Open-end Funds
On December 31, 2017,2018, we had $13.7$10.6 billion of AUM in twentytwenty-one open-end equity funds and $1.9$2.2 billion in our Gabelli U.S. Treasury Money Market Fund. We market our open-end funds primarily through third party distribution programs, including no-transaction fee (“NTF”) programs, and have developed additional share classes for many of our funds for distribution through additional third party distribution channels. At December 31, 2017,2018, third party distribution programs accounted for approximately 78%76% of all assets in open-end equity funds, and, approximately 22%24% of our AUM in open-end equity funds waswere sourced through direct sales relationships.
Closed-end Funds
We act as investment advisor to sixteen closed-end funds, fourteen of which trade on the NYSE or its affiliated exchange: Gabelli Equity Trust (GAB), GDL Fund (GDL), Gabelli Multimedia Trust (GGT), Gabelli Healthcare & Wellness Rx Trust (GRX), Gabelli Convertible and Income Securities Fund (GCV), Gabelli Utility Trust (GUT), Gabelli Dividend & Income Trust (GDV), Gabelli Global Utility & Income Trust (GLU), GAMCO Global Gold, Natural Resources & Income Trust (GGN), GAMCO Natural Resources, Gold & Income Trust (GNT), The Gabelli Global Small and Mid Cap Value Trust (GGZ), the Bancroft Fund Ltd. (BCV), the Ellsworth Growth and Income Fund Ltd. (ECF), and the Gabelli Go Anywhere Trust (GGO). We launched the Gabelli Value Plus+ Trust Plc (GVP) in 2015 and the Gabelli Merger Plus+Plus+ Trust PLCPlc (GMP) in 2017, both of which trade on the London Stock Exchange. As of December 31, 2017,2018, the sixteen closed-end funds had total assets of $8.1$7.0 billion, representing 34.0%35.2% of the total assets in our Funds business.
Exchange Traded Managed Funds
During 2016, we launched our first exchange traded managed fund (“ETMF”).fund. The Gabelli Media Mogul NextSharesTM trades on the Nasdaq Stock Market LLC under the symbol “MOGLC” and was the first member of the Gabelli NextShares Trust offered under an agreement with NextShares Solutions, LLC. The Gabelli Food of All Nations NextSharesTM was launched in 2017 and trades on the Nasdaq Stock Market LLC under the symbol “FOANC”. During 2018, we launched The Gabelli RBI NextSharesTM which trades under the symbol “GRBIC” and The Gabelli Pet Parents’TM NextSharesTM which trades under the symbol “PETZC”. As of December 31, 2017,2018, the twofour ETMFs had AUM of $7.0$8.6 million. On November 14, 2018, the Board of Trustees for each of the Gabelli Media Mogul NextSharesTM and the Gabelli Pet Parents’TM NextSharesTM determined that it would be in the best interest of shareholders of the funds to approve an agreement and plan of reorganization and termination for each fund, pursuant to which substantially all of the assets and liabilities of each fund would be transferred to a new series of a new trust to be created at a future date and shareholders of the funds would become shareholders of the new funds. It is expected that each new fund will be structured and operate as a no-load, open-end mutual fund registered under the Investment Company Act of 1940, as amended, instead of an exchange traded managed fund. In February 2019, the Board of Trustees of the NextSharesTM funds approved a plan of liquidation for the Gabelli Food of All Nations NextSharesTM and the Gabelli RBI NextSharesTM, pursuant to which each fund will be liquidated on or about March 28, 2019.
SICAV
We provide advisory services to one fund under the GAMCO brand, the GAMCO International SICAV. The SICAV has two sub-fund strategies, the GAMCO Merger Arbitrage Fund and the GAMCO All Cap Value Fund. Total AUM in the SICAV was $510$507 million at December 31, 2017.2018.
Institutional and Private Wealth Management: At December 31, 2017,2018, we had $18.9$14.1 billion of AUM in approximately 1,7001,600 Institutional and Private Wealth Management accounts, representing 43.8%41.0% of our total AUM. The Private Wealth Management clients – defined as individuals generally having minimum investable assets of $5$2.5 million comprised approximately 80%81% of the total number of management accounts and approximately $5.3$3.8 billion, or 28%27%, of the Institutional and Private Wealth Management assets as of December 31, 2017.2018. We believe that Private Wealth Management clients for the taxable portion of their assets are attracted to us by our returns and the tax efficient nature of the underlying investment process. As of December 31, 2017,2018, institutional client accounts represented approximately $6.4$4.8 billion, or 35%34%, of the Institutional and Private Wealth Management assets and 9% of the accounts. Foundation and endowment fund assets represented 11%10% of the number of Institutional and Private Wealth Management accounts and approximately $1.7$1.2 billion, or 9%8%, of the Institutional and Private Wealth Management AUM. The sub-advisory clients, (where we act as sub-advisor to third party investment funds) held approximately $5.4$4.3 billion, or 29%31%, of total Institutional and Private Wealth Management assets with 1% of the total number of accounts.
The ten largest Institutional and Private Wealth Management relationships comprised approximately 47%48% of GAMCO Asset Management AUM and approximately 20% of our total AUM and approximately 29%27% of GAMCO Asset Management revenues and approximately 9%8% of our total revenues for the year ended December 31, 2017.2018.
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.
Assets Under Management
The following table sets forth total AUM by product type as of the dates shown:
Assets Under Management
By Product Type
(Dollars in millions)
| | | | | % | | | | | | % | |
| | At December 31, | | | Change | | | At December 31, | | | Change | |
| | 2013 (c) | | | 2014 (c) | | | 2015 | | | 2016 | | | 2017 | | | | 2017/2016 | | | 2014 (c) | | | 2015 | | | 2016 | | | 2017 | | | 2018 | | | | 2018/2017 | |
Equity: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Open-end Funds | | $ | 17,078 | | | $ | 17,684 | | | $ | 13,811 | | | $ | 13,462 | | | $ | 13,747 | | | | 2.1 | % | | $ | 17,684 | | | $ | 13,811 | | | $ | 13,462 | | | $ | 13,747 | | | $ | 10,589 | | | | (23.0 | %) |
Closed-end Funds | | | 6,945 | | | | 6,949 | | | | 6,492 | | | | 7,150 | | | | 8,053 | | | | 12.6 | | | | 6,949 | | | | 6,492 | | | | 7,150 | | | | 8,053 | | | | 6,959 | | | | (13.6 | ) |
Institutional & Private Wealth Management | | | | | | | | | | | | | | | | | | | | | | | | | |
Direct | | | 16,486 | | | | 16,597 | | | | 13,366 | | | | 13,441 | | | | 13,420 | | | | (0.2 | ) | |
Sub-advisory | | | 3,797 | | | | 3,704 | | | | 3,401 | | | | 3,783 | | | | 5,432 | | | | 43.6 | | |
Institutional & Private Wealth | | | | | | | | | | | | | | | | | | | | | | | | | |
Management | | | | 20,301 | | | | 16,767 | | | | 17,224 | | | | 18,852 | | | | 14,078 | | | | (25.3 | ) |
SICAV (a) | | | 96 | | | | 135 | | | | 178 | | | | 320 | | | | 510 | | | | 59.4 | | | | 135 | | | | 178 | | | | 320 | | | | 510 | | | | 507 | | | | (0.6 | ) |
Total Equity | | | 44,402 | | | | 45,069 | | | | 37,248 | | | | 38,156 | | | | 41,162 | | | | 7.9 | | | | 45,069 | | | | 37,248 | | | | 38,156 | | | | 41,162 | | | | 32,133 | | | | (21.9 | ) |
Fixed Income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Money Market Mutual Fund (b) | | | 1,735 | | | | 1,455 | | | | 1,514 | | | | 1,767 | | | | 1,870 | | | | 5.8 | | | | 1,455 | | | | 1,514 | | | | 1,767 | | | | 1,870 | | | | 2,195 | | | | 17.4 | |
Institutional & Private Wealth Management | | | 62 | | | | 58 | | | | 38 | | | | 31 | | | | 31 | | | | 0.0 | | | | 58 | | | | 38 | | | | 31 | | | | 31 | | | | 26 | | | | (16.1 | ) |
Total Fixed Income | | | 1,797 | | | | 1,513 | | | | 1,552 | | | | 1,798 | | | | 1,901 | | | | 5.7 | | | | 1,513 | | | | 1,552 | | | | 1,798 | | | | 1,901 | | | | 2,221 | | | | 16.8 | |
Total AUM | | $ | 46,199 | | | $ | 46,582 | | | $ | 38,800 | | | $ | 39,954 | | | $ | 43,063 | | | | 7.8 | | | $ | 46,582 | | | $ | 38,800 | | | $ | 39,954 | | | $ | 43,063 | | | $ | 34,354 | | | | (20.2 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Breakdown of Total AUM: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Funds | | | 25,758 | | | | 26,088 | | | | 21,817 | | | | 22,379 | | | | 23,670 | | | | 5.8 | | | | 26,088 | | | | 21,817 | | | | 22,379 | | | | 23,670 | | | | 19,743 | | | | (16.6 | ) |
Institutional & Private Wealth Management | | | | | | | | | | | | | | | | | | | | | | | | | |
Direct | | | 16,548 | | | | 16,655 | | | | 13,404 | | | | 13,472 | | | | 13,451 | | | | (0.2 | ) | |
Sub-advisory | | | 3,797 | | | | 3,704 | | | | 3,401 | | | | 3,783 | | | | 5,432 | | | | 43.6 | | |
Institutional & Private Wealth | | | | | | | | | | | | | | | | | | | | | | | | | |
Management | | | | 20,359 | | | | 16,805 | | | | 17,255 | | | | 18,883 | | | | 14,104 | | | | (25.3 | ) |
SICAV | | | 96 | | | | 135 | | | | 178 | | | | 320 | | | | 510 | | | | 59.4 | | | | 135 | | | | 178 | | | | 320 | | | | 510 | | | | 507 | | | | (0.6 | )% |
Total AUM | | $ | 46,199 | | | $ | 46,582 | | | $ | 38,800 | | | $ | 39,954 | | | $ | 43,063 | | | | 7.8 | | | $ | 46,582 | | | $ | 38,800 | | | $ | 39,954 | | | $ | 43,063 | | | $ | 34,354 | | | | (20.2 | %) |
(a) | Adjusted to include assets of $96 million, $135 million, $141 million, and $270 million at December 31, 2013, 2014, 2015, and 2016, respectively.
|
(b) | The Fund is 100% invested in short-term U.S. Treasury obligations which have remaining maturities of 397 days or less. |
(c) | Historical AUM has been restated to remove the AUM managed by AC. |
Summary of Investment Products
We manage assets in the following wide spectrum of investment products and strategies:
U.S. Equities: (92.9% (90.5% of AUM) | Global and International Equities: (1.6% (1.7% of AUM) |
All Cap Value | International Growth |
Large Cap Value | International Small Cap Growth |
Large Cap Growth | Global Growth |
Mid Cap Value | Global Value |
Small Cap Value | Global Content & Connectivity |
Small Cap Growth | Global Utilities |
Micro Cap | Gold |
Natural Resources | Small and Mid Cap |
Income | |
Utilities | U.S. Fixed Income: (4.3% (6.4% of AUM) |
Non-Market Correlated | Corporate |
Option Income | Government |
Multimedia | Asset-backed |
ESG | Intermediate |
Healthcare | Short-term |
| |
Convertible Securities: (1.2% (1.4% of AUM) | |
Convertible Securities | |
| |
Additional Information on Mutual Funds
Through Funds Advisor, we act as advisor to all of the Funds, except with respect to the GAMCO Mathers Fund for which GAMCO Asset Management Inc. actsacted as the advisor.
Shareholders of the open-end funds are allowed to exchange shares among the same class of shares of the other open-end funds as economic and market conditions and investor needs change at no additional cost. However, as noted below, certain open-end funds impose a 2% redemption fee on shares redeemed within seven days or less after a purchase. We periodically introduce new funds designed to complement and expand our investment product offerings, respond to competitive developments in the financial marketplace and meet the changing needs of investors.
Our marketing efforts for the open-end funds are currently focused on increasing the distribution and sales of our existing funds as well as creating new products for sale through our distribution channels. We believe that our marketing efforts for the funds will continue to generate additional revenues from investment advisory fees. We had traditionally distributed most of our open-end funds by using a variety of direct response marketing techniques, including telemarketing and advertising, and as a result we maintain direct relationships with many of our no-load open-end fund shareholders. Beginning in late 1995, we expanded our product distribution by offering several of our open-end funds through third party distribution programs, including NTF programs. In 1998 and 1999, we further expanded these efforts to include substantially all of our open-end funds in third party distribution programs. Approximately 22%24% of the AUM in the open-end equity funds are still attributable to our direct response marketing efforts. Third party distribution programs have become an increasingly important source of asset growth for us. Of the $13.7$10.6 billion of AUM in the open-end equity funds as of December 31, 2017,2018, approximately 78%76% were generated through third party distribution programs. We are responsible for paying the service and distribution fees charged by many of the third party distribution programs, although a portion of such service fees under certain circumstances are payable by the funds. The multi-class shares are available in all of the Gabelli Funds, with the exception of the Gabelli Capital Asset Fund and the GAMCO Mathers Fund. We believe that the use of multi-class shares expands the distribution of our open-end funds into the advised sector of the mutual fund investment community. We introduced Class I shares, which are no-load shares with higher minimum initial investment and without distribution fees available directly through G.distributors or through brokers that have entered into selling agreements with respect to Class I shares. The no-load shares are designated as Class AAA shares and are available for new and current investors. During 2017, we introduced Class T shares for some of our open-end funds which have a reduced sales charge as compared to Class A shares. In general, distribution through third party programs has greater variable cost components and lower fixed cost components than distribution through our traditional direct sales methods.
We provide investment advisory and management services pursuant to an investment management agreement with each fund. The investment management agreements with the funds generally provide that we are responsible for the overall investment and administrative services, subject to the oversight of each fund's Board of Directors or Trustees and in accordance with each fund's fundamental investment objectives and policies. The investment management agreements permit us to enter into separate agreements for sub-administrative and accounting services on behalf of the respective funds.
Our affiliated advisors provideadvisor provides the funds with administrative services pursuant to the management contracts. Such services include, without limitation, supervision of the calculation of net asset value, preparation of financial reports for shareholders of the funds, internal accounting, tax accounting and reporting, regulatory filings and other services. Most of these administrative services are provided through sub-contracts with independent third parties. Transfer agency and custodial services are provided directly to the funds by independent third parties.
Our funds’ investment management agreements may continue in effect from year to year only if specifically approved at least annually by (i) the fund's Board of Directors or Trustees or (ii) the fund's shareholders and, in either case, the vote of a majority of the fund's independent or non-interested directors or trustees who are not parties to the agreement or “interested persons” of any such party, within the meaning of the Investment Company Act of 1940 as amended (the “Company Act”). Each fund may terminate its investment management agreement at any time upon 60 days' written notice by (i) a vote of the majority of the Board of Directors or Trustees cast in person at a meeting called for the purpose of voting on such termination or (ii) a vote at a meeting of shareholders of the lesser of either 67% of the voting shares represented in person or by proxy (if at least 50% of the shares are present at the meeting) or 50% of the outstanding voting shares of such Fund. Each investment management agreement automatically terminates in the event of its assignment, as defined in the Company Act. We may terminate an investment management agreement without penalty on 60 days' written notice.
Open-End Fund Distribution
G.distributors, a wholly-owned subsidiary of GBL, is a broker-dealer registered under the Securities Exchange Act of 1934 and is regulated by FINRA. G.distributors' revenues are derived primarily from the distribution of our open-end funds. G.distributors distributes our open-end funds pursuant to distribution agreements with each fund. It also distributes funds managed by Teton and its affiliates. Under each distribution agreement with an open-end fund, G.distributors offers and sells such open-end fund's shares on a continuous basis and pays the majority 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 receives fees for such services pursuant to distribution plans adopted under provisions of Rule 12b-1 (“12b-1”) of the Company Act. Distribution fees from the open-end funds are computed daily based on average net assets. Distribution fees from the open-end funds amounted to $35.1 million, $39.7 million $41.0 million and $47.7$41.0 million while payments to third-parties for selling the open-end funds totaled $32.3 million, $37.3 million $39.7 million and $45.8$39.7 million for the years ended December 31, 2018, 2017 2016 and 2015,2016, respectively. G.distributors is the principal underwriter for funds distributed in multiple classes of shares which carry either a front-end, back-end or no sales charge. Underwriting fees and sales charges retained amounted to $0.9 million, $1.5 million $1.2 million and $1.0$1.2 million for the years ended December 31, 2018, 2017 2016 and 2015,2016, respectively.
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 T and VADV shares of various funds pay G.distributors a distribution or service fee of .25% per year (except the Class A shares of the TETON Westwood Funds and Gabelli Enterprise Mergers & Acquisition Fund which pay .50% and 0.45% per year, respectively, and the TETON Westwood Intermediate Bond Fund which pays .35%) on the average daily net assets of the fund. Class C shares have a 12b-1 distribution plan with a service and distribution fee totaling 1%. G.distributors’ distribution agreements with the funds may continue in effect from year to year only if specifically approved at least annually by (i) the fund's Board of Directors or Trustees or (ii) the fund's shareholders and, in either case, the vote of a majority of the fund's directors or trustees who are not parties to the agreement or “interested persons” of any such party, within the meaning of the Company Act. Each fund may terminate its distribution agreement, or any agreement thereunder, at any time upon 60 days' written notice by (i) a vote of the majority of its directors or trustees cast in person at a meeting called for the purpose of voting on such termination or (ii) a vote at a meeting of shareholders of the lesser of either 67% of the voting shares represented in person or by proxy (if at least 50% of the shares are present at the meeting) or 50% of the outstanding voting shares of such fund. Each distribution agreement automatically terminates in the event of its assignment, as defined in the Company Act. G.distributors may terminate a distribution agreement without penalty upon 60 days' written notice.
G.distributors also offers our open-end fund products through our website, www.gabelli.com, where directly registered mutual fund investors can access their personal account information and buy, sell, and exchange Fund shares. Fund prospectuses, quarterly reports, fund applications, daily net asset values and performance charts are all available online.
Competition
We compete with other investment management firms and mutual fund companies, insurance companies, banks, brokerage firms and other financial institutions that offer products that have similar features and investment objectives. Many of these investment management firms are subsidiaries of large diversified financial companies. Many others are much larger in terms of AUM and revenues and, accordingly, have much larger sales organizations and marketing budgets. Historically, we have competed primarily on the basis of the long-term investment performance of many of our investment products. However, we have taken steps to increase our distribution channels, brand name awareness and marketing efforts. Other trends affecting the investment management business includes the widespread popularity of exchange traded products which have tax and cost advantages over traditional investment companies.
The market for providing investment management services to Institutional and Private Wealth Management clients is also highly competitive. Approximately 33% of our investment advisory fee revenue for the year ended December 31, 20172018 was derived from our Institutional and Private Wealth Management business. Selection of investment advisors by U.S. institutional investors is often subject to a screening process and to favorable recommendations by investment industry consultants. Many of these investors require their investment advisors to have a successful and sustained performance record, often five years or longer with focus also on one-year and three-year performance records. We have significantly increased our AUM on behalf of U.S. institutional investors since our entry into the institutional asset management business in 1977.
Intellectual Property
Service marks and brand name recognition are important to our business. We have rights to the service marks under which our products are offered. We have registered certain service marks in the United States and will continue to do so as new trademarks and service marks are developed or acquired. We have rights to use the “Gabelli” name, the “GAMCO” name, and other names. Pursuant to an assignment agreement, Mr. Gabelli has assigned to us all of his rights, title and interests in and to the “Gabelli” name for use in connection with investment management services, mutual funds and securities brokerage services. However, under the agreement, Mr. Gabelli will retain any and all rights, title and interests he has or may have in the “Gabelli” name for use in connection with (i) charitable foundations controlled by Mr. Gabelli or members of his family and (ii) entities engaged in private investment activities for Mr. Gabelli or members of his family. In addition, the funds managed by Mr. Gabelli outside GBL have entered into a license agreement with us permitting them to continue limited use of the “Gabelli” name under specified circumstances. We have taken, and will continue to take, action to protect our interests in these service marks.
Regulation
Virtually all aspects of our businesses are subject to various federal, state and foreign laws and regulations. These laws and regulations are primarily intended to protect investment advisory clients and shareholders of investment funds. Under such laws and regulations, agencies that regulate investment advisors and broker-dealers have broad powers, including the power to limit, restrict or prohibit such an advisor or broker-dealer from carrying on its business in the event that it fails to comply with such laws and regulations. In such an event, the possible sanctions that may be imposed include civil and criminal liability, the suspension of individual employees, injunctions, limitations on engaging in certain lines of business for specified periods of time, revocation of the investment advisor and other registrations, censures, and fines.
Our business is subject to extensive regulation at the federal, state and foreign level by the SEC and other regulatory bodies. Certain of our subsidiaries are registered with the SEC under the Investment Advisers Act of 1940 (“Advisers Act”), and the funds are registered with the SEC under the Company Act. We also have a subsidiary that is registered as a broker-dealer with the SEC and is subject to regulation by FINRA and various states.
The subsidiaries of GBL that are registered with the Commission under the Advisers Act (Funds Advisor, Gabelli Fixed Income LLC and GAMCO Asset) are regulated by and subject to examination by the SEC. The Advisers Act imposes numerous obligations on registered investment advisors including fiduciary duties, disclosure obligations and record keeping, operational and marketing requirements. The Commission is authorized to institute proceedings and impose sanctions for violations of the Advisers Act, ranging from censure to termination of an investment advisor's registration. The failure of an advisory subsidiary to comply with the requirements of the SEC could have a material adverse effect on us.
We derive a substantial majority of our revenues from investment advisory services through our various investment management agreements. Under the Advisers Act, our investment management agreements may not be assigned without the client's consent. Under the Company Act, advisory agreements with registered investment companies such as our Funds terminate automatically upon assignment. The term “assignment” is broadly defined and includes direct as well as assignments that may be deemed to occur, under certain circumstances, upon the transfer, directly or indirectly, of a controlling interest in GBL.
In its capacity as a broker-dealer, G.distributors is required to maintain certain minimum net capital amounts. These requirements also provide that equity capital may not be withdrawn, advances to affiliates may not be made or cash dividends paid if certain minimum net capital requirements are not met. G.distributors’ net capital, as defined, met or exceeded all minimum requirements as of December 31, 2017.2018. As a registered broker-dealer, G.distributors is also subject to periodic examination by FINRA, the SEC and the states.
Subsidiaries of GBL are subject to the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and to regulations promulgated thereunder, insofar as they are “fiduciaries” under ERISA with respect to certain of their clients. ERISA and applicable provisions of the Internal Revenue Code of 1986, as amended (the “Code”), impose certain duties on persons who are fiduciaries under ERISA and prohibit certain transactions involving ERISA plan clients. Our failure to comply with these requirements could have a material adverse effect on us.
Investments by GBL and on behalf of our advisory clients and investment funds often represent a significant equity ownership position in an issuer's class of stock. As of December 31, 2017,2018, we had five percent or more beneficial ownership with respect to 108102 equity securities. This activity raises frequent regulatory, legal, and disclosure issues regarding our aggregate beneficial ownership level with respect to portfolio securities, including issues relating to issuers' shareholder rights plans or “poison pills,” and various federal and state regulatory limitations, including state gaming laws and regulations, federal communications laws and regulations and federal and state public utility laws and regulations, as well as federal proxy rules governing shareholder communications and federal laws and regulations regarding the reporting of beneficial ownership positions. Foreign country regulations may have different levels of ownership limitations. Our failure to comply with these requirements could have a material adverse effect on us.
The USA Patriot Act of 2001 contains anti-money laundering and financial transparency laws and mandates the implementation of various new regulations applicable to broker-dealers, mutual funds and other financial services companies, including standards for verifying client identification at account opening, and obligations to monitor client transactions and report suspicious activities. Anti-money laundering laws outside of the U.S. contain some similar provisions. Our failure to comply with these requirements could have a material adverse effect on us.
We and certain of our affiliates are subject to the laws of non-U.S. jurisdictions and non-U.S. regulatory agencies or bodies. In connection with our office in London and our plans to market certain products in Europe, we are required to comply with the laws of the United Kingdom and other European countries regarding these activities. Our subsidiary, GAMCO Asset Management (UK) Limited, is regulated by the Financial Conduct Authority (“FCA”). In connection with our registration in the United Kingdom, we have minimum capital requirements that have been consistently met or exceeded. We opened an office in Tokyo and therefore are subject to national and local laws in that jurisdiction. We are subject to requirements in numerous jurisdictions regarding reporting of beneficial ownership positions in securities issued by companies whose securities are publicly-traded in those countries.
Regulatory matters
The investment management industry is likely to continue facing a high level of regulatory scrutiny and become subject to additional rules designed to increase disclosure, tighten controls and reduce potential conflicts of interest. In addition, the Commission has substantially increased its use of focused inquiries which request information from investment advisors and a number of fund complexes regarding particular practices or provisions of the securities laws. We participate in some of these inquiries in the normal course of our business. Changes in laws, regulations and administrative practices by regulatory authorities, and the associated compliance costs, have increased our cost structure and could in the future have a material adverse impact. Although we have installed procedures and utilize the services of experienced administrators, accountants and lawyers to assist us in adhering to regulatory guidelines and satisfying these requirements, and maintain insurance to protect ourselves in the case of client losses, there can be no assurance that the precautions and procedures that we have instituted and installed, or the insurance that we maintain to protect ourselves in case of client losses, will protect us from all potential liabilities.
See Item 3: LEGAL PROCEEDINGS below.
Personnel
On February 28, 2018,2019, we had a full-time staff of 159172 individuals, of whom 4154 served in the portfolio management, portfolio management support and trading areas (including 1920 portfolio managers for the Funds, Institutional and Private Wealth Management), 5559 served in the marketing and shareholder servicing areas and 6359 served in the administrative area.
ITEM 1A: RISK FACTORS
We caution the reader that the following risks and those risks described elsewhere in this report and in our other SEC filings could have a material adverse effect on our business, prospects, financial condition, results of operations or cash flow or could cause a decline in the Company’s stock price.
Risks Related to Our Industry
We earn substantially all of our revenue based on assets under management and therefore a reduction in assets under management would reduce our revenues and profitability. Assets under management fluctuate based on many factors including: market conditions, investment performance, and terminations of investment contracts.
Substantially all of our revenues are directly related to the amount of our AUM. Under our investment advisory contracts with our clients, the investment advisory fees we receive are typically based on the market value of AUM. In addition, we receive asset-based distribution and/or service fees with respect to the open-end funds managed by Funds Advisor or Teton and its affiliates over time pursuant to distribution plans adopted under provisions of Rule 12b-1 under the Company Act. Rule 12b-1 fees typically are based on the average AUM and represented approximately 11.0%10.3%, 11.6%11.0% and 12.5%11.6% of our total revenues for the years ended December 31, 2018, 2017 2016 and 2015,2016, respectively. Accordingly, a decline in the prices of securities generally may cause our revenues and net income to decline by either causing the value of our AUM to decrease, which would result in lower investment advisory and Rule 12b-1 fees, or causing our clients to withdraw funds in favor of investments they perceive to offer greater opportunity or lower risk, which would also result in lower fees. The securities markets are highly volatile, and securities prices may increase or decrease for many reasons beyond our control, including but not limited to economic and political events, war (whether or not directly involving the U.S.), acts of terrorism, unanticipated changes in currency exchange rates, interest rates, inflation rates, the yield curve, defaults by derivative counterparties, bond default risks, sovereign debt crisis and other factors that are difficult or impossible to predict. If a decline in securities prices caused our revenues to decline, it could have a material adverse effect on our earnings.
Changes in laws or regulations or in governmental policies and compliance with existing laws or regulations could limit the sources and amounts of our revenues, increase our costs of doing business, decrease our profitability and materially and adversely affect our business.
Our business is subject to extensive regulation in the United States, primarily at the federal level, including regulation by the SEC under the Company Act and the Advisers Act as well as other securities laws, by the Department of Labor under ERISA, and regulation by FINRA and state regulators. The Funds managed by Funds Advisor are registered with the SEC as investment companies under the Company Act. The Advisers Act imposes numerous obligations on investment advisors, including record-keeping, advertising and operating requirements, fiduciary and disclosure obligations, custodial requirements and prohibitions on fraudulent activities. The Company Act imposes similar obligations, as well as additional detailed operational requirements, on registered investment companies and investment advisors. In addition, our businesses are also subject to regulation by the Financial Services Authority in the United Kingdom, and we are also subject to the laws of other non-U.S. jurisdictions and non-U.S. regulatory agencies or bodies.
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 that provisions of the Tax Cuts and Jobs Act (the “Act”) affect the deductibility of named executive officer (“NEO”) compensation, we may be impacted.
The Act eliminates the performance based compensation exception for NEO compensation deductibility. To the extent that some of the compensation of our NEOs is affected by this change, we would have a lower amount of deductible compensation in future years and a higher effective tax rate than we would have had without this potential loss of deductibility. We continue to evaluate the impact of the Act’s provisions, regarding NEO compensation and otherwise, and whether and if so, by how much, the Act’s provisions will impact us.
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 managementadvisory 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 managementadvisory 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 investment advisory contracts that may be terminated on short notice or may not be renewed by clients.
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.
