10-Q 1 0001.txt GABELLI ASSET MANAGEMENT INC. 3RD QTR. 10-Q 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, 2000 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ---------- ---------- Commission File No. 1-106 ----- GABELLI ASSET MANAGEMENT INC. -------------------------------------------------------------------------------- (Exact name of Registrant asspecified in its charter) New York 13-4007862 -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) One Corporate Center, Rye, New York 10580 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (914)921-3700 -------------------------------------------------------------------------------- Registrant's telephone number, including area code Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ---- Indicate the number of shares outstanding of each of the Registrant's classes of Common Stock, as of the latest practical date. Class Outstanding at September 30, 2000 ----- ------------------------------------- Class A Common Stock, .001 par value 5,524,300 Class B Common Stock, .001 par value 24,000,000 1 INDEX GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited, except as noted) Condensed Consolidated Statements of Operations: - Three months ended September 30, 1999 and 2000 - Nine months ended September 30, 1999 and 2000 Condensed Consolidated Statements of Financial Condition: - September 30, 2000 - December 31, 1999 (Audited) Condensed Consolidated Statements of Cash Flows: - Nine months ended September 30, 1999 and 2000 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) PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K SIGNATURES 2 GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS UNAUDITED (In thousands, except per share data)
Three Months Ended September 30, ---------------------------------------- 1999 2000 -------- -------- Revenues Investment advisory and incentive fees. . . . . . . . . $ 37,337 $ 49,009 Commission revenue. . . . . . . . . . . . . . . . . . . 2,199 3,800 Distribution fees and other income. . . . . . . . . . . 4,555 6,355 ------ ------ Total revenues . . . . . . . . . . . . . . . . . . . 44,091 59,164 Expenses Compensation costs. . . . . . . . . . . . . . . . . . . 17,900 24,685 Management fee. . . . . . . . . . . . . . . . . . . . . 2,040 2,844 Other operating expenses. . . . . . . . . . . . . . . . 6,723 10,024 ------ ------ Total expenses . . . . . . . . . . . . . . . . . . . 26,663 37,553 Operating income. . . . . . . . . . . . . . . . . . . . . 17,428 21,611 Other income (expense) Net gain from investments . . . . . . . . . . . . . . . 279 2,732 Interest and dividend income. . . . . . . . . . . . . . 1,583 2,188 Interest expense. . . . . . . . . . . . . . . . . . . . (926) (933) ------ ------ Total other income, net. . . . . . . . . . . . . . . 936 3,987 ------ ------ Income before income taxes and minority interest . . . . . . . . . . . . . . . . . . . 18,364 25,598 Income tax provision. . . . . . . . . . . . . . . . . . 7,297 10,137 Minority interest. . . . . . . . . . . . . . . . . . . 830 971 ------ ------ Net income. . . . . . . . . . . . . . . . . . . . . . $ 10,237 $ 14,490 ====== ====== Net income per share: Basic . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.34 $ 0.49 ====== ====== Diluted . . . . . . . . . . . . . . . . . . . . . . . . $ 0.34 $ 0.48 ====== ====== Weighted average shares outstanding: Basic . . . . . . . . . . . . . . . . . . . . . . . . . 29,861 29,547 ====== ====== Diluted . . . . . . . . . . . . . . . . . . . . . . . . 29,861 29,969 ====== ======
3 GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS UNAUDITED (In thousands, except per share data)
Nine Months Ended September 30, -------------------------------------- 1999 2000 -------- --------- Revenues Investment advisory and incentive fees. . . . . . . . . $105,694 $ 141,666 Commission revenue. . . . . . . . . . . . . . . . . . . 8,452 11,493 Distribution fees and other income. . . . . . . . . . . 12,259 20,898 ------- ------- Total revenues . . . . . . . . . . . . . . . . . . . 126,405 174,057 Expenses Compensation costs. . . . . . . . . . . . . . . . . . . 52,179 71,704 Management fee. . . . . . . . . . . . . . . . . . . . . 7,339 8,376 Other operating expenses. . . . . . . . . . . . . . . . 21,205 27,591 Non-recurring charge. . . . . . . . . . . . . . . . . . 50,725 - ------- ------- Total expenses . . . . . . . . . . . . . . . . . . . 131,448 107,671 Operating (loss)income. . . . . . . . . . . . . . . . . . (5,043) 66,386 Other income (expense) Net gain from investments . . . . . . . . . . . . . . . 10,432 5,353 Interest and dividend income. . . . . . . . . . . . . . 4,064 6,434 Interest expense. . . . . . . . . . . . . . . . . . . . (2,514) (2,791) -------- -------- Total other income, net. . . . . . . . . . . . . . . 11,982 8,996 Income before income taxes and minority interest . . . . . . . . . . . . . . . . . . . 