SECURITIES & EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001 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 as specified in its charter) New York 13-4007862 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) One Corporate Center, Rye, 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 April 30, 2001 ----- ----------------------------- Class A Common Stock, .001 par value 5,489,200 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) Condensed Consolidated Statements of Operations: - Three months ended March 31, 2000 and 2001 Condensed Consolidated Statements of Financial Condition: - March 31, 2001 - December 31, 2000 (Audited) Condensed Consolidated Statements of Cash Flows: - Three months ended March 31, 2000 and 2001 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) <TABLE> <CAPTION> Three Months Ended March 31, ---------------------------------------- 2000 2001 -------- -------- <S> <C> <C> Investment advisory and incentive fees. . . . . . . . . $ 45,189 $ 48,187 Commission revenue. . . . . . . . . . . . . . . . . . . 3,778 4,387 Distribution fees and other income. . . . . . . . . . . 8,806 5,770 -------- -------- Total revenues . . . . . . . . . . . . . . . . . . . 57,773 58,344 Expenses Compensation costs. . . . . . . . . . . . . . . . . . . 23,950 23,113 Management fee. . . . . . . . . . . . . . . . . . . . . 2,749 2,793 Other operating expenses. . . . . . . . . . . . . . . . 8,441 8,437 -------- -------- Total expenses . . . . . . . . . . . . . . . . . . . 35,140 34,343 Operating income . . . . . . . . . . . . . . . . . . . . 22,633 24,001 Other Income (Expense) Net gain from investments . . . . . . . . . . . . . . . 1,153 434 Interest and dividend income. . . . . . . . . . . . . . 1,891 1,633 Interest expense. . . . . . . . . . . . . . . . . . . . (933) (931) -------- -------- Total other income, net. . . . . . . . . . . . . . . 2,111 1,136 -------- -------- Income before income taxes and minority interest. . . . . 24,744 25,137 Income tax provision. . . . . . . . . . . . . . . . . . 9,799 9,703 Minority interest. . . . . . . . . . . . . . . . . . . 949 538 -------- -------- Net income . . . . . . . . . . . . . . . . . . . . $ 13,996 $ 14,896 ======== ======== Net income per share: Basic . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.47 $ 0.50 ======== ======== Diluted . . . . . . . . . . . . . . . . . . . . . . . . $ 0.47 $ 0.50 ======== ======== Weighted average shares outstanding: Basic . . . . . . . . . . . . . . . . . . . . . . . . . 29,643 29,507 ======== ======== Diluted . . . . . . . . . . . . . . . . . . . . . . . . 29,643 30,041 ======== ======== </TABLE> See accompanying notes. 3
GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (In thousands) <TABLE> <CAPTION> December 31, March 31, 2000 2001 ------------ ----------- (Unaudited) <S> <C> <C> ASSETS Cash and cash equivalents . . . . . . . . . . . . . . . . . $ 69,271 $ 105,698 Investments in securities . . . . . . . . . . . . . . . . . 134,520 125,844 Investments in partnerships and affiliates. . . . . . . . . 56,546 51,895 Receivable from broker. . . . . . . . . . . . . . . . . . . 3,853 4,778 Investment advisory fees receivable . . . . . . . . . . . . 15,307 14,073 Deferred income taxes, net. . . . . . . . . . . . . . . . . 19,382 19,658 Other assets. . . . . . . . . . . . . . . . . . . . . . . . 18,925 17,022 --------- --------- Total assets . . . . . . . . . . . . . . . . . . . . . $ 317,804 $ 338,968 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Note payable. . . . . . . . . . . . . . . . . . . . . . . . 50,000 50,000 Income taxes payable. . . . . . . . . . . . . . . . . . . . 7,468 12,488 Capital lease obligation. . . . . . . . . . . . . . . . . . 3,541 3,530 Compensation payable. . . . . . . . . . . . . . . . . . . . 25,670 26,173 Accrued expenses and other liabilities. . . . . . . . . . . 11,077 12,187 --------- --------- Total liabilities. . . . . . . . . . . . . . . . . . . 97,756 104,378 Minority interest . . . . . . . . . . . . . . . . . . . . . 17,851 18,351 Stockholders' equity. . . . . . . . . . . . . . . . . . . . 202,197 216,239 --------- --------- Total liabilities and stockholders' equity. . . . . . . . . $ 317,804 $ 338,968 ========= ========= </TABLE> See accompanying notes. 4
GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS UNAUDITED (In thousands) <TABLE> <CAPTION> Three Months Ended March 31, ------------------------------- 2000 2001 ---- <S> <C> <C> Operating activities Net income . . . . . . . . . . . . . . . . . . . . . . . $ 13,996 $ 14,896 Adjustments to reconcile net income to net cash provided by operating activities: Equity in earnings of partnerships and affiliates . . . . (1,115) (963) Depreciation and amortization . . . . . . . . . . . . . . 177 185 Deferred income tax asset . . . . . . . . . . . . . . . . - (276) Minority interest in net income of consolidated Subsidiaries . . . . . . . . . . . . . . . . . . . . . 949 539 (Increase) decrease in operating assets: Investments in securities. . . . . . . . . . . . . . . (11,993) 8,676 Investment advisory fees receivable. . . . . . . . . . (210) 1,234 Receivables from affiliates. . . . . . . . . . . . . . 3,037 1,598 Other receivables. . . . . . . . . . . . . . . . . . . 97 134 Receivable from broker . . . . . . . . . . . . . . . . (162) (925) Other assets . . . . . . . . . . . . . . . . . . . . . (603) (14) Increase (decrease) in operating liabilities: Payable to broker. . . . . . . . . . . . . . . . . . . (5,637) - Income taxes payable . . . . . . . . . . . . . . . . . 5,414 5,020 Compensation payable . . . . . . . . . . . . . . . . . 9,173 503 Accrued expenses and other liabilities . . . . . . . . 4,378 1,100 --------- -------- Total adjustments . . . . . . . . . . . . . . . . . . . . 3,505 16,811 --------- -------- Net cash provided by operating activities . . . . . . . . 17,501 31,707 --------- -------- Investing activities Distributions from partnerships and affiliates. . . . . . 3,342 7,014 Investments in partnerships and affiliates. . . . . . . . (1,000) (1,400) --------- -------- Net cash provided by investing activities . . . . . . . . 2,342 5,614 --------- -------- Financing activities Purchase of minority stockholders' interest . . . . . . . (18) (39) Purchase of treasury stock. . . . . . . . . . . . . . . . (1,762) (855) --------- -------- Net cash used in financing activities . . . . . . . . . . (1,780) (894) --------- -------- Net increase in cash and cash equivalents . . . . . . . . 18,063 36,427 Cash and cash equivalents at beginning of period. . . . . 103,032 69,271 --------- -------- Cash and cash equivalents at end of period. . . . . . . . $ 121,095 $105,698 ========= ======== </TABLE> See accompanying notes. 5
GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31, 2001 (Unaudited) A. Basis of Presentation The unaudited interim condensed consolidated financial statements of Gabelli Asset Management Inc. ("the Company") included herein have been prepared in accordance with generally accepted accounting principles for interim financial information and Rule 10-01 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the unaudited interim condensed consolidated financial statements reflect all adjustments, which are of a normal recurring nature, necessary for a fair presentation of financial position, results of operations and cash flows of the Company for the interim periods presented and are not necessarily indicative of a full year's results. In preparing the unaudited interim condensed consolidated financial statements, management is required to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from those estimates. These financial statements should be read in conjunction with the Company's audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2000, 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. B. Earnings Per Share The computations of basic and diluted net income per share are as follows: <TABLE> <CAPTION> Three Months Ended March 31, (in thousands except per share amounts) 2000 2001 ---- ---- <S> <C> <C> Net income $ 13,996 $ 14,896 ========= ========= Basic weighted average shares outstanding 29,643 29,507 Effect of dilutive stock options - 534 --------- --------- Diluted weighed average shares outstanding 29,643 30,041 ========= ========= Net income per share: Basic and diluted $ 0.47 $ 0.50 ========= ========= </TABLE> C. Stock Award and Incentive Plan On February 20, 2001, the Compensation Committee of the Board of Directors approved an option grant of 172,500 shares under the Stock Award and Incentive Plan (the "Plan") at an exercise price, equal to the market price on that date, of $31.62 per share. At March 31, 2001, there were 224,500 shares available for future awards under the Plan. D. Stock Repurchase Program In 1999 the Board of Directors established the Stock Repurchase Program through which the Company has been authorized to purchase up to $9,000,000 of the Company's Class A Common Stock in open market transactions. During the first quarter of 2001 the Company purchased 30,000 shares at an average cost of $28.46 per share bringing the total shares repurchased under the program to 510,900 at an average cost of $17.38 per share. This substantially completed the previously announced Stock Repurchase Program. On March 2, 2001, the Board of Directors authorized the repurchase of up to an additional $3,000,000 of its shares of Class A Common Stock. 6
