Our disclosure and analysis in this report and in documents that are incorporated by reference contain some forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements because they do not relate strictly to historical or current facts. You should not place undue reliance on these statements. They use words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” and other words and terms of similar meaning. They also appear in any discussion of future operating or financial performance. In particular, these include statements relating to future actions, future performance of our products, expenses, the outcome of any legal proceedings, and financial results.
Although we believe that we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know about our business and operations, there can be no assurance that our actual results will not differ materially from what we expect or believe. Some of the factors that could cause our actual results to differ from our expectations or beliefs include, without limitation: the adverse effect from a decline in the securities markets; a decline in the performance of our products; a general downturn in the economy; changes in government policy or regulation; changes in our ability to attract or retain key employees; and unforeseen costs and other effects related to legal proceedings or investigations of governmental and self-regulatory organizations. We also direct your attention to any more specific discussions of risk contained in Item 1A below and in our other public filings or in documents incorporated by reference here or in prior filings or reports.
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.
Unless we have indicated otherwise, or the context otherwise requires, references in this report to “GAMCO Investors, Inc.,” the “Company,” “GBL,” “Gabelli,” “we,” “us” and “our” or similar terms are to GAMCO Investors, Inc., its predecessors and its subsidiaries.
GBL is a holding company incorporated in April 1998 in connection with our initial public offering (“Offering”) in February 1999. GGCP Holdings, LLC, a subsidiary of GGCP, Inc. owns a majority of the outstanding shares of Class B Common Stock (“Class B Stock”) of GBL. Such ownership represented approximately 95%94% of the combined voting power of the outstanding common stock and approximately 73%74% of the equity interest on December 31, 2011.2012. GGCP, Inc. is majority-owned by Mr. Mario J. Gabelli (“Mr. Gabelli”). Accordingly, Mr. Gabelli is deemed to control GBL.
Our balance sheet provides access to financial markets and the flexibility to opportunistically add operating resources to our firm, repurchase our stock and consider strategic initiatives.initiatives, including lift-outs, acquisitions and seeding new products. As a result of GBL's shelf registration in the thirdsecond quarter of 2009,2012, we have the ability to issue any combination of senior and subordinate debt securities, convertible debt securities and equity securities (including common and preferred securities) up to a total amount of $400 million. On May 31, 2011, the Company issued $100 million of senior unsecured notes at par. The net proceeds of $99.1 million were used for working capital and general corporate purposes. The notes mature June 1, 2021 and bear interest, payable semi-annually, at 5.875% per annum. The notes were issued pursuant to the Company’s shelf registration reducing the amount for future issuances to $300 million. The shelf is available through July 27, 2012.
Our business strategy targets global growth of the franchise through continued leveraging of our proven asset management strengths including our brand name, long-term performance record, diverse product offerings and experienced investment, research and client servicerelationship professionals. In order to achieve performance and growth in AUM and profitability, we are pursuing a strategy which includes the following key elements:
We also hold annual conferences for our investment partnership clients and prospects in New York and London at which our portfolio management team discusses the investment environment, our strategies, and portfolios, and event-driven investment opportunities.
GBL started operations in 1977 as an institutional services firm. We entered the institutionalInstitutional and private wealth managementPrivate Wealth Management business in 1977, management of investment partnerships in 1985 and the mutual fund business in 1986. Our initial product offerings centered on our tax sensitive, buy-hold, value-oriented investment philosophy. Starting in the mid-1980s, we began building on our core value-oriented equity investment products by adding new investment strategies designed for a broad array of clients seeking to invest in growth-oriented equities, convertible securities and fixed income products. Since then, we have continued to build our franchise by expanding our investment management capabilities through the addition of industry specific, international, global, non-market correlated, venture capital, leveraged buy-out and merchant banking product offerings. Throughout our 3435 year history, we have marketed most of our products under the “Gabelli” and “GAMCO” brand names. Specialty brands offered to investors have included Mathers, Comstock and Westwood.
Our AUM are clustered mostly in three groups: Institutional and Private Wealth Management, Mutual Funds and Investment Partnerships.
We act as a sub-advisor on certain funds for several large and well-known fund distributors. Sub-advisory clients are subject to business combinations, much the same as corporate clients, and this may result in the curtailment of product distribution or the termination of the relationship.
Investment advisory agreements for our Institutional and Private Wealth Management clients are typically subject to termination by the client without penalty on 30 days notice or less.
GAMCO is the brand for our “Growth” business, which is primarily represented by The GAMCO Growth Fund, The GAMCO Global Growth Fund, and The GAMCO International Growth Fund. GAMCO also includes other distinct investment strategies and styles including our convertible securities, contrarian funds and covered call writing strategies.
The Gabelli Dividend & Income Trust, launched in November 2003 had net assets of $1.9$2.0 billion as of December 31, 2011.2012.
In January 2007, we launched The GDL Fund, a closed-end fund which seeks to achieve its investment objective by investing primarily in announced merger and acquisition transactions and, to a lesser extent, in corporate reorganizations involving stubs, spin-offs and liquidations. During 2009, The GDL Fund raised $96 million through a rights offering of Series A preferred shares. During 2011, The GDL Fund redeemed the Series A preferred shares and also raised $144 million through a rights offering of Series B preferred shares.
Our failure to comply with applicable laws or regulations could result in fines, censure, suspensions of personnel or other sanctions, including revocation of our subsidiaries’ registrations as an investment advisor or broker-dealer. Industry regulations are designed to protect our clients and investors in our funds and other third parties who deal with us and to ensure the integrity of the financial markets. Our industry is frequently altered by new laws or regulations and by revisions to, and evolving interpretations of, existing laws and regulations, both in the U.S. and in other nations. Changes in laws or regulations or in governmental policies could limit the sources and amounts of our revenues including but not limited to distribution revenue under the Company Act, increase our costs of doing business, decrease our profitability and materially and adversely affect our business.
To the extent we are forced to compete on the basis of price, we may not be able to maintain our current fee structure.
The investment management business is highly competitive and has relatively low barriers to entry. To the extent we are forced to compete on the basis of price, we may not be able to maintain our current fee structure. Although our investment management fees vary from product to product, historically we have competed primarily on the performance of our products and not on the level of our investment management fees relative to those of our competitors. In recent years, however, there has been a trend toward lower fees in the investment management industry. In order to maintain our fee structure in a competitive environment, we must be able to continue to provide clients with investment returns and service that make investors willing to pay our fees. In addition, the board of directors or trustees of each fund managed by Funds Advisor must make certain findings as to the reasonableness of its fees. We cannot be assured that we will succeed in providing investment returns and service that will allow us to maintain our current fee structure. Fee reductions on existing or new business could have an adverse effect on our profit margins and results of operations.
We derive a substantial portion of our revenues from contracts that may be terminated on short notice.
A substantial majority of our revenues are derived from investment management agreements and distribution arrangements. Investment management agreements and distribution arrangements with the Funds are terminable without penalty on 60 days' notice (subject to certain additional procedural requirements in the case of termination by a Fund) and must be specifically approved at least annually, as required by law. Such annual renewal requires, among other things, approval by the disinterested members of each Fund's board of directors or trustees. Investment advisory agreements with our Institutional and Private Wealth Management clients are typically terminable by the client without penalty on 30 days' notice or less. Any failure to renew or termination of a significant number of these agreements or arrangements would have a material adverse effect on us.
Investors in the open-end funds can redeem their investments in these funds at any time without prior notice, which could adversely affect our earnings.
Open-end fund investors may redeem their investments in those funds at any time without prior notice. Investors may reduce the aggregate amount of AUM for any number of reasons, including investment performance, changes in prevailing interest rates and financial market performance. In a declining stock market, the pace of mutual fund redemptions could accelerate. Poor performance relative to other asset management firms tends to result in decreased purchases of mutual fund shares and increased redemptions of mutual fund shares. The redemption of investments in mutual funds managed by Funds Advisor would adversely affect our revenues, which are substantially dependent upon the AUM in our funds. If redemptions of investments in mutual funds caused our revenues to decline, it could have a material adverse effect on our earnings.
Regulatory developments designed to increase oversight of private funds may adversely affect our business.
A decline in the prices of securities would lead to a decline in our AUM, revenues and earnings.
Catastrophic and unpredictable events could have a material adverse effect on our business.
A terrorist attack, political unrest, war (whether or not directly involving the U.S.), power failure, cyber-attack, technology failure, natural disaster or many other possible catastrophic or unpredictable events could adversely affect our future revenues, expenses and earnings by, among other things: causing disruptions in U.S., regional or global economic conditions; interrupting our normal business operations; inflicting employee casualties, including loss of our key executives; requiring substantial expenditures and expenses to repair, replace and restore normal business operations; and reducing investor confidence.
We have a disaster recovery plan to address certain contingencies, but it cannot be assured that this plan will be effective or sufficient in responding to, eliminating or ameliorating the effects of all disaster scenarios. If our employees or vendors we rely upon for support in a catastrophic event are unable to respond adequately or in a timely manner, we may lose clients resulting in a decrease in AUM which may have a material adverse effect on revenues and net income.
On February 6, 2008, Mr. Gabelli entered into an amended and restated employment agreement (the “2008 Employment Agreement”) with the Company, which was initially approved by the Company’s shareholders on November 30, 2007 and approved again on May 6, 2011, and which limits his activities outside of the Company. Under the 2008 Employment Agreement, the manner of computing Mr. Gabelli’s remuneration from GAMCO is unchanged.
The following discussion should be read in conjunction with the Consolidated Financial Statements and the notes thereto included in Item 8 to this report.
Our revenues are highly correlated to the level of AUM and fees associated with our various investment products, rather than our own corporate assets. AUM, which are directly influenced by the level and changes of the overall equity markets, can also fluctuate through acquisitions, the creation of new products, the addition of new accounts or the loss of existing accounts. Since various equity products have different fees, changes in our business mix may also affect revenues. At times, the performance of our equity products may differ markedly from popular market indices, and this can also impact our revenues. It is our belief that general stock market trends will have the greatest impact on our level of AUM and hence, revenues.
Investment advisory and incentive fees, which are based on the amount and composition of AUM in our Mutual Funds, Institutional and Private Wealth Management accounts and Investment Partnerships, represent our largest source of revenues. In addition to the general level and trends of the stock market, growth in revenues depends on good investment performance, which influences the value of existing AUM as well as contributes to higher investment and lower redemption rates and facilitates the ability to attract additional investors while maintaining current fee levels. Growth in AUM is also dependent on being able to access various distribution channels, which is usually based on several factors, including performance and service. Historically, we have depended primarily on direct distribution of our products and services but since 1995 have participated in third party distribution programs, including NTF programs. A majority of our cash inflows to mutual fund products have come through these channels since 1998. In recent years, wethird party distribution programs, including NTF programs. We have also been engaged to act as a sub-advisor for other much larger financial services companies with much larger sales distribution organizations. A substantial portion of the cash flows into our Institutional and Private Wealth Management business has come through this channel. These sub-advisory clients are subject to business combinations that may result in the termination of the relationship. The loss of a sub-advisory relationship could have a significant impact on our financial results in the future.
Advisory fees from the open-end funds, closed-end funds and sub-advisory accounts are computed daily or weekly based on average net assets. Advisory fees from Institutional and Private Wealth Management clients are generally computed quarterly based on account values as of the end of the preceding quarter. Management fees from Investment Partnerships are computed either monthly or quarterly. These revenues are highly correlated to the stock market and can vary in direct proportion to movements in the stock market and the level of sales compared with redemptions, financial market conditions and the fee structure for AUM. Revenues derived from the equity-oriented portfolios generally have higher management fee rates than fixed income portfolios.
Revenues from Investment Partnerships also generally include an incentive allocation on the absolute gain in a portfolio or a fee of 20% of the economic profit, as defined in the partnership agreement. We recognize revenue only when the measurement period has been completed and when the incentive fees have been earned. We also receive -incentiveincentive fees from certain Institutional and Private Wealth Management clients, which are based upon meeting or exceeding a specific benchmark index or indices. These fees are recognized at the end of the stipulated contract period, which may be quarterly or annually, for the respective account. Management fees on assets attributable to a majority of the closed-end preferred shares are earned at year-end if the total return to common shareholders of the closed-end fund for the calendar year exceeds the dividend rate of the preferred shares. These fees are recognized at the end of the measurement period.
Institutional research services revenues consist of brokerage commissions derived from securities transactions executed on an agency basis on behalf of mutual funds, Institutional and Private Wealth Management clients as well as investment banking revenue, which consists of underwriting profits, selling concessions and management fees associated with underwriting activities. Commission revenues vary directly with account trading activity and new account generation. Investment banking revenues are directly impacted by the overall market conditions, which affect the number of public offerings which may take place.
Distribution fees and other income primarily include distribution fee revenue earned in accordance with Rule 12b-1 of the Company Act, as amended, 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 AUM and the amount and type of Mutual Funds sold directly by G.distributors or through various distribution channels.
Compensation costs include variable and fixed compensation and related expenses paid to officers, portfolio managers, sales, trading, research and all other professional staff. Variable compensation paid to sales personnel and portfolio management generally represents 40% of revenues and is the largest component of total compensation costs. Distribution costs include marketing, product distribution and promotion costs. Management fee is incentive-based and entirely variable compensation in the amount of 10% of the aggregate pre-tax profits which is paid to Mr. Gabelli or his designee for acting as CEO pursuant to his 2008 Employment Agreement so long as he is an executive of GBL and devotes the substantial majority of his working time to the business. Other operating expenses include general and administrative operating costs and clearing charges and fees for Gabelli & Company’s brokerage operation.
Other income and expenses include net gains and losses from investments (which includes both realized and unrealized gains and losses from trading securities and equity in earnings of investments in partnerships), interest and dividend income, and interest expense. Net gains and losses from investments are derived from our proprietary investment portfolio consisting of various public and private investments.
Net income (loss) attributable to noncontrolling interests represents the share of net income attributable to the minority stockholders, as reported on a separate company basis, of our consolidated majority-owned subsidiaries and net income attributable to third party limited partners of certain partnerships and offshore funds we consolidate. Please refer to Notes A and D in our consolidated financial statements included elsewhere in this report.
Our debt consisted of $99 million of 5.5% senior notes due May 2013, $100 million of 5.875% senior notes due June 1, 2021 and $64.1$17.4 million in zero coupon subordinated debentures (current principal amount of $86.3$21.7 million) due December 31, 2015, which were dividendedoriginally distributed to shareholders as a dividend on December 31, 2010.
Our primary goal is to use our liquid resources to opportunistically and strategically grow operating income. While this goal is a priority, if opportunities are not present with what we consider a margin of safety, we will consider alternatives to return capital to our shareholders including stock repurchase and dividends.
Our net appreciation and depreciation by product line were as follows (in millions):
Operating Results for the Year Ended December 31, 2011 as Compared to the Year Ended December 31, 2010
Total revenues were $327.1 million in 2011, $46.7 million or 16.7% higher than the total revenues of $280.4 million in 2010. The change in total revenues by revenue component was as follows (in(dollars in millions):
Mutual fund revenues increased $26.6 million or 18.2%, to $172.7 million, driven by higher average AUM. Revenue from open-end funds increased $23.1 million, or 23.9%, from the prior year as average AUM in 2011 increased $2.7 billion, or 24.1%, to $13.9 billion from the $11.2 billion in 2010. Closed-end fund revenues increased $3.5 million, or 7.1%, to $53.1 million from the prior year. The increase was primarily attributable to higher average AUM of $5.9 billion during 2011 as compared with $4.9 billion during 2010, and was offset by a $7.0 million decline in incentive fees on certain preferred closed-end fund AUM. Revenue from Institutional and Private Wealth Management accounts, which are generally billed on beginning quarter AUM, increased $10.0 million, or 12.7%, principally due to higher billable AUM levels throughout the course of 2011 partially offset by a decrease of $2.6 million in incentive fees earned on certain accounts. In 2011, average AUM in our equity Institutional and Private Wealth Management business increased $2.0 billion, or 16.8%, for the year to $13.9 billion.
Total advisory fees from Investment Partnerships were unchanged at $6.4 million in both 2011 and 2010. Management fee revenues were $4.1 million in 2011, an increase of $1.3 million or 46.4%, from the $2.8 million in 2010 as average AUM increased $173 million, or 42.0%, to $585 million in 2011 from $412 million in 2010. This increase was offset by a decrease of $1.3 million to $2.3 million in 2011 from $3.6 million in 2010 in incentive allocations and fees from investment partnerships, which generally represent 20% of the economic profit.
Operating income was $113.3 million for the year ended December 31, 2011, increasing 24.5% from $91.0 million in the prior year. The year over year increase in operating income was primarily due to the growth in revenues which were largely attributable to the higher levels of average AUM in 2011 versus 2010. Operating expenses grew at a slower rate benefiting from lower growth in non-variable compensation and other operating expenses and the impact of lower non-operating income on management fee. Significant charges unique to each period included $5.6 million in distribution costs related to the launch of a new closed-end fund in 2011 and a $5.8 million charge to compensation costs in 2010 related to the acceleration of RSAs. While these charges reduced operating income for each year their net impact on the year over year comparison of total operating income was only $0.2 million. Operating margin was 34.6% for the year ended December 31, 2011, versus 32.5% in the prior year period. Operating income before management fee was $125.6 million for the year ended of 2011, versus $103.0 million in the prior year.
Operating margin before management fee was 38.4% in 2011 versus 36.8% in 2010. The reconciliation of operating income before management fee and operating margin before management fee is provided at the end of this section.
Interest expense increased $3.0 million to $15.0 million in 2011, from $12.0 million in 2010. The increase was primarily due to the issuance of $100 million of 5.875% ten-year senior notes in May 2011 and the issuance of $86.4 million in zero coupon subordinated debentures on December 31, 2010, slightly offset by the repurchases of the $40 million 2011 Notes and the $60 million 2018 Notes during the course of 2010.
The effective tax rate was 36.9% for the year ended December 31, 2011, versus 36.0% for the year ended December 31, 2010.
Net income for 2011 was $69.7 million or $2.61 per fully diluted share versus $68.8 million or $2.52 per fully diluted share for 2010.
During 2011, we returned $51.2 million of our earnings to shareholders through dividends and stock repurchases. We returned to shareholders a total of $0.15 per share in regular quarterly cash dividends and a special dividend of $1.00 per share totaling $30.8 million to shareholders during 2011. During 2010, we returned $139.2 million of our earnings to shareholders through dividends and stock repurchases. We returned to shareholders $1.82 per share in cash dividends through regular quarterly cash dividends and two special cash dividends of $0.90 per share and $0.80 per share, totaling $49.4 million, in 2010. Additionally, we paid a special dividend of $59.6 million ($3.20 of principal per share or $86.4 million) to shareholders in the form of a five-year, zero coupon subordinated debenture due 2015.
Through our stock buyback program, we repurchased 450,966 and 684,003 shares in 2011 and 2010, respectively, for a total of approximately $20.4 million and $30.2 million, respectively or $45.24 and $44.15 per share, respectively. Approximately 573,000 shares remain authorized under our stock buyback program at December 31, 2011.
Weighted average shares outstanding on a diluted basis in 2011 were 26.7 million. During 2011, we issued 197,200 RSA shares. RSAs affect weighted average shares for diluted earnings per share but not for basic earnings per share. See Note H to the financial statements for details.
At December 31, 2011, we had 100,900 options outstanding to purchase our Class A Stock and 275,600 RSAs which were granted under our Stock Award and Incentive Plans (the “Plans”). The allocation of the options and RSAs was recommended by the Company's Chairman who did not receive options or an RSA award.
Operating income before management fee expense is used by management for purposes of evaluating its business operations. We believe this measure is useful in illustrating the operating results of the Company as management fee expense is based on pre-tax income before management fee expense, which includes non-operating items including investment gains and losses from the Company’s proprietary investment portfolio and interest expense. We believe that an investor would find this useful in analyzing the business operations of the Company without the impact of the non-operating items such as trading and investment portfolios or interest expense.
Operating Results for the Year Ended December 31, 2010 as Compared to the Year Ended December 31, 2009
Revenues
Total revenues were $280.4 million in 2010, $62.3 million or 28.6% higher than the total revenues of $218.1 million in 2009. The change in total revenues by revenue component was as follows (in millions):
| | Year Ended December 31, | | | Increase (decrease) | |
(unaudited) | | 2010 | | | 2009 | | | $ | | | % | |
Investment advisory | | $ | 204.9 | | | $ | 156.9 | | | $ | 48.0 | | | 30.6 | % |
Incentive fees | | | 26.4 | | | | 21.8 | | | | 4.6 | | | 21.1 | |
Institutional research services | | | 16.6 | | | | 16.7 | | | | (0.1 | ) | | (0.6 | ) |
Distribution fees and other income | | | 32.5 | | | | 22.7 | | | | 9.8 | | | 43.2 | |
Total revenues | | $ | 280.4 | | | $ | 218.1 | | | $ | 62.3 | | | 28.6 | % |
Investment Advisory and Incentive Fees: Investment advisory and incentive fees, which comprised 82.5% of total revenues in 2010, are directly influenced by the level and mix of AUM. At December 31, 2010, AUM were $32.5 billion, a 23.4% increase from prior year-end AUM of $26.3 billion. Our equity AUM were $30.9 billion on December 31, 2010, or 25.5% higher, than the $24.6 billion on December 31, 2009. We experienced increases in AUM in open-end and closed-end equity funds of $3.6 billion, in Institutional and Private Wealth Management accounts of $2.4 billion and in our investment partnerships of $210 million. Our fixed income AUM decreased 6.1% to $1.6 billion at year-end 2010 from $1.7 billion at the end of 2009. The primary driver in this decrease were net outflows of $0.1 billion.
Mutual fund revenues increased $30.0 million or 25.8%, driven by higher average AUM. Revenue from open-end funds increased $23.5 million or 32.2% from the prior year as average AUM in 2010 increased $2.6 billion, or 30.2%, to $11.2 billion from the $8.6 billion in 2009. Closed-end fund revenues increased $6.5 million, or 15.1%, to $49.6 million from the prior year. The increase was primarily attributable to higher average AUM of $4.9 billion during 2010 as compared with $4.0 billion during 2009, offset slightly by a $2.6 million decline in incentive fee revenue on The GDL Fund. Revenue from Institutional and Private Wealth Management accounts, which are generally billed on beginning quarter AUM, increased $20.8 million, or 36.0%, principally due to higher billable AUM levels and an increase of $6.3 million in incentive fees earned on certain accounts. In 2010, average AUM in our equity Institutional and Private Wealth Management business increased $2.7 billion or 29.4% for the year to $11.9 billion.
Total advisory fees from Investment Partnerships increased to $6.4 million in 2010 from $4.7 million in 2009. Incentive allocations and fees from investment partnerships, which generally represent 20% of the economic profit, increased to $3.6 million in 2010 compared to $2.7 million in 2009 and management fees were $2.8 million in 2010 increasing $0.8 million from the $2.0 million in 2009.
Institutional Research Services: Institutional research services revenues in 2010 were $16.6 million, a $0.1 million or 0.6% decrease from $16.7 million in 2009. Institutional research services revenues derived from transactions on behalf of our Mutual Funds and Institutional and Private Wealth Management clients totaled $12.5 million, or approximately 75% of total institutional research services revenues in 2010.
Distribution Fees and Other Income: Distribution fees and other income increased $9.8 million, or 43.2%, to $32.5 million in 2010 from $22.7 million in 2009. The increase was primarily due to higher distribution fees of $29.0 million in 2010 versus $20.8 million for the prior year, principally as a result of increased average AUM in our open-end equity mutual funds of 37.4%.
Expenses
Compensation: Our business model from inception in 1977 is to try to payout approximately 40% of revenues to portfolio managers and sales people. Total compensation costs, which are largely variable in nature, increased approximately $30.9 million, or 33.3%, to $123.8 million in 2010 from $92.9 million in 2009. Variable compensation costs increased $21.9 million to $83.3 million in 2010 from $61.5 million in 2009 and as a percent of revenues to 29.7% in 2010 compared to 28.2% in 2009 due to the higher marginal payout on incentive fees. Variable compensation is driven by revenue levels which increased in 2010 from 2009. Fixed compensation costs increased to $40.5 million in 2010 from $31.4 million in 2009 largely driven by the acceleration of the 2007 RSA grant during the fourth quarter of 2010 that added a $5.5 million non-cash charge that would have been taken in 2011 and 2012.
Management Fee: Management fee expense is incentive-based and entirely variable in the amount of 10% of the aggregate pre-tax profits which is paid to Mr. Gabelli (or his designee) for acting as CEO pursuant to his 2008 Employment Agreement so long as he is an executive of GBL and devoting the substantial majority of his working time to the business. In accordance with his 2008 Employment Agreement, Mr. Gabelli chose to allocate 20% or $2.4 million of his management fee to an employee of the Company in 2010. In 2010 management fee expense increased 22.4% to $12.0 million versus $9.8 million in 2009.
Distribution Costs: Distribution costs, which include marketing, promotion and distribution costs increased $6.7 million to $31.0 million from $24.3 million, or 27.6%, in 2010 from the 2009 period as average open-end mutual funds AUM increased 29.1%.
Other Operating Expenses: Our other operating expenses were $22.5 million in 2010 compared to $18.9 million in 2009. The largest contributors to the increase were increases in legal expenses of $2.7 million and charitable contributions of $0.3 million.
Operating Income and Margin
Operating income was $91.0 million for the year ended December 31, 2010, increasing 26.0% from the $72.2 million in the prior year. The year over year increase in operating income was largely the result of increased revenues offset by increased compensation expense, mutual fund distribution costs and higher non-compensation operating expenses and an increase in management fee expense. Operating margin was 32.5% for the year ended December 31, 2010, versus 33.1% in the prior year period. Operating income before management fee was $103.0 million for the year ended of 2010, versus $82.0 million in the prior year. Operating margin before management fee was 36.8% in 2010 versus 37.6% in 2010. Included in the 2010 results is a charge of $5.8 million related to the acceleration of the vesting of RSAs. The reconciliation of operating income before management fee and operating margin before management fee is provided at the end of this section.
Other Income and Expense
Total other income (expense) (which represents primarily investment income from our proprietary investments), net of interest expense, was $18.3 million for the year ended December 31, 2010 compared to $15.7 million in 2009.
Net gain/(loss) from investments was $24.4 million in 2010 as compared to $25.6 million in 2009.
Interest and dividend income was $5.9 million in 2010 compared to $3.4 million in 2009. The increase of $2.5 million was due to an increase of $3.2 million of dividend income offset by a reduction of interest income of $733,000 due to lower average balances in our cash and cash equivalent holdings.
Interest expense decreased $1.3 million to $12.0 million in 2010, from $13.3 million in 2009. The decrease was primarily due to the repurchases of the $40 million 2011 Notes and the $60 million 2018 Notes during the course of 2010.
Income Taxes
The effective tax rate was 36.0% for the year ended December 31, 2010, versus 36.1% for the year ended December 31, 2009.
Noncontrolling interest
Noncontrolling interest was an expense of $1.2 million in 2010 compared to $609,000 in 2009. The increase was primarily due to increased earnings at our 93%-owned subsidiary, GSI in 2010 as compared to 2009.
Net Income
Net income for 2010 was $68.8 million or $2.52 per fully diluted share versus $55.5 million or $2.02 per fully diluted share for 2009.
Operating Margin
For the full year ended December 31, 2010, the operating margin before management fee was 36.8% versus 37.6% in the prior year. Operating margin after management fee was 32.5% for the full year ended December 31, 2010 compared to 33.1% in the prior year because of the impact of the other income (expense) on the management fee. The acceleration of RSAs in 2010, impacted operating margin negatively by a non-cash charge of $5.8 million or 2.0% of margin.
Shareholder Compensation and Initiatives
During 2010, we returned $139.2 million of our earnings to shareholders through dividends and our stock repurchases. We returned $1.82 per share in cash dividends ($49.4 million) to our common shareholders in 2010, which included four quarterly dividends of $0.03 per share on March 30, 2010, June 29, 2010, September 28, 2010, and December 28, 2010 to all shareholders of record on March 16, 2010, June 15, 2010, September 14, 2010, and December 14, 2010, respectively. We also paid two special cash dividends of $0.90 per share and $0.80 per share to all of our shareholders, payable on September 14, 2010 and December 31, 2010, respectively, to shareholders of record on August 31, 2010 and December 15, 2010, respectively. Additionally, we paid a special dividend of $59.6 million ($3.20 of principal per share or $86.4 million) in the form of a five-year, zero coupon subordinated debenture due 2015 to all of our shareholders, payable on December 31, 2010 to shareholders of record on December 15, 2010. During 2009, we returned $65.8 million of our earnings to shareholders through dividends and our stock repurchases. We returned $2.13 per share in dividends ($58.8 million) to our common shareholders in 2009, which included four quarterly dividends of $0.03 per share on March 31, 2009, June 30, 2009, September 29, 2009, and December 29, 2009 to all shareholders of record on March 17, 2009, June 16, 2009, September 15, 2009, and December 15, 2009, respectively. We also paid a special dividend of $2.00 per share to all of our shareholders, on December 15, 2009 to shareholders of record on December 1, 2009. Additionally, we distributed the shares of Teton that the Company owned on March 20, 2009 to shareholders of record on March 10, 2009 that had an initial value of approximately $0.01 per GBL share. Through our stock buyback program, we repurchased 684,003 and 156,500 shares in 2010 and 2009, respectively, for a total of approximately $30.2 million and $7.0 million, respectively or $44.15 and $44.91 per share, respectively. Approximately 524,000 shares remain authorized under our stock buyback program at December 31, 2010.
Weighted average shares outstanding on a diluted basis in 2010 were 28.3 million and included approximately 1.1 million shares from the assumed conversion of the 6% convertible note and from the assumed conversion of the 6.5% convertible note for the full year 2010. During 2010, we issued 53,850 shares from the exercise of stock options and 88,800 RSAs. RSAs affect weighted average shares for diluted earnings per share but not for basic earnings per share. See Note I to the financial statements for details.
At December 31, 2010, we had 90,900 options outstanding to purchase our Class A Stock and 123,100 RSAs which were granted under our Stock Award and Incentive Plans (the “Plans”). The allocation of the options and RSAs was recommended by the Company's Chairman who did not receive options or an RSA award.
Reconciliation of non-GAAP financial measures to GAAP: | | | | |
| | 2010 | | | 2009 | |
Revenues | | $ | 280,380 | | | $ | 218,114 | |
Operating income | | | 91,029 | | | | 72,210 | |
Add back: management fee expense | | | 12,013 | | | | 9,758 | |
Operating income before management fee | | $ | 103,042 | | | $ | 81,968 | |
| | | | | | | | |
Operating margin | | | 32.5 | % | | | 33.1 | % |
| | | | | | | | |
Operating margin before management fee | | | 36.8 | % | | | 37.6 | % |
Operating income before management fee expense is used by management for purposes of evaluating its business operations. We believe this measure is useful in illustrating the operating results of the Company as management fee expense is based on pre-tax income before management fee expense, which includes non-operating items including investment gains and losses from the Company’s proprietary investment portfolio and interest expense. We believe that an investor would find this useful in analyzing the business operations of the Company without the impact of the non-operating items such as trading and investment performance.
Liquidity and Capital Resources
Our principal assets are highly liquid in nature and consist of cash and cash equivalents, short-term investments, securities held for investment purposes, investments in mutual funds, and investment partnerships and offshore funds, both proprietary and external.partnerships. Cash and cash equivalents are comprised primarily of 100% U.S. Treasury money market funds managed by GAMCO. Although the investmentinvestments in partnerships and offshore funds are forsubject to restrictions on the most part, illiquid,timing of distributions, the underlying investments of such partnerships or funds are, for the most part, liquid, and the valuations of these products reflect that underlying liquidity.