6,939 75,382 Income tax provision. . . . . . . . . . . . . . . . . . 439 29,852 Minority interest . . . . . . . . . . . . . . . . . . . 2,488 2,790 ------- ------- Net income . . . . . . . . . . . . . . . . . . $ 4,012 $ 42,740 ======= ======= Net income per share: Basic . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.14 $ 1.44 ======= ======= Diluted . . . . . . . . . . . . . . . . . . . . . . . . $ 0.14 $ 1.43 ======= ======= Weighted average shares outstanding: Basic . . . . . . . . . . . . . . . . . . . . . . . . . 28,903 29,593 ======= ======= Diluted . . . . . . . . . . . . . . . . . . . . . . . . 28,903 29,857 ======= ======= Pro forma data: Income before income taxes and minority interest, as reported . . . . . . . . . . . . . . . . . . . . . $ 6,939 Pro forma interest expense on $50 million note payable. (338) Pro forma management fee adjustment from 20% to 10% of pre tax profits . . . . . . . . . . . . . . . . . . . 1,097 Pro forma reallocations to the new parent company . . . 23 Pro forma effect on income and expenses of distribution of assets and liabilities. . . . . . . . . . . . . . (2,256) Pro forma provision for income taxes.. . . . . . . . . . (2,701) Pro forma minority interest . . . . . . . . . . . . . . (2,488) ------- Pro forma net income . . . .. . . . . . . . . . . . . . $ 276 ======= Pro forma net income per share: Basic and diluted . . . . . . . . . . . . . . . . . $ 0.01 ======= Pro forma weighted average shares outstanding: Basic and diluted. . . . . . . . . . . . . . . . . 29,936 =======
4 GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (In thousands)
December 31, September 30, 1999 2000 ---------------- ------------------ (Unaudited) ASSETS Cash and cash equivalents . . . . . . . . . . . . $ 103,032 $ 103,677 Investments in securities . . . . . . . . . . . . 69,791 110,282 Investments in partnerships and affiliates. . . . 21,018 52,560 Investment advisory fees receivable . . . . . . . 14,269 15,453 Deferred income taxes, net. . . . . . . . . . . . 16,887 17,599 Other assets. . . . . . . . . . . . . . . . . . . 18,065 17,619 -------- -------- Total assets . . . . . . . . . . . . . . . . $ 243,062 $ 317,190 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Note payable. . . . . . . . . . . . . . . . . . . 50,000 50,000 Payable to brokers. . . . . . . . . . . . . . . . 5,637 6,863 Income taxes payable. . . . . . . . . . . . . . . 4,592 4,289 Compensation payable. . . . . . . . . . . . . . . 10,260 36,476 Accrued expenses and other liabilities. . . . . . 10,179 15,008 -------- -------- Total liabilities. . . . . . . . . . . . . . 80,668 112,636 Minority interest . . . . . . . . . . . . . . . . 14,818 17,476 Stockholders' equity: . . . . . . . . . . . . . . 147,576 187,078 -------- -------- Total liabilities and stockholders' equity. . . . $ 243,062 $ 317,190 ======== ========
See accompanying notes. 5 GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS UNAUDITED (In thousands)
Nine Months Ended September 30, --------------------------------- 1999 2000 -------- -------- Operating activities Net income . . . . . . . . . . . . . . . . . . . . . . . . $ 4,012 $ 42,740 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Equity in earnings of partnerships and affiliates . . . . (5,060) (4,897) Depreciation and amortization . . . . . . . . . . . . . . 572 521 Non recurring charge. . . . . . . . . . . . . . . . . . . 50,725 - Deferred income taxes, net. . . . . . . . . . . . . . . . (19,830) (712) Minority interest in net income of consolidated subsidiaries . . . . . . . . . . . . . . . . . . . . . 2,488 2,790 Changes in operating assets and liabilities . . . . . . . (36,687) (9,782) ------- ------- Total adjustments . . . . . . . . . . . . . . . . . . . . . (7,792) (12,080) ------- ------- Net cash (used in) provided by operating activities . . . . (3,780) 30,660 ------- ------- Investing activities Distributions from partnerships and affiliates. . . . . . . 5,554 3,523 Investments in partnerships and affiliates. . . . . . . . . (694) (30,168) ------- ------- Net cash provided by (used in) investing activities . . . . 4,860 (26,645) ------- ------- Financing activities Distributions to shareholders . . . . . . . . . . . . . . . (10,023) - Purchase of minority stockholders' interest. . . . . (549) (132) Net proceeds from issuance of common stock. . . . . . . . . 95,619 - Purchase of treasury stock. . . . . . . . . . . . . . . . . (2,868) (3,238) Cash included in deemed distribution. . . . . . . . . . . . (18,170) - ------- ------- Net cash provided by (used in) financing activities . . . . 64,009 (3,370) ------- ------- Net increase in cash and cash equivalents . . . . . . . . . 65,089 645 Cash and cash equivalents at beginning of period. . . . . . 50,222 103,032 ------- ------- Cash and cash equivalents at end of period. . . . . . . . . $115,311 $103,677 ======= ======= See footnote C regarding non-cash financing transactions.