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview Gabelli Asset Management Inc. (the "Company") is a widely recognized provider of investment advisory and brokerage services to mutual fund, institutional and high net worth investors in the United States and internationally. We generally manage assets on a discretionary basis and invest in a wide variety of U.S. and international securities through various investment styles. The Company's revenues are largely based on the level of assets under management in its business as well as the level of fees associated with its various investment products. Growth in revenues generally depends on good investment performance and the ability to attract additional investors while maintaining current fee levels. The Company's largest source of revenues is investment advisory fees which are based on the amount of assets under management in its Mutual Funds and Separate Accounts business. Revenues derived from the equity oriented portfolios generally have higher management fee rates than fixed income portfolios. The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements and the notes thereto included in Item 1 to this report. RESULTS OF OPERATIONS Three Months Ended March 31, 2001 As Compared To the Three Months Ended March 31, 2000 Consolidated Results - Three Months Ended March 31: <TABLE> <CAPTION> (unaudited; in thousands, except per share data) ------------------------------------------------ 2000 2001 % Change ---- ---- -------- <S> <C> <C> <C> Revenues $ 57,773 $ 58,344 1.0 Expenses 35,140 34,343 (2.3) -------- -------- Operating income 22,633 24,001 6.0 Other income, net 2,111 1,136 -------- -------- Income before taxes and minority interest 24,744 25,137 1.6 Income tax provision 9,799 9,703 Minority interest 949 538 -------- -------- Net income $ 13,996 $ 14,896 6.4 ======== ======== Net income per share: Basic and diluted $ 0.47 $ 0.50 6.4 ======== ======== Included in income before taxes and minority interest: Depreciation and amortization $ 177 $ 185 Interest expense $ 933 $ 931 Adjusted EBITDA(a) $ 25,854 $ 26,253 (a) Adjusted EBITDA is defined as earnings before interest, taxes, depreciation and amortization and minority interest. </TABLE> 7
Total revenues were $58.3 million in the first quarter of 2001, up from $57.8 million, in the first quarter of 2000. Included in total revenues in the prior year quarter was a $3.1 million investment banking fee. Excluding this fee total revenues for the first quarter 2000 were $54.7 million. Investment advisory and incentive fees, which comprise 83% of total revenues, were $48.2 million in the first quarter of 2001, 7% higher than the same period a year earlier. The growth in investment advisory and incentive fees is based on the growth in average assets under management during the respective periods. Average assets under management were $24.2 billion in the first quarter 2001, 9% higher than average assets of $22.4 billion in the first quarter of 2000. Average assets under management in open end equity mutual funds were $9.0 billion in the first quarter 2001 compared to $8.8 billion in the first quarter 2000. Commission revenues was $4.4 million in the first quarter of 2001, an increase of 16% from the same period a year earlier. The increase was principally driven by the increased activity related to the net cash flows and growth in assets under management in institutional and high net worth separate accounts. Distribution fees and other income were $5.8 million in the first quarter of 2001 versus $8.8 million in the first quarter of 2000 which included a $3.1 million investment banking fee. Excluding this fee, distribution fees and other income were $5.7 million in the first quarter of 2000. The increase in distribution fees results from the growth in average assets managed in open-end equity mutual funds which generate distribution fees under 12b-1 compensation plans. Total expenses were $34.3 million in the first quarter of 2001, a 2.3% decrease from total expenses of $35.1 million in 2000. Total expenses declined as a percentage of total revenues to 58.9% in 2001 from 60.8% in the prior year quarter. Compensation costs, which are largely variable in