Summary cash flow data derived from our audited consolidated statements of cash flows are as follows:
| | Year Ended December 31, | |
| | 2011 | | | 2010 | | | 2009 | |
| | (in thousands) | |
Cash flows provided by (used in): | | | | | | | | | |
Operating activities | | $ | 36,363 | | | $ | (80,030 | ) | | $ | 131,793 | |
Investing activities | | | 3,982 | | | | 67,186 | | | | (55,250 | ) |
Financing activities | | | 67,896 | | | | (155,816 | ) | | | (69,531 | ) |
Increase (decrease) in cash and cash equivalents | | | 108,241 | | | | (168,660 | ) | | | 7,012 | |
Effect of exchange rates on cash and cash equivalents | | | - | | | | (9 | ) | | | 84 | |
Net increase (decrease) in cash and cash equivalents | | | 108,241 | | | | (168,669 | ) | | | 7,096 | |
Net decrease in cash from consolidated partnerships and offshore funds | | | (1,502 | ) | | | - | | | | - | |
Cash and cash equivalents at beginning of year | | | 169,601 | | | | 338,270 | | | | 331,174 | |
Cash and cash equivalents at end of year | | $ | 276,340 | | | $ | 169,601 | | | $ | 338,270 | |
| | Year Ended December 31, | | | | |
| | 2012 | | | 2011 | | | 2010 | |
| | (in thousands) | | | | |
Cash flows provided by (used in): | | | | | | | | | |
Operating activities | | $ | 85,745 | | | $ | 36,363 | | | $ | (80,030 | ) |
Investing activities | | | 4,447 | | | | 3,982 | | | | 67,186 | |
Financing activities | | | (175,912 | ) | | | 67,896 | | | | (155,816 | ) |
Increase (decrease) in cash and cash equivalents | | | (85,720 | ) | | | 108,241 | | | | (168,660 | ) |
Effect of exchange rates on cash and cash equivalents | | | (12 | ) | | | - | | | | (9 | ) |
Net increase (decrease) in cash and cash equivalents | | | (85,732 | ) | | | 108,241 | | | | (168,669 | ) |
Cash and cash equivalents at beginning of year | | | 276,340 | | | | 169,601 | | | | 338,270 | |
Decrease in cash from deconsolidation of partnership | | | - | | | | (1,502 | ) | | | - | |
Cash and cash equivalents at end of year | | $ | 190,608 | | | $ | 276,340 | | | $ | 169,601 | |
Cash and liquidity requirements have historically been met through cash generated by operating income and our borrowing capacity. We filed a shelf registration with the SEC in 20092012 which, among other things, provides us opportunistic flexibility to sell any combination of senior and subordinate debt securities, convertible debt securities, equity securities (including common and preferred stock), and other securities up to a total amount of $400 million. OnThe shelf is available through May 31, 2011, the Company issued $100 million of senior unsecured notes30, 2015, at par. The net proceeds of $99.1 million willwhich time it may be used for working capital and general corporate purposes, which may include acquisitions. The notes mature June 1, 2021 and bear interest, payable semi-annually, at 5.875% per annum. The notes were issued pursuant to the Company’s shelf registration reducing the amount for future issuances to $300 million.renewed.
At December 31, 2011,2012, we had cash and cash equivalents of $276.3$190.6 million, an increasea decrease of $106.7$85.7 million from the prior year-end primarily due to the Company’s financing activities.activities described below. Cash and cash equivalents of $16.8$0.9 million and investments in securities of $6.2$7.0 million held by consolidated investment partnerships and offshore funds may not be readily available for the Company to access. Total debt outstanding at December 31, 20112012 was $263.1$216.4 million, consisting of $64.1$17.4 million in five year zero coupon subordinated debentures due 2015 (“Debentures”), with a face value of $86.3$21.7 million, $100 million of 5.875% senior notes due 2021 and $99 million of 5.5% senior notes due 2013.
NetFor the year ended December 31, 2012, cash provided by operating activities was $85.7 million, an increase of $49.3 million from cash provided in the prior year of $36.4 million for the year ended December 31, 2011. Netmillion. Cash was provided through an increase in net income of $69.7$5.9 million, a $75.5 million decrease in trading investments, $11.0 million increase in stock compensation, $10.7 million increase in income taxes payables and partnership distributionsreceivables, $6.3 million loss on repurchase of $57.1debt and $3.0 from other sources. Reducing cash was net contributions to partnerships of $34.5 million, were the most significant contributorsa $23.0 million decrease in investment advisory fees receivable and a $5.6 million decrease in payables to brokers.
Net cash provided by operating activities in 2011. The largest components of cash usage were additional investments in trading securities in our proprietary portfolios and contributions to partnerships. In 2010, we had net cash used in operatinginvesting activities of $80.0 million. Net income$4.4 million in 2012 is due to proceeds from sales of $70.0available for sale securities of $3.2 million and partnership distributionsreturn of $9.7capital from available for sale securities of $2.5 million were the most significant contributors to cash providedpartially offset by operations$1.3 million in 2010 while additional investments in trading securities into our proprietary portfolios and contributions to partnerships were the largest componentpurchases of cash usage.
available for sale securities. Net cash provided by investing activities of $4.0 million in 2011 is due to proceeds from sales of available for sale securities of $6.1 million and return of capital from available for sale securities of $2.3 million partially offset by $4.4 million in purchases of available for sale securities. Net cash provided by investing activities of $67.2 million in 2010 is due to a decrease in restricted cash of $62.3 million as the collateral underlying the Cascade escrow account during 2010 was released and no longer considered restricted while during 2009 the collateral was invested in treasury bills with maturities of less than three months and considered cash equivalents. Additionally, there were purchases of available for sale securities of $157,000, proceeds from sales of available for sale securities of $2.1 million and return of capital from available for sale securities of $3.0 million.
Net cash used in financing activities of $175.9 million in 2012 principally resulted from $76.8 million in dividends paid, $56.2 million for the repurchase of debt, $54.9 million of repurchases of our Class A Stock under the Stock Repurchase Program partially offset by net contributions of $11.1 million from redeemable non-controlling interests and $0.9 million in proceeds from the exercise of stock options. Net cash provided by financing activities of $67.9 million in 2011 principally resulted from the $100 million ($99.1 million net of issuance costs) issuance of 5.875% senior unsecured notes due June 2021 and net contributions of $20.1 million from redeemable non-controlling interests partially offset by $20.4 million of repurchases of our Class A Stock under the Stock Repurchase Program and $30.5 million in dividends paid. Net cash used in financing activities of $155.8 million in 2010 principally resulted from the repayment of both the 2011 Notes and the 2018 Notes of $100.4 million, repurchase of our Class A Stock under the Stock Repurchase Program of $30.2 million and dividends paid of $50.6 million offset by contributions of $25.1 million from redeemable non-controlling interests.
Under the terms of the lease of our Rye, New York office, we are obligated to make minimum total payments of $13.0$12.0 million through December 2023.
We continue to maintain our investment grade ratings which we have received from two ratings agencies, Moody’s Investors Services and Standard and Poor’s Ratings Services. We believe that our ability to maintain our investment grade ratings will provide greater access to the capital markets, enhance liquidity and lower overall borrowing costs. As of December 31, 2011 we have debt outstanding of $100 million of 5.875% senior notes due June 1, 2021, $99 million of 5.5% senior notes due May 15, 2013 and $64.1 million of zero coupon subordinated debentures due December 15, 2015 (with a face value of $86.3 million). In addition to the $261.7 million in cash and cash equivalents at December 31, 2011, we also had $421.6 million in investments in securities, investments in partnerships and receivable from brokers, net of securities sold not yet purchased and payables to brokers.
Gabelli & Company and G.distributors are registered with the SEC as broker-dealers and are regulated by FINRA. As such, they are subject to the minimum net capital requirements promulgated by the SEC. Gabelli & Company’s and G.distributors’ net capital exceeded these minimum requirements at December 31, 2011.2012. Both Gabelli & Company and G.distributors compute their net capital under the alternative method permitted by the SEC, which requires minimum net capital of the greater of $250,000 or 2% of the aggregate debit items in the reserve formula for those broker-dealers subject to Rule 15c3-3 promulgated under the Securities Exchange Act of 1934. As of December 31, 20112012 and 2010,2011, Gabelli & Company had net capital, as defined, of approximately $6.0$4.5 million and $11.2$6.0 million, respectively, exceeding the regulatory requirement by approximately $4.2 million and $5.7 million, respectively. At December 31, 2012 and $11.0 million, respectively.2011, G.distributors had net capital, as defined, of approximately $4.6 million and $2.3 million, respectively, exceeding the regulatory requirement by approximately $4.3 million and $2.1 million.million, respectively. Net capital requirements for our affiliated broker-dealers may increase in accordance with rules and regulations to the extent they engage in other business activities.
Our subsidiary, GAMCO Asset Management (UK) Limited is authorized and regulated by the FSA. In connection with this registration, we held Own Funds of £357,000£384,000 and £343,000 ($552,000621,000 and $530,000 at December 31, 2010)2012 and had an Own Funds requirement of £5,000 ($7,000 at December 31, 2010). In February 2011, GAMCO Asset Management (UK) Limited increased its permitted license with the FSA and held Own Funds of £343,000 ($530,000 at December 31, 2011)respectively) and had an Own Funds requirement of €50,000 ($65,00066,000 and $65,000 at December 31, 2011)2012 and 2011, respectively). We have consistently met or exceeded these minimum requirements.
Market Risk
Our primary market risk exposure is to changes in equity prices and interest rates. Since approximately 95% of our AUM are equities, our financial results are subject to equity-market risk as revenues from our moneyinvestment management services are directly correlated to changes in the stock market and are sensitive to other stock market dynamics. In addition, returns from our proprietary investment portfolio are exposed to interest rate and equity market risk.
The Company’s Chief Investment Officer oversees the proprietary investment portfolios and allocations of proprietary capital among the various strategies. The Chief Investment Officer and the Board of Directors review the proprietary investment portfolios throughout the year. Additionally, the Company has a risk committee which monitors theits proprietary investment portfolios to ensure that they are in compliance with the Company’s guidelines.
Equity Price Risk
The Company earns substantially all of its revenue as advisory and distribution fees from our affiliated open-end and closed-end funds, Institutional and Private Wealth Management, and Investment Partnership assets. Such fees represent a percentage of AUM, and the majority of these assets are in equity investments. Accordingly, since revenues are proportionate to the value of those investments, a substantial increase or decrease in equity markets overall will have a corresponding effect on the Company's revenues.
With respect to our proprietary investment activities, included in investments in securities and investments in sponsored registered investment companies of $297.5$280.7 million and $305.5$297.5 million at December 31, 20112012 and 2010,2011, respectively, were investments in United States Treasury Bills and Notes of $42.1$43.0 million and $27.3$42.1 million, respectively, mutual funds, largely invested in equity products, of $62.4$65.1 million and $66.7$62.4 million, respectively, a selection of common and preferred stocks totaling $192.6$172.0 million and $209.5$192.6 million, respectively, and other investments of approximately $0.4$0.6 million and $2.0$0.4 million, respectively. Investments in mutual funds generally have lower market risk through the diversification of financial instruments within their portfolio. In addition, we may alter our investment holdings from time to time in response to changes in market risks and other factors considered appropriate by management. Of the approximately $192.6$172.0 million and $209.5$192.6 million, invested in common and preferred stocks at December 31, 2012 and 2011, and 2010, respectively, $33.3$33.6 million and $37.1$33.3 million, respectively, was related to our investment in Westwood Holdings Group Inc., and $69.2$53.6 million and $24.8$69.2 million, respectively, was invested in risk arbitrage opportunities in connection with mergers, consolidations, acquisitions, tender offers or other similar transactions. Securities sold, not yet purchased are financial instruments purchased under agreements to resell and financial instruments sold under agreement to repurchase. These financial instruments are stated at fair value and are subject to market risks resulting from changes in price and volatility. At December 31, 20112012 and 2010,2011, the fair value of securities sold, not yet purchased was $5.5$3.1 million and $19.3$5.5 million, respectively. Investments in partnerships and affiliates totaled $115.9$97.5 million and $82.9$100.9 million at December 31, 20112012 and 2010,2011, respectively, the majority of which consisted of investment partnerships and offshore funds which invest in risk arbitrage opportunities. These transactions generally involve announced deals with agreed upon terms and conditions, including pricing, which typically involve less market risk than common stocks held in a trading portfolio. The principal risk associated with risk arbitrage transactions is the inability of the companies involved to complete the transaction.
The following table provides a sensitivity analysis for our investments in equity securities and partnerships and affiliates which invest primarily in equity securities, excluding arbitrage products for which the principal exposure is to deal closure and not overall market conditions, as of December 31, 2011.2012. The sensitivity analysis assumes a 10% increase or decrease in the value of these investments (in thousands):
| | | | | Fair Value | | | Fair Value | | | | | | Fair Value | | | Fair Value |
| | | | | assuming | | | assuming | | | | | | assuming | | | assuming |
| | | | | 10% decrease in | | | 10% increase in | | | | | | 10% decrease in | | | 10% increase in |
(unaudited) | | Fair Value | | | equity prices | | | equity prices | | | Fair Value | | | equity prices | | | equity prices |
At December 31, 2012: | | | | | | | | | |
Equity price sensitive investments, at fair value | | | $ | 273,271 | | | $ | 245,944 | | | $ | 300,598 |
At December 31, 2011: | | | | | | | | | | | | | | | | | | | | |
Equity price sensitive investments, at fair value | | $ | 261,024 | | | $ | 234,922 | | | $ | 287,126 | | | $ | 261,024 | | | $ | 234,922 | | | $ | 287,126 |
At December 31, 2010: | | | | | | | | | | | | | |
Equity price sensitive investments, at fair value | | $ | 359,699 | | | $ | 323,729 | | | $ | 395,669 | | |
The deconsolidation of Gabelli Green Long/Short Fund, L.P., on January 1, 2011, and Gabelli Associates Limited II E, on October 1, 2011, reduced investments in securities by approximately $80 million and securities sold, not yet purchased by $17 million.
The Company earns substantially all of its revenue as advisory fees from our Mutual Fund, Institutional and Private Wealth Management, and Investment Partnership assets. Such fees represent a percentage of AUM and the majority of these assets are in equity investments. Accordingly, since revenues are proportionate to the value of those investments, a substantial increase or decrease in equity markets overall will have a corresponding effect on the Company's revenues.
Investment advisory fees for mutual funds and sub-advisory relationships are based on average daily or weekly asset values. Advisory fees earned on Institutional and Private Wealth Management assets, for any given quarter, are generally determined based on asset values at the beginning of a quarter with any significant increases or decreases in market value of assets managed which occur during a quarter resulting in a relative increase or decrease in revenues for the following quarter.
Investment Partnership advisory fees are computed based on monthly or quarterly asset values. The incentive allocation or fee of 20% of the economic profit from Investment Partnerships is impacted by changes in the market prices of the underlying investments of these products and is not recognized until the end of the measurement period.
Interest Rate Risk
Our exposure to interest rate risk results, principally, from our investment of excess cash in a money market fund that holds U.S. Government securities. These investments are primarily short term in nature, and the carrying value of these investments generally approximates fair value. Based on December 31, 2011,2012, cash and cash equivalent balance of $276.3$190.6 million a 1% increase in interest rates would increase our interest income by $2.8$1.9 million annually. Given that our current return on these cash equivalent investment is approximately 0.00%0.02% annually, an analysis of a 1% decrease is not meaningful.
Commitments and Contingencies
We are obligated to make future payments under various contracts such as debt agreements and capital and operating lease agreements. The following table sets forth our significant contractual cash obligations as of December 31, 20112012 (in thousands):
| | Total | | | 2012 | | | 2013 | | | 2014 | | | 2015 | | | 2016 | | | Thereafter | |
Contractual Obligations: | | | | | | | | | | | | | | | | | | | | | |
5.5% Senior notes | | $ | 99,000 | | | $ | - | | | $ | 99,000 | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
Interest on 5.5% senior notes | | | 7,941 | | | | 5,445 | | | | 2,496 | | | | - | | | | - | | | | - | | | | - | |
5.875% Senior notes | | | 100,000 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 100,000 | |
Interest on 5.875% senior notes | | | 55,813 | | | | 5,875 | | | | 5,875 | | | | 5,875 | | | | 5,875 | | | | 5,875 | | | | 26,438 | |
Zero coupon Subordinated debentures | | | 86,299 | | | | - | | | | - | | | | - | | | | 86,299 | | | | - | | | | - | |
Capital lease obligations | | | 13,017 | | | | 1,137 | | | | 1,080 | | | | 1,080 | | | | 1,080 | | | | 1,080 | | | | 7,560 | |
Non-cancelable operating | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
lease obligations | | | 1,487 | | | | 658 | | | | 513 | | | | 295 | | | | 21 | | | | - | | | | - | |
Total | | $ | 363,557 | | | $ | 13,115 | | | $ | 108,964 | | | $ | 7,250 | | | $ | 93,275 | | | $ | 6,955 | | | $ | 133,998 | |
| | Total | | | 2013 | | | 2014 | | | 2015 | | | 2016 | | | 2017 | | | Thereafter |
Contractual Obligations: | | | | | | | | | | | | | | | | | | | | |
5.5% Senior notes | | $ | 99,000 | | | $ | 99,000 | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - |
Interest on 5.5% Senior notes | | | 2,496 | | | | 2,496 | | | | - | | | | - | | | | - | | | | - | | | | - |
5.875% Senior notes | | | 100,000 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 100,000 |
Interest on 5.875% Senior notes | | | 49,938 | | | | 5,875 | | | | 5,875 | | | | 5,875 | | | | 5,875 | | | | 5,875 | | | | 20,563 |
Zero coupon Subordinated debentures | | | 21,700 | | | | - | | | | - | | | | 21,700 | | | | - | | | | - | | | | - |
Capital lease obligations | | | 11,960 | | | | 1,160 | | | | 1,080 | | | | 1,080 | | | | 1,080 | | | | 1,080 | | | | 6,480 |
Non-cancelable operating | | | | | | | | | | | | | | | | | | | | | | | | | | | |
lease obligations | | | 900 | | | | 574 | | | | 305 | | | | 21 | | | | - | | | | - | | | | - |
Total | | $ | 285,994 | | | $ | 109,105 | | | $ | 7,260 | | | $ | 28,676 | | | $ | 6,955 | | | $ | 6,955 | | | $ | 127,043 |
The capital lease contains an escalation clause tied to the change in the New York Metropolitan Area Consumer Price Index which may cause the future minimum payments to exceed $1,080,000 annually. Any increases to the base rental will be accounted for prospectively.
Off-Balance Sheet Arrangements
We are the General Partner or co-General Partner of various limited partnerships whose underlying assets consist primarily of marketable securities.
Our income from these limited partnerships consists of our share of the management fees and a 20% incentive allocation on profits earned by the limited partners. We also receive a pro-rata return on any investment we have in the limited partnership. We earned management fees of $3.1 million, $3.0 million and $2.1 million in 2012, 2011 and $1.5 million in 2011, 2010, and 2009, respectively, and incentive fees of $1.2 million, $1.4 million and $2.2 million in 2012, 2011 and $1.8 million in 2011, 2010, and 2009, respectively. Our pro-rata gain on investments in these limited partnerships totaled $0.9 million, $1.6 million and $2.1 million in 2012, 2011 and $1.3 million in 2011, 2010, and 2009, respectively.
We do not invest in any other off-balance sheet vehicles that provide financing, liquidity, market or credit risk support or engage in any leasing activities that expose us to any liability that is not reflected on the Consolidated Financial Statements.
Critical Accounting Policies
In the ordinary course of business, we make a number of estimates and assumptions relating to the reporting of results of operations and financial condition in the preparation of our financial statements in conformity with U.S. generally accepted accounting principles. We base our estimates on historical experience, when available, and on other various assumptions that are believed to be reasonable under the circumstances. Actual results could differ significantly from those estimates under different assumptions and conditions.
We believe the critical assumptions and estimates are those applied to revenue recognition, the accounting for and valuation of investments in securities, partnerships, and offshore funds, goodwill and other long-lived intangibles, income taxes, and stock based compensation accounting.
Major Revenue-Generating Services and Revenue Recognition
The Company’s revenues are derived primarily from investment advisory and incentive fees, institutional research services and distribution fees.
Investment advisory and incentive fees are directly influenced by the level and mix of AUM as fees are derived from a contractually-determined percentage of AUM for each account as well as incentive fees earned on certain accounts. Advisory fees from the open-end mutual funds, closed-end funds and sub-advisory accounts are computed daily or weekly based on average net assets and amounts receivable are included in investment advisory fees receivable on the consolidated statements of financial condition. Advisory fees from Institutional and Private Wealth Management accounts are generally computed quarterly based on account values as of the end of the preceding quarter, and amounts receivable are included in investment advisory fees receivable on the consolidated statements of financial condition. Management fees from investment partnerships and offshore funds are computed either monthly or quarterly, and amounts receivable are included in investment advisory fees receivable on the consolidated statements of financial condition. The Company derived approximately 82%84%, 83%82% and 82%83% of its total revenues from advisory and management fees, including incentive fees, for the periods ended December 31, 2012, 2011 2010 and 2009,2010, respectively. These revenues vary depending upon the level of sales compared with redemptions, financial market conditions, performance and the fee structure for AUM. Revenues derived from the equity-oriented portfolios generally have higher management fee rates than fixed income portfolios.
Revenues from investment partnerships and offshore funds also generally include an incentive allocation on the absolute gain in a portfolio or a fee of 20% of the economic profit as defined in the partnership agreement. The incentive allocation or fee is recognized at the end of the measurement period, which is annually, and amounts receivable are included in investment advisory fees receivable on the consolidated statements of financial condition. There were $2.3$3.0 million and $3.7$2.3 million in incentive allocations or fees receivable as of December 31, 20112012 and 2010,2011, respectively. The Company also receives incentive fees from certain Institutional and Private Wealth Management accounts, which are based upon meeting or exceeding specific benchmark index or indices. Incentive fees refer to fees earned when the return generated for the client exceeds the benchmark and can be earned even if the return to the client is negative as long as the return exceeds the benchmark. These fees are recognized, for each respective account, at the end of the stipulated contract period which is both quarterly and annually and varies by account. Receivables due for incentive fees earned are included in investment advisory fees receivable on the consolidated statements of financial condition. There were $0.9$2.0 million and $8.4$0.9 million in incentive fees receivable as of December 31, 20112012 and 2010,2011, respectively. Management fees on a majority of the closed-end preferred shares are received at year-end if the total return to common shareholders of the closed-end fund for the calendar year exceeds the dividend rate of the preferred shares. These fees are recognized at the end of the measurement period, which is annually. Receivables due for management fees on closed-end preferred shares are included in investment advisory fees receivable on the consolidated statements of financial condition. There were $3.7$7.0 million and $8.7$3.7 million in management fees receivable on closed-end preferred shares as of December 31, 20112012 and 2010,2011, respectively. For The GDL Fund, there is an incentive fee earned as of the end of the calendar year and varies to the extent the total return of the fund is in excess of the 90 day T-Bill Index total return. This fee is recognized at the end of the measurement period, which is annually on a calendar year basis. Receivables due on incentive fees relating to The GDL Fund are included in investment advisory fees receivable on the consolidated statements of financial condition and were $1.3$4.6 million and $3.3$1.3 million as of December 31, 20112012 and 2010,2011, respectively.
Gabelli & Company, Inc. provides institutional research services and earns brokerage commission revenues and sales manager fees on a trade-date basis from securities transactions executed on an agency basis on behalf of institutional clients and mutual funds, private wealth management clients and retail customers of affiliated companies. It has also been involved in syndicated underwriting activities that included public equity and debt offerings managed by major investment banks. Underwriting fees include underwriting revenues and syndicate profits and are accrued as earned. Underwriting fees include gains, losses, selling concessions and fees, net of syndicate expenses, arising from securities offerings in which the Company acts as underwriter or agent. It provides institutional investors and investment partnerships with investment ideas on numerous industries and special situations, with a particular focus on small-cap and mid-cap companies. Commission revenue and related clearing charges are recorded on a trade-date basis and are included in commission revenue and other operating expenses, respectively, on the consolidated statements of income.
Distribution fees revenues are derived primarily from the distribution of Gabelli, GAMCO and Comstock open-end mutual funds (“Funds”) advised by a subsidiary of GBL, Funds Advisor and a subsidiary of GGCP, Teton. Effective August 1, 2011, G.distributors distributes our open-end Funds pursuant to distribution agreements with each Fund. Under each distribution agreement with an open-end Fund, G.distributors offers and sells such open-end Fund 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 G.distributors’ sales personnel. G.distributors receive fees for such services pursuant to distribution plans adopted under provisions of Rule 12b-1 of the Investment Company Act of 1940 (“Company Act”). G.distributors is the principal underwriter for funds distributed in multiple classes of shares which carry either a front-end or back-end sales charge. Prior to August 1, 2011, Gabelli & Company was the distributor of the Gabelli, GAMCO and Comstock open-end Funds.
Under the distribution plans, the open-end Class AAA shares of the Funds (except The Gabelli U.S. Treasury Money Market Fund, Gabelli Capital Asset Fund and The Gabelli ABC Fund) and the Class A shares of certain Funds pay G.distributors a distribution or service fee of .25% per year (except the Class A shares of the Westwood Funds which pay .50% per year, except for the GAMCOTETON Westwood Intermediate Bond Fund which pays .35%, and the Class A shares of the Gabelli Enterprise Mergers and Acquisitions Fund which pay .45% per year) on the average daily net assets of the fund. Class B and Class C shares have a 12b-1 distribution plan with a service and distribution fee totaling 1%.
Distribution fees from the open-end mutual funds are computed daily based on average net assets. The amounts receivable for distribution fees are included in receivables from affiliates on the consolidated statements of financial condition.
Finally, GBL also has investment gains or losses generated from its proprietary trading activities which are included in net gain/(loss) from investments on the consolidated statements of income.
Investments in Securities Transactions and Other Than Temporary Impairment
Investments in securities are accounted for as either “trading securities” or “available for sale” and are stated at fair value. Management determines the appropriate classification of debt and equity securities at the time of purchase and reevaluates such designations as of each balance sheet date. U.S. Treasury Bills and Notes with maturities of greater than three months at the time of purchase are considered investments in securities. Securities that are not readily marketable are stated at their estimated fair values in accordance with Generally Accepted Accounting Principles (“GAAP”). A substantial portion of investments in securities are held for resale in anticipation of short-term market movements and therefore are classified as trading securities. Trading securities are stated at fair value, with any unrealized gains or losses reported in current period earnings in net gain/(loss) from investments on the consolidated statements of income. AFS investments are stated at fair value, with any unrealized gains or losses, net of taxes, reported as a component of equityother comprehensive income except for losses deemed to be other than temporary which are recorded as realized losses on the consolidated statements of income. 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 specific identified cost basis and are included in net gain/(loss) from investments on the consolidated statements of income.
AFS securities are evaluated for other than temporary impairments each reporting period and any impairment charges are recorded in net gain/(loss) from investments on the consolidated statements of income. Management reviews all available for sale securities whose cost exceeds their fair value to determine if the impairment is other than temporary. Management uses qualitative factors such as diversification of the investment, the intent to hold the investment, the amount of time that the investment has been impaired and the severity of the decline in determining whether the impairment is other than temporary.
Securities sold, but not yet purchased are recorded on the trade date, and are stated at fair value and represent obligations of GBL 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. Realized gains and losses from covers of securities sold, not yet purchased transactions are included in net gain/(loss) from investments on the consolidated statements of income. Securities sold, not yet purchased are stated at fair value, with any unrealized gains or losses reported in current period earnings in net gain/(loss) from investments on the consolidated statements of income.
Consolidation
In accordance with the consolidation assessment models set forth in ASC 810-10 and 810-20, the Company consolidates all investments in partnerships and affiliates in which the Company has a controlling interest or is deemed to be the primary beneficiary. In order to make this determination, an analysis is performed to determine if the entity is a variable interest entity (“VIE”) or a voting interest entity (“VOE”). If the entity is a VIE, further analysis, as discussed below, is performed to determine if GBL is the primary beneficiary of the entity. If the entity is not a VIE, the Company will apply the VOE model as discussed below.
Variable Interest Entities
A VIE is an entity in which either (a) the equity investment at risk is not sufficient to permit the entity to finance its own activities without additional financial support or (b) the equity investors do not have the ability to make decisions about the entities’ activities or obligation to absorb the expected losses of the entity or the right to receive the expected residual returns of the entity or (c) the voting rights are not proportional to their obligations to absorb the expected losses of the entity or their rights to receive the expected residual returns of the entity. The Company evaluates whether entities in which it has an interest are VIEs and whether the Company is the primary beneficiary of any VIEs identified in its analysis. The Company is determined to be the primary beneficiary if it absorbs a majority of the VIE’s expected losses, expected residual returns, or both. If the Company is the primary beneficiary of a VIE, it consolidates that entity. If the Company is not the primary beneficiary, it accounts for its investment under the equity method.
In June 2009 the Financial Accounting Standards Board (“FASB”) amended the guidance on VIEs when it issued ASU 2009-17. This guidance requires that if a decision maker has a variable interest in a VIE, the decision maker is not solely acting in a fiduciary capacity and would be required to consolidate the VIE if it has both the power to direct the most significant activities of the VIE and economic exposure that could potentially be significant to the VIE. The Company is general partner or co-general partner of various sponsored partnerships and the investment manager of various sponsored offshore funds whose underlying assets consist primarily of marketable securities (the “affiliated entities”). If the Company were to apply such guidance it would be required to consolidate most of its affiliated entities. In February 2010, the FASB issued ASU 2010-10, which indefinitely deferred the effective date of the amendments to ASC 810-10 made by ASU 2009-17, for a reporting entity’s interest in certain entities. Currently, interests in entities that qualify for the deferral are evaluated by applying the VIE model in ASC 810-10 (i.e., before the amendments by ASU 2009-17), while interests in entities that do not qualify for the deferral must be evaluated under the amendments in ASU 2009-17. Because all of the entities with which the Company is involved which would have been subject to the guidance in ASU 2009-17 were determined to qualify for the FASB’s deferral of such guidance, the Company applies the guidance for VIEs that existed prior to the issuance of ASU 2009-17.
Voting Interest Entities
If the entity is not considered a VIE, it is treated as a VOE, and the Company applies the guidance in ASC 810-20 in determining whether the entity should be consolidated. Under ASC 810-20, the general partner or investment manager is deemed to control the entity and therefore must consolidate it unless the unaffiliated limited partners or shareholders (a) have the ability to remove the general partner or investment manager, without cause, (b) have the ability to dissolve the entity or (c) have substantive participating rights. If the unaffiliated limited partners or shareholders possess any of the foregoing rights, then the Company does not consolidate the entity, and either the equity or cost method of accounting is applied. If the unaffiliated limited partners or shareholders do not have any such rights, the Company consolidates the entity.
Equity Method Investments
Substantially all of GBL’s equity method investees are entities that record their underlying investments at fair value. Therefore, under the equity method of accounting, GBL’s share of the investee’s underlying net income predominantly represents fair value adjustments in the investments held by the equity method investees. GBL’s share of the investee’s underlying net income or loss is based upon the most currently available information and is recorded as “Net gain/(loss) from investments” on the consolidated statements of income. Capital contributions are recorded as an increase in investments when paid, while withdrawals and distributions are recorded as reductions of the investments when received. Depending on the terms of the investment, the Company may be restricted as to the timing and amounts of withdrawals.
See Note D. Investments in Partnerships, Offshore Funds and Variable Interest Entities (“VIEs”) for more detail as to the number and types of entities consolidated as well as the impact on the consolidated statements of financial condition and consolidated statements of income.
Investments in Partnerships and Affiliates
Affiliated Entities
The Company is general partner or co-general partner of various sponsored limited partnerships and the investment manager of various sponsored offshore funds whose underlying assets consist primarily of marketable securities (the “affiliated entities”). In accordance with the consolidation assessment models set forth in ASC 810-10 and 810-20, the Company consolidates all investments in partnerships and affiliates in which the Company has a controlling financial interest.
The Company first determines whether an entity is a variable interest entity (“VIE”). A VIE is an entity in which either (a) the equity investment at risk is not sufficient to permit the entity to finance its own activities without additional financial support or (b) the equity investors do not have the ability to make decisions about the entities’ activities or obligation to absorb the expected losses of the entity or the right to receive the expected residual returns of the entity or (c) the voting rights are not proportional to their obligations to absorb the expected losses of the entity or their rights to receive the expected residual returns of the entity. The Company evaluates whether entities in which it has an interest are VIEs and whether the Company is the primary beneficiary of any VIEs identified in its analysis. The Company is determined to be the primary beneficiary if it absorbs a majority of the VIE’s expected losses, expected residual returns, or both. If the Company is the primary beneficiary of a VIE, it consolidates that entity. If the Company is not the primary beneficiary, it accounts for its investment under the equity method.
