, 2003 grant reflected the assumption that no or an immaterial
payout would be made in the foreseeable future at that time. The dividend yield
for the May 11, 2004 grant reflected the assumption that we would continue our
current policy of a $0.02 per share quarterly dividend. For the three months
ended September 30, 2004 and 2003, we recognized $467,000 and $434,000,
respectively, in stock based compensation. For the nine months ended September
30, 2004 and 2003, we recognized $1,352,000 and $1,119,000, respectively, in
stock-based compensation.
Proceeds from the exercise of 22,900 and 40,389 stock options were
$487,000 and $703,000 for the three months ended September 30, 2004 and 2003,
respectively, resulting in a tax benefit to Gabelli of $191,000 and $320,000 for
the three months ended September 30, 2004 and 2003, respectively.
Proceeds from the exercise of 81,025 and 207,156 stock options were
$1,939,000 and $3,580,000 for the nine months ended September 30, 2004 and 2003,
respectively, resulting in a tax benefit to Gabelli of $570,000 and $1,084,000
for the nine months ended September 30, 2004 and 2003, respectively.
On September 30, 2004 we had 29,557,853 shares outstanding, which is
approximately 2% lower than our shares outstanding of 30,080,856 at the end of
the third quarter 2003 and approximately 1% below shares outstanding of
29,822,853 on June 30, 2004.
On September 30, 2004, we paid a $0.02 quarterly dividend to all
shareholders of record on September 15, 2004.
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:
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net income (in thousands):
As reported ..................... $ 13,031 $ 12,302 $ 43,020 $ 33,186
Pro forma ....................... $ 12,922 $ 11,840 $ 42,911 $ 32,725
Net income per share - Basic
As reported ..................... $ 0.44 $ 0.41 $ 1.44 $ 1.11
Pro forma ....................... $ 0.44 $ 0.40 $ 1.44 $ 1.10
Net income per share - Diluted
As reported ..................... $ 0.43 $ 0.41 $ 1.41 $ 1.10
Pro forma ....................... $ 0.43 $ 0.40 $ 1.41 $ 1.09
10
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. The Board of Directors, during the third quarter 2004, authorized
the repurchase of an additional $25.0 million of our Class A common stock. For
the three and nine months ended September 30, 2004, we repurchased 287,900
shares at an average investment of $40.46 and 572,727 shares at an average
investment of $39.87 per share, respectively. Since the inception of the program
we have repurchased 1,750,076 shares at an average investment of $30.30 per
share. At September 30, 2004 the total amount available to repurchase shares
under the program was approximately $26.3 million.
Since May 2002 the Board of Directors has also approved the repurchase
of up to 900,000 shares of our mandatory convertible securities. The Board of
Directors, during the third quarter 2004, authorized an additional allocation
available to repurchase our mandatory convertible securities bringing the total
authorization up to $25 million. During the third quarter and first nine months
of 2004, we repurchased 22,500 shares at an average investment of $24.10 per
share and 68,900 shares at an average investment of $24.67 per share,
respectively, bringing the total shares repurchased to 307,700 at a total
investment of $6.9 million. A gain attributable to the debt component of the
mandatory convertible securities totaling $24,000 and $34,000 has been included
in other income (expense) for both the three and nine months ended September 30,
2004, respectively. During the third quarter of 2003, no shares were repurchased
in the open market. For the nine month period ended September 30, 2003, the
Company repurchased 15,300 shares at an average investment of $19.02 per share.
A gain attributable to the debt component of the mandatory convertible
securities totaling $87,000 has been included in other income (expense) for the
nine months ended September 30, 2003. At September 30, 2004 there remains $25.0
million authorized for repurchase under the program.
E. SUBSEQUENT EVENTS
During October 2004, we repurchased 184,100 shares of our Class A
common stock through the end of the month, under the Stock Repurchase Program,
at an average investment of $44.65 per share.
On October 5, 2004 the Company announced that the Board of Directors
authorized the repurchase of an additional 1 million shares of its Class A
common stock. On the same date, the Board of Directors approved a change in the
payment date for the special $1.00 per share dividend to November 30, 2004 with
a record date of November 15, 2004. Subsequently, the Board of Directors also
approved a change in the record and payable date for the Class B shareholders to
December 23, 2004.
During November 2004, the notes of the holders of our mandatory
convertible securities will be remarketed and the interest rate reset. In the
event of a successful remarketing, the interest rate to be in effect on and
after November 17, 2004 for the notes will be approximately 5%. On November 3,
2004 the reset spread of 232 basis points (2.32%) and the Two-Year Benchmark
Treasury (CUSIP: 9128Z8BX5, Maturity date: February 15, 2007) was announced.