nature, were $23.1 million, 3.5% lower than the same period a year earlier. The decrease in compensation principally reflects lower incentive compensation costs. Management fee expense, which is totally variable and based on pretax income, was $2.7 million in the first quarter of 2000 and $2.8 million in the first quarter of 2001. Other operating expenses were $8.4 million in both the first quarter of 2001 and 2000 as increased mutual fund distribution costs were offset by lower administrative costs resulting from company-wide cost reduction efforts. Other income, net, which includes investment gains from our proprietary portfolio was $1.1 million in the first quarter of 2001, a 46% decline from the prior year quarter which reflects the effects of the adverse equity markets. The effective tax rate for the first quarter of 2001 was approximately 38.6%, down from 39.6% in the first quarter of 2000. 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. Investments in partnerships are generally illiquid, however, 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: <TABLE> <CAPTION> Three Months Ended March 31, -------------------------------- 2000 2001 ---- ---- <S> <C> <C> Cash flows provided by (used in): (in thousands) Operating activities $ 17,501 $ 31,707 Investing activities 2,342 5,614 Financing activities (1,780) (894) --------- --------- Increase 18,063 36,427 Cash and cash equivalents at beginning of period 103,032 69,271 --------- --------- Cash and cash equivalents at end of period $ 121,095 $ 105,698 ========= ========= </TABLE> 8
Cash requirements and liquidity needs have historically been met through cash generated by operating activities and through the Company's borrowing capacity. At March 31, 2001, the Company had cash and cash equivalents of $105.7 million, an increase of $36.4 million from December 31, 2000. Cash provided by operating activities was $31.7 million in the first quarter of 2001 principally resulting from $14.9 million in net income and decreases in investments in securities and various receivables of $8.7 million and $2.0 million, respectively. In the first quarter of 2000, cash provided by operating activities was $17.5 million largely from $14.0 million in net income. Cash provided by investing activities, related to investments in and distributions from partnerships and affiliates, was $5.6 million in the first quarter of 2001. Cash provided by these investing activities in the first quarter of 2000 was $2.3 million. Cash used in financing activities in the first quarter of 2001 and 2000 was $0.9 million and $1.8 million, respectively, primarily from the purchase of treasury stock under the company's Stock Repurchase Program. Based upon the Company's current level of operations and its anticipated growth, the Company expects that its current cash balances plus cash flows from operating activities and its borrowing capacity will be sufficient to finance its working capital needs for the foreseeable future. The Company has no material commitments for capital expenditures. Gabelli & Company 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 March 31, 2001, Gabelli & Company had net capital, as defined, of approximately $16.7 million exceeding the regulatory requirement by approximately $16.4 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. At March 31, 2001, the Company's primary market risk exposure was for changes in equity prices and interest rates. Included in investments in securities of $125.8 million at March 31, 2001 were investments in Treasury Bills and Notes of $72.4 million, in mutual funds, largely invested in equity products, of $36.0 million, a diverse selection of common stocks totaling $15.7 million and other investments of approximately $1.7 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 $12.9 million of the $15.7 million invested in common stocks at March 31, 2001, 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 fair 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 advisoryfees 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. 9
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. 10
Part II: Other Information Item 6. (a) Exhibits (b) Reports on Form 8-K. The Company did not file any reports on Form 8-K during the three months ended March 31, 2001. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GABELLI ASSET MANAGEMENT INC. ----------------------------- (Registrant) May 14, 2001 /s/ Robert S. Zuccaro ------------ --------------------- Date Robert S. Zuccaro Vice President and Chief Financial Officer