Certain changes in control of our company would automatically terminate our investment management agreements with our clients, unless our Institutional and Private Wealth Management clients consent and, in the case of Fund clients, the Funds’ boards of directors and shareholders vote to continue the agreements, and could prevent us for a two-year period from increasing the investment advisory fees we are able to charge our mutual fund clients.
Under the Company Act, an investment management agreement with a fund must provide for its automatic termination in the event of its assignment. The fund’s board and shareholders must vote to continue the agreement following its assignment, the cost of which ordinarily would be borne by us. Under the Advisers Act, a client’s investment management agreement may not be “assigned” by the investment advisor without the client’s consent. An investment management agreement is considered to be assigned to another party when a controlling block of the advisor’s ownership is transferred. In our case, an assignment of our investment management agreements may occur if, among other things, we sell or issue a certain number of additional common shares in the future. We cannot be certain that our clients will consent to assignments of our investment management agreements or approve new agreements with us if an assignment occurs. Under the Company Act, if a fund’s investment advisor engages in a transaction that results in the assignment of its investment management agreement with the fund, the advisor may not impose an “unfair burden” on that fund as a result of the transaction for a two-year period after the transaction is completed. The term “unfair burden” has been interpreted to include certain increases in investment advisory fees. This restriction may discourage potential purchasers from acquiring a controlling interest in our company.
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.
The soundness of other financial institutions could adversely affect our business.
Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. We and the investments we manage may have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial services industry, including: brokers and dealers, commercial banks, investment banks, clearing organizations, mutual and hedge funds, and other institutions. Many of these transactions expose us, or the accounts we manage, to credit risk in the event of the counterparty’s default. There is no assurance that any such losses would not materially and adversely impact the Company’s revenues and earnings.
Risks Related to Our Business
Control by Mr. Gabelli of a majority of the combined voting power of our common stock may give rise to conflicts of interests.
Since our Offering in 1999, Mr. Gabelli, through his control and majority ownership of GGCP, has beneficially owned a majority of our outstanding Class B Stock, representing 91% of voting control. As long as Mr. Gabelli indirectly beneficially owns a majority of the combined voting power of our common stock, he will have the ability to elect all of the members of our Board of Directors and thereby control our management and affairs, including determinations with respect to acquisitions, dispositions, borrowings, issuances of common stock or other securities, and the declaration and payment of dividends on the common stock. In addition, Mr. Gabelli will be able to determine the outcome of matters submitted to a vote of our shareholders for approval and will be able to cause or prevent a change in control of our company. As a result of Mr. Gabelli's control, none of our agreements with Mr. Gabelli and other companies controlled by him can be assumed to have been arrived at through “arm's-length” negotiations, although we believe that the parties endeavor to implement market-based terms. There can be no assurance that we would not have received more favorable terms, or offered less favorable terms to, an unaffiliated party.
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 May 5, 2015, 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.
Mr. Gabelli has agreed that while he is employed by us he will not provide investment management services outside of GAMCO, AC, and GGCP, except for certain permitted accounts. These permitted accounts, excluding personal accounts, held assets at December 31, 20172018 and 20162017 of approximately $267.7$239.0 million and $252.3$267.7 million, respectively. Mr. Gabelli continues to be a member of the team that manages the TETON Westwood Mighty MitesSM Fund, whose advisor, Teton, was spun-off from GBL in March 2009. Effective February 27, 2017, Funds Advisor became the sub-advisor to the TETON Westwood Mighty MitesSM Fund. The assets in the TETON Westwood Mighty MitesSM Fund at December 31, 2018 and 2017 were $1.1 billion and $1.4 billion.billion, respectively. The 2008 Employment Agreement may not be amended without the approval of the Compensation Committee and Mr. Gabelli.
We depend on Mr. Gabelli and other key personnel.
We are dependent on the efforts of Mr. Gabelli, our Chairman of the Board, Chief Executive Officer and the primary portfolio manager for a significant majority of our AUM. The loss of Mr. Gabelli's services could have a material adverse effect on us.
In addition to Mr. Gabelli, our future success depends to a substantial degree on our ability to retain and attract other qualified personnel to conduct our investment management business including, Christopher Marangi and Kevin Dreyer, the other Co-Chief Investment Officers of the Value team. The market for qualified portfolio managers is extremely competitive. We anticipate that it will be necessary for us to add portfolio managers and investment analysts as we further diversify our investment products and strategies. There can be no assurance, however, that we will be successful in our efforts to recruit and retain personnel. In addition, our investment professionals and senior marketing personnel have direct contact with our Institutional and Private Wealth Management clients, which can lead to strong client relationships. The loss of these personnel could jeopardize our relationships with certain Institutional and Private Wealth Management clients, and result in the loss of such accounts. The loss of key management professionals or the inability to recruit and retain sufficient portfolio managers and marketing personnel could have a material adverse effect on our business.
There may be adverse effects on our business from a decline in the performance of the securities markets.
Our results of operations are affected by many economic factors, including the performance of the securities markets. The securities markets in general have experienced significant volatility, and such volatility may continue or increase in the future. At December 31, 2017,2018, approximately 96%94% of our AUM were invested in portfolios consisting primarily of equity securities. Any decline in the securities markets, in general, and the equity markets, in particular, could reduce our AUM and consequently reduce our revenues. In addition, any such decline in the equity markets, failure of these markets to sustain their prior levels of growth, or continued short-term volatility in these markets could result in investors withdrawing from the equity markets or decreasing their rate of investment, either of which would be likely to adversely affect us. Also, from time to time, a relatively high proportion of the assets we manage may be concentrated in particular economic or industry sectors. A general decline in the performance of securities in those industry sectors could have an adverse effect on our AUM and revenues.
Since the separation, certain of our directors and officers may have actual or potential conflicts of interest because of their positions or relationships with AC.
Since the separation of AC from GAMCO, Mario J. Gabelli has continued to serve as our Chairman and Chief Executive Officer and also serves as Executive Chairman of AC. Marc Gabelli, a son of Mario J. Gabelli, continues to have responsibilities relating to GAMCO. Kevin Handwerker, GAMCO’s Executive Vice President, General Counsel and Secretary, also serves AC in the same capacities. Douglas R. Jamieson has continued to serve as President and Director of GAMCO Asset Management Inc. and also serves as President and Chief Executive Officer and Director of AC. Agnes Mullady has continued to serve as President and COO of the Fund Division of Gabelli Funds, LLC and also serves as an Executive Vice President of AC. In addition, certain of our portfolio managers and teammates will be providedprovide services to AC pursuant to the Transitional Services Agreement with AC and will be officers or employees of AC. Such dual assignments could create, or appear to create, potential conflicts of interest when our and AC’s officers and directors face decisions that could have different implications for the two companies.
Also, some of our directors, executive officers, portfolio managers and teammates own shares of AC common stock.
Mario J. Gabelli is deemed to control AC by his control of GGCP Holdings, LLC, an intermediate subsidiary of GGCP, Inc., a private company controlled by Mario J. Gabelli. Marc Gabelli is President of GGCP, Inc.
In addition, potential conflicts of interest could arise in connection with the resolution of any dispute that may arise between GAMCO and AC regarding the terms of the agreements governing the separation and the relationship thereafter between the companies. The executive officers and other personnel of AC who serve as directors or executive management of GAMCO may interpret these agreements in their capacity as AC employees in a manner that would adversely affect the business of GAMCO.
Also, certain subsidiaries of AC are investment advisers. The executive officers and other personnel of AC who also serve as directors or executive management of GAMCO may be confronted with the possibility of making decisions in their AC capacity that would adversely affect the business of GAMCO.
Both GAMCO and AC expect to be vigilant in attempting to identify and resolve any potential conflicts of interest, including but not limited to the types described above, at the earliest possible time. However, there can be no guarantee that the interests of GAMCO may not be adversely affected at some point by such a conflict.
Our reputation is critical to our success.
Our reputation is critical to acquiring, maintaining and developing relationships with our clients, Mutual Fund shareholders and third party intermediaries. Misconduct by our staff, or even unsubstantiated allegations, could result not only in direct financial harm but also in harm to our reputation, causing injury to the value of our brands and our ability to retain or attract AUM. Moreover, reputational harm may cause us to lose current employees and we may be unable to attract new employees with similar qualification or skills. Damage to our reputation could substantially reduce our AUM and impair our ability to maintain or grow our business, which could have a material adverse effect on us.
There is a possibility of losses associated with proprietary investment activities.
Currently, we maintain a proprietary investment position in a few securities. Market fluctuations and other factors may result in substantial losses in our proprietary accounts, which could have an adverse effect on our balance sheet, reduce our ability or willingness to make new investments or impair our credit ratings.
Future investment performance could reduce revenues and other income.
Success in the investment management and mutual fund businesses is dependent on investment performance as well as distribution and client servicing. Good performance generally stimulates sales of our investment products and tends to keep withdrawals and redemptions low, which generates higher managementadvisory fees (which are based on the amount of AUM). Conversely, poor performance, both in absolute terms and/or relative to peers and industry benchmarks, tends to result in decreased sales, increased withdrawals and redemptions in the case of the open-end Funds, and in the loss of Institutional and Private Wealth Management clients, with corresponding decreases in revenues to us. Many analysts of the mutual fund industry believe that investment performance is the most important factor for the growth of open and closed-end funds, such as those we offer. Failure of our investment products to perform well or failure of the Funds to maintain ratings or rankings could, therefore, have a material adverse effect on us.
In addition, when our investment products experience strong results relative to the market or other asset classes, clients' investments in our products may increase beyond their target levels, and we could, therefore, suffer withdrawals as our clients rebalance their investments to fit their asset allocation preferences.
Loss of significant Institutional and Private Wealth Management accounts could affect our revenues.
We had approximately 1,7001,600 Institutional and Private Wealth Management accounts as of December 31, 2017,2018, of which the ten largest accounts generated approximately 9%8% of our total revenues during the year ended December 31, 2017.2018. Account turnover for any reason would have an adverse effect on our revenues. Notwithstanding performance, we have from time to time experienced account turnover of large Institutional and Private Wealth Management accounts as a result of corporate mergers and restructurings, and we could continue to lose accounts under these or other circumstances.
A decline in the market for closed-end funds could reduce our ability to raise future assets to manage.
Market conditions may preclude us from increasing the assets we manage in closed-end funds. A significant portion of our recent growth in the assets we manage has resulted from public offerings of the common and preferred shares of closed-end funds. We have raised approximately $5.4$5.7 billion in gross assets through closed-end fund offerings since January 2004. The market conditions for these offerings may not be as favorable in the future, which could adversely impact our ability to grow our AUM and our revenue.
We rely on third party distribution programs.
A significant share of sales of our open-end funds come through third party distribution programs, which are programs sponsored by third party intermediaries that offer their mutual fund customers a variety of competing products and administrative services. A substantial component of sales growth is from third party distribution programs with no transaction fees payable by the customer, which we refer to as NTF programs. Approximately $4.2$3.1 billion of our AUM in the open-end equity funds as of December 31, 20172018 are held through NTF programs. The cost of participating in third party distribution programs is higher than our direct distribution costs, and it is anticipated that the cost of third party distribution programs will increase in the future. Any increase would be likely to have an adverse effect on our profit margins and results of operations. In addition, there can be no assurance that the third party distribution programs will continue to distribute the Funds. At December 31, 2017,2018, approximately 94%92% of the NTF program net assets in the Gabelli/GAMCO families of funds are attributable to two NTF programs. The decision by these third party distribution programs to discontinue distribution of the funds, or a decision by us to withdraw one or more of the funds from the programs, could have an adverse effect on our growth of AUM.
Operational risks may disrupt our businesses, result in regulatory action against us or limit our growth.
We face operational risk arising from errors made in the execution, confirmation or settlement of transactions or from transactions not being properly recorded, evaluated or accounted for. Our business is highly dependent on our ability to process, on a daily basis, transactions across markets in an efficient and accurate manner. Consequently, we rely heavily on our financial, accounting and other data processing systems. Despite the reliability of these systems, and the training and skill of our employees and third parties we rely on, it remains likely that errors may occasionally occur due to the extremely large number of transactions we process. In addition, if systems we use are unable to accommodate an increasing volume of transactions our ability to expand our businesses could be constrained. If any of these systems do not operate properly or are disabled, we could suffer financial loss, a disruption of our businesses, liability to clients, regulatory intervention or reputational damage.
Failure to maintain adequate infrastructure could impede the Company’s productivity and growth. Additionally, failure to implement effective information and cyber security policies, procedures and capabilities could disrupt operations and cause financial losses that could result in a decrease in the Company’s earnings or stock price.
The Company’s infrastructure, including its information systems and technology, is vital to the competitiveness of its business. The failure to maintain an adequate infrastructure commensurate with the size and scope of our business could impede our productivity and growth, which could cause our earnings or stock price to decline. We outsource a significant portion of our information systems operations to third parties who are responsible for providing the management, maintenance and updating of such systems. Technology is subject to rapid change and we cannot guarantee that our competitors may not implement more advanced technology platforms for their products than we do for ours. In addition, there can be no assurance that the cost of maintaining such outsourcing arrangements will not increase from its current level, which could have a material adverse effect on us.
In addition, any inaccuracies, delays, system failures or security breaches in these and other systems could subject us to client dissatisfaction and losses. Breach of our technology systems could result in the loss of valuable information, liability for stolen assets or information, remediation costs to repair damage caused by the breach, additional security costs to mitigate against future incidents and litigation costs resulting from the incident. Moreover, loss of confidential customer identification information could harm our reputation and subject us to liability under laws that protect confidential personal data, resulting in increased costs or loss of revenues. Further, although we take precautions to password protect and encrypt our laptops and other mobile electronic hardware, if such hardware is stolen, misplaced or left unattended, it may become vulnerable to hacking or other unauthorized use, creating a possible security risk and resulting in potentially costly actions by us.
Our operations rely on the secure processing, storage and transmission of confidential and other information in our computer systems and networks. We may be the target of cyber-attacks, including denial-of-service attacks, and must continuously monitor and develop our systems to protect our technology infrastructure and data from misappropriation or corruption. Although we take protective measures and endeavor to modify them as circumstances warrant, our computer systems, software and networks may be vulnerable to unauthorized access, misuse, computer viruses or other malicious code and other events that could have a security impact. If one or more of such events occur, this potentially could jeopardize our or our clients’ or counterparties’ confidential and other information processed and stored in our, our clients’, our counterparties’ or third parties’ operations, which could impact their ability to transact with us or otherwise result in significant losses or reputational damage. The increased use of mobile technologies can heighten these and other operational risks. We expect to expend significant additional resources on an ongoing basis to modify our protective measures and to investigate and remediate vulnerabilities or other exposures, and we may be subject to litigation and financial losses that are either not insured against or not fully covered through any insurance maintained by us.
We routinely transmit and receive personal, confidential and proprietary information by email and other electronic means. We have discussed and worked with clients, vendors, service providers, counterparties and other third parties to develop secure transmission capabilities and protect against cyber-attacks, but we do not have, and may be unable to put in place, secure capabilities with all of our clients, vendors, service providers, counterparties and other third parties and we may not be able to ensure that these third parties have appropriate controls in place to protect the confidentiality of the information. An interception, misuse or mishandling of personal, confidential or proprietary information being sent to or received from a client, vendor, service provider, counterparty or other third party could result in legal liability, regulatory action and reputational harm.
The failure of one of our vendors to fulfill its obligations to us could have a material adverse effect on the Company and its products.
The Company depends on a number of key vendors for various fund administration, accounting, custody and transfer agent roles and other operational needs. The failure or inability of the Company to diversify its sources for key services or the failure of any key vendors to fulfill their obligations could lead to operational issues for the Company and in certain products, which could result in financial losses for the Company and its clients.
Our ability to meet cash needs may be adversely affected by a number of factors.
Our ability to meet anticipated cash needs is affected by factors such as the market value of our assets, our operating cash flows and our creditworthiness as perceived by lenders. Adverse developments in any of these areas could have significantly adverse effects on our business. If we are unable to obtain funds and financing in a timely manner or on acceptable terms, we may be forced to incur unanticipated costs or revise our business plans. Further, our access to the capital markets depends significantly on our credit ratings. A reduction in our credit ratings could increase our borrowing costs and limit our access to the capital markets. Volatility in the U.S., regional or global financing markets may also impact our ability to access the capital markets should we seek to do so, and we may be forced to incur unanticipated costs or experience other adverse effects on our business. We currently have a credit rating of investment grade with one rating agency and one below investment grade with another rating agency. We believe that if our credit rating was below investment grade with both credit agencies it would increase our long-term borrowing costs, on future borrowings, by 3565 basis points, while a two notch downgrade would increase our long-term borrowing costs, on future borrowings, by approximately 60-7080-85 basis points. Our current outstanding debt issuances would not be impacted by any changes in our ratings.
We face exposure to legal actions, including litigation and arbitration claims and regulatory and governmental examinations and/or investigations. Insurance coverage for these matters may be inadequate.
The volume of litigation and arbitration claims against financial services firms and the amount of damages claimed has increased over the past several years. The types of claims that we may face are varied. For example, we may face claims against us for purchasing securities that are inconsistent with a client’s investment objectives or guidelines, in connection with the operation of the Funds or arising from an employment dispute. The risk of litigation is difficult to predict, assess or quantify, and may occur years after the activities or events at issue. In addition, from time to time we may become the subject of governmental or regulatory investigations and/or examinations. Even if we prevail in a legal or regulatory action, the costs alone of defending against the action or the harm to our reputation could have a material adverse effect on us. The insurance coverage that we maintain with respect to legal and regulatory actions may be inadequate or may not cover certain proceedings.
Compliance failures could adversely affect us.
Our investment management activities are subject to client guidelines, and our Mutual Fund business involves compliance with numerous investment, asset valuation, liquidity, distribution, and tax requirements. A failure to comply with these guidelines or contractual requirements could result in damage to the Company’s reputation or in its clients seeking to recover losses, withdrawing their AUM or terminating their contracts, any of which could cause the Company’s revenues and earnings to decline. There can be no assurance that the precautions and procedures that we have instituted and installed or the insurance we maintain to protect ourselves in case of client losses will protect us from potential liabilities.
We face strong competition from numerous and, in many instances, larger companies.
The asset management business is intensely competitive. We compete with numerous investment management companies, stock brokerage and investment banking firms, insurance companies, banks, savings and loan associations and other financial institutions. The periodic establishment of new investment management companies and other competitors increases the competition that we face. At the same time, consolidation in the financial services industry has created stronger competitors with greater financial resources and broader distribution channels than our own. Competition is based on various factors, including, among others, business reputation, investment performance, product mix and offerings, service quality and innovation, distribution relationships and fees charged. Our competitive success in any or all of these areas cannot be assured. Additionally, competing securities dealers whom we rely upon to distribute our mutual funds also sell their own proprietary funds and investment products, which could limit the distribution of our investment products. To the extent that existing or potential customers, including securities dealers, decide to invest in or distribute the products of our competitors, the sales of our products as well as our market share, revenues and net income could decline.
Fee pressures could reduce our profit margins.
There has been a trend toward lower fees in some segments of the investment management industry. In order for us to maintain our fee structure in a competitive environment, we must be able to provide clients with investment returns and service that will encourage them to be willing to pay such fees. Expense limitations and reimbursements have been put in place for certain classes of certain funds. Accordingly, there can be no assurance that we will be able to maintain our current fee structure. Fee reductions on existing or future new business could have an adverse effect on our profit margins and results of operations.
Mr. Gabelli, our Chairman of the Board and Chief Executive Officer, may receive enhanced compensation under his various deferred compensation agreements in the event we repurchase shares under our Stock Repurchase Program.
GAMCO has entered into three separate deferred compensation agreements with Mr. Mario J. Gabelli whereby his variable compensation for fiscal 2016 and certain periods of fiscal 2017 (each such period, an “employment period”) will be in the form of Restricted Stock Units (“RSUs”), payable at the end of a specified deferral period (each, a “Lapse Date”). On each Lapse Date, the RSUs can be settled in either stock or cash, in an amount determined by the lesser of (x) the volume-weighted average price (“VWAP”) of the Company’s Class A Stock during the applicable employment period and (y) the VWAP of the Class A Stock on the Lapse Date. On July 2, 2018, the RSU for the first half of 2017 vested in accordance with the terms of the agreement and a cash payment in the amount of $28.3 million was made to Mr. Gabelli.
From time to time, the Company repurchases shares of its Class A Stock under a Stock Repurchase Program authorized by the Board. Share repurchases reduce the number of shares in a company held by the public, which increases earnings per share. As a result, the stock price may rise because shareholders know that a buyback will immediately boost earnings per share.
Since the amount of RSUs payable under Mr. Gabelli’s deferred compensation agreements are tied to the Company’s stock price, an increase in the amount of shares the Company repurchases under its Stock Repurchase Program may have the effect of increasing Mr. Gabelli’s overall compensation.
Risks Related to the Company
The disparity in the voting rights among the classes of shares may have a potential adverse effect on the price of our Class A Stock.
The holders of Class A Common Stock (“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. Since our Offering in 1999, Mr. Gabelli, through his control and majority ownership of GGCP, has beneficially owned a majority of our outstanding Class B Stock, representing approximately 91% of voting control. As long as Mr. Gabelli indirectly beneficially owns a majority of the combined voting power of our common stock, he will have the ability to elect all of the members of our Board of Directors and thereby control our management and affairs, including among other things any determinations with respect to acquisitions, dispositions, borrowings, issuances of common stock or other securities, and the declaration and payment of dividends on the common stock. The differential in voting rights and the ability of our company to issue additional Class B Stock could adversely affect the value of the Class A Stock to the extent the investors, or any potential future purchaser of our company, view the superior voting rights of the Class B Stock to have value. On May 6, 2014,3, 2017, Class A Stock shareholders approved an advisory proposal for the Board of Directors to consider the conversion and reclassification of our shares of Class B Stock into Class A Stock at a ratio in the range of 1.15 to 1.25 shares of Class A Stock for each share of Class B Stock. The Board of Directors has made no decision on this matter.
Future sales of our Class A Stock in the public market or sales or distributions of our Class B Stock could lower our stock price, and any additional capital raised by us through the sale of equity or convertible securities may dilute our stockholders’ ownership in us.
We may sell additional shares of Class A Stock in subsequent public offerings. We also may issue additional shares of Class A Stock or convertible debt securities. On March 5, 2018, AC completed a tender offer in which tendering AC shareholders received an aggregate of approximately 660,000 shares of our registered Class A Stock constituting approximately 7% of the Class A Stock outstanding. On October 29, 2018, AC completed another tender offer in which tendering AC shareholders received an aggregate of approximately 710,000 shares of our registered Class A Stock constituting approximately 7% of the Class A Stock outstanding. The market price of our Class A Stock could decline as a result of sales of Class A Stock by such shareholders. Any such sales as well as sales by our other current shareholders could be perceived negatively.
No prediction can be made as to the effect, if any, that future sales or distributions of Class B Stock owned by GGCP Holdings LLC will have on the market price of the Class A Stock from time to time. Sales or distributions of substantial amounts of Class A Stock or Class B Stock, or the perception that such sales or distributions are likely to occur, could adversely affect the prevailing market price for the Class A Stock.
Our common stock has relatively limited trading volume, and ownership of a large percentage is concentrated with a small number of shareholders, which could increase the volatility in our stock trading and dramatically affect our share price.
A large percentage of our common stock is held by a limited number of shareholders. If our larger shareholders decide to liquidate their positions, it could cause significant fluctuation in the share price of our common stock.
21There has been no authoritative determination as to whether the distribution of shares of Associated Capital Group, Inc. to GAMCO stockholders in 2015 qualified for tax-free treatment for GAMCO, ACG or GAMCO stockholders under U.S. tax laws. It could be determined in the future that the distribution should have been considered a taxable event with respect to U.S. federal income tax purposes for ACG, GAMCO or GAMCO stockholders.
While at the time of the distribution GAMCO received an opinion from its tax advisors substantially to the effect that the distribution would be tax-free to GAMCO and its stockholders under Section 355 of the Code, neither GAMCO nor ACG ever applied for a private letter ruling from the IRS with respect to the tax consequences of the distribution. Accordingly, there can be no assurance that the IRS or another taxing authority will not assert that the distribution was taxable to GAMCO, ACG or GAMCO stockholders. If that were to happen, among other things, each GAMCO stockholder who received shares of ACG common stock in the Spin-off may be treated as having received a taxable distribution, and GAMCO would realize taxable income to the extent the distribution consists of appreciated property distributed by GAMCO.
ITEM 1B: UNRESOLVED STAFF COMMENTS
None.
ITEM 2: PROPERTIES
Since 1997, our principal offices, consisting of a single 60,000 square foot building, are located at 401 Theodore Fremd Avenue, Rye, New York, under a lease agreement which expires on December 31, 2028 from an entity controlled by members of Mr. Gabelli's immediate family. In addition we lease office space in Connecticut, Florida, Illinois, Missouri, New Jersey, Nevada and, internationally, in London and Tokyo.
ITEM 3: LEGAL PROCEEDINGS
From time to time, the Company may be named in legal actions and proceedings. These actions may seek substantial or indeterminate compensatory as well as punitive damages or injunctive relief. The Company is also subject to governmental or regulatory examinations or investigations. The examinations or investigations could result in adverse judgments, settlements, fines, injunctions, restitutions or other relief. For any such matters, the consolidated financial statements include the necessary provisions for losses that the Company believes are probable and estimable. Furthermore, the Company evaluates whether there exist losses which may be reasonably possible and, if material, makes the necessary disclosures.
ITEM 4: MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5: MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our shares of Class A Stock are traded on the NYSE under the symbol GBL.
As of February 1, 2018,2019, there were 129435 Class A Stockholders of record and 2221 Class B Stockholders of record. These figures do not include approximately 3,2003,400 stockholders with shares held under beneficial ownership in nominee name.
The following table sets forth the high and low prices of our Class A Stock and historical dividends declared per share to both Class A Stock and Class B Stock for each quarter of 2017 and 2016 as reported by the NYSE.23
| 2016 | | 2017 | |
| | | | | Dividends | | | | | | Dividends | |
| High | | Low | | Declared | | High | | Low | | Declared | |
First Quarter | | $ | 38.60 | | | $ | 25.95 | | | $ | 0.02 | | | $ | 32.55 | | | $ | 28.51 | | | $ | 0.02 | |
Second Quarter | | | 41.67 | | | | 31.34 | | | | 0.02 | | | | 30.55 | | | | 27.55 | | | | 0.02 | |
Third Quarter | | | 35.62 | | | | 28.30 | | | | 0.02 | | | | 32.60 | | | | 28.05 | | | | 0.02 | |
Fourth Quarter | | $ | 33.55 | | | $ | 27.85 | | | $ | 0.02 | | | $ | 30.94 | | | $ | 27.79 | | | $ | 0.02 | |
As of December 31, 2017,2018, since the Offering, we have returned to shareholders $1.9$2.0 billion in total of which $1.0 billion was in the form of the Spin-offs of AC and Teton, $491.0$493.3 million was from dividends and $453.1$463.7 million was through our stock buyback program.
The following table provides information with respect to the shares of our Class A Stock we repurchased during the three months ended December 31, 2017:2018:
| | | | | Total Number of | | Maximum | |
| Total | | Average | | Shares Repurchased as | | Number of Shares | |
| Number of | | Price Paid Per | | Part of Publicly | | That May Yet Be | |
| Shares | | Share, net of | | Announced Plans | | Purchased Under | |
Period | Repurchased | | Commissions | | or Programs | | the Plans or Programs | |
10/01/17 - 10/31/17 | | | 16,100 | | | $ | 29.15 | | | | 16,100 | | | | 852,420 | |
11/01/17 - 11/30/17 | | | 38,197 | | | | 28.73 | | | | 38,197 | | | | 814,223 | |
12/01/17 - 12/31/17 | | | 139,929 | | | | 29.51 | | | | 139,929 | | | | 674,294 | |
Totals | | | 194,226 | | | $ | 29.33 | | | | 194,226 | | | | | |
| | | | | Total Number of | | Maximum | |
| Total | | Average | | Shares Repurchased as | | Number of Shares | |
| Number of | | Price Paid Per | | Part of Publicly | | That May Yet Be | |
| Shares | | Share, net of | | Announced Plans | | Purchased Under | |
Period | Repurchased | | Commissions | | or Programs | | the Plans or Programs | |
10/01/18 - 10/31/18 | | | - | | | $ | - | | | | - | | | | 941,949 | |
11/01/18 - 11/30/18 | | | 18,597 | | | | 20.70 | | | | 18,597 | | | | 923,352 | |
12/01/18 - 12/31/18 | | | 58,542 | | | | 19.25 | | | | 58,542 | | | | 864,810 | |
Totals | | | 77,139 | | | $ | 19.60 | | | | 77,139 | | | | | |
In 1999, the Board of Directors established the stock repurchase program. Our stock repurchase program is not subject to an expiration date.