11
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, the
creation of new products and 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 September 30, 2004, we had $27.2 billion of assets under
management, approximately 93.1% 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.
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 and
subpoenas from the SEC and 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 our independent directors was also
formed to review various issues involving mutual fund share transactions and has
been 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.
We have issued three press releases (October 9, 2003; November 19,
2003; October 11, 2004) regarding these regulatory developments and the various
initiatives we have taken since 1998. These releases may be found on our website
(www.gabelli.com).
12
The following discussion should be read in conjunction with
the Condensed Consolidated Financial Statements and the notes thereto included
in Item 1 to this report.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2003
Consolidated Results - Three Months Ended September 30:
(Unaudited; in thousands, except per share data)
------------------------------------------------
2004 2003
-------- --------
Revenues ............................................ $ 57,237 $ 51,823
Expenses ............................................ 35,286 32,420
-------- --------
Operating income .................................... 21,951 19,403
Investment income, net .............................. 2,620 4,508
Interest expense .................................... (4,014) (4,174)
-------- --------
Total other income (expense), net ................... (1,394) 334
-------- --------
Income before taxes and minority interest ........... 20,557 19,737
Income tax provision ................................ 7,483 7,298
Minority interest ................................... 43 137
-------- --------
Net income .......................................... $ 13,031 $ 12,302
======== ========
Net income per share:
Basic ............................................ $ 0.44 $ 0.41
======== ========
Diluted .......................................... $ 0.43 $ 0.41
======== ========
Reconciliation of Net income to Adjusted EBITDA:
Net income .......................................... $ 13,031 $ 12,302
Interest expense .................................... 4,014 4,174
Income tax provision and minority interest .......... 7,526 7,435
Depreciation and amortization ....................... 241 242
-------- --------
Adjusted EBITDA(a) .................................. $ 24,812 $ 24,153
======== ========
(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 U.S. generally accepted accounting
principles 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 $57.2 million in the third quarter of 2004 up $5.4
million or 10.4% from total revenues of $51.8 million reported in the third
quarter of 2003. Investment advisory and incentive fees, which comprised 86.8%
of total revenues, were $49.7 million in the third quarter of 2004, $5.5 million
or 12.4% higher than the $44.2 million reported in the third quarter of 2003
which comprised 85.3% of total revenues. The increase in investment advisory and
incentive fees was principally the result of higher levels of assets under
management in our equity mutual funds and our institutional and high net worth
equity separate accounts. Revenues from mutual funds increased $3.6 million or
15.0% from the prior year as assets under management in mutual funds increased
to $12.8 billion on September 30, 2004, or 18.1% ahead of the September 30, 2003
assets under management of $10.8 billion. The increase in assets under
management included the addition of two new closed-end funds, The Gabelli
Dividend & Income Trust ("GDV") in November 2003 and The Gabelli Global Utility
& Income Trust ("GLU") in May 2004. Our fees from GAMCO separate accounts, which
are generally billed based on asset levels at the beginning of a quarter,
increased $3.2 million or 18.7% in the third quarter of 2004 as compared to the
third quarter of 2003. Our revenues will be negatively impacted in the fourth
quarter when a sub-advisory client will transfer out one of its three portfolios
from our management. We were retained to manage this account four years ago. The
sponsor was recently taken over by a larger entity. Revenues from our
alternative investment products
13
decreased $1.3 million or 38.6% resulting from a claw back in incentive fees of
approximately $2.0 million offset partially by higher management fees as assets
under management increased 36.0% to $934 million on September 30, 2004 from $687
million on September 30, 2003.
Commission revenue was $3.0 million in the third quarter of 2004, lower
by 11.0% from $3.3 million in the same period a year earlier largely due to a
decrease in overall trading volume.