See accompanying notes. 6 GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2000 (Unaudited) A. Organization Gabelli Asset Management Inc. (the "Company") was incorporated in April 1998 in the state of New York, with no significant assets or liabilities and did not engage in any substantial business activities prior to the public offering ("Offering") of its shares. On February 9, 1999, the Company exchanged 24 million shares of its Class B Common Stock, representing all of its then issued and outstanding shares of Common Stock, with Gabelli Group Capital Partners, Inc. and two of its subsidiaries ("GGCP") in consideration for substantially all of the operating assets and liabilities of GGCP relating to its institutional and retail asset management, mutual fund advisory, underwriting and brokerage business (the "Reorganization"). On February 17, 1999, the Company completed its sale of 6 million shares of Class A Common Stock and received proceeds, after fees and expenses, of approximately $96 million. After the Offering, GGCP owned 80% of the outstanding common stock of the Company. In addition, with the completion of the Offering, the Company is a "C" Corporation for Federal and state income tax purposes and is subject to substantially higher income tax rates. The accompanying condensed consolidated financial statements for periods prior to the date of the Reorganization, include the assets, liabilities and earnings of GGCP, its wholly-owned subsidiary GAMCO Investors, Inc. ("GAMCO"), and GGCP majority-owned subsidiaries consisting of Gabelli Securities, Inc. ("GSI"), Gabelli Fixed Income L.L.C. ("Fixed Income") and Gabelli Advisers LLC ("Advisers"). After the Reorganization, these financial statements include the accounts of Gabelli Funds, LLC and GAMCO and former GGCP majority-owned subsidiaries GSI, Fixed Income and Advisers. B. Basis of Presentation The unaudited interim condensed consolidated financial statements of the Company included herein have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and Rule 10-01 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, the unaudited interim condensed consolidated financial statements reflect all adjustments, which are of a normal recurring nature, necessary for a fair presentation of financial position, results of operations and cash flows of the Company for the interim periods presented and are not necessarily indicative of a full year's results. In preparing the unaudited interim condensed consolidated financial statements, management is required to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from those estimates. These financial statements should be read in conjunction with the Company's audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 1999, from which the accompanying Statement of Financial Condition was derived. Certain items previously reported have been reclassified to conform with the current year's financial statement presentation. 7 C. Stockholder's Equity Stock Award and Incentive Plan On August 15, 2000, the Compensation Committee of the Board of Directors approved a third option grant of 36,000 shares under the Stock Award and Incentive Plan at an exercise price, equal to the market price on that date, of $23.06 per share. At September 30, 2000, there were 306,500 shares available for future awards. Stock Repurchase Program During 1999 the Board of Directors authorized the repurchase of up to $6,000,000 of the Company's Class A Common Stock. The Company completed the stock buyback during the first quarter of 2000 at which time the Board of Directors authorized the repurchase of an additional $3,000,000 of shares in open market transactions. During 2000 the Company repurchased 175,000 shares at an average cost of $ 18.50 per share. A total of 475,000 shares have been repurchased since the inception of this program in May 1999 at an average cost of $16.58 per share. D. Pro Forma Information Pro forma information has been included which gives effect to the Reorganization, including the reduction in other income as a result of the deemed distribution of a proprietary investment portfolio, the lower management fee and the increase in interest expense as if the Employment Agreement had been in effect as of January 1, 1999 and the additional income taxes which would have been recorded if GGCP had been a "C" corporation instead of an "S" corporation based on tax laws in effect. The pro forma information does not give effect to the use of proceeds received from the Offering prior to the date received. E. Earnings Per Share Net income per share is computed in accordance with the Statement of Financial Accounting Standards No. 128 "Earnings Per Share." Basic net income per common share is calculated by dividing net income applicable to common shareholders by the weighted average number of common shares outstanding. Diluted net income per share is computed using the treasury stock method and includes the effect of the assumed exercise of dilutive stock options. Pro forma earnings per share for 1999 are based on the number of shares outstanding at the close of the Offering for the period prior to the Offering and on the actual number of shares outstanding subsequent thereto. 