In June 2009 the Financial Accounting Standards Board (“FASB”) amended the guidance on VIEs when it issued ASU 2009-17. This guidance requires that if a decision maker has a variable interest in a VIE, the decision maker is not solely acting in a fiduciary capacity and would be required to consolidate the VIE if it has both the power to direct the most significant activities of the VIE and economic exposure that could potentially be significant to the VIE. If the Company were to apply such guidance it would be required to consolidate most of its affiliated entities. In February 2010, the FASB issued ASU 2010-10, which indefinitely deferred the effective date of the amendments to ASC 810-10 made by ASU 2009-17, for a reporting entity’s interest in certain entities. Currently, interests in entities that qualify for the deferral are evaluated by applying the VIE model in ASC 810-10 (i.e., before the amendments by ASU 2009-17), while interests in entities that do not qualify for the deferral must be evaluated under the amendments in ASU 2009-17. Because all of the entities with which the Company is involved which would have been subject to the guidance in ASU 2009-17 were determined to qualify for the FASB’s deferral of such guidance, the Company applies the guidance for VIEs that existed prior to the issuance of ASU 2009-17.
If the entity is not considered a VIE it is treated as a voting interest entity (“VOE”) and the Company applies the guidance in ASC 810-20 in determining whether the entity should be consolidated. Under ASC 810-20, the general partner or investment manager is deemed to control the entity and therefore must consolidate it unless the unaffiliated limited partners or shareholders have the ability (a) to remove the general partner or investment manager, without cause, (b) to dissolve the entity or (c) have substantive participating rights. If the unaffiliated limited partners or shareholders possess substantive rights, then the Company does not consolidate the entity, and the equity method of accounting is applied. If the unaffiliated limited partners or shareholders do not have such rights, the Company consolidates the entity.
For those investments accounted for under the equity method, the Company’s share in net earnings or losses of these affiliated entities are reflected in income as earned and are included in net gain/(loss) from investments on the consolidated statements of income. Capital contributions are recorded as an increase in investments when paid, while withdrawals and distributions received are recorded as reductions of the investments. Depending on the terms of the investment, the Company may be restricted as to the timing and amounts of withdrawals.
For consolidated feeder funds (“CFFs”) that own 100% of their offshore master funds, the Company retains the feeder funds’ specialized investment company accounting (i.e., the feeder funds accounts for its investment in the master fund at fair value).
The Company records noncontrolling interests in consolidated entities for which the Company’s ownership is less than 100%.
Unaffiliated entities
We also have investments in unaffiliated partnerships, offshore funds and other entities. The Company applies the same guidance to entities (“unaffiliated entities as it does for affiliated entities, first looking at the VIE criteria, then VOE criteria and finally applying the equity method, if applicable.entities”). Given that we are not a general partner or investment manager in any unaffiliated entities, we do not earn any management or incentive fees and we do not have a controlling financial interest, we do not currently consolidate any unaffiliated entities.
Our balance sheet caption “investments“Investments in partnerships” includes those investments, in both affiliated and unaffiliated entities, which the Company accounts for under the equity method of accounting and certain investments in consolidated feeder funds (“CFFs”) that the Company accounts for at fair value, as described above. below.
For CFFs that own 100% of their offshore master funds, the Company retains the CFF’s specialized investment company accounting (i.e., the CFFs account for their investment in master funds at fair value).
The Company reflectsrecords noncontrolling interests in consolidated entities for which the equity in earnings of these equity method investees and the change in fair value of the consolidated feeder funds under the caption net gain/(loss) from investments on the consolidated statements of income.Company’s ownership is less than 100%. Refer to Noncontrolling Interests section within Note A for additional disclosures.
Goodwill and Identifiable Intangible Assets
Goodwill is initially measured as the excess of the cost of the acquired business over the sum of the amounts assigned to assets acquired less the liabilities assumed. At December 31, 2012 and 2011, and 2010,$3.3 million of goodwill recorded on the consolidated statements of financial condition relates to our 93%-owned subsidiary, GSI, $0.2 million relates to G.distributors and the $1.9 million identifiable intangible asset is an investment advisory contract for the Gabelli Enterprise Mergers and Acquisition Fund.Fund which relates to Funds Advisor. Goodwill and identifiable intangible assets are tested for impairment at least annually on November 30th and whenever certain triggering events are met. In assessing the recoverability of goodwill and identifiable intangible assets, projections regarding estimated future cash flows and other factors are made to determine the fair value of the respective assets.
Income Taxes
Deferred tax assets and liabilities are recorded for temporary differences between the tax basis of assets and liabilities and the reported amounts on the consolidated financial statements using the statutory tax rates in effect for the year when the reported amount of the asset or liability is recovered or settled, respectively. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is recorded to reduce the carrying values of deferred tax assets to the amount that is more likely than not to be realized. For each tax position taken or expected to be taken in a tax return, the Company determines whether it is more likely than not that the position will be sustained upon examination based on the technical merits of the position, including resolution of any related appeals or litigation. A tax position that meets the more likely than not recognition threshold is measured to determine the amount of benefit to recognize. The tax position is measured at the largest amount of benefit that is greater than 50% likely of being realized upon settlement. The Company recognizes the accrual of interest on uncertain tax positions and penalties in income tax provision on the consolidated statements of income.
Stock Based Compensation
The Company has granted RSAs and stock options to staff members which were recommended by the Company’s Chairman, who did not receive an RSA or option award, and approved by the Compensation Committee of the Company’s Board of Directors. We use a fair value based method of accounting for stock-based compensation provided to our employees. The estimated fair value of RSAs is determined by using the closing price of our Class A Stock on the day prior to the grant date. The total expense, which is reduced by estimated forfeitures, is recognized over the vesting period for these awards which is 30% over three years from the date of grant and 70% over five years from the date of grant. The forfeiture rate is determined by reviewing historical forfeiture rates for previous stock-based compensation grants and is reviewed and updated quarterly, if necessary. During the vesting period, dividends to RSA holders are held for them until the RSA vesting dates and are forfeited if the grantee is no longer employed by the Company on the vesting dates. Dividends declared on these RSAs, less estimated forfeitures, are charged to retained earnings on the declaration date. During 2012, the Board of Directors accelerated the lapsing of restrictions on all outstanding RSAs.
The estimated fair value of option awards is determined using the Black Scholes option-pricing model. This sophisticated model utilizes a number of assumptions in arriving at its results, including the estimated life of the option, the risk free interest rate at the date of grant and the volatility of the underlying common stock. There may be other factors, which have not been considered, which may have an effect on the value of the options as well. The effects of changing any of the assumptions or factors employed by the Black Scholes model may result in a significantly different valuation for the options. The total expense, which is reduced by estimated forfeitures, is recognized over the vesting period for these awards which is 75% over three years from the date of grant and 25% after four years from date of grant. The forfeiture rate is determined by reviewing historical forfeiture rates for previous stock-based compensation grants and is reviewed and updated quarterly, if necessary.
Recent Accounting Developments
In January 2010, the FASB issued guidance to improve disclosures about fair value measurements. The guidance affects all entities that are required to make disclosures about recurring and nonrecurring fair value measurements. The guidance requires new disclosures regarding purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. The guidance is effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The Company adopted the applicable portions of this guidance on January 1, 2011 without a material impact to the consolidated financial statement disclosures.
In May 2011, the FASBFinancial Accounting Standards Board (“FASB”) issued guidance on fair value measurement which expands existing disclosure requirements for fair value measurements and makes other amendments. The guidance requires, for level 3 fair value measurements, (1) a quantitative disclosure of the unobservable inputs and assumptions used in the measurement, (2) a description of the valuation processes in place, and (3) a narrative description of the sensitivity of the fair value to changes in unobservable inputs and interrelationships between those inputs. Additionally, the guidance requires disclosure of the level in the fair value hierarchy of items that are not measured at fair value in the statement of financial condition but whose fair value must be disclosed and clarifies that the valuation premise and highest and best use concepts are not relevant to financial assets or liabilities. The guidance is effective for interim and annual periods beginning after December 15, 2011. The applicationLevel 3 investments held by the Company are not material, and therefore the adoption of this guidance will result in enhanced footnote disclosure upon adoptionstandard did not have a material impact on January 1, 2012.
In June 2011, the FASB issued guidance which revises the manner in which entities present comprehensive income in their financial statements. The new guidance requires entities to report comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. Under the two-statement approach, the first statement would include components of net income, which is consistent with the income statement format used currently,historically, and the second statement would include components of other comprehensive income (“OCI”). The guidance does not change the items that must be reported in OCI. In December 2011, the FASB indefinitely deferred a portion of the guidance that would have required entities to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement in which the net income is presented and the statement in which other comprehensive income is presented. The guidance is effective for fiscal years beginning after December 15, 2011, and for interim periods within those fiscal years. The application of thisCompany adopted the guidance is not expected to be material toon January 1, 2012 and opted for the two separate but consecutive statements approach. Accordingly, the Company now presents the consolidated financial statements.
statements of comprehensive income immediately following the consolidated statements of income.
In September 2011, the FASB issued guidance which permits an entity to make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying value before applying the quantitative two-step goodwill impairment model that is currently in place. If it is determined through the qualitative assessment that a reporting unit’s fair value is more likely than not greater than its carrying value, the remaining impairment steps would be unnecessary. The qualitative assessment is optional, allowing companies to go directly to the quantitative assessment. This guidance is effective for annual and interim goodwill impairment tests performed in fiscal years beginning after December 15, 2011, with early adoption allowed. The Company early adopted this guidance that allowed for a qualitative assessment of whether it is more likely than not that an impairment has occurred.
In December 2011, the FASB issued guidance which creates new disclosure requirements about the nature of an entity’s right of offset and related arrangements associated with its financial instruments and derivative instruments. The disclosure requirements are effective for annual reporting periods beginning on or after January 1, 2013, and interim periods therein, with retrospective application required. The new disclosures are designed to make financial statements that are prepared under U.S. GAAP more comparable to those prepared under International Financial Reporting Standards. The Company is currently evaluating the impact that the application of this guidance will have on its disclosures.
In July 2012, the FASB issued guidance allowing companies to first perform a qualitative assessment to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired. If a company determines, on the basis of qualitative factors, that the fair value of such asset is not more likely than not impaired, it would not need to calculate the fair value of such asset. However, if a company concludes otherwise, it must calculate the fair value of the asset, compare the value with its carrying amount and record an impairment charge, if any. To perform the qualitative assessment, a company must identify and evaluate events and circumstances that could affect the significant inputs used to determine the fair value of an indefinite-lived intangible asset. This guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. The Company expects to adopt this guidance on January 1, 2013.
In February 2013, the FASB issued guidance which adds new disclosure requirements for items reclassified out of accumulated other comprehensive income (“AOCI”). The guidance is intended to help entities improve the transparency of changes in other comprehensive income (“OCI”) and items reclassified out of AOCI in their financial statements. It does not amend any existing requirements for reporting net income or OCI in the financial statements. The guidance requires entities to disclose additional information about reclassification adjustments, including changes in AOCI balances by component and significant items reclassified out of AOCI. The guidance requires an entity to present information about significant items reclassified out of AOCI by component either on the face of the statement where net income is presented or as a separate disclosure in the notes to the financial statements. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2012. Early adoption is permitted. The Company is currently evaluating the impact that the application of this guidance will have on its disclosures.
Seasonality and Inflation
We do not believe our operations are subject to significant seasonal fluctuations. We do not believe inflation will significantly affect our compensation costs, as they are substantially variable in nature. However, the rate of inflation may affect our 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 our financial position and results of operations by reducing our AUM, revenues or otherwise.
Reference is made to the information contained under the heading “Management's Discussion and Analysis of Financial Condition and Results of Operations -- Market Risk.”
GAMCO INVESTORS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| Page |
| |
| |
Report of Independent Registered Public Accounting Firm | 4847 |
Report of Independent Registered Public Accounting Firm on Effectiveness of Internal Control over Financial Reporting | 4948 |
| |
Consolidated Financial Statements: | |
Consolidated Statements of Income for the years ended December 31, 2012, 2011 2010 and 20092010 | 49 |
Consolidated Statements of Comprehensive Income for the years ended December 31, 2012, 2011 and 2010 | 50 |
Consolidated Statements of Financial Condition at December 31, 20112012 and 20102011 | 51 |
Consolidated Statements of Equity and Comprehensive Income | |
for the years ended December 31, 2012, 2011 2010 and 2009 2010 | 52 |
Consolidated Statements of Cash Flows for the years ended December 31, 2012, 2011 2010 and 20092010 | 55 |
Notes to Consolidated Financial Statements | 57 |
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 REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
GAMCO Investors, Inc.
Rye, New York
We have audited the accompanying consolidated statements of financial condition of GAMCO Investors, Inc. and subsidiaries (the "Company") as of December 31, 20112012 and 2010,2011, and the related consolidated statements of income, equity and comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2011.2012. 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 the standards of the Public Company Accounting Oversight Board (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, such consolidated financial statements present fairly, in all material respects, the financial position of GAMCO Investors, Inc. and subsidiaries at December 31, 20112012 and 2010,2011, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2011,2012, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2011,2012, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 6, 20128, 2013 expressed an unqualified opinion on the Company's internal control over financial reporting.
DELOITTE & TOUCHE LLP
New York, New York
March 6, 20128, 2013
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
GAMCO Investors, Inc.
Rye, New York
We have audited the internal control over financial reporting of GAMCO Investors, Inc. and subsidiaries (the "Company") as of December 31, 2011,2012, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011,2012, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 20112012 of the Company and our report dated March 6, 2012,8, 2013, expressed an unqualified opinion on those financial statements.
DELOITTE & TOUCHE LLP
New York, New York
March 6, 20128, 2013
GAMCO INVESTORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
| | Year Ended December 31, | |
| | 2012 | | | 2011 | | | 2010 | |
Revenues | | | | | | | | | |
Investment advisory and incentive fees | | $ | 288,480 | | | $ | 268,024 | | | $ | 231,269 | |
Distribution fees and other income | | | 44,848 | | | | 44,816 | | | | 32,511 | |
Institutional research services | | | 10,953 | | | | 14,288 | | | | 16,600 | |
Total revenues | | | 344,281 | | | | 327,128 | | | | 280,380 | |
Expenses | | | | | | | | | | | | |
Compensation | | | 137,223 | | | | 130,382 | | | | 113,255 | |
Stock based compensation | | | 13,583 | | | | 2,588 | | | | 10,585 | |
Management fee | | | 13,018 | | | | 12,270 | | | | 12,013 | |
Distribution costs | | | 40,842 | | | | 44,427 | | | | 31,048 | |
Other operating expenses | | | 28,485 | | | | 24,167 | | | | 22,450 | |
Total expenses | | | 233,151 | | | | 213,834 | | | | 189,351 | |
Operating income | | | 111,130 | | | | 113,294 | | | | 91,029 | |
Other income (expense) | | | | | | | | | | | | |
Net gain from investments | | | 22,741 | | | | 5,549 | | | | 24,888 | |
Extinguishment of debt | | | (6,307 | ) | | | 2 | | | | (497 | ) |
Interest and dividend income | | | 5,651 | | | | 6,594 | | | | 5,905 | |
Interest expense | | | (15,899 | ) | | | (14,997 | ) | | | (11,984 | ) |
Total other income (expense), net | | | 6,186 | | | | (2,852 | ) | | | 18,312 | |
Income before income taxes | | | 117,316 | | | | 110,442 | | | | 109,341 | |
Income tax provision | | | 41,721 | | | | 40,767 | | | | 39,326 | |
Net income | | | 75,595 | | | | 69,675 | | | | 70,015 | |
Net income (loss) attributable to noncontrolling interests | | | 56 | | | | (7 | ) | | | 1,223 | |
Net income attributable to GAMCO Investors, Inc.'s shareholders | | $ | 75,539 | | | $ | 69,682 | | | $ | 68,792 | |
| | | | | | | | | | | | |
Net income per share attributable to GAMCO Investors, Inc.'s | | | | | | | | | | | | |
shareholders: | | | | | | | | | | | | |
Basic | | $ | 2.87 | | | $ | 2.62 | | | $ | 2.55 | |
Diluted | | $ | 2.86 | | | $ | 2.61 | | | $ | 2.52 | |
| | | | | | | | | | | | |
Weighted average shares outstanding: | | | | | | | | | | | | |
Basic | | | 26,283 | | | | 26,636 | | | | 26,959 | |
Diluted | | | 26,436 | | | | 26,724 | | | | 28,348 | |
See accompanying notes. | | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2011 | | | 2010 | | | 2009 | |
Revenues | | | | | | | | | |
Investment advisory and incentive fees | | $ | 268,024 | | | $ | 231,269 | | | $ | 178,713 | |
Institutional research services | | | 14,288 | | | | 16,600 | | | | 16,715 | |
Distribution fees and other income | | | 44,816 | | | | 32,511 | | | | 22,686 | |
Total revenues | | | 327,128 | | | | 280,380 | | | | 218,114 | |
Expenses | | | | | | | | | | | | |
Compensation | | | 132,970 | | | | 123,840 | | | | 92,859 | |
Management fee | | | 12,270 | | | | 12,013 | | | | 9,758 | |
Distribution costs | | | 44,427 | | | | 31,048 | | | | 24,339 | |
Other operating expenses | | | 24,167 | | | | 22,450 | | | | 18,948 | |
Total expenses | | | 213,834 | | | | 189,351 | | | | 145,904 | |
Operating income | | | 113,294 | | | | 91,029 | | | | 72,210 | |
Other income (expense) | | | | | | | | | | | | |
Net gain from investments | | | 5,551 | | | | 24,391 | | | | 25,558 | |
Interest and dividend income | | | 6,594 | | | | 5,905 | | | | 3,425 | |
Interest expense | | | (14,997 | ) | | | (11,984 | ) | | | (13,290 | ) |
Total other income (expense), net | | | (2,852 | ) | | | 18,312 | | | | 15,693 | |
Income before income taxes | | | 110,442 | | | | 109,341 | | | | 87,903 | |
Income tax provision | | | 40,767 | | | | 39,326 | | | | 31,761 | |
Net income | | | 69,675 | | | | 70,015 | | | | 56,142 | |
Net income (loss) attributable to noncontrolling interests | | | (7 | ) | | | 1,223 | | | | 609 | |
Net income attributable to GAMCO Investors, Inc.'s shareholders | | $ | 69,682 | | | $ | 68,792 | | | $ | 55,533 | |
| | | | | | | | | | | | |
Net income attributable to GAMCO Investors, Inc.'s shareholders | | | | | | | | | | | | |
per share: | | | | | | | | | | | | |
Basic | | $ | 2.62 | | | $ | 2.55 | | | $ | 2.03 | |
Diluted | | $ | 2.61 | | | $ | 2.52 | | | $ | 2.02 | |
| | | | | | | | | | | | |
Weighted average shares outstanding: | | | | | | | | | | | | |
Basic | | | 26,636 | | | | 26,959 | | | | 27,345 | |
Diluted | | | 26,724 | | | | 28,348 | | | | 28,214 | |
See accompanying notes. | | | | | | | | | | | | |
GAMCO INVESTORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands, except per share data)
| | Year Ended December 31, | |
| | 2012 | | | 2011 | | | 2010 | |
| | | | | | | | | |
Net income | | $ | 75,595 | | | $ | 69,675 | | | $ | 70,015 | |
Other comprehensive income/(loss), net of tax: | | | | | | | | | | | | |
Foreign currency translation | | | (28 | ) | | | 8 | | | | (16 | ) |
Net unrealized gains/(losses) on securities available for sale (a) | | | 3,808 | | | | (2,877 | ) | | | 6,317 | |
Total other comprehensive income/(loss) | | | 3,780 | | | | (2,869 | ) | | | 6,301 | |
| | | | | | | | | | | | |
Comprehensive income | | | 79,375 | | | | 66,806 | | | | 76,316 | |
Less: Comprehensive income/(loss) attributable to noncontrolling interests | | | (56 | ) | | | 7 | | | | (1,223 | ) |
| | | | | | | | | | | | |
Comprehensive income attributable to GAMCO Investors, Inc. | | $ | 79,319 | | | $ | 66,813 | | | $ | 75,093 | |
| | | | | | | | | | | | |
(a) Net of income tax expense of $2,236 for 2012, income tax benefit of ($1,690) for 2011 and income tax expense of $3,710 for 2010. | |
| | | | | | | | | | | | |
See accompanying notes. | | | | | | | | | | | | |
GAMCO INVESTORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except per share data) |
| | December 31, | | | December 31, | |
| | 2011 | | | 2010 | |
ASSETS | | | | | | |
| | | | | | |
Cash and cash equivalents | | $ | 276,340 | | | $ | 169,601 | |
Investments in securities | | | 297,547 | | | | 305,486 | |
Investments in partnerships | | | 100,893 | | | | 82,871 | |
Receivable from brokers | | | 20,913 | | | | 46,621 | |
Investment advisory fees receivable | | | 32,156 | | | | 44,660 | |
Receivable from affiliates | | | 5,048 | | | | 3,837 | |
Capital lease | | | 3,133 | | | | 3,394 | |
Goodwill and identifiable intangible asset | | | 5,358 | | | | 5,358 | |
Income tax receivable | | | 39 | | | | 325 | |
Other assets | | | 15,322 | | | | 10,583 | |
Total assets | | $ | 756,749 | | | $ | 672,736 | |
| | | | | | | | |
LIABILITIES AND EQUITY | | | | | | | | |
| | | | | | | | |
Payable to brokers | | $ | 10,770 | | | $ | 1,554 | |
Income taxes payable and deferred tax liabilities | | | 15,296 | | | | 23,225 | |
Capital lease obligation | | | 5,072 | | | | 5,182 | |
Compensation payable | | | 17,695 | | | | 23,771 | |
Securities sold, not yet purchased | | | 5,488 | | | | 19,299 | |
Mandatorily redeemable noncontrolling interests | | | 1,386 | | | | 1,444 | |
Accrued expenses and other liabilities | | | 24,441 | | | | 23,089 | |
Sub-total | | | 80,148 | | | | 97,564 | |
| | | | | | | | |
5.5% Senior notes (due May 15, 2013) | | | 99,000 | | | | 99,000 | |
5.875% Senior notes (due June 1, 2021) | | | 100,000 | | | | - | |
Zero coupon subordinated debentures, Face value: $86.3 million at December 31, 2011 and | | | | | | | | |
$86.4 million at December 31, 2010 (due December 31, 2015) | | | 64,119 | | | | 59,580 | |
Total liabilities | | | 343,267 | | | | 256,144 | |
| | | | | | | | |
Redeemable noncontrolling interests | | | 6,071 | | | | 26,984 | |
| | | | | | | | |
Commitments and contingencies (Note J) | | | | | | | | |
| | | | | | | | |
Equity: | | | | | | | | |
Preferred stock, $.001 par value; 10,000,000 shares authorized; none issued and outstanding | | | | | | | | |
Class A Common Stock, $0.001 par value; 100,000,000 shares authorized; 13,627,397 and 13,255,503 | | | | | | | | |
shares issued, respectively; 6,684,149 and 6,763,221 shares outstanding, respectively | | | 13 | | | | 13 | |
Class B Common Stock, $0.001 par value; 100,000,000 shares authorized; 24,000,000 shares issued | | | | | | | | |
and 20,070,746 and 20,290,140 shares outstanding, respectively | | | 20 | | | | 20 | |
Additional paid-in capital | | | 264,409 | | | | 262,108 | |
Retained earnings | | | 409,191 | | | | 370,272 | |
Accumulated comprehensive income | | | 22,520 | | | | 25,389 | |
Treasury stock, at cost (6,943,248 and 6,492,282 shares, respectively) | | | (292,181 | ) | | | (271,773 | ) |
Total GAMCO Investors, Inc. stockholders' equity | | | 403,972 | | | | 386,029 | |
Noncontrolling interests | | | 3,439 | | | | 3,579 | |
Total equity | | | 407,411 | | | | 389,608 | |
Total liabilities and equity | | $ | 756,749 | | | $ | 672,736 | |
| | | | | | | | |
See accompanying notes. | | | | | | | | |
| | December 31, | | | December 31, | |
| | 2012 | | | 2011 | |
ASSETS | | | | | | |
| | | | | | |
Cash and cash equivalents | | $ | 190,608 | | | $ | 276,340 | |
Investments in securities | | | 218,843 | | | | 238,333 | |
Investments in sponsored registered investment companies | | | 61,872 | | | | 59,214 | |
Investments in partnerships | | | 97,549 | | | | 100,893 | |
Receivable from brokers | | | 50,655 | | | | 20,913 | |
Investment advisory fees receivable | | | 42,429 | | | | 32,156 | |
Receivable from affiliates | | | 4,457 | | | | 5,048 | |
Capital lease | | | 2,872 | | | | 3,133 | |
Goodwill and identifiable intangible asset | | | 5,358 | | | | 5,358 | |
Income tax receivable | | | 1,018 | | | | 39 | |
Other assets | | | 15,072 | | | | 15,322 | |
Total assets | | $ | 690,733 | | | $ | 756,749 | |
| | | | | | | | |
LIABILITIES AND EQUITY | | | | | | | | |
| | | | | | | | |
Payable to brokers | | $ | 14,346 | | | $ | 10,770 | |
Income taxes payable and deferred tax liabilities | | | 25,398 | | | | 15,296 | |
Capital lease obligation | | | 4,949 | | | | 5,072 | |
Compensation payable | | | 10,535 | | | | 17,695 | |
Securities sold, not yet purchased | | | 3,136 | | | | 5,488 | |
Mandatorily redeemable noncontrolling interests | | | 1,342 | | | | 1,386 | |
Accrued expenses and other liabilities | | | 26,365 | | | | 24,441 | |
Sub-total | | | 86,071 | | | | 80,148 | |
| | | | | | | | |
5.5% Senior notes (due May 15, 2013) | | | 99,000 | | | | 99,000 | |
5.875% Senior notes (due June 1, 2021) | | | 100,000 | | | | 100,000 | |
Zero coupon subordinated debentures, Face value: $21.7 million at December 31, 2012 and | | | | | | | | |
$86.3 million at December 31, 2011 (due December 31, 2015) | | | 17,366 | | | | 64,119 | |
Total liabilities | | | 302,437 | | | | 343,267 | |
| | | | | | | | |
Redeemable noncontrolling interests | | | 17,362 | | | | 6,071 | |
| | | | | | | | |
Commitments and contingencies (Note J) | | | | | | | | |
| | | | | | | | |
Equity: | | | | | | | | |
Preferred stock, $.001 par value; 10,000,000 shares authorized; none issued and outstanding | | | | | | | | |
Class A Common Stock, $0.001 par value; 100,000,000 shares authorized; 14,203,146 and 13,627,397 | | | | | |
shares issued, respectively; 6,121,585 and 6,684,149 shares outstanding, respectively | | | 13 | | | | 13 | |
Class B Common Stock, $0.001 par value; 100,000,000 shares authorized; 24,000,000 shares issued | | | | | | | | |
and 19,624,174 and 20,070,746 shares outstanding, respectively | | | 20 | | | | 20 | |
Additional paid-in capital | | | 280,089 | | | | 264,409 | |
Retained earnings | | | 408,295 | | | | 409,191 | |
Accumulated comprehensive income | | | 26,300 | | | | 22,520 | |
Treasury stock, at cost (8,081,561 and 6,943,248 shares, respectively) | | | (347,109 | ) | | | (292,181 | ) |
Total GAMCO Investors, Inc. stockholders' equity | | | 367,608 | | | | 403,972 | |
Noncontrolling interests | | | 3,326 | | | | 3,439 | |
Total equity | | | 370,934 | | | | 407,411 | |
Total liabilities and equity | | $ | 690,733 | | | $ | 756,749 | |
| | | | | | | | |
See accompanying notes. | | | | | | | | |
GAMCO INVESTORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(In thousands)
| | | | | GAMCO Investors, Inc. shareholders | | | | | | | | | | | | | |
| | | | | | | | Additional | | | | | | Accumulated | | | | | | | | | Redeemable | |
| | Noncontrolling | | | Common | | | Paid-in | | | Retained | | | Comprehensive | | | Treasury | | | | | | Noncontrolling | |
| | Interests | | | Stock | | | Capital | | | Earnings | | | Income | | | Stock | | | Total | | | Interests | |
Balance at December 31, 2009 | | $ | 4,043 | | | $ | 33 | | | $ | 251,591 | | | $ | 410,473 | | | $ | 19,088 | | | $ | (241,567 | ) | | $ | 443,661 | | | $ | 1,464 | |
Redemptions of redeemable | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
noncontrolling interests | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (475 | ) |
Contributions from redeemable | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
noncontrolling interests | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 25,137 | |
Dividends paid to noncontrolling | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
interests | | | (829 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | (829 | ) | | | - | |
Net income | | | 365 | | | | - | | | | - | | | | 68,792 | | | | - | | | | - | | | | 69,157 | | | | 858 | |
Net unrealized gains on | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
securities available for sale, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
net of income tax ($3,710) | | | - | | | | - | | | | - | | | | - | | | | 6,317 | | | | - | | | | 6,317 | | | | - | |
Foreign currency translation | | | - | | | | - | | | | - | | | | - | | | | (16 | ) | | | - | | | | (16 | ) | | | - | |
Cash dividends declared | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
($1.82 per share) | | | - | | | | - | | | | - | | | | (49,413 | ) | | | - | | | | - | | | | (49,413 | ) | | | - | |
Non-cash dividends declared | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
($3.20 of principal per share) | | | - | | | | - | | | | - | | | | (59,580 | ) | | | - | | | | - | | | | (59,580 | ) | | | - | |
Stock based compensation | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
expense | | | - | | | | - | | | | 10,585 | | | | - | | | | - | | | | - | | | | 10,585 | | | | - | |
Reduction of deferred tax asset | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
for excess of recorded RSA tax | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
benefit over actual tax benefit | | | - | | | | - | | | | (1,872 | ) | | | - | | | | - | | | | - | | | | (1,872 | ) | | | - | |
Exercise of stock options | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
including tax benefit | | | - | | | | - | | | | 1,804 | | | | - | | | | - | | | | - | | | | 1,804 | | | | - | |
Purchase of treasury stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (30,206 | ) | | | (30,206 | ) | | | - | |
Balance at December 31, 2010 | | $ | 3,579 | | | $ | 33 | | | $ | 262,108 | | | $ | 370,272 | | | $ | 25,389 | | | $ | (271,773 | ) | | $ | 389,608 | | | $ | 26,984 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
See accompanying notes. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
GAMCO INVESTORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY AND COMPREHENSIVE INCOME
(In thousands)
| | | | GAMCO Investors, Inc. shareholders | | | | | |
| | | | | | Additional | | | | Accumulated | | | | | | Redeemable | | | |
| | Noncontrolling | | Common | | Paid-in | | Retained | | Comprehensive | | Treasury | | | | Noncontrolling | | Comprehensive | |
| | Interests | | Stock | | Capital | | Earnings | | Income | | Stock | | Total | | Interests | | Income | |
Balance at December 31, 2008 | | $ | 4,788 | | $ | 33 | | $ | 245,973 | | $ | 413,761 | | $ | 14,923 | | $ | (234,537 | ) | $ | 444,941 | | $ | 4,201 | | $ | - | |
Redemptions of redeemable | | | | | | | | | | | | | | | | | | | �� | | | | | | | | | |
noncontrolling interests | | | (747 | ) | | - | | | - | | | - | | | - | | | - | | | (747 | ) | | (2,932 | ) | | - | |
Spin-off of subsidiary shares | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
to noncontrolling interests | | | (412 | ) | | - | | | - | | | - | | | - | | | - | | | (412 | ) | | - | | | - | |
Net income | | | 414 | | | - | | | - | | | 55,533 | | | - | | | - | | | 55,947 | | | 195 | | | 56,142 | |
Net unrealized gains on | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
securities available for sale, | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
net of income tax ($15,765) | | | - | | | - | | | - | | | - | | | 4,112 | | | - | | | 4,112 | | | - | | | 4,112 | |
Foreign currency translation | | | - | | | - | | | - | | | - | | | 53 | | | - | | | 53 | | | - | | | 53 | |
Dividends declared ($2.13 per | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
share) | | | - | | | - | | | - | | | (58,821 | ) | | - | | | - | | | (58,821 | ) | | - | | | - | |
Income tax effect of transaction | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
with shareholders | | | - | | | - | | | (243 | ) | | - | | | - | | | - | | | (243 | ) | | - | | | - | |
Stock based compensation | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
expense | | | - | | | - | | | 5,085 | | | - | | | - | | | - | | | 5,085 | | | - | | | - | |
Exercise of stock options | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
including tax benefit | | | - | | | - | | | 776 | | | - | | | - | | | - | | | 776 | | | - | | | - | |
Purchase of treasury stock | | | - | | | - | | | - | | | - | | | - | | | (7,030 | ) | | (7,030 | ) | | - | | | - | |
Balance at December 31, 2009 | | $ | 4,043 | | $ | 33 | | $ | 251,591 | | $ | 410,473 | | $ | 19,088 | | $ | (241,567 | ) | $ | 443,661 | | $ | 1,464 | | $ | 60,307 | |
Comprehensive income attributable | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
to noncontrolling interest | | | | | | | | | | | | | | | | | | | | | | | | | | | (609 | ) |
Total comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
attributable to GAMCO Investors, Inc. | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 59,698 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
See accompanying notes. | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
GAMCO INVESTORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY AND COMPREHENSIVE INCOME
(continued) (In thousands)
| | | | GAMCO Investors, Inc. shareholders | | | | | |
| | | | | | Additional | | | | Accumulated | | | | | | Redeemable | | | |
| | Noncontrolling | | Common | | Paid-in | | Retained | | Comprehensive | | Treasury | | | | Noncontrolling | | Comprehensive | |
| | Interests | | Stock | | Capital | | Earnings | | Income | | Stock | | Total | | Interests | | Income | |
Balance at December 31, 2009 | | $ | 4,043 | | $ | 33 | | $ | 251,591 | | $ | 410,473 | | $ | 19,088 | | $ | (241,567 | ) | $ | 443,661 | | $ | 1,464 | | $ | - | |
Redemptions of redeemable | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
noncontrolling interests | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | (475 | ) | | - | |
Contributions from redeemable | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
noncontrolling interests | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | 25,137 | | | - | |
Dividends paid to noncontrolling | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
interests | | | (829 | ) | | - | | | - | | | - | | | - | | | - | | | (829 | ) | | - | | | - | |
Net income | | | 365 | | | - | | | - | | | 68,792 | | | - | | | - | | | 69,157 | | | 858 | | | 70,015 | |
Net unrealized gains on | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
securities available for sale, | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
net of income tax ($3,710) | | | - | | | - | | | - | | | - | | | 6,317 | | | - | | | 6,317 | | | - | | | 6,317 | |
Foreign currency translation | | | - | | | - | | | - | | | - | | | (16 | ) | | - | | | (16 | ) | | - | | | (16 | ) |
Cash dividends declared | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
($1.82 per share) | | | - | | | - | | | - | | | (49,413 | ) | | - | | | - | | | (49,413 | ) | | - | | | - | |
Non-cash dividends declared | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
($3.20 of principal per share) | | | - | | | - | | | - | | | (59,580 | ) | | - | | | - | | | (59,580 | ) | | - | | | - | |
Stock based compensation | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
expense | | | - | | | - | | | 10,585 | | | - | | | - | | | - | | | 10,585 | | | - | | | - | |
Reduction of deferred tax asset | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
for excess of recorded RSA tax | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
benefit over actual tax benefit | | | - | | | - | | | (1,872 | ) | | - | | | - | | | - | | | (1,872 | ) | | - | | | - | |
Exercise of stock options | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
including tax benefit | | | - | | | - | | | 1,804 | | | - | | | - | | | - | | | 1,804 | | | - | | | - | |
Purchase of treasury stock | | | - | | | - | | | - | | | - | | | - | | | (30,206 | ) | | (30,206 | ) | | - | | | - | |
Balance at December 31, 2010 | | $ | 3,579 | | $ | 33 | | $ | 262,108 | | $ | 370,272 | | $ | 25,389 | | $ | (271,773 | ) | $ | 389,608 | | $ | 26,984 | | $ | 76,316 | |
Comprehensive income attributable | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
to noncontrolling interest | | | | | | | | | | | | | | | | | | | | | | | | | | | (1,223 | ) |
Total comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
attributable to GAMCO Investors, Inc. | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 75,093 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
See accompanying notes. | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | GAMCO Investors, Inc. stockholders | | | | |
| | | | | | | | Additional | | | | | | Accumulated | | | | | | | | | Redeemable | |
| | Noncontrolling | | | Common | | | Paid-in | | | Retained | | | Comprehensive | | | Treasury | | | | | | Noncontrolling | |
| | Interests | | | Stock | | | Capital | | | Earnings | | | Income | | | Stock | | | Total | | | Interests | |
Balance at December 31, 2010 | | $ | 3,579 | | | $ | 33 | | | $ | 262,108 | | | $ | 370,272 | | | $ | 25,389 | | | $ | (271,773 | ) | | $ | 389,608 | | | $ | 26,984 | |
Redemptions of redeemable | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
noncontrolling interests | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (2,340 | ) |
Contributions from redeemable | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
noncontrolling interests | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 22,418 | |
Dividends paid to noncontrolling | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
interests | | | (331 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | (331 | ) | | | - | |
Deconsolidation of | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Partnership | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (40,998 | ) |
Gain attributable to noncontrolling | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
interest holders related to common | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
control transaction | | | 205 | | | | - | | | | (287 | ) | | | - | | | | - | | | | - | | | | (82 | ) | | | - | |
Net income (loss) | | | (14 | ) | | | - | | | | - | | | | 69,682 | | | | - | | | | - | | | | 69,668 | | | | 7 | |
Net unrealized losses on | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
securities available for sale, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
net of income tax benefit ($1,690) | | | - | | | | - | | | | - | | | | - | | | | (2,877 | ) | | | - | | | | (2,877 | ) | | | - | |
Foreign currency translation | | | - | | | | - | | | | - | | | | - | | | | 8 | | | | - | | | | 8 | | | | - | |
Dividends declared ($1.15 per | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
share) | | | - | | | | - | | | | - | | | | (30,763 | ) | | | - | | | | - | | | | (30,763 | ) | | | - | |
Stock based compensation | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
expense | | | - | | | | - | | | | 2,588 | | | | - | | | | - | | | | - | | | | 2,588 | | | | - | |
Purchase of treasury stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (20,408 | ) | | | (20,408 | ) | | | - | |
Balance at December 31, 2011 | | $ | 3,439 | | | $ | 33 | | | $ | 264,409 | | | $ | 409,191 | | | $ | 22,520 | | | $ | (292,181 | ) | | $ | 407,411 | | | $ | 6,071 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
See accompanying notes. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
GAMCO INVESTORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY AND COMPREHENSIVE INCOME
(continued) (In thousands)
| | | | GAMCO Investors, Inc. shareholders | | | | | |
| | | | | | Additional | | | | Accumulated | | | | | | Redeemable | | | |
| | Noncontrolling | | Common | | Paid-in | | Retained | | Comprehensive | | Treasury | | | | Noncontrolling | | Comprehensive | |
| | Interests | | Stock | | Capital | | Earnings | | Income | | Stock | | Total | | Interests | | Income | |
Balance at December 31, 2010 | | $ | 3,579 | | $ | 33 | | $ | 262,108 | | $ | 370,272 | | $ | 25,389 | | $ | (271,773 | ) | $ | 389,608 | | $ | 26,984 | | $ | - | |
Redemptions of redeemable | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
noncontrolling interests | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | (2,340 | ) | | - | |
Contributions from redeemable | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
noncontrolling interests | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | 22,418 | | | - | |
Dividends paid to noncontrolling | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
interests | | | (331 | ) | | - | | | - | | | - | | | - | | | - | | | (331 | ) | | - | | | - | |
Deconsolidation of | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Partnership | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | (40,998 | ) | | - | |
Gain attributable to noncontrolling | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
interest holders related to common | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
control transaction | | | 205 | | | - | | | (287 | ) | | - | | | - | | | - | | | (82 | ) | | - | | | - | |
Net income (loss) | | | (14 | ) | | - | | | - | | | 69,682 | | | - | | | - | | | 69,668 | | | 7 | | | 69,675 | |
Net unrealized losses on | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
securities available for sale, | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
net of income tax benefit ($1,690) | | | - | | | - | | | - | | | - | | | (2,877 | ) | | - | | | (2,877 | ) | | - | | | (2,877 | ) |
Foreign currency translation | | | - | | | - | | | - | | | - | | | 8 | | | - | | | 8 | | | - | | | 8 | |
Dividends declared ($1.15 per | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
share) | | | - | | | - | | | - | | | (30,763 | ) | | - | | | - | | | (30,763 | ) | | - | | | - | |
Stock based compensation | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
expense | | | - | | | - | | | 2,588 | | | - | | | - | | | - | | | 2,588 | | | - | | | - | |
Purchase of treasury stock | | | - | | | - | | | - | | | - | | | - | | | (20,408 | ) | | (20,408 | ) | | - | | | - | |
Balance at December 31, 2011 | | $ | 3,439 | | $ | 33 | | $ | 264,409 | | $ | 409,191 | | $ | 22,520 | | $ | (292,181 | ) | $ | 407,411 | | $ | 6,071 | | $ | 66,806 | |
Comprehensive loss attributable | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
to noncontrolling interest | | | | | | | | | | | | | | | | | | | | | | | | | | | 7 | |
Total comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
attributable to GAMCO Investors, Inc. | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 66,813 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
See accompanying notes. | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | GAMCO Investors, Inc. shareholders | | | | |
| | | | | | | | Additional | | | | | | Accumulated | | | | | | | | | Redeemable | |
| | Noncontrolling | | | Common | | | Paid-in | | | Retained | | | Comprehensive | | | Treasury | | | | | | Noncontrolling | |
| | Interests | | | Stock | | | Capital | | | Earnings | | | Income | | | Stock | | | Total | | | Interests | |
Balance at December 31, 2011 | | $ | 3,439 | | | $ | 33 | | | $ | 264,409 | | | $ | 409,191 | | | $ | 22,520 | | | $ | (292,181 | ) | | $ | 407,411 | | | $ | 6,071 | |
Redemptions of redeemable | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
noncontrolling interests | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (13,069 | ) |
Contributions from redeemable | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
noncontrolling interests | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 24,189 | |
Net income (loss) | | | (113 | ) | | | - | | | | - | | | | 75,539 | | | | - | | | | - | | | | 75,426 | | | | 171 | |
Net unrealized gains on | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
securities available for sale, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
net of income tax ($2,236) | | | - | | | | - | | | | - | | | | - | | | | 3,808 | | | | - | | | | 3,808 | | | | - | |
Foreign currency translation | | | - | | | | - | | | | - | | | | - | | | | (28 | ) | | | - | | | | (28 | ) | | | - | |
Dividends declared ($2.88 per | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
share) | | | - | | | | - | | | | - | | | | (76,435 | ) | | | - | | | | - | | | | (76,435 | ) | | | - | |
Stock based compensation | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
expense | | | - | | | | - | | | | 13,583 | | | | - | | | | - | | | | - | | | | 13,583 | | | | - | |
Increase to paid in capital for the | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
excess of actual tax benefit over | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
recorded RSA tax benefit | | | - | | | | - | | | | 1,072 | | | | - | | | | - | | | | - | | | | 1,072 | | | | - | |
Exercise of stock options | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
including tax benefit | | | - | | | | - | | | | 1,025 | | | | - | | | | - | | | | - | | | | 1,025 | | | | - | |
Purchase of treasury stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (54,928 | ) | | | (54,928 | ) | | | - | |
Balance at December 31, 2012 | | $ | 3,326 | | | $ | 33 | | | $ | 280,089 | | | $ | 408,295 | | | $ | 26,300 | | | $ | (347,109 | ) | | $ | 370,934 | | | $ | 17,362 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
See accompanying notes. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
GAMCO INVESTORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| | Year Ended December 31, | |
| | 2011 | | | 2010 | | | 2009 | |
Operating activities | | | | | | | | | |
Net income | | $ | 69,675 | | | $ | 70,015 | | | $ | 56,142 | |
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | | | | | | | |
Equity in net gains from partnerships | | | (1,060 | ) | | | (9,155 | ) | | | (10,335 | ) |
Depreciation and amortization | | | 825 | | | | 700 | | | | 656 | |
Stock based compensation expense | | | 2,588 | | | | 10,585 | | | | 5,085 | |
Deferred income taxes | | | (1,521 | ) | | | 7,553 | | | | 1,831 | |
Tax benefit from exercise of stock options | | | - | | | | 216 | | | | 168 | |
Foreign currency translation gain/(loss) | | | 8 | | | | (16 | ) | | | 53 | |
Donated securities | | | 167 | | | | (524 | ) | | | 370 | |
Gains on sales of available for sale securities | | | (772 | ) | | | (29 | ) | | | (2,150 | ) |
Amortization of discount on convertible debt | | | - | | | | 52 | | | | 85 | |
Accretion of zero coupon debentures | | | 4,572 | | | | - | | | | - | |
(Gain) loss on extinguishment of debt | | | (2 | ) | | | 497 | | | | - | |
(Increase) decrease in assets: | | | | | | | | | | | | |
Investments in trading securities | | | (58,286 | ) | | | (132,702 | ) | | | 97,533 | |
Investments in partnerships: | | | | | | | | | | | | |
Contributions to partnerships | | | (15,483 | ) | | | (20,743 | ) | | | (4,351 | ) |
Distributions from partnerships | | | 57,148 | | | | 9,680 | | | | 12,739 | |
Receivable from brokers | | | (30,039 | ) | | | (16,549 | ) | | | (13,612 | ) |
Investment advisory fees receivable | | | 12,718 | | | | (8,975 | ) | | | (24,101 | ) |
Income tax receivable and deferred tax assets | | | 286 | | | | - | | | | 14,865 | |
Other assets | | | (5,659 | ) | | | (2,411 | ) | | | (2,121 | ) |
Increase (decrease) in liabilities: | | | | | | | | | | | | |
Payable to brokers | | | 9,216 | | | | 1,159 | | | | (1,462 | ) |
Income taxes payable and deferred tax liabilities | | | (4,456 | ) | | | 1,241 | | | | - | |
Compensation payable | | | (6,076 | ) | | | 10,470 | | | | (1,295 | ) |
Mandatorily redeemable noncontrolling interests | | | (137 | ) | | | (178 | ) | | | 226 | |
Accrued expenses and other liabilities | | | 2,651 | | | | (916 | ) | | | 1,467 | |
Total adjustments | | | (33,312 | ) | | | (150,045 | ) | | | 75,651 | |
Net cash provided by (used in) operating activities | | $ | 36,363 | | | $ | (80,030 | ) | | $ | 131,793 | |
| | Year Ended December 31, | |
| | 2012 | | | 2011 | | | 2010 | |
Operating activities | | | | | | | | | |
Net income | | $ | 75,595 | | | $ | 69,675 | | | $ | 70,015 | |
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | | | | | | | |
Equity in net gains from partnerships | | | (5,948 | ) | | | (1,060 | ) | | | (9,155 | ) |
Depreciation and amortization | | | 777 | | | | 825 | | | | 700 | |
Stock based compensation expense | | | 13,583 | | | | 2,588 | | | | 10,585 | |
Deferred income taxes | | | 8,504 | | | | (1,521 | ) | | | 7,553 | |
Tax benefit from exercise of stock options | | | 105 | | | | - | | | | 216 | |
Foreign currency translation gain/(loss) | | | (28 | ) | | | 8 | | | | (16 | ) |
Other-than-temporary loss on available for sale securities | | | 20 | | | | - | | | | - | |
Donated securities | | | 448 | | | | 167 | | | | (524 | ) |
Gains on sales of available for sale securities | | | (1,565 | ) | | | (772 | ) | | | (29 | ) |
Amortization of discount on convertible debt | | | - | | | | - | | | | 52 | |
Accretion of zero coupon debentures | | | 3,155 | | | | 4,572 | | | | - | |
(Gain) loss on extinguishment of debt | | | 6,307 | | | | (2 | ) | | | 497 | |
(Increase) decrease in assets: | | | | | | | | | | | | |
Investments in trading securities | | | 17,174 | | | | (58,286 | ) | | | (132,702 | ) |
Investments in partnerships: | | | | | | | | | | | | |
Contributions to partnerships | | | (27,443 | ) | | | (15,483 | ) | | | (20,743 | ) |
Distributions from partnerships | | | 36,735 | | | | 57,148 | | | | 9,680 | |
Receivable from brokers | | | (29,742 | ) | | | (30,039 | ) | | | (16,549 | ) |
Investment advisory fees receivable | | | (10,272 | ) | | | 12,718 | | | | (8,975 | ) |
Income tax receivable and deferred tax assets | | | (979 | ) | | | 286 | | | | - | |
Other assets | | | 338 | | | | (5,659 | ) | | | (2,411 | ) |
Increase (decrease) in liabilities: | | | | | | | | | | | | |
Payable to brokers | | | 3,576 | | | | 9,216 | | | | 1,159 | |
Income taxes payable and deferred tax liabilities | | | 432 | | | | (4,456 | ) | | | 1,241 | |
Compensation payable | | | (7,162 | ) | | | (6,076 | ) | | | 10,470 | |
Mandatorily redeemable noncontrolling interests | | | (44 | ) | | | (137 | ) | | | (178 | ) |
Accrued expenses and other liabilities | | | 2,179 | | | | 2,651 | | | | (916 | ) |
Total adjustments | | | 10,150 | | | | (33,312 | ) | | | (150,045 | ) |
Net cash provided by (used in) operating activities | | $ | 85,745 | | | $ | 36,363 | | | $ | (80,030 | ) |
GAMCO INVESTORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued) (In thousands)
| | Year Ended December 31, | | | Year Ended December 31, | |
| | 2011 | | | 2010 | | | 2009 | | | 2012 | | | 2011 | | | 2010 | |
Investing activities | | | | | | | | | | | | | | | | | | |
Purchases of available for sale securities | | $ | (4,378 | ) | | $ | (157 | ) | | $ | (8,194 | ) | | $ | (1,268 | ) | | $ | (4,378 | ) | | $ | (157 | ) |
Proceeds from sales of available for sale securities | | | 6,054 | | | | 2,097 | | | | 4,329 | | | | 3,184 | | | | 6,054 | | | | 2,097 | |
Return of capital on available for sale securities | | | 2,306 | | | | 2,988 | | | | 3,717 | | | | 2,531 | | | | 2,306 | | | | 2,988 | |
Decrease (increase) in restricted cash | | | - | | | | 62,258 | | | | (55,102 | ) | | | - | | | | - | | | | 62,258 | |
Net cash provided by (used in) investing activities | | | 3,982 | | | | 67,186 | | | | (55,250 | ) | |
Net cash provided by investing activities | | | | 4,447 | | | | 3,982 | | | | 67,186 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Financing activities | | | | | | | | | | | | | | | | | | | | | | | | |
Contributions from redeemable noncontrolling interests | | | 22,418 | | | | 25,137 | | | | - | | | | 24,189 | | | | 22,418 | | | | 25,137 | |
Redemptions of redeemable noncontrolling interests | | | (2,340 | ) | | | (475 | ) | | | (2,930 | ) | | | (13,069 | ) | | | (2,340 | ) | | | (475 | ) |
Issuance of 5.875% Senior notes due June 1, 2021 | | | 100,000 | | | | - | | | | - | | | | - | | | | 100,000 | | | | - | |
Issuance costs on the 5.875% Senior notes due June 1, 2021 | | | (934 | ) | | | - | | | | - | | | | - | | | | (934 | ) | | | - | |
Repayment of 6% Convertible note due August 14, 2011 | | | - | | | | (40,400 | ) | | | - | | | | - | | | | - | | | | (40,400 | ) |
Repayment of 6.5% Convertible note due October 2, 2018 | | | - | | | | (60,000 | ) | | | - | | | | - | | | | - | | | | (60,000 | ) |
Repurchase of Zero coupon subordinated debentures due December 31, 2015 | | | (32 | ) | | | - | | | | - | | | | (56,215 | ) | | | (32 | ) | | | - | |
Proceeds from exercise of stock options | | | - | | | | 1,588 | | | | 607 | | | | 920 | | | | - | | | | 1,588 | |
Dividends paid | | | (30,477 | ) | | | (50,631 | ) | | | (59,431 | ) | | | (76,809 | ) | | | (30,477 | ) | | | (50,631 | ) |
Dividends paid to noncontrolling interests | | | (331 | ) | | | (829 | ) | | | - | | | | - | | | | (331 | ) | | | (829 | ) |
Purchase of subsidiary shares from noncontrolling interests | | | - | | | | - | | | | (747 | ) | |
Purchase of treasury stock | | | (20,408 | ) | | | (30,206 | ) | | | (7,030 | ) | | | (54,928 | ) | | | (20,408 | ) | | | (30,206 | ) |
Net cash provided by (used in) financing activities | | | 67,896 | | | | (155,816 | ) | | | (69,531 | ) | | | (175,912 | ) | | | 67,896 | | | | (155,816 | ) |
Effect of exchange rates on cash and cash equivalents | | | - | | | | (9 | ) | | | 84 | | | | (12 | ) | | | - | | | | (9 | ) |
Net increase (decrease) in cash and cash equivalents | | | 108,241 | | | | (168,669 | ) | | | 7,096 | | | | (85,732 | ) | | | 108,241 | | | | (168,669 | ) |
Cash and cash equivalents at beginning of period | | | 169,601 | | | | 338,270 | | | | 331,174 | | | | 276,340 | | | | 169,601 | | | | 338,270 | |
Decrease in cash from deconsolidation of partnership | | | (1,502 | ) | | | - | | | | - | | | | - | | | | (1,502 | ) | | | - | |
Cash and cash equivalents at end of period | | $ | 276,340 | | | $ | 169,601 | | | $ | 338,270 | | | $ | 190,608 | | | $ | 276,340 | | | $ | 169,601 | |
Supplemental disclosures of cash flow information: | | | | | | | | | | | | | | | | | | | | | | | | |
Cash paid for interest | | $ | 9,539 | | | $ | 12,902 | | | $ | 12,890 | | | $ | 10,049 | | | $ | 9,539 | | | $ | 12,902 | |
Cash paid for taxes | | $ | 45,460 | | | $ | 29,870 | | | $ | 25,364 | | | $ | 32,106 | | | $ | 45,460 | | | $ | 29,870 | |
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Non-cash activity: | | | | | | | | | | | | | | | | | | | | | | | | |
- On March 20, 2009, GAMCO Investors, Inc. distributed its shares of Teton Advisors, Inc. ($300) to its shareholders which resulted in the deconsolidation of Teton, and decreases of | | |
approximately $911 of cash and cash equivalents, $199 of net liabilities and $412 of noncontrolling interests. | | |
- On December 31, 2010, GAMCO Investors, Inc. distributed $59,580 of zero coupon subordinated debentures ($86.4 million principal amount) due December 31, 2015 as dividends. | | |
- For 2010, the Company recorded $1,872 as a reduction to its deferred tax asset and additional paid-in capital for the excess of the recorded restricted stock award tax benefit over the | | |
actual tax benefit. | | | | | | | | | | | | | |
- On January 1, 2011, GAMCO Investors, Inc. was no longer deemed to have control over a certain partnership which resulted in the deconsolidation of that partnership and decreases | | |
of approximately $1,251 of cash and cash equivalents, $2,852 of net assets and $4,103 of noncontrolling interests. | | |
- On October 1, 2011, GAMCO Investors, Inc. was no longer deemed to have control over a certain VIE which resulted in the deconsolidation of that VIE and decreases of | | |
approximately $251 of cash and cash equivalents, $36,644 of net assets and $36,895 of noncontrolling interests. | | |
- For 2011, 2010 and 2009 the Company accrued restricted stock award dividends of $278, $626 and $1,393, respectively. | | | | | | |
- On December 31, 2010, GAMCO Investors, Inc. distributed $59,580 of zero coupon subordinated debentures ($86.4 million principal | | - On December 31, 2010, GAMCO Investors, Inc. distributed $59,580 of zero coupon subordinated debentures ($86.4 million principal | |
amount) due December 31, 2015 as dividends. | | | | | | | | | | | | | |
- For 2010, the Company recorded $1,872 as a reduction to its deferred tax asset and additional paid-in capital for the excess of the | | - For 2010, the Company recorded $1,872 as a reduction to its deferred tax asset and additional paid-in capital for the excess of the | |
recorded restricted stock award tax benefit over the actual tax benefit. | | | | | | | | | | | | | |
- On January 1, 2011, GAMCO Investors, Inc. was no longer deemed to have control over a certain partnership which resulted in the | | - On January 1, 2011, GAMCO Investors, Inc. was no longer deemed to have control over a certain partnership which resulted in the | |
deconsolidation of that partnership and decreases of approximately $1,251 of cash and cash equivalents, $2,852 of net assets and | | deconsolidation of that partnership and decreases of approximately $1,251 of cash and cash equivalents, $2,852 of net assets and | |
$4,103 of noncontrolling interests. | | | | | | | | | | | | | |
- On October 1, 2011, GAMCO Investors, Inc. was no longer deemed to have control over a certain VIE which resulted in the | | - On October 1, 2011, GAMCO Investors, Inc. was no longer deemed to have control over a certain VIE which resulted in the | |
deconsolidation of that VIE and decreases of approximately $251 of cash and cash equivalents, $36,644 of net assets and $36,895 of | | deconsolidation of that VIE and decreases of approximately $251 of cash and cash equivalents, $36,644 of net assets and $36,895 of | |
noncontrolling interests. | | | | | | | | | | | | | |
- For 2012, the Company recorded $1,072 as a reduction to current tax payable and an increase to additional paid-in capital for the excess | | - For 2012, the Company recorded $1,072 as a reduction to current tax payable and an increase to additional paid-in capital for the excess | |
of the actual tax benefit over the recorded restricted stock award tax benefit. | | | | | | | | | | | | | |
- For 2012, 2011 and 2010 the Company accrued restricted stock award dividends of $277, $278 and $626, respectively. | | - For 2012, 2011 and 2010 the Company accrued restricted stock award dividends of $277, $278 and $626, respectively. | |
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See accompanying notes. | | | | | | | | | | | | | | | | | | | | | | | | |
A. Significant Accounting Policies
Basis of Presentation
GAMCO Investors, Inc. (“GBL” or the “Company”) was incorporated in April 1998 in the state of New York, with no significant assets or liabilities and did not engage in any substantial business activities prior to the initial public offering (“Offering”) of our shares. On February 9, 1999, we exchanged 24 million shares of our Class B Common Stock (“Class B Stock”), representing all of our 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”). GBL distributed net assets and liabilities, principally a proprietary investment portfolio, of approximately $165 million, including cash of $18 million, which was recorded for accounting purposes as a deemed distribution to GFI. GFI, which was renamed Gabelli Group Capital Partners, Inc. in 1999, is the majority shareholder of GBL and was renamed GGCP, Inc. (“GGCP”) in 2005. During 2010, the shares of GBL owned by GGCP were transferred to GGCP Holdings LLC, a subsidiary of GGCP.
The accompanying consolidated financial statements include the assets, liabilities and earnings of:
· | Our wholly-owned subsidiaries: Gabelli Funds, LLC (“Funds Advisor”), GAMCO Asset Management Inc. (“GAMCO”), G.distributors, LLC (“G.distributors”), GAMCO Asset Management (UK) Limited, Gabelli Arbitrage Holdings LLC, Gabelli Trading Holdings LLC, Gabelli Fixed Income, Inc. (“Fixed Income”) and its subsidiaries, GAMCO International Partners LLC, GAMCO Acquisition LLC, GAMCO Asset Management (Singapore) Pte. Ltd.; |
· | Our majority-owned or majority-controlled subsidiaries: Gabelli Securities, Inc. (“GSI”) and its subsidiaries and Teton Advisors, Inc. (“Teton”) (through the date of the spin-off on March 20, 2009);subsidiaries; and |
· | Certain investment partnerships (“Investment Partnerships”) and offshore funds in which we have a direct or indirect controlling financial interest. Please see Note D included herein. |
At December 31, 2012, 2011 2010 and 2009,2010, we owned approximately 93% of GSI. In 2009 through the date of its spin-off, we had a 51% voting interest in Teton (42% economic interest). The consolidated financial statements comprise the financial statements of GBL and its subsidiaries as of December 31 of each year. The financial statements of the subsidiaries are prepared for the same reporting year as the parent company, using consistent accounting policies. All intercompany transactions and balances have been eliminated. Subsidiaries are fully consolidated from the date of acquisition, being the date on which GBL obtains control, and continue to be consolidated until the date that such control ceases.
Certain items previously reported have been reclassified to conform to the current period’s consolidated financial statements presentation.The Company has now separately disclosed the amount of investments in sponsored registered investment companies as a new line item in the consolidated statements of financial condition. These amounts were previously included within investments in securities in the consolidated statements of financial condition.
Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported on the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Nature of Operations
GAMCO, Funds Advisor, Gabelli Fixed Income LLC (“Fixed Income LLC”), a wholly-owned subsidiary of Fixed Income, Teton and GSI are registered investment advisors under the Advisers Act of 1940. Gabelli & Company, Inc. (“Gabelli & Company” or "Institutional Broker-Dealer"), a wholly-owned subsidiary of GSI, and G.distributors are registered broker-dealers with the Securities and Exchange Commission (“SEC”) and are regulated by the Financial Industry Regulatory Authority (“FINRA”). Gabelli & Company acts as an introducing broker, and all transactions for its customers are cleared through New York Stock Exchange (“NYSE”) member firms on a fully-disclosed basis. Accordingly, open customer transactions are not reflected in the accompanying consolidated statements of financial condition. Gabelli & Company is exposed to credit losses on these open positions in the event of nonperformance by its customers, pursuant to conditions of its clearing agreements with its clearing brokers. This exposure is reduced by the clearing brokers' policy of obtaining and maintaining adequate collateral and credit of the counterparties until the open transaction is completed. Refer to Major Revenue-Generating Services and Revenue Recognition section within Note A for additional discussion of GBL's business.
Cash and Cash Equivalents
Cash equivalents primarily consist of an affiliated money market mutual fund which is highly liquid. U.S. Treasury Bills and Notes with maturities of three months or less at the time of purchase are also considered cash equivalents. At December 31, 2009, approximately $62.3 million of cash and cash equivalents was held in escrow to secure the $60 million convertible note. On October 13, 2010, the Company repaid Cascade Investment LLC (“Cascade”) $60.1 million of principal and accrued but unpaid interest, and the escrow agreement relating to the 2018 Note was terminated by mutual consent between the Company and Cascade. The remaining funds in the escrow account were no longer restricted and were returned to the Company at that time.
Securities Transactions
Investments in securities are accounted for as either “trading securities” or “available for sale” and are stated at fair value. Management determines the appropriate classification of debt and equity securities at the time of purchase and reevaluates such designations as of each balance sheet date. U.S. Treasury Bills and Notes with maturities of greater than three months at the time of purchase are considered investments in securities. Securities that are not readily marketable are stated at their estimated fair values in accordance with Generally Accepted Accounting Principles (“GAAP”). A substantial portion of investments in securities are held for resale in anticipation of short-term market movements and therefore are classified as trading securities. Trading securities are stated at fair value, with any unrealized gains or losses reported in current period earnings in net gain/(loss) from investments on the consolidated statements of income. Available for sale (“AFS”) investments are stated at fair value, with any unrealized gains or losses, net of taxes, reported as a component of equityother comprehensive income except for losses deemed to be other than temporary which are recorded as realized losses on the consolidated statements of income. 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 specific identified cost basis and are included in net gain/(loss) from investments on the consolidated statements of income.
Available for sale securities are evaluated for other than temporary impairments each reporting period and any impairment charges are recorded in net gain/(loss) from investments on the consolidated statements of income. Management reviews all available for sale securities whose cost exceeds their fair value to determine if the impairment is other than temporary. Management uses qualitative factors such as diversification of the investment, the intent to hold the investment, the amount of time that the investment has been impaired and the severity of the decline in determining whether the impairment is other than temporary.
Securities sold, but not yet purchased are recorded on the trade date, and are stated at fair value and represent obligations of GBL 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. Realized gains and losses from covers of securities sold, not yet purchased transactions are included in net gain/(loss) from investments on the consolidated statements of income. Securities sold, not yet purchased are stated at fair value, with any unrealized gains or losses reported in current period earnings in net gain/(loss) from investments on the consolidated statements of income.
Investments in PartnershipsConsolidation
Affiliated Entities
The Company is general partner or co-general partner of various sponsored limited partnerships and the investment manager of various sponsored offshore funds whose underlying assets consist primarily of marketable securities (the “affiliated entities”). In accordance with the two consolidation assessment models the variable interest modelset forth in ASC 810-10 and voting interest model applicable to partnerships,810-20, the Company consolidates all investments in partnerships and affiliates in which the Company has a controlling financial interest.
The Company first determines whetherinterest or is deemed to be the primary beneficiary. In order to make this determination, an analysis is performed to determine if the entity is a variable interest entity (“VIE”) or a voting interest entity (“VOE”). If the entity is a VIE, further analysis, as discussed below, is performed to determine if GBL is the primary beneficiary of the entity. If the entity is not a VIE, the Company will apply the VOE model as discussed below.
Variable Interest Entities
A VIE is an entity in which either (a) the equity investment at risk is not sufficient to permit the entity to finance its own activities without additional financial support or (b) the equity investors do not have the ability to make decisions about the entities’ activities or obligation to absorb the expected losses of the entity or the right to receive the expected residual returns of the entity or (c) the voting rights are not proportional to their obligations to absorb the expected losses of the entity or their rights to receive the expected residual returns of the entity. The Company evaluates whether entities in which it has an interest are VIEs and whether the Company is the primary beneficiary of any VIEs identified in its analysis. The Company is determined to be the primary beneficiary if it absorbs a majority of the VIE’s expected losses, expected residual returns, or both. If the Company is the primary beneficiary of a VIE, it consolidates that entity. If the Company is not the primary beneficiary, it accounts for its investment under the equity method.
In June 2009 the Financial Accounting Standards Board (“FASB”) amended the guidance on VIEs.VIEs when it issued ASU 2009-17. This guidance requires that if a decision maker has a variable interest in a VIE, the decision maker is not solely acting in a fiduciary capacity and would be required to consolidate the VIE if it has both the power to direct the most significant activities of the VIE and economic exposure that could potentially be significant to the VIE. The Company is general partner or co-general partner of various sponsored partnerships and the investment manager of various sponsored offshore funds whose underlying assets consist primarily of marketable securities (the “affiliated entities”). If the Company were to apply such guidance it would be required to consolidate most of its affiliated entities. In February 2010, the FASB issued guidance,ASU 2010-10, which indefinitely deferred the effective date of the amendments to the guidance on VIEs,ASC 810-10 made by ASU 2009-17, for a reporting entity’s interest in certain entities. Currently, interests in entities that qualify for the deferral are evaluated by applying the VIE model in ASC 810-10 (i.e., before the amendments by ASU 2009-17), while interests in entities that do not qualify for the deferral must be evaluated under the amended guidance.amendments in ASU 2009-17. Because all of the entities with which the Company is involved which would have been subject to the amended guidance in ASU 2009-17 were determined to qualify for the FASB’s deferral of such guidance, the Company applies the guidance for VIEs that existed prior to the issuance of the amended guidance.ASU 2009-17.
Voting Interest Entities
If the entity is not considered a VIE, it is treated as a voting interest entity (“VOE”)VOE, and the Company applies the guidance under the voting interest model for partnershipsin ASC 810-20 in determining whether the entity should be consolidated. Under this guidance,ASC 810-20, the general partner or investment manager is deemed to control the entity and therefore must consolidate it unless the unaffiliated limited partners or shareholders (a) have the ability (a) to remove the general partner or investment manager, without cause, (b) have the ability to dissolve the entity or (c) have substantive participating rights. If the unaffiliated limited partners or shareholders possess substantiveany of the foregoing rights, then the Company does not consolidate the entity, and either the equity or cost method of accounting is applied. If the unaffiliated limited partners or shareholders do not have any such rights, the Company consolidates the entity.
For thoseEquity Method Investments
Substantially all of GBL’s equity method investees are entities that record their underlying investments accounted forat fair value. Therefore, under the equity method of accounting, GBL’s share of the Company’sinvestee’s underlying net income predominantly represents fair value adjustments in the investments held by the equity method investees. GBL’s share inof the investee’s underlying net earningsincome or losses of these affiliated entities are reflected in incomeloss is based upon the most currently available information and is recorded as earned and are included in net“Net gain/(loss) from investmentsinvestments” on the consolidated statements of income. Capital contributions are recorded as an increase in investments when paid, while withdrawals and distributions received are recorded as reductions of the investments.investments when received. Depending on the terms of the investment, the Company may be restricted as to the timing and amounts of withdrawals.
ForSee Note D. Investments in Partnerships, Offshore Funds and Variable Interest Entities for more detail as to the number and types of entities consolidated feeder funds (“CFFs”) that own 100%as well as the impact on the consolidated statements of their offshore master funds, the Company retains the feeder funds’ specialized investment company accounting (i.e., the feeder funds accounts for its investmentfinancial condition and consolidated statements of income.
Investments in the master fund at fair value).Partnerships and Affiliates
The Company records noncontrolling interests in consolidated entities for which the Company’s ownership is less than 100%.
Unaffiliated entities
general partner or co-general partner of various affiliated entities. We also have investments in unaffiliated partnerships, offshore funds and other entities. The Company applies the same guidance to entities (“unaffiliated entities as it does for affiliated entities, first looking at the VIE criteria, then VOE criteria and finally applying the equity method, if applicable.entities”). Given that we are not a general partner or investment manager in any unaffiliated entities, we do not earn any management or incentive fees and we do not have a controlling financial interest, we do not currently consolidate any unaffiliated entities.
Our balance sheet caption “investments“Investments in partnerships” includes those investments, in both affiliated and unaffiliated entities, which the Company accounts for under the equity method of accounting and certain investments in consolidated feeder funds (“CFFs”) that the Company accounts for at fair value, as described above. below.
For CFFs that own 100% of their offshore master funds, the Company retains the CFF’s specialized investment company accounting (i.e., the CFFs account for their investment in master funds at fair value).
The Company reflectsrecords noncontrolling interests in consolidated entities for which the equity in earnings of these equity method investees and the change in fair value of the consolidated feeder funds under the caption net gain/(loss) from investments on the consolidated statements of income.Company’s ownership is less than 100%. Refer to Noncontrolling Interests section within Note A for additional disclosures.
Receivables from and Payables to Brokers
Receivables from and payables to brokers consist of amounts arising from the purchases and sales of securities as well as cash amounts held in anticipation of investment.
Major Revenue-Generating Services and Revenue Recognition
The Company’s revenues are derived primarily from investment advisory and incentive fees, institutional research services and distribution fees.
Investment advisory and incentive fees are directly influenced by the level and mix of assets under management (“AUM”) as fees are derived from a contractually-determined percentage of AUM for each account as well as incentive fees earned on certain accounts. Advisory fees from the open-end mutual funds, closed-end funds and sub-advisory accounts are computed daily or weekly based on average net assets and amounts receivable are included in investment advisory fees receivable on the consolidated statements of financial condition. Advisory fees from Institutional and Private Wealth Management accounts are generally computed quarterly based on account values as of the end of the preceding quarter, and amounts receivable are included in investment advisory fees receivable on the consolidated statements of financial condition. Management fees from investment partnerships and offshore funds are computed either monthly or quarterly, and amounts receivable are included in investment advisory fees receivable on the consolidated statements of financial condition. The Company derived approximately 82%84%, 83%82% and 82%83% of its total revenues from advisory and management fees, including incentive fees, for the periods ended December 31, 2012, 2011 2010 and 2009,2010, respectively. These revenues vary depending upon the level of sales compared with redemptions, financial market conditions, performance and the fee structure for AUM. Revenues derived from the equity-oriented portfolios generally have higher management fee rates than fixed income portfolios.
Revenues from investment partnerships and offshore funds also generally include an incentive allocation on the absolute gain in a portfolio or a fee of 20% of the economic profit as defined in the partnership agreement. The incentive allocation or fee is recognized at the end of the measurement period, which is annually, and amounts receivable are included in investment advisory fees receivable on the consolidated statements of financial condition. There were $2.3$3.0 million and $3.7 $2.3 million in incentive allocations or fees receivable as of December 31, 20112012 and 2010,2011, respectively. The Company also receives incentive fees from certain Institutional and Private Wealth Management accounts, which are based upon meeting or exceeding a specific benchmark index or indices. Incentive fees refer to fees earned when the return generated for the client exceeds the benchmark and can be earned even if the return to the client is negative as long as the return exceeds the benchmark. These fees are recognized, for each respective account, at the end of the stipulated contract period which is either quarterly or annually and varies by account. Receivables due for incentive fees earned are included in investment advisory fees receivable on the consolidated statements of financial condition. There were $0.9$2.0 million and $8.4$0.9 million in incentive fees receivable as of December 31, 20112012 and 2010,2011, respectively. Management fees on a majority of the closed-end preferred shares are received at year-end if the total return to common shareholders of the closed-end fund for the calendar year exceeds the dividend rate of the preferred shares. These fees are recognized at the end of the measurement period, which is annually. Receivables due for management fees on closed-end preferred shares are included in investment advisory fees receivable on the consolidated statements of financial condition. There were $3.7$7.0 million and $8.7$3.7 million in management fees receivable on closed-end preferred shares as of December 31, 2012 and 2011, and respectively. For The GDL Fund, there is a performance fee earned as of the end of the calendar year if the total return of the fund is in excess of the 90 day T-Bill Index total return. This fee is recognized at the end of the measurement period, which is annually on a calendar year basis. Receivables due on incentive fees relating to The GDL Fund are included in investment advisory fees receivable on the consolidated statements of financial condition and were $1.3$4.6 million and $3.3$1.3 million as of December 31, 2012 and 2011, and 2010, respectively.
Gabelli & Company provides institutional research services and earns brokerage commission revenues and sales manager fees on a trade-date basis from securities transactions executed on an agency basis on behalf of institutional clients and mutual funds, private wealth management clients and retail customers of affiliated companies. It has also been involved in syndicated underwriting activities that included public equity and debt offerings managed by major investment banks. Underwriting fees include underwriting revenues and syndicate profits and are accrued as earned. Underwriting fees include gains, losses, selling concessions and fees, net of syndicate expenses, arising from securities offerings in which the Company acts as underwriter or agent. It provides institutional investors and investment partnerships with investment ideas on numerous industries and special situations, with a particular focus on small-cap and mid-cap companies. Commission revenue and related clearing charges are recorded on a trade-date basis and are included in commission revenue and other operating expenses, respectively, on the consolidated statements of income.
Distribution fees revenues are derived primarily from the distribution of Gabelli, GAMCO and Comstock open-end mutual funds (“Funds”) advised by a subsidiary of GBL, Funds Advisor and a subsidiary of GGCP, Teton. Effective August 1, 2011, G.distributors distributes our open-end Funds pursuant to distribution agreements with each Fund. Under each distribution agreement with an open-end Fund, G.distributors offers and sells such open-end Fund 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 G.distributors’ sales personnel. G.distributors receive fees for such services pursuant to distribution plans adopted under provisions of Rule 12b-1 (“12b-1”) of the Investment Company Act of 1940 (“Company Act”). G.distributors is the principal underwriter for funds distributed in multiple classes of shares which carry either a front-end or back-end sales charge. Prior to August 1, 2011, Gabelli & Company was the distributor of the Gabelli, GAMCO and Comstock open-end Funds.
Under the distribution plans, the open-end Class AAA shares of the Funds (except The Gabelli U.S. Treasury Money Market Fund, Gabelli Capital Asset Fund and The Gabelli ABC Fund) and the Class A shares of certain Funds pay G.distributors a distribution or service fee of .25% per year (except the Class A shares of the Westwood Funds which pay .50% per year and the Class A shares of the Gabelli Enterprise Mergers and Acquisitions Fund which pays .45% per year) on the average daily net assets of the fund. Class B and Class C shares have a 12b-1 distribution plan with a service and distribution fee totaling 1%.
Distribution fees from the open-end mutual funds are computed daily based on average net assets. The amounts receivable for distribution fees are included in receivables from affiliates on the consolidated statements of financial condition.
Finally, GBL also has investment gains or losses generated from its proprietary trading activities which are included in net gain/(loss) from investments on the consolidated statements of income.
Distribution Costs
We incur certain promotion and distribution costs, which are expensed as incurred, principally related to the sale of shares of open-end mutual funds, shares sold in the initial public offerings of our closed-end funds, and after-market support services related to our closed-end funds. Additionally, Funds Advisor has agreed to reimburse expenses on certain funds, beyond certain expense caps.
Dividends and Interest Income and Interest Expense
Dividends are recorded on the ex-dividend date. Interest income and interest expense are accrued as earned or incurred.
Depreciation and Amortization
Fixed assets other than leasehold improvements, with net book value of $817,000$680,000 and $869,000$817,000 at December 31, 20112012 and 2010,2011, respectively, which are included in other assets, are recorded at cost and depreciated using the straight-line method over their estimated useful lives from four to seven years. Accumulated depreciation was $1.9$2.1 million and $1.5$1.9 million at December 31, 20112012 and 2010,2011, respectively. Leasehold improvements, with net book value of $2.1 million and $2.0$2.1 million at December 31, 20112012 and 2010,2011, respectively, which are included in other assets, are recorded at cost and amortized using the straight-line method over their estimated useful lives or lease terms, whichever is shorter. The leased property under the capital lease is depreciated utilizing the straight-line method over the term of the lease, which expires on December 31, 2023. The capital lease was extended on September 15, 2008 to December 31, 2023 from April 30, 2013. For the years ended December 31, 2012, 2011 2010 and 2009,2010, depreciation and amortization were $777,000, $825,000 $700,000 and $656,000,$700,000, respectively. We estimate that depreciation and amortization will be approximately $800,000$775,000 annually over the next three years.
Derivative Financial Instruments
The Company recognizes all derivatives as either assets or liabilities measured at fair value and are included in either investments in securities or securities sold, not yet purchased on the consolidated statements of financial condition. From time to time, the Company will enter into hedging transactions to manage its exposure to foreign currencies and equity prices related to its proprietary investments. During 2012, 2011 2010 and 2009,2010, the Company had derivative transactions which resulted in net losses of $207,000, net losses of $676,000 and net gains of $42,000, and net losses of $281,000, respectively. At December 31, 20112012 and 20102011 we held derivative contracts on 142,0001.2 million equity shares and 403,000142,000 equity shares, respectively, and the fair value was $24,000($121,000) and $1.0 million,$24,000, respectively, and are included as investments in securities on the consolidated statements of financial condition. These transactions are not designated as hedges for accounting purposes, and changes in fair values of these derivatives are included in net gain (loss) from investments on the consolidated statements of income and included in investments in trading securities on the consolidated statements of financial condition.
Goodwill and Identifiable Intangible Assets
Goodwill is initially measured as the excess of the cost of the acquired business over the sum of the amounts assigned to assets acquired less the liabilities assumed. At December 31, 2010, goodwill recorded on the consolidated statements of financial condition relates to our 93%-owned subsidiary, GSI,2012 and the identifiable intangible asset is an investment advisory contact for the Gabelli Enterprise Mergers and Acquisition Fund. During 2011, concurrent with the transfer of the distribution business from Gabelli & Company to G.distributors on August 1, 2011 the Company transferred $213,000 of goodwill from GSI to G.distributors, our wholly-owned subsidiary. At December 31, 2011, goodwill recorded on the consolidated statements of financial condition relates to two reporting units, GSI and G.distributors, and the identifiable intangible asset is an investment advisory contact for the Gabelli Enterprise Mergers and Acquisition Fund. Goodwill and identifiable intangible assets are tested for impairment at least annually on November 30th30th and whenever certain triggering events are met. In assessing the recoverability of the identifiable intangible asset for 20112012 and 2010,2011, projections regarding estimated future cash flows and other factors are made to determine the fair value of the asset.
In assessing the recoverability of goodwill for our annual impairment test on November 30, 2012 and 2011, we early adopted the guidance issued by FASB that allowed forperformed a qualitative assessment of whether it was more likely than not that an impairment has occurred, and concluded that a quantitative analysis was not required. In assessing the recoverability of goodwill for 2010 and the triggering event that occurred during 2011, projections regarding estimated future cash flows and other factors were made to determine the fair value of the reporting units.
Income Taxes
Deferred tax assets and liabilities are recorded for temporary differences between the tax basis of assets and liabilities and the reported amounts on the consolidated financial statements using the statutory tax rates in effect for the year when the reported amount of the asset or liability is recovered or settled, respectively. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is recorded to reduce the carrying values of deferred tax assets to the amount that is more likely than not to be realized. For each tax position taken or expected to be taken in a tax return, the Company determines whether it is more likely than not that the position will be sustained upon examination based on the technical merits of the position, including resolution of any related appeals or litigation. A tax position that meets the more likely than not recognition threshold is measured to determine the amount of benefit to recognize. The tax position is measured at the largest amount of benefit that is greater than 50% likely of being realized upon settlement. The Company recognizes the accrual of interest on uncertain tax positions and penalties in income tax provision on the consolidated statements of income.
Noncontrolling Interests
Noncontrolling interests that are mandatorily redeemable upon a certain date or event occurring are classified as liabilities and relates to certain shareholders of GSI who are employed by GBL, or its affiliates, who are required to sell their shares back to GSI at book value once they cease being employed by GBL, or its affiliates. Noncontrolling interests in investment partnerships and offshore funds that are redeemable at the option of the holder are classified as redeemable noncontrolling interests in the mezzanine section between liabilities and equity. All other noncontrolling interests are classified as equity and are presented within the equity section, separately from GAMCO Investors, Inc.’sGBL’s portion of equity.
For the years ended December 31, 2012, 2011 2010 and 2009,2010, net income (loss) attributable to noncontrolling interests on the consolidated statements of income represents income attributable to certain minority stockholders of GSI and Teton (through March 20, 2009), as well as to certain limited partners of investment partnerships and offshore funds that are also consolidated. The minority stockholders of Teton were principally employees, officers and directors of GBL. The income/expense attributable to the noncontrolling interests classified as liabilities is included in interest expense on the consolidated statements of income.
Fair Values of Financial Instruments
All of the instruments within cash and cash equivalents, investments in securities and securities sold, not yet purchased are measured at fair value. Certain investments in partnerships are also measured at fair value.
The Company’s assets and liabilities recorded at fair value have been categorized based upon a fair value hierarchy in accordance with the FASB’s guidance on fair value measurement. The levels of the fair value hierarchy and their applicability to the Company are described below:
- | Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities at the reporting date. Level 1 assets include cash equivalents, government obligations, open-end mutual funds, closed-end funds and equities. |
- | Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities that are not active and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly-quoted intervals. Assets that generally are included in this category may include certain limited partnership interests in private funds in which the valuations for substantially all of the investments within the fund are based upon Level 1 or Level 2 inputs and over the counter derivatives that have inputs to the valuations that can generally be corroborated by observable market data. |
- | Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. Assets included in this category generally include equities that trade infrequently and direct private equity investments held within consolidated partnerships. |
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. Investments are transferred into or out of any level at their beginning period values.
The availability of observable inputs can vary from product to product and is affected by a wide variety of factors, including, for example, the type of product, whether the product is new and not yet established in the marketplace, and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized as Level 3.
The valuation process and policies reside with the financial reporting and accounting group which reports to the Chief Financial Officer. The Company uses the “market approach” valuation technique to value its investments in Level 3 investments. The Company’s valuation of the Level 3 investments has been based upon either i) the recent sale prices of the issuer’s equity securities or ii) the net assets, book value or cost basis of the issuer when there is no recent sales prices available.
In the absence of a closing price, an average of the bid and ask price is used. Bid prices reflect the highest price that the market is willing to pay for an asset. Ask prices represent the lowest price that the market is willing to accept for an asset.
Cash equivalents – Cash equivalents primarily consist of an affiliated money market mutual fund which is invested solely in U.S. Treasuries. U.S. Treasury Bills and Notes with maturities of three months or less at the time of purchase are also considered cash equivalents. Cash equivalents are valued using unadjusted quoted market prices.
Investments in securities, investments in sponsored registered investment companies and securities sold, not yet purchased – Investments in securities, investments in sponsored registered investment companies and securities sold, not yet purchased are generally valued based on quoted prices from an exchange. To the extent these securities are actively traded, valuation adjustments are not applied, and they are categorized in Level 1 of the fair value hierarchy. Securities categorized in Level 2 investments are valued using other observable inputs. Nonpublic and infrequently traded investments are included in Level 3 of the fair value hierarchy because significant inputs to measure fair value are unobservable.
Investments in Partnerships – The Company’s investments include limited partner investments in consolidated feeder funds. The Company considers the net asset value of the master funds held by the consolidated feeder fund to be the best estimate of fair value. Investments in private funds that are redeemable at the measurement date or within the near term, are categorized in Level 2 of the fair value hierarchy. These funds primarily invest in long and short investments in debt and equity securities that are traded in public and over-the-counter exchanges in the United States and are generally classified as Level 1 assets or liabilities in the funds’ financial statements. We may redeem our investments in these funds monthly with 30 days’ notice.
Earnings Per Share
Basic earnings per share is based on the weighted-average number of common shares outstanding during each period less unvested restricted stock. Diluted earnings per share is based on basic shares plus the incremental shares that would be issued upon the assumed exercise of in-the-money stock options and unvested restricted stock using the treasury stock method and, if dilutive, assumes the conversion of the convertible notes for the periods outstanding since the issuances in August 2001 and October 2008 using the if converted method.
Management Fee
Management fee expense is incentive-based and entirely variable compensation in the amount of 10% of the aggregate pre-tax profits which is paid to Mr. Gabelli or his designee for acting as CEO pursuant to his 2008 Employment Agreement so long as he is an executive of GBL and devotes the substantial majority of his working time to the business. In accordance with his 2008 Employment Agreement, he has allocated approximately $0.7 million, $0.5 million $2.4 million and $4.0$2.4 million of his management fee to certain other employees of the Company in 2012, 2011 2010 and 2009,2010, respectively.
Stock Based Compensation
The Company has granted restricted stock awards (“RSAs”) and stock options to staff members which were recommended by the Company’s Chairman, who did not receive an RSA or option award, and approved by the Compensation Committee of the Company’s Board of Directors. We use a fair value based method of accounting for stock-based compensation provided to our employees.
The estimated fair value of RSAs is determined by using the closing price of our Class A Stock on the day prior to the grant date. The total expense, which is reduced by estimated forfeitures, is recognized over the vesting period for these awards which is 30% over three years from the date of grant and 70% over five years from the date of grant. The forfeiture rate is determined by reviewing historical forfeiture rates for previous stock-based compensation grants and is reviewed and updated quarterly, if necessary. During the vesting period, dividends to RSA holders are held for them until the RSA vesting dates and are forfeited if the grantee is no longer employed by the Company on the vesting dates. Dividends declared on these RSAs, less estimated forfeitures, are charged to retained earnings on the declaration date.
During 2012, the Board of Directors accelerated the lapsing of restrictions on all outstanding RSAs.
The estimated fair value of option awards on the grant date is determined using the Black Scholes option-pricing model. This sophisticated model utilizes a number of assumptions in arriving at its results, including the estimated life of the option, the risk free interest rate at the date of grant and the volatility of the underlying common stock. There may be other factors, which are not considered in the Black Scholes model, which may have an effect on the value of the options as well. The effects of changing any of the assumptions or factors employed by the Black Scholes model may result in a significantly different valuation for the options. The total expense based on the grant date fair value, which is reduced by estimated forfeitures, is recognized over the vesting period for these awards which is 75% over three years from the date of grant and 25% over four years from date of grant. The forfeiture rate is determined by reviewing historical forfeiture rates for previous stock-based compensation grants and is reviewed and updated quarterly, if necessary.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and receivable from brokers. The Company maintains cash and cash equivalents primarily in the Gabelli U.S. Treasury Money Market Fund, which invests fully in instruments issued by the U.S. government, and has receivables from brokers with various brokers and financial institutions, where these balances can exceed the federally insured limit. The concentration of credit risk with respect to advisory fees receivable is generally limited due to the short payment terms extended to clients by the Company. In addition, the credit risk is further limited by virtue of the fact that no single advisory relationship provided over 10% of the total revenue of the Company during the years 2012, 2011, 2010, or 2009.2010. All investments in securities are held at third party brokers or custodians.
Business Segment
The Company operates in one business segment, the investment advisory and asset management business. The Company conducts its investment advisory business principally through: GAMCO (Institutional and Private Wealth Management), Funds Advisor (Mutual Funds) and GSI (Investment Partnerships). The Company also provides institutional research through Gabelli & Company, one of the Company’s broker-dealer subsidiaries. The distribution of our open-end funds and underwriting of those Funds was conducted through Gabelli & Company, until July 31, 2011, and through G.distributors, our newly formed broker-dealer subsidiary, effective August 1, 2011.G.distributors.
Recent Accounting Developments
In January 2010, the FASB issued guidance to improve disclosures about fair value measurements. The guidance affects all entities that are required to make disclosures about recurring and nonrecurring fair value measurements. The guidance requires new disclosures regarding purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. The guidance is effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The Company adopted the applicable portions of this guidance on January 1, 2011 without a material impact to the consolidated financial statement disclosures.
In May 2011, the FASBFinancial Accounting Standards Board (“FASB”) issued guidance on fair value measurement which expands existing disclosure requirements for fair value measurements and makes other amendments. The guidance requires, for level 3 fair value measurements, (1) a quantitative disclosure of the unobservable inputs and assumptions used in the measurement, (2) a description of the valuation processes in place, and (3) a narrative description of the sensitivity of the fair value to changes in unobservable inputs and interrelationships between those inputs. Additionally, the guidance requires disclosure of the level in the fair value hierarchy of items that are not measured at fair value in the statement of financial condition but whose fair value must be disclosed and clarifies that the valuation premise and highest and best use concepts are not relevant to financial assets or liabilities. The guidance is effective for interim and annual periods beginning after December 15, 2011. The applicationLevel 3 investments held by the Company are not material, and therefore the adoption of this guidance will result in enhanced footnote disclosure upon adoptionstandard did not have a material impact on January 1, 2012.the Company.
In June 2011, the FASB issued guidance which revises the manner in which entities present comprehensive income in their financial statements. The new guidance requires entities to report comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. Under the two-statement approach, the first statement would include components of net income, which is consistent with the income statement format used currently,historically, and the second statement would include components of other comprehensive income (“OCI”). The guidance does not change the items that must be reported in OCI. In December 2011, the FASB indefinitely deferred a portion of the guidance that would have required entities to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement in which the net income is presented and the statement in which other comprehensive income is presented. The guidance is effective for fiscal years beginning after December 15, 2011, and for interim periods within those fiscal years. The application of thisCompany adopted the guidance is not expected to be material toon January 1, 2012 and opted for the two separate but consecutive statements approach. Accordingly, the Company now presents the consolidated financial statements.statements of comprehensive income immediately following the consolidated statements of income.
In September 2011, the FASB issued guidance which permits an entity to make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying value before applying the quantitative two-step goodwill impairment model that is currently in place. If it is determined through the qualitative assessment that a reporting unit’s fair value is more likely than not greater than its carrying value, the remaining impairment steps would be unnecessary. The qualitative assessment is optional, allowing companies to go directly to the quantitative assessment. This guidance is effective for annual and interim goodwill impairment tests performed in fiscal years beginning after December 15, 2011, with early adoption allowed. The Company early adopted this guidance that allowed for a qualitative assessment of whether it is more likely than not that an impairment has occurred.
In December 2011, the FASB issued guidance which creates new disclosure requirements about the nature of an entity’s right of offset and related arrangements associated with its financial instruments and derivative instruments. The disclosure requirements are effective for annual reporting periods beginning on or after January 1, 2013, and interim periods therein, with retrospective application required. The new disclosures are designed to make financial statements that are prepared under U.S. GAAP more comparable to those prepared under International Financial Reporting Standards. The Company is currently evaluating the impact that the application of this guidance will have on its disclosures.
In July 2012, the FASB issued guidance allowing companies to first perform a qualitative assessment to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired. If a company determines, on the basis of qualitative factors, that the fair value of such asset is not more likely than not impaired, it would not need to calculate the fair value of such asset. However, if a company concludes otherwise, it must calculate the fair value of the asset, compare the value with its carrying amount and record an impairment charge, if any. To perform the qualitative assessment, a company must identify and evaluate events and circumstances that could affect the significant inputs used to determine the fair value of an indefinite-lived intangible asset. This guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. The Company expects to adopt this guidance on January 1, 2013.
In February 2013, the FASB issued guidance which adds new disclosure requirements for items reclassified out of accumulated other comprehensive income (“AOCI”). The guidance is intended to help entities improve the transparency of changes in other comprehensive income (“OCI”) and items reclassified out of AOCI in their financial statements. It does not amend any existing requirements for reporting net income or OCI in the financial statements. The guidance requires entities to disclose additional information about reclassification adjustments, including changes in AOCI balances by component and significant items reclassified out of AOCI. The guidance requires an entity to present information about significant items reclassified out of AOCI by component either on the face of the statement where net income is presented or as a separate disclosure in the notes to the financial statements. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2012. Early adoption is permitted. The Company is currently evaluating the impact that the application of this guidance will have on its disclosures.
B. Investments in Securities
Investments in securities at December 31, 20112012 and 20102011 consisted of the following:
| | 2011 | | | 2010 | |
| | Cost | | | Fair Value | | | Cost | | | Fair Value | |
(In thousands) | | | | | | | | | | | | |
Trading securities: | | | | | | | | | | | | |
Government obligations | | $ | 42,124 | | | $ | 42,126 | | | $ | 27,327 | | | $ | 27,288 | |
Common stocks | | | 153,294 | | | | 159,314 | | | | 158,455 | | | | 170,374 | |
Mutual funds | | | 1,099 | | | | 1,325 | | | | 1,205 | | | | 1,554 | |
Convertible bonds | | | - | | | | - | | | | 574 | | | | 620 | |
Preferred stocks | | | - | | | | - | | | | 1,783 | | | | 1,973 | |
Other investments | | | 466 | | | | 399 | | | | 1,559 | | | | 1,350 | |
Total trading securities | | | 196,983 | | | | 203,164 | | | | 190,903 | | | | 203,159 | |
| | | | | | | | | | | | | | | | |
Available for sale securities: | | | | | | | | | | | | | | | | |
Common stocks | | | 16,487 | | | | 33,282 | | | | 16,835 | | | | 37,139 | |
Mutual funds | | | 40,679 | | | | 61,101 | | | | 43,707 | | | | 65,188 | |
Total available for sale securities | | | 57,166 | | | | 94,383 | | | | 60,542 | | | | 102,327 | |
| | | | | | | | | | | | | | | | |
Total investments in securities | | $ | 254,149 | | | $ | 297,547 | | | $ | 251,445 | | | $ | 305,486 | |
Securities sold, not yet purchased at December 31, 2011 and 2010 consisted of the following: | | 2011 | | | 2010 | |
| | Cost | | | Fair Value | | | Cost | | | Fair Value | |
(In thousands) | | | | | | | | | | | | |
Common stocks | | $ | 5,271 | | | $ | 5,415 | | | $ | 19,071 | | | $ | 19,299 | |
Other | | | 49 | | | | 73 | | | | - | | | | - | |
Total securities sold, not yet purchased | | $ | 5,320 | | | $ | 5,488 | | | $ | 19,071 | | | $ | 19,299 | |
The aggregate fair value of common stock investments available for sale at December 31, 2011 and 2010 was $33.3 million and $37.1 million, respectively. The total unrealized gains for common stock investments available for sale were $16.8 million and $20.3 million at December 31, 2011 and 2010, respectively. There were no unrealized losses for common stock investments available for sale at December 31, 2011 or December 31, 2010. At December 31, 2011 and 2010, the fair value of mutual fund investments available for sale with unrealized gains was $61.0 million and $65.2 million, respectively. At December 31, 2011, the fair value of mutual fund investments available for sale with unrealized losses was $0.1 million. At December 31, 2010 there were no unrealized losses for mutual fund investments available for sale. The total unrealized gains for mutual fund investments available for sale were $20.5 million and $21.5 million at December 31, 2011 and 2010, respectively. The total unrealized losses for mutual fund investments available for sale was $28,000 at December 31, 2011. | | 2012 | | | 2011 |
| | Cost | | | Fair Value | | | Cost | | | Fair Value |
(In thousands) | | | | | | | | | | | |
Trading securities: | | | | | | | | | | | |
Government obligations | | $ | 42,973 | | | $ | 42,989 | | | $ | 42,124 | | | $ | 42,126 |
Common stocks | | | 125,697 | | | | 138,478 | | | | 153,294 | | | | 159,314 |
Mutual funds | | | 1,072 | | | | 1,484 | | | | 1,084 | | | | 1,307 |
Other investments | | | 328 | | | | 630 | | | | 466 | | | | 399 |
Total trading securities | | | 170,070 | | | | 183,581 | | | | 196,968 | | | | 203,146 |
| | | | | | | | | | | | | | | |
Available for sale securities: | | | | | | | | | | | | | | | |
Common stocks | | | 14,822 | | | | 33,560 | | | | 16,487 | | | | 33,282 |
Mutual funds | | | 1,105 | | | | 1,702 | | | | 1,362 | | | | 1,905 |
Total available for sale securities | | | 15,927 | | | | 35,262 | | | | 17,849 | | | | 35,187 |
| | | | | | | | | | | | | | | |
Total investments in securities | | $ | 185,997 | | | $ | 218,843 | | | $ | 214,817 | | | $ | 238,333 |
Securities sold, not yet purchased at December 31, 2012 and 2011 consisted of the following:
| | 2012 | | | 2011 |
| | Cost | | | Fair Value | | | Cost | | | Fair Value |
(In thousands) | | | | | | | | | | | |
Trading securities: | | | | | | | | | | | |
Common stocks | | $ | 2,593 | | | $ | 2,867 | | | $ | 5,271 | | | $ | 5,415 |
Other | | | 184 | | | | 269 | | | | 49 | | | | 73 |
Total securities sold, not yet purchased | | $ | 2,777 | | | $ | 3,136 | | | $ | 5,320 | | | $ | 5,488 |
Investments in sponsored registered investment companies at December 31, 2012 and 2011 consisted of the following:
| | 2012 | | | 2011 |
| | Cost | | | Fair Value | | | Cost | | | Fair Value |
(In thousands) | | | | | | | | | | | |
Trading securities: | | | | | | | | | | | |
Mutual funds | | $ | 19 | | | $ | 20 | | | $ | 15 | | | $ | 18 |
Total trading securities | | | 19 | | | | 20 | | | | 15 | | | | 18 |
| | | | | | | | | | | | | | | |
Available for sale securities: | | | | | | | | | | | | | | | |
Closed-end funds | | | 35,868 | | | | 58,511 | | | | 37,104 | | | | 55,855 |
Mutual funds | | | 2,055 | | | | 3,341 | | | | 2,213 | | | | 3,341 |
Total available for sale securities | | | 37,923 | | | | 61,852 | | | | 39,317 | | | | 59,196 |
| | | | | | | | | | | | | | | |
Total investments in sponsored | | | | | | | | | | | | | | | |
registered investment companies | | $ | 37,942 | | | $ | 61,872 | | | $ | 39,332 | | | $ | 59,214 |
The following is a summary of the cost, gross unrealized gains, gross unrealized losses and fair value of available for sale investments as of December 31, 2012 and December 31, 2011:
| | December 31, 2012 |
| | | | | Gross | | | Gross | | | |
| | | | | Unrealized | | | Unrealized | | | Fair |
| | Cost | | | Gains | | | Losses | | | Value |
| | (In thousands) | | | | | | | | | |
Common stocks | | $ | 14,822 | | | $ | 18,738 | | | $ | - | | | $ | 33,560 |
Closed-end Funds | | | 35,868 | | | | 22,645 | | | | (2 | ) | | | 58,511 |
Mutual funds | | | 3,160 | | | | 1,883 | | | | - | | | | 5,043 |
Total available for sale securities | | $ | 53,850 | | | $ | 43,266 | | | $ | (2 | ) | | $ | 97,114 |
| | | | | | | | | | | | | | | |
| | December 31, 2011 |
| | | | | | Gross | | | Gross | | | | |
| | | | | | Unrealized | | | Unrealized | | | Fair |
| | Cost | | | Gains | | | Losses | | | Value |
| | (In thousands) | | | | | | | | | | | | |
Common stocks | | $ | 16,487 | | | $ | 16,795 | | | $ | - | | | $ | 33,282 |
Closed-end Funds | | | 37,104 | | | | 18,779 | | | | (28 | ) | | | 55,855 |
Mutual funds | | | 3,575 | | | | 1,671 | | | | - | | | | 5,246 |
Total available for sale securities | | $ | 57,166 | | | $ | 37,245 | | | $ | (28 | ) | | $ | 94,383 |
Increases in unrealized gains, net of taxes, for AFS securities for the years ended December 31, 2012 and 2010 of $3.8 million and $6.3 million have been included in other comprehensive income at December 31, 2012 and 2010, respectively. Increases in unrealized losses, net of taxes, for AFS securities for the year ended December 31, 2011 of $2.9 million have been included in equityother comprehensive income at December 31, 2011. Increases in unrealized gains, net of taxes, for AFS securities for the years ended December 31, 2010 and 2009 of $6.3 million and $4.1 million have been included in equity at December 31, 2010 and 2009, respectively. Return of capital on available for sale securities were $2.5 million, $2.3 million $3.0 million and $3.7$3.0 million for the years ended December 31, 2012, 2011 2010 and 2009,2010, respectively. Proceeds from sales of investments available for sale were approximately $3.2 million, $6.1 million $2.1 million and $4.3$2.1 million for the years ended December 31, 2012, 2011 2010 and 2009,2010, respectively. For the years ended December 31, 2012, 2011 2010 and 2009,2010, gross gains on the sale of investments available for sale amounted to $1.6 million, $772,000 $29,000 and $2.1 million,$29,000, respectively, and were reclassed from other comprehensive income into the consolidated statements of income. There were no losses on the sale of investments available for sale for the years ended December 31, 2012, 2011 2010 and 2009.2010. The basis on which the cost of a security sold is determined is specific identification.Accumulated other comprehensive income on the consolidated statements of equity is primarily comprised of unrealized gains/losses, net of taxes, for AFS securities.
GBL has an established accounting policy and methodology to determine other-than-temporary impairment. Under this policy, available for sale securities are evaluated for other than temporary impairments and any impairment charges are recorded in net gain/(loss) from investments on the consolidated statements of income. Management reviews all available for sale securities whose cost exceeds their market value to determine if the impairment is other than temporary. Management uses qualitative factors such as diversification of the investment, the amount of time that the investment has been impaired and the severity of the decline in determining whether the impairment is other than temporary.
Investments classified as available for sale that are in an unrealized loss position for which other-than-temporary impairment has not been recognized consisted of the following:
| | December 31, 2012 | | | December 31, 2011 |
| | | | | Unrealized | | | | | | | | | Unrealized | | | |
| | Cost | | | Losses | | | Fair Value | | | Cost | | | Losses | | | Fair Value |
(in thousands) | | | | | | | | | | | | | | | | | |
Mutual Funds | | $ | 73 | | | $ | (2 | ) | | $ | 71 | | | $ | 101 | | | $ | (28 | ) | | $ | 73 |
At December 31, 2012 and 2011, there was one holding in a loss position which was not deemed to be other-than-temporarily impaired due to the length of time that it had been in a loss position and because it passed scrutiny in our evaluation of issuer-specific and industry-specific considerations. In this specific instance, the investment at December 31, 2012 and December 31, 2011 was a mutualclosed-end fund with diversified holdings across multiple companies and across multiple industries. The one holding was impaired for one and seven consecutive months.months, respectively. The value of this holding at December 31, 2012 and December 31, 2011 was $0.1 million.million and $0.1 million, respectively.
AtFor the year ended December 31, 2010,2012, there were nowas $20,000 of losses on available for sale holdings in loss positions.
securities deemed to be other than temporary. For the years ended December 31, 20102011 and 2009,2010, there were no losses on available for sale securities deemed to be other than temporary.
C. Fair Value
The following tables present information about the Company’s assets and liabilities by major categories measured at fair value on a recurring basis as of December 31, 20112012 and 20102011 and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value:
Assets and Liabilities Measured at Fair Value on a Recurring Basis as of December 31, 2012 (in thousands)
| | Quoted Prices in Active | | | Significant Other | | | Significant | | | Balance as of |
| | Markets for Identical | | | Observable | | | Unobservable | | | December 31, |
Assets | | Assets (Level 1) | | | Inputs (Level 2) | | | Inputs (Level 3) | | | 2012 |
Cash equivalents | | $ | 190,475 | | | $ | - | | | $ | - | | | $ | 190,475 |
Investments in partnerships | | | - | | | | 26,128 | | | | - | | | | 26,128 |
Investments in securities: | | | | | | | | | | | | | | | |
AFS - Common stocks | | | 33,560 | | | | - | | | | - | | | | 33,560 |
AFS - Mutual funds | | | 1,702 | | | | - | | | | - | | | | 1,702 |
Trading - Gov't obligations | | | 42,989 | | | | - | | | | - | | | | 42,989 |
Trading - Common stocks | | | 137,796 | | | | 7 | | | | 675 | | | | 138,478 |
Trading - Mutual funds | | | 1,484 | | | | - | | | | - | | | | 1,484 |
Trading - Other | | | 120 | | | | 148 | | | | 362 | | | | 630 |
Total investments in securities | | | 217,651 | | | | 155 | | | | 1,037 | | | | 218,843 |
Investments in sponsored registered investment companies: | | | | | | | | | | | |
AFS - Closed-end Funds | | | 58,511 | | | | - | | | | - | | | | 58,511 |
AFS - Mutual Funds | | | 3,341 | | | | - | | | | - | | | | 3,341 |
Trading - Mutual funds | | | 20 | | | | - | | | | - | | | | 20 |
Total investments in sponsored | | | | | | | | | | | | | | | |
registered investment companies | | | 61,872 | | | | - | | | | - | | | | 61,872 |
Total investments | | | 279,523 | | | | 26,283 | | | | 1,037 | | | | 306,843 |
Total assets at fair value | | $ | 469,998 | | | $ | 26,283 | | | $ | 1,037 | | | $ | 497,318 |
Liabilities | | | | | | | | | | | | | | | |
Trading - Common stocks | | $ | 2,867 | | | $ | - | | | $ | - | | | $ | 2,867 |
Trading - Other | | | - | | | | 269 | | | | - | | | | 269 |
Securities sold, not yet purchased | | $ | 2,867 | | | $ | 269 | | | $ | - | | | $ | 3,136 |
Assets and Liabilities Measured at Fair Value on a Recurring Basis as of December 31, 2011 (in thousands)
| | Quoted Prices in Active | | Significant Other | | | Significant | | | Balance as of |
| | Markets for Identical | | | Observable | | | Unobservable | | | December 31, |
Assets | | Assets (Level 1) | | | Inputs (Level 2) | | | Inputs (Level 3) | | | 2011 |
Cash equivalents | | $ | 260,969 | | | $ | - | | | $ | - | | | $ | 260,969 |
Investments in partnerships | | | - | | | | 27,122 | | | | - | | | | 27,122 |
Investments in securities: | | | | | | | | | | | | | | | |
AFS - Common stocks | | | 33,282 | | | | - | | | | - | | | | 33,282 |
AFS - Mutual funds | | | 1,905 | | | | - | | | | - | | | | 1,905 |
Trading - Gov't obligations | | | 42,126 | | | | - | | | | - | | | | 42,126 |
Trading - Common stocks | | | 158,623 | | | | 21 | | | | 670 | | | | 159,314 |
Trading - Mutual funds | | | 1,307 | | | | - | | | | - | | | | 1,307 |
Trading - Other | | | 55 | | | | 60 | | | | 284 | | | | 399 |
Total investments in securities | | | 237,298 | | | | 81 | | | | 954 | | | | 238,333 |
Investments in sponsored registered investment companies: | | | | | | | | | | | |
AFS - Closed-end Funds | | | 55,855 | | | | - | | | | - | | | | 55,855 |
AFS - Mutual Funds | | | 3,341 | | | | - | | | | - | | | | 3,341 |
Trading - Mutual funds | | | 18 | | | | - | | | | - | | | | 18 |
Total investments in sponsored | | | | | | | | | | | | | | | |
registered investment companies | | | 59,214 | | | | - | | | | - | | | | 59,214 |
Total investments | | | 296,512 | | | | 27,203 | | | | 954 | | | | 324,669 |
Total assets at fair value | | $ | 557,481 | | | $ | 27,203 | | | $ | 954 | | | $ | 585,638 |
Liabilities | | | | | | | | | | | | | | | |
Trading - Common stocks | | $ | 5,415 | | | $ | - | | | $ | - | | | $ | 5,415 |
Trading - Other | | | - | | | | 73 | | | | - | | | | 73 |
Securities sold, not yet purchased | | $ | 5,415 | | | $ | 73 | | | $ | - | | | $ | 5,488 |
| | | | | | | | | | | | | | | |
| | Quoted Prices in Active | | | Significant Other | | | Significant | | | Balance as of | |
| | Markets for Identical | | | Observable | | | Unobservable | | | December 31, | |
Assets | | Assets (Level 1) | | | Inputs (Level 2) | | | Inputs (Level 3) | | | 2011 | |
Cash equivalents | | $ | 260,969 | | | $ | - | | | $ | - | | | $ | 260,969 | |
Investments in partnerships | | | - | | | | 27,122 | | | | - | | | | 27,122 | |
Investments in securities: | | | | | | | | | | | | | | | | |
AFS - Common stocks | | | 33,282 | | | | - | | | | - | | | | 33,282 | |
AFS - Mutual funds | | | 61,101 | | | | - | | | | - | | | | 61,101 | |
Trading - Gov't obligations | | | 42,126 | | | | - | | | | - | | | | 42,126 | |
Trading - Common stocks | | | 158,623 | | | | 21 | | | | 670 | | | | 159,314 | |
Trading - Mutual funds | | | 1,325 | | | | - | | | | - | | | | 1,325 | |
Trading - Other | | | 55 | | | | 60 | | | | 284 | | | | 399 | |
Total investments in securities | | | 296,512 | | | | 81 | | | | 954 | | | | 297,547 | |
Total investments | | | 296,512 | | | | 27,203 | | | | 954 | | | | 324,669 | |
Total assets at fair value | | $ | 557,481 | | | $ | 27,203 | | | $ | 954 | | | $ | 585,638 | |
Liabilities | | | | | | | | | | | | | | | | |
Trading - Common stocks | | $ | 5,415 | | | $ | - | | | $ | - | | | $ | 5,415 | |
Trading - Other | | | - | | | | 73 | | | | - | | | | 73 | |
Securities sold, not yet purchased | | $ | 5,415 | | | $ | 73 | | | $ | - | | | $ | 5,488 | |
Assets and Liabilities Measured at Fair Value on a Recurring Basis as of December 31, 2010 (in thousands)
| | Quoted Prices in Active | | | Significant Other | | | Significant | | | Balance as of | |
| | Markets for Identical | | | Observable | | | Unobservable | | | December 31, | |
Assets | | Assets (Level 1) | | | Inputs (Level 2) | | | Inputs (Level 3) | | | 2010 | |
Cash equivalents | | $ | 167,548 | | | $ | - | | | $ | - | | | $ | 167,548 | |
Investments in partnerships | | | - | | | | 27,690 | | | | - | | | | 27,690 | |
Investments in securities: | | | | | | | | | | | | | | | | |
AFS - Common stocks | | | 37,139 | | | | - | | | | - | | | | 37,139 | |
AFS - Mutual funds | | | 65,188 | | | | - | | | | - | | | | 65,188 | |
Trading - Gov't obligations | | | 27,288 | | | | - | | | | - | | | | 27,288 | |
Trading - Common stocks | | | 170,204 | | | | 23 | | | | 147 | | | | 170,374 | |
Trading - Mutual funds | | | 1,554 | | | | - | | | | - | | | | 1,554 | |
Trading - Convertible bonds | | | 620 | | | | - | | | | - | | | | 620 | |
Trading - Preferred stocks | | | 1,973 | | | | - | | | | - | | | | 1,973 | |
Trading - Other | | | 72 | | | | 1,000 | | | | 278 | | | | 1,350 | |
Total investments in securities | | | 304,038 | | | | 1,023 | | | | 425 | | | | 305,486 | |
Total investments | | | 304,038 | | | | 28,713 | | | | 425 | | | | 333,176 | |
Total assets at fair value | | $ | 471,586 | | | $ | 28,713 | | | $ | 425 | | | $ | 500,724 | |
Liabilities | | | | | | | | | | | | | | | | |
Trading - Common stocks | | $ | 19,299 | | | $ | - | | | $ | - | | | $ | 19,299 | |
Securities sold, not yet purchased | | $ | 19,299 | | | $ | - | | | $ | - | | | $ | 19,299 | |
The following tables present additional information about assets by major categories measured at fair value on a recurring basis and for which the Company has utilized Level 3 inputs to determine fair value.
Changes in Level 3 Assets Measured at Fair Value on a Recurring Basis for the year ended December 31, 2012 (in thousands)
| | | | | | | | | | | Total | | | | | | | | | | | | | | | |
| | | | | | | | | | | Unrealized | | | | | | | | | | | | | | | |
| | | | | | | | | | | Gains or | | | Total | | | | | | | | | | | | |
| | | | | Total Realized and | | | (Losses) | | | Realized | | | | | | | | | Net | | | |
| | December | | | Unrealized Gains or | | | Included in | | | and | | | | | | | | | Transfers | | | |
| | | 31, 2011 | | | (Losses) in Income | | | Other | | | Unrealized | | | | | | | | | In and/or | | | |
| | Beginning | | | | | | AFS | | | Comprehensive | | | Gains or | | | | | | | | | (Out) of | | | Ending |
Asset | | Balance | | | Trading | | | Investments | | | Income | | | (Losses) | | | Purchases | | | Sales | | | Level 3 | | | Balance |
Financial | | | | | | | | | | | | | | | | | | | | | | | | | | | |
instruments owned: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Trading - Common | | | | | | | | | | | | | | | | | | | | | | | | | | | |
stocks | | $ | 670 | | | $ | 56 | | | $ | - | | | $ | - | | | $ | 56 | | | $ | 57 | | | $ | (108 | ) | | $ | - | | | $ | 675 |
Trading - Other | | | 284 | | | | 88 | | | | - | | | | - | | | | 88 | | | | 18 | | | | (28 | ) | | | - | | | | 362 |
Total | | $ | 954 | | | $ | 144 | | | $ | - | | | $ | - | | | $ | 144 | | | $ | 75 | | | $ | (136 | ) | | $ | - | | | $ | 1,037 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
There were no transfers between any Levels during the year ended December 31, 2012.
Changes in Level 3 Assets Measured at Fair Value on a Recurring Basis for the year ended December 31, 2011 (in thousands)
| | | | | Total Realized and | | | (Losses) | | | Realized | | | | | | | | | Net | | | | |
| | December | | | Unrealized Gains or | | | Included in | | | and | | | | | | | | | Transfers | | | | |
| | 31, 2010 | | | (Losses) in Income | | | Other | | | Unrealized | | | | | | | | | In and/or | | | | |
| | Beginning | | | | | | AFS | | | Comprehensive | | | Gains or | | | | | | | | | (Out) of | | | Ending | |
Asset | | Balance | | | Trading | | | Investments | | | Income | | | (Losses) | | | Purchases | | | Sales | | | Level 3 | | | Balance | |
Financial | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
instruments owned: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Trading - Common | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
stocks | | $ | 147 | | | $ | 94 | | | $ | - | | | $ | - | | | $ | 94 | | | $ | 537 | | | $ | (108 | ) | | $ | - | | | $ | 670 | |
Trading - Other | | | 278 | | | | 142 | | | | - | | | | - | | | | 142 | | | | 13 | | | | (155 | ) | | | 6 | | | | 284 | |
Total | | $ | 425 | | | $ | 236 | | | $ | - | | | $ | - | | | $ | 236 | | | $ | 550 | | | $ | (263 | ) | | $ | 6 | | | $ | 954 | |
| | | | | | | | | | | Total | | | | | | | | | | | | | | | |
| | | | | | | | | | | Unrealized | | | | | | | | | | | | | | | |
| | | | | | | | | | | Gains or | | | Total | | | | | | | | | | | | |
| | | | | Total Realized and | | | (Losses) | | | Realized | | | | | | | | | Net | | | |
| | December | | | Unrealized Gains or | | | Included in | | | and | | | | | | | | | Transfers | | | |
| | 31, 2010 | | | (Losses) in Income | | | Other | | | Unrealized | | | | | | | | | In and/or | | | |
| | Beginning | | | | | | AFS | | | Comprehensive | | Gains or | | | | | | | | | (Out) of | | | Ending |
Asset | | Balance | | | Trading | | | Investments | | | Income | | | (Losses) | | | Purchases | | | Sales | | | Level 3 | | | Balance |
Financial | | | | | | | | | | | | | | | | | | | | | | | | | | | |
instruments owned: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Trading - Common | | | | | | | | | | | | | | | | | | | | | | | | | | | |
stocks | | $ | 147 | | | $ | 94 | | | $ | - | | | $ | - | | | $ | 94 | | | $ | 537 | | | $ | (108 | ) | | $ | - | | | $ | 670 |
Trading - Other | | | 278 | | | | 142 | | | | - | | | | - | | | | 142 | | | | 13 | | | | (155 | ) | | | 6 | | | | 284 |
Total | | $ | 425 | | | $ | 236 | | | $ | - | | | $ | - | | | $ | 236 | | | $ | 550 | | | $ | (263 | ) | | $ | 6 | | | $ | 954 |
During the year ended December 31, 2011, there were no transfers between Level 1 and Level 2 holdings. During the year ended December 31, 2011, the Company reclassed approximately $6,000 of investments from Level 1 to Level 3. The reclassifications were due to decreased availability of market price quotations and were based on the values at the beginning of the period in which the reclass occurred.
Changes in Level 3 Assets Measured at Fair Value on a Recurring Basis for the year ended December 31, 2010 (in thousands)
| | | | | | | | | | | Total | | | | | | | | | | | | | |
| | | | | | | | | | | Unrealized | | | | | | | | | | | | | |
| | | | | | | | | | | Gains or | | | Total | | | | | | | | | | |
| | | | | Total Realized and | | | (Losses) | | | Realized | | | | | | Net | | | | |
| | December | | | Unrealized Gains or | | | Included in | | | and | | | | | | Transfers | | | | |
| | 31, 2009 | | | (Losses) in Income | | | Other | | | Unrealized | | | Purchases | | | In and/or | | | | |
| | Beginning | | | | | | AFS | | | Comprehensive | | | Gains or | | | and Sales, | | | (Out) of | | | Ending | |
Asset | | Balance | | | Trading | | | Investments | | | Income | | | (Losses) | | | net | | | Level 3 | | | Balance | |
Financial | | | | | | | | | | | | | | | | | | | | | | | | | |
instruments owned: | | | | | | | | | | | | | | | | | | | | | | | | | |
Trading - Common | | | | | | | | | | | | | | | | | | | | | | | | | |
stocks | | $ | 205 | | | $ | 78 | | | $ | - | | | $ | - | | | $ | 78 | | | $ | (206 | ) | | $ | 70 | | | $ | 147 | |
Trading - Preferred | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
stocks | | | 15 | | | | (15 | ) | | | - | | | | - | | | | (15 | ) | | | - | | | | - | | | | - | |
Trading - Other | | | 90 | | | | 188 | | | | - | | | | - | | | | 188 | | | | - | | | | - | | | | 278 | |
Total | | $ | 310 | | | $ | 251 | | | $ | - | | | $ | - | | | $ | 251 | | | $ | (206 | ) | | $ | 70 | | | $ | 425 | |
During the year ended December 31, 2010, there were no transfers between Level 1 and Level 2 holdings. During the year ended December 31, 2010, the Company reclassed approximately $23,000 of investments from Level 1 to Level 3 and $47,000 from Level 2 to Level 3. The reclassifications were due to decreased availability of market price quotations and were based on the values at the beginning of the period in which the reclass occurred.
D. Investment in Partnerships, Offshore Funds and Variable Interest Entities
The Company is general partner or co-general partner of various sponsored limited partnerships andaffiliated entities, in which the investment manager of various sponsored offshore funds,Company has investments totaling $86.9$83.9 million and $64.0$86.9 million at December 31, 2012 and 2011, respectively, and 2010, respectively, whose underlying assets consist primarily of marketable securities (the “affiliated entities”). We also have investments in unaffiliated partnerships, offshore funds and other entities of $14.0$13.6 million and $18.9$14.0 million at December 31, 20112012 and 2010,2011, respectively (the “unaffiliated entities”). We evaluate each entity for the appropriate accounting treatment and disclosure. Certain of the affiliated entities, and none of the unaffiliated entities, are consolidated, as discussedconsolidated.
For those entities where consolidation is not deemed to be appropriate, we report them in Note A. In addition, our balance sheetstatement of financial condition under the caption “investments“Investments in partnerships”. This caption includes those investments, in both affiliated and unaffiliated entities, which the Company accounts for under the equity method of accounting, as well as certain investments that the feeder funds hold that are carried at fair value, as described in Note C. The Company reflects the equity in earnings of these equity method investees and the change in fair value of the consolidated feeder funds (“CFFs”) under the caption net gain“Net gain/(loss) from investmentsinvestments” on the consolidated statements of income.
The following table highlights the number of entities, including voting interest entities (“VOEs”), that we consolidate as well as under which accounting guidance they are consolidated, including CFFs, which retain their specialized investment company accounting, and partnerships and offshore funds which we consolidate as described in Note A.funds.
Entities consolidated | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | CFFs | | | Partnerships | | | Offshore Funds | | | Total | | | CFFs | | | Partnerships | | | Offshore Funds | | | Total | |
| | VIEs | | | VOEs | | | VIEs | | | VOEs | | | VIEs | | | VOEs | | | VIEs | | | VOEs | | | VIEs | | | VOEs | | | VIEs | | | VOEs | | | VIEs | | | VOEs | | | VIEs | | | VOEs | |
Entities consolidated at December 31, 2008 | | | 1 | | | | 5 | | | | - | | | | 1 | | | | 1 | | | | - | | | | 2 | | | | 6 | | |
Additional consolidated entities | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | |
Deconsolidated entities | | | - | | | | (3 | ) | | | - | | | | - | | | | (1 | ) | | | - | | | | (1 | ) | | | (3 | ) | |
Entities consolidated at December 31, 2009 | | | 1 | | | | 2 | | | | - | | | | 1 | | | | - | | | | - | | | | 1 | | | | 3 | | | | 1 | | | | 2 | | | | - | | | | 1 | | | | - | | | | - | | | | 1 | | | | 3 | |
Additional consolidated entities | | | - | | | | - | | | | - | | | | 1 | | | | 1 | | | | - | | | | 1 | | | | 1 | | | | - | | | | - | | | | - | | | | 1 | | | | 1 | | | | - | | | | 1 | | | | 1 | |
Deconsolidated entities | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Entities consolidated at December 31, 2010 | | | 1 | | | | 2 | | | | - | | | | 2 | | | | 1 | | | | - | | | | 2 | | | | 4 | | | | 1 | | | | 2 | | | | - | | | | 2 | | | | 1 | | | | - | | | | 2 | | | | 4 | |
Additional consolidated entities | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1 | | | | - | | | | 1 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1 | | | | - | | | | 1 | |
Deconsolidated entities | | | - | | | | - | | | | - | | | | (1 | ) | | | (1 | ) | | | - | | | | (1 | ) | | | (1 | ) | | | - | | | | - | | | | - | | | | (1 | ) | | | (1 | ) | | | - | | | | (1 | ) | | | (1 | ) |
Entities consolidated at December 31, 2011 | | | 1 | | | | 2 | | | | - | | | | 1 | | | | - | | | | 1 | | | | 1 | | | | 4 | | | | 1 | | | | 2 | | | | - | | | | 1 | | | | - | | | | 1 | | | | 1 | | | | 4 | |
Additional consolidated entities | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Deconsolidated entities | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Entities consolidated at December 31, 2012 | | | | 1 | | | | 2 | | | | - | | | | 1 | | | | - | | | | 1 | | | | 1 | | | | 4 | |
At and for the year ended December 31, 2012, the one CFF VIE is consolidated, as the Company has been determined to be the primary beneficiary because it has an equity interest and absorbs the majority of the expected losses and/or expected gains. At and for the year ended December 31, 2012, the two CFF VOEs, the one Partnership VOE and the one Offshore Fund VOE are consolidated because the unaffiliated partners or shareholders lack substantive rights, and the Company, as either the general partner or investment manager, is deemed to have control.
On January 1, 2011, upon analysis of several factors, including the additional contribution of capital from unrelated third parties into a partnership that we consolidated for the year ended and as of December 31, 2010, we determined that the Company was no longer deemed to control the partnership, resulting in the deconsolidation of this partnership, effective January 1, 2011. The deconsolidation did not result in the recognition of any gain or loss. The Company continues to serve as the general partner and earns fees for this role, and it also maintains an investment in the deconsolidated partnership which is included in investments in partnerships on the consolidated statements of financial condition and is accounted for under the equity method (which approximates fair value).
The following table includes the impact by line item on the consolidated statements of financial condition for each category of entity consolidated (in thousands):
| | December 31, 2011 | |
| | Prior to | | | | | | | | | | | | | |
| | Consolidation | | | CFFs | | | Partnerships | | | Offshore Funds | | | As Reported | |
Assets | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 259,531 | | | $ | 15,000 | | | $ | 1,809 | | | $ | - | | | $ | 276,340 | |
Investments in securities | | | 284,796 | | | | - | | | | 6,228 | | | | 6,523 | | | | 297,547 | |
Investments in partnerships | | | 107,981 | | | | 933 | | | | (8,021 | ) | | | - | | | | 100,893 | |
Receivable from brokers | | | 17,593 | | | | - | | | | 270 | | | | 3,050 | | | | 20,913 | |
Investment advisory fees receivable | | | 32,157 | | | | 1 | | | | (2 | ) | | | - | | | | 32,156 | |
Other assets | | | 43,889 | | | | (14,989 | ) | | | - | | | | - | | | | 28,900 | |
Total assets | | $ | 745,947 | | | $ | 945 | | | $ | 284 | | | $ | 9,573 | | | $ | 756,749 | |
Liabilities and equity | | | | | | | | | | | | | | | | | | | | |
Securities sold, not yet purchased | | $ | 5,488 | | | $ | - | | | $ | - | | | $ | - | | | $ | 5,488 | |
Accrued expenses and other liabilities | | | 69,929 | | | | 51 | | | | 28 | | | | 4,652 | | | | 74,660 | |
Total debt | | | 263,119 | | | | - | | | | - | | | | - | | | | 263,119 | |
Redeemable noncontrolling interests | | | - | | | | 894 | | | | 256 | | | | 4,921 | | | | 6,071 | |
Total equity | | | 407,411 | | | | - | | | | - | | | | - | | | | 407,411 | |
Total liabilities and equity | | $ | 745,947 | | | $ | 945 | | | $ | 284 | | | $ | 9,573 | | | $ | 756,749 | |
| | | | | | | | | | | | | | | | | | | | |
| | December 31, 2010 | |
| | Prior to | | | | | | | | | | | | | | | | | |
| | Consolidation | | | CFFs | | | Partnerships | | | Offshore Funds | | | As Reported | |
Assets | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 167,753 | | | $ | - | | | $ | 1,297 | | | $ | 551 | | | $ | 169,601 | |
Investments in securities | | | 219,364 | | | | - | | | | 20,410 | | | | 65,712 | | | | 305,486 | |
Investments in partnerships | | | 147,801 | | | | 1,069 | | | | (13,381 | ) | | | (52,618 | ) | | | 82,871 | |
Receivable from brokers | | | 23,062 | | | | - | | | | 8,388 | | | | 15,171 | | | | 46,621 | |
Investment advisory fees receivable | | | 44,944 | | | | 7 | | | | (149 | ) | | | (142 | ) | | | 44,660 | |
Other assets | | | 23,429 | | | | 10 | | | | 10 | | | | 48 | | | | 23,497 | |
Total assets | | $ | 626,353 | | | $ | 1,086 | | | $ | 16,575 | | | $ | 28,722 | | | $ | 672,736 | |
Liabilities and equity | | | | | | | | | | | | | | | | | | | | |
Securities sold, not yet purchased | | $ | 2,557 | | | $ | - | | | $ | 10,157 | | | $ | 6,585 | | | $ | 19,299 | |
Accrued expenses and other liabilities | | | 75,608 | | | | 193 | | | | 1,639 | | | | 825 | | | | 78,265 | |
Total debt | | | 158,580 | | | | - | | | | - | | | | - | | | | 158,580 | |
Redeemable noncontrolling interests | | | - | | | | 893 | | | | 4,779 | | | | 21,312 | | | | 26,984 | |
Total equity | | | 389,608 | | | | - | | | | - | | | | - | | | | 389,608 | |
Total liabilities and equity | | $ | 626,353 | | | $ | 1,086 | | | $ | 16,575 | | | $ | 28,722 | | | $ | 672,736 | |
The following table breaks out the Company’s net earnings (loss) from non consolidated entities, a component of net gain/(loss) from investments on the consolidated statements of income, management fee and incentive allocation, components of investment advisory and incentive fees on the consolidated statements of income, by type of entity (in thousands):
| | | 2011 | |
| | | Net Earnings | | | Management | | | Incentive | |
| | | (Loss) | | | Fees | | | Allocation | |
Feeder funds | | | $ | (58 | ) | | $ | 114 | | | $ | - | |
Affiliated partnerships | | | | 1,558 | | | | 3,029 | | | | 1,397 | |
Affilated offshore funds | | | | 1,057 | | | | 976 | | | | 876 | |
Unaffiliated entities | | | | (929 | ) | | | - | | | | - | |
Total | | | $ | 1,628 | | | $ | 4,119 | | | $ | 2,273 | |
| | | | | | | | | | | | | |
| | | 2010 | |
| | | Net Earnings | | | Management | | | Incentive | |
| | | (Loss) | | | Fees | | | Allocation | |
Feeder funds | | | $ | 159 | | | $ | 97 | | | $ | 151 | |
Affiliated partnerships | | | | 1,975 | | | | 2,031 | | | | 2,118 | |
Affilated offshore funds | | | | 1,070 | | | | 722 | | | | 1,337 | |
Unaffiliated entities | | | | 3,761 | | | | - | | | | - | |
Total | | | $ | 6,965 | | | $ | 2,850 | | | $ | 3,606 | |
| | | | | | | | | | | | | |
| | | 2009 | |
| | | Net Earnings | | | Management | | | Incentive | |
| | | (Loss) | | | Fees | | | Allocation | |
Feeder funds | | | $ | 49 | | | $ | 121 | | | $ | 27 | |
Affiliated partnerships | | | | 1,235 | | | | 1,428 | | | | 1,730 | |
Affilated offshore funds | | | | 1,055 | | | | 501 | | | | 923 | |
Unaffiliated entities | | | | 2,585 | | | | - | | | | - | |
Total | | | $ | 4,924 | | | $ | 2,050 | | | $ | 2,680 | |
Variable Interest Entities
We also have sponsored a number of investment vehicles where we are the general partner or investment manager. These vehicles are variable interest entities (“VIEs”), and we are not the primary beneficiary because we do not absorb a majority of the entities’ expected losses or expected returns. The Company has not provided any financial or other support to these entities. The total assets of these entities at December 31, 2011 and 2010 were $73.7 million and $13.3 million, respectively. Our maximum exposure to loss as a result of our involvement with the VIEs is limited to the investment in one VIE and the deferred carried interest that we have in another. On December 31, 2011, we had an investment in one of the VIE offshore funds of approximately $5.0 million which was included in investments in partnerships on the consolidated statements of financial condition. On December 31, 2011 and 2010, we had a deferred carried interest in one of the VIE offshore funds of approximately $47,000 and $325,000, respectively, which was included in investments in partnerships on the consolidated statements of financial condition. Additionally, as the general partner or investment manager to these VIEs the Company earns fees in relation to these roles, which given a decline in AUMs of the VIEs would result in lower fee revenues earned by the Company which would be reflected on the consolidated statement of income, consolidated statement of financial condition and consolidated statement of cash flows.
Prior to January 1, 2011, we were consolidating two VIEs since we had determined that we were the primary beneficiary of each because we had equity interests and absorbed a majority of each entity’s expected losses; therefore they were consolidated in the financial statements. EffectiveOn October 1, 2011, we deconsolidated one of thethese VIEs upon analysis of several factors, including the redemption of the $49.2 million of proprietary capital from this VIE, as a result of which we determined that the Company was no longer deemed to be the primary beneficiary of the VIE. The deconsolidation did not result in the recognition of any gain or loss. The Company has not provided any financial support to these VIEs but does continue to serve as the investment manager and earn fees for this role, and it also maintains an investment in the deconsolidated VIE, which is included in investments in partnerships on the consolidated statement of financial condition and is accounted for under the equity method (which approximates fair value).
The following table breaks down the investments in partnerships line by accounting method, either fair value or equity method, and investment type.
| | December 31, 2012 |
| | Investment Type |
| | Affiliated | | | Unaffiliated | | | |
| | Consolidated | | | | | | | | | | | | | | | |
Accounting method | | Feeder Funds | | | Partnerships | | | Offshore Funds | | | Partnerships | | | Offshore Funds | | | Total |
| | | | | | | | | | | | | | | | | |
Fair Value | | $ | 26,128 | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | 26,128 |
Equity Method | | | - | | | | 28,158 | | | | 29,679 | | | | 6,505 | | | | 7,079 | | | | 71,421 |
| | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 26,128 | | | $ | 28,158 | | | $ | 29,679 | | | $ | 6,505 | | | $ | 7,079 | | | $ | 97,549 |
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2011 |
| | Investment Type |
| | Affiliated | | | Unaffiliated | | | | |
| | Consolidated | | | | | | | | | | | | | | | | | | | | |
Accounting method | | Feeder Funds | | | Partnerships | | | Offshore Funds | | | Partnerships | | | Offshore Funds | | | Total |
| | | | | | | | | | | | | | | | | | | | | | | |
Fair Value | | $ | 27,122 | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | 27,122 |
Equity Method | | | - | | | | 34,135 | | | | 25,588 | | | | 7,610 | | | | 6,438 | | | | 73,771 |
| | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 27,122 | | | $ | 34,135 | | | $ | 25,588 | | | $ | 7,610 | | | $ | 6,438 | | | $ | 100,893 |
The following table includes the net impact by line item on the consolidated statements of financial condition for each category of entity consolidated (in thousands):
| | December 31, 2012 |
| | Prior to | | | | | | | | | | | | |
| | Consolidation | | | CFFs | | | Partnerships | | | Offshore Funds | | | As Reported |
Assets | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 189,743 | | | $ | - | | | $ | 865 | | | $ | - | | | $ | 190,608 |
Investments in securities | | | 275,491 | | | | - | | | | 6,964 | | | | (1,740 | ) | | | 280,715 |
Investments in partnerships | | | 100,164 | | | | 5,388 | | | | (8,003 | ) | | | - | | | | 97,549 |
Receivable from brokers | | | 25,972 | | | | - | | | | 1,480 | | | | 23,203 | | | | 50,655 |
Investment advisory fees receivable | | | 42,425 | | | | 9 | | | | (5 | ) | | | - | | | | 42,429 |
Other assets | | | 32,673 | | | | (2,986 | ) | | | (1,000 | ) | | | 90 | | | | 28,777 |
Total assets | | $ | 666,468 | | | $ | 2,411 | | | $ | 301 | | | $ | 21,553 | | | $ | 690,733 |
Liabilities and equity | | | | | | | | | | | | | | | | | | | |
Securities sold, not yet purchased | | $ | 3,033 | | | $ | - | | | $ | - | | | $ | 103 | | | $ | 3,136 |
Accrued expenses and other liabilities | | | 76,135 | | | | 384 | | | | 21 | | | | 6,395 | | | | 82,935 |
Total debt | | | 216,366 | | | | - | | | | - | | | | - | | | | 216,366 |
Redeemable noncontrolling interests | | | - | | | | 2,027 | | | | 280 | | | | 15,055 | | | | 17,362 |
Total equity | | | 370,934 | | | | - | | | | - | | | | - | | | | 370,934 |
Total liabilities and equity | | $ | 666,468 | | | $ | 2,411 | | | $ | 301 | | | $ | 21,553 | | | $ | 690,733 |
| | | | | | | | | | | | | | | | | | | |
| | December 31, 2011 |
| | Prior to | | | | | | | | | | | | | | | | |
| | Consolidation | | | CFFs | | | Partnerships | | | Offshore Funds | | | As Reported |
Assets | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 259,531 | | | $ | 15,000 | | | $ | 1,809 | | | $ | - | | | $ | 276,340 |
Investments in securities | | | 284,796 | | | | - | | | | 6,228 | | | | 6,523 | | | | 297,547 |
Investments in partnerships | | | 107,981 | | | | 933 | | | | (8,021 | ) | | | - | | | | 100,893 |
Receivable from brokers | | | 17,593 | | | | - | | | | 270 | | | | 3,050 | | | | 20,913 |
Investment advisory fees receivable | | | 32,157 | | | | 1 | | | | (2 | ) | | | - | | | | 32,156 |
Other assets | | | 43,889 | | | | (14,989 | ) | | | - | | | | - | | | | 28,900 |
Total assets | | $ | 745,947 | | | $ | 945 | | | $ | 284 | | | $ | 9,573 | | | $ | 756,749 |
Liabilities and equity | | | | | | | | | | | | | | | | | | | |
Securities sold, not yet purchased | | $ | 5,488 | | | $ | - | | | $ | - | | | $ | - | | | $ | 5,488 |
Accrued expenses and other liabilities | | | 69,929 | | | | 51 | | | | 28 | | | | 4,652 | | | | 74,660 |
Total debt | | | 263,119 | | | | - | | | | - | | | | - | | | | 263,119 |
Redeemable noncontrolling interests | | | - | | | | 894 | | | | 256 | | | | 4,921 | | | | 6,071 |
Total equity | | | 407,411 | | | | - | | | | - | | | | - | | | | 407,411 |
Total liabilities and equity | | $ | 745,947 | | | $ | 945 | | | $ | 284 | | | $ | 9,573 | | | $ | 756,749 |
| | | | | | | | | | | | | | | | | | | |
The CFFs, Partnerships and Offshore Funds columns above include only affiliated entities as no unaffiliated entities are consolidated.
The following table includes the net impact by line item on the consolidated statements of income for each category of entity consolidated (in thousands):
| | Twelve Months Ended December 31, 2012 | |
| | Prior to | | | | | | | | | | | | | |
| | Consolidation | | | CFFs | | | Partnerships | | | Offshore Funds | | | As Reported | |
Total revenues | | $ | 346,195 | | | $ | 2 | | | $ | (6 | ) | | $ | (1,910 | ) | | $ | 344,281 | |
Total expenses | | | 232,313 | | | | 132 | | | | 39 | | | | 667 | | | | 233,151 | |
Operating income | | | 113,882 | | | | (130 | ) | | | (45 | ) | | | (2,577 | ) | | | 111,130 | |
Total other income, net | | | 3,264 | | | | 216 | | | | 67 | | | | 2,639 | | | | 6,186 | |
Income before income taxes | | | 117,146 | | | | 86 | | | | 22 | | | | 62 | | | | 117,316 | |
Income tax provision | | | 41,721 | | | | - | | | | - | | | | - | | | | 41,721 | |
Net income | | | 75,425 | | | | 86 | | | | 22 | | | | 62 | | | | 75,595 | |
Net income attributable to noncontrolling interests | | | (114 | ) | | | 86 | | | | 22 | | | | 62 | | | | 56 | |
Net income attributable to GAMCO | | $ | 75,539 | | | $ | - | | | $ | - | | | $ | - | | | $ | 75,539 | |
| | | | | | | | | | | | | | | | | | | | |
| | Twelve Months Ended December 31, 2011 | |
| | Prior to | | | | | | | | | | | | | | | | | |
| | Consolidation | | | CFFs | | | Partnerships | | | Offshore Funds | | | As Reported | |
Total revenues | | $ | 328,151 | | | $ | (24 | ) | | $ | (3 | ) | | $ | (996 | ) | | $ | 327,128 | |
Total expenses | | | 212,844 | | | | 121 | | | | 40 | | | | 829 | | | | 213,834 | |
Operating income | | | 115,307 | | | | (145 | ) | | | (43 | ) | | | (1,825 | ) | | | 113,294 | |
Total other income (expense), net | | | (4,872 | ) | | | 71 | | | | 34 | | | | 1,915 | | | | (2,852 | ) |
Income before income taxes | | | 110,435 | | | | (74 | ) | | | (9 | ) | | | 90 | | | | 110,442 | |
Income tax provision | | | 40,767 | | | | - | | | | - | | | | - | | | | 40,767 | |
Net income | | | 69,668 | | | | (74 | ) | | | (9 | ) | | | 90 | | | | 69,675 | |
Net income (loss) attributable to noncontrolling interests | | | (14 | ) | | | (74 | ) | | | (9 | ) | | | 90 | | | | (7 | ) |
Net income attributable to GAMCO | | $ | 69,682 | | | $ | - | | | $ | - | | | $ | - | | | $ | 69,682 | |
| | | | | | | | | | | | | | | | | | | | |
| | Twelve Months Ended December 31, 2010 | |
| | Prior to | | | | | | | | | | | | | | | | | |
| | Consolidation | | | CFFs | | | Partnerships | | | Offshore Funds | | | As Reported | |
Total revenues | | $ | 280,713 | | | $ | (13 | ) | | $ | (149 | ) | | $ | (171 | ) | | $ | 280,380 | |
Total expenses | | | 188,793 | | | | 51 | | | | 240 | | | | 267 | | | | 189,351 | |
Operating income | | | 91,920 | | | | (64 | ) | | | (389 | ) | | | (438 | ) | | | 91,029 | |
Total other income, net | | | 16,054 | | | | 264 | | | | 1,194 | | | | 800 | | | | 18,312 | |
Income before income taxes | | | 107,974 | | | | 200 | | | | 805 | | | | 362 | | | | 109,341 | |
Income tax provision | | | 38,817 | | | | 74 | | | | 300 | | | | 135 | | | | 39,326 | |
Net income | | | 69,157 | | | | 126 | | | | 505 | | | | 227 | | | | 70,015 | |
Net income attributable to noncontrolling interests | | | 365 | | | | 126 | | | | 505 | | | | 227 | | | | 1,223 | |
Net income attributable to GAMCO | | $ | 68,792 | | | $ | - | | | $ | - | | | $ | - | | | $ | 68,792 | |
The CFFs, Partnerships and Offshore Funds columns above include only affiliated entities as no unaffiliated entities are consolidated.
Variable Interest Entities
We sponsor a number of investment vehicles where we are the general partner or investment manager. Certain of these vehicles are VIEs, but we are not the primary beneficiary, in all but one case, because we do not absorb a majority of the entities’ expected losses or expected returns, and they are, therefore, not consolidated. We consolidate the one VIE where we are the primary beneficiary. The Company has not provided any financial or other support to these entities. The total assets of these non-consolidated VIEs at December 31, 2012 and 2011 were $75.0 million and $73.7 million, respectively. Our maximum exposure to loss as a result of our involvement with the VIEs is limited to the investment in one VIE and the deferred carried interest that we have in another. On December 31, 2012 and 2011, we had an investment in one of the VIE offshore funds of approximately $7.7 million and $5.0 million, respectively, which was included in investments in partnerships on the consolidated statements of financial condition. On December 31, 2012 and 2011, we had a deferred carried interest in one of the VIE offshore funds of approximately $45,000 and $47,000, respectively, which was included in investments in partnerships on the consolidated statements of financial condition. Additionally, as the general partner or investment manager to these VIEs the Company earns fees in relation to these roles, which given a decline in AUMs of the VIEs would result in lower fee revenues earned by the Company which would be reflected on the consolidated statement of income, consolidated statement of financial condition and consolidated statement of cash flows.
The assets of these VIEs may only be used to satisfy obligations of the VIEs. The following table presents the balances related to these VIEs that are consolidated and were included on the consolidated statements of financial condition as well as GAMCO’s net interest in these VIEs:VIEs. Only one VIE is consolidated at both December 31, 2012 and December 31, 2011:
| | December 31, | | | December 31, | | | December 31, | | | December 31, | |
| | 2011 | | | 2010 | | | 2012 | | | 2011 | |
(In thousands) | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 15,000 | | | $ | 551 | | | $ | - | | | $ | 15,000 | |
Investments in securities | | | - | | | | 65,712 | | | | - | | | | - | |
Investments in partnerships | | | 1,433 | | | | 1,522 | | | | 18,507 | | | | 1,433 | |
Receivable from brokers | | | - | | | | 15,171 | | | | - | | | | - | |
Other assets | | | - | | | | 47 | | | | - | | | | - | |
Securities sold, not yet purchased | | | - | | | | (6,585 | ) | | | - | | | | - | |
Accrued expenses and other liabilities | | | (15,006 | ) | | | (864 | ) | | | (3,010 | ) | | | (15,006 | ) |
Redeemable noncontrolling interests | | | (381 | ) | | | (21,699 | ) | | | (411 | ) | | | (381 | ) |
GAMCO's net interests in consolidated VIEs | | $ | 1,046 | | | $ | 53,855 | | | $ | 15,086 | | | $ | 1,046 | |
E. Income Taxes
GBL and the Company’sits greater than 80% owned subsidiaries file a consolidated federal income tax return. Accordingly, the income tax provision represents the aggregate of the amounts provided for all companies.
The provision for income taxes for the years ended December 31, 2012, 2011 2010 and 20092010 consisted of the following:
| | 2011 | | | 2010 | | | 2009 | |
(In thousands) | | | | | | | | | |
Federal: | | | | | | | | | |
Current | | $ | 37,293 | | | $ | 28,140 | | | $ | 27,290 | |
Deferred | | | (1,417 | ) | | | 7,432 | | | | 1,825 | |
State and local: | | | | | | | | | | | | |
Current | | | 4,995 | | | | 3,633 | | | | 2,640 | |
Deferred | | | (104 | ) | | | 121 | | | | 6 | |
Total | | $ | 40,767 | | | $ | 39,326 | | | $ | 31,761 | |
| | 2012 | | | 2011 | | | 2010 |
(In thousands) | | | | | | | | |
Federal: | | | | | | | | |
Current | | $ | 28,362 | | | $ | 37,293 | | | $ | 28,140 |
Deferred | | | 8,386 | | | | (1,417 | ) | | | 7,432 |
State and local: | | | | | | | | | | | |
Current | | | 4,855 | | | | 4,995 | | | | 3,633 |
Deferred | | | 118 | | | | (104 | ) | | | 121 |
Total | | $ | 41,721 | | | $ | 40,767 | | | $ | 39,326 |
A reconciliation of the Federal statutory income tax rate to the effective tax rate is set forth below:
| | 2011 | | | 2010 | | | 2009 | | | 2012 | | | 2011 | | | 2010 | |
Statutory Federal income tax rate | | | 35.0 | % | | | 35.0 | % | | | 35.0 | % | | | 35.0 | % | | | 35.0 | % | | | 35.0 | % |
State income tax, net of Federal benefit | | | 2.6 | | | | 2.2 | | | | 2.0 | | | | 2.3 | | | | 2.6 | | | | 2.2 | |
Other | | | (0.7 | ) | | | (1.2 | ) | | | (0.9 | ) | | | (1.7 | ) | | | (0.7 | ) | | | (1.2 | ) |
Effective income tax rate | | | 36.9 | % | | | 36.0 | % | | | 36.1 | % | | | 35.6 | % | | | 36.9 | % | | | 36.0 | % |
Significant components of our deferred tax assets and liabilities are as follows:
| | 2011 | | | 2010 | | | 2012 | | | 2011 | |
(In thousands) | | | | | | | | | | | | |
Deferred tax assets: | | | | | | | | | | | | |
Stock compensation expense | | $ | 1,620 | | | $ | 656 | | | $ | 307 | | | $ | 1,620 | |
Deferred compensation | | | 2,193 | | | | 1,001 | | | | 848 | | | | 2,193 | |
Intangible asset amortization | | | 229 | | | | 309 | | | | 145 | | | | 229 | |
Capital lease obligation | | | 718 | | | | 655 | | | | 768 | | | | 718 | |
Other | | | 221 | | | | 270 | | | | 143 | | | | 221 | |
Total deferred tax assets | | | 4,981 | | | | 2,891 | | | | 2,211 | | | | 4,981 | |
Deferred tax liabilities: | | | | | | | | | | | | | | | | |
Investments in securities available for sale | | | (5,166 | ) | | | (6,837 | ) | | | (7,408 | ) | | | (5,166 | ) |
Investments in securities and partnerships | | | (6,213 | ) | | | (5,934 | ) | | | (12,502 | ) | | | (6,213 | ) |
Contingent deferred sales commissions | | | (1,050 | ) | | | (760 | ) | | | (496 | ) | | | (1,050 | ) |
Total deferred tax liabilities | | | (12,429 | ) | | | (13,531 | ) | | | (20,406 | ) | | | (12,429 | ) |
Net deferred tax assets (liabilities) | | $ | (7,448 | ) | | $ | (10,640 | ) | | $ | (18,195 | ) | | $ | (7,448 | ) |
As a result of the accelerated vesting of the RSAs and in accordance with GAAP, a $1.9 million reduction to deferred tax assets of $1.9 million was recorded in additional paid in capital for the year ended December 31, 2010 as the previously recorded deferred tax benefit for the RSA was greater than the actual tax benefit realized by the Company and the Company had a sufficient additional paid in capital pool.pool, while an increase of $108,000 was recorded in additional paid in capital for the year ended December 31, 2012 as the actual tax benefit realized by the Company was greater than the previously recorded deferred tax benefit.
As of December 31, 20112012 and 2010,2011, the total amount of gross unrecognized tax benefits related to uncertain tax positions was approximately $9.1$10.6 million and $8.8$9.1 million, respectively, of which recognition of $6.0$7.0 million and $5.7$6.0 million, respectively, would impact the Company’s effective tax rate.
As of December 31, 20112012 and 2010,2011, the net liability for unrecognized tax benefits related to uncertain tax positions was $8.3$9.9 million and $7.5$8.3 million, respectively, and is included in accrued expenses and other liabilities on the consolidated statements of financial condition.
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits related to uncertain tax positions is as follows:
| | (in millions) | |
Balance at January 1, 2009 | | $ | 8.6 | |
Additions based on tax positions related to the current year | | | 1.1 | |
Additions for tax positions of prior years | | | - | |
Reductions for tax positions of prior years | | | (1.8 | ) |
Settlements | | | - | |
Balance at December 31, 2009 | | | 7.9 | |
Additions based on tax positions related to the current year | | | 1.4 | |
Additions for tax positions of prior years | | | - | |
Reductions for tax positions of prior years | | | (0.4 | ) |
Settlements | | | (0.1 | ) |
Balance at December 31, 2010 | | | 8.8 | |
Additions based on tax positions related to the current year | | | 0.7 | |
Additions for tax positions of prior years | | | - | |
Reductions for tax positions of prior years | | | (0.4 | ) |
Settlements | | | - | |
Balance at December 31, 2011 | | $ | 9.1 | |
| | (in millions) | |
Balance at January 1, 2010 | | $ | 7.9 | |
Additions based on tax positions related to the current year | | | 1.4 | |
Additions for tax positions of prior years | | | - | |
Reductions for tax positions of prior years | | | (0.4 | ) |
Settlements | | | (0.1 | ) |
Balance at December 31, 2010 | | | 8.8 | |
Additions based on tax positions related to the current year | | | 0.7 | |
Additions for tax positions of prior years | | | - | |
Reductions for tax positions of prior years | | | (0.4 | ) |
Settlements | | | - | |
Balance at December 31, 2011 | | | 9.1 | |
Additions based on tax positions related to the current year | | | 1.1 | |
Additions for tax positions of prior years | | | 0.5 | |
Reductions for tax positions of prior years | | | - | |
Settlements | | | (0.1 | ) |
Balance at December 31, 2012 | | $ | 10.6 | |
The Company records penalties and interest related to tax uncertainties in income taxes. As of December 31, 20112012 and 2010,2011, the Company had recognized gross liabilities of approximately $3.4$4.3 million and $2.6$3.4 million, respectively, related to interest and penalties. For the years ended December 31, 2012, 2011 2010 and 2009,2010, the Company recorded income tax expenses related to an increase in its liability for interest and penalties of $0.6 million, $0.6 million and $0.1 million, and $0.02 million, respectively.
The Company is currently being audited by New York State for its income tax returns filed between 2001 and 20052007 but does not expect that theany potential assessments will be material to its results of operations. The Company’s Federal tax returns are subject to potential future audit for 2009, 2010, 2011 and 2011.2012. The Company’s Statestate income tax returns are subject to potential future audit for all years after 2005.2007.
F. Earnings per Share
The computations of basic and diluted net income per share are as follows:
| | For the Years Ending December 31, | |
(In thousands, except per share amounts) | | 2011 | | | 2010 | | | 2009 | |
Basic: | | | | | | | | | |
Net income attributable to GAMCO Investors, Inc.'s shareholders | | $ | 69,682 | | | $ | 68,792 | | | $ | 55,533 | |
Weighted average shares outstanding | | | 26,636 | | | | 26,959 | | | | 27,345 | |
Basic net income attributable to GAMCO Investors, Inc.'s | | | | | | | | | | | | |
shareholders per share | | $ | 2.62 | | | $ | 2.55 | | | $ | 2.03 | |
| | | | | | | | | | | | |
Diluted: | | | | | | | | | | | | |
Net income attributable to GAMCO Investors, Inc.'s shareholders | | $ | 69,682 | | | $ | 68,792 | | | $ | 55,533 | |
Add interest expense on certain convertible notes, net of | | | | | | | | | | | | |
management fee and taxes | | | - | | | | 2,521 | | | | 1,356 | |
Total | | $ | 69,682 | | | $ | 71,313 | | | $ | 56,889 | |
| | | | | | | | | | | | |
Weighted average share outstanding | | | 26,636 | | | | 26,959 | | | | 27,345 | |
Dilutive stock options and restricted stock awards | | | 88 | | | | 249 | | | | 114 | |
Assumed conversion of certain convertible notes | | | - | | | | 1,140 | | | | 755 | |
Total | | | 26,724 | | | | 28,348 | | | | 28,214 | |
Diluted net income attributable to GAMCO Investors, Inc.'s | | | | | | | | | | | | |
shareholders per share | | $ | 2.61 | | | $ | 2.52 | | | $ | 2.02 | |
| | For the Years Ending December 31, |
(In thousands, except per share amounts) | | 2012 | | | 2011 | | | 2010 |
Basic: | | | | | | | | |
Net income attributable to GAMCO Investors, Inc.'s shareholders | | $ | 75,539 | | | $ | 69,682 | | | $ | 68,792 |
Weighted average shares outstanding | | | 26,283 | | | | 26,636 | | | | 26,959 |
Basic net income per share attributable to GAMCO | | | | | | | | | | | |
Investors, Inc.'s shareholders | | $ | 2.87 | | | $ | 2.62 | | | $ | 2.55 |
| | | | | | | | | | | |
Diluted: | | | | | | | | | | | |
Net income attributable to GAMCO Investors, Inc.'s shareholders | | $ | 75,539 | | | $ | 69,682 | | | $ | 68,792 |
Add interest expense on certain convertible notes, net of | | | | | | | | | | | |
management fee and taxes | | | - | | | | - | | | | 2,521 |
Total | | $ | 75,539 | | | $ | 69,682 | | | $ | 71,313 |
| | | | | | | | | | | |
Weighted average share outstanding | | | 26,283 | | | | 26,636 | | | | 26,959 |
Dilutive stock options and restricted stock awards | | | 153 | | | | 88 | | | | 249 |
Assumed conversion of certain convertible notes | | | - | | | | - | | | | 1,140 |
Total | | | 26,436 | | | | 26,724 | | | | 28,348 |
Diluted net income per share attributable to GAMCO | | | | | | | | | | | |
Investors, Inc.'s shareholders | | $ | 2.86 | | | $ | 2.61 | | | $ | 2.52 |
| | | | | | | | | | | |
G. Debt
Debt consists of the following:
| | 2011 | | | 2010 | |
(In thousands) | | | | | | |
5.5% Senior notes | | $ | 99,000 | | | $ | 99,000 | |
5.875% Senior notes | | | 100,000 | | | | - | |
0% Subordinated debentures | | | 64,119 | | | | 59,580 | |
Total | | $ | 263,119 | | | $ | 158,580 | |
| | December 31, 2012 | | | December 31, 2011 |
| | Carrying | | | Fair Value | | | Carrying | | | Fair Value |
| | Value | | | Level 2 | | | Value | | | Level 2 |
(In thousands) | | | | | | | | | | | |
5.5% Senior notes | | $ | 99,000 | | | $ | 100,485 | | | $ | 99,000 | | | $ | 93,070 |
5.875% Senior notes | | | 100,000 | | | | 106,250 | | | | 100,000 | | | | 100,733 |
0% Subordinated debentures | | | 17,366 | | | | 19,638 | | | | 64,119 | | | | 58,899 |
Total | | $ | 216,366 | | | $ | 226,373 | | | $ | 263,119 | | | $ | 252,702 |
5.5% Senior notes
On May 15, 2003, the Company issued 10-year, $100 million senior notes. The senior notes, due May 15, 2013, pay interest semi-annually at 5.5%. During 2008, the Company repurchased $1 million of these notes. There were no repurchases during 2009, 2010 or 2011.
5.875% Senior notes
On May 31, 2011, the Company issued $100 million of senior unsecured notes at par. The net proceeds of $99.1 million will beare being used for working capital and general corporate purposes, which may include acquisitions. The issuance costs of $0.9 million have been capitalized and will be amortized over the term of the debt. The notes mature on June 1, 2021 and bear interest at 5.875% per annum, payable semi-annually on June 1 and December 1 of each year and commenced on December 1, 2011. Upon the occurrence of a change of control triggering event, as defined in the indenture, the Company would be required to offer to repurchase the notes at 101% of their principal amount.
Zero coupon Subordinated debentures due December 31, 2015
On December 31, 2010, the Company issued $86.4 million in par value of five year zero coupon subordinated debentures due December 31, 2015 (“Debentures”) to its shareholders of record on December 15, 2010 through the declaration of a special dividend of $3.20 per share. The Debentures have a par value of $100 and are callable at the option of the Company, in whole or in part, at any time or from time to time, at a redemption price equal to 100% of the principal amount of the Debentures to be redeemed. During 2012 and 2011, the Company repurchased 646,008 Debentures and 461 Debentures, respectively, having a face value of $46,100.$64.6 million and $46,100, respectively. The redemption wasredemptions in 2012 and 2011 were accounted for as an extinguishment of debt and resulted in a loss of $6.3 million and a gain of $2,000, respectively, which was included in net gain/(loss) from investmentsextinguishment of debt on the consolidated statements of income. The debt is being accreted to its face value using the effective rate on the date of issuance of 7.45%. At December 31, 20112012 and 2010,2011, the debt was recorded at its accreted value of $64.1$17.4 million and $59.6$64.1 million, respectively.
The fair value of the Company’s debt, which is a Level 2 valuation, is estimated based on either quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities or using market standard models. At December 31, 2011Inputs into these models include credit rating, maturity and 2010, the fair value of the Company’s debt is estimated to be $252.7 million and $163.0 million, respectively. The carrying value of the Company’s debt at December 31, 2011 and 2010 is $263.1 million and $158.6 million, respectively.interest rate.
H. Equity
Voting Rights
The holders of Class A Stock and Class B Stock have identical rights except that (i) holders of Class A Stock are entitled to one vote per share, while holders of Class B Stock are entitled to ten votes per share on all matters to be voted on by shareholders in general, and (ii) holders of Class A Stock are not eligible to vote on matters relating exclusively to Class B Stock and vice versa.
Stock Award and Incentive Plan
The Company maintains two Plans approved by the shareholders, which are designed to provide incentives which will attract and retain individuals key to the success of GBL through direct or indirect ownership of our common stock. Benefits under the Plans 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 1.5 million shares of Class A Stock have been reserved for issuance under each of the Plans by a committee of the Board of Directors responsible for administering the Plans (“Compensation Committee”). Under the Plans, the committee may grant RSAs and 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.
During 2011, the Company issued 10,000 options at an exercise price of $45.77 having a grant date fair value of $18.66 per share. These options vest 75% after three years and 100% after four years from the date of grant and expire after ten years.
During 2012, 2011 2010 and 2009,2010, the Company issued 105,300, 197,200 88,800 and 15,00088,800 RSAs, respectively, at grant date fair values of $43.49, $48.80 $40.64 and $29.06$40.64 per share, respectively. As of December 31, 2011, there arewere 275,600 RSA shares outstanding that were issued at an average grant price of $45.56.$45.56 per share. All grants of RSAs were recommended by the Company's Chairman, who did not receive a RSA, and approved by the Compensation Committee of the Company's Board of Directors. This expense, net of estimated forfeitures, is recognized over the vesting period for these awards which is 30% over three years from the date of grant and 70% over five years from the date of grant. During the vesting period, dividends to RSA holders are held for them until the RSA vesting dates and are forfeited if the grantee is no longer employed by the Company on the vesting dates. Dividends declared on these RSAs, less estimated forfeitures, are charged to retained earnings on the declaration date.
During 2012, the Board of Directors accelerated the lapsing of restrictions on all outstanding RSAs resulting in recognition of $10.1 million in stock compensation expense during 2012 that would have been recorded in 2013 through 2016.
During 2010, the Board of Directors of the Company approved the acceleration of the vesting of the 70% tranche of the RSAs granted in 2007 to December 7, 2010, resulting in recognition of $5.5 million in stock compensation expense during 2010 that would have been recorded in 2011 and 2012. Additionally, the Board of Directors of the Company approved an offer to repurchase the newly vested RSAs from employees at fair value on one of two dates in December 2010. As a result of this offer, 212,031 shares of the newly vested RSAs were repurchased for $10.1 million, or a weighted average of $47.80 per share.
A summary of the stock option and RSA activity for the years ended December 31, 20112012 and 20102011 is as follows:
| | Options | | | RSAs | |
| | | | | | | | | | | Weighted Average | |
| | | | | Weighted Average | | | | | | Grant Date | |
| | Shares | | | Exercise Price | | | Shares | | | Fair Value | |
| | | | | | | | | | | | |
Outstanding at December 31, 2009 | | | 144,750 | | | $ | 34.17 | | | | 360,100 | | | $ | 60.79 | |
Granted | | | - | | | | - | | | | 88,800 | | | | 40.64 | |
Forfeited | | | - | | | | - | | | | (10,200 | ) | | | 50.73 | |
Exercised | | | (53,850 | ) | | | 29.50 | | | | (315,600 | ) | | | 63.50 | |
Outstanding at December 31, 2010 | | | 90,900 | | | | 36.93 | | | | 123,100 | | | | 40.14 | |
Granted | | | 10,000 | | | | 45.77 | | | | 197,200 | | | | 48.80 | |
Forfeited | | | - | | | | - | | | | (44,700 | ) | | | 44.90 | |
Exercised / Vested | | | - | | | | - | | | | - | | | | - | |
Outstanding at December 31, 2011 | | | 100,900 | | | $ | 37.81 | | | | 275,600 | | | $ | 45.56 | |
| | | | | | | | | | | | | | | | |
Shares available for future issuance at | | | | | | | | | | | | | | | | |
December 31, 2011 | | | 637,575 | | | | | | | | | | | | | |
| | Options | | | | | | RSAs | | | |
| | | | | | | | | | | Weighted Average |
| | | | | Weighted Average | | | | | | Grant Date |
| | Shares | | | Exercise Price | | | Shares | | | Fair Value |
| | | | | | | | | | | |
Outstanding at December 31, 2010 | | | 90,900 | | | $ | 36.93 | | | | 123,100 | | | $ | 40.14 |
Granted | | | 10,000 | | | | 45.77 | | | | 197,200 | | | | 48.80 |
Forfeited | | | - | | | | - | | | | (44,700 | ) | | | 44.90 |
Exercised / Vested | | | - | | | | - | | | | - | | | | - |
Outstanding at December 31, 2011 | | | 100,900 | | | | 37.81 | | | | 275,600 | | | | 45.56 |
Granted | | | - | | | | - | | | | 105,300 | | | | 43.49 |
Forfeited | | | (500 | ) | | | 28.95 | | | | (7,900 | ) | | | 45.21 |
Exercised / Vested | | | (31,777 | ) | | | 28.95 | | | | (373,000 | ) | | | 44.99 |
Outstanding at December 31, 2012 | | | 68,623 | | | $ | 41.79 | | | | - | | | $ | - |
| | | | | | | | | | | | | | | |
Shares available for future issuance at | | | | | | | | | | | | | | | |
December 31, 2012 | | | 540,675 | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
At December 31, 20112012 and 2010,2011, there were exercisable outstanding stock options of 89,40059,623 and 82,400,89,400, respectively. The weighted average exercise price of the exercisable outstanding stock options at December 31, 2012 and 2011 was $41.12 per share and 2010 was $36.69 per share, and $35.77 per share, respectively.
The table below represents for various prices, the weighted average characteristics of outstanding employee stock options at December 31, 20112012.
Exercise | | | Options | | | Weighted average remaining | | | Options currently | | | Exercise price of options | |
price | | | outstanding | | | contractual life | | | exercisable | | | currently exercisable | |
$ | 28.95 | | | | 34,900 | | | | 1.17 | | | | 34,900 | | | $ | 28.95 | |
| 39.55 | | | | 10,000 | | | | 4.33 | | | | 10,000 | | | | 39.55 | |
| 39.65 | | | | 20,000 | | | | 2.42 | | | | 20,000 | | | | 39.65 | |
| 39.90 | | | | 10,000 | | | | 5.08 | | | | 10,000 | | | | 39.90 | |
| 44.90 | | | | 10,000 | | | | 3.83 | | | | 10,000 | | | | 44.90 | |
| 45.77 | | | | 10,000 | | | | 9.08 | | | | - | | | | 45.77 | |
$ | 51.74 | | | | 6,000 | | | | 6.33 | | | | 4,500 | | | $ | 51.74 | |
Exercise | | | Options | | | Weighted average remaining | | | Options currently | | | Exercise price of options |
price | | | outstanding | | | contractual life | | | exercisable | | | currently exercisable |
$ | 28.95 | | | | 3,623 | | | | 0.17 | | | | 3,623 | | | $ | 28.95 |
| 39.55 | | | | 10,000 | | | | 3.33 | | | | 10,000 | | | | 39.55 |
| 39.65 | | | | 20,000 | | | | 1.42 | | | | 20,000 | | | | 39.65 |
| 39.90 | | | | 10,000 | | | | 4.08 | | | | 10,000 | | | | 39.90 |
| 44.90 | | | | 10,000 | | | | 2.83 | | | | 10,000 | | | | 44.90 |
| 45.77 | | | | 10,000 | | | | 8.08 | | | | - | | | | N/A |
$ | 51.74 | | | | 6,000 | | | | 5.33 | | | | 6,000 | | | $ | 51.74 |
The weighted average estimated fair value of the options granted at their grant date using the Black-Scholes option-pricing model was as follows:
| | 2011 | | 2010 (a) | | 2009 (a) |
| | | | | | |
Weighted average fair value of options granted: | | $ 18.66 | | N/A | | N/A |
| | | | | | |
Assumptions made: | | | | | | |
Expected volatility | | 49% | | N/A | | N/A |
Risk free interest rate | | 0.15% | | N/A | | N/A |
Expected life | | 5 years | | N/A | | N/A |
Dividend yield | | 0.26% | | N/A | | N/A |
(a) The Company did not grant any options in 2010 or 2009. | | | | |
| | 2011 | |
| | | |
Weighted average fair value of options granted: | | $ | 18.66 | |
| | | | |
Assumptions made: | | | | |
Expected volatility | | | 49 | % |
Risk free interest rate | | | 0.15 | % |
Expected life | | 5 years | |
Dividend yield | | | 0.26 | % |
The Company did not grant any options in 2012 or 2010.
The expected volatility reflects the volatility of GBL stock over a period of approximately four years, prior to each respective grant date, based on month-end prices. The expected life reflected an estimate of the length of time the employees are expected to hold the options, including the vesting period, and is based, in part, on actual experience with other grants. The dividend yield for the grants reflected the assumption of a $0.03 per share quarterly dividend. The weighted average remaining contractual life of the outstanding options at December 31, 20112012 was 3.473.51 years.
The total compensation costs related to non-vested awards not yet recognized is approximately $11.5 million$75,000 as of December 31, 2011.2012. This will be recognized as expense in the following periods:periods (in thousands):
2012 | | | 2013 | | | 2014 | | | 2015 | | | 2016 | |
$ | 3,481,000 | | | $ | 3,328,000 | | | $ | 2,389,000 | | | $ | 1,754,000 | | | $ | 559,000 | |
For the years ended December 31, 2012, 2011 2010 and 2009,2010, the Company recorded approximately $13.6 million, $2.6 million $10.6 million and $5.1$10.6 million, respectively, in stock based compensation expense which resulted in the recognition of tax benefits of approximately $5.0 million, $843,000 and $3.6 million, and $1.9respectively. The $13.6 million respectively.for the year ended December 31, 2012, includes $10.1 million in stock compensation expense as a result of accelerating all outstanding RSAs. The $10.6 million for the year ended December 31, 2010 is net of a $0.5 million reversal of expense recorded for the forfeiture of a single grant and includes $5.5 million in stock compensation expense as a result of the acceleration of the 70% tranche of the RSAs granted in 2007. There were no comparable reversals or acceleration in the yearsyear ended December 31, 2011 and 2009.2011.
There were no stock options exercised for the year ended December 31, 2011. For the years ended December 31, 20102012 and 2009,2010, the Company received approximately $920,000 and $1.6 million, and $608,000, respectively, from the exercise of stock options which resulted in tax benefits of $216,000$105,000 and $168,000,$216,000, respectively.
Stock Repurchase Program
In 1999, the Board of Directors established the Stock Repurchase Program through which the Company has been authorized to purchase up to $9 million of Class A Stock. During 2010, the Board of Directors authorized additional repurchases of 500,000 shares in May. In May 2011, the Board of Directors authorized an additional 500,000 shares. In November 2012, the Board of Directors authorized the purchase of up to 800,000 shares of Class A Stock through a modified “Dutch Auction” tender. 717,389 shares of this authorization were used when the tender concluded in December 2012. The remaining 82,611 shares under this authorization lapsed upon the conclusion of the tender. In 2012, 2011 2010 and 2009,2010, we repurchased 1,138,313 shares, 450,966 shares 684,003 shares and 156,500684,003 shares, respectively, at an average price of $48.25 per share, $45.24 per share $44.15 per share and $44.91$44.15 per share, respectively. There remain 573,367152,443 shares available under this program at December 31, 2011.2012. Under the program, the Company has repurchased 7,344,0528,482,365 shares at an average price of $40.63$41.65 per share and an aggregate cost of $298.4$353.3 million through December 31, 2011.2012.
Dividends
During 2012, the Company paid dividends of $2.88 per share to class A and class B shareholders totaling $76.4 million. During 2011, the Company paid dividends of $1.15 per share to class A and class B shareholders totaling $30.8 million. During 2010, the Company paid cash dividends of $1.82 per share to class A and class B shareholders totaling $49.4 million and paid $3.20 of principal value per share in the form of a five-year, zero coupon subordinated debenture due December 31, 2015. For dividend accounting purposes the debenture was valued at $2.21 per share. During 2009, the Company paid dividends of $2.13 per share to class A and class B shareholders totaling $58.8 million, including the Teton distribution of approximately $0.01. Under the terms of the RSA agreements, we accrue dividends, less estimated forfeitures, for RSA grantees from the date of grant but these dividends are held for grantees who are not entitled to receive dividends until their awards vest and only if they are still employed by the Company at those dates. As of December 31, 2011, and 2010, dividends accrued on RSAs not yet vested were approximately $452,000 and $174,000, respectively.$452,000. There were no dividends accrued at December 31, 2012 as there were no unvested RSAs outstanding.
Shelf Registration
In August 2009,May 2012, the SEC declared effective the Company’s $400 million “shelf” registration statement on Form S-3. The $100 million 5.875% senior notes were issued pursuant to this shelf, leavingS-3 giving the Company the flexibility to sell any combination of senior and subordinate debt securities, convertible debt securities and equity securities (including common and preferred securities) up to a total amount of $300$400 million. The shelf is available through May 30, 2015, at which time it may be renewed.
I. Capital Lease
On December 5, 1997, prior to the Offering in 1999, the Company entered into a fifteen-year lease, expiring on April 30, 2013, of office space from an entity controlled by members of the Chairman's family. On September 15, 2008, the Company modified and extended its lease with M4E, LLC, the Company’s landlord at 401 Theodore Fremd Ave, Rye, NY. The lease term was extended to December 31, 2023, and the base rental was established at $18 per square foot, or $1.1 million, for 2009, an increase from $14.83 per square foot for 2008.2009. From January 1, 2010 through December 31, 2023, the base rental will be determined by the change in the consumer price index for the New York Metropolitan Area for November of the immediate prior year with the base period as November 2008 for the New York Metropolitan Area. As a result of the lease term's extension, the present value of net obligations increased by approximately $3.0 million.
The lease has been accounted for as a capital lease as it transfers substantially all the benefits and risks of ownership to GBL. The Company has recorded the leased property as an asset and a capital lease obligation for the present value of the obligation of the leased property. The leased property is amortized over the fifteen-year lease term on a straight-line basis. The capital lease obligation is amortized over the same term using the interest method of accounting. Capital lease improvements are amortized from the date of expenditure through the end of the lease term or the useful life, whichever is shorter, on a straight-line basis. 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, GBL. These are recognized as expenses in the periods in which they are incurred. Accumulated amortization on the leased property was approximately $3.5$3.8 million and $3.3$3.5 million at December 31, 20112012 and 2010,2011, respectively.
Future minimum lease payments for this capitalized lease at December 31, 20112012 are as follows:
| | (In thousands) | |
2012 | | $ | 1,137 | |
2013 | | | 1,080 | |
2014 | | | 1,080 | |
2015 | | | 1,080 | |
2016 | | | 1,080 | |
Thereafter | | | 7,560 | |
Total minimum obligations | | | 13,017 | |
Interest | | | 7,942 | |
Present value of net obligations | | $ | 5,075 | |
| | (In thousands) |
2013 | | $ | 1,160 |
2014 | | | 1,080 |
2015 | | | 1,080 |
2016 | | | 1,080 |
2017 | | | 1,080 |
Thereafter | | | 6,480 |
Total minimum obligations | | | 11,960 |
Interest | | | 7,006 |
Present value of net obligations | | $ | 4,954 |
Lease payments under this agreement amounted to approximately $1.1 million for each of the years ended December 31, 2012, 2011 2010 and 2009,2010, respectively. The capital lease contains an escalation clause tied to the change in the New York Metropolitan Area Consumer Price Index which may cause the future minimum payments to exceed $1,080,000 annually. Future minimum lease payments have not been reduced by related minimum future sublease rentals of approximately $1.4$1.3 million due over the next twelveeleven years, which are due from affiliated entities. Total minimum obligations exclude the operating expenses to be borne by the Company, which are estimated to be approximately $800,000$825,000 per year.
J. Commitments and Contingencies
We rent office space under leases which expire at various dates through January 2015. Future minimum lease commitments under these operating leases as of December 31, 20112012 are as follows:
| | (In thousands) | | | (In thousands) |
2012 | | $ | 658 | | |
2013 | | | 513 | | | $ | 574 |
2014 | | | 295 | | | | 305 |
2015 | | | 21 | | | | 21 |
2016 | | | - | | |
Total | | $ | 1,487 | | | $ | 900 |
| | | | |
Equipment rentals and occupancy expense amounted to approximately $2.6$2.8 million, $2.6 million and $2.5$2.6 million, respectively, for the years ended December 31, 2012, 2011 2010 and 2009.2010.
K. Related Party Transactions
The following is a summary of certain related party transactions.
GGCP Holdings LLC owns a majority of our Class B Stock, representing approximately 95%94% of the combined voting power and 73%74% of the outstanding shares of our common stock at December 31, 2011.2012.
Capital Lease
We lease an approximately 60,000 square foot building located at 401 Theodore Fremd Avenue, Rye, New York as our headquarters (the “Building”) from an entity controlled by members of the Chairman’s family. Under the lease for the Building, which expires on December 31, 2023, we are responsible for all operating expenses, costs of electricity and other utilities and taxes. For 2011, the rent was $1,103,567 or $18.39 per square foot, and will increase to $1,137,450, or $18.96 per square foot, for the period January 1, 2012 through December 31, 2012. For 2010 and 2009, the rent was $1,088,907, or $18.15 per square foot, and $1,080,000, or $18.00 per square foot, respectively.
See Note I.
We sub-lease approximately 3,300 square feet in the Building to LICT Corporation, a company for which Mr. Gabelli serves as Chairman and CEO, which pays rent at the rate of $28 per square foot plus $3 per square foot for electricity, subject to adjustment for increases in taxes and other operating expenses. The total amounts paid in 2012, 2011, 2010, and 20092010 for rent and other expenses under this lease were $114,716, $119,025, $112,087, and $113,730,$112,087, respectively. Concurrent with the extension of the lease on the Building, we and LICT Corporation further agreed to extend the term of the sub-lease until December 2023 on the same terms and conditions. As of July 1, 2008, we also sub-lease approximately 1,600 square feet in the Building to Teton. Teton pays rent at the rate of $37.75 per square foot plus $3 per square foot for electricity, subject to adjustment for increases in taxes and other operating expenses. The total amount paid in 2012, 2011 2010 and 20092010 for rent and other expenses under this lease were $67,361, $69,330 $66,911 and $66,911, respectively, and were recorded in other operating expenses as a credit on the consolidated statements of income.
Investment Advisory Services
GAMCO has entered into agreements to provide advisory and administrative services to MJG Associates, Inc., which is wholly-owned by Mr. Gabelli, with respect to the private investment funds managed by them. Pursuant to such agreements, MJG Associates, Inc. paid GAMCO $10,000 (excluding reimbursement of expenses) for each of the years 2012, 2011, 2010, and 2009.2010. For 2012, 2011 2010 and 2009,2010, Manhattan Partners I, L.P. and Manhattan Partners II, L.P., investment partnerships for which John Gabelli Inc., an entity owned by John Gabelli, a brother of our Chairman, is the general partner, paid GAMCO investment advisory fees in the amount of $21,660, $19,608 $19,870 and $24,242,$19,870, respectively, and Manhattan Partners I, L.P. paid management fees in the amount of $0, $10,665 $9,974 and $9,002,$9,974, respectively, to the general partners of Gemini Global Partners, L.P. In addition, an entity that Mr. John Gabelli’s wife is the sole shareholder of is the co-general partner of S.W.A.N. Partners, LP (“S.W.A.N.”). S.W.A.N. paid GAMCO investment advisory fees in the amount of $35,649, $36,466 and $30,826 for 2012, 2011 and $26,929 for 2011, 2010, and 2009, respectively, and is included in investment advisory and incentive fees on the consolidated statements of income.
Gabelli Securities International Limited (“GS International”) was formed in 1994 to provide management and investment advisory services to offshore funds and accounts. Mr. Marc Gabelli, who had various responsibilities within several of our subsidiaries and is thea son of our Chairman, owns 55% of GS International and GSI owns the remaining 45%. In 1994, Gabelli International Gold Fund Limited (“GIGFL”), an offshore investment company investing primarily in securities of issuers with gold-related activities, was formed and GS International entered into an agreement to provide management services to GIGFL. GSI in turn entered into an agreement with GS International to provide investment advisory services to GIGFL in return for receiving all investment management fees paid by GIGFL. Pursuant to such agreement, GSI received investment management fees of $32,203$23,192 and no incentive fees for 2011.2012. Comparable amounts for 2011 were $32,203 and $0, respectively, and for 2010 they were $50,337 and $267,238, respectively, and for 2009 they were $39,326 and $0, respectively. As of December 31, 20112012 and 2010,2011, there were $8,335$11,957 and $1,701,$8,335, respectively, payable to GIGFL included in accrued expenses and other liabilities on the consolidated statements of financial condition relating to management fees. At December 31, 2010, there was $267,238 receivable from GIGFL included in investment advisory fees receivable on the consolidated statements of financial condition.
In April 1999, Gabelli Global Partners, Ltd. (“GGP Ltd.”), an offshore investment fund, was incorporated. GS International and Gemini Capital Management, LLC (“Gemini”), an entity owned by Mr. Marc Gabelli, were engaged by GGP Ltd. as investment advisors as of July 1, 1999. GGP Ltd. paid halfall of the management fees for 20112012 in the amount of $45,668$80,761 to GS International. There was no incentive fee earned in 2011. GS International in turn paid GSI $20,551 in management fees.2012. For 2011, Gemini received half of the management fees paid by GGP Ltd. in the amount of $45,668. GGP Ltd. paid half of the management fees and incentive fees for 2010 in the amounts of $45,928 and $61,808, respectively, to GS International. GS International in turn paid GSI $15,680 and $28,197 in management and incentive fees, respectively. For 2010, Gemini received half of the management fees and incentive fees paid by GGP Ltd. in the amounts of $45,928 and $61,808, respectively. For 2009 there was no incentive fee paid. For 2009, the fund paid half of the management fees in the amounts of $42,628 to GS International, with equal amounts being received by Gemini. For 2009 there was no incentive fee paid. As of December 31, 20112012 and 2010,2011, there were $69,426$59,390 and $15,680,$69,426, respectively, receivable from GGP Ltd. included in investment advisory fees receivable on the consolidated statements of financial condition.
In April 1999, GSI formed Gabelli Global Partners, L.P., an investment limited partnership for which GSI and Gemini are the general partners. In March 2002, Gabelli Global Partners, L.P. changed its name to Gemini Global Partners, L.P. Gemini and GSI each received half of the management fee paid by the partnership to the general partners in the amount of $88,904$76,548 for 2011.2012. There was no incentive fee earned in 2011.2012. Comparable amounts for 2011 were $88,904 and $0, respectively, and comparable amounts for 2010 were $81,735 and $74,429, respectively, and comparable amounts for 2009 were $78,459 and $27,025, respectively. As of December 31, 20112012 and 2010,2011, there were $151,092$36,257 and $62,188,$151,092, respectively, receivable from Gemini Global Partners, L.P. included in investment advisory fees receivable on the consolidated statements of financial condition.
We serve as the investment advisor for the Funds and earn advisory fees based on predetermined percentages of the average net assets of the Funds. In addition, G.distributors has entered into distribution agreements with each of the Funds. As principal distributor, G.distributors incurs certain promotional and distribution costs related to the sale of Fund shares, for which it receives a distribution fee from the Funds or reimbursement from the investment advisor. Gabelli & Company earns a majority of its commission revenue from transactions executed on behalf of clients of affiliated companies. Advisory and distribution fees receivable from the Funds were approximately $22.8$30.2 million and $28.2$22.8 million at December 31, 20112012 and 2010,2011, respectively. GBL earned approximately $1.0 million, $1.4 million and $1.6 million in 2012, 2011 and $1.8 million in 2011, 2010, and 2009, respectively, in advisory fee revenues and approximately $13,000, $15,000 and $16,000 in 2012, 2011 and $12,000 in 2011, 2010, and 2009, respectively, in distribution fees from our proprietary investments in the Funds which are included in investment advisory and incentive fees and distribution fees and other income, respectively, on the consolidated statements of income.
Investments in Securities
At December 31, 2012 and 2011, and 2010, approximately $93$85 million and $90$93 million, respectively, of our proprietary investment portfolio were managed by our analysts or portfolio managers other than Mr. Gabelli. The individuals managing these accounts receive 20% of the net profits, if any, earned on the accounts; however, some of the analysts are required to meet a hurdle rate of 5% before earning this 20% payout. In August 2006, a son of the Chairman was given responsibility for managing a proprietary investment account on which he would be paid, on an annual basis, 20% of any net profits earned on the account for the year. The account was initially funded with approximately $40 million during 2006. During 2009, $202012, $2 million was transferred from this account back to the firm’s proprietary account and is no longer subject to the 20% payout. For 2012 and 2010, he was paid approximately $230,000 and $174,000, respectively, for managing this account. For 2011, and 2009, there were no payouts for managing this account. At December 31, 2011, there existed a high water mark of $1.7 million.
We had an aggregate investment in the Funds of approximately $320.1$254.0 million and $217.3$320.1 million at December 31, 20112012 and 2010,2011, respectively, of which approximately $259.0$190.4 million and $152.1$259.0 million was invested in an affiliated money market mutual fund, included in cash and cash equivalents, at December 31, 20112012 and 2010,2011, respectively. GBL earned approximately $52,000, $45,000, and $189,000 in 2012, 2011 and $873,000 in 2011, 2010, and 2009, respectively, in dividend income from our investment in our money market mutual fund. Distributions from investments in our equity Funds, which are included within interest and dividend income on the consolidated statements of income, were approximately $1.8 million, $2.2 million and $1.2 million, in 2012, 2011 and $653,000, in 2011, 2010, and 2009, respectively.
Investments in Partnerships
We had an aggregate investment in affiliated partnerships and offshore funds of approximately $93.9$83.9 million and $128.9$93.9 million at December 31, 20112012 and 2010,2011, respectively.
Compensation
Immediately preceding the Offering and in conjunction with the Reorganization, GBL and our Chairman and CEO entered into an employment agreement. Under the employment agreement and the amended agreement described below, we will pay the Chairman and CEO, or his designee, 10% of our aggregate pre-tax profits while he is an executive of GBL and devoting the substantial majority of his working time to the business of GBL.
On February 6, 2008, as noted above in Note A, Mr. Gabelli’s employment agreement was amended and restated as the 2008 Employment Agreement which was approved by the GBL shareholders on November 30, 2007 and re-approved on May 6, 2011 and which limits his activities outside of GBL. The 2008 Employment Agreement amended Mr. Gabelli’s employment agreement primarily by (i) eliminating outdated provisions, clarifying certain language and reflecting our name change, (ii) revising the term of the employment agreement from an indefinite term to automatically renewed one-year periods in perpetuity following the initial three-year term unless either party gives 90 days written notice prior to the expiration of the annual term following the initial three-year term, (iii) allowing for services to be performed for former subsidiaries that are spun off to shareholders or otherwise cease to be subsidiaries in similar transactions, (iv) allowing new investors in the permitted outside accounts if all of the performance fees, less expenses, generated by assets attributable to such investors are paid to us, (v) allowing for the management fee to be paid directly to Mr. Gabelli or to an entity designated by him, and (vi) adding certain language to ensure that the 2008 Employment Agreement is construed to avoid the imposition of any tax pursuant to Section 409A of the Code.
Consistent with the firm’s practice since its inception in 1977, Mr. Gabelli will also continue receiving a percentage of revenues or net operating contribution, which are substantially derived from AUM, as compensation relating to or generated by the following activities: (i) managing or overseeing the management of various investment companies and partnerships, (ii) attracting mutual fund shareholders, (iii) attracting and managing Institutional and Private Wealth Management clients, and (iv) otherwise generating revenues for the company. Such payments are made in a manner and at rates as agreed to from time to time by GAMCO, which rates have been and generally will be the same as those received by other professionals at GAMCO performing similar services. With respect to our Institutional and Private Wealth Management and mutual fund advisory business, we pay out up to 40% of the revenues or net operating contribution to the portfolio managers and marketing staff who introduce, service or generate such business, with payments involving the Institutional and Private Wealth Management accounts being typically based on revenues and payments involving the mutual funds being typically based on net operating contribution.
Mr. Gabelli has agreed that while he is employed by us he will not provide investment management services outside of GAMCO, except for certain permitted accounts. The 2008 Employment Agreement may not be amended without the approval of the Compensation Committee and Mr. Gabelli.Gabelli.
The Chairman and CEO received compensation in the form of a management fee for managing the Company. Additionally, he earns compensation for acting as portfolio manager and/or attracting and providing client service to a large number of GAMCO's Institutional and Private Wealth Management clients, for creating and acting as portfolio manager of several open-end funds, for creating and acting as portfolio manager of the closed-end funds and for providing other services, including acting as portfolio and relationship manager of investment partnerships.
Other
On May 31, 2006, we entered into an Exchange and Standstill Agreement with Frederick J. Mancheski, a significant shareholder, pursuant to which, among other things, he agreed to exchange his 2,071,635 shares of Class B Stock for an equal number of shares of Class A Stock. The standstill expires on May 31, 2016. Under the terms of the standstill agreement, Mr. Mancheski agreed to, among other things, vote his shares in favor of the nominees and positions advocated by the boardBoard of directors.
Directors. In accordance with Form 13D filed by Mr. Mancheski on December 20, 2012 he continues to exercise voting control over 1,725,974 shares of Class A Stock.As required by our Code of Ethics, our staff members are required to maintain their brokerage accounts at Gabelli & Company unless they receive permission to maintain an outside account. Gabelli & Company offers its entire staff the opportunity to engage in brokerage transactions at discounted commission rates. Accordingly, many of our staff members, including the executive officers or entities controlled by them, have brokerage accounts at Gabelli & Company and have engaged in securities transactions at discounted rates.
GBL and Teton entered into a transitional administrative and management service agreement in connection with the spin-off of Teton from GBL that formalized certain arrangements. Effective January 1, 2011, Teton and GBL renegotiated the terms of the sub-administration agreement from a flat .20%0.20% on the average net assets of the mutual funds managed by Teton to .20%0.20% on the first $370 million in average net assets, .12%0.12% on the next $630 million in average net assets and .10%0.10% on average net assets in excess of $1 billion, as compensation for providing mutual fund administration services and $15,000 per month for various administrative services. Prior to the spin-off these fees were eliminated. During 2012, 2011 2010 and 2009,2010, there was $1.5 million, $1.2$1.5 million and $886,000,$1.2 million, respectively, included in distribution fees and other income on the consolidated statements of income.
Our subsidiary, GAMCO Asset Management (UK) Limited is authorized and regulated by the Financial Services Authority (“FSA”). In connection with this registration, we held Own Funds of £357,000 ($552,000 at December 31, 2010) and had an Own Funds requirement of £5,000 ($7,000 at December 31, 2010). In February 2011, GAMCO Asset Management (UK) Limited increased its permitted license with the FSA and held Own Funds of £384,000 and £343,000 ($530,000621,000 and $530,000 at December 31, 2011)2012 and 2011, respectively) and had an Own Funds requirement of €50,000 ($65,00066,000 and $65,000 at December 31, 2011)2012 and 2011, respectively). We have consistently met or exceeded these minimum requirements.
We have entered into administration agreements with other companies (the “Administrators”), whereby the Administrators provide certain services on behalf of several of the Funds and Investment Partnerships. Such services do not include the investment advisory and portfolio management services provided by GBL. The fees are negotiated based on predetermined percentages of the net assets of each of the Funds.
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 $52,000, $13,000 $67,000 and $79,000$67,000 to the plans for the years ended December 31, 2012, 2011 2010 and 2009,2010, respectively.
O. Goodwill and Identifiable Intangible Asset