Revenues from distribution of mutual funds and other income were $4.6
million in the third quarter of 2004 versus $4.3 million in the third quarter of
2003. This increase was a result of a 2.2% increase in average assets for
open-end equity funds for the third quarter of 2004 versus the prior year's
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 $33.0 million in the
third quarter of 2004, a 9.2% increase from total expenses of $30.2 million
reported in the third quarter of 2003. Compensation and related costs, which are
largely variable, were $23.5 million in the third quarter of 2004, an increase
of 8.0% from the same period a year earlier. The increase in compensation was
due to increased variable compensation related to our Mutual Fund products of
$1.3 million, an increase in variable compensation related to our GAMCO separate
accounts of $0.9 million and an increase in salaries and accruals for incentive
compensation totaling $0.8 million. However, as a percent of revenues, these
costs declined to 41.1% in the third quarter of 2004 from 42.1% in the 2003
quarter. Management fee expense, which is totally variable and based on pretax
income, was 4.1% higher at $2.3 million in the third quarter of 2004 versus $2.2
million in the third quarter of 2003. Other operating expenses were higher by
$1.1 million, a 12.2% increase to $9.5 million in the third quarter of 2004 from
the prior year third quarter of $8.4 million due to distribution and service
costs related to our new closed-end funds and additional insurance, legal and
accounting expenses partially related to compliance with section 404 of the
Sarbanes-Oxley Act of 2002 as well as other regulatory and corporate governance
initiatives. Included in distribution and service costs are $1.0 million
relating to the initial inclusion of GDV and GLU in the third quarter 2004. Our
operating expenses will likely continue to increase through this year as we
incur additional costs to comply with Sarbanes-Oxley and new SEC rules including
those relating to investment advisers and investment company compliance
programs.
For the third quarter 2004, we experienced a loss of $1.4 million from
our investments and net interest expense versus a net benefit of $0.3 million in
the 2003 quarter. The net return from our corporate investment portfolio
declined to $2.6 million in the 2004 third quarter from $4.5 million in the
prior year's quarter. Interest expense decreased to $4.0 million in the third
quarter of 2004 from $4.2 million in the comparable prior year quarter. This
decrease is a result of a one percentage point 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 third quarter of 2004
decreased to 36.4% from 37.6% in the third quarter of 2003 as we adjusted the
tax rate to reflect our estimate of the current year end tax liability.
14
NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2003
Consolidated Results - Nine Months Ended September 30:
(Unaudited; in thousands, except per share data)
------------------------------------------------
2004 2003
---------- ----------
Revenues ............................................ $ 180,980 $ 145,832
Expenses ............................................ 109,318 93,684
---------- ----------
Operating income .................................... 71,662 52,148
Investment income, net .............................. 8,459 12,277
Interest expense .................................... (12,095) (10,790)
---------- ----------
Total other income (expense), net ................... (3,636) 1,487
---------- ----------
Income before taxes and minority interest ........... 68,026 53,635
Income tax provision ................................ 24,768 20,044
Minority interest ................................... 238 405
---------- ----------
Net income .......................................... $ 43,020 $ 33,186
========== ==========
Net income per share:
Basic ............................................ $ 1.44 $ 1.11
========== ==========
Diluted .......................................... $ 1.41 $ 1.10
========== ==========
Reconciliation of Net income to Adjusted EBITDA:
Net income .......................................... $ 43,020 $ 33,186
Interest expense .................................... 12,095 10,790
Income tax provision and minority interest .......... 25,006 20,449
Depreciation and amortization ....................... 720 727
---------- ----------
Adjusted EBITDA(a) .................................. $ 80,841 $ 65,152
========== ==========
(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 U.S. generally accepted accounting
principles 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 $181.0 million in the first nine months of 2004 up
$35.2 million or 24.1% from total revenues of $145.8 million reported in the
first nine months of 2003. Investment advisory and incentive fees, which
comprised 85.6% of total revenues, were $154.9 million in the first nine months
of 2004, $30.4 million or 24.5% higher than the $124.5 million reported in the
first nine months of 2003 which comprised 85.3% of total revenues. The increase
in investment advisory and incentive fees was principally the result of higher
levels of assets under management in our equity mutual funds and our
institutional and high net worth equity separate accounts. Revenues from mutual
funds increased $18.1 million or 27.0% from the prior year as assets under
management in mutual funds increased to $12.8 billion on September 30, 2004, or
18.1% ahead of the September 30, 2003 assets under management of $10.8 billion.
The increase in assets under management included the addition of our new
closed-end funds, The Gabelli Dividend & Income Trust ("GDV") in November 2003
and The Gabelli Global Utility & Income Trust ("GLU") in May 2004. Our fees from
GAMCO separate accounts, which are generally billed based on asset levels at the
beginning of a quarter, increased $14.6 million or 29.9% in the first nine
months of 2004 as compared to the first nine months of 2003. Our revenues will
be negatively impacted in the fourth quarter when a sub-advisory client will
transfer out one of its three portfolios from our management. We were retained
to manage this account four years ago. The sponsor was recently taken over by a
larger entity. Revenues from our alternative investment products decreased $2.2
million or 25.5% resulting from a claw back in incentive fees of approximately
$4.4 million offset partially by higher management fees as assets under
management increased to $934 million on September 30, 2004, or 36.0% ahead of
September 20, 2003 assets under management of $687 million.
Commission revenue was $11.3 million in the first nine months of 2004,
up 32.8% from $8.5 million in the same period a year earlier largely due to an
increase in overall trading volume.
15
Revenues from distribution of mutual funds and other income were $14.7
million in the first nine months of 2004 versus $12.8 million in the first nine
months of 2003. This increase was a result of a 14.4% increase in average assets
for open-end equity funds for the first nine months of 2004 versus the prior
year's comparable period, 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 $101.8 million in the
first nine months of 2004, a 16.0% increase from total expenses of $87.7 million
reported in the first nine months of 2003. Compensation and related costs, which
are largely variable, were $72.7 million for the first nine months of 2004, an
increase of 15.1% from the same period a year earlier. The increase in
compensation was due to increased variable compensation related to our Mutual
Fund products of $5.4 million, an increase in variable compensation related to
our GAMCO separate accounts of $3.6 million and an increase in salaries,
accruals for incentive compensation and stock option expense totaling $2.4
million. However, as a percent of revenues, these costs declined to 40.2% in the
first nine months of 2004 from 43.3% in the 2003 comparable period. Management
fee expense, which is totally variable and based on pretax income, was 26.8%
higher at $7.6 million in the first nine months of 2004 versus $6.0 million in
the first nine months of 2003. Other operating expenses were higher by $4.5
million, an 18.3% increase to $29.0 million in the first nine months of 2004
from the prior year first nine months of $24.5 million due to distribution and
service costs related to our new closed-end funds and additional insurance,
legal and accounting expenses partially related to compliance with section 404
of Sarbanes-Oxley Act of 2002 as well as other regulatory and corporate
governance initiatives. Included in distribution and service costs are $3.3
million relating to the initial inclusion of GDV and GLU in the first nine
months of 2004, of which $400,000 related to non-recurring costs of the initial
public offering of GLU. Our operating expenses will likely continue to increase
through this year as we incur additional costs to comply with Sarbanes-Oxley and
new SEC rules including those relating to investment advisers and investment
company compliance programs.
Investment income was $8.5 million in the first nine months of 2004
lower by $3.8 million, or 31.1% from $12.3 million reported in the first nine
months of 2003 due to a shortfall from our corporate investment portfolio.
Interest expense increased to $12.1 million in the first nine months of 2004
from $10.8 million in the comparable period of the prior year. 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
percentage point 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 nine months of 2004
decreased to 36.4% from 37.6% in 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:
Nine Months Ended September 30,
-------------------------------
2004 2003
---------- ----------
Cash flows provided by (used in): (in thousands)
Operating activities ................................ $ 15,695 $ 26,935
Investing activities ................................ (34,902) (15,516)
Financing activities ................................ (29,474) 103,000
---------- ----------
(Decrease) increase ................................. (48,681) 114,419
Cash and cash equivalents at beginning of period .... 386,511 311,430
---------- ----------
Cash and cash equivalents at end of period .......... $ 337,830 $ 425,849
========== ==========
16
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 September 30,
2004, we had total cash and cash equivalents of $337.8 million, a decrease of
$48.7 million from December 31, 2003. Gabelli has established a collateral
account, consisting of cash and cash equivalents and investments in securities
totaling $103.9 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
on August 4, 2004 and now expires on April 9, 2005. The holder of the note also
has a put option, which was also extended on August 4, 2004 and now has an
exercise date of April 1, 2005. Cash and cash equivalents and investments in
securities held in the collateral account are restricted from other uses until
the date of expiration. Total debt on September 30, 2004 was $282.3 million,
consisting of the $100 million 5% convertible note, $100 million of 5.5%
non-callable senior notes due May 15, 2013 and $82.3 million in mandatory
convertible securities. Our mandatory convertible securities consist of (a) a
purchase contract under which holders will purchase shares of our Class A common
stock and (b) notes due February 17, 2007. The purchase contract obligates
current holders to purchase, on February 17, 2005, newly issued shares of our
Class A common stock. The notes that currently bear interest at 6% will be
remarketed and the interest rate reset in November 2004. The settlement of the
purchase contract will result in the receipt of additional proceeds and the
issuance of Class A common shares. The total number of shares to be issued will
be approximately 1.8 million if the market price of GBL is $46.50 or greater,
approximately 2.1 million if the market price of GBL is $39.40 or less, and
within this range if the market price of GBL is between $39.40 and $46.50. The
applicable market price is the average closing price per share of our Class A
common stock (NYSE: GBL) on each of the twenty consecutive trading days ended on
the third trading day immediately preceding February 17, 2005. Following a
successful remarketing and the satisfaction of the purchase contract in February
2005, we will have approximately $82 million of notes due in February 2007 based
on the current amount of mandatory convertible securities outstanding. Also, the
newly issued Class A shares will be included in our calculation of earnings per
share. Assuming no further stock repurchases and further assuming that the
maximum number of shares (approximately 2.1 million) are issued, the impact of
the share issuance on our earnings will be a reduction of approximately 6% on a
per share basis.
Cash provided by operating activities was $15.7 million in the first
nine months of 2004 principally from a $8.7 million increase in compensation
payable and $43.0 million in net income partially offset by a $12.7 million
increase in investments in securities and a $21.4 million increase in receivable
from brokers. Cash provided by operating activities was $26.9 million in the
first nine months of 2003 principally resulting from $33.2 million in net income
and $8.8 million increase in compensation payable partially offset by a $11.4
million reduction in payable to brokers and $4.4 million reduction in securities
sold, not yet purchased.
Cash used in investing activities, related to investments in and
distributions from partnerships and affiliates and purchases and sales of
available for sale securities, was $34.9 million in the first nine months of
2004. Cash used by investing activities, related to investments in and
distributions from partnerships and affiliates, was $15.5 million in the first
nine months of 2003.
Cash used in financing activities in the first nine months of 2004 was
$29.5 million. The decrease in cash principally resulted from the repurchase of
our Class A common stock and mandatory convertible securities under the
respective Stock Repurchase Programs of $24.5 million, dividend payments of $4.2
million and 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 partially offset by the $1.9 million received
from the exercise of non-qualified stock options that further generated cash tax
savings of $0.6 million. As further background, our mandatory convertible
securities consist of (a) a purchase contract under which holders will purchase
shares of our Class A common stock and (b) notes due February 17, 2007. The
purchase contract obligates current holders to purchase, on February 17, 2005,
newly issued shares of our Class A common stock. The notes that currently bear
interest at 6% will be remarketed and the interest rate reset in November 2004.
The total number of shares to be issued will be approximately 1.8 million if the
market price of GBL is $46.50 or greater, approximately 2.1 million if the
market price of GBL is $39.40 or less, and within this range if the market price
of GBL is between $39.40 and $46.50. Following a successful remarketing and the
satisfaction of the purchase contract in February 2005, we will have
approximately $82 million of notes due in February 2007 based on the current
amount of mandatory convertible securities outstanding. Also, the newly issued
Class A shares will be included in our calculation of
17
earnings per share. Assuming no further stock repurchases and further assuming
that the maximum number of shares (approximately 2.1 million) are issued, the
impact of the share issuance will be a reduction of approximately 6% on a per
share basis.
Cash provided by financing activities in the first nine months of 2003
was $103.0 million. The increase in cash primarily results from the $100 million
issuance of ten-year, 5.5% non-callable and non-convertible senior notes and
$3.6 million received from the exercise of non-qualified stock options that
further generated cash tax savings of $1.1 million. Other significant financing
activities which used cash included $0.6 million to repurchase shares of our
Class A common stock and mandatory convertible securities under the Company's
respective Stock Repurchase Programs.
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
September 30, 2004, Gabelli & Company had net capital, as defined, of
approximately $19.1 million, exceeding the regulatory requirement by
approximately $18.9 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. On September 30, 2004, our primary
market risk exposure was to changes in equity prices and interest rates.
With respect to our proprietary investment activities included in
investments in securities of $249.8 million on September 30, 2004 were
investments in Treasury Bills and Notes of $108.9 million, in mutual funds,
largely invested in equity products, of $108.5 million, a selection of common
and preferred stocks totaling $31.2 million and other investments of
approximately $1.2 million. Investments in mutual funds generally lower market
risk through the diversification of investments 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 $31.2 million invested in common and preferred stocks at
September 30, 2004, $15.9 million is related to our investment in Westwood
Holdings Group Inc. and $8.0 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 $91.1
million on September 30, 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 and money market mutual
funds. These investments are primarily short term in nature and the carrying
value of these investments generally approximates market value.
18
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 during the previous quarter will generally result in a
relative increase or decrease in revenues for the following quarter.
RECENT ACCOUNTING DEVELOPMENTS
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 September 30, 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
September 30, 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.
19
ITEM 4. CONTROLS AND PROCEDURES
Management, including the Chief Executive Officer and the Chief
Financial 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 Financial Officer
concluded that the disclosure controls and procedures are effective in ensuring
that all material information required to be filed in this quarterly report has
been made known to them in a timely fashion. There have been no significant
changes in internal controls, or in factors that could significantly affect
internal controls, subsequent to the date the Chief Executive Officer and the
Chief Financial Officer completed their evaluation.
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.
20
PART II: OTHER INFORMATION
ITEM 2. Changes in Securities, Use of Proceeds and Issuer Purchases
of Equity Securities
The following table provides information with respect to the shares of
common stock and mandatory convertible securities we repurchased during the nine
months ended September 30, 2004:
(d) Maximum Number
(c) Total Number of of Shares (or
Shares Repurchased as Approximate Dollar
(a) Total Number (b) Average Price Part of Publicly Value) That May Yet
of Shares Paid Per Share, Announced Plans or Be Purchased Under the
Period Repurchased net of Commissions Programs Plans or Programs
- -----------------------------------------------------------------------------------------------------
GBL
1/01/04 - 1/31/04 -- $ -- -- $12,146,465
2/01/04 - 2/29/04 3,127 $ 42.60 3,127 $12,013,212
3/01/04 - 3/31/04 26,800 $ 39.22 26,800 $10,960,818
4/01/04 - 4/30/04 157,400 $ 39.20 157,400 $ 4,785,998
5/01/04 - 5/31/04 97,500 $ 39.29 97,500 $12,953,206
6/01/04 - 6/30/04 -- $ -- -- $12,953,206
7/01/04 - 7/31/04 70,500 $ 38.70 70,500 $10,224,511
8/01/04 - 8/31/04 62,500 $ 38.63 62,500 $32,810,008
9/01/04 - 9/30/04 154,900 $ 41.99 154,900 $26,305,772
----------- -----------
Totals 572,727 572,727
=========== ===========
GBL.I
1/01/04 - 1/31/04 -- $ -- -- 461,200
2/01/04 - 2/29/04 -- $ -- -- 461,200
3/01/04 - 3/31/04 8,200 $ 25.04 8,200 453,000
4/01/04 - 4/30/04 34,600 $ 24.95 34,600 418,400
5/01/04 - 5/31/04 3,600 $ 24.74 3,600 614,800
6/01/04 - 6/30/04 -- $ -- -- 614,800
7/01/04 - 7/31/04 20,200 $ 24.15 20,200 594,600
8/01/04 - 8/31/04 2,300 $ 23.67 2,300 $25,000,000
9/01/04 - 9/30/04 -- $ -- -- $25,000,000
----------- -----------
Totals 68,900 68,900
=========== ===========
In May 2004 we announced an increase in the dollar value of GBL shares
available to repurchase under our stock repurchase program of $12.0
million and an increase in the number of shares of GBL.I available to
repurchase under our stock repurchase program of 200,000 shares. In
August 2004 we announced an increase in the dollar value of GBL shares
available to repurchase under our stock repurchase program of $25.0
million and an increase in the dollar value of GBL.I shares available
to repurchase under our stock repurchase program bringing the total
authorization up to $25.0 million. Our stock repurchase programs are
not subject to expiration dates.
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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 Financial 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 Chief Executive Officer 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 Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K.
The Company filed the following Current Reports on Form 8-K
during the three months ended September 30, 2004.
1. Current Report on Form 8-K dated July 15, 2004
containing the press release disclosing the Company's
ongoing discussions with Cascade Investments LLC to
further extend the exercise date of the put option on
the 5% Convertible Note purchased by Cascade in August
2001.
2. Current Report on Form 8-K dated July 26, 2004
containing the press release disclosing the Company's
operating results for the second quarter ended June 30,
2004.
3. Current Report on Form 8-K dated September 14, 2004
containing the press release disclosing that a
sub-advisory client notified the Company of the
client's intention to transfer management of the
largest of its three portfolios managed by the Company
to another asset manager in mid-November 2004.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GABELLI ASSET MANAGEMENT INC.
----------------------------------
(Registrant)
NOVEMBER 9, 2004 /s/ Michael R. Anastasio
- ---------------- ----------------------------------
Date Michael R. Anastasio
Chief Financial Officer
22