8 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview Gabelli Asset Management Inc. (the "Company"), incorporated in April 1998, had no significant assets or liabilities and did not engage in any business activities prior to its reorganization and the public offering ("Offering") of its shares. On February 9, 1999, the Company exchanged 24 million shares of its Class B Common Stock, representing all of its then issued and outstanding common stock, to Gabelli Group Capital Partners, Inc. ("GGCP") and two of its subsidiaries in consideration for substantially all of the operating assets and liabilities of GGCP related to its institutional and retail asset management, mutual fund advisory, underwriting and brokerage business (the "Reorganization"). Immediately following the Reorganization, the Company sold 6 million shares of its Class A Common Stock in an initial public offering. Proceeds from the Offering, net of fees and expenses, were approximately $96 million. Following the Offering, GGCP owned 80% of the outstanding common stock of the Company. For periods after the Offering, the Company's financial statements reflect the financial condition and results of operations of Gabelli Asset Management Inc. and the historical results of GGCP are shown as predecessor financial statements. 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. The Company's revenues are largely based on the level of assets under management in its business as well as the level of fees associated with its various investment products. Growth in revenues generally depends on good investment performance and the ability to attract additional investors while maintaining current fee levels. The Company's largest source of revenues is investment advisory fees which are based on the amount of assets under management in its Mutual Funds and Separate Accounts business. Revenues derived from the equity oriented portfolios generally have higher management fee rates than fixed income portfolios. RESULTS OF OPERATIONS The pro forma information presented herein for the nine months ended September 30, 1999 presents results of operations as if the Reorganization and Offering had occurred at the beginning of 1999. The Company believes the pro forma results provide more meaningful information for comparing operating results and earnings trends. The pro forma information is not necessarily indicative of the results that the Company would have reported had these events occurred at the beginning of the year. Information for the nine months ended September 30, 1999 is also presented herein on an "as reported" basis to meet certain disclosure requirements. This information does not give effect to assets and liabilities assumed to be distributed as part of the Reorganization and the resulting impact on allocated income and expenses; the $50 million deferred payment to the Chairman and Chief Executive Officer net of deferred tax benefit; the reduction in the management fee from 20% to 10% and the conversion from an "S" corporation to a "C" corporation for tax purposes. The net effect of these adjustments was to lower net income on a pro forma basis for the nine months of 1999 by $3.7 million. These adjustments principally consisted of $2.3 million of investment earnings from assets distributed as part of the Reorganization and a $2.3 million increase in the pro forma tax provision due to the conversion from an S corporation to a C corporation partially offset by a $1.1 million decrease in the pro forma management fee. 9 Three Months Ended September 30, 2000 as Compared to the Three Months Ended September 30, 1999 Consolidated Results - Three Months Ended September 30:
(unaudited; in thousands, except per share data) ------------------------------------------------ 1999 2000 % Change ---------- ---------- -------- Revenues $ 44,091 $ 59,164 34.2 Expenses 26,663 37,553 40.8 ---------- ---------- Operating income 17,428 21,611 24.0 Other income, net 936 3,987 ---------- ---------- Income before taxes and minority interest 18,364 25,598 39.4 Income tax provision 7,297 10,137 Minority interest 830 971 ---------- ---------- Net income $ 10,237 $ 14,490 41.5 ========== ========== Net income per share: Basic $ 0.34 $ 0.49 44.1 ========== ========== Diluted $ 0.34 $ 0.48 41.2 ========== ========== Included in income before taxes and minority interest: Depreciation and amortization $ 175 $ 177 Interest expense $ 925 $ 933 Adjusted EBITDA(a) $ 19,464 $ 26,708 37.2 ========== ==========