We are required to provide a comparison of the cumulative total return on our Class A Stock as of December 31, 20172018 with that of a broad equity market index and either a published industry index or a peer group index selected by us. The following chart compares the return on the Class A Stock with the return on the S&P 500 Index and an index comprised of public asset managers (“SNL Asset Manager”). The comparison assumes that $100 was invested in the Class A Stock and in each of the named indices, including the reinvestment of dividends, on December 31, 2012.2013. This chart is not intended to forecast future performance of our common stock.
| Dec. 31, | | Dec. 31, | | Dec. 31, | | Dec. 31, | | Dec. 31, | | Dec. 31, | Dec. 31, | | Dec. 31, | | Dec. 31, | | Dec. 31, | | Dec. 31, | | Dec. 31, |
| 2012 | | 2013 | | 2014 | | 2015 | | 2016 | | 2017 | 2013 | | 2014 | | 2015 | | 2016 | | 2017 | | 2018 |
GAMCO Investors, Inc. | | 100.00 | | 165.45 | | 170.24 | | 111.47 | | 111.13 | | 107.02 | | 100.00 | | 102.89 | | 67.37 | | 67.17 | | 64.69 | | 36.98 |
SNL Asset Manager | | 100.00 | | 153.67 | | 162.12 | | 138.26 | | 146.27 | | 194.23 | | 100.00 | | 105.50 | | 89.97 | | 95.18 | | 126.39 | | 95.35 |
S&P 500 Index | | 100.00 | | 132.39 | | 150.51 | | 152.59 | | 170.84 | | 208.14 | | 100.00 | | 113.69 | | 115.26 | | 129.05 | | 157.22 | | 150.33 |
The following table shows information regarding outstanding options and shares reserved for future issuance under our equity compensation plans as of December 31, 2017.2018.
| | Number of Securities to be | | | | | Number of Securities to be | | | |
| | Issued upon Exercise of | | Weighted-Average Exercise | | | Issued upon Exercise of | | Weighted-Average Exercise | |
| | Outstanding Options, | | Price of Outstanding Options, | | | Outstanding Options, | | Price of Outstanding Options, | |
Plan Category | | Warrants and Rights | | Warrants and Rights | | | Warrants and Rights | | Warrants and Rights | |
Equity compensation plans approved | | | | | | | | | | |
by security holders: | | | | | | | | | | |
Stock options | | | - | | | | n/a | | | | 10,000 | | | $ | 25.55 | |
Restricted stock awards | | | 19,400 | | | $ | 65.67 | | | | 427,650 | | | $ | 24.93 | |
Equity compensation plans not approved | | | | | | | | | | | | | | | | |
by security holders: | | | - | | | | n/a | | | | - | | | | n/a | |
Total | | | 19,400 | | | | | | | | 437,650 | | | $ | 24.94 | |
The $65.67 RSA grant price for the remaining 19,400 RSAs reflects a pre AC spin-off stock price. The number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in the first column above) is 281,349.1,087,717.
ITEM 6: SELECTED FINANCIAL DATA
General
The selected historical financial data presented below has been derived in part from, and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7 and “Financial Statements and Supplementary Data” included in Item 8 of this report. Amounts included in the tables related to income statement data and balance sheet data are derived from audited financial statements. See Note P. Discontinued Operations for further details.
| | Year Ended December 31, | | | Year Ended December 31, | |
| | 2017 | | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2018 | | | 2017 | | | 2016 | | | 2015 | | | 2014 | |
Income Statement Data (in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Revenues | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Investment advisory and incentive fees | | $ | 316,705 | | | $ | 308,459 | | | $ | 329,965 | | | $ | 360,498 | | | $ | 326,325 | | | $ | 302,651 | | | $ | 316,705 | | | $ | 308,459 | | | $ | 329,965 | | | $ | 360,498 | |
Distribution fees and other income | | | 43,819 | | | | 44,541 | | | | 51,011 | | | | 61,438 | | | | 52,034 | | | | 38,804 | | | | 43,819 | | | | 44,541 | | | | 51,011 | | | | 61,438 | |
Total revenues | | | 360,524 | | | | 353,000 | | | | 380,976 | | | | 421,936 | | | | 378,359 | | | | 341,455 | | | | 360,524 | | | | 353,000 | | | | 380,976 | | | | 421,936 | |
Expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Compensation costs | | | 125,501 | | | | 82,613 | | | | 136,503 | | | | 151,255 | | | | 138,859 | | | | 83,768 | | | | 134,170 | | | | 86,572 | | | | 146,371 | | | | 156,533 | |
Stock based compensation | | | 8,669 | | | | 3,959 | | | | 9,868 | | | | 5,278 | | | | 1,562 | | |
Management fee | | | 13,666 | | | | 6,518 | | | | 15,503 | | | | 18,663 | | | | 14,344 | | | | 9,014 | | | | 13,666 | | | | 6,518 | | | | 15,503 | | | | 18,663 | |
Distribution costs | | | 44,447 | | | | 44,189 | | | | 51,990 | | | | 59,746 | | | | 50,195 | | | | 39,194 | | | | 44,447 | | | | 44,189 | | | | 51,990 | | | | 59,746 | |
Other operating expenses | | | 23,221 | | | | 23,925 | | | | 19,163 | | | | 17,542 | | | | 16,541 | | | | 22,692 | | | | 23,221 | | | | 23,925 | | | | 19,163 | | | | 17,542 | |
Total expenses | | | 215,504 | | | | 161,204 | | | | 233,027 | | | | 252,484 | | | | 221,501 | | | | 154,668 | | | | 215,504 | | | | 161,204 | | | | 233,027 | | | | 252,484 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Operating income | | | 145,020 | | | | 191,796 | | | | 147,949 | | | | 169,452 | | | | 156,858 | | | | 186,787 | | | | 145,020 | | | | 191,796 | | | | 147,949 | | | | 169,452 | |
Other income (expense), net | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net gain from investments | | | 3,115 | | | | 1,594 | | | | 4,953 | | | | 4,282 | | | | 5,145 | | | | (25,173 | ) | | | 3,115 | | | | 1,594 | | | | 4,953 | | | | 4,282 | |
Extinguishment of debt | | | (3,300 | ) | | | - | | | | (1,067 | ) | | | (84 | ) | | | (998 | ) | | | - | | | | (3,300 | ) | | | - | | | | (1,067 | ) | | | (84 | ) |
Interest and dividend income | | | 2,350 | | | | 1,511 | | | | 2,222 | | | | 2,154 | | | | 2,661 | | | | 2,241 | | | | 2,350 | | | | 1,511 | | | | 2,222 | | | | 2,154 | |
Interest expense | | | (10,160 | ) | | | (12,674 | ) | | | (8,636 | ) | | | (7,653 | ) | | | (10,033 | ) | | | (3,525 | ) | | | (10,160 | ) | | | (12,674 | ) | | | (8,636 | ) | | | (7,653 | ) |
Charitable contributions | | | (4,137 | ) | | | - | | | | (6,396 | ) | | | (134 | ) | | | (10,626 | ) | | | (5,671 | ) | | | (4,137 | ) | | | - | | | | (6,396 | ) | | | (134 | ) |
Total other income (expense), net | | | (12,132 | ) | | | (9,569 | ) | | | (8,924 | ) | | | (1,435 | ) | | | (13,851 | ) | | | (32,128 | ) | | | (12,132 | ) | | | (9,569 | ) | | | (8,924 | ) | | | (1,435 | ) |
Income before income taxes | | | 132,888 | | | | 182,227 | | | | 139,025 | | | | 168,017 | | | | 143,007 | | | | 154,659 | | | | 132,888 | | | | 182,227 | | | | 139,025 | | | | 168,017 | |
Income tax provision | | | 55,079 | | | | 65,106 | | | | 51,726 | | | | 61,734 | | | | 52,974 | | | | 37,463 | | | | 55,079 | | | | 65,106 | | | | 51,726 | | | | 61,734 | |
Income from continuing operations | | | 77,809 | | | | 117,121 | | | | 87,299 | | | | 106,283 | | | | 90,033 | | | | 117,196 | | | | 77,809 | | | | 117,121 | | | | 87,299 | | | | 106,283 | |
Income/(loss) from discontinued operations, net of taxes | | | - | | | | - | | | | (3,887 | ) | | | 3,107 | | | | 26,820 | | | | - | | | | - | | | | - | | | | (3,887 | ) | | | 3,107 | |
Net income attributable to GAMCO Investors, Inc.'s shareholders | | $ | 77,809 | | | $ | 117,121 | | | $ | 83,412 | | | $ | 109,390 | | | $ | 116,853 | | | $ | 117,196 | | | $ | 77,809 | | | $ | 117,121 | | | $ | 83,412 | | | $ | 109,390 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income per share attributable to GAMCO Investors, Inc.'s shareholders: | Net income per share attributable to GAMCO Investors, Inc.'s shareholders: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic - Continuing operations | | $ | 2.68 | | | $ | 4.01 | | | $ | 3.43 | | | $ | 4.20 | | | $ | 3.51 | | | $ | 4.08 | | | $ | 2.68 | | | $ | 4.01 | | | $ | 3.43 | | | $ | 4.20 | |
Basic - Discontinued operations | | | - | | | | - | | | | (0.15 | ) | | | 0.12 | | | | 1.05 | | | | - | | | | - | | | | - | | | | (0.15 | ) | | | 0.12 | |
Basic - Total | | $ | 2.68 | | | $ | 4.01 | | | $ | 3.28 | | | $ | 4.32 | | | $ | 4.56 | | | $ | 4.08 | | | $ | 2.68 | | | $ | 4.01 | | | $ | 3.28 | | | $ | 4.32 | |
| | | | | | | | | | | | | | | | | | | | | |
Diluted - Continuing operations | | $ | 2.60 | | | $ | 3.92 | | | $ | 3.40 | | | $ | 4.16 | | | $ | 3.50 | | | $ | 4.07 | | | $ | 2.60 | | | $ | 3.92 | | | $ | 3.40 | | | $ | 4.16 | |
Diluted - Discontinued operations | | | - | | | | - | | | | (0.15 | ) | | | 0.12 | | | | 1.04 | | | | - | | | | - | | | | - | | | | (0.15 | ) | | | 0.12 | |
Diluted - Total | | $ | 2.60 | | | $ | 3.92 | | | $ | 3.24 | | | $ | 4.28 | | | $ | 4.54 | | | $ | 4.07 | | | $ | 2.60 | | | $ | 3.92 | | | $ | 3.24 | | | $ | 4.28 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Weighted average shares outstanding: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic | | | 28,980 | | | | 29,182 | | | | 25,425 | | | | 25,335 | | | | 25,653 | | | | 28,744 | | | | 28,980 | | | | 29,182 | | | | 25,425 | | | | 25,335 | |
Diluted | | | 30,947 | | | | 30,170 | | | | 25,711 | | | | 25,558 | | | | 25,712 | | | | 28,777 | | | | 30,947 | | | | 30,170 | | | | 25,711 | | | | 25,558 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Actual shares outstanding at December 31st (a) | | | 28,974 | | | | 29,463 | | | | 29,821 | | | | 25,855 | | | | 26,086 | | | | 28,982 | | | | 28,974 | | | | 29,463 | | | | 29,821 | | | | 25,855 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Dividends declared per share: | | $ | 0.08 | | | $ | 0.08 | | | $ | 0.28 | | | $ | 0.50 | | | $ | 0.72 | | | $ | 0.08 | | | $ | 0.08 | | | $ | 0.08 | | | $ | 0.28 | | | $ | 0.50 | |
(a) | Includes unvested RSAs of 427,650, 19,400, 424,340, 553,100 710,750, and 566,950710,750 at December 31, 2018, 2017, 2016, 2015 2014, and 2013,2014, respectively. |
| December 31, | | December 31, | |
| 2017 | | 2016 | | 2015 | | 2014 | | 2013 | | 2018 | | 2017 | | 2016 | | 2015 | | 2014 | |
Balance Sheet Data (in thousands) | | | | | | | | | | | | | | | | | | | | |
Total assets (a) | | $ | 128,286 | | | $ | 149,229 | | | $ | 103,899 | | | $ | 865,803 | | | $ | 708,761 | | | $ | 134,612 | | | $ | 128,286 | | | $ | 149,229 | | | $ | 103,899 | | | $ | 865,803 | |
Long-term obligations (a) | | | 79,087 | | | | 239,021 | | | | 279,267 | | | | 116,789 | | | | 116,510 | | | | 28,962 | | | | 79,087 | | | | 239,021 | | | | 279,267 | | | | 116,789 | |
Other liabilities and noncontrolling interest | | | 145,472 | | | | 76,855 | | | | 100,959 | | | | 221,219 | | | | 132,069 | | | | 96,040 | | | | 145,472 | | | | 76,855 | | | | 100,959 | | | | 221,219 | |
Total liabilities and noncontrolling interest | | | 224,559 | | | | 315,876 | | | | 380,226 | | | | 338,008 | | | | 248,579 | | | | 125,002 | | | | 224,559 | | | | 315,876 | | | | 380,226 | | | | 338,008 | |
Total equity (deficit) | | $ | (96,273 | ) | | $ | (166,647 | ) | | $ | (276,327 | ) | | $ | 527,795 | | | $ | 460,182 | | | $ | 9,610 | | | $ | (96,273 | ) | | $ | (166,647 | ) | | $ | (276,327 | ) | | $ | 527,795 | |
(a) | Total assets and long-term obligations have been decreased by $128 $627, and $724$627 at December 31, 2015 2014, and 2013,2014, respectively, for the adoption of ASU 2015-03 to present the debt issuance costs as a reduction of the related debt rather than as an asset. |
| December 31, | | December 31, | |
| 2017 | | 2016 | | 2015 | | 2014 | | 2013 | | 2018 | | 2017 | | 2016 | | 2015 | | 2014 | |
Assets Under Management | | | | | | | | | | | | | | | | | | | | |
(at year end, in millions): | | | | | | | | | | | | | | | | | | | | |
Open-end Funds | | $ | 15,617 | | | $ | 15,229 | | | $ | 15,325 | | | $ | 19,139 | | | $ | 18,813 | | | $ | 12,784 | | | $ | 15,617 | | | $ | 15,229 | | | $ | 15,325 | | | $ | 19,139 | |
Closed-end Funds | | | 8,053 | | | | 7,150 | | | | 6,492 | | | | 6,949 | | | | 6,945 | | | | 6,959 | | | | 8,053 | | | | 7,150 | | | | 6,492 | | | | 6,949 | |
Institutional & PWM Separate Accounts | | | | | | | | | | | | | | | | | | | | | | | 14,104 | | | | 18,883 | | | | 17,255 | | | | 16,805 | | | | 20,359 | |
Direct | | | 13,451 | | | | 13,472 | | | | 13,404 | | | | 16,655 | | | | 16,548 | | |
Sub-advisory | | | 5,432 | | | | 3,783 | | | | 3,401 | | | | 3,704 | | | | 3,797 | | |
SICAV (a) | | | 510 | | | | 320 | | | | 178 | | | | 135 | | | | 96 | | | | 507 | | | | 510 | | | | 320 | | | | 178 | | | | 135 | |
Total | | $ | 43,063 | | | $ | 39,954 | | | $ | 38,800 | | | $ | 46,582 | | | $ | 46,199 | | | $ | 34,354 | | | $ | 43,063 | | | $ | 39,954 | | | $ | 38,800 | | | $ | 46,582 | |
(a) Adjusted to include assets of $96 million, $135 million, $141 million and $270 million at December 31, 2013, 2014, 2015, and 2016, respectively.
ITEM 7:MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated Financial Statements and the notes thereto included in Item 8 to this report.
Introduction
On the Spin-Off Date, GBL distributed to its stockholders all of the outstanding common stock of Associated Capital Group, Inc. (“AC”) and its subsidiaries along with certain cash and other assets. AC owns and operates, directly or indirectly, the alternatives and the institutional research businesses previously owned and operated by GBL. In the Spin-off, each holder of GAMCO’s Class A Common Stock (“Class A Stock”) of record as of 5:00 p.m. New York City time on November 12, 2015 (the “Record Date”), received one share of AC Class A common stock for each share of GAMCO Class A Stock held on the Record Date. Each record holder of GAMCO’s Class B Stock received one share of AC Class B common stock for each share of GAMCO Class B Stock held on the Record Date. Subsequent to the Spin-off, GAMCO no longer consolidates the financial results of AC for the purposes of its own financial reporting and the historical financial results of AC have been reflected in the Company’s consolidated financial statements as discontinued operations for all periods presented through the Spin-off Date. Historical AUM have similarly been adjusted to remove AUM managed by AC.
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.
As of December 31, 2017,2018, we had $43.1$34.4 billion of AUM. We conduct our investment advisory business principally through: Funds Advisor (Funds) and GAMCO (Institutional and Private Wealth Management), and Funds Advisor (Funds). We also are a distributor of our open-end funds through our broker-dealer subsidiary G.distributors.
Organizational Chart
Subsequent to the Spin-off, this is the current organizational chart of the Company.
2017
2018 Business and Investment Highlights
· | On February 14, 2017, the Company launchedIn May, the Gabelli Food of all Nations NextSharesTM, its second actively managed, non-transparent exchange traded managed fund. The fund is investing primarily in domestic and foreign companies in the food and beverage industry, which isUtility Trust completed a consolidating sector that includes many strong cash generators with pricing power. The fund will capitalize on a segment where we have accumulated and compounded knowledge. Consumer companies have long been a core competency at GAMCO. significantly over-subscribed rights offering raising $48.5 million. |
· | We launched our fourth exchange traded managed fund, the Gabelli Pet Parents’TM Fund (the “Fund”). The Fund invests primarily in companies that actively participate in the companion animal food, therapeutics, diagnostics, product distribution and related services. |
· | DuringIan Lapey joined in October 2018 as the first quarter of 2017,Portfolio Manager for the shareholderslaunch of the TETON Westwood Mighty MitesSMGabelli Global Financial Services Fund. Prior to joining Moerus, Ian was a Partner, Research Analyst, and Portfolio Manager at Third Avenue Management. In 2009 he was appointed Co-Manager of the firm’s flagship Third Avenue Value Fund, and the TETON Convertible Securities Fund voted to approve Gabelli Funds, LLC as the sub-advisor. These assets are now includedwas subsequently named sole Portfolio Manager of that fund in the Institutional & PWM – sub-advisory segment of our AUM.2012. |
· | On July 10, 2017, StandardAugust 27, 2018, Trevor, Stewart, Burton & Poor’s revised its outlook onJacobson (“TSB&J”), an RIA firm, agreed to assign their private wealth clients to GAMCO Asset Management. Carl Kempner, Jr. and Melody Bryant joined GAMCO to stable from negative and reaffirmed its BBB- rating.manage the portfolios for the former TSB&J clients. |
· | On July 19, 2017,September 28, 2018, Fitch Ratings gave the Gabelli U.S. Treasury Fund its highest rating, AAAmmf. |
· | In October, we launched our 16th closed-end fund and second on the London Stock Exchange, the Gabelli Merger Plus+ Trust plc. The fund,Global Mini Mites Fund, which trades underinvests on a global basis in equity securities that have a market capitalization of $250 million or less. |
· | In October, the symbol GMP, raised $100Gabelli Convertible and Income Securities Fund completed a common share rights offering raising $23 million. |
· | On September 18, 2017, the Ellsworth GrowthOctober 30, 2018, we announced that Theresa Pope joined GAMCO’s institutional team as Vice President, Consultant Relations. This role underscores GAMCO’s commitment to serving this important distribution channel and Income Fund Ltd. completed its initial preferred offering. The Fund issued $30 million of 5.25% Series A Cumulative Preferred Shares which are perpetual, non-callable for five years,delivering superior risk adjusted returns and was issued at $25 per share.best in class service to our institutional clients. |
· | On September 26, 2017,November 19, 2018, we announced that Peter Tcherepnine, CEO of Loeb Partners Corporation, joined GAMCO as a Senior Vice President along with the Gabelli Multimedia Trust completed its offeringprivate wealth clients that will be assigning their assets to GAMCO subject to the completion of $50 million of 5.125% Series E Cumulative Preferred Stock. The preferred stock is perpetual, non-callable for five years, and was issued at $25 per share.documentation. |
· | On October 26, 2017,In November, the GAMCO Natural Resources, Gold & Income Trust completed its offeringCompany announced that both the Gabelli Media Mogul NextSharesTM and the Gabelli Pet Parents’TM NextSharesTM would be starting as no-load open-end mutual fund registered under the Investment Company Act of $30 million of 5.2% Series A Cumulative Preferred Stock. The preferred stock is perpetual, non-callable for five years, and was issued at $25 per share.1940 with timing subject to the Federal government shutdown. |
· | DuringIn December, 2017, the Company completed two rights offerings for two of its closed-end funds, The Gabelli Equity Trust Inc. and The Gabelli Global SmallUtility & Income Trust completed a common and Mid Cap Value Trust, which raised a combined $203preferred share rights offering raising $85 million. Both offerings were heavily oversubscribed. |
· | Net debt declined from $156.9 million at December 31, 2016 to $37.4 million at December 31, 2017 as we repaid the $110 million 4.5% Convertible note and $50 million of the 4% AC Note. As of December 31, 2017, there is $123.8 million of deferred compensation payable. $59.0 million of which has not been reflected in our GAAP financials and will be expensed $39.4 million during 2018 and $19.6 million during 2019 (see page 36 for details). |
Overview
Consolidated Statements of Income
Investment advisory and incentive fees, which are based on the amount and composition of AUM in our Funds, Institutional and Private Wealth Management accounts, 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. A majority of our cash inflows to mutual fund products have come through third 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. 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. These revenues are based on AUM which is 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 managementadvisory fee rates than fixed income portfolios.
We also receive incentive 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. ManagementAdvisory 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.
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.
Other income and expenses includes net gains and losses from investments (which include both realized and unrealized gains and losses from trading securities), 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 Note A in our consolidated financial statements included elsewhere in this report.
Income/(loss) on discontinued operations, net of taxes represents the results of the businesses and assets that were part of the Spin-off of AC. Please refer to Note P in our consolidated financial statements included elsewhere in this report.
Consolidated Statements of Financial Condition
We ended the 20172018 year with approximately $54.7$75.0 million in cash and investments. The $54.7$75.0 million consists of $17.9$41.2 million cash and cash equivalents, primarily invested in our 100% U.S. Treasury Money Market Fund $0.1and $33.8 million invested in common stocks, mutual funds and closed-end funds. Of the $33.8 million of common stocks, mutual funds, and available for sale (“AFS”) securities of $36.7 million. Of the $36.7 million of AFS securities, $36.6closed-end funds, $18.8 million represent our investment in shares of Westwood Holdings Group.
The face value of our debt consisted of $50 million of a 4% PIK Note due to AC on November 30, 2020, $15 million of a 1.6% Note due to AC on February 28, 2018 and $24.2 million of 5.875% senior notes due June 1, 2021.
Deferred compensation owed totaled $123.8$48.1 million as of December 31, 2017, of which $64.82018. The balance sheet includes $36.8 million is included as of December 31, 2017. $36.8 million is payable on July 1, 2018, $15.52018. $9.0 million is payable on April 1, 2019 and $71.5$39.1 million is payable on January 1, 2020. We will receive a tax benefit upon payment of the deferred compensation equal to Federal and State rates in effect at the time of payment.
Equity was $9.6 million on December 31, 2018 compared to a negative $96.3 million on December 31, 2017 compared to a negative $166.6 million on December 31, 2016.2017.
We filed a shelf registration with the SEC in 20152018 which, among other things, provides us the 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 $500 million. The shelf is available through April 10, 2018,2021, at which time it may be renewed.
Our short-term focus has been to use our cash flow to pay down our existing debt. During 2017,2018, we repaid the $110$15 million 4.5% Convertible1.6% AC note and $50 million of the 4% AC Note. We continue to opportunistically and strategically grow operating income.
Assets Under Management Highlights
We reported assets under management as follows (dollars in millions):
| | Year Ended December 31, | | | CAGR (a) | | | Year Ended December 31, | | | CAGR (a) | |
| | 2017 | | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | | 2017/2013 | | | 2018 | | | 2017 | | | 2016 | | | 2015 | | | 2014 | | | | 2018/2014 | |
Equities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Open-End | | $ | 13,747 | | | $ | 13,462 | | | $ | 13,811 | | | $ | 17,684 | | | $ | 17,078 | | | | (5.3 | ) | | $ | 10,589 | | | $ | 13,747 | | | $ | 13,462 | | | $ | 13,811 | | | $ | 17,684 | | | | (12.0 | )% |
Closed-End | | | 8,053 | | | | 7,150 | | | | 6,492 | | | | 6,949 | | | | 6,945 | | | | 3.8 | | | | 6,959 | | | | 8,053 | | | | 7,150 | | | | 6,492 | | | | 6,949 | | | | - | |
Institutional & PWM direct | | | 13,420 | | | | 13,441 | | | | 13,366 | | | | 16,597 | | | | 16,486 | | | | (5.0 | ) | |
Institutional & PWM sub-advisory | | | 5,432 | | | | 3,783 | | | | 3,401 | | | | 3,704 | | | | 3,797 | | | | 9.4 | | |
Institutional & PWM | | | | 14,078 | | | | 18,852 | | | | 17,224 | | | | 16,767 | | | | 20,301 | | | | (8.7 | ) |
SICAV (b) | | | 510 | | | | 320 | | | | 178 | | | | 135 | | | | 96 | | | | 51.8 | | | | 507 | | | | 510 | | | | 320 | | | | 178 | | | | 135 | | | | 39.2 | |
Total Equities | | | 41,162 | | | | 38,156 | | | | 37,248 | | | | 45,069 | | | | 44,402 | | | | (1.9 | ) | | | 32,133 | | | | 41,162 | | | | 38,156 | | | | 37,248 | | | | 45,069 | | | | (8.1 | ) |
Fixed Income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Money-Market Fund | | | 1,870 | | | | 1,767 | | | | 1,514 | | | | 1,455 | | | | 1,735 | | | | 1.9 | | | | 2,195 | | | | 1,870 | | | | 1,767 | | | | 1,514 | | | | 1,455 | | | | 10.8 | |
Institutional & PWM | | | 31 | | | | 31 | | | | 38 | | | | 58 | | | | 62 | | | | (15.9 | ) | | | 26 | | | | 31 | | | | 31 | | | | 38 | | | | 58 | | | | (18.2 | ) |
Total Fixed Income | | | 1,901 | | | | 1,798 | | | | 1,552 | | | | 1,513 | | | | 1,797 | | | | 1.4 | | | | 2,221 | | | | 1,901 | | | | 1,798 | | | | 1,552 | | | | 1,513 | | | | 10.1 | |
Total AUM | | $ | 43,063 | | | $ | 39,954 | | | $ | 38,800 | | | $ | 46,582 | | | $ | 46,199 | | | | (1.7 | ) | | $ | 34,354 | | | $ | 43,063 | | | $ | 39,954 | | | $ | 38,800 | | | $ | 46,582 | | | | (7.3 | )% |
(a) Compound annual growth rate.
(b) Adjusted to include assets of $96 million, $135 million, $141 million, and $270 million at December 31, 2013, 2014, 2015, and 2016, respectively.
