Report To Shareholders
To Our Shareholders:
Gabelli Asset Management, Inc. (NYSE: GBL) reported revenues of $57.2 million for the third quarter ended September 30, 2004, up 10.4% from the $51.8 million generated in the comparable year earlier period. Operating income increased 13.1% to $22.0 million from $19.4 million reported in last year’s third quarter, principally due to higher revenues and lower variable expenses as a percent of revenues. Our operating margin rose to 38.4% in the 2004 quarter versus 37.4% in the prior year’s quarter. Net income for the quarter was $13.0 million or $0.43 per diluted share versus $12.3 million or $0.41 per diluted share in the prior year’s quarter. Our earnings per share, despite improved operating results, were impacted by lower other income causing a negative swing of $1.7 million on a pre-tax basis (approximately $0.03 per diluted share).
Financial Results
Assets under management (AUM) were $27.2 billion on September 30, 2004, up 17.4% from third quarter end 2003 assets, but below the record $28.2 billion in AUM on June 30, 2004. Average AUM were $27.2 billion in the quarter, up 22.8% from average total assets of $22.2 billion in the third quarter of 2003. Average total AUM were $27.8 billion in the first nine months, up 29.9% from average total assets of $21.4 billion in the prior year period.
GAMCO, the institutional and high net worth segment of our business, had AUM of $13.2 billion on September 30, 2004, up 16.6% from the $11.3 billion on September 30, 2003 but 3.3% below the $13.6 billion on June 30, 2004. AUM in our equity mutual funds were $11.3 billion at quarter end, 24.6% ahead of the $9.0 billion at the end of the third quarter 2003 but 3.1% under the $11.6 billion on June 30, 2004. Fixed income assets totaled $1.87 billion on September 30, 2004, down 14.1% from the prior year’s quarter end assets of $2.17 billion and 2.6% lower than assets of $1.92 billion on June 30, 2004. Our alternative investment assets were $934 million, up 36.0% from third quarter end 2003 assets of $687 million but 12.0% below the record assets of $1.06 billion on June 30, 2004.
Investment advisory fees totaled $49.7 million during the third quarter 2004, an increase of 12.4% from the third quarter of 2003. For the first nine months of 2004, investment advisory fees were $154.9 million, up 24.5% from the prior year period. The growth in investment advisory fees was driven by higher assets under management in our institutional and high net worth separately managed equity accounts, open-end equity mutual funds and closed-end funds. Advisory fees from alternative investments had a clawback in incentive fees during the third quarter 2004 which led to a negative swing in revenues totaling $2 million or approximately $0.02 per share on a year-to-year basis.
Commission revenues for our institutional research affiliate, Gabelli & Company, Inc. were $3.0 million during the third quarter of 2004 down from $3.3 million in the prior year’s quarter but were up 32.8% to $11.3 million for the first nine months of 2004 as compared to $8.5 million in the 2003 period.
Variable compensation costs, as a percent of revenues, decreased to 30.0% in the third quarter 2004 versus 31.3% in the 2003 quarter and 29.6% versus 31.8% for the nine month period. This decrease is traceable to a shift in revenue mix from alternative investments to separately managed accounts and lower overall variable compensation costs related to separately managed accounts compared to the prior year’s periods. Other variable operating expenses, as a percent of revenues, fell to 10.7% in the 2004 quarter versus 11.7% in the third quarter of 2003 and to 10.9% for the first nine months of 2004 versus 11.8% in the comparable prior year period. Other variable operating expenses included distribution costs of $1.0 million in the third quarter 2004 and $3.3 million during the first nine months of 2004 which were due to the initial inclusion of our two new closed-end funds, The Gabelli Dividend & Income Trust (“GDV”) in November 2003 and The Gabelli Global Utility & Income Trust ("GLU") in May 2004.
Expenses not directly tied to revenues increased to $9.7 million in the third quarter 2004, up 22.5% from $7.9 million in the prior year’s quarter and up 18.1% to $28.4 million for the nine months of 2004 from $24.1 million in the comparable prior year period. The increases from the comparable periods include costs related to the expensing of stock options, higher insurance expenses, compliance with Sarbanes-Oxley as well as other regulatory and corporate governance initiatives.
For the third quarter, we experienced a loss of $1.4 million from our investments and net interest expense versus a net benefit of $0.3 million in the 2003 quarter. The net return from our corporate investment portfolio declined to $2.6 million in the 2004 third quarter from $4.5 million in the prior year’s quarter. For the first nine months of 2004, investment income totaled $8.5 million versus $12.3 million in the comparable 2003 period. The effective tax rate for the third quarter and nine months was 36.4% versus 37.6% in comparable periods in 2003, as we adjusted the tax rate in 2004 to reflect our estimate of the current year-end tax liability.
Investment and Business Highlights
Gabelli Asset Management, Inc. announced several organizational changes to strengthen and broaden our management team:
- Douglas R. Jamieson, a 23-year veteran executive with the firm, was named to the new position of President and Chief Operating Officer. In addition to continuing to head up the firm’s separate accounts business, he will now oversee all of the company's business units and work closely with its mutual funds, administration, operations and securities trading areas.
- Henry G. Van der Eb, CFA was named as Senior Vice President and will serve as a Senior Advisor to management in all aspects of the firm's business. Mr. Van der Eb has over 30 years of registered investment advisor industry experience and has a wide range of responsibilities across Gabelli's three major product groups (mutual funds, separate accounts, and alternative investments).
- Michael R. Anastasio, Jr., CPA, was named Chief Financial Officer. Mr. Anastasio has served as the Chief Accounting Officer since September 2003 and was previously the CFO of the Alternative Investment Group at Gabelli.
- Christopher C. Desmarais, Senior Vice President of GAMCO, has been named the company's Director of Institutional Marketing. Mr. Desmarais, has been the Director of GAMCO's Socially Responsive Investments (SRI) since March 2003 -- where assets have grown to over half a billion dollars. His responsibilities will include marketing the firm's separate account products directly to Consultants, Corporate Plan Sponsors, Taft Hartley Plans, Foundations and Endowments.
Financial Strength and Flexibility
We ended the quarter with roughly $701 million in cash, marketable securities and investments. This includes approximately $73 million of investments in GDV, GLU, Gabelli mutual funds and other investments classified as available for sale securities. Our debt of $282.3 million consists of a $100 million 5% convertible note, $100 million of 5.5% senior notes, and $82.3 million of mandatory convertible securities. Expressed another way, we had $14.18 per share of net cash, marketable securities and investments on September 30, 2004.
Shareholder Initiatives
In our first quarter report we shared with you that our firm is overcapitalized. We would like to return part of our earnings to shareholders in the absence of strategic transactions. The Board of Directors has authorized a special dividend of $1.00 per share to be paid November 30, 2004 to all shareholders of record on November 15, 2004. The Board also established and declared a quarterly dividend of $0.02 per share.
During the third quarter of 2004, we bought back 287,900 shares at an average investment of $40.46 per share. The Board of Directors authorized the repurchase of an additional $25 million of our Class Acommon stock during the third quarter and announced another increase to the buyback program of 1 million shares of Class A common stock during October 2004. This brings the total shares available to be repurchased under the program to approximately 1.5 million. During the quarter, we repurchased 22,500 shares of our mandatory convertible securities. On September 30, 2004 there were 3,292,300 shares of mandatory convertible securities outstanding and there remains $25 million authorized for repurchase under our program. The mandatory convertible securities will be remarketed to new holders in November 2004 and current mandatory convertible shareholders will convert their holdings to our Class A Common Stock in February 2005.
Outlook
The outcome of the U.S. presidential election is history and the re-election of President Bush resulted in an expected market rally. Stocks will now refocus on the fundamentals. We are back to basics. Corporate America will be operating with substantially less policy uncertainty for taxes, trade and regulatory reform. The President will move to make the 15% tax on dividends and long-term capital gains that expires in 2008 permanent, which will give investors confidence to extend their time horizon for holding stocks. We expect takeover activity to accelerate now that pre-election uncertainty over political policy on taxes, regulatory reform, and trade has diminished.
By the summer of 2005 the market will be looking at an improving backdrop in 2006 and the effect of the absence of fiscal and monetary stimulus will be discounted. President Bush will be focused on reducing the three deficits - jobs, trade, the Federal budget – and establishing the "ownership society". Iraq’s ability to transition to a democracy will be more visible. For now, investors will remain fixed on the price of oil, reports on the economy, and the Fed's efforts to return short-term interest rates to a more normal level of 2.5% to 3.5% for this economic environment. Terrorist activity always lurks. We see many new investment opportunities in the year ahead.
Special Note Regarding Forward-Looking Information
Our disclosure and analysis in this press release contain
some forward-looking statements. Forward-looking statements
give our current expectations or forecasts of future events. Yo u
can identify these statements because they do not relate strictly to
historical or current facts. They use words such as "anticipate,"
"estimate," "expect," "project," "intend," "plan," "believe," and
other words and terms of similar meaning. They also appear in
any discussion of future operating or financial performance. In
particular, these include statements relating to future actions,
future performance of our products, expenses, the outcome of any
legal proceedings, and financial results. Although we believe that
we are basing our expectations and beliefs on reasonable
assumptions within the bounds of what we currently know about
our business and operations, there can be no assurance that our
actual results will not differ materially from what we expect or
believe. Some of the factors that could cause our actual results to
d i ffer from our expectations or beliefs include, without
limitation: the adverse effect from a decline in the securities
markets; a decline in the performance of our products; a general
downturn in the economy; changes in government policy or
regulation; changes in our ability to attract or retain key
employees; and unforeseen costs and other effects related to legal
proceedings or investigations of governmental and selfregulatory
organizations. We also direct your attention to any
more specific discussions of risk contained in our Form 10-K and
other public filings. We are providing these statements as
permitted by the Private Litigation Reform Act of 1995. We do
not undertake to update publicly any forward-looking statements
if we subsequently learn that we are unlikely to achieve our
expectations or if we receive any additional information relating
to the subject matters of our forward-looking statements.
Unaudited Consolidated
Statements of Income
Unaudited Condensed
Consolidated Statements
of Financial Condition