(a) Adjusted EBITDA is defined as earnings before interest, taxes, depreciation and amortization and minority interest. Total revenues rose 34% in the third quarter of 2000, to $59.2 million, up $15.1 million from $44.1 million in the third quarter of 1999. The increase in revenues results from the increase in assets under management, which drive investment advisory fees, commission revenues and incentive fees earned as General Partner of the alternative investment partnerships. Investment advisory and incentive fees, which comprised 83% of total revenues, were $49.0 million in the third quarter of 2000, 31% higher than the same period a year earlier. The growth in investment advisory and incentive fees from mutual funds and partnerships is driven by the growth in average assets under management. For institutional and separate accounts fees are based on asset values on the last day of the preceding quarter. For the third quarter of 2000 average assets under management in open end equity mutual funds was $9.9 billion, a 48% increase from the prior year average assets in open end equity mutual funds of $6.7 billion. Assets under management used in computing fees from institutional and separate accounts rose 19% for the third quarter of 2000 versus the same period a year earlier. Commission revenue was $3.8 million in the third quarter of 2000, 73% higher than the same period a year earlier, largely the result of increased trading volume associated with the increase in assets under management. Distribution fees and other income were $6.4 million, an increase of 40% from the $4.6 million reported in the third quarter of 1999. This increase results from the growth in average assets managed in open end mutual funds which generate distribution fees under 12b-1 compensation plans. Total expenses were $37.6 million in the third quarter of 2000, a 41% increase from total expenses of $26.7 million in the third quarter of 1999. Compensation costs, which are largely variable in nature, were $24.7 million in 2000, 38% ahead of the third quarter of 1999. Compensation costs rose at a faster pace than revenues as a result of planned increases in sales and marketing, research and portfolio management personnel. Management fee expense, which is totally variable and based on pretax income, increased 39% to $2.8 million in 2000 versus $2.0 million a year earlier. Other operating expenses increased $3.3 million, or 49%, to $10.0 million in the current year versus $6.7 million in the third quarter of 1999. This increase results principally from the increased mutual fund distribution costs associated with the increase in open end equity mutual fund assets under management and the higher costs associated with assets gathered under No Transaction Fee ("NTF") programs. 10 Other income, net, which includes investment gains from our proprietary portfolio was $4.0 million in 2000 as compared to $0.9 million in the third quarter of 1999 with the increase largely the result of market appreciation in our investment portfolio. The effective tax rate for the three months ended September 30, 2000 of 39.6% remains consistent with the prior year. Nine Months Ended September 30, 2000 as Compared to the Nine Months Ended September 30, 1999 Consolidated Results - Nine Months Ended September 30:
(unaudited; in thousands, except per share data) ------------------------------------------------ 1999 (a) 1999 Adjusted % Change (as reported) (pro forma) 2000 (vs. pro forma) ------------- ----------- --------- --------------- Revenues $ 126,405 $ 126,405 $ 174,057 37.7 Expenses 131,448 79,604 107,671 35.3 --------- --------- --------- Operating (loss) income (5,043) 46,801 66,386 41.8 Other income, net 11,982 9,388 8,996 --------- --------- --------- Income before taxes and minority interest 6,939 56,189 75,382 34.2 Income tax provision 439 22,530 29,852 Minority interest 2,488 2,488 2,790 --------- --------- --------- Net income $ 4,012 $ 31,171 $ 42,740 37.1 ========= ========= ========= Net income per share: Basic $ 0.14 $ 1.04 $ 1.44 ========= ========= ========= Diluted $ 0.14 $ 1.04 $ 1.43 37.5 ========= ========= ========= Included in income before taxes and minority interest: Depreciation and amortization $ 572 $ 521 Interest expense $ 2,514 $ 2,791 Adjusted EBITDA(b) $ 59,275 $ 78,694 32.8 ======== =========
11 (a) The 1999 adjusted pro forma results above do not include the $50.7 million non-recurring charge ($30.9 million net of tax benefit or $1.03 per share) recorded in the first quarter of 1999. After giving effect to this charge, net of tax, the Company had net income of $0.01 per share for the nine months ended September 30, 1999. (b) Adjusted EBITDA is defined as earnings before interest, taxes, depreciation and amortization and minority interest. Total revenues rose 38% in the nine months ended September 30, 2000, to $174.1 million, up $47.7 million from $126.4 million in the 1999 period. Included in total revenue is a $3.1 million investment banking fee earned by a subsidiary in the first quarter of 2000. Excluding this fee total revenues were $171.0 million, a 35% increase over the prior year period. Investment advisory and incentive fees, which comprised 81% of total revenues, were $141.7 million in the nine months ended September 30, 2000, 34% higher than the same period a year earlier. The growth in investment advisory and incentive fees results from the growth in average assets under management, principally in the open end equity mutual funds, during the respective periods. Average total assets under management were $22.9 billion for the nine months of 2000, 28% higher than average total assets of $17.9 billion during the same period of the prior year. Average assets under management in open end equity mutual funds climbed 49%, to $9.3 billion, over the first nine months of 2000 compared to $6.2 billion during the same period a year earlier. Commission revenue was $11.5 million in the nine months ended September 30, 2000, 36% higher than the prior year period and largely reflects the increased trading activities associated with the increase in assets under management. Distribution fees and other income were $20.9 million for the first nine months of 2000, including a $3.1 million investment banking fee, as compared to $12.3 million in 1999. Excluding this fee, distribution fees and other income were $17.8 million in 2000, an increase of 45% from the prior year, largely resulting from the growth in average assets managed in open end mutual funds which generate distribution fees under 12b-1 compensation plans. Total expenses were $107.7 million in the first nine months of 2000, a 35% increase over total expenses, excluding the $50.7 million non-recurring charge, of $79.6 million in 1999. Included in total expenses in 1999 were $1.5 million consisting of additional compensation ($0.6 million) and other operating costs ($0.9 million) directly related to investment earnings. Excluding these costs total expenses increased $29.6 million or 38% from the prior year and remained consistent, as a percentage of total revenues, at 62%. Compensation costs were $71.7 million in 2000, 37% ahead of the prior year period. Management fee expense increased 34% to $8.4 million in 2000 versus $6.2 million a year earlier. Other operating expenses increased $4.2 million, or 18%, to $27.6 million in the current year versus $23.4 million in the same period a year earlier. Other operating expenses rose at a slower pace than revenues as increases in mutual fund distribution costs, particularly those associated with NTF programs, were offset by the leveraging of our fixed costs over a larger revenue base. Other income, net, which includes investment gains from our proprietary portfolio was $9.0 million during the nine months ended September 30, 2000 as compared to $9.4 million during the prior year period. 12 The effective tax rate for the nine months ended September 30, 2000 was approximately 39.6% which reflects our estimate of the effective tax rate for the full year. In the same period a year earlier, the Company had recorded tax expense of $0.4 million, which included a deferred tax benefit of $19.8 million related to a non-recurring charge of $50.7 million. On a pro forma basis and excluding this deferred tax benefit, the effective tax rate for the first nine months of 1999 was 40.1%. LIQUIDITY AND CAPITAL RESOURCES The Company's assets are primarily liquid, consisting mainly of cash, short term investments, securities held for investment purposes and investments in partnerships in which the Company is a general or limited partner. Although investments in partnerships are generally illiquid, the underlying investments in such partnerships are generally liquid and the valuations of the investment partnerships reflect this underlying liquidity. Summary cash flow data is as follows:
Nine Months Ended September 30, ------------------------------- 1999 2000 ---- ---- (in thousands) Cash flows provided by (used in): Operating activities $ (3,780) $ 30,660 Investing activities 4,860 (26,645) Financing activities 64,009 (3,370) --------- --------- Increase 65,089 645 Cash and cash equivalents at beginning of year 50,222 103,032 --------- --------- Cash and cash equivalents at end of year $ 115,311 $ 103,677 ========= =========
Cash requirements and liquidity needs have historically been met through cash generated by operating activities and through the Company's borrowing capacity. At September 30, 2000, the Company had cash and cash equivalents of $103.7 million, an increase of $0.6 million from December 31, 1999. Cash provided by operating activities of $30.7 million in the first nine months of 2000 resulting from $42.7 million in net income partially offset by the net decrease of $9.8 million in other operating assets. In the first nine months of 1999, cash used in operating activities was $3.8 million. Cash used by investing activities, principally related to increased investments in partnerships and affiliates, was $26.6 million in the first nine months of 2000. Cash provided by investing activities in the first nine months of 1999 was $4.9 million largely due to distributions received from partnerships and affiliates. Cash used in financing activities in the first nine months of 2000 of $3.4 was million principally due to the purchase of the Company's Class A Common Stock under its Share Repurchase Program. Cash provided by financing activities in the first nine months of 1999 was $64.0 million largely resulting from the net proceeds received in the Offering of $95.6 million and reduced by distributions to shareholders of $10.0 million and $18.2 million of cash included in the deemed distribution. Based upon the Company's current level of operations and its anticipated growth, the Company expects that its current cash balances plus cash flows from operating activities and its borrowing capacity will be sufficient to finance its working capital needs for the foreseeable future. The Company has no material commitments for capital expenditures. 13 Gabelli & Company is registered with the 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, 2000, Gabelli & Company had net capital, as defined, of approximately $13.0 million exceeding the regulatory requirement by approximately $12.8 million. Regulatory net capital requirements increase when Gabelli & Company is involved in underwriting activities. Market Risk The Company is subject to potential losses from certain market risks as a result of absolute and relative price movements in financial instruments due to changes in interest rates, equity prices and other factors. The Company's exposure to market risk is directly related to its role as financial intermediary and advisor for assets under management in its mutual funds, institutional and separate accounts business and its proprietary trading activities. Since December 31, 1999, the Company has increased its positions in securities held for investment purposes effectively increasing its exposure to market risk. At September 30, 2000, the Company's primary market risk exposure was for changes in equity prices and interest rates. Included in investments in securities of $110.3 million at September 30, 2000 were investments in government obligations of $29.5 million, in mutual funds, largely invested in equity products, of $27.0 million, a diverse selection of common stocks totaling $53.1 million and other investments of approximately $0.7 million. Investments in mutual funds generally lower market risk through the diversification of financial instruments within their portfolio. In addition, the Company may alter its investment holdings from time to time in response to changes in market risks and other factors considered appropriate by management. More than $48.6 million of the $53.1 million invested in common stocks at September 30, 2000, represents the Company's participation in risk arbitrage opportunities in connection with mergers, consolidations, acquisitions, tender offers or other similar transactions. These transactions involve announced deals with agreed upon terms and conditions, including pricing, which generally involve less market risk than common stocks held in a trading portfolio. The principal risk associated with risk arbitrage transactions is the inability of the companies involved to complete the transaction. The Company's exposure to interest rate risk results, principally, from its investment of excess cash in government obligations. These investments are primarily short term in nature and the carrying value of these investments generally approximates market value. The Company's revenues are largely driven by the market value of its assets under management and are therefore exposed to fluctuations in market prices. Investment advisory fees for mutual funds are based on average daily asset values. Management fees earned on institutional and separate accounts, for any given quarter, are determined based on asset values on the last day of the preceding quarter. Any significant increases or decreases in market value of institutional and separate accounts assets managed which occur on the last day of the quarter will result in a relative increase or decrease in revenues for the following quarter. 14 Forward Looking Information Statements included in Management's Discussion and Analysis of Financial Condition and Results of Operations may contain "forward-looking information", including information relating to anticipated growth in assets under management, revenues or earnings, strategies to bring about anticipated growth, anticipated expense levels and expectations regarding market risk. The Company cautions readers that any forward-looking information provided by or on behalf of the Company is not a guarantee of future performance or events. Actual results may differ materially from those in forward-looking information as a result of many risk factors including, but not limited to, economic, competitive, governmental and technological, many of which are beyond the Company's control or are subject to change. Further, such forward-looking information speaks only as of the date on which such statements are made and the Company undertakes no obligation to update any forward-looking information to reflect changes in events or circumstances subsequent to the date made or to reflect the occurrence of unanticipated events. 15 Part II: Other Information Item 6. (a) Exhibits Exhibit No. Description ----------- ----------------------- 27-1 Financial Data Schedule (b) Reports on Form 8-K. The Company did not file any reports on Form 8-K during the three months ended September 30, 2000. 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 10, 2000 /s/ Robert S. Zuccaro ----------------- --------------------- Date Robert S. Zuccaro Vice President and Chief Financial Officer