Our net cash inflows or outflows by product line were as follows (in millions):
| | Year Ended December 31, | | | Year Ended December 31, | |
| | 2017 | | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2018 | | | 2017 | | | 2016 | | | 2015 | | | 2014 | |
Equities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Open-End | | $ | (1,347 | ) | | $ | (1,832 | ) | | $ | (3,053 | ) | | $ | (355 | ) | | $ | 1,305 | | | $ | (2,160 | ) | | $ | (1,347 | ) | | $ | (1,832 | ) | | $ | (3,053 | ) | | $ | (355 | ) |
Closed-End (a) | | | (91 | ) | | | (55 | ) | | | (87 | ) | | | (137 | ) | | | (334 | ) | | | (501 | ) | | | (91 | ) | | | (55 | ) | | | (87 | ) | | | (137 | ) |
Institutional & PWM direct | | | (2,067 | ) | | | (1,571 | ) | | | (2,273 | ) | | | (846 | ) | | | 169 | | |
Institutional & PWM sub-advisory | | | 988 | | | | (226 | ) | | | (237 | ) | | | (250 | ) | | | (134 | ) | |
SICAV (b) | | | 149 | | | | 133 | | | | 49 | | | | 42 | | | | (30 | ) | |
Institutional & PWM | | | | (2,464 | ) | | | (1,079 | ) | | | (1,797 | ) | | | (2,510 | ) | | | (1,096 | ) |
SICAV(b) | | | | 28 | | | | 149 | | | | 133 | | | | 49 | | | | 42 | |
Total Equities | | | (2,368 | ) | | | (3,551 | ) | | | (5,601 | ) | | | (1,546 | ) | | | 976 | | | | (5,097 | ) | | | (2,368 | ) | | | (3,551 | ) | | | (5,601 | ) | | | (1,546 | ) |
Fixed Income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Money-Market Fund | | | 89 | | | | 249 | | | | 59 | | | | (280 | ) | | | 54 | | | | 290 | | | | 89 | | | | 249 | | | | 59 | | | | (280 | ) |
Institutional & PWM | | | - | | | | (7 | ) | | | (20 | ) | | | (4 | ) | | | 2 | | | | (5 | ) | | | - | | | | (7 | ) | | | (20 | ) | | | (4 | ) |
Total Fixed Income | | | 89 | | | | 242 | | | | 39 | | | | (284 | ) | | | 56 | | | | 285 | | | | 89 | | | | 242 | | | | 39 | | | | (284 | ) |
Total Net Cash In (Out) Flows | | $ | (2,279 | ) | | $ | (3,309 | ) | | $ | (5,562 | ) | | $ | (1,830 | ) | | $ | 1,032 | | | $ | (4,812 | ) | | $ | (2,279 | ) | | $ | (3,309 | ) | | $ | (5,562 | ) | | $ | (1,830 | ) |
| (a) | Our net cash inflows or outflows for Closed-End equity funds includes distributions, net of reinvestments, to fund holders of $522 million, $483 million, $500 million, $461 million, and $479 million and $484 million in 2018, 2017, 2016, 2015, 2014, and 2013,2014, respectively. |
| (b) | Adjusted to include inflows or outflows of $125 million, $10 million, $42 million, and ($30)$42 million in 2016, 2015, 2014, and 2013,2014, respectively. |
| | Closed-End Fund flows | | | Closed-End Fund flows | |
| | Offerings, net | | | Distributions, net | | | | | | Offerings, net
| | | Distributions, net of
| | | | |
| | of repurchases | | | of reinvestments | | | Net | | | of repurchases | | | reinvestments | | | Net | |
2018 | | | $ | 21 | | | $ | (522 | ) | | $ | (501 | ) |
2017 | | $ | 392 | | | $ | (483 | ) | | $ | (91 | ) | | | 392 | | | | (483 | ) | | | (91 | ) |
2016 | | | 445 | | | | (500 | ) | | | (55 | ) | | | 445 | | | | (500 | ) | | | (55 | ) |
2015 | | | 374 | | | | (461 | ) | | | (87 | ) | | | 374 | | | | (461 | ) | | | (87 | ) |
2014 | | | 342 | | | | (479 | ) | | | (137 | ) | | | 342 | | | | (479 | ) | | | (137 | ) |
2013 | | | 150 | | | | (484 | ) | | | (334 | ) | |
Our net appreciation and depreciation by product line were as follows (in millions):
| | Year Ended December 31, | | | Year Ended December 31, | |
| | 2017 | | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2018 | | | 2017 | | | 2016 | | | 2015 | | | 2014 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Equities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Open End | | $ | 1,632 | | | $ | 1,483 | | | $ | (820 | ) | | $ | 961 | | | $ | 3,271 | | |
Close End | | | 994 | | | | 713 | | | | (370 | ) | | | 141 | | | | 991 | | |
Institutional & PWM direct | | | 2,046 | | | | 1,646 | | | | (958 | ) | | | 957 | | | | 4,287 | | |
Institutional & PWM sub-advisory | | | 661 | | | | 608 | | | | (66 | ) | | | 157 | | | | 1,007 | | |
SICAV (a) | | | 41 | | | | 9 | | | | (6 | ) | | | (3 | ) | | | 7 | | |
Open-End | | | $ | (998 | ) | | $ | 1,632 | | | $ | 1,483 | | | $ | (820 | ) | | $ | 961 | |
Closed-End | | | | (593 | ) | | | 994 | | | | 713 | | | | (370 | ) | | | 141 | |
Institutional & PWM | | | | (2,310 | ) | | | 2,707 | | | | 2,254 | | | | (1,024 | ) | | | 1,114 | |
SICAV(a) | | | | (31 | ) | | | 41 | | | | 9 | | | | (6 | ) | | | (3 | ) |
Total Equities | | | 5,374 | | | | 4,459 | | | | (2,220 | ) | | | 2,213 | | | | 9,563 | | | | (3,932 | ) | | | 5,374 | | | | 4,459 | | | | (2,220 | ) | | | 2,213 | |
Fixed Income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Money-Market Fund | | | 14 | | | | 4 | | | | - | | | | - | | | | - | | | | 35 | | | | 14 | | | | 4 | | | | - | | | | - | |
Institutional & PWM | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Total Fixed Income | | | 14 | | | | 4 | | | | - | | | | - | | | | - | | | | 35 | | | | 14 | | | | 4 | | | | - | | | | - | |
Total Net Appreciation/(Depreciation) | | $ | 5,388 | | | $ | 4,463 | | | $ | (2,220 | ) | | $ | 2,213 | | | $ | 9,563 | | | $ | (3,897 | ) | | $ | 5,388 | | | $ | 4,463 | | | $ | (2,220 | ) | | $ | 2,213 | |
| (a) | Adjusted to include appreciation and depreciation of $4 million, ($4) million, and ($3) million, and $7 million in 2016, 2015, 2014, and 2013,2014, respectively. |
AUM at December 31, 20172018 were $43.1$34.4 billion, an increasea decrease of 8.6%20.2% from AUM of $39.7$43.1 billion at December 31, 2016.2017. Equity AUM were $32.1 billion on December 31, 2018, 22.1% below the $41.2 billion on December 31, 2017, 7.9% above the $38.2 billion on December 31, 2016.2017. We earn incentive fees for certain institutional client assets, assets attributable to certain preferred issues for our closed-end funds, our GDL Fund (NYSE: GDL), the Gabelli Merger Plus+ Trust PLCPlc (LSE: GMP), and the GAMCO Merger Arbitrage Fund. As of December 31, 2017,2018, assets with incentive based fees were $3.1$1.8 billion, 10.7% above41.9% below the $2.8$3.1 billion on December 31, 2016.2017. The majority of these assets have calendar year-end measurement periods; therefore, our incentive fees are primarily recognized in the fourth quarter when the uncertainty is removed at the end of the annual measurement period.
Operating Results for the Year Ended December 31, 2018 as Compared to the Year Ended December 31, 2017
Revenues
Total revenues were $341.5 million in 2018, $19.0 million or 5.3% lower than the total revenues of $360.5 million in 2017. The change in total revenues by revenue component was as follows (dollars in millions):
| Year Ended December 31, | | Increase (decrease) | |
| 2018 | | 2017 | | $
| | |
| % | |
| | | | | | | | | | |
Investment advisory | | $ | 299.6 | | | $ | 307.6 | | | $ | (8.0 | ) | | | (2.6 | ) |
Incentive fees | | | 3.1 | | | | 9.1 | | | | (6.0 | ) | | | (65.9 | ) |
Distribution fees and other income | | | 38.8 | | | | 43.8 | | | | (5.0 | ) | | | (11.4 | ) |
Total revenues | | $ | 341.5 | | | $ | 360.5 | | | $ | (19.0 | ) | | | (5.3 | ) |
Investment Advisory and Incentive Fees: Investment advisory fees, which comprised 88.6% of total revenues in 2018, are directly influenced by the level and mix of average AUM. Average total AUM decreased 4.0% to $40.3 billion in 2018 as compared to $42.0 billion in 2017. Average equity AUM decreased 4.7% to $38.3 billion in 2018 from $40.2 billion in 2017, primarily from market depreciation. Incentive fees, which comprised 0.9% of total revenues in 2018, result from our ability to either generate an absolute return in a portfolio or meet or exceed a specific benchmark index or indices and can vary significantly from one period to another. Incentive fees were lower in 2018 as a fewer number of portfolios exceeded their respective benchmarks as compared to 2017.
Fund revenues decreased $12.1 million or 5.9%, to $194.7 million, driven by lower average AUM. Revenue from open-end funds decreased $6.7 million, or 5.0%, to $127.3 million from the prior year as average AUM in 2018 decreased $0.5 billion, or 3.0%, to $16.1 billion from the $16.6 billion in 2017. Closed-end fund revenues decreased $5.4 million, or 7.4%, to $67.4 million from the prior year and were comprised of a decrease of $8.6 million in incentive fees on certain closed-end fund AUM, offset by an increase of $3.2 million in investment advisory fees attributable to higher average AUM. Revenue from Institutional and Private Wealth Management accounts, excluding incentive fees, which are generally billed on beginning quarter AUM, decreased $5.6 million, or 5.3%, principally due to lower billable AUM levels throughout the course of 2018. There were $1.7 million in incentive fees earned in 2018 and none earned in 2017. In 2018, average AUM in our equity Institutional and Private Wealth Management business decreased $1.6 billion, or 9.1%, for the year to $15.9 billion.
Distribution Fees and Other Income: Distribution fees and other income decreased $5.0 million, or 11.4%, to $38.8 million in 2018 from $43.8 million in 2017 primarily from lower average open-end equity AUM . Lower distribution fees of $35.1 million in 2018 versus $39.7 million for the prior year and $0.6 million less fees from the sale of load shares of mutual funds offset slightly by $0.2 million in increased other revenue.
Expenses
Compensation: Total compensation costs, which are largely variable in nature, decreased $43.4 million, or 34.6%, to $82.1 million in 2018 from $125.5 million in 2017. Variable compensation costs, principally portfolio manager and relationship manager fees, decreased $48.6 million to $48.8 million in 2018 from $97.4 million in 2017 and decreased as a percent of revenues to 14.3% in 2018 from 27.0% in 2017. The main driver of this decrease was the $46.6 million of compensation that was waived by the CEO. On February 23, 2018, the Company announced that the CEO would be waiving all of his compensation that he otherwise would have been entitled to for the period from March 1, 2018 to December 31, 2018. Additionally, the accounting for the vesting of the Deferred Cash Compensation Agreements (“DCCAs”) reduced 2018 compensation by $3.6 million. Compensation expense without the impact of the CEO compensation waiver and the DCCAs, was $132.3 million in 2018 as compared to $133.1 million in 2017.
The DCCAs granted to the CEO are required to be amortized over their respective vesting periods. The 2016 DCCA is being amortized over four years, the First Half 2017 DCCA was amortized over eighteen months, and the Fourth Quarter 2017 DCCA is being amortized over eighteen months. In the third quarter 2017, there was no DCCA. In 2016, the full amount of the compensation was deferred, and expense was recorded for the 25% vesting in that year. In 2017, an additional 25% of the deferred compensation from 2016 was recorded as well as 67% of the First Half 2017 DCCA and 17% of the Fourth Quarter 2017 DCCA. In 2018, an additional 25% of the deferred compensation from 2016 was recorded as well as 33% of the First Half 2017 DCCA and 66% of the Fourth Quarter 2017 DCCA. The effect of the DCCAs and current non deferred compensation being recorded resulted in a $4.1 million decrease in compensation in 2018 compared to 2017. Variable compensation is also driven by revenue levels which decreased in 2018 from 2017. Fixed compensation costs increased slightly to $33.4 million in 2018 from $28.1 million in 2017.
Stock Based Compensation: Stock based compensation was $1.6 million in 2018, a decrease of $7.1 million, as compared to $8.7 million in 2017. The decrease primarily results from the acceleration of all but 19,400 RSAs during 2017 for an additional expense of $6.8 million that would have been recognized in future years.
Management Fee: In 2018, management fee expense decreased to $9.0 million versus $13.7 million in 2017. 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) in accordance with his employment agreement. During 2018, the CEO compensation waiver reduced management fee expense by $9.9 million while the amortization of the DCCAs increased it by $7.2 million. Management fee expense for 2018 without the impact of the CEO compensation waiver and amortization of the DCCAs was $11.7 million.
Distribution Costs: Distribution costs, which include marketing, promotion and distribution costs decreased $5.2 million, or 11.7%, to $39.2 million in 2018 from $44.4 million in 2017, driven by a decrease in average open-end equity mutual funds AUM of 6.6%.
Other Operating Expenses: Our other operating expenses were $22.7 million in 2018 compared to $23.2 million in 2017, a decrease of $0.5 million or 2.2%. Lower research service fee of $2.5 million was slightly offset by an increase to the advisory fee paid to GCIA for the SICAV of $1.1 million, legal expense of $0.4 million and other operating expense of $0.5 million.
Operating Income and Margin
Operating income increased $41.8 million, or 28.8%, to $186.8 million for 2018 versus $145.0 million in the prior year period. This increase was primarily due to the CEO compensation waiver of $56.5 million in 2018. Operating margin was 54.7% for the year ended December 31, 2018, versus 40.2% in the prior year period. The increase in operating margin was due primarily to lower variable compensation costs and management fee expense related to the CEO compensation waiver in 2018.
Operating income before management fee was $195.8 million for the year ended of 2018, versus $158.7 million in the prior year. Operating margin before management fee was 57.3% in the 2018 period versus 44.0% in the 2017 period. The reconciliation of operating income before management fee and operating margin before management fee, both of which are non-GAAP measures to their respective GAAP measures, is provided at the end of this section.
Other Income and Expense
Total other income (expense), net of interest expense, was an expense of $32.1 million for the year ended December 31, 2018, compared to an expense of $12.1 million in 2017. This is comprised of net loss from investments of $25.2 million in 2018 as compared to a net gain from investments of $3.1 million in 2017; interest and dividend income of $2.2 million in 2018 versus $2.4 million in 2017; interest expense of $3.5 million in 2018 as compared to $10.2 million in 2017 and charitable contributions expense of $5.7 million in 2018 and $4.1 million in 2017. There was no loss on extinguishment of debt in 2018. 2017 included a loss on extinguishment of debt of $3.3 million.
Income Taxes
The effective tax rate (“ETR”) was 24.2% for the year ended December 31, 2018, versus 41.4% for the year ended December 31, 2017. The ETR for 2017 included a net $8.2 million write down for net deferred tax assets resulting from the enactment of the Tax Cuts and Jobs Act (the “Act”) in December 2017. The Act had the effect of increasing the ETR for 2017 by 6.1%.
Shareholder Compensation and Initiatives
During 2018, we returned $12.9 million of our earnings to shareholders through dividends and stock repurchases. We returned to shareholders a total of $0.08 per share in regular quarterly cash dividends in 2018 totaling $2.3 million. During 2017, we returned $16.7 million of our earnings to shareholders through dividends and stock repurchases. We returned to shareholders a total of $0.08 per share in regular quarterly cash dividends in 2017 totaling $2.4 million.
Through our stock buyback program, we repurchased 419,995 shares and 484,526 shares in 2018 and 2017, respectively, for approximately $10.6 million and $14.3 million, respectively, or $25.25 per share and $29.56 per share, respectively. Approximately 865,000 shares remain authorized under our stock buyback program at December 31, 2018.
Weighted average shares outstanding on a diluted basis in 2018 and 2017 were 28.8 million and 30.9 million, respectively.
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.
Reconciliation of non-GAAP financial measures to GAAP:
| | 2018 | | | 2017 | |
Revenues | | $ | 341,455 | | | $ | 360,524 | |
Operating Income | | | 186,787 | | | | 145,020 | |
Add back: management fee expense | | | 9,014 | | | | 13,666 | |
Operating income before management fee | | $ | 195,801 | | | $ | 158,686 | |
| | | | | | | | |
Operating margin | | | 54.7 | % | | | 40.2 | % |
| | | | | | | | |
Operating margin before management fee | | | 57.3 | % | | | 44.0 | % |
Operating Results for the Year Ended December 31, 2017 as Compared to the Year Ended December 31, 2016
Revenues
Total revenues were $360.5 million in 2017, $7.5 million or 2.1% higher than the total revenues of $353.0 million in 2016. The change in total revenues by revenue component was as follows (dollars in millions):
| Year Ended December 31, | | Increase (decrease) | | Year Ended December 31, | Increase (decrease) |
| 2017 | | 2016 | | $ | | | | % | | 2017 | | 2016 | | $
| | |
| % | |
| | | | | | | | | | | | | | | | | | | | | |
Investment advisory | | $ | 307.6 | | | $ | 293.1 | | | $ | 14.5 | | | | 4.9 | | | $ | 307.6 | | | $ | 293.1 | | | $ | 14.5 | | | | 4.9
| | |
Incentive fees | | | 9.1 | | | | 15.4 | | | | (6.3 | ) | | | (40.9 | ) | | | 9.1 | | | | 15.4 | | | | (6.3 | ) | | | (40.9)
|
| |
Distribution fees and other income | | | 43.8 | | | | 44.5 | | | | (0.7 | ) | | | (1.6 | ) | | | 43.8 | | | | 44.5 | | | | (0.7 | ) | | | (1.6)
|
| |
Total revenues | | $ | 360.5 | | | $ | 353.0 | | | $ | 7.5 | | | | 2.1 | | | $ | 360.5 | | | $ | 353.0 | | | $ | 7.5 | | | | 2.1
| | |
Investment Advisory and Incentive Fees: Investment advisory fees, which comprised 87.9% of total revenues in 2017, are directly influenced by the level and mix of average AUM. Average total AUM rose 8.0% to $42.0 billion in 2017 as compared to $38.9 billion in 2016. Average equity AUM increased 8.1% to $40.2 billion in 2017 from $37.2 billion in 2016, primarily from market appreciation. Incentive fees, which comprised 2.5% of total revenues in 2017, result from our ability to either generate an absolute return in a portfolio or meet or exceed a specific benchmark index or indices and can vary significantly from one period to another. Incentive fees were lower in 2017 as a fewer number of portfolios exceeded their respective benchmarks as compared to 2016.
Fund revenues increased $7.5 million or 3.8%, to $206.8 million, driven by higher average AUM. Revenue from open-end funds rose $4.0 million, or 3.1%, to $134.0 million from the prior year as average AUM in 2017 increased $1.4 billion, or 9.2%, to $16.6 billion from the $15.2 billion in 2016. Closed-end fund revenues increased $3.4 million, or 4.9%, to $72.8 million from the prior year and waswere comprised of an increase of $6.3 million in investment advisory fees attributable to higher average AUM, offset by a decrease of $2.9 million in incentive fees on certain closed-end fund AUM. Revenue from Institutional and Private Wealth Management accounts, excluding incentive fees, which are generally billed on beginning quarter AUM, increased $2.1 million, or 2.1%, principally due to higher billable AUM levels throughout the course of 2017. There were no incentive fees earned in 2017. In 2017, average AUM in our equity Institutional and Private Wealth Management business increased $0.8 billion, or 4.8%, for the year to $17.5 billion.
Distribution Fees and Other Income: Distribution fees and other income decreased $0.7 million, or 1.6%, to $43.8 million in 2017 from $44.5 million in 2016. Lower distribution fees of $39.7 million in 2017 versus $41.0 million for the prior year, were partially offset by an increase of $0.5 million in fees from the sale of load shares of mutual funds and other income.
Expenses
Compensation: Total compensation costs, which are largely variable in nature, increased $42.9 million, or 51.9%, to $125.5 million in 2017 from $82.6 million in 2016. Variable compensation costs, principally portfolio manager and relationship manager fees, increased $40.8 million to $97.4 million in 2017 from $56.6 million in 2016 and increased as a percent of revenues to 27.0% in 2017 from 16.0% in 2016. This is primarily due to the accounting for the vesting of the Deferred Cash Compensation Agreements (“DCCAs”). Absent the DCCAs, compensation expense was $133.1 million in 2017 as compared to $128.3 million in 2016.
The DCCAs granted to the CEO are required to be amortized over their respective vesting periods. The 2016 DCCA will be amortized over four years, the First Half 2017 DCCA will be amortized over eighteen months, and the Fourth Quarter 2017 DCCA will be amortized over eighteen months. In the third quarter 2017, there was no DCCA. In 2016, the full amount of the compensation was deferred, and expense was recorded for the 25% vesting in that year. In 2017, an additional 25% of the deferred compensation from 2016 was recorded as well as 67% of the First Half 2017 DCCA and 17% of the Fourth Quarter 2017 DCCA. The effect of the DCCAs and current non deferred compensation being recorded resulted in a $38.1 million increase in compensation in 2017 compared to 2016. Variable compensation is also driven by revenue levels which increased in 2017 from 2016. Fixed compensation costs increased slightly to $28.1 million in 2017 from $26.0 million in 2016.
Stock based compensation:Based Compensation: Stock based compensation was $8.7 million in 2017, an increase of $4.7 million, as compared to $4.0 million in 2016. The increase primarily results from the acceleration of all but 19,400 RSAs during 2017 for an additional expense of $6.8 million that would have been recognized in future years.
Management Fee: In 2017, management fee expense increased to $13.7 million versus $6.5 million in 2016. 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) in accordance with his employment agreement. Most importantly, the DCCA agreements reduced the management fee by $7.8 million in 2016 while 2017 was virtually unchanged. (see page 36)
Distribution Costs: Distribution costs, which include marketing, promotion and distribution costs increased $0.2 million, or 0.5%, to $44.4 million in 2017 from $44.2 million in 2016 driven by an increase in average open-end equity mutual funds AUM of 0.4%.
Other Operating Expenses: Our other operating expenses were $23.2 million in 2017 compared to $23.9 million in 2016, a decrease of $0.7 million or 2.9%. Lower donated securities expense of $1.7 million and legal expense of $0.7 million were slightly offset by an increase to the research services fee of $1.5 million.
Operating Income and Margin
Operating income decreased $46.8 million, or 24.4%, to $145.0 million for 2017 versus $191.8 million in the prior year period. This decrease was primarily due to increased variable compensation expense relating to the DCCA agreements of $45.9 million. Operating margin was 40.2% for the year ended December 31, 2017, versus 54.3% in the prior year period. The decrease in operating margin was due primarily to higher variable compensation costs and management fee expense related to the DCCA agreements. (see page 36)
Operating income before management fee was $158.7 million for the year ended of 2017, versus $198.3 million in the prior year. Operating margin before management fee was 44.0% in the 2017 period versus 56.2% in the 2016 period. The reconciliation of operating income before management fee and operating margin before management fee, both of which are non-GAAP measures to their respective GAAP measures, is provided at the end of this section.
Other Income and Expense
Total other income (expense), net of interest expense, was an expense of $12.1 million for the year ended December 31, 2017 compared to an expense of $9.6 million in 2016. This is comprised of net gain from investments of $3.1 million in 2017 as compared to $1.6 million in 2016; loss on extinguishment of debt of $3.3 million in 2017; interest and dividend income of $2.4 million in 2017 versus $1.5 million in 2016; interest expense of $10.2 million in 2017 as compared to $12.7 million in 2016 and charitable contributions expense of $4.1 million in 2017.
Interest expense decreased $2.5 million to $10.2 million in 2017, from $12.7 million in 2016 primarily related to the higher average amount of debt outstanding in 2016 versus 2017.
Income Taxes
The effective tax rate (“ETR”) was 41.4% for the year ended December 31, 2017, versus 35.7% for the year ended December 31, 2016. The ETR for 2017 included a net $8.2 million write down for net deferred tax assets resulting from the enactment of the Tax Cuts and Jobs Act (the “Act”) in December 2017. AbsentThe Act had the effectseffect of the Act,increasing the ETR for 2017 was 35.3%by 6.1%. The ETR for 2016 benefitted by 1.4% due to the reversal of tax accruals related to the closing out of a state audit.
Shareholder Compensation and Initiatives
During 2017, we returned $16.7 million of our earnings to shareholders through dividends and stock repurchases. We returned to shareholders a total of $0.08 per share in regular quarterly cash dividends in 2017 totaling $2.4 million. During 2016, we returned $13.2 million of our earnings to shareholders through dividends and stock repurchases. We returned to shareholders a total of $0.08 per share in regular quarterly cash dividends totaling $2.4 million.
Through our stock buyback program, we repurchased 484,526 and 348,687 shares in 2017 and 2016, respectively, for approximately $14.3 million and $10.8 million, or $29.56 and $30.88 per share, respectively. Approximately 674,000 shares remain authorized under our stock buyback program at December 31, 2017. Since our IPO we have repurchased 10,385,866 shares for a total investment of $453.1 million, or $43.63 per share.
Weighted average shares outstanding on a diluted basis in 2017 and 2016 were 30.9 million and 30.2 million, respectively.
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.
Reconciliation of non-GAAP financial measures to GAAP:
| | 2017 | | | 2016 | | | 2017 | | | 2016 | |
Revenues | | $ | 360,524 | | | $ | 353,000 | | | $ | 360,524 | | | $ | 353,000 | |
Operating Income | | | 145,020 | | | | 191,796 | | |
Operating income | | | | 145,020 | | | | 191,796 | |
Add back: management fee expense | | | 13,666 | | | | 6,518 | | | | 13,666 | | | | 6,518 | |
Operating income before management fee | | $ | 158,686 | | | $ | 198,314 | | | $ | 158,686 | | | $ | 198,314 | |
| | | | | | | | | | | | | | | | |
Operating margin | | | 40.2 | % | | | 54.3 | % | | | 40.2 | % | | | 54.3 | % |
| | | | | | | | | | | | | | | | |
Operating margin before management fee | | | 44.0 | % | | | 56.2 | % | | | 44.0 | % | | | 56.2 | % |
Operating Results for the Year Ended December 31, 2016 as Compared to the Year Ended December 31, 2015
Revenues
Total revenues were $353.0 million in 2016, $28.0 million or 7.3% lower than the total revenues of $381.0 million in 2015. The change in total revenues by revenue component was as follows (dollars in millions):
| Year Ended December 31, | | Increase (decrease) |
| 2016 | | 2015 | | $ | | | | % | |
| | | | | | | | | | | |
Investment advisory | | $ | 293.1 | | | $ | 325.6 | | | $ | (32.5 | ) | | | (10.0 | ) | |
Incentive fees | | | 15.4 | | | | 4.4 | | | | 11.0 | | | | 250.0 | | |
Distribution fees and other income | | | 44.5 | | | | 51.0 | | | | (6.5 | ) | | | (12.7 | ) | |
Total revenues | | $ | 353.0 | | | $ | 381.0 | | | $ | (28.0 | ) | | | (7.3 | ) | |
Investment Advisory and Incentive Fees: Investment advisory fees, which comprised 83.0% of total revenues in 2016, are directly influenced by the level and mix of average AUM. Average total AUM declined 10.0% to $38.9 billion in 2016 as compared to $43.2 billion in 2015. Average equity AUM fell 10.6% to $37.2 billion in 2016 from $41.6 billion in 2015, primarily from net outflows. Incentive fees, which comprised 4.4% of total revenues in 2016, result from our ability to either generate an absolute return in a portfolio or meet or exceed a specific benchmark index or indices and can vary significantly from one period to another. Incentive fees were higher in 2016 as a greater number of portfolios exceeded their respective benchmarks as compared to 2015.
Fund revenues decreased $14.9 million or 7.0%, to $199.3 million, driven by lower average AUM. Revenue from open-end funds decreased $21.9 million, or 14.4%, to $130.0 million from the prior year as average AUM in 2016 decreased $2.2 billion, or 12.6%, to $15.2 billion from the $17.4 billion in 2014. Closed-end fund revenues increased $7.0 million, or 11.2%, to $69.3 million from the prior year and was comprised of an increase of $7.8 million in incentive fees on certain closed-end fund AUM partially reduced by a decrease of $0.8 million in investment advisory fees attributable to lower average AUM. Revenue from Institutional and Private Wealth Management accounts, excluding incentive fees, which are generally billed on beginning quarter AUM, decreased $11.7 million, or 10.3%, principally due to lower billable AUM levels throughout the course of 2016. Incentive fees earned on certain accounts increased by $1.7 million. In 2016, average AUM in our equity Institutional and Private Wealth Management business decreased $2.1 billion, or 11.1%, for the year to $16.8 billion.
Distribution Fees and Other Income: Distribution fees and other income decreased $6.5 million, or 12.7%, to $44.5 million in 2016 from $51.0 million in 2015. Lower distribution fees of $41.0 million in 2016 versus $47.7 million for the prior year, principally as a result of decreased average AUM in our open-end equity mutual funds of 13.7%, offset by an increase of $0.2 million in fees from the sale of load shares of mutual funds and other income, contributed to this decrease.
Expenses
Compensation: Total compensation costs, which are largely variable in nature, decreased $53.9 million, or 39.5%, to $82.6 million in 2016 from $136.5 million in 2015. Variable compensation costs, principally portfolio manager and relationship manager fees, decreased $53.6 million to $56.6 million in 2016 from $110.2 million in 2015 and decreased as a percent of revenues to 16.0% in 2016 from 28.9% in 2015. The principle reason was the DCCA agreements with Mr. Gabelli which reduced variable compensation by $44.6 million in 2016. (see page 36) Variable compensation is also driven by revenue levels which decreased in 2016 from 2015. Fixed compensation costs decreased slightly to $26.0 million in 2016 from $26.3 million in 2015.
Stock based compensation: Stock based compensation was $4.0 million in 2016, a decrease of $5.9 million, as compared to $9.9 million in 2015. The decrease primarily results from the acceleration of 130,650 RSAs during 2015 for an additional expense of $3.5 million that would have been recognized in future years.
Management Fee: In 2016 management fee expense decreased to $6.5 million versus $15.5 million in 2015. 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) in accordance with his employment agreement. Most importantly the DCCA agreements reduced the management fee by $12.4 million in 2016. (see page 36)
Distribution Costs: Distribution costs, which include marketing, promotion and distribution costs decreased $7.8 million, or 15.0%, to $44.2 million in 2016 from $52.0 million in 2015 driven by a decrease in average open-end equity mutual funds AUM of 13.7%.
Other Operating Expenses: Our other operating expenses were $23.9 million in 2016 compared to $19.2 million in 2015, an increase of $4.7 million or 24.4%. The largest components of this increase were additional donated securities expense of $1.6 million and an increase to the research services fee of $1.5 million.
Operating Income and Margin
Operating income increased $43.9 million, or 29.7%, to $191.8 million for 2016 versus $147.9 million in the prior year period. This increase was primarily due to higher incentive fees of $11.0 million and reduced variable compensation expense relating to the RSU agreement of $57.0 million partially offset by lower non-incentive fee revenues of $39.0 million. Operating margin was 54.3% for the year ended December 31, 2016, versus 38.8% in the prior year period. The increase in operating margin was due primarily to lower variable compensation costs and management fee expense related to the RSU agreement. (see page 36)
Operating income before management fee was $198.3 million for the year ended of 2016, versus $163.5 million in the prior year. Operating margin before management fee was 56.2% in the 2016 period versus 42.9% in the 2015 period. The reconciliation of operating income before management fee and operating margin before management fee, both of which are non-GAAP measures to their respective GAAP measures, is provided at the end of this section.
Other Income and Expense
Total other income (expense), net of interest expense, was an expense of $9.6 million for the year ended December 31, 2016 compared to an expense of $8.9 million in 2015. This is comprised of net gain from investments of $1.6 million in 2016 as compared to $5.0 million in 2015; loss on extinguishment of debt of $1.1 million in 2015; interest and dividend income of $1.5 million in 2016 versus $2.2 million in 2015; interest expense of $12.7 million in 2016 as compared to $8.6 million in 2015 and Shareholder-designated contribution expense of $6.4 million in 2015.
Interest expense increased $4.1 million to $12.7 million in 2016, from $8.6 million in 2015 primarily related to the higher average amount of debt outstanding in 2016 versus 2015.
In 2015, the Board of Directors of GBL again adopted a Shareholder Designated Charitable Contribution program on behalf of all registered Class A and Class B shareholders. Under the programs the Board approved a $0.25 per share contribution, resulting in a charge of $6.4 million in 2015.
Income Taxes
The effective tax rate (“ETR”) was 35.7% for the year ended December 31, 2016, versus 37.2% for the year ended December 31, 2015. The ETR for 2016 benefitted by 1.4% due to the reversal of tax accruals related to the closing out of a state audit.
Shareholder Compensation and Initiatives
During 2016, we returned $13.2 million of our earnings to shareholders through dividends and stock repurchases. We returned to shareholders a total of $0.08 per share in regular quarterly cash dividends in 2016 totaling $2.4 million. During 2015, we returned $34.7 million of our earnings to shareholders through dividends and stock repurchases. We returned to shareholders a total of $0.28 per share in regular quarterly cash dividends totaling $7.5 million.
Through our stock buyback program, we repurchased 348,687 and 426,628 shares in 2016 and 2015, respectively, for approximately $10.8 million and $27.2 million, or $30.88 and $63.85 per share, respectively (For 2015, 413,228 shares were at an average investment of $64.86 per share prior to the distribution of AC on November 30, 2015 and 13,400 shares were at an average price of $32.56 following the distribution of AC). Approximately 233,000 shares remain authorized under our stock buyback program at December 31, 2016. Since our IPO we have repurchased 9,901,340 shares for a total investment of $438.8 million, or $44.32 per share.
Weighted average shares outstanding on a diluted basis in 2016 and 2015 were 30.2 million and 25.7 million, respectively.
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.
Reconciliation of non-GAAP financial measures to GAAP:
| | 2016 | | | 2015 | |
Revenues | | $ | 353,000 | | | $ | 380,976 | |
Operating income | | | 191,796 | | | | 147,949 | |
Add back: management fee expense | | | 6,518 | | | | 15,503 | |
Operating income before management fee | | $ | 198,314 | | | $ | 163,452 | |
| | | | | | | | |
Operating margin | | | 54.3 | % | | | 38.8 | % |
| | | | | | | | |
Operating margin before management fee | | | 56.2 | % | | | 42.9 | % |
DEFERRED COMPENSATION
As previously disclosed, the Company has deferred the cash compensation of the Chief Executive Officer relating to all of 2016 (“2016 DCCA”), the first half of 2017 (“First Half 2017 DCCA”) and the fourth quarter of 2017 (“Fourth Quarter 2017 DCCA”) to provide the Company with flexibility to pay down debt.debt and enhance our ability to execute lift-outs, make acquisitions, and seed new products. We have made substantial progress toward this objective, having reduced our debt since the November 2015 spin-offSpin-off of AC, resulting in Standard & Poor’s recent revision of its outlook to stable from negative andJuly 2018 reaffirmation of our debtinvestment grade rating of BBB-.BBB- and stable outlook.
Notwithstanding its ability to settle these agreements in stock, GAMCO currently intends to make cash payments to Mr. Gabelli on the respective vesting dates. While the agreements did not change Mr. Gabelli’s compensation, GAAP reporting for his compensation did change due to the ratable vesting.
The DCCAs defer the Chief Executive Officer’s compensation expense by amortizing it over each DCCA’s respective vesting period. The Chief Executive Officer is not entitled to receive the compensation until the end of the vesting period, so generally accepted accounting principles (“GAAP”) specifyGAAP specifies this treatment of the expense. The 2016 DCCA is expensed ratably over 4 years, the First Half 2017 DCCA is expensed ratably over 18 months, and the Fourth Quarter 2017 DCCA is expensed ratably over 18 months.
Because the GAAP reporting of the DCCAs granted to the CEO tracks vesting, compensation expense and management fee expense in the year of grant is lower than compensation expense and management fee expense in future periods to the extent that future periods contain the vesting of the prior year’s DCCA compensation on top of thein addition to normal non-deferred compensation for the current year period which has not been deferred.period. In 2016, the full amount of the compensation was deferred, and expense was recorded for the 25% vesting in that year. In the first six months of 2017, the ratable vesting continued for the 2016 compensation, and the new First Half 2017 DCCA grant resulted in compensation for the first six months of 2017 being deferred and expense being recorded for 33% vesting in that period. The CEO’s third quarter 2017 compensation was not deferred so 100% of the CEO’s compensation for that period was recorded together with the ratable portions of the vestings of the 2016 DCCA and the First Half 2017 DCCA. So there isThis results in a compounding effect in future periods when there are bothnon-deferred current period compensation that has not been deferred and prior period deferred compensation that is being ratably vested. On May 23, 2018, the CEO waived receipt of $6 million of the First Half 2017 DCCA, and a reduction in expense was recognized in 2018. On July 2, 2018, the First Half 2017 DCCA vested in accordance with the terms of the agreement and a cash payment in the amount of $28.3 million was made to the CEO.
Accordingly, this vesting schedule resulted in a $38.1$4.0 million increasedecrease in compensation expense in 20172018 versus 20162017 as well as a $7.8$7.1 million increasedecrease in management fee expense in 20172018 as compared to 2016.2017.
The following tables show the amortization and EPS impact of the DCCAs by quarter. The amortization amount of future periods assumes that the stock price of GBL of $16.89 is unchanged from December 31, 2018. For every $1.00 change in the GBL stock price, up to a GBL stock price of $32.8187, the 2016 DCCA would increase by $2,314,695, while the Fourth Quarter 2017 DCCA would increase by $530,662, up to a GBL stock price of $29.1875.
| | | 2017 | | | 2018 | | | 2019 | | | 2020 | | | | | | 2017 | | | 2018 | | | 2019 | | | 2020 | |
| | | (amounts in thousands) | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Q1 | | | $ | (8,126 | ) | | $ | 979 | | | $ | 3,937 | | | $ | - | | | | Q1 | | | $ | 0.16 | | | $ | (0.03 | ) | | $ | 0.10 | | | $ | - | |
| Q2 | | | | (7,389 | ) | | | 11,232 | | | | 2,443 | | | | - | | | | Q2 | | | | 0.15 | | | | (0.29 | ) | | | 0.06 | | | | - | |
| Q3 | | | | 9,805 | | | | 183 | | | | 2,443 | | | | - | | | | Q3 | | | | (0.20 | ) | | | - | | | | 0.06 | | | | - | |
| Q4 | | | | (1,857 | ) | | | (8,764 | ) | | | 2,443 | | | | - | | | | Q4 | | | | 0.04 | | | | (0.23 | ) | | | 0.06 | | | | - | |
Year | | | $ | (7,567 | ) | | $ | 3,630 | | | $ | 11,266 | | | $ | - | | | Year | | | $ | 0.15 | | | $ | (0.55 | ) | | $ | 0.28 | | | $ | - | |
The GAAP based balance sheets are also impacted; the compensation payable at December 31, 2017impacted as only includes the vested portion of the compensation subject to the DCCAs.DCCAs is included in compensation payable. At December 31, 2017,2018, the amount of unrecognized compensation was $59.0$11.3 million.
The following tables show a reconciliation of our results for 20172018 and 2016,2017, and our balance sheet at December 31, 20172018 between the GAAP basis and a non-GAAP adjusted basis as if all of the 2016 DCCA, the First Half 2017 DCCA, and the Fourth Quarter 2017 DCCA expense were recognized in 20162017 and 2017,2018, respectively, without regard to the vesting schedule. We believe the non-GAAP financial measures below provide relevant and meaningful information to investors about our core operating results. These measures have been established in order to increase transparency for the purpose of evaluating our core business, for comparing results with prior period results, and to enable comparisons with industry peers. However, non-GAAP financial measures should not be considered a substitute for financial measures calculated in accordance with U.S. GAAP and may be calculated differently by other companies. The following schedules reconcile U.S. GAAP financial measures to non-GAAP measures for the years ended December 31, 20172018 and 20162017 as well as at December 31, 2017.2018.
| | Full Year Ended December 31, 2017 | |
| | | | | Impact of | | | Impact of | | | | | | | |
| | Reported | | | Fourth Quarter | | | First Half | | | Impact of | | | | |
| | GAAP | | | 2017 DCCA | | | 2017 DCCA | | | 2016 DCCA | | | Non-GAAP | |
Revenues | | | | | | | | | | | | | | | |
Investment advisory and incentive fees | | $ | 316,705 | | | $ | - | | | $ | - | | | $ | - | | | $ | 316,705 | |
Distribution fees and other income | | | 43,819 | | | | - | | | | - | | | | - | | | | 43,819 | |
Total revenues | | | 360,524 | | | | - | | | | - | | | | - | | | | 360,524 | |
Expenses | | | | | | | | | | | | | | | | | | | | |
Compensation | | | 125,501 | | | | 10,318 | | | | 9,619 | | | | (12,322 | ) | | | 133,116 | |
Stock based compensation | | | 8,669 | | | | - | | | | - | | | | - | | | | 8,669 | |
Management fee | | | 13,666 | | | | 1,064 | | | | 1,775 | | | | (2,887 | ) | | | 13,618 | |
Distribution costs | | | 44,447 | | | | - | | | | - | | | | - | | | | 44,447 | |
Other operating expenses | | | 23,221 | | | | - | | | | - | | | | - | | | | 23,221 | |
Total expenses | | | 215,504 | | | | 11,382 | | | | 11,394 | | | | (15,209 | ) | | | 223,071 | |
| | | | | | | | | | | | | | | | | | | | |
Operating income | | | 145,020 | | | | (11,382 | ) | | | (11,394 | ) | | | 15,209 | | | | 137,453 | |
Other income (expense) | | | | | | | | | | | | | | | | | | | | |
Net gain from investments | | | (185 | ) | | | - | | | | - | | | | - | | | | (185 | ) |
Interest and dividend income | | | 2,350 | | | | - | | | | - | | | | - | | | | 2,350 | |
Interest expense | | | (10,160 | ) | | | - | | | | - | | | | - | | | | (10,160 | ) |
Charitable contibutions | | | (4,137 | ) | | | - | | | | - | | | | - | | | | (4,137 | ) |
Total other expense, net | | | (12,132 | ) | | | - | | | | - | | | | - | | | | (12,132 | ) |
Income before income taxes | | | 132,888 | | | | (11,382 | ) | | | (11,394 | ) | | | 15,209 | | | | 125,321 | |
Income tax provision | | | 55,079 | | | | (4,325 | ) | | | (4,442 | ) | | | 5,818 | | | | 52,130 | |
Net income attributable to GAMCO Investors, Inc.'s shareholders | | $ | 77,809 | | | $ | (7,057 | ) | | $ | (6,952 | ) | | $ | 9,391 | | | $ | 73,191 | |
| | | | | | | | | | | | | | | | | | | | |
Net income attributable to GAMCO Investors, Inc.'s shareholders per share: | | | | | | | | | | | | | | | | | |
Basic | | $ | 2.68 | | | $ | (0.24 | ) | | $ | (0.24 | ) | | $ | 0.32 | | | $ | 2.53 | |
Diluted | | $ | 2.60 | | | $ | (0.23 | ) | | $ | (0.22 | ) | | $ | 0.30 | | | $ | 2.45 | |
| | Full Year Ended December 31, 2016 | |
| | | | | | | | | |
| | Reported | | | Impact of | | | | |
| | GAAP | | | 2016 DCCA | | | Non-GAAP | |
Revenues | | | | | | | | | |
Investment advisory and incentive fees | | $ | 308,459 | | | $ | - | | | $ | 308,459 | |
Distribution fees and other income | | | 44,541 | | | | - | | | | 44,541 | |
Total revenues | | | 353,000 | | | | - | | | | 353,000 | |
Expenses | | | | | | | | | | | | |
Compensation | | | 82,613 | | | | 45,734 | | | | 128,347 | |
Stock based compensation | | | 3,959 | | | | - | | | | 3,959 | |
Management fee | | | 6,518 | | | | 7,782 | | | | 14,300 | |
Distribution costs | | | 44,189 | | | | - | | | | 44,189 | |
Other operating expenses | | | 23,925 | | | | - | | | | 23,925 | |
Total expenses | | | 161,204 | | | | 53,516 | | | | 214,720 | |
| | | | | | | | | | | | |
Operating income | | | 191,796 | | | | (53,516 | ) | | | 138,280 | |
Other income (expense) | | | - | | | | | | | | | |
Net gain from investments | | | 1,594 | | | | - | | | | 1,594 | |
Interest and dividend income | | | 1,511 | | | | - | | | | 1,511 | |
Interest expense | | | (12,674 | ) | | | - | | | | (12,674 | ) |
Total other expense, net | | | (9,569 | ) | | | - | | | | (9,569 | ) |
Income before income taxes | | | 182,227 | | | | (53,516 | ) | | | 128,711 | |
Income tax provision | | | 65,106 | | | | (20,069 | ) | | | 45,037 | |
Net income attributable to GAMCO Investors, Inc.'s shareholders | | $ | 117,121 | | | $ | (33,447 | ) | | $ | 83,674 | |
| | | | | | | | | | | | |
Net income attributable to GAMCO Investors, Inc.'s shareholders per share: | | | | | | | | | |
Basic | | $ | 4.01 | | | $ | (1.15 | ) | | $ | 2.87 | |
Diluted | | $ | 3.92 | | | $ | (1.11 | ) | | $ | 2.81 | |
| | Year Ended December 31, 2018 | |
| | | | | Impact of | | | Impact of | | | | | | | |
| | Reported | | | Fourth Quarter | | | First Half | | | Impact of | | | | |
| | GAAP | | | 2017 DCCA | | | 2017 DCCA | | | 2016 DCCA | | | Non-GAAP | |
Revenues | | | | | | | | | | | | | | | |
Investment advisory and incentive fees | | $ | 302,651 | | | $ | - | | | $ | - | | | $ | - | | | $ | 302,651 | |
Distribution fees and other income | | | 38,804 | | | | - | | | | - | | | | - | | | | 38,804 | |
Total revenues | | | 341,455 | | | | - | | | | - | | | | - | | | | 341,455 | |
Expenses | | | | | | | | | | | | | | | | | | | | |
Compensation | | | 83,768 | | | | (3,210 | ) | | | (2,335 | ) | | | 9,113 | | | | 87,336 | |
Management fee | | | 9,014 | | | | (1,676 | ) | | | (1,401 | ) | | | (4,120 | ) | | | 1,817 | |
Distribution costs | | | 39,194 | | | | - | | | | - | | | | - | | | | 39,194 | |
Other operating expenses | | | 22,692 | | | | - | | | | - | | | | - | | | | 22,692 | |
Total expenses | | | 154,668 | | | | (4,886 | ) | | | (3,736 | ) | | | 4,993 | | | | 151,039 | |
| | | | | | | | | | | | | | | | | | | | |
Operating income | | | 186,787 | | | | 4,886 | | | | 3,736 | | | | (4,993 | ) | | | 190,416 | |
Other income (expense) | | | | | | | | | | | | | | | | | | | | |
Net gain (loss) from investments | | | (25,173 | ) | | | - | | | | - | | | | - | | | | (25,173 | ) |
Interest and dividend income | | | 2,241 | | | | - | | | | - | | | | - | | | | 2,241 | |
Interest expense | | | (3,525 | ) | | | - | | | | - | | | | - | | | | (3,525 | ) |
Charitable contributions | | | (5,671 | ) | | | - | | | | - | | | | - | | | | (5,671 | ) |
Total other expense, net | | | (32,128 | ) | | | - | | | | - | | | | - | | | | (32,128 | ) |
Income before income taxes | | | 154,659 | | | | 4,886 | | | | 3,736 | | | | (4,993 | ) | | | 158,288 | |
Income tax provision | | | 37,463 | | | | 1,222 | | | | 934 | | | | (1,249 | ) | | | 38,370 | |
Net income attributable to GAMCO Investors, Inc.'s shareholders | | $ | 117,196 | | | $ | 3,664 | | | $ | 2,802 | | | $ | (3,744 | ) | | $ | 119,918 | |
| | | | | | | | | | | | | | | | | | | | |
Net income attributable to GAMCO Investors, Inc.'s shareholders | | | | | | | | | | | | | | | | | | | | |
per share: | | | | | | | | | | | | | | | | | | | | |
Basic | | $ | 4.08 | | | $ | 0.13 | | | $ | 0.10 | | | $ | (0.13 | ) | | $ | 4.17 | |
Diluted | | $ | 4.07 | | | $ | 0.13 | | | $ | 0.10 | | | $ | (0.13 | ) | | $ | 4.17 | |
| | Year Ended December 31, 2017 | |
| | | | | Impact of | | | Impact of | | | | | | | |
| | Reported | | | Fourth Quarter | | | First Half | | | Impact of | | | | |
| | GAAP | | | 2017 DCCA | | | 2017 DCCA | | | 2016 DCCA | | | Non-GAAP | |
Revenues | | | | | | | | | | | | | | | |
Investment advisory and incentive fees | | $ | 316,705 | | | $ | - | | | $ | - | | | $ | - | | | $ | 316,705 | |
Distribution fees and other income | | | 43,819 | | | | - | | | | - | | | | - | | | | 43,819 | |
Total revenues | | | 360,524 | | | | - | | | | - | | | | - | | | | 360,524 | |
Expenses | | | | | | | | | | | | | | | | | | | | |
Compensation | | | 134,170 | | | | 10,318 | | | | 9,619 | | | | (12,322 | ) | | | 141,785 | |
Management fee | | | 13,666 | | | | 1,064 | | | | 1,775 | | | | (2,887 | ) | | | 13,618 | |
Distribution costs | | | 44,447 | | | | - | | | | - | | | | - | | | | 44,447 | |
Other operating expenses | | | 23,221 | | | | - | | | | - | | | | - | | | | 23,221 | |
Total expenses | | | 215,504 | | | | 11,382 | | | | 11,394 | | | | (15,209 | ) | | | 223,071 | |
| | | | | | | | | | | | | | | | | | | | |
Operating income | | | 145,020 | | | | (11,382 | ) | | | (11,394 | ) | | | 15,209 | | | | 137,453 | |
Other income (expense) | | | | | | | | | | | | | | | | | | | | |
Net gain (loss) from investments | | | (185 | ) | | | - | | | | - | | | | - | | | | (185 | ) |
Interest and dividend income | | | 2,350 | | | | - | | | | - | | | | - | | | | 2,350 | |
Interest expense | | | (10,160 | ) | | | - | | | | - | | | | - | | | | (10,160 | ) |
Charitable contributions | | | (4,137 | ) | | | - | | | | - | | | | - | | | | (4,137 | ) |
Total other expense, net | | | (12,132 | ) | | | - | | | | - | | | | - | | | | (12,132 | ) |
Income before income taxes | | | 132,888 | | | | (11,382 | ) | | | (11,394 | ) | | | 15,209 | | | | 125,321 | |
Income tax provision | | | 55,079 | | | | (4,325 | ) | | | (4,442 | ) | | | 5,818 | | | | 52,130 | |
Net income attributable to GAMCO Investors, Inc.'s shareholders | | $ | 77,809 | | | $ | (7,057 | ) | | $ | (6,952 | ) | | $ | 9,391 | | | $ | 73,191 | |
| | | | | | | | | | | | | | | | | | | | |
Net income attributable to GAMCO Investors, Inc.'s shareholders
| | | | | | | | | | | | | | | | | | | | |
per share: | | | | | | | | | | | | | | | | | | | | |
Basic | | $ | 2.68 | | | $ | (0.24 | ) | | $ | (0.24 | ) | | $ | 0.32 | | | $ | 2.53 | |
Diluted | | $ | 2.60 | | | $ | (0.23 | ) | | $ | (0.22 | ) | | $ | 0.30 | | | $ | 2.45 | |
| | December 31, 2017 | | | December 31, 2018 | |
| | | | | Impact of | | | Impact of | | | | | | | | | | | | Impact of | | | | | | | |
| | Reported | | | Fourth Quarter | | | First Half | | | Impact of | | | | | | Reported | | | Fourth Quarter | | | Impact of | | | | |
| | GAAP | | | 2017 DCCA | | | 2017 DCCA | | | 2016 DCCA | | | Non-GAAP | | | GAAP | | | 2017 DCCA | | | 2016 DCCA | | | Non-GAAP | |
ASSETS | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 17,821 | | | $ | - | | | $ | - | | | $ | - | | | $ | 17,821 | | | $ | 41,202 | | | $ | - | | | $ | - | | | $ | 41,202 | |
Investments in securities | | | 36,790 | | | | - | | | | - | | | | - | | | | 36,790 | | | | 33,789 | | | | - | | | | - | | | | 33,789 | |
Receivable from brokers | | | 1,578 | | | | - | | | | - | | | | - | | | | 1,578 | | | | 3,423 | | | | - | | | | - | | | | 3,423 | |
Investment advisory fees receivable | | | 38,712 | | | | - | | | | - | | | | - | | | | 38,712 | | | | 25,677 | | | | - | | | | - | | | | 25,677 | |
Receivable from affiliates | | | 6,908 | | | | - | | | | - | | | | - | | | | 6,908 | | | | 4,194 | | | | - | | | | - | | | | 4,194 | |
Income tax receivable | | | 15,615 | | | | 2,917 | | | | 2,892 | | | | 8,064 | | | | 29,488 | | | | 15,001 | | | | 374 | | | | 2,444 | | | | 17,819 | |
Other assets | | | 10,862 | | | | - | | | | - | | | | - | | | | 10,862 | | | | 11,326 | | | | - | | | | - | | | | 11,326 | |
Total assets | | $ | 128,286 | | | $ | 2,917 | | | $ | 2,892 | | | $ | 8,064 | | | $ | 142,159 | | | $ | 134,612 | | | $ | 374 | | | $ | 2,444 | | | $ | 137,430 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
LIABILITIES AND EQUITY | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Payable to brokers | | | 14,926 | | | | - | | | | - | | | | - | | | | 14,926 | | | | 112 | | | | - | | | | - | | | | 112 | |
Income taxes payable and deferred tax liabilities | | | 3,128 | | | | - | | | | - | | | | - | | | | 3,128 | | | | 2,388 | | | | - | | | | - | | | | 2,388 | |
Capital lease obligation | | | 4,943 | | | | - | | | | - | | | | - | | | | 4,943 | | | | 4,794 | | | | - | | | | - | | | | 4,794 | |
Compensation payable | | | 82,907 | | | | 12,414 | | | | 12,307 | | | | 34,315 | | | | 141,943 | | | | 60,408 | | | | 1,494 | | | | 9,774 | | | | 71,676 | |
Payable to affiliates | | | 855 | | | | - | | | | - | | | | - | | | | 855 | | | | 1,041 | | | | - | | | | - | | | | 1,041 | |
Accrued expenses and other liabilities | | | 28,656 | | | | - | | | | - | | | | - | | | | 28,656 | | | | 32,091 | | | | - | | | | - | | | | 32,091 | |
Sub-total | | | 135,415 | | | | 12,414 | | | | 12,307 | | | | 34,315 | | | | 194,451 | | | | 100,834 | | | | 1,494 | | | | 9,774 | | | | 112,102 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
AC 4% PIK Note (due November 30, 2020) | | | 50,000 | | | | - | | | | - | | | | - | | | | 50,000 | | |
5.875% Senior notes (due June 1, 2021) | | | 24,144 | | | | - | | | | - | | | | - | | | | 24,144 | | | | 24,168 | | | | - | | | | - | | | | 24,168 | |
AC 1.6% Note Payable (due February 28, 2018) | | | 15,000 | | | | - | | | | - | | | | - | | | | 15,000 | | |
Total liabilities | | | 224,559 | | | | 12,414 | | | | 12,307 | | | | 34,315 | | | | 283,595 | | | | 125,002 | | | | 1,494 | | | | 9,774 | | | | 136,270 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Equity | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
GAMCO Investors, Inc. stockholders' equity | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Class A Common Stock | | | 14 | | | | - | | | | - | | | | - | | | | 14 | | | | 14 | | | | - | | | | - | | | | 14 | |
Class B Common Stock | | | 19 | | | | - | | | | - | | | | - | | | | 19 | | | | 19 | | | | - | | | | - | | | | 19 | |
Additional paid-in capital | | | 12,572 | | | | - | | | | - | | | | - | | | | 12,572 | | | | 14,192 | | | | - | | | | - | | | | 14,192 | |
Retained earnings (deficit) | | | 155,939 | | | | (9,497 | ) | | | (9,415 | ) | | | (26,251 | ) | | | 110,776 | | | | 282,928 | | | | (1,120 | ) | | | (7,330 | ) | | | 274,478 | |
Accumulated other comprehensive income | | | 11,876 | | | | - | | | | - | | | | - | | | | 11,876 | | | | (240 | ) | | | - | | | | - | | | | (240 | ) |
Treasury stock, at cost | | | (276,693 | ) | | | - | | | | - | | | | - | | | | (276,693 | ) | | | (287,303 | ) | | | - | | | | - | | | | (287,303 | ) |
Total GAMCO Investors, Inc. stockholders' equity (deficit) | | | (96,273 | ) | | | (9,497 | ) | | | (9,415 | ) | | | (26,251 | ) | | | (141,436 | ) | | | 9,610 | | | | (1,120 | ) | | | (7,330 | ) | | | 1,160 | |
Total liabilities and equity (deficit) | | $ | 128,286 | | | $ | 2,917 | | | $ | 2,892 | | | $ | 8,064 | | | $ | 142,159 | | | $ | 134,612 | | | $ | 374 | | | $ | 2,444 | | | $ | 137,430 | |
Liquidity and Capital Resources
Our principal assets are highly liquid in nature and consist of cash and cash equivalents, short-term investments and securities held for investment purposes. Cash and cash equivalents are comprised primarily of 100% U.S. Treasury money market funds managed by GAMCO. Although investments in partnerships and offshore funds are subject to restrictions as to the 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, | | | Year Ended December 31, | |
| | 2017 | | | 2016 | | | 2015 | | | 2018 | | | 2017 | | | 2016 | |
| | (in thousands) | | | (in thousands) | |
Cash flows provided by (used in) from continuing operations: | | | | | | |
Operating activities | | $ | 126,691 | | | $ | 115,737 | | | $ | 117,130 | | | $ | 117,882 | | | $ | 126,691 | | | $ | 115,737 | |
Investing activities | | | 237 | | | | (1,435 | ) | | | (6,198 | ) | | | (2,388 | ) | | | 237 | | | | (1,435 | ) |
Financing activities | | | (148,902 | ) | | | (88,247 | ) | | | (109,923 | ) | | | (92,029 | ) | | | (148,902 | ) | | | (88,247 | ) |
Increase (decrease) in cash and cash equivalents from continuing operations | | | (21,974 | ) | | | 26,055 | | | | 1,009 | | | | 23,465 | | | | (21,974 | ) | | | 26,055 | |
Cash flows from discontinued operations | | | | | | | | | | | | | |
Operating activities | | | - | | | | - | | | | 54,335 | | |
Investing activities | | | - | | | | - | | | | (41,463 | ) | |
Financing activities | | | - | | | | - | | | | (12,871 | ) | |
Increase in cash and cash equivalents from discontinued operations | | | - | | | | - | | | | 1 | | |
Effect of exchange rates on cash and cash equivalents | | | (17 | ) | | | 38 | | | | 15 | | | | (84 | ) | | | (17 | ) | | | 38 | |
Net increase (decrease) in cash and cash equivalents | | | (21,991 | ) | | | 26,093 | | | | 1,025 | | | | 23,381 | | | | (21,991 | ) | | | 26,093 | |
Cash and cash equivalents at beginning of year | | | 39,812 | | | | 13,719 | | | | 12,694 | | | | 17,821 | | | | 39,812 | | | | 13,719 | |
Cash and cash equivalents at end of year | | $ | 17,821 | | | $ | 39,812 | | | $ | 13,719 | | | $ | 41,202 | | | $ | 17,821 | | | $ | 39,812 | |
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 20152018 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 $500 million. The shelf is available through April 2018,2021, at which time it may be renewed.
At December 31, 2017,2018, we had cash and cash equivalents of $17.8$41.2 million, a decreasean increase of $22.0$23.4 million from the prior year-end primarily due to the Company’s financing activities described below. Total faceFace value third party debt outstanding at December 31, 20172018 was $89.1$24.1 million, consisting of $50 million of a 4% PIK Note due November 30, 2020, $15 million of a 1.6% note due February 28, 2018 and $24.1 million of 5.875% senior notes due 2021. It is anticipated that the majority of our cash flow will go towards servicing our debt and deferred compensation payable for the next few years.year.
Cash provided by operating activities was $117.9 million in 2018 and $126.7 million in 2017 and $115.7 million in 2016.2017. Our largest source of cash comes from net earnings as adjusted for non-cash expenses. In 2017,2018, this totaled $117.2 million versus $77.8 million versus $117.1 million in 2016.2017. Other sources of cash included an increasea decrease in compensation payableunrealized value for available for sale securities of $22.5$18.6 million, an increase of $5.7 million in payable to affiliates, a decrease in investment advisory fees receivable of $17.7$8.0 million, a decrease in deferred income taxes of $5.0 million, an increase of $4.0 million of accrued expenses and other liabilities, and an increase of $0.7 million in payable to affiliates. Cash uses included a decrease in compensation payable of $63.0 million, an increase in investments in trading securities of $13.6 million, a decrease in stock based compensation expense of $4.7$7.0 million, an increase in receivable from brokers of $0.7 million, and $5.9$0.2 million from other changes in net assets and liabilities. Cash uses included a decrease in income taxes payable of $3.5 million, a decrease in receivable from brokers of $1.8 million, and a decrease of $0.9 million of accrued expenses and other liabilities. In 2016, cash was provided by net income of $117.1 million.
Net cash used in investing activities of $2.4 million in 2018 is due to purchases of securities of $2.4 million. Net cash provided by investing activities of $0.2 million in 2017 is due to $4.1 million in proceeds from sales of available for sale securities less purchases of available for sale securities of $3.9 million. Net cash used in investing activities of $1.4 million in 2016 is due to purchases of available for sale securities of $1.8 million less $0.4 million in proceeds from sales of available for sale securities.
Net cash used in financing activities of $164.7$92.0 million in 2018 principally resulted from the $50 million in prepayments of our AC 4% PIK Note due November 30, 2020, $25.1 million in margin loan payments, $15 million in prepayments of our AC 1.6% Note due February 28, 2018, $10.6 million of repurchases of our Class A Stock under the Stock Repurchase Program, and $2.3 million in dividends paid offset partially by $11.0 million in margin loan borrowings. Net cash used in financing activities of $148.9 million in 2017 principally resulted from the $113.3 million repayment of the 4.5% Convertible note due August 15, 2021, the $50 million in prepayments of our AC 4% PIK Note due November 30, 2020, $14.3 million of repurchases of our Class A Stock under the Stock Repurchase Program, $5.0 million in margin loan payments, and $2.3 million in dividends paid offset slightly by margin loan borrowings of $20.9 million and the issuance of the $15 million 1.6% note due February 28, 2018. Net cash used in financing activities of $88.2 million in 2016 principally resulted from $150 million in repayments of our AC 4% PIK Note due November 30, 2020, $35 million repayment of the loan from GGCP, $10.8 million of repurchases of our Class A Stock under the Stock Repurchase Program, and $2.3 million in dividends paid offset by the issuance of the 4.5% Convertible Note due August 15, 2021 of $109.8 million.
Under the terms of the lease of our Rye, New York office, we are obligated to make minimum total payments of $11.9$11.0 million through December 2028. For our Greenwich, Connecticut office we are obligated to make payments of approximately $0.1 million through July 2019.
On November 25, 2015, Moody’s Investors Services downgraded the Company to Ba1 from Baa3. We continue to maintain an investment grade rating of BBB- with Standard and Poor’s Ratings Services. We believe that our ability to maintain our investment grade rating will provide greater access to the capital markets, enhance liquidity and lower overall borrowing costs.
G.distributors is registered with the SEC as a broker-dealer and is regulated by FINRA. As such, it is subject to the minimum net capital requirements promulgated by the SEC. G.distributors’ net capital exceeded these minimum requirements at December 31, 2017.2018. G.distributors computes its 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. At December 31, 20172018 and 2016,2017, G.distributors had net capital, as defined, of approximately $2.0$3.7 million and $2.8$2.0 million, respectively, exceeding the regulatory requirement by approximately $1.8$3.4 million and $2.6$1.8 million, respectively. Net capital requirements for our affiliated broker-dealer 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 FCA. In February 2011, GAMCO Asset Management (UK) Limited increased its permitted license with the FCA’s predecessor, the Financial Services Authority (“FSA”) and has held Total Capital of £671,000 and £632,000 ($852,000 and £580,000 ($853,000 and $713,000$853,000 at December 31, 20172018 and 2016,2017, respectively) and had a Financial Resources Requirement of £154,000 and £216,000 ($195,000 and £265,000 ($291,000 and $326,000$291,000 at December 31, 20172018 and 2016,2017, respectively). We have consistently met or exceeded these minimum requirements.
The Tax Cuts and Jobs Act (the “Act”) enacted in December 2017 contains provisions that affect the deductibility of named executive officer (“NEO”) compensation. Specifically, the Act eliminates the performance based compensation exception for NEO compensation deductibility. To the extent that some of the compensation of our NEOs is affected by this change, we would have a lower amount of deductible compensation in future years and a higher effective tax rate than we would have had without this potential loss of deductibility. We continue to evaluate the impact of the Act’s provisions, regarding NEO compensation and otherwise, and whether and if so, by how much, the Act’s provisions will impact us.
Market Risk
Our primary market risk exposure is to changes in equity prices and interest rates. Since approximately 95%94% of our AUM are equities, our financial results are subject to equity-market risk as revenues from our investment management services are sensitive to 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 monitors its 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 of $36.8$33.8 million and $37.3$36.8 million at December 31, 20172018 and 2016,2017, respectively, were investments in common stocks totaling $36.7$32.4 million and $37.2$36.7 million, respectively, and closed-end funds of $0.1$1.3 million and $0.1 million, respectively. Of the $36.7$32.4 million and $37.2$36.7 million, invested in common stocks at December 31, 2018 and 2017, and 2016, respectively, $36.6$18.8 million and $37.1$36.6 million, respectively, was related to our investment in Westwood Holdings Group Inc. (NYSE: WHG). 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, 20172018 and 2016,2017, there were no securities sold, not yet purchased.
The following table provides a sensitivity analysis for our investments in equity securities as of December 31, 2017.2018. 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 | |
| Fair Value | | equity prices | | equity prices | | Fair Value | | equity prices | | equity prices | |
At December 31, 2017 | | | | | | | | | | |
At December 31, 2018: | | | | | | | | | | |
Equity price sensitive investments, at fair value | | $ | 36,790 | | | $ | 33,111 | | | $ | 40,470 | | | $ | 33,789 | | | $ | 30,410 | | | $ | 37,168 | |
At December 31, 2016 | | | | | | | | | | | | | |
At December 31, 2017: | | | | | | | | | | | | | |
Equity price sensitive investments, at fair value | | $ | 37,285 | | | $ | 33,557 | | | $ | 41,014 | | | $ | 36,790 | | | $ | 33,111 | | | $ | 40,470 | |
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.
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, 2017,2018, cash and cash equivalent balance of $17.8$41.2 million a 1% increase in interest rates would increase our interest income by $0.2$4.1 million annually while a 1% decrease would reduce our interest income by $0.2$4.1 million annually.
Contractual Obligations
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, 20172018 (in thousands):
| | Total | | | 2018 | | | 2019 | | | 2020 | | | 2021 | | | 2022 | | | Thereafter | |
Contractual Obligations: | | | | | | | | | | | | | | | | | | | | | |
5.875% Senior notes | | $ | 24,225 | | | $ | - | | | $ | - | | | $ | - | | | $ | 24,225 | | | $ | - | | | $ | - | |
Interest on 5.875% Senior notes | | | 4,862 | | | | 1,423 | | | | 1,423 | | | | 1,423 | | | | 593 | | | | - | | | | - | |
AC 4% PIK Note | | | 50,000 | | | | - | | | | - | | | | 50,000 | | | | - | | | | - | | | | - | |
Interest on AC 4% PIK Note | | | 5,833 | | | | 2,000 | | | | 2,000 | | | | 1,833 | | | | - | | | | - | | | | - | |
AC 1.6% Note | | | 15,000 | | | | 15,000 | | | | - | | | | - | | | | - | | | | - | | | | - | |
Interest on 1.6% Note | | | 44 | | | | 44 | | | | - | | | | - | | | | - | | | | - | | | | - | |
Capital lease obligations | | | 12,030 | | | | 1,230 | | | | 1,080 | | | | 1,080 | | | | 1,080 | | | | 1,080 | | | | 6,480 | |
Non-cancelable operating lease obligations | | | 1,385 | | | | 808 | | | | 479 | | | | 47 | | | | 47 | | | | 4 | | | | - | |
Total | | $ | 113,379 | | | $ | 20,505 | | | $ | 4,982 | | | $ | 54,383 | | | $ | 25,945 | | | $ | 1,084 | | | $ | 6,480 | |
The AC 4% PIK Note interest may be paid in kind with additional notes on the same terms as the original note at the Company’s option. See Note F Debt for additional details.
| | Total | | | 2019 | | | 2020 | | | 2021 | | | 2022 | | | 2023 | | | Thereafter | |
Contractual Obligations: | | | | | | | | | | | | | | | | | | | | | |
5.875% Senior notes | | $ | 24,225 | | | $ | - | | | $ | - | | | $ | 24,225 | | | $ | - | | | $ | - | | | $ | - | |
Interest on 5.875% Senior notes | | | 3,439 | | | | 1,423 | | | | 1,423 | | | | 593 | | | | - | | | | - | | | | - | |
Capital lease obligations | | | 10,973 | | | | 1,253 | | | | 1,080 | | | | 1,080 | | | | 1,080 | | | | 1,080 | | | | 5,400 | |
Non-cancelable operating lease obligations | | | 809 | | | | 616 | | | | 121 | | | | 68 | | | | 4 | | | | - | | | | - | |
Total | | $ | 39,446 | | | $ | 3,292 | | | $ | 2,624 | | | $ | 25,966 | | | $ | 1,084 | | | $ | 1,080 | | | $ | 5,400 | |
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 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, 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 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. The Company derived approximately 88%89%, 87%88% and 87% of its total revenues from advisory and management fees, including incentive fees, for the periods ended December 31, 2018, 2017 2016 and 2015,2016, 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 managementadvisory fee rates than fixed income portfolios.
The Company earns 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 no incentive fees receivable as of December 31, 2018 or 2017. There were $2.4 million in incentive fees receivable as of December 31, 2016.
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 ICE Bank of America Merrill Lynch 3 Month U.S. Treasury 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 $1.4 million and $4.2 million as of December 31, 2017 and 2016, respectively.2017. There were no incentive fees receivable at December 31, 2018.
For the Gabelli Merger Plus+ Trust PLC,Plc, there is an incentive fee which is earned and recognized at the end of the measurement period, June 30th and varies to the extent the total return of the fund is in excess of twice the rate of return of the 13 week Treasury Bills over the performance period. There was no performance fee receivable as of December 31, 2018 or 2017.
ManagementAdvisory fees on 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, which is annually. Receivables due for managementadvisory fees on closed-end preferred shares are included in investment advisory fees receivable on the consolidated statements of financial condition. There were $7.1 million and $7.3 million in managementadvisory fees receivable on closed-end preferred shares as of December 31, 2017,2017. There were no advisory fees receivable on closed-end preferred shares at December 31, 2018.
For the GAMCO Merger Arbitrage SICAV, there is an incentive fee earned as of the end of the calendar year equal to twenty percent of the gross return of the fund. This fee is recognized as the end of the measurement period, which is annually on a calendar year basis, or earlier if there is a redemption. Receivables due on incentive fees relating to the GAMCO Merger Arbitrage SICAV are included in investment advisory fees receivable on the consolidated statements of financial condition and 2016,were $1.3 million and $0.5 million as of December 31, 2018 and 2017, respectively.
Distribution fees revenues are derived primarily from the distribution of Gabelli, GAMCO, Comstock, TetonTETON and Teton-Keeley open-end funds (“Funds”) advised by a subsidiary of GBL, Funds Advisor and a subsidiary of GGCP, Teton. G.distributors distributes these 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 receives fees for such services pursuant to distribution plans adopted under provisions of Rule 12b-1 of the Company Act. G.distributors is the principal underwriter for funds distributed in multiple classes of shares which carry front-end or back-end sales charge or no-load to certain investors.
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), the Class A shares and the Class T shares of certain Funds pay G.distributors a distribution or service fee of .25% per year (except the Class A shares of the TETON Westwood Funds which pay .50% per year, except for the TETON 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 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
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.purchase. 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 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, and effective January 1, 2018, with the adoption of Accounting Standards Update (“ASU”) 2016-01, available for sale (“AFS”) investments, 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. Prior to January 1, 2018, AFS investments arewere stated at fair value, with any unrealized gains or losses, net of taxes, reported as a component of other comprehensive income except for losses deemed to be other than temporary which arewere 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.
Prior to January 1, 2018, AFS securities arewere evaluated for other than temporary impairmentimpairments each reporting period and any impairment charges arewere recorded in net gain/(loss) from investments on the consolidated statements of income. Management reviewsreviewed all available for sale securities whose cost exceeds their fair value to determine if the impairment iswas other than temporary. Management usesused qualitative factors such as diversification of the investment, the intent to hold the investment, the amount of time that the investment hashad been impaired and the severity of the decline in determining whether the impairment iswas 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.
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. As a result of the enactment of the Tax Cuts and Jobs Act in December 2017, the Company recorded an increase in expense of $8.2 million reflecting the net write-down to its deferred tax assets and deferred tax liabilities. In accordance with SEC SAB 118, this revaluation could have been provisional but the Company had the requisite information to complete the evaluation and finalize the December 22, 2017 adjustment. 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 to staff members and stock options to staff members of the board of directors 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. staff and board members.
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 either (1) 30% over three years from the date of grant and 70% over five years from the date of grant or (2) 30% over three years from the date of grant and 10% each year over years four through ten 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.
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.
In connection with the spin-offSpin-off of AC, the unvested RSA expense relating to the existing GBL RSAs at November 30, 2015 was split between GBL and AC based on the allocation of time of the underlying employees who held the RSAs.
The Company has entered into three deferred compensation agreements with Mr. Gabelli whereby his variable compensation for 2016, the first half of 2017 and the fourth quarter of 2017 was in the form of Restricted Stock Units (“RSUs”) determined by the volume-weighted average price (“VWAP”) of the Company’s Class A Stock during those respective periods. The 2016 DCCA will vest 100% on January 1, 2020, the First Half 2017 DCCA will vestvested 100% on July 1, 2018, and the Fourth Quarter 2017 DCCA will vest 100% on April 1, 2019. The Company settled the First Half 2017 DCCA award in cash and intends to settle the unvested awards in cash at vesting;their vesting. The Company, however, the Company reserves the right to issue shares of the Company’s Class A Stock in lieu of such cash payment. Under the terms of the agreement the Company will pay Mr. Gabelli an amount equal to the number of RSUs valued at the lesser of the VWAP of the Company’s Class A Stock for the applicable period or the value on the lapse date or, if not a trading day, then the first trading date thereafter.
Under GAAP, for the 2016 DCCA only 25% of this deferred compensation expense is being recognized in 2016 with the remainder amortized ratably over 2017, 2018, and 2019. Similarly, under GAAP, for the First Half 2017 DCCA 67% of the expense is recognized in 2017 with the remaining 33% expensed in 2018. For the Fourth Quarter 2017 DCCA 17% of the expense is recognized in 2017, 66% in 2018 and the remaining 17% in 2019. Notwithstanding its ability to settle the award in stock, given the Company’s intent to settle it in cash, in accordance with GAAP (ASC 718), the awards are accounted for as liability-classified awards and not as equity-classified awards. The liability is remeasured at fair value on each reporting period from December 31, 2016 until the vesting date. However, given the cap on the obligation in that Mr. Gabelli will not receive cash in excess of the VWAP of the Company’s Class A Stock for each respective period, the remeasurement of the liability at fair value will never exceed its value determined using each period’s respective VWAP price.
Recent Accounting Developments
See Footnote A. Significant Accounting Policies – Recent Accounting Developments.
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.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Reference is made to the information contained under the heading “Management's Discussion and Analysis of Financial Condition and Results of Operations -- Market Risk.”
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
GAMCO INVESTORS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| Page |
| |
| |
Report of Independent Registered Public Accounting Firm | 4647 |
Report of Independent Registered Public Accounting Firm on Effectiveness of Internal Control over Financial Reporting | 4748 |
| |
Consolidated Financial Statements: | |
Consolidated Statements of Income for the years ended December 31, 2018, 2017 2016 and 20152016 | 4849 |
Consolidated Statements of Comprehensive Income for the years ended December 31, 2018, 2017 2016 and 20152016 | 4950
|
Consolidated Statements of Financial Condition at December 31, 20172018 and 20162017 | 5051 |
Consolidated Statements of Equity for the years ended December 31, 2018, 2017 2016 and 20152016 | 5152 |
Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 2016 and 20152016 | 5455 |
Notes to Consolidated Financial Statements | 5657 |
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 Stockholders and the Board of Directors and Stockholders of
GAMCO Investors, Inc.
Rye, New YorkGreenwich, Connecticut
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of financial condition of GAMCO Investors, Inc. and subsidiaries (the "Company") as of December 31, 20172018 and 2016,2017, the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2017,2018, and the related notes and the schedule listed in the Index as Exhibit 99.1 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20172018 and 2016,2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017,2018, 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) (PCAOB), the Company's internal control over financial reporting as of December 31, 2017,2018, based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 8, 2018,11, 2019, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Deloitte & Touche LLP
New York, New York
March 8, 201811, 2019
We have served as the Company’s auditor since 2009.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors and Stockholders of
GAMCO Investors, Inc.
Rye, New YorkGreenwich, Connecticut
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of GAMCO Investors, Inc. and subsidiaries (the "Company") as of December 31, 2017,2018, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2018, based on criteria established in Internal Control – Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 20172018 of the Company and our report dated March 8, 2018,11, 2019, expressed an unqualified opinion on those financial statements.
Basis for Opinion
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 are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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.
Definition and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed 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 its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
New York, New York
March 8, 201811, 2019
GAMCO INVESTORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
| | Year Ended December 31, | | | Year Ended December 31, | |
| | 2017 | | | 2016 | | | 2015 | | | 2018 | | | 2017 | | | 2016 | |
Revenues | | | | | | | | | | | | | | | | | | |
Investment advisory and incentive fees | | $ | 316,705 | | | $ | 308,459 | | | $ | 329,965 | | | $ | 302,651 | | | $ | 316,705 | | | $ | 308,459 | |
Distribution fees and other income | | | 43,819 | | | | 44,541 | | | | 51,011 | | | | 38,804 | | | | 43,819 | | | | 44,541 | |
Total revenues | | | 360,524 | | | | 353,000 | | | | 380,976 | | | | 341,455 | | | | 360,524 | | | | 353,000 | |
Expenses | | | | | | | | | | | | | | | | | | | | | | | | |
Compensation | | | 125,501 | | | | 82,613 | | | | 136,503 | | | | 83,768 | | | | 134,170 | | | | 86,572 | |
Stock based compensation | | | 8,669 | | | | 3,959 | | | | 9,868 | | |
Management fee | | | 13,666 | | | | 6,518 | | | | 15,503 | | | | 9,014 | | | | 13,666 | | | | 6,518 | |
Distribution costs | | | 44,447 | | | | 44,189 | | | | 51,990 | | | | 39,194 | | | | 44,447 | | | | 44,189 | |
Other operating expenses | | | 23,221 | | | | 23,925 | | | | 19,163 | | | | 22,692 | | | | 23,221 | | | | 23,925 | |
Total expenses | | | 215,504 | | | | 161,204 | | | | 233,027 | | | | 154,668 | | | | 215,504 | | | | 161,204 | |
Operating income | | | 145,020 | | | | 191,796 | | | | 147,949 | | | | 186,787 | | | | 145,020 | | | | 191,796 | |
Other income (expense) | | | | | | | | | | | | | | | | | | | | | | | | |
Net gain from investments | | | 3,115 | | | | 1,594 | | | | 4,953 | | |
Net gain/(loss) from investments | | | | (25,173 | ) | | | 3,115 | | | | 1,594 | |
Extinguishment of debt | | | (3,300 | ) | | | 0 | | | | (1,067 | ) | | | - | | | | (3,300 | ) | | | - | |
Interest and dividend income | | | 2,350 | | | | 1,511 | | | | 2,222 | | | | 2,241 | | | | 2,350 | | | | 1,511 | |
Interest expense | | | (10,160 | ) | | | (12,674 | ) | | | (8,636 | ) | | | (3,525 | ) | | | (10,160 | ) | | | (12,674 | ) |
Charitable contributions | | | (4,137 | ) | | | - | | | | (6,396 | ) | | | (5,671 | ) | | | (4,137 | ) | | | - | |
Total other income (expense), net | | | (12,132 | ) | | | (9,569 | ) | | | (8,924 | ) | | | (32,128 | ) | | | (12,132 | ) | | | (9,569 | ) |
Income before income taxes | | | 132,888 | | | | 182,227 | | | | 139,025 | | | | 154,659 | | | | 132,888 | | | | 182,227 | |
Income tax provision | | | 55,079 | | | | 65,106 | | | | 51,726 | | | | 37,463 | | | | 55,079 | | | | 65,106 | |
Income from continuing operations | | | 77,809 | | | | 117,121 | | | | 87,299 | | |
Loss from discontinued operations, net of taxes | | | - | | | | 0 | | | | (3,887 | ) | |
Net income attributable to GAMCO Investors, Inc.'s shareholders | | $ | 77,809 | | | $ | 117,121 | | | $ | 83,412 | | | $ | 117,196 | | | $ | 77,809 | | | $ | 117,121 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net income per share attributable to GAMCO Investors, Inc.'s shareholders: | | | | | | | | | | | | | |
Basic - Continuing operations | | $ | 2.68 | | | $ | 4.01 | | | $ | 3.43 | | |
Basic - Discontinued operations | | | - | | | | - | | | | (0.15 | ) | |
Basic - Total | | $ | 2.68 | | | $ | 4.01 | | | $ | 3.28 | | |
| | | | | | | | | | | | | |
Diluted - Continuing operations | | $ | 2.60 | | | $ | 3.92 | | | $ | 3.40 | | |
Diluted - Discontinued operations | | | - | | | | - | | | | (0.15 | ) | |
Diluted - Total | | $ | 2.60 | | | $ | 3.92 | | | $ | 3.24 | | |
Net income per share attributable to GAMCO Investors, Inc.'s | | | | | | | | | | | | | |
shareholders: | | | | | | | | | | | | | |
Basic | | | $ | 4.08 | | | $ | 2.68 | | | $ | 4.01 | |
Diluted | | | $ | 4.07 | | | $ | 2.60 | | | $ | 3.92 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Weighted average shares outstanding: | | | | | | | | | | | | | | | | | | | | | | | | |
Basic | | | 28,980 | | | | 29,182 | | | | 25,425 | | | | 28,744 | | | | 28,980 | | | | 29,182 | |
Diluted | | | 30,947 | | | | 30,170 | | | | 25,711 | | | | 28,777 | | | | 30,947 | | | | 30,170 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Actual shares outstanding | | | 28,974 | | | | 29,463 | | | | 29,821 | | | | 28,982 | | | | 28,974 | | | | 29,463 | |
See accompanying notes.
GAMCO INVESTORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands, except per share data)
| | Year Ended December 31, | | | Year Ended December 31, | |
| | 2017 | | | 2016 | | | 2015 | | | 2018 | | | 2017 | | | 2016 | |
| | | | | | | | | | | | | | | | | | |
Net income attributable to GAMCO Investors, Inc.'s shareholders | | $ | 77,809 | | | $ | 117,121 | | | $ | 83,412 | | | $ | 117,196 | | | $ | 77,809 | | | $ | 117,121 | |
Other comprehensive income/(loss), net of tax: | | | | | | | | | | | | | | | | | | | | | | | | |
Foreign currency translation | | | 82 | | | | (164 | ) | | | (46 | ) | | | (6 | ) | | | 82 | | | | (164 | ) |
Net unrealized gains/(losses) on securities available for sale (a) | | | 523 | | | | 2,320 | | | | (8,300 | ) | |
Net unrealized gains on securities available for sale (a) | | | | - | | | | 523 | | | | 2,320 | |
Other comprehensive income/(loss) | | | 605 | | | | 2,156 | | | | (8,346 | ) | | | (6 | ) | | | 605 | | | | 2,156 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Comprehensive income attributable to GAMCO Investors, Inc. | | $ | 78,414 | | | $ | 119,277 | | | $ | 75,066 | | |
Comprehensive income attributable to GAMCO Investors, Inc. shareholders | | | $ | 117,190 | | | $ | 78,414 | | | $ | 119,277 | |
(a) Net of income tax expense (benefit) of $0, $290 and $1,363 for 2018, 2017 and ($4,875) for 2017, 2016, and 2015, respectively.
Effective January 1, 2018, upon the adoption of ASU 2016-01, the Company no longer recognizes unrealized gains or losses on equity securities through other comprehesive income/(loss). See Note C.
See accompanying notes.
GAMCO INVESTORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands)
| | December 31, | | | December 31, | | | December 31, | | | December 31, | |
| | 2017 | | | 2016 | | | 2018 | | | 2017 | |
ASSETS | | | | | | | | | | | | |
| | | | | | | | | | | | |
Cash and cash equivalents | | $ | 17,821 | | | $ | 39,812 | | | $ | 41,202 | | | $ | 17,821 | |
Investments in securities | | | 36,790 | | | | 37,285 | | | | 33,789 | | | | 36,790 | |
Receivable from brokers | | | 1,578 | | | | 453 | | | | 3,423 | | | | 1,578 | |
Investment advisory fees receivable | | | 38,712 | | | | 43,736 | | | | 25,677 | | | | 38,712 | |
Receivable from affiliates | | | 5,635 | | | | 5,960 | | | | 4,194 | | | | 5,635 | |
Capital lease | | | 2,304 | | | | 2,514 | | | | 2,095 | | | | 2,304 | |
Goodwill and identifiable intangible assets | | | 3,765 | | | | 3,765 | | | | 3,765 | | | | 3,765 | |
Income tax receivable and deferred tax assets, net | | | 15,615 | | | | 9,349 | | |
Income taxes receivable and deferred tax assets, net | | | | 15,001 | | | | 15,615 | |
Other assets | | | 6,066 | | | | 6,355 | | | | 5,466 | | | | 6,066 | |
Total assets | | $ | 128,286 | | | $ | 149,229 | | | $ | 134,612 | | | $ | 128,286 | |
| | | | | | | | | | | | | | | | |
LIABILITIES AND EQUITY | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Payable to brokers | | $ | 14,926 | | | $ | 66 | | | $ | 112 | | | $ | 14,926 | |
Income taxes payable | | | 3,128 | | | | 3,815 | | | | 2,388 | | | | 3,128 | |
Capital lease obligation | | | 4,943 | | | | 5,066 | | | | 4,794 | | | | 4,943 | |
Compensation payable | | | 82,907 | | | | 42,384 | | | | 60,408 | | | | 82,907 | |
Payable to affiliates | | | 855 | | | | 1,412 | | | | 1,041 | | | | 855 | |
Accrued expenses and other liabilities | | | 28,656 | | | | 29,178 | | | | 32,091 | | | | 28,656 | |
Sub-total | | | 135,415 | | | | 81,921 | | | | 100,834 | | | | 135,415 | |
| | | | | | | | | | | | | | | | |
AC 4% PIK Note (due November 30, 2020) (Note F) | | | 50,000 | | | | 100,000 | | |
4.5% Convertible note (due August 15, 2021) (Note F) | | | - | | | | 109,835 | | |
5.875% Senior notes (due June 1, 2021) (Note F) | | | 24,144 | | | | 24,120 | | |
AC 1.6% Note (due February 28, 2018) (Note F) | | | 15,000 | | | | - | | |
AC 4% PIK Note (due November 30, 2020) (Note G) | | | | - | | | | 50,000 | |
5.875% Senior notes (net of issuance costs of $57 and $81, respectively) (due June 1, 2021) (Note G) | | | | 24,168 | | | | 24,144 | |
AC 1.6% Note Payable (due February 28, 2018) (Note G) | | | | - | | | | 15,000 | |
Total liabilities | | | 224,559 | | | | 315,876 | | | | 125,002 | | | | 224,559 | |
| | | | | | | | | | | | | | | | |
Commitments and contingencies (Note I) | | | | | | | | | |
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; 15,541,489 and 15,477,082 | | | | | | | | | |
shares issued, respectively; 9,949,482 and 10,369,601 shares outstanding, respectively | | | 14 | | | | 14 | | |
Class A Common Stock, $0.001 par value; 100,000,000 shares authorized; 15,969,303 and 15,541,489 | | | | | | | | | |
shares issued, respectively; 9,957,301 and 9,949,482 shares outstanding, respectively | | | | 14 | | | | 14 | |
Class B Common Stock, $0.001 par value; 100,000,000 shares authorized; 24,000,000 shares issued | | | | | | | | | | | | | | | | |
and 19,024,404 and 19,093,311 shares outstanding, respectively | | | 19 | | | | 19 | | |
and 19,024,240 and 19,024,404 shares outstanding, respectively | | | | 19 | | | | 19 | |
Additional paid-in capital | | | 12,572 | | | | 3,903 | | | | 14,192 | | | | 12,572 | |
Retained earnings | | | 155,939 | | | | 80,515 | | | | 282,928 | | | | 155,939 | |
Accumulated comprehensive income | | | 11,876 | | | | 11,271 | | | | (240 | ) | | | 11,876 | |
Treasury stock, at cost (5,592,007 and 5,107,481 shares, respectively) | | | (276,693 | ) | | | (262,369 | ) | |
Total deficit | | | (96,273 | ) | | | (166,647 | ) | |
Treasury stock, at cost (6,012,002 and 5,592,007 shares, respectively) | | | | (287,303 | ) | | | (276,693 | ) |
Total equity/(deficit) | | | | 9,610 | | | | (96,273 | ) |
Total liabilities and equity | | $ | 128,286 | | | $ | 149,229 | | | $ | 134,612 | | | $ | 128,286 | |
See accompanying notes.
GAMCO INVESTORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(In thousands)
| | | | | GAMCO Investors, Inc. shareholders | | | | |
| | | | | | | | Additional | | | Retained | | | Accumulated | | | | | | | | | Redeemable | |
| | Noncontrolling | | | Common | | | Paid-in | | | Earnings | | | Comprehensive | | | Treasury | | | | | | Noncontrolling | |
| | Interests | | | Stock | | | Capital | | | (Deficit) | | | Income | | | Stock | | | Total | | | Interests | |
Balance at December 31, 2014 | | $ | 2,734 | | | $ | 33 | | | $ | 291,681 | | | $ | 602,950 | | | $ | 25,014 | | | $ | (394,617 | ) | | $ | 527,795 | | | $ | 68,334 | |
Net income | | | - | | | | - | | | | - | | | | 83,412 | | | | - | | | | - | | | | 83,412 | | | | - | |
Net unrealized losses on | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
securities available for sale, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
net of income tax benefit $(3,213) | | | - | | | | - | | | | - | | | | - | | | | (5,471 | ) | | | - | | | | (5,471 | ) | | | - | |
Amounts reclassified from | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
accumulated other | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
comprehensive income, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
net of income tax benefit $(1,662) | | | - | | | | - | | | | - | | | | - | | | | (2,829 | ) | | | - | | | | (2,829 | ) | | | - | |
Foreign currency translation | | | - | | | | - | | | | - | | | | - | | | | (46 | ) | | | - | | | | (46 | ) | | | - | |
Dividends declared ($0.28 per | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
share) | | | - | | | | - | | | | - | | | | (7,477 | ) | | | - | | | | - | | | | (7,477 | ) | | | - | |
Stock based compensation | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
expense | | | - | | | | - | | | | 9,868 | | | | - | | | | - | | | | - | | | | 9,868 | | | | - | |
Reduction of deferred tax asset | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
for excess of recorded RSA tax | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
benefit over actual tax benefit | | | - | | | | - | | | | (1,190 | ) | | | - | | | | - | | | | - | | | | (1,190 | ) | | | - | |
Exercise of stock options | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
including tax benefit $(102) | | | - | | | | - | | | | 1,269 | | | | - | | | | - | | | | - | | | | 1,269 | | | | - | |
Purchase of treasury stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | (27,249 | ) | | | (27,249 | ) | | | - | |
Issuance of 4.4 million treasury | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
shares to GCIA | | | - | | | | - | | | | (20,270 | ) | | | - | | | | - | | | | 170,270 | | | | 150,000 | | | | - | |
Spin-off of AC | | | (2,734 | ) | | | - | | | | (281,013 | ) | | | (713,109 | ) | | | (7,553 | ) | | | - | | | | (1,004,409 | ) | | | (68,334 | ) |
Balance at December 31, 2015 | | $ | - | | | $ | 33 | | | $ | 345 | | | $ | (34,224 | ) | | $ | 9,115 | | | $ | (251,596 | ) | | $ | (276,327 | ) | | $ | - | |
See accompanying notes.
GAMCO INVESTORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(continued) (In thousands)
| | | GAMCO Investors, Inc. shareholders | | | | | GAMCO Investors, Inc. shareholders | |
| | | | | | Additional | | | Retained | | | Accumulated | | | | | | | | | | | | | | Additional | | | Retained | | | Accumulated | | | | | | | |
| | | Common | | | Paid-in | | | Earnings | | | Comprehensive | | | Treasury | | | | | | | | Common | | | Paid-in | | | Earnings | | | Comprehensive | | | Treasury | | | | |
| | | Stock | | | Capital | | | (Deficit) | | | Income | | | Stock | | | Total | | | | | Stock | | | Capital | | | (Deficit) | | | Income | | | Stock | | | Total | |
Balance at December 31, 2015 | | | $ | 33 | | | $ | 345 | | | $ | (34,224 | ) | | $ | 9,115 | | | $ | (251,596 | ) | | $ | (276,327 | ) | | | | $ | 33 | | | $ | 345 | | | $ | (34,224 | ) | | $ | 9,115 | | | $ | (251,596 | ) | | $ | (276,327 | ) |
Net income | | | | - | | | | - | | | | 117,121 | | | | - | | | | - | | | | 117,121 | | | | | | - | | | | - | | | | 117,121 | | | | - | | | | - | | | | 117,121 | |
Net unrealized gains on | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
securities available for sale, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
net of income tax expense ($1,857) | | | | - | | | | - | | | | - | | | | 3,111 | | | | - | | | | 3,111 | | | | | | - | | | | - | | | | - | | | | 3,111 | | | | - | | | | 3,111 | |
Amounts reclassified from | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
accumulated other | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
comprehensive income, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
net of income tax benefit ($464) | | | | - | | | | - | | | | - | | | | (791 | ) | | | - | | | | (791 | ) | | | | | - | | | | - | | | | - | | | | (791 | ) | | | - | | | | (791 | ) |
Foreign currency translation | | | | - | | | | - | | | | - | | | | (164 | ) | | | - | | | | (164 | ) | | | | | - | | | | - | | | | - | | | | (164 | ) | | | - | | | | (164 | ) |
Dividends declared ($0.08 per | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
share) | | | | - | | | | - | | | | (2,382 | ) | | | - | | | | - | | | | (2,382 | ) | | | | | - | | | | - | | | | (2,382 | ) | | | - | | | | - | | | | (2,382 | ) |
Stock based compensation | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
expense | | | | - | | | | 3,959 | | | | - | | | | - | | | | - | | | | 3,959 | | | | | | - | | | | 3,959 | | | | - | | | | - | | | | - | | | | 3,959 | |
Reduction of deferred tax asset | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
for excess of recorded RSA tax | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
benefit over actual tax benefit | | | | - | | | | (401 | ) | | | - | | | | - | | | | - | | | | (401 | ) | | | |
Reduction of deferred tax asset for excess of
| | | | | | | | | | | | | | | | | | | | | | | | | |
recorded RSA tax benefit over actual tax
| | | | | | | | | | | | | | | | | | | | | | | | | |
benefit | | | | - | | | | (401 | ) | | | - | | | | - | | | | - | | | | (401 | ) |
Purchase of treasury stock | | | | - | | | | - | | | | - | | | | - | | | | (10,773 | ) | | | (10,773 | ) | | | | | - | | | | - | | | | - | | | | - | | | | (10,773 | ) | | | (10,773 | ) |
Balance at December 31, 2016 | | | $ | 33 | | | $ | 3,903 | | | $ | 80,515 | | | $ | 11,271 | | | $ | (262,369 | ) | | $ | (166,647 | ) | | | | $ | 33 | | | $ | 3,903 | | | $ | 80,515 | | | $ | 11,271 | | | $ | (262,369 | ) | | $ | (166,647 | ) |
See accompanying notes.
GAMCO INVESTORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(continued) (In thousands)
| | GAMCO Investors, Inc. shareholders | | | GAMCO Investors, Inc. shareholders | |
| | | | | Additional | | | | | | Accumulated | | | | | | | | | | | | Additional | | | Retained | | | Accumulated | | | | | | | |
| | Common | | | Paid-in | | | Retained | | | Comprehensive | | | Treasury | | | | | | Common | | | Paid-in | | | Earnings | | | Comprehensive | | | Treasury | | | | |
| | Stock | | | Capital | | | Earnings | | | Income | | | Stock | | | Total | | | Stock | | | Capital | | | (Deficit) | | | Income | | | Stock | | | Total | |
Balance at December 31, 2016 | | $ | 33 | | | $ | 3,903 | | | $ | 80,515 | | | $ | 11,271 | | | $ | (262,369 | ) | | $ | (166,647 | ) | | $ | 33 | | | $ | 3,903 | | | $ | 80,515 | | | $ | 11,271 | | | $ | (262,369 | ) | | $ | (166,647 | ) |
Net income | | | - | | | | - | | | | 77,809 | | | | - | | | | - | | | | 77,809 | | | | - | | | | - | | | | 77,809 | | | | - | | | | - | | | | 77,809 | |
Net unrealized gains on | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
securities available for sale, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
net of income tax expense ($1,446) | | | - | | | | - | | | | - | | | | 2,492 | | | | - | | | | 2,492 | | | | - | | | | - | | | | - | | | | 2,492 | | | | - | | | | 2,492 | |
Amounts reclassified from | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
accumulated other | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
comprehensive income, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
net of income tax benefit $(1,156) | | | - | | | | - | | | | - | | | | (1,969 | ) | | | - | | | | (1,969 | ) | |
net of income tax benefit ($1,156) | | | | - | | | | - | | | | - | | | | (1,969 | ) | | | - | | | | (1,969 | ) |
Foreign currency translation | | | - | | | | - | | | | - | | | | 82 | | | | - | | | | 82 | | | | - | | | | - | | | | - | | | | 82 | | | | - | | | | 82 | |
Dividends declared ($0.08 per | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
share) | | | - | | | | - | | | | (2,385 | ) | | | - | | | | - | | | | (2,385 | ) | | | - | | | | - | | | | (2,385 | ) | | | - | | | | - | | | | (2,385 | ) |
Stock based compensation | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
expense | | | - | | | | 8,669 | | | | - | | | | - | | | | - | | | | 8,669 | | | | - | | | | 8,669 | | | | - | | | | - | | | | - | | | | 8,669 | |
Purchase of treasury stock | | | - | | | | - | | | | - | | | | - | | | | (14,324 | ) | | | (14,324 | ) | | | - | | | | - | | | | - | | | | - | | | | (14,324 | ) | | | (14,324 | ) |
Balance at December 31, 2017 | | $ | 33 | | | $ | 12,572 | | | $ | 155,939 | | | $ | 11,876 | | | $ | (276,693 | ) | | $ | (96,273 | ) | | $ | 33 | | | $ | 12,572 | | | $ | 155,939 | | | $ | 11,876 | | | $ | (276,693 | ) | | $ | (96,273 | ) |
See accompanying notes.
GAMCO INVESTORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(continued) (In thousands)
| | GAMCO Investors, Inc. shareholders | |
| | | | | Additional | | | Retained | | | Accumulated | | | | | | | |
| | Common | | | Paid-in | | | Earnings | | | Comprehensive | | | Treasury | | | | |
| | Stock | | | Capital | | | (Deficit) | | | Income | | | Stock | | | Total | |
Balance at December 31, 2017 | | $ | 33 | | | $ | 12,572 | | | $ | 155,939 | | | $ | 11,876 | | | $ | (276,693 | ) | | $ | (96,273 | ) |
Net income | | | - | | | | - | | | | 117,196 | | | | - | | | | - | | | | 117,196 | |
Reclassification pursuant to adoption of ASU
| | | | | | | | | | | | | | | | | | | | | | | | |
2016-01, net of tax ($7,095) | | | - | | | | - | | | | 12,110 | | | | (12,110 | ) | | | - | | | | - | |
Foreign currency translation | | | - | | | | - | | | | - | | | | (6 | ) | | | - | | | | (6 | ) |
Dividends declared ($0.08 per | | | | | | | | | | | | | | | | | | | | | | | | |
share) | | | - | | | | - | | | | (2,317 | ) | | | - | | | | - | | | | (2,317 | ) |
Stock based compensation | | | | | | | | | | | | | | | | | | | | | | | | |
expense | | | - | | | | 1,620 | | | | - | | | | - | | | | - | | | | 1,620 | |
Purchase of treasury stock | | | - | | | | - | | | | - | | | | - | | | | (10,610 | ) | | | (10,610 | ) |
Balance at December 31, 2018 | | $ | 33 | | | $ | 14,192 | | | $ | 282,928 | | | $ | (240 | ) | | $ | (287,303 | ) | | $ | 9,610 | |
See accompanying notes.
GAMCO INVESTORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| | Year Ended December 31, | | | Year Ended December 31, | |
| | 2017 | | | 2016 | | | 2015 | | | 2018 | | | 2017 | | | 2016 | |
Operating activities | | | | | | | | | | | | | | | | | | |
Net income | | $ | 77,809 | | | $ | 117,121 | | | $ | 83,412 | | | $ | 117,196 | | | $ | 77,809 | | | $ | 117,121 | |
Loss from discontinued operations, net of taxes | | | - | | | | - | | | | 3,887 | | |
Income from continuing operations | | | 77,809 | | | | 117,121 | | | | 87,299 | | |
Adjustments to reconcile net income to net cash provided by operating activities | | | | | | | | | | | | | | | | | | | | | | | | |
from continuing operations: | | | | | | | | | | | | | |
Depreciation and amortization | | | 595 | | | | 625 | | | | 618 | | | | 562 | | | | 595 | | | | 625 | |
Stock based compensation expense | | | 8,669 | | | | 3,959 | | | | 9,868 | | | | 1,620 | | | | 8,669 | | | | 3,959 | |
Deferred income taxes | | | (5,451 | ) | | | (5,537 | ) | | | 1,166 | | | | (487 | ) | | | (5,451 | ) | | | (5,537 | ) |
Tax benefit from exercise of stock options | | | - | | | | - | | | | 102 | | |
Foreign currency translation gain/(loss) | | | 82 | | | | (164 | ) | | | (46 | ) | | | (6 | ) | | | 82 | | | | (164 | ) |
Donated securities | | | 1,124 | | | | 499 | | | | 1,945 | | | | 325 | | | | 1,124 | | | | 499 | |
Unrealized on available for sale securities | | | | 18,632 | | | | - | | | | - | |
Gains on sales of available for sale securities | | | (62 | ) | | | (4 | ) | | | (6 | ) | | | - | | | | (62 | ) | | | (4 | ) |
Accretion of zero coupon debentures | | | - | | | | - | | | | 628 | | |
Loss on extinguishment of debt | | | 3,300 | | | | - | | | | 1,067 | | | | - | | | | 3,300 | | | | - | |
Acquisition of identifiable intangible asset | | | - | | | | - | | | | (1,661 | ) | |
(Increase) decrease in assets: | | | | | | | | | | | | | | | | | | | | | | | | |
Investments in trading securities | | | 8 | | | | 186 | | | | (240 | ) | | | (13,568 | ) | | | 8 | | | | 186 | |
Receivable from affiliates | | | 329 | | | | (927 | ) | | | 21,393 | | | | 1,532 | | | | 329 | | | | (927 | ) |
Receivable from brokers | | | (1,125 | ) | | | 638 | | | | 592 | | | | (1,845 | ) | | | (1,125 | ) | | | 638 | |
Investment advisory fees receivable | | | 5,024 | | | �� | (12,688 | ) | | | 6,679 | | | | 13,035 | | | | 5,024 | | | | (12,688 | ) |
Income tax receivable and deferred tax assets | | | (6,267 | ) | | | (2,562 | ) | | | (4,354 | ) | | | 615 | | | | (1,105 | ) | | | (2,562 | ) |
Other assets | | | (73 | ) | | | (69 | ) | | | 529 | | | | 234 | | | | (73 | ) | | | (69 | ) |
Increase (decrease) in liabilities: | | | | | | | | | | | | | | | | | | | | | | | | |
Payable to affiliates | | | (557 | ) | | | (6,275 | ) | | | 7,333 | | | | 186 | | | | (557 | ) | | | (6,275 | ) |
Payable to brokers | | | (990 | ) | | | 54 | | | | 1 | | | | (698 | ) | | | (990 | ) | | | 54 | |
Income taxes payable and deferred tax liabilities | | | 4,473 | | | | 2,768 | | | | (10,401 | ) | |
Income taxes payable | | | | (252 | ) | | | (689 | ) | | | 2,768 | |
Compensation payable | | | 40,517 | | | | 17,969 | | | | (6,369 | ) | | | (22,496 | ) | | | 40,517 | | | | 17,969 | |
Accrued expenses and other liabilities | | | (714 | ) | | | 144 | | | | 987 | | | | 3,297 | | | | (714 | ) | | | 144 | |
Total adjustments | | | 48,882 | | | | (1,384 | ) | | | 29,831 | | | | 686 | | | | 48,882 | | | | (1,384 | ) |
Net cash provided by operating activities from continuing operations | | $ | 126,691 | | | $ | 115,737 | | | $ | 117,130 | | |
Net cash provided by operating activities | | | $ | 117,882 | | | $ | 126,691 | | | $ | 115,737 | |
GAMCO INVESTORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued) (In thousands)
| | Year Ended December 31, | | | Year Ended December 31, | |
| | 2017 | | | 2016 | | | 2015 | | | 2018 | | | 2017 | | | 2016 | |
Investing activities | | | | | | | | | | | | | | | | | | |
Purchases of available for sale securities | | $ | (3,932 | ) | | $ | (1,843 | ) | | $ | (6,279 | ) | | $ | (2,388 | ) | | $ | (3,932 | ) | | $ | (1,843 | ) |
Proceeds from sales of available for sale securities | | | 4,169 | | | | 408 | | | | 81 | | | | - | | | | 4,169 | | | | 408 | |
Net cash provided by (used in) investing activities from continuing operations | | | 237 | | | | (1,435 | ) | | | (6,198 | ) | |
Net cash provided by (used in) investing activities | | | | (2,388 | ) | | | 237 | | | | (1,435 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Financing activities | | | | | | | | | | | | | | | | | | | | | | | | |
Repurchase of Zero coupon subordinated debentures due December 31, 2015 | | | - | | | | - | | | | (13,101 | ) | |
Repurchase of 5.875% Senior note due June 1, 2021 | | | - | | | | - | | | | (76,533 | ) | |
Repurchases of AC 4% PIK Note | | | (50,000 | ) | | | (150,000 | ) | | | - | | |
Dividends paid | | | | (2,328 | ) | | | (2,315 | ) | | | (2,333 | ) |
Purchase of treasury stock | | | | (10,610 | ) | | | (14,324 | ) | | | (10,773 | ) |
Repurchases of AC 4% PIK Note due November 30, 2020 | | | | (50,000 | ) | | | (50,000 | ) | | | (150,000 | ) |
Proceeds from 4.5% Convertible note due August 15, 2021 | | | - | | | | 109,826 | | | | - | | | | - | | | | - | | | | 109,826 | |
Repayment of 4.5% Convertible note due August 15, 2021 | | | (113,300 | ) | | | - | | | | - | | | | - | | | | (113,300 | ) | | | - | |
Repayment of GGCP loan due December 28, 2016 | | | - | | | | (35,000 | ) | | | - | | | | - | | | | - | | | | (35,000 | ) |
Proceeds from GGCP due December 28, 2016 | | | - | | | | - | | | | 35,000 | | |
Proceeds from 1.6% AC Note due February 28, 2018 | | | 15,000 | | | | - | | | | - | | |
Repayment of AC 1.6% Note due February 28, 2018 | | | | (15,000 | ) | | | - | | | | - | |
Proceeds from AC 1.6% Note due February 28, 2018 | | | | - | | | | 15,000 | | | | - | |
Margin loan borrowings | | | 20,850 | | | | - | | | | - | | | | 11,000 | | | | 20,850 | | | | - | |
Margin loan repayments | | | (5,000 | ) | | | - | | | | - | | | | (25,115 | ) | | | (5,000 | ) | | | - | |
Amortization of debt issuance costs | | | 187 | | | | 33 | | | | - | | | | 24 | | | | 187 | | | | 33 | |
Net cash transferred to AC | | | - | | | | - | | | | (21,739 | ) | |
Proceeds from exercise of stock options | | | - | | | | - | | | | 1,167 | | |
Dividends paid | | | (2,315 | ) | | | (2,333 | ) | | | (7,468 | ) | |
Purchase of treasury stock | | | (14,324 | ) | | | (10,773 | ) | | | (27,249 | ) | |
Net cash used in financing activities from continuing operations | | | (148,902 | ) | | | (88,247 | ) | | | (109,923 | ) | |
Cash flows of discontinued operations | | | | | | | | | | | | | |
Net cash provided by operating activities | | | - | | | | - | | | | 54,335 | | |
Net cash used in investing activities | | | - | | | | - | | | | (41,463 | ) | |
Net cash used in financing activities | | | - | | | | - | | | | (12,871 | ) | | | (92,029 | ) | | | (148,902 | ) | | | (88,247 | ) |
Net cash provided by discontinued operations | | | - | | | | - | | | | 1 | | |
Effect of exchange rates on cash and cash equivalents | | | (17 | ) | | | 38 | | | | 15 | | | | (84 | ) | | | (17 | ) | | | 38 | |
Net increase (decrease) in cash and cash equivalents | | | (21,991 | ) | | | 26,093 | | | | 1,025 | | | | 23,381 | | | | (21,991 | ) | | | 26,093 | |
Cash and cash equivalents at beginning of period | | | 39,812 | | | | 13,719 | | | | 12,694 | | | | 17,821 | | | | 39,812 | | | | 13,719 | |
Cash and cash equivalents at end of period | | $ | 17,821 | | | $ | 39,812 | | | $ | 13,719 | | | $ | 41,202 | | | $ | 17,821 | | | $ | 39,812 | |
Supplemental disclosures of cash flow information: | | | | | | | | | | | | | | | | | | | | | | | | |
Cash paid for interest | | $ | 12,180 | | | $ | 11,274 | | | $ | 7,011 | | | $ | 3,622 | | | $ | 12,180 | | | $ | 11,274 | |
Cash paid for taxes | | $ | 62,259 | | | $ | 75,238 | | | $ | 59,657 | | | $ | 36,400 | | | $ | 62,259 | | | $ | 75,238 | |
Non-cash activity:
- For 2018, 2017 2016 and 20152016 the Company accrued restricted stock award dividends of $25,$20, $23 and $35, and $175, respectively.
- For 2016, and 2015, the Company recorded $402 and $1,190, respectively, 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 November 1, 2015, in connection with becoming the advisor to the Bancroft Fund Ltd. and the Ellswoth Growth and Income Fund Ltd., the Company recorded a non-cash identifiable intangible asset of $1.2 million.
- On November 28, 2015, the Company issued 4.4 million shares to GCIA in exchange for a $150 million five-year 4% note ("GCIA Note").
- On November 30, 2015, in connection with the spin-off of AC, the Company issued a $250 million five-year 4% PIK Note to AC and also contributed the GCIA Note to AC.
- On November 30, 2015, in connection with the spin-off of AC, the Company transferred $601.7 million of net assets, excluding cash and cash equivalents.
See accompanying notes.
A. Significant Accounting Policies
Basis of Presentation
GAMCO Investors, Inc. (“GBL”, “We” 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”). 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. In 2014, the Company changed its state of incorporation from New York to Delaware in a tax-free reorganization. On November 30, 2015 (the “Spin-Off Date”), GBL distributed to its stockholders all of the outstanding common stock of Associated Capital Group, Inc. (“AC”) and its subsidiaries along with certain cash and other assets (the “Spin-off”). AC owns and operates, directly or indirectly, the alternatives and the institutional research businesses previously owned and operated by GBL. In the Spin-off, each holder of GAMCO’s Class A Common Stock (“Class A Stock”) of record as of 5:00 p.m. New York City time on November 12, 2015 (the “Record Date”), received one share of AC Class A common stock for each share of GAMCO Class A Stock held on the Record Date. Each record holder of GAMCO’s Class B Stock received one share of AC Class B common stock for each share of GAMCO Class B Stock held on the Record Date. Subsequent to the Spin-off, GAMCO no longer consolidates the financial results of AC or certain investment partnerships and offshore funds in which we had a direct or indirect controlling financial interest for the purposes of GAMCO’s financial reporting and the historical financial results of AC and certain investment partnerships and offshore funds have been reflected in the Company’s consolidated financial statements as discontinued operations for all periods presented through the Spin-off Date.
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”), Distributors Holdings, Inc. (“DHI”), G.distributors, LLC (“G.distributors”), GAMCO Asset Management (UK) Limited, Gabelli Fixed Income, Inc. (“Fixed Income”), GAMCO International Partners LLC, and GAMCO Acquisition LLC. |
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.
Reclassifications
The historical results of AC and certain investment partnerships and offshore funds have been reflected in the accompanying consolidated statements of income for the year ended December 31, 2015 as discontinued operations and financial information related to discontinued operations has been excluded from the notes to these financial statements for all periods presented (See Note P. Discontinued Operations for further details).
Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Nature of Operations
GAMCO, Funds Advisor, and Gabelli Fixed Income LLC (“Fixed Income LLC”), a wholly-owned subsidiary of Fixed Income, are registered investment advisors under the Advisers Act of 1940. G.distributors is a registered broker-dealer with the Securities and Exchange Commission (“SEC”) and is regulated by the Financial Industry Regulatory Authority (“FINRA”). 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.
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. 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 GAAP. A 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 other 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.
Prior to January 1, 2018, investments in equity securities were accounted for as either “trading securities” or “available for sale” and were stated at fair value. A portion of investments in securities are held for resale in anticipation of short-term market movements and therefore were, prior to January 1, 2018, classified as trading securities. Trading securities were 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 were stated at fair value, with any unrealized gains or losses, net of taxes, reported as a component of other comprehensive income except for losses deemed to be other than temporary which were recorded as realized losses on the consolidated statements of income.
Prior to January 1, 2018, AFS securities arewere evaluated for other than temporary impairments each reporting period and any impairment charges arewere recorded in net gain/(loss) from investments on the consolidated statements of income. Management reviewsreviewed all available for sale securities whose cost exceedsexceeded their fair value to determine if the impairment iswas other than temporary. Management usesused qualitative factors such as the intent to hold the investment, the amount of time that the investment hashad been impaired and the severity of the decline in determining whether the impairment iswas other than temporary.
Effective January 1, 2018, investments in equity securities with readily determinable fair values 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.
For 2018, because all changes in fair value of investments in our securities with readily determinable fair values are recognized in the consolidated statements of income, no evaluation for impairment was necessary. There were no investments in equity securities without a readily determinable fair value at any time during 2018. Such investments would require the application of impairment testing.
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.
Major Revenue-Generating Services and Revenue Recognition
The Company’s revenues are derived primarily from investment advisory and incentive fees 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 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. The Company derived approximately 88%89%, 87%88% and 87% of its total revenues from advisory and management fees, including incentive fees, for the periods ended December 31, 2018, 2017 2016 and 2015,2016, respectively. These revenues vary depending upon the level of sales compared with redemptions, financial market conditions, performance and the fee structure for AUM.the Fund or account. Revenues derived from the equity-oriented portfolios generally have higher managementadvisory fee rates than fixed income portfolios.
The Company 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 no incentive fees receivable as of December 31, 2018 and 2017. There were $2.4 million of incentive fees receivable as of December 31, 2016.
For The GDL Fund, there is a performancean incentive fee earned as of the end of the calendar year ifand varies to the extent the total return of the fund is in excess of the 90 day T-Bill ICE Bank of America Merrill Lynch 3 Month U.S. Treasury Bill Index total return. This fee is recognized at the end of the measurement period, which is annually on a calendar year basis.period. 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 $1.4 million and $4.2 million as of December 31, 2017 and 2016, respectively.2017. There were no incentive fees receivable at December 31, 2018.
For the Gabelli Merger Plus+ Trust Plc, there is an incentive fee which is earned and recognized at the end of the measurement period, June 30th and varies to the extent the total return of the fund is in excess of twice the rate of return of the 13 week Treasury Bills over the performance period. There was no performance fee receivable as of December 31, 2018 or 2017.
ManagementAdvisory fees on $0.7 billiona 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, which is annually. Receivables due for managementadvisory fees on closed-end preferred shares are included in investment advisory fees receivable on the consolidated statements of financial condition. There were $7.1 million and $7.3 million in managementadvisory fees receivable on closed-end preferred shares as of December 31, 20172017. There were no advisory fees receivable on closed-end preferred shares at December 31, 2018.
For the GAMCO Merger Arbitrage SICAV, there is an incentive fee earned as of the end of the calendar year equal to twenty percent of the gross return of the fund. This fee is recognized as the end of the measurement period, which is annually on a calendar year basis, or earlier if there is a redemption. Receivables due on incentive fees relating to the GAMCO Merger Arbitrage SICAV are included in investment advisory fees receivable on the consolidated statements of financial condition and 2016,were $1.3 million and $0.5 million as of December 31, 2018 and 2017, respectively.
Distribution fees revenues are derived primarily from the distribution of Gabelli, GAMCO, TETON, KEELEYKeeley and Comstock open-end funds (“Funds”) advised by either a subsidiary of GBL (Funds Advisor), a subsidiary of GGCP (Teton), or a subsidiary of Teton (Keeley-Teton Advisors, Inc.). 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 receives 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.
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), the Class A shares and the Class T shares of certain Funds pay G.distributors a distribution or service fee of 0.25% per year (except the Class A shares of the TETON Westwood Funds which pay 0.50% per year, except for the TETON Westwood Intermediate Bond Fund which pays .35%, and the Class A shares of the Gabelli Enterprise Mergers and Acquisitions Fund which pays 0.45% per year) on the average daily net assets of the Fund. Class C shares have a 12b-1 distribution plan with a service and distribution fee totaling 1%.
Distribution fees from the open-end 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.
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 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. The reimbursed expenses are presented on a gross basis in distribution costs in the consolidated statements of income.
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 $421,000$362,000 and $524,000$421,000 at December 31, 20172018 and 2016,2017, 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 $2.7$2.8 million and $2.6$2.7 million at December 31, 20172018 and 2016,2017, respectively. Leasehold improvements, with net book value of $1.5$1.3 million and $1.6$1.5 million at December 31, 20172018 and 2016,2017, 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, 2028. The capital lease was extended on June 11, 2014 to December 31, 2028 from December 31, 2023. For the years ended December 31, 2018, 2017 2016 and 2015,2016, depreciation and amortization were $562,000, $595,000 $632,000 and $618,000,$632,000, respectively. We estimate that depreciation and amortization will be approximately $590,000$550,000 annually over the next three years.
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, 20172018 and 2016,2017, goodwill recorded on the consolidated statements of financial condition relates to G.distributors. At December 31, 20172018 and 2016,2017, the identifiable intangible assets are the investment advisory contracts for the Gabelli Enterprise Mergers and Acquisition Fund, for the Bancroft Fund Ltd. and the Ellsworth Growth and Income Fund Ltd., all of which relate 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 the identifiable intangible asset for 20172018 and 2016,2017, projections regarding estimated future cash flows and other factors are made to determine the fair value of the asset. No impairment was recorded during 2018, 2017, 2016, or 2015.2016.
In assessing the recoverability of goodwill for our annual impairment test on November 30, 20172018 and 2016,2017, we performed a qualitative assessment of whether it was more likely than not that an impairment had occurred and concluded that a quantitative analysis was not required. No impairment was recorded during 2018, 2017, 2016, or 2015.2016.
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. As a result of the enactment of the Tax Cuts and Jobs Act in December 2017, the Company recorded an increase in expense of $8.2 million reflecting the net write-down to its deferred tax assets and deferred tax liabilities. 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.
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 Financial Accounting Standards Board’s (“FASB”) 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 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 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 instrument to instrument and is affected by a wide variety of factors, including, for example, the type of instrument, whether the instrument 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 Co-Chief Accounting Officers. The Company may use the “market approach” or “income approach” valuation technique to value its investments in Level 3 investments. The Company’s valuation of the Level 3 investments could be 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 and valued based on the net asset value of the fund. 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 and Securities sold, not yet purchased – Investments in securities 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.
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 note for the periods outstanding since the issuance in August 2016 through the repayment in November 2017 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 before management fee 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$0.9 million, $1.4 million $2.2 million and $1.9$2.2 million of his management fee to certain other employees of the Company in 2018, 2017 and 2016, and 2015, respectively.
Stock Based Compensation
The Company has granted restricted stock awards (“RSAs”) to staff members and stock options to staffboard 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.employees and board members.
The estimated fair value of RSAs is determined by using the closing price of Class A Common Stock (“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 either (1) 30% over three years from the date of grant and 70% over five years from the date of grant or (2) 30% over three years from the date of grant and 10% each year over years four through ten 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.
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.
In connection with the Spin-off of AC and in accordance with GAAP, the Company has allocated the stock compensation costs between GBL and AC based upon each employee’s individual allocation of their responsibilities between GBL and AC. See note H. Equity for further details.
The Company has entered into three deferred compensation agreements with Mr. Gabelli whereby his variable compensation for 2016, the first half of 2017 and the fourth quarter of 2017 was in the form of Restricted Stock Units (“RSUs”) determined by the volume-weighted average price (“VWAP”) of the Company’s Class A Stock during those respective periods. The 2016 Deferred Cash Compensation Agreement (“DCCA”) will vest 100% on January 1, 2020, the First Half 2017 DCCA will vestvested 100% on July 1, 2018, and the Fourth Quarter 2017 DCCA will vest 100% on April 1, 2019. On May 23, 2018, the CEO waived receipt of $6 million of the First Half 2017 DCCA, and a reduction in expense was recognized in 2018. The Company settled the First Half 2017 DCCA award in cash and intends to settle the two other unvested awards in cash at vesting;their vesting. The Company, however, the Company reserves the right to issue shares of the Company’s Class A Stock in lieu of such cash payment. Under the terms of the agreement the Company will pay Mr. Gabelli an amount equal to the number of RSUs valued at the lesser of the VWAP of the Company’s Class A Stock for the applicable period or the value on the lapse date or, if not a trading day, then the first trading date thereafter.
Under GAAP, for the 2016 DCCA only 25% of this deferred compensation expense iswas being recognized in 2016 with the remainder amortized ratably over 2017, 2018, and 2019. Similarly, under GAAP, for the First Half 2017 DCCA 67% of the expense iswas recognized in 2017 with the remaining 33% expensed in 2018. For the Fourth Quarter 2017 DCCA 17% of the expense iswas recognized in 2017, 66% in 2018 and the remaining 17% will be recognized in 2019. Notwithstanding its ability to settle the award in stock, given the Company’s intent to settle it in cash, in accordance with GAAP (ASC 718), the awards are accounted for as liability-classified awards and not as equity-classified awards. The liability is remeasured at fair value on each reporting period from December 31, 2016 until the vesting date. However, given the cap on the obligation in that Mr. Gabelli will not receive cash in excess of the VWAP of the Company’s Class A Stock for each respective period, the remeasurement of the liability at fair value will never exceed its value determined using each period’s respective VWAP price.
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 2018, 2017, 2016, or 2015.2016. 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: Funds Advisor (Funds) and GAMCO (Institutional and Private Wealth Management) and Funds Advisor (Funds). The distribution of our open-end funds and underwriting of those Funds wasis conducted through G.distributors.
Recent Accounting Developments
In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, "Revenue from Contracts with Customers," which supersedes the revenue recognition requirements in the Accounting Standards Codification ("Codification") Topic 605, Revenue Recognition, and most industry-specific guidance throughout the industry topics of the Codification. The core principle of the new ASU No. 2014-09 is for companies to recognize revenue from the transfer of goods or services to customers in amounts that reflect the consideration to which the company expects to be entitled to receive in exchange for those goods or services. The new standard provides a five-step approach to be applied to all contracts with customers and also requires expanded disclosures about revenue recognition. In March 2016, the FASB issued revised guidance which clarifies the guidance related to (a) determining the appropriate unit of account under the revenue standard’s principal versus agent guidance and (b) applying the indicators of whether an entity is a principal or an agent in accordance with the revenue standard’s control principle. In April 2016, the FASB issued an amendment to provide more detailed guidance including additional implementation guidance and examples related to (a) identifying performance obligations and (b) licenses of intellectual property. In May 2016, the FASB amended the standard to clarify theThe Company adopted this guidance on (a) assessing collectability, (b) presenting sales taxes, (c) measuring noncash consideration, and (d) certain transition matters. This new guidance will be effective for the Company's first quarter ofJanuary 1, 2018 and requires either a full retrospective or aadopted the modified retrospective approach to adoption.approach. The Company’s implementation analysis has been completed, and we have identified similar performance obligations under this guidance as compared with deliverables and separate units of account previously identified under Topic 605. As a result, we expect the timing of the recognition of our revenue to remainremains the same as under Topic 605, and therefore the Companyadoption does not therefore expect the adoption of the new guidance to have any effect on the timing of the recognition of revenue. If there were to be any impact, which is not expected, the Company has determined that it would use the modified retrospective transition method. The Company has also been reviewing and preparingSee Note B. Revenue Recognition for the enhanced disclosure requirements of the standard, which will have an effect on the disclosures in the consolidated financial statements and accompanying notes effective with our first quarter 2018 Form 10-Q.required by ASU 2014-09.
In January 2016, the FASB issued ASU 2016-01, which amends the guidance in U.S. GAAP on the classification and measurement of financial instruments. Although the ASU retains many current requirements, it significantly revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. The ASU also amends certain disclosure requirements associated with the fair value of financial instruments. In addition, the FASB clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-saleavailable for sale debt securities. To adopt the amendments, entities will be required to make a cumulative-effect adjustment to beginning retained earnings as of the beginning of the fiscal year in which the guidance is effective. The Company adopted this guidance on January 1, 2018 and reclassed $11.9$12.1 million out of Accumulated Comprehensive Income and into Retained Earnings. Effective January 1, 2018, changes in the fair value of the Company’s available-for-saleavailable for sale investments will be reported through earnings rather than through other comprehensive income.
In February 2016, the FASB issued ASU 2016-02, which amends the guidance in U.S. GAAP for the accounting for leases. ASU 2016-02 requires a lessee to recognize assets and liabilities arising from most operating leases in the consolidated statement of financial position. It requires these operating leases to be recorded on the balance sheet as right of use assets and offsetting lease liability obligations. This new guidance will be effective for the Company’s first quarter of 2019.2019 and we have elected the transition method allowed under ASU 2018-11, which does not require restatement of comparative periods but instead requires a cumulative adjustment to opening retained earnings at the January 1, 2019 adoption date. The Company is currently evaluatinghas performed the analysis on the transition to this new guidance, and the impactwe do not expect it willto have on its consolidated financial statements and related disclosures.
In March 2016, the FASB issued ASU 2016-09, which simplifies several aspects of the accounting for employee share-based payment transactions for both public and nonpublic entities, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. For public companies, the ASU is effective for annual reporting periods beginning after December 15, 2016, including interim periods within those annual reporting periods. The Company adopted this guidance on January 1, 2017 without a material impact toon the consolidated financial statements. Please see Note D.
In August 2016, the FASB issued ASU 2016-15, which adds and clarifies guidance on the classification of certain cash receipts and payments in the consolidated statements of cash flows. This guidance is intended to unify the currently diverse presentations and classifications, whichand address eight classification issues related to the statement of cash flows, including debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, distributions received from equity method investees, beneficial interests in securitization transactions, and separately identifiable cash flows and application of the predominance principle. The Company adopted this guidance on January 1, 2018 without a material impact to the consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, which amends ASC 230 to clarify guidance on the classification and presentation of restricted cash in the statement of cash flows. Key requirements are that an entity should include in its cash and cash equivalent balances in the statement of cash flow those amounts that are deemed to be restricted cash and restricted cash equivalents and that a reconciliation between the statement of financial position and the statement of cash flows must be disclosed when the statement of financial position includes more than one line item for cash, cash equivalents, restricted cash, and restricted cash equivalents. The ASU also mandates that changes in restricted cash and restricted cash equivalents that result from transfers between cash, cash equivalents, restricted cash, and restricted cash equivalents should not be presented as cash flow activities in the statement of cash flows and that an entity with a material amount of restricted cash and restricted cash equivalents must disclose information about the nature of the restrictions. This new guidance was to be effective for the Company’s first quarter of 2018, but the Company has elected to early adopt in the third quarter of 2017. There was no material impact to the consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04 to simplify the process used to test for goodwill impairment. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. This new guidance will be effective for the Company’s first quarter of 2020. The Company is currently evaluating the potential effect of this new guidance on its consolidated financial statements and related disclosures.statements.
On May 10, 2017, the FASB issued ASU 2017-09, which amends the scope of modification accounting for share-based payment arrangements. The ASU provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under ASC 718. Specifically, an entity would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. For all entities, the ASU is effective for annual reporting periods, including interim periods within those annual reporting periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period. This ASU, which we did not early adopt, would not have impacted the accounting for the acceleration of vesting of restricted stock awards during the year ended December 31, 2017.
In January 2018, the Securities and Exchange Commission (“the Commission”) issued Staff Accounting Bulletin No. 118 (“SAB 118”) which expresses the Commission’s views regarding application of FASB’s ASC Topic 740 “Income Taxes” in the reporting period that includes December 22, 2017. The Commission indicated that The Tax Cuts and Jobs Act (“the Act”), which was enacted on December 22, 2017, affects companies’ reporting because of the Act’s changes that impact U.S. corporate tax rates, business-related exclusions, and deductions and credits.
ASC Topic 740 provides accounting and disclosureCompany adopted this guidance on accounting for income taxes under generally accepted accounting principles (“U.S. GAAP”). This guidance addresses the recognition of taxes payable or refundable for the current year and the recognition of deferred tax liabilities and deferred tax assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. ASC Topic 740 also addresses the accounting for income taxes uponJanuary 1, 2018 without a change in tax laws or tax rates. The income tax accounting effect of a change in tax laws or tax rates includes, for example, adjusting (or re-measuring) deferred tax liabilities and deferred tax assets, as well as evaluating whether a valuation allowance is needed for deferred tax assets.
The Commission issued SAB 118 to address situations where the accounting under ASC Topic 740 is incomplete for certain income tax effects of the Act upon issuance of an entity’s financial statements for the reporting period in which the Act was enacted. A company’s financial statements that include the reporting period in which the Act was enacted must first reflect the income tax effects of the Act in which the accounting under ASC Topic 740 is complete. These completed amounts would not be provisional amounts. The company would then also report provisional amounts for those specific income tax effects of the Act for which the accounting under ASC Topic 740 will be incomplete but a reasonable estimate can be determined. For any specific income tax effects of the Act for which a reasonable estimate cannot be determined, the company would not report provisional amounts and would continue to apply ASC Topic 740 based on the provisions of the tax laws that were in effect immediately priormaterial impact to the Act being enacted. For those income tax effects for which the company was not able to determine a reasonable estimate (such that no related provisional amount was reported for the reporting period in which the Act was enacted), the company would report provisional amounts in the first reporting period in which a reasonable estimate can be determined.consolidated financial statements.
The Company has revalued its deferred tax assets and liabilities as of the date of enactment and has determined that the provisions of SAB 118 related to incomplete or provisional amounts do not apply as it considers its evaluation complete.
In February 2018, the FASB issued ASU 2018-02 to address constituent concerns related to the application of ASC 740 to certain provisions of the new tax reform legislation, the Tax Cuts and Jobs Act. Specifically, the ASU addressed concerns about the requirement in ASC 740 that the effect of a change in tax laws or rates on deferred tax assets and liabilities be included in income from continuing operations in the reporting period that contains that enactment date of the change. That guidance applies even in situations in which the tax effects were initially recognized directly to other comprehensive income at the previous rate, resulting in “stranded” amounts in accumulated comprehensive income (AOCI) related to the income tax rate differential. This new guidance will be effective for the Company’s first quarter of 2019. Early adoption is permitted. The Company has elected not to early adopt for the financial statements for the year ended December 31, 20172018 contained in this Form 10K. It10-K. The Company adopted this guidance on January 1, 2019 without a material impact to the consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, which clarifies and simplifies the disclosure requirements for fair value transfers and measurements. This new guidance will be effective for periods beginning after December 15, 2019. The Company is currently evaluating whether it will early adoptthe potential effect of this ASU in 2018 and the effects that the adoption will havenew guidance on its consolidated financial statements in the period of adoption.and related disclosures.
B. Revenue Recognition
B.The revenue streams in the discussion below and in the table at the end of this Note include those that are within the scope of ASU 2014-09. In all cases for all revenue streams discussed below, the revenue generated is from a single transaction price, and there is no need to allocate the amounts across more than a single revenue stream. The customer for all revenues derived from open-end and closed-end funds described in detail below has been determined to be the fund itself and not the ultimate underlying investor in the fund. The Company has identified similar performance obligations under ASU 2014-09 as compared with ASC Topic 605. As a result, the timing of the recognition of our revenue remains the same under this new guidance as it was under ASC Topic 605.
Significant judgments that affect the amounts and timing of revenue recognition:
The Company’s analysis of the timing of revenue recognition for each revenue stream is based upon an analysis of current contract terms. Performance obligations could, however, change from time to time if and when existing contracts are modified or new contracts are entered into. These changes could potentially affect the timing of satisfaction of performance obligations, the determination of the transaction price, and the allocation of the price to performance obligations. In the case of the revenue streams discussed below, the performance obligation is satisfied either at a point in time or over time. For performance correlated and conditional revenues, the performance obligation (advising a client portfolio) is satisfied over time, while recognition of revenues effectively occurs at the end of the measurement period as defined within the contract, as such amounts are subject to reduction to zero on the date where the measurement period ends even if the performance benchmarks were exceeded during the intervening period. The judgments outlined below, where the determination as to these factors is discussed in detail, are continually reviewed and monitored by the Company when new contracts or contract modifications occur. Transaction price is in all instances formulaic and not subject to significant (or any) judgment at the current time. The allowance for doubtful accounts is subject to judgment. There were no impairment losses (allowance for doubtful accounts) on any receivables from any revenue stream at the end of the full year ended December 31, 2018.
Advisory Fee Revenues
Advisory fees for open-end funds, closed-end funds, sub-advisory accounts, SICAVs, and Exchange Traded Managed Funds (“ETMFs”) are earned based on predetermined percentages of the average net assets of the individual funds and are recognized as revenues as the related services are performed. Fees for open-end funds, one non-U.S. closed-end fund, sub-advisory accounts, SICAVs, and ETMFs are computed on a daily basis on average net assets under management (“AUM”). Fees for U.S. closed-end funds are computed on average weekly net AUM, and fees for one non-U.S. closed-end fund are computed on a daily basis based on market value. These fees are received in cash after the end of each monthly period within 30 days. The revenue recognition occurs ratably as the performance obligation (advising the fund) is met continuously over time. There is a risk of non-payment, and therefore an impairment loss on these receivables is possible at each reporting date. There were no such impairment losses for the current period.
Advisory fees for Institutional & Private Wealth Management accounts are earned based on predetermined percentages of the average AUM and are generally computed quarterly based on account values at the end of the preceding quarter. The revenue recognition occurs daily as the performance obligation (advising the client portfolio) is met continuously. These fees are received in cash, typically within 60 days of the client being billed. There is a risk of non-payment, and therefore an impairment loss on these receivables is possible at each reporting date. There were no such impairment losses for the current period.
Performance Correlated and Conditional Revenues
Investment advisory fees earned on a portion of the closed-end funds' 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 which coincides with the calendar year. The fee would also be earned and the contract period ended at any interim point in time that the preferred shares are redeemed. These fees are received in cash after the end of the measurement period, within 30 days.
We also receive incentive fees from certain institutional clients which are based upon exceeding a specific benchmark index. These fees are recognized at the end of the stipulated contract period, which is generally annually, for the respective account. The fee would also be earned and the contract period ended at any interim point in time that the client terminated its relationship with us. These fees are received in cash after the end of the measurement period, typically within 60 days.
One fund within the SICAV structure charges a performance fee. That fee is recognized at the end of the measurement period which coincides with the calendar year or upon redemption. The fee would also be earned and the contract period ended at any interim point in time that the client terminated its relationship with us. That fee is received in cash after the end of the measurement period, within 30 days.
We also receive conditional fees from certain institutional clients which are based upon exceeding a defined return for these accounts. These fees are recognized at the end of the stipulated contract period, which is generally annually, for the respective account. The fee would also be earned and the contract period ended at any interim point in time that the client terminated its relationship with us. These fees are received in cash after the end of the measurement period, typically within 60 days.
In all cases of the performance correlated and conditional revenue, because of the variable nature of the consideration, revenue recognition is delayed until it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur, which is generally when the uncertainty associated with the variable consideration is subsequently resolved (for example, the measurement period has concluded and the hurdle has been exceeded). There is a risk of non-payment, and therefore an impairment loss on these receivables is possible at each reporting date. There were no such impairment losses for the current period.
Distribution Fees and Other Income
Distribution fees and other income primarily includes 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. Distribution plan fees are computed based on average daily net assets of each fund and are accrued for during the period in which they are earned. These fees are received in cash after the end of each monthly period within 30 days. In evaluating the appropriate timing of the recognition of these fees, we applied the guidance on up-front fees to determine whether such fees are related to the transfer of a promised service (a distinct performance obligation). Our conclusion is that the service being provided by G.distributors to the customer in exchange for the fee is for the initial distribution of the funds and is completed at the time of the sale. Any fixed amounts are recognized on the trade date, and variable amounts are recognized to the extent it is probable that a significant revenue reversal will not occur once the uncertainty is resolved. For variable amounts, as the uncertainty is dependent on the value of the shares at future points in time as well as the length of time the investor remains in the fund, both of which are highly susceptible to factors outside the Company’s influence, the Company does not believe that it can overcome this constraint until the market value of the fund and the investor activities are known, which are usually monthly. Sales charges and underwriting fees associated with the sale of the mutual funds are recognized on the trade date of the sale of the shares. There is a risk of non-payment, and therefore an impairment loss on these receivables is possible at each reporting date. There were no such impairment losses for the current period.
Revenue Disaggregated
The following table presents our revenue disaggregated by account type:
| | Twelve Months Ended December 31, | |
| | 2018 | | | 2017 | |
Advisory Fees: | | | | | | |
Open-end Funds | | $ | 122,804 | | | $ | 130,543 | |
Closed-end Funds | | | 67,418 | | | | 64,198 | |
Sub-advisory accounts | | | 4,479 | | | | 3,434 | |
Institutional & Private Wealth Management | | | 99,180 | | | | 104,760 | |
SICAVs | | | 5,625 | | | | 4,628 | |
Performance-based | | | 1,495 | | | | 9,142 | |
Conditional | | | 1,650 | | | | - | |
Distribution and other income | | | 38,804 | | | | 43,819 | |
Total revenues | | $ | 341,455 | | | $ | 360,524 | |
C. Investments in Securities
Investments in securities at December 31, 20172018 and 20162017 consisted of the following:following (in thousands):
| | 2017 | | | 2016 | |
| | Cost | | | Fair Value | | | Cost | | | Fair Value | |
(In thousands) | | | | | | | | | | | | |
Trading securities: | | | | | | | | | | | | |
Common stocks | | $ | 26 | | | $ | 34 | | | $ | 51 | | | $ | 54 | |
Mutual Funds | | | 11 | | | | 11 | | | | - | | | | - | |
Total trading securities | | | 37 | | | | 45 | | | | 51 | | | | 54 | |
| | | | | | | | | | | | | | | | |
Available for sale securities: | | | | | | | | | | | | | | | | |
Common stocks | | | 17,441 | | | | 36,637 | | | | 18,739 | | | | 37,131 | |
Closed-end funds | | | 99 | | | | 108 | | | | 99 | | | | 100 | |
Total available for sale securities | | | 17,540 | | | | 36,745 | | | | 18,838 | | | | 37,231 | |
| | | | | | | | | | | | | | | | |
Total investments in securities | | $ | 17,577 | | | $ | 36,790 | | | $ | 18,889 | | | $ | 37,285 | |
| | 2018 | | | | 2017 | |
| | Cost | | | Fair Value | | | | Cost | | | Fair Value | |
Securities carried at FVTNI: | | | | | | | Trading securities: | | | | | | |
Common stocks | | $ | 38,865 | | | $ | 32,414 | | Common stocks | | $ | 26 | | | $ | 34 | |
Closed-end funds | | | 1,414 | | | | 1,337 | | Closed-end funds | | | - | | | | - | |
Mutual funds | | | 44 | | | | 38 | | Mutual funds | | | 11 | | | | 11 | |
Total securities at FVTNI | | | 40,323 | | | | 33,789 | | Total trading securities | | | 37 | | | | 45 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | Available for sale securities: | | | | | | | | |
| | | | | | | | | Common stocks | | | 17,441 | | | | 36,637 | |
| | | | | | | | | Closed-end funds | | | 99 | | | | 108 | |
| | | | | | | | | Total available for sale securities | | | 17,540 | | | | 36,745 | |
| | | | | | | | | | | | | | | | | |
Total investments in securities | | $ | 40,323 | | | $ | 33,789 | | Total investments in securities | | $ | 17,577 | | | $ | 36,790 | |
There were no securities sold, not yet purchased at December 31, 20172018 and 2016.2017.
Effective January 1, 2018, the Company adopted ASU 2016-01, which changed the accounting for equity securities and resulted in the reclassification of $12.1 million, net of tax, out of accumulated comprehensive income and into retained earnings in the condensed consolidated statement of financial condition. As a result, for the year ended December 31, 2018, the Company carries all investments in equity securities at fair value through net income (“FVTNI”) which approximates market value and all changes in the fair value of the Company’s entire investment portfolio are now recorded in the net gain/(loss) from investments line in the consolidated statements of income rather than through other comprehensive income. For the year ended December 31, 2018, the Company recorded an unrealized loss of $25.0 million related to equity securities still held at December 31, 2018.
The following table identifies all reclassifications out of accumulated other comprehensive income and into net income for the year ended December 31, 2017 and 2016 (in thousands):
Amount | Amount | | Affected Line Item | | Reason for | Amount | | Affected Line Item in | | Reason for |
Reclassified | Reclassified | | in the Statements | | Reclassification | Reclassified | | in the Statements | | Reclassification |
from AOCI | from AOCI | | of Income | | from AOCI | from AOCI | | Of Income | | from AOCI |
Twelve months ended December 31, | | | | | |
2017 | | | 2016 | | | | | |
For the year ended | | For the year ended | | | | |
December 31, 2017 | | December 31, 2017 | | | | |
| | | | | | | | | | | | | |
| $ | 62 | | | $ | 4 | | Net gain from investments | | Realized gain / (loss) on sale of AFS securities | $ | 62 | | Net gain from investments | | Realized gain on sale of AFS securities |
| | 3,063 | | | | 1,251 | | Other operating expenses | | Donation of AFS securities | | 3,063 | | Other operating expenses | | Donation of AFS securities |
| | 3,125 | | | | 1,255 | | Income before income taxes | | | | 3,125 | | Income before income taxes | | |
| | (1,156 | ) | | | (464 | ) | Income tax expense | | | | (1,156 | ) | Income tax provision | | |
| $ | 1,969 | | | $ | 791 | | Net income | | | $ | 1,969 | | Net income | | |
The following is a summary of the cost, gross unrealized gains, gross unrealized losses and fair value of available for sale investments in securities as of December 31, 2017 and December 31, 2016:2017:
| December 31, 2017 | | December 31, 2017 | |
| | | Gross | | Gross | | | | | | Gross | | Gross | | | |
| | | Unrealized | | Unrealized | | Fair | | | | Unrealized | | Unrealized | | Fair | |
| Cost | | Gains | | Losses | | Value | | Cost | | Gains | | Losses | | Value | |
| (In thousands) | | (In thousands) | |
Common stocks | | $ | 17,441 | | | $ | 19,196 | | | $ | - | | | $ | 36,637 | | | $ | 17,441 | | | $ | 19,196 | | | $ | - | | | $ | 36,637 | |
Closed-end Funds | | $ | 99 | | | $ | 9 | | | $ | - | | | $ | 108 | | |
Closed-end funds | | | | 99 | | | | 9 | | | | - | | | | 108 | |
Total available for sale securities | | $ | 17,540 | | | $ | 19,205 | | | $ | - | | | $ | 36,745 | | | $ | 17,540 | | | $ | 19,205 | | | $ | - | | | $ | 36,745 | |
| December 31, 2016 | |
| | | Gross | | Gross | | | |
| | | Unrealized | | Unrealized | | Fair | |
| Cost | | Gains | | Losses | | Value | |
| (In thousands) | |
Common stocks | | $ | 18,739 | | | $ | 18,392 | | | $ | - | | | $ | 37,131 | |
Closed-end funds | | | 99 | | | | 1 | | | | - | | | | 100 | |
Total available for sale securities | | $ | 18,838 | | | $ | 18,393 | | | $ | - | | | $ | 37,231 | |
Increases in unrealized gains, net of taxes, for AFS securities for the yearyears ended December 31, 2017 and 2016 of $0.5 million and $2.3 million have been included in other comprehensive income at December 31, 2017 and 2016, respectively. Increases in unrealized losses, net of taxes, for AFS securities for the year ended December 31, 2015 of $5.5 million have been included in other comprehensive income at December 31, 2015. The amount reclassified from other comprehensive income for the years ended December 31, 2017 2016 and 20152016 was $2.0 million $0.8 million and $2.8$0.8 million, respectively. Proceeds from sales of investments available for sale were approximately $4.2 million $0.4 million and $0.1$0.4 million for the years ended December 31, 2017 2016 and 2015,2016, respectively. For the years ended December 31, 2017 2016 and 2015,2016, gross gains on the sale of investments available for sale amounted to $62,000 $4,000 and $6,000,$4,000, 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, 2017 2016 and 2015.2016. The basis on which the cost of a security sold is determined is specific identification. AccumulatedFor 2017, accumulated other comprehensive income on the consolidated statements of equity is primarily comprised of unrealized gains/losses, net of taxes, for AFS securities.
Prior to the adoption of ASU 2016-01, GBL hashad an established accounting policy and methodology to determine other-than-temporary impairment on available for sale securities. Under this policy, available for sale securities arewere evaluated for other than temporary impairments and any impairment charges arewere recorded in net gain/(loss) from investments on the consolidated statements of income. Management reviewsreviewed all available for sale securities whose cost exceeds their market value to determine if the impairment iswas other than temporary. Management usesused qualitative factors such as diversification of the investment, the amount of time that the investment hashad been impaired, the intent to sell and the severity of the decline in determining whether the impairment iswas other than temporary.
There were no investments classified as available for sale that were in an unrealized loss position at either December 31, 2017 or December 31, 2016.
For the years ended December 31, 2017 2016 and 20152016 there were no losses on available for sale securities that were deemed to be other than temporary.
All of our investments within the Investments in securities line item on the consolidated statement of financial condition are pledged as collateral against a margin loan outstanding with an unaffiliated broker included in the Payable to brokers line item on the consolidated statements of financial condition. Certain of the investments within the Investments in securities line item are also pledged against the AC 1.6% Note due February 28, 2018.
C.D. Fair Value
ASU 2016-09, which was issued in March 2016 and became effective for interim and annual reporting periods beginning after December 15, 2016, simplifies several aspects of accounting for employee share-based payment transactions. Upon adoption of ASU 2016-09 on January 1, 2017, our accounting for excess tax benefits has changed and was adopted prospectively, resulting in recognition of excess tax benefits or tax deficiencies against income tax expenses rather than additional paid-in capital. During the twelve months ended December 31, 2017, the ETR was higher by 0.7% as a result of a reduction to previously recorded stock compensation tax benefits.
Significant components of our deferred tax assets and liabilities are as follows: