Item 1: Business Overview
Gabelli Asset Management Inc. (the "Company"; and where the context requires, the "Company" includes its predecessors and its consolidated subsidiaries) is a provider of investment advisory and brokerage services to mutual fund, institutional and high net worth investors, primarily in the United States. The Company generally manages assets on a discretionary basis and invests in a variety of U.S. and international securities through various investment styles. Unlike many of its competitors, the Company's business is focused principally on investment management. As such, the Company's revenues are largely based on the level of assets under management in its business and the level of fees associated with its various investment products rather than total assets of the Company. As of December 31, 2000, the Company had approximately $23.6 billion of assets under management, 88% of which were invested in equity securities.
Organization and Formation Transactions
The Company was incorporated in April 1998 as "Alpha G, Inc." under the laws of the state of New York and renamed "Gabelli Asset Management Inc." in February 1999. The Company is a holding company formed in connection with the reorganization (the "Reorganization") of Gabelli Funds, Inc. ("GFI") and the Company's subsequent initial public offering ("Offering"). On February 9, 1999, in connection with the Reorganization, the Company issued 24 million shares of Class B Common Stock, representing all of its then issued and outstanding common stock to GFI and two of GFI's subsidiaries for substantially all of the operating assets and liabilities of GFI relating to its institutional and retail asset management, mutual fund advisory, underwriting and brokerage business. GFI was later renamed "Gabelli Group Capital Partners, Inc." ("GGCP").
On February 11, 1999, the Company sold 6 million shares of its Class A Common Stock in the Offering to the public at a price of $17.50 per share, receiving approximately $96 million after fees and expenses through an underwriting led by Merrill Lynch & Co., Salomon Smith Barney and Gabelli & Company.
The Company's principal executive offices are located at One Corporate Center, Rye, New York 10580 and the telephone number is (914) 921-3700.
Business Description
GFI, predecessor to the Company, was originally founded in 1976 as an institutional broker-dealer and entered the separate accounts business in 1977 and the mutual fund business in 1986. Its initial money management activities centered on the Company's value-oriented investment philosophy. Starting in the mid-1980s, the Company began building upon its core of value-oriented equity investment products by adding new investment strategies designed for clients seeking to invest in growth-oriented equities, convertible securities and fixed income products. Since then, the Company has continued to build its franchise by expanding its investment management capabilities through the addition of industry specific, international, global, and real estate oriented product offerings. Throughout its 24-year history, the Company has marketed most of its products under the "Gabelli" brand name.
The Company's assets under management are organized principally in three groups: Mutual Funds, Separate Accounts and Partnerships.
|X| Mutual Funds: At December 31, 2000, the Company had $12.1 billion of assets under management in open-end mutual funds and closed-end funds, representing approximately 51% of the Company's total assets under management. The Company currently provides advisory services to (i) the Gabelli family of funds, which consists of 19 open-end mutual funds and 4 closed-end funds; (ii) The Treasurer's Fund, consisting of 3 open-end money market funds (the "Treasurer's Funds"); and (iii) the Gabelli Westwood family of funds, consisting of 6 open-end mutual funds, 5 of which are managed on a day-to-day basis by an unaffiliated subadviser (collectively, the "Mutual Funds"). The Mutual Funds have a long-term record of achieving high returns, relative to similar investment products. At December 31, 2000, 98% of the assets under management in the open-end Mutual Funds having an overall rating from Morningstar, Inc. ("Morningstar") were in open-end Mutual Funds ranked "three stars" or better, with 7% of such assets in open-end Mutual Funds ranked "five stars" and 86% of such assets in open-end Mutual Funds ranked "four stars" on an overall basis (i.e., based on three-, five- and ten-year risk adjusted average returns). The Gabelli family of funds was honored as the top performing mutual fund family by Mutual Funds Magazine for 1997. There can be no assurance, however, that these funds will be able to maintain such ratings or that past performance will be indicative of future results. At December 31, 2000, approximately 44% of the Company's assets under management in open-end, no-load equity Mutual Funds had been obtained through direct sales relationships. The Company also has its open-end Mutual Funds through Third-Party Distribution Programs, particularly No-Transaction Fee ("NTF") Programs, and has developed additional classes of shares for several of its mutual funds for sale through additional third- party distribution channels on a commission basis. Net cash flows from Third Party Distribution Programs accounted for 90% of all cash flows into open-end equity funds during 2000 and represented nearly 56% of all assets in these funds at December 31, 2000.
o Separate Accounts: At December 31, 2000, the Company had $11.0 billion of assets in approximately 1,500 separate accounts, representing approximately 47% of the Company's total assets under management. The Company currently provides advisory services to a broad range of investors including high net worth individuals. Historically, the majority of the client accounts are high net worth client accounts. As of December 31, 2000, high net worth accounts (including the account assets of individuals and their individual retirement accounts generally having a minimum account balance of $1 million) comprised approximately 86% of the number of Separate Accounts and approximately 30% of the assets. Foundation and endowment fund assets represented an additional 9% of the number of Separate Accounts and over 12% of the assets. The sub advisory portion of the Separate Accounts (sub advisor to certain other third-party investment funds) held approximately $1.9 billion or 17% of total assets with less than 1% of the number of accounts. Institutional client accounts, which include corporate pension and profit sharing plans, jointly-trusteed plans, public funds comprised the balance. In general, these accounts are managed to meet the specific needs and objectives of the particular client by utilizing investment strategies - traditional "value", "large cap growth", "large cap value", "global", "international growth" and convertible bond techniques that are within the Company's areas of expertise. The Company distinguishes between taxable and tax free assets and manages client portfolios for the greatest tax benefit within given investment strategies. At December 31, 2000, over 90% of the Company's assets in Separate Accounts (excluding sub advisory assets) had been obtained through direct sales relationships. The Company believes that an important element of future growth in the Separate Accounts is dependent on client relationships and client retention. In this vein, the company hosts annual client seminars and is establishing and staffing relationship offices around the country.
o Partnerships: The Company also provides alternative investments through its majority-owned subsidiary, Gabelli Securities, Inc. ("GSI"). These alternative investment products consist primarily of risk arbitrage, merchant banking and global equities long/short funds (collectively, the "Partnerships"). The Partnerships had $437 million of assets, or approximately 2% of total assets under management, at December 31, 2000.
Investment advisory and incentive fees relating to the Mutual Funds, the Separate Accounts, and the Partnerships generated approximately 84% and 81% of the Company's total revenues for the year ended December 31, 2000, respectively.
The Company's majority owned subsidiary, Gabelli & Company, Inc. ("Gabelli & Company"), is a registered broker-dealer and a member of the National Association of Securities Dealers, Inc. ("NASD") and acts as underwriter and distributor of the open-end Mutual Funds and provides brokerage, trading, underwriting and research services. On December 22, 2000 the Company acquired, through its subsidiary GSI, all of the outstanding common stock of Lynch Capital Corporation ("Lynch Capital"), a registered broker dealer. The name Gabelli Direct Inc. has been reserved with the NASD to replace the name Lynch Capital Corporation.
The following table sets forth total assets under management by product type as of the dates shown and their compound annual growth rates ("CAGR").
Assets Under Management By Product Type (Dollars in millions)
(a) Compound annual growth rate.
(b) Effective April 14, 1997, the Company increased its ownership of Gabelli Fixed Income L.L.C. from 50% to 80.1%, thereby causing Gabelli Fixed Income L.L.C. to become a consolidated subsidiary of the Company. Accordingly, for periods after April 14, 1997, the assets managed by Gabelli Fixed Income L.L.C. are included in the Company's Total Assets Under Management. If the assets managed by Gabelli Fixed Income L.L.C. had been included for all periods presented, assets under management would have been $11,082 at December 31, 1996, respectively, and the CAGR for Total Assets Under Management would have been 19.4%.
Summary of Investment Products
The Company manages assets in the following wide spectrum of investment products and strategies, many of which are focused on fast-growing areas:
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(a) Invested primarily in publicly-traded real estate investment trusts and sub-advised by Westwood Management Corporation.
(b) Invested primarily in publicly-traded equities of U.S. and international gold companies.
The Company's long-term strategic goal is to continue to expand its asset management capabilities in order to provide a range of products suitable to meet the diverse requirements of its clients.
The Company believes that its growth to date can be largely credited to the following:
o Long-Term Fund Performance: The Company has a long-term record of achieving relatively high returns for its Mutual Fund and Separate Account clients when compared to similar investment products. The Company believes that its performance record is a competitive advantage and a recognized component of its franchise.
o Widely Recognized "Gabelli" Brand Name: For much of its history, the Company has advertised in a variety of financial print media, including publications such as The Wall Street Journal, Money Magazine, Barron's and Investor's Business Daily. The Company also underwrites publications written by its investment professionals, including "Deals...Deals...and More Deals" which examines the practice of merger arbitrage and the soon to be released "Win, Win Investing - Your Guide to Global Convertible Securities." The Company believes that the breadth and consistency of its advertising has enhanced investor awareness of its product offerings and of the "Gabelli" brand name.
o Diversified Product Offerings: Since the inception of its investment management activities, the Company has sought to expand the breadth of its product offerings. The Company currently offers a wide spectrum of investment products and strategies, including product offerings in U.S. equities, U.S. fixed income, global and international equities, convertible securities, U.S. balanced and alternative products.
o Strong Industry Fundamentals: According to data compiled by the U.S. Federal Reserve, the investment management industry has grown faster than more traditional segments of the financial services industry, including the banking and insurance industries. The Company believes that demographic trends and the growing role of money managers in the placement of capital compared to the traditional role played by banks and life insurance companies will result in continued growth of the investment management industry.
Business Strategy
The Company plans to grow its franchise by continuing to leverage its competitive asset management strengths, including its long-term performance record, brand name, diverse product offerings and experienced research, client service and investment staff. In order to achieve continued growth in assets under management and profitability, the Company will continue to pursue its business strategy, the key elements of which include:
o Broadening and Strengthening the Gabelli Brand. The Company believes that the Gabelli brand name is one of the more widely recognized brand names in the U.S. investment management industry. The Company intends to continue to strengthen its brand name identity by, among other things, increasing its marketing and advertising to provide a uniform global image. The Company expanded its geographic presence in January 2000, with the addition of a London office to coordinate marketing and research efforts for our European and Global private fund and mutual fund products. The Company believes that with its brand name recognition, it has the capacity to create new products and services around the Gabelli brand to complement its existing product offerings. New product offerings since the Firm's Public Offering include two open end mutual funds, the Gabelli Blue Chip Value Fund and the Gabelli Utilities Fund; one closed end fund, The Gabelli Utility Trust; two private limited partnerships, Gabelli Global Partners, L.P. and Gabelli European Partners, L.P. and two offshore funds, Gabelli Global Partners, Ltd. and Gabelli European Partners Ltd.
o Expanding Mutual Fund Distribution. The Company intends to continue expanding its distribution network through Third-Party Distribution Programs, particularly NTF Programs. In recent years, the Company has realized significant growth in its mutual fund assets under management through alliances with "mutual fund supermarkets" and other Third-Party Distribution Programs, through which its Mutual Funds are made available to investors. As of December 31, 2000, the Company was participating in 80 Third-Party Distribution Programs, including the Charles Schwab and Fidelity Investments "mutual fund supermarket" programs. In addition, the Company intends to develop a marketing strategy to increase its presence in the 401(k) market for its Mutual Funds. Additionally, the Company now offers investors the ability to purchase mutual fund shares directly through the Internet or by telephone. The Company has also entered into various marketing alliances and distribution arrangements with leading national brokerage and investment houses and has developed additional classes of shares for several of its mutual funds for sale through national brokerage and investment houses and other third-party distribution channels on a commission basis.
o Increasing Penetration in High Net Worth Market. The Company's high net worth business focuses, in general, on serving clients who have established an account relationship of $1 million or more with the Company. According to certain industry estimates, the number of households with over $1 million in investable assets will grow from approximately 2.5 million in 1996 to over 15 million by 2010. With the Company's 24-year history of serving this segment, its long-term performance record and brand name recognition, the Company believes that it is well positioned to capitalize on the growth opportunities in this market.
o Increasing Marketing for Institutional Separate Accounts. The institutional Separate Accounts business has been primarily developed through direct marketing channels. Historically, third-party pension consultants and financial consultants have not been a major source of new institutional Separate Accounts business for the Company. However, these consultants have significantly increased their presence among institutional investors. As a result, the Company intends both to add marketing personnel to target pension and financial consultants and to expand its efforts through its traditional marketing channels.
|X| Attracting and Retaining Experienced Professionals. As the Company continues to increase the breadth of its investment management capabilities, it plans to add portfolio managers and other investment personnel in order to foster expansion of its products. The ability to attract and retain highly experienced investment and other professionals with a long-term commitment to the Company and its clients has been, and will continue to be, a significant factor in its long-term growth. The availability of publicly traded Class A Common Stock enhances the Company's ability to attract and retain top performing investment professionals. Since its Offering, two highly regarded investment professionals, Barbara Marcin and Timothy O'Brien have joined the Company. Ms. Marcin and Mr. O'Brien currently manage the Gabelli Blue Chip Value Fund and the Gabelli Utilities Fund, respectively, as well as certain private accounts. In addition, joining through the acquisition of the Mathers Fund and heading up the newly formed Non-Market-Correlated group is portfolio manager Henry Van der Eb. With the addition of the Comstock Partners Funds we were joined by portfolio managers Charles Minter and Martin Weiner.
o Capitalizing on Acquisitions and Strategic Alliances. The Company intends to selectively and opportunistically pursue acquisitions and alliances that will broaden its product offerings and add new sources of distribution. On October 1, 1999 the Company completed its alliance with Mathers and Company, Inc. and now acts as investment advisor to the Mathers Fund (renamed Gabelli Mathers Fund). The Gabelli Mathers Fund has over $100 million in assets under management and approximately 5,000 shareholders. In May 2000 the Company added Comstock Partners Funds, Inc., renamed Comstock Funds, Inc., along with Gabelli Mathers to the Non-Market Correlated mutual fund product line. The Comstock Funds are comprised of the Comstock Capital Value Fund, a specialty diversified equity fund, and Comstock Strategy Fund, a flexible income fund. These funds are currently positioned to take advantage of a sustained stock market decline. At the time of its acquisition, the Comstock Funds added over $82 million in assets under management and 20,000 new investors to the Gabelli mutual fund family. The Company believes that it is well positioned to pursue acquisitions and alliances because it is one of relatively few publicly traded investment management firms.
Mutual Funds
The Mutual Funds include 28 open-end mutual funds and 4 closed-end funds which had total assets as of December 31, 2000 of $12.1 billion. The open-end Mutual Funds are available to individuals and institutions primarily on a no-load basis, while the closed-end funds are listed and traded on the New York Stock Exchange ("NYSE"). At December 31, 2000, the open-end funds had total assets of $10.4 billion and the closed-end funds had total assets of $1.7 billion. The assets managed in the closed-end funds represent approximately 14% of the assets in the Mutual Funds and 7% of the total assets under management of the Company at December 31, 2000. The Company's assets under management consist of a broad range of U.S. and international stock, bond and money market mutual funds that meet the varied needs and objectives of its Mutual Fund shareholders. At December 31, 2000, approximately 44% of the Company's assets under management in open-end, no-load equity Mutual Funds had been obtained through direct sales relationships.
The Company, through its affiliates, acts as adviser to all of the Mutual Funds, except with respect to the Gabelli Capital Asset Fund for which the Company acts as a subadviser and Guardian Investment Services Corporation, an unaffiliated company, acts as manager. As subadviser, the Company makes day-to-day investment decisions for the Gabelli Capital Asset Fund.
Gabelli Funds, L.L.C. ("Funds Adviser"), a wholly owned subsidiary of the Company, acts as the investment adviser for all of the Mutual Funds other than the Gabelli Westwood family of funds and the Treasurer's Funds.
Gabelli Advisers, Inc. acts as investment adviser to the Gabelli Westwood family of funds and has retained Westwood Management to act as subadviser for five of the six portfolios. Westwood Management is a wholly owned subsidiary of Southwest Securities Group, Inc., a publicly held securities brokerage firm. In its capacity as subadviser, Westwood Management makes day-to-day investment decisions and provides the portfolio management services for five of the six current Gabelli Westwood portfolios. The Gabelli Westwood Mighty MitesSM Fund, launched in May 1998, is advised solely by Gabelli Advisers, Inc., using a team investment approach, without any subadvisers. Westwood Management owns 100% of the Class A common stock of Gabelli Advisers, Inc. (representing 20% of the economic interest), and is not an affiliate of the Company. The Company believes that Gabelli Advisers, Inc. will serve as a platform for future growth and diversification of the Company's product line.
Gabelli Fixed Income L.L.C. currently manages short-term and short-intermediate term fixed income securities for the Treasurer's Funds as well as for the Separate Accounts. The Company plans to further increase and diversify the number of fixed income products offered by Gabelli Fixed Income L.L.C.. Certain members of senior management of Gabelli Fixed Income L.L.C. own a 19.9% equity interest in Gabelli Fixed Income L.L.C.
The following table lists the Mutual Funds, together with the December 31, 2000 Morningstar overall rating, where rated (ratings are not available for the money-market mutual funds and other mutual funds, which collectively represent 15% of the assets under management in the Mutual Funds), the portfolio manager(s) and associate portfolio managers(s) for such mutual fund, and provides a description of the primary investment objective, fund characteristics, fees, the date that the mutual fund was initially offered to investors and the assets under management in the Mutual Funds as of December 31, 2000.
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(1) Morningstar proprietary ratings reflect historical risk-adjusted performance as of December 31, 2000 and are subject to change every month. Overall Morningstar ratings are calculated from the fund's three-, five- and ten-year average annual returns, as available, in excess of 90 day T-bill returns with appropriate fee adjustments and a risk factor that reflects fund performance below 90 day T-bill returns. The top 10% of the funds in an investment category receive five stars, the next 22.5% receive four stars, the next 35% receive three stars, the next 22.5% receive two stars and the last 10% receive one star.
(2) The Gabelli Multimedia Trust was formed in 1994 through a spin-off of assets previously held in the Gabelli Equity Trust.
(3) The Gabelli Convertible Securities Fund was originally formed in 1989 as an open end investment company and was converted to a closed end investment company in March 1995.
(4) These funds have the multi-classes of shares available. Multi-class shares include Class A shares with a front-end sales charge; Class B shares are subject to a back-end contingent deferred sales charge and Class C shares are subject to a 1% back-end contingent deferred sales charge. Comstock Strategy Fund Class R shares, which are no-load, are available only for retirement and certain institutional accounts.
(5) The Gabelli Utility Trust was formed in 1999 through a spin off of assets previously held in the Gabelli Equity Trust.
Shareholders of the no-load open-end Mutual Funds are allowed to exchange shares among the open-end funds as economic and market conditions and investor needs change at no additional cost. The Company periodically introduces new mutual funds designed to complement and expand its investment product offerings, respond to competitive developments in the financial marketplace and meet the changing needs of clients.
The Company's marketing efforts for the Mutual Funds are currently focused on increasing the distribution and sales of its existing funds as well as creating new products for sale through its distribution channels. The Company believes that its marketing efforts for the Mutual Funds will continue to generate additional revenues from investment advisory fees. The Company has traditionally distributed most of its open-end Mutual Funds by using a variety of direct response marketing techniques, including telemarketing and advertising, and as a result the Company maintains direct relationships with a high percentage of its no-load open-end Mutual Fund customers. Beginning in late 1995, the Company expanded its product distribution by offering additional open-end Mutual Funds through Third-Party Distribution Programs, including NTF Programs. In 1998 and 1999, the Company further expanded these efforts to include substantially all of its open-end Mutual Funds in eighty Third-Party Distribution Programs. Although 44% of the assets under management in the open-end Mutual Funds are still attributable to the Company's direct response marketing efforts, Third-Party Distribution Programs, particularly NTF Programs, have become an increasingly important source of asset growth for the Company. Of the $8.9 billion of assets under management in the open-end equity Mutual Funds as of December 31, 2000, approximately 31% were generated from NTF Programs. During 2000, the Company completed development of additional classes of shares for several of its mutual funds for sale through national brokerage and investment houses and other third-party distribution channels on a commission basis. The multi-class shares were initially added to the global series of Gabelli mutual funds and the Gabelli Westwood funds. The use of multi-class share products will expand the distribution of all Gabelli Fund products into the advised sector of the mutual fund investment community. In 2000 approximately 50% of all U.S. equity mutual fund inflows came through this sector. The multi-class shares include Class A shares with a front end sales charge; Class B shares are subject to a back end contingent deferred sales charge and Class C shares are subject to a 1% back-end contingent deferred sales charge. The existing class of no-load shares are designated as Class AAA shares and remains available for new and current investors. In general, distribution through Third-Party Distribution Programs have greater variable cost components and lower fixed cost components than distribution through the Company's traditional direct sales methods.
The Company through its affiliated broker-dealer Gabelli & Company, Inc. also offers its open-end mutual fund products through our internet site, www.gabelli.com, where mutual fund investors can access their personal account information and buy, sell and exchange Fund shares. Fund prospectuses, quarterly reports, fund applications, daily net asset values and performance charts are all available. Our "Meet the Managers" program provides a regular forum to chat with our portfolio manages on a wide variety of investment issues. A feature unique to Gabelli is the "Online Real Time Chat Support" which provides clients with access to a "live" client representative to assist with investment or account questions. As part of our efforts to educate investors we introduced Gabelli University with its initial publication "Deals, Deals... and More Deals" and the soon to be released "Win, Win Investing - Your Guide to Global Convertible Securities." Our website continues to be an active, informative and valuable resource which we believe will become an increasingly important feature of our client service efforts in the ensuing years.
The Company provides investment advisory and management services pursuant to an investment management agreement with each Mutual Fund. While the specific terms of the investment management agreements vary to some degree, the basic terms of the investment management agreements are similar. The investment management agreements with the Mutual Funds generally provide that the Company is responsible for the overall investment and administrative services, subject to the oversight of each Mutual Fund's board of directors or trustees and in accordance with each Mutual Fund's fundamental investment objectives and policies. The investment management agreements permit the Company to enter into separate agreements for administrative and accounting services on behalf of the respective Mutual Funds.
The Company provides the Mutual Funds with administrative services pursuant to management contracts. Most of these administrative services are provided through subcontracts with unaffiliated third parties. Such services include, without limitation, calculation of net asset value, preparation of financial reports for shareholders of the Mutual Funds, internal accounting, tax accounting and reporting, regulatory filings, and other services. Transfer agency and custodial services are provided directly to the Mutual Funds by unaffiliated third parties.
The Company's Mutual Fund investment management agreements may continue in effect from year to year only if specifically approved at least annually by (i) the Mutual Fund's board of directors or trustees or (ii) the Mutual Fund's shareholders and, in either case, the vote of a majority of the Mutual Fund's directors or trustees who are not parties to the agreement or "interested persons" of any such party, within the meaning of the Investment Company Act of 1940 as amended (the "Investment Company Act"). Each Mutual Fund may terminate its investment management agreement at any time upon 60 days' written notice by (i) a vote of the majority of the board of directors or trustees cast in person at a meeting called for the purpose of voting on such termination or (ii) a vote at a meeting of shareholders of the lesser of either 67% of the voting shares represented in person or by proxy or 50% of the outstanding voting shares of such Mutual Fund. Each investment management agreement automatically terminates in the event of its assignment, as defined in the Investment Company Act. The Company may terminate an investment management agreement without penalty on 60 days' written notice.
Separate Accounts
Since 1977, the Company has provided investment management services through its subsidiary GAMCO Investors, Inc. ("GAMCO") to a broad spectrum of institutional and high net worth investors. As of December 31, 2000, the Company had approximately 1,500 Separate Accounts with an aggregate of approximately $11.0 billion of assets, which represent approximately 47% of the total assets under management of the Company. The ten largest Separate Accounts comprise approximately 15% of the Company's total assets under management and 6% of the Company's total revenues as of and for the period ended December 31, 2000. The Separate Accounts are invested in U.S. and international equity securities, U.S. fixed-income securities and convertible securities. At December 31, 2000, high net worth accounts (accounts of individuals and related parties in general having a minimum account balance of $1 million) comprised approximately 86% of the number of Separate Accounts and approximately 30% of the assets, with institutional investors accounting for the balance.
Each Separate Account portfolio is managed to meet the specific needs and objectives of the particular client by utilizing investment strategies and techniques within the Company's areas of expertise. Members of the sales and marketing staff for the Separate Accounts business have an average of approximately 10 years of experience with the Company and focus on developing and maintaining long-term relationships with their Separate Account clients in order to be able to understand and meet their individual clients' needs. Investment advisory agreements with the Separate Accounts are typically terminable by the client without penalty on 30 days' notice or less.
The Company's Separate Accounts business is marketed primarily through the direct efforts of its in-house sales force. At December 31, 2000, over 90% of the Company's assets in Separate Accounts (excluding subadvisory assets) were obtained through direct sales relationships. Sales efforts are conducted on a regional and product specialist basis. Clients are generally serviced by a team of individuals, the core of which remain assigned to a specific client from the onset of the client relationship. The Company's sales force maintains direct relationships with corporate pension and profit sharing plans, foundations, endowment funds, jointly trusteed plans, municipalities and high net worth individuals that comprise the Company's Separate Accounts business.
Partnerships
The Company offers alternative investment products principally through its majority-owned subsidiary, GSI. These alternative investments products consist primarily of global equities, risk arbitrage and merchant banking limited partnerships and offshore companies. The Partnerships had $437 million of assets at December 31, 2000. Gabelli Associates Fund had $179 million of assets under management as of December 31, 2000 and invests in merger arbitrage opportunities. Merchant banking activities are carried out through ALCE Partners, L.P. ("Alce"), and Gabelli Multimedia Partners, L.P. ("Multimedia"), both of which are closed to new investors. Aggregate assets for Alce and Multimedia as of December 31, 2000 were approximately $12 million and $6 million, respectively. Gabelli Associates Limited, which had approximately $155 million of assets as of December 31, 2000, is an offshore investment company designed for non-U.S. investors seeking to participate in risk arbitrage opportunities utilizing the same investment objectives and strategies as the Gabelli Associates Fund. Gabelli Global Partners, a global equity long/short fund introduced in 1999 and Gabelli European Partners, a European equity long/short fund introduced in 2000, had assets under management of $79 million and $3 million, respectively, at December 31, 2000. The Company also manages New Century Capital Partners with assets as of December 31, 2001 of $2.2 million and the Gabelli International Gold Fund Limited, which as of December 31, 2000 had less than $1 million of assets. The Company's alternative investment products are marketed primarily through its direct sales force. The Company intends to expand product offerings, both domestic and international, and the geographic composition of its customer base in the Partnerships and other alternative investment products and expects that the assets invested in these products will provide a growing source of revenues in the future.
Brokerage and Mutual Fund Distribution
The Company offers underwriting, execution and trading services through its majority owned subsidiary, Gabelli & Company. Gabelli & Company is a broker-dealer registered under the Securities Exchange Act of 1934 and a member of the NASD. Gabelli & Company's revenues are derived primarily from distribution of the Mutual Funds, brokerage commissions on transactions in equity securities for the Mutual Funds, Separate Accounts and other customers, and from underwriting fees selling concessions and market-making activities.
The Company distributes the open-end Mutual Funds pursuant to distribution agreements with each open-end Mutual Fund. Under each distribution agreement with an open-end Mutual Fund, the Company offers and sells such open-end Mutual Fund's shares on a continuous basis and pays all of the costs of marketing and selling the shares, including printing and mailing prospectuses and sales literature, advertising and maintaining sales and customer service personnel and sales and services fulfillment systems, and payments to the sponsors of Third-Party Distribution Programs, financial intermediaries and sales personnel of the Company. The Company receives fees for such services pursuant to distribution plans adopted under provisions of Rule 12b-1 ("12b-1") of the Investment Company Act. Distribution fees from the open-end Mutual Funds amounted to $11.9 million, $16.2 million and $22.9 million for the years ended December 31, 1998 1999 and 2000 respectively. The Company is the principal underwriter for several funds distributed with a sales charge, including shares of The Gabelli Value Fund, The Comstock Funds and the multi-class series of shares which were added to the global and international series of Gabelli mutual funds, the Gabelli Westwood Funds and The Gabelli Value Fund.
Under the distribution plans, the open-end no load (Class AAA shares) Mutual Funds (except the Treasurer's Funds, the Gabelli U.S. Treasury Money Market Fund and the Gabelli Capital Asset Fund) and the Class A shares of various funds pay the Company a distribution fee of .25% per year (except the Class A shares of the Gabelli Westwood Funds which pay .50% per year) on the average daily net assets of the fund. Class B and Class C shares, launched in March 2000 as part of the multi-class option for certain mutual funds, have a 12b-1 distribution plan with a service and distribution fee totaling 1%. The Company's distribution agreements with the Mutual Funds may continue in effect from year to year only if specifically approved at least annually by (i) the
Mutual Fund's board of directors or trustees or (ii) the Mutual Fund's shareholders and, in either case, the vote of a majority of the Mutual Fund's directors or trustees who are not parties to the agreement or "interested persons" of any such party, within the meaning of the Investment Company Act. Each Mutual Fund may terminate its distribution agreement, or any agreement thereunder, at any time upon 60 days' written notice by (i) a vote of the majority of its directors or trustees cast in person at a meeting called for the purpose of voting on such termination or (ii) a vote at a meeting of shareholders of the lesser of either 67% of the voting shares represented in person or by proxy or 50% of the outstanding voting shares of such Mutual Fund. Each distribution agreement automatically terminates in the event of its assignment, as defined in the Investment Company Act. The Company may terminate a distribution agreement without penalty upon 60 days' written notice.
Underwriting Activities
Gabelli & Company is involved in external syndicated underwriting activities. In 1998, 1999 and 2000 Gabelli & Company participated in 32, 35 and 16 syndicated underwritings of public equity and debt offerings managed by major investment banks with commitments of $104 million, $64.2 million and $42.4 million, respectively.
Competition
The Company competes with mutual fund companies and other investment management firms, insurance companies, banks, brokerage firms and other financial institutions that offer products that have similar features and investment objectives to those offered by the Company. Many of the investment management firms with which the Company competes are subsidiaries of large diversified financial companies and many others are much larger in terms of assets under management and revenues and, accordingly, have much larger sales organizations and marketing budgets. Historically, the Company has competed primarily on the basis of the long-term investment performance of many of its funds. However, the Company has taken steps over the past two years to increase its distribution channels, brand name awareness and marketing efforts. Although there can be no assurance that the Company will be successful in these efforts, its net sales of Mutual Funds have increased over the past year and the Company's strategy is to continue to devote additional resources to its sales and marketing efforts.
The market for providing investment management services to institutional and high net worth Separate Accounts is also highly competitive. Approximately 34% of the Company's investment management fee revenues for the year ended December 31, 2000 were derived from its Separate Accounts. Selection of investment advisers by U.S. institutional investors is often subject to a screening process and to favorable recommendation by investment industry consultants. Many of these investors require their investment advisers to have a successful and sustained performance record, often five years or longer, and also focus on one and three year performance records. The Company has significantly increased its assets under management on behalf of U.S. institutional investors since its entry into the institutional asset management business in 1977. At the current time, the Company believes that its investment performance record would be attractive to potential new institutional and high net worth clients and the Company has determined to devote additional resources to the institutional and high net worth investor markets. However, no assurance can be given that the Company's efforts to obtain new business will be successful.
Intellectual Property
Service marks and brand name recognition are important to the Company's business. The Company has rights to the service marks under which its products are offered. The Company has registered certain service marks in the United States and will continue to do so as new trademarks and service marks are developed or acquired. The Company has rights to use (i) the "Gabelli" name, (ii) the "GAMCO" name, (iii) the research triangle logo, (iv) the "Interactive Couch Potato" name, and (v) the "Mighty Mites" name. Pursuant to an assignment agreement, Mr. Gabelli has assigned to the Company all of his rights, title and interests in and to the "Gabelli" name for use in connection with investment management services, mutual funds and securities brokerage services. However, under the agreement, Mr. Gabelli will retain any and all right, title and interest he has or may have in the "Gabelli" name for use in connection with (i) charitable foundations controlled by Mr. Gabelli or members of his family or (ii) entities engaged in private investment activities for Mr. Gabelli or members of his family. In addition, the funds managed by Mr. Gabelli outside the Company have entered into a license agreement with the Company permitting them to continue limited use of the "Gabelli" name under specified circumstances. The Company has taken, and will continue to take, action to protect its interests in these service marks.
Regulation
Virtually all aspects of the Company's businesses are subject to various Federal and state laws and regulations. These laws and regulations are primarily intended to protect investment advisory clients and shareholders of registered investment companies. Under such laws and regulations, agencies that regulate investment advisers and broker-dealers such as the Company have broad administrative powers, including the power to limit, restrict or prohibit such an adviser or broker-dealer from carrying on its business in the event that it fails to comply with such laws and regulations. In such event, the possible sanctions that may be imposed include the suspension of individual employees, limitations on engaging in certain lines of business for specified periods of time, revocation of investment adviser and other registrations, censures, and fines. The Company believes that it is in substantial compliance with all material laws and regulations.
The business of the Company is subject to regulation at both the federal and state level by the Securities and Exchange Commission ("Commission") and other regulatory bodies. Subsidiaries of the Company are registered with the Commission under the Investment Advisers Act, and the Mutual Funds are registered with the Commission under the Investment Company Act. Three subsidiaries of the Company are also registered as broker-dealers with the Commission and are subject to regulation by the NASD and various states.
The subsidiaries of the Company that are registered with the Commission under the Investment Advisers Act (Funds Adviser, Gabelli Advisers, Inc., Gabelli Fixed Income L.L.C. and GAMCO) are regulated by and subject to examination by the Commission. The Investment Advisers Act imposes numerous obligations on registered investment advisers including fiduciary duties, record keeping requirements, operational requirements, marketing requirements and disclosure obligations. The Commission is authorized to institute proceedings and impose sanctions for violations of the Investment Advisers Act, ranging from censure to termination of an investment adviser's registration. The failure of a subsidiary of the Company to comply with the requirements of the Commission could have a material adverse effect on the Company. The Company believes it is in substantial compliance with the requirements of the regulations under the Investment Advisers Act.
The Company derives a substantial majority of its revenues from investment advisory services through its investment management agreements. Under the Investment Advisers Act, the Company's investment management agreements terminate automatically if assigned without the client's consent. Under the Investment Company Act, advisory agreements with registered investment companies such as the Mutual Funds terminate automatically upon assignment. The term "assignment" is broadly defined and includes direct assignments as well as assignments that may be deemed to occur, under certain circumstances, upon the transfer, directly or indirectly, of a controlling interest in the Company.
In their capacity as broker-dealers, Gabelli & Company, Gabelli Fixed Income Distributors, Inc. and Lynch Capital are required to maintain certain minimum net capital and cash reserves for the benefit of its customers. Gabelli & Company and Gabelli Fixed Income Distributors, Inc. net capital, as defined, has consistently met or exceeded all minimum requirements. Lynch Capital which was acquired on December 22, 2000 has consistently met or exceeded all minimum requirements. Under the rules and regulations of the Commission promulgated pursuant to the federal securities laws, the Company is subject to periodic examination by the Commission and the NASD. Gabelli & Company, Gabelli Fixed Income Distributors, Inc. and Lynch Capital are also subject to periodic examination by the NASD.
Subsidiaries of the Company are subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and to regulations promulgated thereunder, insofar as they are "fiduciaries" under ERISA with respect to certain of their clients. ERISA and applicable provisions of the Internal Revenue Code of 1986, as amended (the "Code"), impose certain duties on persons who are fiduciaries under ERISA and prohibit certain transactions involving ERISA plan clients. The failure of the Company to comply with these requirements could have a material adverse effect on the Company.
Investments by the Company on behalf of its clients often represent a significant equity ownership position in an issuer's class of stock. As of December 31, 2000, the Company had five percent or more beneficial ownership with respect to 118 equity securities. This activity raises frequent regulatory and legal issues regarding the Company's aggregate beneficial ownership level with respect to portfolio securities, including issues relating to issuers' shareholder rights plans or "poison pills," state gaming laws and regulations, federal communications laws and regulations, public utility holding company laws and regulations, federal proxy rules governing shareholder communications and federal laws and regulations regarding the reporting of beneficial ownership positions. The failure of the Company to comply with these requirements could have a material adverse effect on the Company.
The Company and certain of its affiliates are subject to the laws of non-U.S. jurisdictions and non-U.S. regulatory agencies or bodies. In particular, the Company is subject to requirements in numerous jurisdictions regarding reporting of beneficial ownership positions in securities issued by companies whose securities are publicly traded in those countries. In addition, GAMCO is registered as an international adviser, investment counsel and portfolio manager with the Ontario Securities Commission in Canada in order to market its services to prospective clients which reside in Ontario. Gabelli Associates Limited is organized under the laws of the British Virgin Islands and Gabelli International Gold Fund Limited is organized under the laws of Bermuda. The Company's opening of an office in London and its plans to market certain products in Europe will also require the Company to comply with the laws of the United Kingdom and other European countries regarding these activities.
Staff
At March 1, 2001, the Company had a full-time staff of approximately 156 individuals, of whom 68 served in the portfolio management, research and trading areas, 52 served in the marketing and shareholder servicing areas and 36 served in the administrative area. As part of its staff, the Company employs eleven portfolio managers for the Mutual Funds, Separate Accounts and Partnerships. Additionally, Westwood Management employs five portfolio managers who advise five of the six portfolios of the Gabelli Westwood family of funds.
Item 2:
Item 2: Properties
As of December 31, 2000, the principal properties leased by the Company for use in its business were as follows:
All of these properties are used by the Company as office space. The building and property at 401 Theodore Fremd Avenue was leased from an entity controlled by members of Mr. Gabelli's family, and approximately 40,000 square feet are currently subleased to other tenants. The Company receives rental payments under the sublease agreements which totaled approximately $717,000 in 2000 and were used to offset operating expenses incurred for the property. The lease provides that all operating expenses related to the property are to be paid by the Company. The Company has begun relocating certain departments of the Company to these premises and expects to completely relocate its principal executive office to these premises in the year 2001.
Item 3:
Item 3: Legal Proceedings
From time to time, the Company is a defendant in various lawsuits incidental to its business. The Company does not believe that the outcome of any current litigation will have a material effect on the financial condition of the Company.
Item 4:
Item 4: Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's security holders during the fourth quarter of 2000.
PART II
Item 5:
Item 5: Market for the Registrant's Common Equity and Related Stockholder Matters
The Company's shares of Class A common stock have been traded on the New York Stock Exchange (NYSE) under the symbol GBL since its initial public offering on February 11, 1999. Prior to that there was no public market for our common stock.
As of March 1, 2001 there were approximately 32 Class A common stockholders of record and 3 Class B common stockholders of record (GGCP and two wholly-owned subsidiaries). These figures do not include stockholders with shares held under beneficial ownership in nominee name which are estimated to be in excess of 3,000.
The following table sets forth the high and low prices of the Company's Class A common stock for each quarter of 2000 commencing with its initial public offering, as reported by the New York Stock Exchange.
Quarter Ended High Low
March 31, 2000 $ 17.88 $ 15.38 June 30, 2000 $ 25.13 $ 16.88 September 30, 2000 $ 31.25 $ 22.25 December 31, 2000 $ 36.00 $ 25.82
The Company has not paid any dividends since its inception and does not presently anticipate paying dividends in the foreseeable future.
Item 6:
Item 6: Selected Financial Data
General
The selected historical financial data presented below has been derived in part from, and should be read in conjunction with Management's Discussion and Analysis included in Item 7
Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the Consolidated Financial Statements and the notes thereto included in Item 8 to this report.
Basis of Presentation
Gabelli Asset Management Inc. (the "Company"), incorporated in April 1998, had 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 common stock, to Gabelli Funds, Inc. ("GFI") and two of its subsidiaries in consideration for substantially all of the operating assets and liabilities of GFI related to its institutional and retail asset management, mutual fund advisory, underwriting and brokerage business (the "Reorganization"). GFI was subsequently renamed Gabelli Group Capital Partners, Inc. ("GGCP").
Immediately following the Reorganization, the Company sold 6 million shares of its Class A Common Stock in an initial public offering. On February 17, 1999 the Offering was completed and the Company received proceeds, net of fees and expenses, of approximately $96 million. Following the Offering, GFI owned 80% of the outstanding common stock of the Company. For periods after the Offering, the Company's financial statements will reflect the financial condition and results of operations of Gabelli Asset Management Inc. and the historical results of GFI will be shown as predecessor financial statements.
Overview
The Company's revenues are largely based on the level of assets under management in its businesses as well as the level of fees associated with its various investment products. Growth in revenues generally depends on good investment performance, which increases assets under management by increasing the value of existing assets under management, contributing to higher investment and lower redemption rates and facilitating the ability to attract additional investors while maintaining current fee levels. Growth in assets under management is also dependent on being able to access various distribution channels, which is usually based on several factors, including performance and service. Historically, the Company depended primarily on direct distribution of its products and services, but since 1995 has increasingly participated in Third-Party Distribution Programs, particularly NTF Programs. A majority of the Company's cash inflows to mutual fund products have come through these channels since 1998. Fluctuations in financial markets also have a substantial effect on assets under management and results of operations, although the Company's extensive use of variable compensation programs tends to moderate the effects of fluctuations in revenues. 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. Advisory fees from the Mutual Funds are computed daily or weekly, while advisory fees from the Separate Accounts are generally computed quarterly based on account values as of the end of the preceding quarter. These revenues vary depending upon the level of sales compared with redemptions, financial market conditions and the fee structure for assets under management. Revenues derived from the equity oriented portfolios generally have higher management fee rates than fixed income portfolios.
Commission revenues consist of brokerage commissions derived from securities transactions executed on an agency basis on behalf of mutual funds, institutional and high net worth clients as well as investment banking revenue, which consists of underwriting profits, selling concessions and management fees associated with underwriting activities.
Distribution fees and other income primarily include distribution fees payable in accordance with Rule 12b-1 ("12b-1") of the Investment Company Act of 1940, as amended (the "Investment Company Act"), along with sales charges and underwriting fees associated with the sale of the Mutual Funds plus other revenues. Distribution fees fluctuate based on the level of assets under management and the amount and type of Mutual Funds sold directly by the Company and through various distribution channels. During 1997, the 12b-1 plans for 15 of the open-end Mutual Funds were restructured as compensation plans with annual fees set at 25 basis points of average assets under management. Previously, these plans reimbursed the Company for actual distribution expenses incurred, up to 25 basis points of average assets under management.
Compensation costs include variable and fixed compensation and related expenses paid to the officers, portfolio managers, sales, trading, research and all other staff members of the Company.
Other operating expenses include product distribution and promotion costs, clearing charges and fees for the Company's brokerage operation, rental of office space and electronic data equipment and services, insurance, client servicing and other general and administrative operating costs.
Interest and dividend income, interest expense and net gain (loss) from investments (which includes both realized and unrealized gains) is derived from proprietary investments of the Company's capital in various public and private investments. Prior to the date of the Reorganization, net gain (loss) from investments was derived primarily from the assets that were distributed to GFI and also included the results of GFI's hedging activities. As part of an overall hedge of the risks associated with GFI's proprietary investment portfolio, GFI entered into transactions in domestic equity index contracts. These financial instruments represented future commitments to sell an underlying index for specified amounts at specified future dates. In connection with the Formation Transactions, the Company distributed most of the proprietary investment portfolio (which included the hedging activities) to GFI.
As a result of the Offering, the Company became taxable as a "C" corporation for Federal and state income tax purposes and will pay taxes at an effective rate considerably higher than when Gabelli Asset Management Inc. and certain of its subsidiaries were treated as Subchapter "S" corporations.
Minority interest represents the share of net income attributable to the minority stockholders, as reported on a separate company basis, of the Company's consolidated majority-owned subsidiaries.
Operating Results for the Year Ended December 31, 2000 as Compared to the Year Ended December 31, 1999
Total revenues for the year ended December 31, 2000 were $233.9 million, an increase of $57.7 million, or 33%, compared to $176.3 million for the year ended December 31, 1999. Investment advisory and incentive fees, comprising 81% of total revenues, increased $42.8 million, or 29%, to $190.2 million, as the Company experienced strong growth in the level of average assets under management in each of its Mutual Funds, Separate Accounts and Alternative Investments businesses. Average total assets under management, which is the basis for investment advisory and incentive fees, were $23.1 billion in 2000, an increase of $4.6 billion, or 25%, compared to average assets under management of $18.5 billion in 1999. Total assets under management at December 31, 2000 were $23.6 billion, an increase of $1.6 billion or 7% from assets under management of $21.9 billion at December 31, 1999. Assets under management in Mutual Funds were $12.1 billion at December 31, 2000, an increase of approximately $0.5 billion, or 4%, from December 31, 1999. This increase represents approximately $1.7 billion in net cash inflows and $0.1 billion in assets acquired, offset by $1.3 billion in market-related depreciation. Assets under management in Separate Accounts were $11.0 billion at December 31, 2000, an increase of $0.9 billion or 9% from $10.1 billion at December 31, 1999. This increase represents approximately $1.0 billion in net cash inflows offset by $0.1 billion in market-related depreciation.
Commission revenues in 2000 were $16.8 million, an increase of $4.9 million, or 42%, from commission revenues of $11.9 million in 1999. The increase resulted from increased agency trading activity for accounts managed by affiliated companies. Commission revenues derived from transactions on behalf of the Mutual Funds and Separate Accounts clients totaled $14.5 million, or approximately 87% of total commission revenues in 2000.
Distribution fees and other income increased more than 58% to $26.9 million in 2000 from $17.0 million in 1999. Increased 12b-1 fees, resulting from the 41% growth in assets under management in our open end equity mutual funds, to $22.9 million, and a $3.1 million investment banking fee were the principal components for this increase.
Total expenses were $145.0 million in 2000, an increase of $34.1 million, or 31%, from $110.9 million, excluding a $50.7 million non-recurring charge, in 1999. Operating income as a percentage of total revenues rose to 38% in 2000 from 37% in 1999. Compensation costs, which are largely variable in nature and increase or decrease as revenues grow or decline, increased approximately $25.2 million, or 35%, to $97.1 million in 2000 from $71.9 million in 1999. Management fee expense, which is totally variable and increases or decreases as pre-tax profits grow or decline, was $11.3 million in 2000, an increase of $1.1 million, or 11%, from $10.2 million for the year ended December 31, 1999. Other operating expenses, which include marketing, promotion and distribution costs as well as general operating expenses were $36.7 million in 2000, an increase of approximately $7.8 million, or 27%, from $28.9 million in 1999. Mutual fund administration and distribution expenses and brokerage clearing charges accounted for more than $6.4 million, or 82%, of this increase.
Net gain from investments, which is derived from the Company's proprietary investment portfolio, was approximately $6.7 million for the year ended December 31, 2000 compared to a net gain of $14.3 million for 1999. Included in the net gain for 1999 was $2.3 million which was derived from the proprietary portfolio distributed to GFI as part of the Reorganization. Interest and dividend income was $9.7 million in 2000 compared to $6.9 million in 1999. Interest expense rose $0.3 million to $3.7 million in 2000, from $3.4 million in 1999.
Income taxes increased to $40.3 million, an effective tax rate of 39.6%, in 2000 from $10.5 million and an effective tax rate of 32.4% for 1999. This increase is principally due to the 1999 conversion of the Company from an "S" Corporation to a "C"
Corporation for Federal and state income tax purposes. Income taxes for 1999 is net of the $19.8 million deferred tax benefit resulting from the $50.7 million non recurring charge.
Minority interest expense increased to $3.4 million in 2000 from $3.3 million in 1999. This increase is reflective of additional income attributable to the minority interests of the Company's majority controlled subsidiaries, GSI, Fixed Income and Advisers.
Operating Results for the Year Ended December 31, 1999 as Compared to the Year Ended December 31, 1998
Total revenues for the year ended December 31, 1999 were $176.3 million, an increase of $38.1 million, or 28%, compared to $138.2 million for the year ended December 31, 1998. Investment advisory and incentive fees, comprising 84% of total revenues, increased $31.1 million, or 27%, to $147.4 million, as the Company experienced strong growth in the level of average assets under management in both its Mutual Funds and Separate Accounts businesses. Total average assets under management, which is the basis for investment advisory and incentive fees, were $18.5 billion in 1999, an increase of $3.7 billion, or 25%, compared to average assets under management of $14.8 billion in 1998. Total assets under management at December 31, 1999 were $21.9 billion, an increase of $5.6 billion or 35% from assets under management of $16.3 billion at December 31, 1998. Assets under management in Mutual Funds were $11.6 billion at December 31, 1999, an increase of approximately $3.4 billion, or 42%, from December 31, 1998. This increase represents approximately $1.0 billion in net cash inflows, $2.3 billion from market-related appreciation, and $0.1 billion in assets acquired. Assets under management in Separate Accounts were $10.1 billion at December 31, 1999, an increase of $2.1 billion or 26% from $8.0 billion at December 31, 1998. This increase represents approximately $0.1 billion in net cash inflows and $2.0 billion from market related appreciation.
Commission revenues in 1999 were $11.9 million, an increase of $3.2 million, or 37%, from commission revenues of $8.7 million in 1998. The increase resulted from increased agency trading activity for accounts managed by affiliated companies. Commission revenues derived from transactions on behalf of the Mutual Funds and Separate Accounts clients totaled $9.4 million, or approximately 80% of total commission revenues in 1999.
Distribution fees and other income increased more than 29% to $17.0 million in 1999 from $13.2 million in 1998. Increased 12b-1 fees, resulting from the growth in assets under management in our open end equity mutual funds, of $4.2 million were partially offset by lower revenues from syndicate activities and other income.
Total expenses, excluding a $50.7 million non-recurring charge, were $110.9 million in 1999, an increase of $17.8 million, or 19%, from $93.2 million in 1998. Operating income as a percentage of total revenues, excluding the non recurring charge, rose to 37% in 1999 from 33% in the prior year largely resulting from the reduction in the management fee rate and the benefit from spreading fixed costs over a larger revenue base. Compensation costs rose approximately $15.8 million, or 28%, to $71.9 million in 1999 from $56.0 million in 1998. Management fee expense was $10.2 million in 1999, a decline of $2.0 million, or 17%, from $12.2 million for the year ended December 31, 1998 as the result of the reduced management fee rate effective at the close of the Offering. Other operating expenses were $28.9 million in 1999, an increase of approximately $4.0 million, or 16%, from $24.9 million in 1998. Mutual fund administration and distribution expenses accounted for more than $3.1 million, or 78%, of this increase.
The Company recorded a $50.7 million non recurring charge in the first quarter of 1999 resulting from a note payable to the Company's Chairman under the terms of an Employment Agreement executed in conjunction with the Reorganization.
Net gain from investments, which is derived from the Company's proprietary investment portfolio, was approximately $14.3 million for the year ended December 31, 1999 compared to a net gain of $16.5 million for 1998, which included a net gain of approximately $17.6 million from the sale of certain Personal Communications Services ("PCS") licenses. Interest and dividend income was $6.9 million in 1999 compared to $5.1 million in 1998. In connection with the Reorganization, GFI retained most of the proprietary investment portfolio (which included the remaining PCS licenses and hedging activities). Interest expense rose $1.2 million to $3.4 million in 1999, from $2.2 million in 1998 principally from the increase in notes payable resulting as part of the Reorganization.
Income taxes increased to $10.5 million for 1999 from $5.5 million for 1998, principally due to the conversion of the Company from an "S" Corporation to a "C" Corporation for Federal and state income tax purposes and is net of the $19.8 million deferred tax benefit resulting from the $50.7 million non recurring charge.
Minority interest expense increased to $3.3 million in 1999 from $1.7 million in 1998. This increase is reflective of additional income attributable to the minority interests of the Company's majority controlled subsidiaries, GSI, Fixed Income and Advisers.
Liquidity and Capital Resources
The Company's principal assets consist of cash, short-term investments, securities held for investment purposes and investments in partnerships in which the Company is either a general or limited partner. Short-term investments are comprised primarily of United States treasury securities with maturities of less than one year and money market funds managed by the Company. Although investments in investment partnerships are for the most part illiquid, the underlying investments of such partnerships are for the most part liquid and the valuations of the investment partnerships reflect that underlying liquidity.
Cash and liquidity requirements have historically been met through operating activities and the Company's borrowing capacity. At December 31, 2000, the Company had cash and cash equivalents of $69.3 million, a decrease of $33.8 million from the prior year-end.
Cash used in operating activities of $1.9 million in 2000 results primarily from $64.7 million used for net purchases of equity securities and U.S. government obligations which, due to their maturities, are not classified as cash equivalents, partially offset by cash provided by net income of $58.0 million. Cash used in operating activities in 1999 of $13.5 million resulted principally from $63.4 million in net purchases of securities, which was partially offset by net income of $49.4 million before a non cash charge, net of tax benefit, of $30.9 million related to a note payable to the Company's Chairman.
Cash used in investing activities of $28.1 million in 2000 is primarily due to investments in partnerships and affiliates of $32.5 million. Cash provided by investing activities of $4.1 million in 1999 resulted principally from partnership distributions.
Cash used in financing activities of $3.8 million in 2000 was largely due to the purchase of additional treasury stock during the year. Cash provided by financing activities in 1999 of $62.2 million largely resulted from the receipt of the net proceeds from the Offering of $96 million partially offset by distributions to GFI, of $18.2 million, and to shareholders, of $10.0 million, prior to the date of the Reorganization. Proceeds from the Offering are being used for general corporate purposes and to initiate strategic growth plans, which call for expanding product offerings, enhancing distribution and marketing of existing investment products and pursuing strategic acquisitions and alliances. At present, the Company has no plans, arrangements or understandings relating to any specific acquisitions or alliances, and does not intend to use any of the net proceeds from the Offering to pay debt service on the $50 million payable to the Chairman under the terms of his Employment Agreement.
Gabelli & Company is registered with the Commission as a broker-dealer and is a member of the NASD. As such, it is subject to the minimum net capital requirements promulgated by the Commission. Gabelli & Company's net capital has historically exceeded these minimum requirements. Gabelli & Company computes its net capital under the alternative method permitted by the Commission, which requires minimum net capital of $250,000. As of December 31, 1999 and 2000, Gabelli & Company had net capital, as defined, of approximately $10.1 million and $16.0 million, respectively, exceeding the regulatory requirement by approximately $9.9 million and $15.8 million, respectively. 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 investment and trading activities. At December 31, 2000, the Company's primary market risk exposure was for changes in equity prices and interest rates. At December 31, 1999 and 2000, the Company had equity investments, including mutual funds largely invested in equity products, of $45.6 million and $57.3 million, respectively. Investments in mutual funds, $31.2 million and $32.2 million at December 31, 1999 and 2000, respectively, generally lower market risk through the diversification of financial instruments within their portfolios. 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.
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 of these assets, which are largely readily marketable equity securities. Investment advisory fees for mutual funds are based on average daily or weekly asset values. 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 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.
Recent Accounting Developments
In 1998, the Financial Accounting Standards Board issued SFAS No. 133 ("Accounting for Derivative Instruments and Hedging Activities"). SFAS No. 133, as amended, establishes standards for recognizing and fair valuing derivative financial instruments. SFAS No. 133 is required to be adopted for fiscal years beginning after January 1, 2001. The Company does not expect the implementation of this statement to have any significant effect on the Company's reported financial position or results of operations.
Seasonality and Inflation
The Company does not believe its operations are subject to significant seasonal fluctuations. The Company does not believe inflation will significantly affect its compensation costs as they are substantially variable in nature. However, the rate of inflation may affect Company expenses such as information technology and occupancy costs. To the extent inflation results in rising interest rates and has other effects upon the securities markets, it may adversely affect the Company's financial position and results of operations by reducing the Company's assets under management, revenues or otherwise.
Item 7A:
Item 7A: Quantitative and Qualitative Disclosures About Market Risk
Reference is made to the information contained under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Market Risk."
Item 8:
Item 8: Financial Statements and Supplementary Data
Reference is made to the Index on page of the Consolidated Financial Statements of the Company and the Notes thereto contained herein.
Item 8: Financial Statements and Supplementary Data
GABELLI ASSET MANANAGEMENT INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
--------
All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission that are not required under the related instructions or are inapplicable have been omitted.
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders Gabelli Asset Management Inc. and Subsidiaries
We have audited the accompanying consolidated statements of financial condition of Gabelli Asset Management Inc. and Subsidiaries as of December 31, 1999 and 2000 and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Gabelli Asset Management Inc. and Subsidiaries at December 31, 1999 and 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States.
ERNST & YOUNG LLP
New York, New York February 28, 2001
GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
See accompanying notes.
GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
See accompanying notes.
GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years ended December 31, 1998, 1999 and 2000 (in thousands)
See accompanying notes.
GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes
GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000
A. Significant Accounting Policies
Basis of Presentation
Gabelli Asset Management Inc. ("GAMI" or the "Company" and where the context requires, the "Company" includes its predecessors and its consolidated subsidiaries) was incorporated in April 1998 in the state of New York, with no significant assets or liabilities and did not engage in any substantial business activities prior to the initial public offering ("Offering") of 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, with Gabelli Funds, Inc. ("GFI") and two of its subsidiaries in consideration for substantially all of the operating assets and liabilities of GFI, relating to its institutional and retail asset management, mutual fund advisory, underwriting and brokerage business (the "Reorganization"). GAMI distributed net assets and liabilities, principally a proprietary investment portfolio, of approximately $165 million, including cash of $18 million, which has been recorded for accounting purposes as a deemed distribution to GFI. GFI was later renamed Gabelli Group Capital Partners, Inc. ("GGCP").
On February 17, 1999, the Company completed its sale of 6 million shares of Class A Common Stock in the Offering and received proceeds, after fees and expenses, of approximately $96 million. Immediately after the Offering GFI owned 80% of the outstanding common stock of the Company. In addition, with the completion of the Offering, the Company became a "C" Corporation for Federal and state income tax purposes and is subject to substantially higher income tax rates.
The accompanying consolidated financial statements for periods prior to the date of the Reorganization include the assets, liabilities and earnings of GFI, its wholly-owned subsidiary GAMCO Investors, Inc. ("GAMCO"), and GFI's majority-owned subsidiaries consisting of Gabelli Securities, Inc. ("GSI"), Gabelli Fixed Income L.L.C. ("Fixed Income") and Gabelli Advisers Inc. ("Advisers"). After the Reorganization these financial statements include the accounts of Gabelli Funds, L.L.C., GAMCO and former GFI majority-owned subsidiaries GSI, Fixed Income and Advisers.
At December 31, 1998, 1999 and 2000, the Company owned approximately 77% of GSI and 41% of Advisers, which, combined with the voting interests of affiliated parties, represented voting control, and 80% of Fixed Income, which commenced operations on April 15, 1997. All significant intercompany transactions and balances have been eliminated.
Use of Estimates
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Nature of Operations
GAMCO, Gabelli Funds L.L.C., Fixed Income and Advisers are registered investment advisers under the Investment Advisers Act of 1940. Gabelli & Company, Inc. ("Gabelli & Company") and Lynch Capital Corp. ("Lynch Capital") are both wholly owned subsidiaries of GSI, are registered broker-dealers with the Securities and Exchange Commission ("SEC") and are members of the National Association of Securities Dealers, Inc. ("NASD"). Gabelli & Company and Lynch Capital both act as an introducing broker and all transactions for its customers are cleared through New York Stock Exchange member firms on a fully disclosed basis. Accordingly, open customer transactions are not reflected in the accompanying consolidated statements of financial condition. Both of these broker dealers are exposed to credit losses on these open positions in the event of nonperformance by their customers. This exposure is reduced by the clearing brokers' policy of obtaining and maintaining adequate collateral until the open transaction is completed.
Cash Equivalents
Cash equivalents consist of highly liquid investments with a maturity of three months or less at the time of purchase.
Securities Transactions
Investments in securities are accounted for as "trading securities" and are stated at quoted market values. Securities which are not readily marketable are stated at their estimated fair values as determined by the Company's management. The resulting unrealized
gains and losses are included in net gain (loss) from investments. Securities transactions and any related gains and losses are recorded on a trade date basis. Realized gains and losses from securities transactions are recorded on the identified cost basis. Commissions and related clearing charges are recorded on a trade date basis.
Securities sold, but not yet purchased are stated at quoted market values and represent obligations of the Company to purchase the securities at prevailing market prices. Therefore, the future satisfaction of such obligations may be for an amount greater or less than the amounts recorded on the consolidated statements of financial condition. The ultimate gains or losses recognized are dependent upon the prices at which these securities are purchased to settle the obligations under the sales commitments.
Investments in Partnerships and Affiliates
Investments in partnerships, whose underlying assets consist of marketable securities, and investments in affiliates are accounted for using the equity method, under which the Company's share of net earnings or losses of these partnerships and affiliated entities is reflected in income as earned and distributions received are reductions of the investments. Investments in partnerships for which market values are not readily available are stated at their estimated fair values as determined by the Company's management.
Receivables from and Payables to Brokers
Receivables from and payables to brokers consist of amounts arising from the purchases and sales of securities.
Investment Advisory Fees
Investment advisory fees are based on predetermined percentages of the market values of the portfolios under management and are recognized as revenues as the related services are performed.
Depreciation and Amortization
Fixed assets are recorded at cost and depreciated using the straight-line method over their estimated useful lives. Leasehold improvements are amortized using the straight-line method over their estimated useful lives or lease terms, whichever is shorter.
Intangible Assets
The cost in excess of net assets acquired is amortized on a straight-line basis over ten years. The carrying value of cost in excess of net assets acquired is reviewed for impairment whenever events or changes in circumstances indicate that it may not be recoverable based upon expectations of operating income and non-discounted cash flows over its remaining life. Accumulated amortization at December 31, 1999 and 2000 was approximately $578,000 and $791,000, respectively.
Income Taxes
The Company accounts for income taxes under the liability method prescribed by Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." Deferred tax assets and liabilities are recognized for the future tax consequences attributable to the differences between the financial statement carrying amount of existing assets and liabilities and their respective tax basis. Future tax benefits are recognized only to the extent that realization of such benefits is more likely than not.
Minority Interest
Minority interest represents the minority stockholders' ownership of Fixed Income, GSI and Advisers. With the exception of GSI, these minority stockholders are principally employees, officers and directors of the Company.
Fair Values of Financial Instruments
The carrying amount of all assets and liabilities, other than goodwill and fixed assets, in the consolidated statements of financial condition approximate their fair values.
Earnings Per Share
The Company has not presented historical net income per share for 1998 due to the significant changes in its operations which are not reflected in those historical financial statements. For the years ended December 31, 1999 and 2000 net income per share is computed in accordance with SFAS No. 128, "Earnings Per Share". Basic net income per common share is calculated by dividing net income applicable to common stockholders by the weighted average number of shares of common stock outstanding.
Diluted net income per share is computed using the treasury stock method. Diluted net income per share assumes full dilution and is computed by dividing net income by the total of the weighted average number of shares of common stock outstanding and common stock equivalents.
Business Segments
The Company operates predominantly in one business segment, the investment advisory and asset management industry.
Distribution Costs
The Company incurs certain promotion and distribution costs, which are expensed as incurred, related to the sale of shares of mutual funds advised by the Company (the "Funds").
Comprehensive Income
The Company has not presented a consolidated statement of comprehensive income in accordance with SFAS No. 130, "Reporting Comprehensive Income," because it does not have any items of "other comprehensive income".
Reclassifications
Certain items previously reported have been reclassified to conform with the current year's financial statement presentation.
B. Investments in Securities
Investments in securities at December 31, 1999 and 2000 consist of the following:
C. Investments in Partnerships and Affiliates
The Company is a co-General Partner of various limited partnerships whose underlying assets consist primarily of marketable securities. As co-General Partner, the Company is contingently liable for all of the partnerships' liabilities. Summary financial information, including the Company's carrying value and income from these partnerships at December 31, 1999 and 2000 and for the years then ended, is as follows (in thousands):
Income from the above partnerships for the year ended December 31, 1998 was approximately $2,162,000.
The Company's income from these partnerships consists of its pro rata capital allocation and its share of a 20% incentive allocation from the limited partners. The general partners also receive an annual administrative fee based on a percentage of each partnership's net assets. For the years ended December 31, 1998, 1999 and 2000, the Company earned administrative fees of approximately $1,177,000, $1,328,000, and $1,745,000, respectively.
At December 31, 1999 and 2000, the Company had various limited partner interests in unaffiliated limited partnerships aggregating approximately $1,141,000 and $1,077,000, respectively. For the years ended December 31, 1998, 1999 and 2000, the net gains (losses) recorded by the Company in these investments approximated ($659,000), ($8,000), and $137,000, respectively.
D. Notes Receivable
The Company had approximately $2,913,000 and $2,855,000 in various notes and interest receivable outstanding at December 31, 1999 and 2000, respectively, from certain executive officers and employees in connection with the acquisition of ownership interests in various subsidiaries and affiliates of the Company. Interest rates on these notes range from 5% to 10%.
E. Income Taxes
The Company and its two less than 80% owned subsidiaries, GSI and Advisers, each file separate income tax returns. Accordingly, the income tax provision represents the aggregate of the amounts provided for all companies.
Prior to the Offering, the Company elected to be taxed as a Subchapter S Corporation for Federal and state income tax purposes. Pursuant to this election earnings were subject to tax at the stockholder level rather than the corporate level. Therefore, no provision was made for Federal income tax on earnings generated by the Company in the consolidated financial statements prior to the Offering. In conjunction with the Offering the S Corporation status was terminated after February 17, 1999 and the Company became subject to a substantially higher Federal and state income tax rate. The Federal and state income tax provisions for periods prior to the Offering are substantially those of GSI.
The provision (benefit) for income taxes for the years ended December 31, 1998, 1999 and 2000 consisted of the following:
The Company's effective tax rate for each of the years ended December 31, 1998, 1999 and 2000 was 8.5%, 32.4% and 39.6%, respectively.
A reconciliation of the Federal statutory income tax rate to the actual effective rate reflected on the historical consolidated financial statements for the years ended December 31, 1999 and 2000 is as follows:
Significant components of the Company's deferred tax assets and liabilities were as follows:
SFAS No. 109 requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax asset may not be realized. Since the Company has a history of generating pre-tax earnings and is expected to generate pre-tax earnings in future years sufficient to realize the full benefit of the deferred tax asset, no valuation allowance has been recorded.
F. Notes Payable
In conjunction with the Reorganization, the Company entered into an Employment Agreement with its Chairman and Chief Executive Officer ("Chairman") which, in part, provides the Chairman will be paid $50 million on January 2, 2002. Interest is payable quarterly at an annual rate of 6% from the date of the Agreement. This payment, plus related costs and net of a related deferred tax benefit of $19.8 million, has been reflected as a one time charge to earnings in the first quarter of 1999 and the liability has been recorded as a note payable. Interest expense recorded on this note for the years ended December 31, 1999 and 2000 was $2,653,000 and $3,000,000, respectively.
In connection with the restructuring of GAMCO's ownership, GAMCO issued a note payable in 1997 of approximately $976,000 to an employee and director of the Company and GAMCO, respectively, in consideration for repurchase of GAMCO common stock. The note was transferred to GGCP as part of the Reorganization in February 1999. Interest expense on this note amounted to approximately $117,000 and $13,000 for the years ended December 31, 1998 and 1999, respectively.
G. Stockholders' Equity
Stock Award and Incentive Plan
On February 5, 1999, the Board of Directors adopted the 1999 Gabelli Asset Management Inc. Stock Award and Incentive Plan (the "Plan"), designed to provide incentives which will attract and retain individuals key to the success of the Company through director indirect ownership of the Company's common stock. Benefits under the Plan may be granted in any one or a combination of stock options, stock appreciation rights, restricted stock, restricted stock units, stock awards, dividend equivalents and other stock or cash based awards. A maximum of 1,500,000 shares Class A Common Stock have been reserved for issuance by a committee of the Board of Directors charged with administering the Plan. Under the Plan, the committee may grant either incentive or nonqualified stock options with a term not to exceed ten years from the grant date and at an exercise price that the committee may determine. Options granted under the Plan vest 75% after three years and 100% after four years from the date of grant and expire after ten years.
A summary of the stock option activity for the years ended December 31, 1999 and 2000 is as follows:
None of the options granted were exercisable at December 31, 1999 or December 31, 2000.
The Company has elected to account for stock options under the intrinsic value method. Under the intrinsic value method, compensation expense is recognized only if the exercise price of the employee stock option is less than the market price of the underlying stock on the date of grant.
The weighted average estimated fair value of the options granted at their grant date using the Black-Scholes option-pricing model was as follows:
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its stock option plan. Accordingly, no compensation expense is recognized where the exercise price equals or exceeds the market price of the underlying stock on the date of the grant. If the Company had elected to account for its stock options under the fair value method of SFAS No. 123 "Accounting for Stock Based Compensation," the Company's net income and net income per share would have been reduced to the pro forma amounts indicated below:
Stock Repurchase Program
During 1999 the Board of Directors authorized the repurchase, at management's discretion, of up to $6 million of its 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 million of shares in open market transactions. Under the program the Company has repurchased 480,900 shares of common stock through December 31, 2000 at an aggregate cost of $8.0 million.
Certain shareholders of GSI are required to sell, upon disassociation with the Company, their shares to GSI at book value or a price established by management (approximately $6.0 million at December 31, 2000).
H. Capital Lease
The Company leases office space from a company owned by stockholders of GFI. The Company has recorded a capital lease asset and liability for the fair value of the leased property. Amortization of the capital lease is computed on the straight-line method over the term of the lease, which expires on April 30, 2013. The lease provides that all operating expenses relating to the property (such as property taxes, utilities and maintenance) are to be paid by the lessee, the Company.
Future minimum lease payments for this capitalized lease at December 31, 2000 are as follows:
(In thousands) 2001................................. $ 720 2002................................. 720 2003................................. 756 2004................................. 765 2005................................. 765 Thereafter........................... 5,610 ------- Total minimum obligations............ 9,336 Interest............................. 3,119 ------- Present value of net obligations..... $6,217 =======
Lease payments under this agreement amounted to approximately $720,000 for each of the years ended December 31, 1999 and 2000, respectively. Future minimum lease payments have not been reduced by related minimum future sublease rentals of approximately $391,000, of which approximately $173,000 is due from an affiliated entity. Total minimum obligations exclude the operating expenses to be borne by the Company, which are estimated to be approximately $600,000 per year.
I. Commitments
The Company rents office space under leases which expire at various dates through January 2006. Future minimum lease commitments under these operating leases as of December 31, 2000 are as follows:
(In thousands) 2001........... $ 787 2002........... 253 2003........... 209 2004........... 133 2005........... 24 Thereafter.... 2 ------- $ 1,408 =======
Equipment rentals and occupancy expense amounted to approximately $1,502,000, $1,724,000 and $2,156,000 respectively, for the years ended December 31, 1998, 1999 and 2000.
J. Related Party Transactions
The Company serves as the investment adviser for the Funds and earns advisory fees based on predetermined percentages of the average net assets of the Funds. In addition, Gabelli & Company has entered into distribution agreements with each of the Funds. As principal distributor, Gabelli & Company incurs certain promotional and distribution costs related to the sale of Fund shares, for which it receives a fee from the Funds or reimbursement from the Adviser. Gabelli & Company earns a majority of its commission revenue from transactions executed on behalf of clients of affiliated companies.
The Company had an aggregate investment in the Funds of approximately $136,938,000 and $101,108,000 at December 31, 1999 and 2000, respectively, of which approximately $103,032,000 and $68,828,000 is invested in a money market mutual fund at December 31, 1999 and 2000, respectively.
Prior to the Reorganization, the Company was required to pay the Chairman a management fee, which was equal to 20% of the pretax profits of each of the Company's operating divisions before consideration of this management fee. Immediately preceding the Offering and in conjunction with the Reorganization, the Company and its Chairman entered into an Employment Agreement. The Employment Agreement provides that the Company will pay the Chairman 10% of the Company's aggregate pre-tax profits while he is an executive of the Company and devoting the substantial majority of his working time to the business of the Company. The Employment Agreement further provides that the Company will pay the Chairman $50 million on January 2, 2002, which amount has been included in notes payable (see Note F). The management fee was approximately $12,246,000, $10,153,000, and $11,296,000 for the years ended December 31, 1998, 1999 and 2000, respectively. The Chairman also received portfolio management compensation and account executive fees of approximately $30,105,000, $31,645,000, and $34,203,000, respectively, for the years ended December 31, 1998, 1999 and 2000, which have been included in compensation costs.
K. Financial Requirements
The Company is required to maintain minimum capital levels with affiliated partnerships. At December 31, 2000, the minimum capital requirements approximated $1,562,000.
As a registered broker-dealer, Gabelli & Company is subject to Uniform Net Capital Rule 15c3-1 (the "Rule") of the Securities and Exchange Commission. Gabelli & Company computes its net capital under the alternative method permitted by the Rule which requires minimum net capital of $250,000. At December 31, 2000, Gabelli & Company had net capital in excess of the minimum requirement of approximately $15,761,812.
L. Administration Fees
The Company has entered into administration agreements with other companies (the "Administrators"), whereby the Administrators provide certain services on behalf of several of the Funds. Such services do not include the investment advisory and portfoliomanagement services provided by the Company. The fees are negotiated based on predetermined percentages of the net assets of each of the Funds.
M. Profit Sharing Plan and Incentive Savings Plan
The Company has a qualified contributory employee profit sharing plan and incentive savings plan covering substantially all employees. Company contributions to the plans are determined annually by the Board of Directors but may not exceed the amount permitted as a deductible expense under the Internal Revenue Code. The Company accrued contributions of approximately $50,000, $60,000 and $80,000, to the plans for the years ended December 31, 1998, 1999 and 2000, respectively.
N. Derivative Financial Instruments
Prior to the Reorganization, the Company's trading activities included transactions in domestic equity index futures contracts. These financial instruments represent future commitments to purchase or sell an underlying index for specified amounts at specified future dates. Such contracts create off-balance sheet risk for the Company as the future satisfaction of these contracts may be for amounts in excess of the amounts recognized in the consolidated statements of financial condition.
In connection with this futures activity, the Company incurred losses of approximately $4,749,000, during the year ended December 31, 1998 and a gain of $542,000 in 1999. There were no gains or losses for the year ended December 31, 2000. Such gains and losses were reflected as part of net gain (loss) from investments in the consolidated statements of income.
O. PCS Licenses
The Company, through Rivgam Communicators, LLC purchased Personal Communications Service ("PCS") licenses auctioned by the Federal Communications Commission ("FCC") in 1997. During 1998, the Company sold certain of its PCS licenses with a cost basis of $51,551,000. The Company recorded a pre-tax gain of approximately $17,614,000, net of investment banking, management and other related fees of approximately $10,835,000 paid principally to related parties, of which $4,196,000 was paid to the Company's Chairman.
In conjunction with the Reorganization the remaining licenses were included as part of the net assets and liabilities distributed to GFI.
P. Quarterly Financial Information (Unaudited)
Quarterly financial information for the years ended December 31, 1999 and 2000 is presented below. The financial information for the first quarter of 1999 has been presented on a pro forma basis. Historical information, except for revenues, for the first quarter of 1999 is not presented due to the significant changes in the Company's operations which are not reflected in the historical consolidated financial statements (See Note A).
Pro forma financial information reflects the results of operations as if all of the following were in effect at January 1, 1999: the Formation Transactions and resulting impact on income and expense items; the $50 million note payable; the reduction in management fee from 20% to 10% and the conversion from a Subchapter S Corporation to a "C" Corporation for tax purposes.
Operating income, net income and net income per share for the first quarter 1999 exclude a non-recurring charge related to the note payable ($30.9 million, net of tax benefit of $19.8 million, or $1.03 per share). Including this non-recurring charge the Company had an operating loss, net loss and net loss per share of $35.9 million, $21.6 million and $0.72, respectively, for the first quarter of 1999.
Q. Subsequent Events
On February 20, 2001 the Company's Board of Directors approved the fourth option grant under the Stock Award and Incentive Plan for 172,500 shares at an exercise price, equal to the market price on that date, of $31.62 per share.
Subsequent to year end the Company repurchased an additional 30,000 shares of its Class A Common Stock at an aggregate cost of $0.9 million and substantially completed its $9 million stock repurchase program. The Board of Directors then authorized the repurchase of up to an additional $3 million of these shares under this program at the discretion of management.
GABELLI ASSET MANAGEMENT INC. AND SUBSIDIARIES UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME December 31, 1999
The following unaudited pro forma consolidated financial information gives 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% pursuant to the Employment Agreement; and the conversion from an "S" corporation to a "C" corporation.
The unaudited pro forma consolidated financial information does not purport to represent the results of operations or the financial position of the Company which actually would have occurred had the Reorganization and Formation Transactions been previously consummated or project the results of operations or the financial position of the Company for any future date or period. The unaudited pro forma information does not give effect to the use of proceeds received from the Offering for the period prior to the Offering.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME YEAR ENDED DECEMBER 31, 1999
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(a) To adjust the management fee to reflect the Employment Agreement, which provides for a reduction in the fee from 20% to 10% of pre-tax profits.
(b) To reflect the reallocation of expenses to the new parent company.
(c) To reflect the effect on income and expenses related to the distribution of assets and liabilities which occurred on February 9, 1999.
(d) To reflect interest expense on the $50 million note payable to the Chairman and Chief Executive Officer.
(e) To record additional taxes related to conversion from an "S" corporation to a "C" corporation and other pro forma adjustments.
Item 9:
Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable. PART III
Item 10:
Item 10: Directors and Executive Officers of the Registrant
Information regarding the Directors and Executive Officers of the Company and compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated herein by reference from the sections captioned "Election of Directors" "Information Regarding Executive Officers" and "Security Ownership of Certain Beneficial Owners and Management - Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's definitive proxy statement for its 2001 Annual Meeting of Shareholders (the "Proxy Statement").
Item 11:
Item 11: Executive Compensation
The information set forth under the captions "Compensation of Executive Officers" and "Election of Directors - Compensation of Directors" in the Proxy Statement is incorporated herein by reference.
Item 12:
Item 12: Security Ownership of Certain Beneficial Owners and Management
The information set forth under the caption "Certain Ownership of Gabelli's Stock" in the Proxy Statement is incorporated herein by reference.
Item 13:
Item 13: Certain Relationships and Related Transactions
The information set forth under the caption "Certain Relationships and Related Transactions" in the Proxy Statement is incorporated herein by reference.
PART IV
Item 14:
Item 14: Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) List of documents filed as part of this Report:
(1) Consolidated Financial Statements and Independent Auditors' Report included herein:
See Index on page
(2) Financial Statement Schedules:
Financial statement schedules are omitted as not required or not applicable or because the information is included in the Financial Statements or notes thereto.
(3) List of Exhibits:
Exhibit Number Description of Exhibit
3.1 -- Restated Certificate of Incorporation of the Company. (Incorporated by reference to Exhibit 3.2 to Amendment No. 4 to the Company's Registration Statement on Form S-1 (File No. 333-51023) filed with the Securities and Exchange Commission on February 10, 1999).
3.2 -- Amended Bylaws of the Company. (Incorporated by reference to Exhibit 3.4 to Amendment No. 4 to the Company's Registration Statement on Form S-1 (File No. 333-51023) filed with the Securities and Exchange Commission on February 10, 1999).
4.1 -- Specimen of Class A Common Stock Certificate. (Incorporated by reference to Exhibit 4.1 to Amendment No. 3 to the Company's Registration Statement on Form S-1 (File No. 333-51023) filed with the Securities and Exchange Commission on January 29, 1999).
10.1 -- Management Services Agreement between the Company and GFI dated as of February 9, 1999. (Incorporated by reference to Exhibit 10.1 to Amendment No. 4 to the Company's Registration Statement on Form S-1 (File No. 333-51023)filed with the Securities and Exchange Commission on February 10, 1999).
10.2 -- Tax Indemnification Agreement between the Company and GFI.
10.3 -- Lock-Up Agreement between the Company and GFI.
10.4 -- Gabelli Asset Management Inc. 1999 Stock Award and Incentive Plan.
10.5 -- Gabelli Asset Management Inc. 1999 Annual Performance Incentive Plan.
10.6 -- Employment Agreement between the Company and Mario J. Gabelli. (Incorporated by reference to Exhibit 10.6 to Amendment No. 4 to the Company's Registration Statement on Form S-1 (File No. 333-51023) filed with the Securities and Exchange Commission on February 10, 1999).
21.1 -- Subsidiaries of the Company. (Incorporated by reference to Exhibit 21.1 to Amendment No. 4 to the Company's Registration Statement on Form S-1 (File No. 333-51023) filed with the Securities and Exchange Commission on February 10, 1999).
24.1 -- Powers of Attorney (included on page II-3 of this Report).
*27.1 -- Financial Data Schedule. - ------------------ * Filed herewith.
(b) Reports on Form 8-K:
Gabelli Asset Management Inc. filed no reports on Form 8-K during the fiscal year ended December 31, 2000.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Rye, State of New York, on March 29, 2001.
GABELLI ASSET MANAGEMENT INC.
By:/s/ Robert S. Zuccaro ----------------- Name: Robert S. Zuccaro Title: Vice President and Chief Financial Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints Robert S. Zuccaro and James E. McKee and each of them, his true and lawful attorney-in-fact and agent with full power of substitution and resubstitution, for him in his name, place and stead, in any and all capacities, to sign any and all amendments to this report and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, and hereby grants to such attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent or his substitute or substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated.