SECURITIES & EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
-----------
(Amendment No. 1)3)
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30,March 31, 2006
---------------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------- ----------
Commission File No. 1-106
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GAMCO INVESTORS, INC.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
New York 13-4007862
- --------------------------------------------------------------------------------
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Corporate Center, Rye, NY 10580-1422
- --------------------------------------------------------------------------------
(Address of principle executive offices) (Zip Code)
(914) 921-3700
- --------------------------------------------------------------------------------
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
------ ------
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer Accelerated filer X Non-accelerated filer
--- --- -------- ----- -----
Indicate by check mark whether the registrant is a shell company (as defined in
Exchange Act Rule 12b-2). Yes No X
No
------ ----------- -----
Indicate the number of shares outstanding of each of the Registrant's classes of
Common Stock, as of the latest practical date.
Class Outstanding at July 31,April 30, 2006
----- ---------------------------------------------------------
Class A Common Stock, .001 par value 7,473,7585,645,985
Class B Common Stock, .001 par value 20,781,02723,128,500
1
Explanatory Note
This formForm 10-Q/A of GAMCO Investors, Inc. (the "Company") constitutes Amendment
No. 13 to the Company's Quarterly Report on Form 10-Q for the quarter ended June
30,March
31, 2006, which was initially filed with the Securities and Exchange Commission
on August 8,May 10, 2006 and amended on May 11, 2006. On November 9, 2006, Amendment No.
2 was filed to restate the Financial Statements and amend Management's
Discussion and Analysis of Financial Condition and Results of Operations
(Including Quantitative and Qualitative Disclosure about Market Risk) in Part I,
Items 1 and 2, respectively, as a result of the Company changing its accounting
method for recognizing incentive fee revenues on Investment Partnerships
effective January 1, 2006. As further discusseddescribed in Note A to the Condensed
Consolidated Financial Statements, the purpose of this filing is to restate the
Financial Statements and amend Management's Discussion and Analysis of Financial
Condition and Results of Operations (Including Quantitative and Qualitative
Disclosure about Market Risk) both in Part I, Items 1 and 2, respectively, as a resultrelating
to the reporting of individual assets and liabilities of certain proprietary
investment accounts. In addition, certain reclassifications on the Company changing its accounting method for recognizing incentive fee
revenuesCondensed
Consolidated Statements of Financial Condition and on the Condensed Consolidated
Statements of Cash Flows have been made relating to the consolidation of certain
investment partnerships effective January 1, 2006.and offshore funds in accordance with the provisions of
FASB Interpretation No. 46R ("FIN 46R") and Emerging Issue Task Force 04-5
("EITF 04-5") and relating to the voluntary change in accounting principle.
2
INDEX
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GAMCO INVESTORS, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
- ------- ----------------------------------------------------------------
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Income:
- Three months ended June 30, 2006 and 2005
- Six months ended June 30,March 31, 2006 and 2005
Condensed Consolidated Statements of Financial Condition:
- December 31, 2005
(Audited)
- June 30,March 31, 2006
- June 30,March 31, 2005
Condensed Consolidated Statements of Stockholders' Equity and
Comprehensive Income:
- Three months ended June 30, 2006 and 2005
- Six months ended June 30,March 31, 2006 and 2005
Condensed Consolidated Statements of Cash Flows:
- Three months ended June 30, 2006 and 2005
- Six months ended June 30,March 31, 2006 and 2005
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Including Quantitative and Qualitative
Disclosure about Market Risk)
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
- -------- --------------------------------------------------------
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits
SIGNATURES
- ----------
3
GAMCO INVESTORS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED
(In thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------------------------------------------
2006(a) 2005(a) 2006(a) 2005(a)
------- --------- ---------- --------
Revenues
Investment advisory and incentive fees $ 53,586 $ 52,336 $ 103,984 $ 105,049
Commission revenue 2,722 2,574 6,173 5,039
Distribution fees and other income 5,351 4,908 10,786 10,043
------- --------- ---------- --------
Total revenues 61,659 59,818 120,943 120,131
Expenses
Compensation and related costs 26,021 26,919 51,298 52,541
Management fee 1,760 2,313 5,127 4,519
Distribution costs 5,329 4,535 10,544 10,748
Other operating expenses 7,713 6,502 15,104 13,058
Reserve for settlement 11,900 - 11,900 -
------- --------- ---------- --------
Total expenses 52,723 40,269 93,973 80,866
Operating income 8,936 19,549 26,970 39,265
Other income (expense)
Net gain from investments 4,244 387 27,369 982
Interest and dividend income 6,111 4,157 12,484 7,629
Interest expense (3,394) (3,275) (7,269) (7,204)
------- --------- ---------- --------
Total other income, net 6,961 1,269 32,584 1,407
------- --------- ---------- --------
Income before income taxes and minority interest 15,897 20,818 59,554 40,672
Income tax provision 7,163 7,808 23,534 15,253
Minority interest 93 110 8,679 90
------- --------- ---------- --------
Net income $ 8,641 $ 12,900 $ 27,341 $ 25,329
======= ========= ========== ========
Net income per share:
Basic $ 0.30 $ 0.43 $ 0.95 $ 0.85
======= ========= ========== ========
Diluted $ 0.30 $ 0.42 $ 0.94 $ 0.84
======= ========= ========== ========
Weighted average shares outstanding:
Basic 28,507 30,079 28,842 29,821
======= ========= ========== ========
Diluted 29,496 31,211 29,838 31,447
======= ========= ========== ========
Dividends declared: $ 0.03 $ 0.02 $ 0.06 $ 0.04
======= ========= ========== ========
(a) As restated for the change in accounting method as described in Note A in
Item 1 of this report on Form Q.GAMCO INVESTORS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED
(In thousands, except per share data)
Three Months Ended
March 31,
-------------------------------
2005 (a) 2006 (a)
-------------- ---------------
Revenues
Investment advisory and incentive
fees $ 52,713 $ 50,398
Commission revenue 2,465 3,451
Distribution fees and other income 5,135 5,435
-------------- ---------------
Total revenues 60,313 59,284
-------------- ---------------
Expenses
Compensation and related costs 25,622 25,277
Management fee 2,206 3,367
Distribution costs 6,213 5,215
Other operating expenses 6,556 7,391
-------------- ---------------
Total expenses 40,597 41,250
-------------- ---------------
Operating income 19,716 18,034
-------------- ---------------
Other income (expense)
Net gain from investments 595 23,125
Interest and dividend income 3,472 6,373
Interest expense (3,929) (3,875)
-------------- ---------------
Total other income, net 138 25,623
-------------- ---------------
Income before income taxes and minority
interest 19,854 43,657
Income tax provision 7,445 16,371
Minority interest (20) 8,586
-------------- ---------------
Net income $ 12,429 $ 18,700
============== ===============
Net income per share:
Basic $ 0.42 $ 0.64
============== ===============
Diluted $ 0.41 $ 0.63
============== ===============
Weighted average shares outstanding:
Basic 29,560 29,180
============== ===============
Diluted 31,684 30,185
============== ===============
Dividends declared:
Quarterly $ 0.02 $ 0.03
============== ===============
(a) As restated for the change in accounting method as described in Note A in
item 1 of this report on Form 10-Q/A which were previously reported on Form
10-Q/A (Amendment No. 2) filed with the Securities and Exchange Commission on
November 9, 2006.
See accompanying notes.
4
GAMCO INVESTORS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except per share data)
December 31, June 30, June 30,
2005(a) 2006(a) 2005(a)
--------------------------------------------------------
ASSETS (Unaudited)
December 31, March 31, March 31,
2005 (a) 2005 (a) 2006 (a)
-------------- -------------- ---------------
ASSETS (Unaudited)
Cash and cash equivalents, including restricted cash of
$2,503, $730$51,811 and $1,508.$739. $ 170,659173,161 $ 116,852332,927 $ 191,413126,842
Investments in securities, including restricted securities
of $52,219, $52,141$51,895 and $52,270. 401,216 447,464 366,664$81,059. 421,404 293,455 412,031
Investments in partnerships and affiliates 91,971 89,380 85,71674,827 68,388 89,250
Receivable from brokers 8,545 39,490 24,2749,827 27,639 77,731
Investment advisory fees receivable 22,098 11,221 14,21022,499 16,619
Other assets 26,443 20,837 27,625
--------- --------- ---------26,821 25,581 20,798
-------------- -------------- ---------------
Total assets $ 720,932728,138 $ 725,244770,489 $ 709,902
========= ========= =========743,271
============== ============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Payable to brokers $ 43,937 $ 2,037- $ 13,406
Income taxes payable, including deferred taxes of $1,699,
$4,323,$708, and $296.$4,129. 10,097 1,913 2,7407,782 14,539
Compensation payable 27,820 36,082 30,37132,212 34,296
Capital lease obligation 2,992 2,891 3,0843,127 2,943
Securities sold, not yet purchased - - 3,3573,183 2,921 4,833
Accrued expenses and other liabilities 17,489 28,920 15,506
--------- --------- ---------17,579 18,990 20,590
-------------- -------------- ---------------
Total operating liabilities 58,402 71,843 55,059
--------- --------- ---------65,608 65,032 80,607
-------------- -------------- ---------------
5.5% Senior notes (due May 15, 2013) 100,000 100,000 100,000
5% Convertible note (conversion price, $52.00 per share;
note due August 14, 2011) 50,000 50,000100,000 50,000
5.22% Senior notes (due February 17, 2007) 82,308 82,308 82,308
--------- --------- ----------------------- -------------- ---------------
Total liabilities 290,710 304,151 287,367297,916 347,340 312,915
Minority interest 6,147 19,640 5,7036,135 19,997
Stockholders' equity
Class A Common Stock, $0.001 par value; 100,000,000
shares authorized; 9,648,339, 12,010,8129,612,314 and 9,621,0649,658,339
issued, respectively; 6,414,517, 7,509,0587,192,992 and
6,820,6425,645,985 outstanding, respectively 10 10 10
Class B Common Stock, $0.001 par value; 100,000,000
shares authorized; 23,128,500, 23,128,500 and
23,128,500 issued respectively;
23,128,500, 20,781,027 and 23,128,500 outstanding, respectively 23 23 23
Additional paid-in capital 226,353 228,573 235,104232,540 226,640
Retained earnings 329,036 354,576 292,335280,085 346,939
Accumulated comprehensive gain 526 2,423 1,8641,088 2,985
Treasury stock, at cost (3,233,822, 4,501,7542,419,322 and 2,800,4224,012,354
shares, respectively) (131,873) (184,152) (112,504)
--------- --------- ---------(96,732) (166,238)
-------------- -------------- ---------------
Total stockholders' equity 424,075 401,453 416,832
--------- --------- ---------417,014 410,359
-------------- -------------- ---------------
Total liabilities and stockholders' equity $ 720,932728,138 $ 725,244770,489 $ 709,902
========= ========= =========
(a) As restated for the change in accounting method as described in Note A in
Item 1 of this report on Form Q.743,271
============== ============== ===============
(a) As restated for (1) the change in accounting method which was previously
reported on Form 10-Q/A (Amendment No. 2) filed with the Securities and Exchange
Commission on November 9, 2006 as described in Note A in item 1 of this report
on Form 10-Q/A, and (2) the reporting of individual assets and liabilities of
certain proprietary investment accounts as described in Note A in item 1 of this
report on Form 10-Q/A.
See accompanying notes.
5
GAMCO INVESTORS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY AND COMPREHENSIVE INCOME
UNAUDITED
(In thousands)
Three Months Ended
Six Months Ended
June 30, June 30,
---------------------------------------------------------
2006(a) 2005(a) 2006(a) 2005(a)
--------- --------- --------- ---------
March 31,
-------------------------------
2005 (a) 2006 (a)
-------------- ---------------
Stockholders' equity - beginning of period $ 410,359334,878 $ 417,014 $ 424,075 $ 334,878
Cumulative effect of change in accounting principle (178) -
- - (178)
--------- --------- --------- ----------------------- ---------------
Beginning balance, as restated 410,359 417,014334,700 424,075 334,700
Comprehensive income:
Net income 8,641 12,900 27,341 25,32912,429 18,700
Foreign currency translation adjustments (128) (16) (53) 3450 74
Net unrealized (loss) gain on securities available for sale (588) 741 1,867 1,883
--------- --------- --------- ---------1,142 2,455
-------------- ---------------
Comprehensive income 7,925 13,625 29,155 27,24613,621 21,229
-------------- ---------------
Dividends declared (851) (599) (1,718) (1,334)(735) (867)
Stock option expense 14 2,275 20 2,760485 6
Proceeds from settlement of purchase contracts - - - 70,567
Excess tax benefit for exercised stock options 1,782 - 1,78270,568 -
Exercise of stock options including tax benefit 137 304 418 740
Capitalized costs - (15) - (15)435 281
Purchase of treasury stock (17,913) (15,772) (52,279) (17,832)
--------- --------- --------- ---------(2,060) (34,365)
-------------- ---------------
Stockholders' equity - end of period $ 401,453417,014 $ 416,832 $ 401,453 $ 416,832
========= ========= ========= =========
(a) As restated for the change in accounting method as described in Note A in
Item 1 of this report on Form Q.410,359
============== ===============
(a) As restated for the change in accounting method as described in Note A in
item 1 of this report on Form 10-Q/A which were previously reported on Form
10-Q/A (Amendment No. 2) filed with the Securities and Exchange Commission on
November 9, 2006.
See accompanying notes.
6
GAMCO INVESTORS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(In thousands)
Three Months Ended
Six Months Ended
June 30, June 30,
-----------------------------------------------------
2006(a) 2005(a) 2006(a) 2005(a)
------------ ------------ ------------March 31,
-------------------------------
2005 (a) 2006 (a)
-------------- ---------------
Operating activities
Net income $8,641 $12,900 $27,341 $25,329$ 12,429 $ 18,700
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Equity in gains from partnerships and affiliates (1,021) (538) (4,946) (2,696)(2,110) (2,864)
Depreciation and amortization 220 237 444 471234 224
Stock-based compensation expense 14 2,275 20 2,760485 6
Tax benefit from exercise of stock options 21 52 87 154102 66
Foreign currency loss 30 (9) 30 202211 -
Other-than-temporary loss on available for sale securities 56 122 56 3,3013,179 -
Impairment of goodwill 1,127 - - - 1,127
Minority interest in net income of consolidated subsidiaries 55 110 295 90(20) 240
Realized gains on sales of available for sale securities, net - - (442) -
Realized gains on sales of investments in securities, net (2,704) (534) (9,152) (1,767)(1,239) (6,585)
Change in unrealized value of investments in securities, net (2,493) (1,128) (2,589) (3,562)
Excess tax benefit adjustment 1,782 - 1,782 -(2,455) (1,018)
(Increase) decrease in operating assets:
Purchases of trading investments in securities (203,842) (147,495) (450,832) (535,101)(400,400) (287,602)
Proceeds from sales of trading investments in securities 166,816 70,231 451,032 473,392
Receivables from affiliates 2,277 (497) 5,439 580407,615 321,529
Investments in partnerships and affiliates (7,833) (4,126) (10,059) (10,683)(6,557) (1,225)
Distributions from partnerships and affiliates 7,075 4,248 7,923 17,00229,619 848
Investment advisory fees receivable 1,842 5,941 10,779 11,2272,938 5,430
Other receivables from affiliates 3,425 6,669
Receivable from brokers 37,151 (656) (27,005) (18,736)(22,100) (62,873)
Other assets 842 532 (31) (1,731)(2,290) (884)
Increase (decrease) in operating liabilities:
Payable to brokers 190 - 186 (301) (531)
Income taxes payable (12,260) (5,485) (9,376) (6,795)(1,310) 2,884
Compensation payable 1,891 (1,975) 7,931 3,2105,185 6,040
Accrued expenses and other liabilities 10,275 (3,499) 10,441 (2,278)1,221 215
Effects of consolidation of investment partnerships and offshore funds
consolidated under FIN 46R and EITF 04-5:
Realized gains on sales of investments in securities and securities
sold short, net (163) - (12,001) -(11,917)
Change in unrealized value of investments in securities and
securities sold short, net (2,942) - (4,782)(1,430)
Equity in net gains from partnerships and affiliates - (425)
Purchases of trading investments in securities and securities sold
short (9,218) - (648,099) -(642,059)
Proceeds from sales of trading investments in securities and
securities sold short 9,517 - 628,428619,704
Investments in partnerships and affiliates - Investment advisory fees receivable 98(982)
Distributions from partnerships and affiliates - 98 -380
Increase in receivable from brokers 1,042 - (9,757) -(12,469)
Decrease in other assets (21) - 387 -354
Increase in payable to brokers 1,847 - 7,630 -5,783
Decrease in accrued expenses and other liabilities (1,892) - (12,992) -(9,786)
Income related to investment partnerships and offshore funds
consolidated under FIN 46R and EITF 04-5, net 207 - 14,637 -
------------ ------------ ------------14,430
-------------- ---------------
Total adjustments (1,141) (82,194) (54,438) (70,134)
------------ ------------ ------------16,559 (58,290)
-------------- ---------------
Net cash provided by (used in) operating activities 7,500 (69,294) (27,097) (44,805)
------------ ------------ ------------28,988 (39,590)
-------------- ---------------
7
GAMCO INVESTORS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(In thousands)
Three Months Ended
Six Months Ended
June 30, June 30,
-----------------------------------------------------
2006(a) 2005(a) 2006(a) 2005(a)
------------ ------------ ------------March 31,
-------------------------------
2005 (a) 2006 (a)
-------------- ---------------
Investing activities
Purchases of available for sale securities (247) (1,016) (3,253) (4,960)(3,944) (3,006)
Proceeds from sales of available for sale securities - - 1,486
-
------------ ------------ ------------ -------------- ---------------
Net cash used in investing activities (247) (1,016) (1,767) (4,960)
------------ ------------ ------------(3,944) (1,520)
-------------- ---------------
Financing activities
Dividend paid to minority stockholders of subsidiary - (544) - (544)
Contributions related to investment partnerships and offshore funds
consolidated under FIN 46R and EITF 04-5, net 1,537 - 27,236 -28,190
Proceeds from exercise of stock options 116 253 332 586
Repurchase of 5% convertible note - (50,000) - (50,000)333 215
Dividends paid (851) (599) (1,718) (18,636)(18,037) (867)
Proceeds from the settlement of purchase contracts 70,568 - (1) - 70,567
Capitalized costs - (15) - (15)
Purchase of treasury stock (17,913) (15,772) (52,279) (17,832)
------------ ------------ ------------(2,060) (34,365)
-------------- ---------------
Net cash used inprovided by (used in) financing activities (17,111) (66,678) (26,429) (15,874)
------------ ------------ ------------50,804 (6,827)
-------------- ---------------
Net decreaseincrease (decrease) in cash and cash equivalents (9,858) (136,988) (55,293) (65,639)75,848 (47,937)
Net increase in cash from partnerships and offshore funds consolidated
under FIN 46R and EITF 04-5 - - 1,550 -
Effect of exchange rates on cash and cash equivalents (132) (27) (64) (44)
------------ ------------ ------------ --------------(17) 68
Cash and cash equivalents at beginning of period 126,842 328,428 170,659 257,096 ------------ ------------ ------------173,161
-------------- ---------------
Cash and cash equivalents at end of period $116,852 $191,413 $116,852 $191,413
============ ============ ============$ 332,927 $ 126,842
============== (a) As restated for the change in accounting method as described in Note A in
Item 1 of this report on Form Q.===============
(a) As restated for (1) the change in accounting method which was previously
reported on Form 10-Q/A (Amendment No. 2) filed with the Securities and Exchange
Commission on November 9, 2006 as described in Note A in item 1 of this report
on Form 10-Q/A, and (2) the reporting of individual assets and liabilities of
certain proprietary investment accounts as described in Note A in item 1 of this
report on Form 10-Q/A.
See accompanying notes.
8
GAMCO INVESTORS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30,March 31, 2006
(Unaudited)
A. Basis of Presentation
Unless we have indicated otherwise, or the context otherwise requires,
references in this report to "GAMCO Investors, Inc.," "GAMCO," "we," "us" and
"our" or similar terms are to GAMCO Investors, Inc. (formerly Gabelli Asset
Management Inc.), its predecessors and its subsidiaries.
The unaudited interim Condensed Consolidated Financial Statements of GAMCO
Investors, Inc. included herein have been prepared in conformity with generally
accepted accounting principles in the United States for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all the information and footnotes required
by generally accepted accounting principles in the United States for complete
financial statements. In the opinion of management, the unaudited interim
condensed consolidated financial statements reflect all adjustments, which are
of a normal recurring nature, necessary for a fair presentation of financial
position, results of operations and cash flows of GAMCO for the interim periods
presented and are not necessarily indicative of a full year's results.
In preparing the unaudited interim condensed consolidated financial
statements, management is required to make estimates and assumptions that affect
the amounts reported in the financial statements. Actual results could differ
from those estimates.
These financial statements should be read in conjunction with our audited
consolidated financial statements included in our Annual Report on Form 10-K for
the year ended December 31, 2005, from which the accompanying Condensed
Consolidated Statement of Financial Condition was derived.
Certain items previously reported have been reclassified to conform to the
current period's financial statement presentation.
ChangeChanges in Accounting Policy
GAMCO has voluntarily changed its accounting method to recognize management
fee revenues on closed-end preferred shares at the end of the measurement
period, effective January 1, 2006. Unlike most money management firms, GAMCO
does not charge fees on leverage in its closed-end funds unless the total return
to the common shareholders (of the closed-end fund at year-end) exceeds the
dividend rate of the preferred shares. In 2005, GAMCO recognized these revenues
during each interim reporting period if and when the total return to common
shareholders of the closed-end fund exceeded the dividend rate of the preferred
shares. Under this method, management fee revenues recognized in prior interim
periods during the measurement period were subject to possible reversal in
subsequent periods during that measurement period. Had this method not changed,
we would have recorded approximately $3.1$1.5 million in management fee revenues on
closed-end preferred shares for the three month period ended June
30,March 31, 2006.
In applying the voluntary change in accounting method as described in
the preceding paragraph, GAMCO should have also changed its accounting method
for investment partnerships. By not changing the method for the investment
partnerships,9
GAMCO inadvertently incorrectly applied the voluntary accounting change
discussed in the preceding paragraph because it did not include changing the
method of accounting for the investment partnerships. Therefore, GAMCO has
changed its accounting method to recognize incentive fee revenues on investment
partnerships at the end of the measurement period, effective January 1, 2006.
Previously,The restatement effects of this correction of the application of this accounting
change were previously reported in Form 10-Q/A (Amendment No. 2) filed with the
Securities and Exchange Commission on November 9, 2006. Prior to that correction
of the application of the voluntary accounting change, GAMCO recognized these
revenues during each interim reporting period. Under this method, incentive fee
revenues recognized in prior interim periods during the measurement period were
subject to possible reversal in subsequent periods during the measurement
period. Had this method not changed, we would have recorded approximately $1.1$1.3
million in incentive fee revenues on investment partnerships for the three month
period ended June 30,March 31, 2006. The result of the restatement includes a reduction
in net income of $0.2 million and $0.8$0.6 million and a reduction in fully diluted EPS of $0.01 per share and $0.03$0.02 per
share for the three month period ended June 30, 2006 and the six month period ended June
30, 2006 respectively.March 31, 2006.
After considering the guidance provided in EITF D-96, "Accounting for
Management Fees Based on Formula", GAMCO believes that the preferable method of
accounting is to recognize management fee revenues on closed-end preferred
shares and incentive fees on investment partnerships at the end of the
measurement period.
9
A. Basis of Presentation (continued) This method results in revenue recognition only when the
measurement period has been completed and when the management fees and incentive
fees have been earned. This eliminates the possibility of revenues that have
been recognized in interim measurement periods subsequently being reversed in
later periods during a fiscal year.
Under SFAS No. 154 "Accounting Changes and Error Corrections," which GAMCO
adopted on January 1, 2006, a voluntary change in accounting principle requires
retrospective application to each period presented as if the different
accounting principle had always been used and requires an adjustment at the
beginning of the first period presented for the cumulative effect of the change
to the new accounting principle. Whereas some investment partnerships have a
fiscal year-end differing from GAMCO's fiscal year-end, there is an adjustment
for the cumulative effect of a change to the accounting principle at January 1,
2005 and a change in full year 2005 revenues and net income from what was
previously reported. ThisTherefore, this change in accounting principle will resultresulted in
a reduction of revenues of approximately $1.2 million in the first quarter of
2005, approximately $23,000 in the second quarter of 2005, $5.5 million in the
third quarter of 2005 and an increase in revenues of $7.7 million in the fourth
quarter of 2005.
Quarter Ended (a)
($ millions) March 31, 2005 June 30, 2005 September 30, 2005 December 31, 2005
------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Revenue Reported $61.5 million $59.8 million $66.2 million $64.8 million
Restated $60.3 million $59.8 million $60.7 million $72.5
million----- ----- ----- -----
Change ($1.2) million - ($5.5) million $7.7 million
EPS Reported $0.42 $0.43 $0.64 $0.61
Restated $0.41 $0.42 $0.59 $0.67
----- ----- ----- -----
Change ($0.01) ($0.01) ($0.05) $0.06
(a) Differences due to rounding.
Recent Accounting Developments
In FebruaryAs disclosed in our Annual Report on Form 10-K for the year ended December
31, 2006 (filed with the FASB issued FASB Statement No. 155, "AccountingSecurities and Exchange Commission on March 19, 2007),
GAMCO is restating its financial statements included herein to properly report
individual assets and liabilities relating to certain of GAMCO's proprietary
investments. The assets and liabilities (primarily short positions and margin)
associated with these investment accounts were previously reported on a net
asset basis but should have been reported on a gross asset and liability basis.
This change had no effect on net income or stockholders' equity. See Item 7 and
Note A contained in Item 8 of our Annual Report on Form 10-K for Certain Hybrid Financial Instruments - an amendmentthe year ended
December 31, 2006 for further details. The impact of FASB Statement No.
133 and 140," that amends FASBthe change on our Condensed
Consolidated Statements No. 133 "Accounting for Derivative
Instruments and Hedging Activities," and No. 140 "Accounting for Transfers and
Servicing of Financial AssetsCondition for March 31, 2005, June 30,
2005, September 30, 2005 and ExtinguishmentsDecember 31, 2005, respectively, is as follows:
10
($ millions) 3/31/2005 6/30/2005 9/30/2005 12/31/2005
----------- ----------- ----------- ------------
Assets:
Reported $ 768.7 $ 709.9 $ 733.4 $ 720.9
Restated 770.5 712.0 738.2 728.1
----------- ----------- ----------- ------------
Change 1.8 2.1 4.8 7.2
Operating Liabilities:
Reported 63.2 55.1 64.7 58.4
Restated 65.0 57.2 69.5 65.6
----------- ----------- ----------- ------------
Change 1.8 2.1 4.8 7.2
Total Liabilities:
Reported 345.5 287.4 297.0 290.7
Restated 347.3 289.5 301.8 297.9
----------- ----------- ----------- ------------
Change 1.8 2.1 4.8 7.2
Equity:
Reported 417.0 416.8 430.5 424.1
Restated 417.0 416.8 430.5 424.1
----------- ----------- ----------- ------------
Change $ - $ - $ - $ -
The impact of Liabilities." Thethe change on our Condensed Consolidated Statement
permits fair value remeasurement for any hybrid financial instrument that
contains an embedded derivative that otherwise would require bifurcation;
clarifies which interest-only strips and principle-only strips are not subject
to the requirements of Statement 133; establishes a requirement to evaluate
interests in securitized financial assets to identify interests that are
freestanding derivatives or that are hybrid financial instruments that contain
an embedded derivative requiring bifurcation; Clarifies that concentrations of
credit risk in the form of subordination are not embedded derivatives; amends
Statement 140 to eliminate the prohibition on a qualifying special-purpose
entity from holding a derivative financial instrument that pertains to a
beneficial interest other than another derivative financial instrument.
Statement 155 does not permit prior period restatement. The Statement is
effective for all financial instruments acquired or issued after the beginning
of an entity's second fiscal year that begins after September 15, 2006. The
Company plans to adopt this Statement on January 1, 2007. The adoption is not
expected to have a material impact on the Company's future consolidated
financial statements.
In March 2006, the FASB issued FASB Statement No. 156, "Accounting for
Servicing of
Financial Assets," which amends FASB Statements No. 140 "Accounting
for Transfers and Servicing of FinancialCondition at March 31, 2006 is as follows:
Operating Total
($ millions) Assets and Extinguishments of
Liabilities." The Statement permits an entity to choose either the amortization
method or fair value measurement method for each class of separately recognized
servicing assets and servicing liabilities. The Statement is effective as of the
beginning of an entity's second fiscal year that begins after September 15,
2006. The Company plans to adopt this Statement on January 1, 2007. The adoption
is not expected to have a material impact on the Company's future consolidated
financial statements.
In April 2006, the FASB issued FSP FIN 46R-6 "Determining the
Variability to be Considered in Applying FASB Interpretation No. 46(R)." The FSP
addresses certain major implementation issues related to FIN 46R, specifically
how a reporting enterprise should determine the variability to be considered in
10
applying FIN 46R. The FSP is effective as of the beginning of the second day of
the second reporting period beginning after June 15, 2006. The Company plans to
adopt this Statement on January 1, 2007. The adoption is not expected to have a
material impact on the Company's future consolidated financial statements.
In June 2006, the FASB issued Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes" which is an interpretation of FASB Statement No.
109, "Accounting for Income Taxes". This Interpretation prescribes a recognition
threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expect to be taken in a tax return. This
Interpretation is effective for fiscal years beginning after December 15, 2006.
The Company plans to adopt this Statement on January 1, 2007. The adoption is
not expected to have a material impact on the Company's future consolidated
financial statements.Liabilities Liabilities Equity
----------- ------------ ------------ ------------
Reported $ 734.9 $ 72.2 $ 304.5 $ 410.4
Restated 743.3 80.6 312.9 410.4
----------- ------------ ------------ ------------
Change $ 8.4 $ 8.4 $ 8.4 $ -
B. Investment in Securities
Management determines the appropriate classification of debt and equity
securities at the time of purchase and reevaluates such designation as of each
balance sheet date. Investments in Treasury Bills and Notes with maturities of
greater than three months at the time of purchase are classified as investments
in securities and with maturities of three months or less at time of purchase
are classified as cash and cash equivalents. A substantial portion of
Investments in Securities are held for resale in anticipation of short-term
market movements and therefore are classified as trading securities. Trading
securities are stated at fair value, with any unrealized gains or losses, net of
deferred taxes, reported in current period earnings. Available
for sale ("AFS") investments are stated at fair value, with any unrealized gains
or losses, net of deferred taxes, reported as a component of stockholders'
equity except for losses deemed to be other than temporary which are recorded as
realized losses in the statement of income.
ForThe Company accounts for derivative financial instruments in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 133 ("Statement
No. 133"), Accounting for Derivative Instruments and Hedging Activities, as
amended. Statement No. 133 requires that an entity recognize all derivatives, as
defined, as either assets or liabilities measured at fair value. The Company
uses swaps and treasury futures to manage its exposure to market and credit
risks from changes in certain equity prices, interest rates, and volatility and
does not hold or issue swaps and treasury futures for speculative or trading
purposes. These swaps and treasury futures are not designated as hedges, and
changes in fair values of these derivatives are recognized in earnings as gains
(losses) on derivative contracts. The fair value of swaps and treasury shares
are included in the threeinvestments in securities in the statements of financial
condition, and six month periods ended June 30, 2006, there were
$0.1 milliongains and losses from the swaps and treasury shares are included
in losses on AFS securities deemed to be other than temporary which
were recordednet gain from investments in the statement of income.
11
For the three and sixmonths ended March 31, 2006, there was no impairment of AFS
securities. For the three month periodsperiod ended June 30,March 31, 2005, there were $0.1was $3.2
million in losses and $3.3 million in
losses, respectively, on AFS securities deemed to be other than temporary which were
recorded in the statement of income.
The losses related to AFS securities in the sixthree month period ended June
30,March
31, 2005 were partially offset by gains related to our $100,000 venture capital
investment in optionsXpress Holdings, Inc. (Nasdaq: OXPS) made in 2001 through
our 92% owned subsidiary, Gabelli Securities, Inc. OXPS completed its initial
public offering during the first quarter of 2005. We recorded a total gain of
$2.1 million on OXPS for the first sixthree months of 2005.
For the six month period
ended June 30,At March 31, 2006 we recorded a gain of $0.5 million on OXPS.
At June 30, 2006 and June 30, 2005, the market value of investments available for
sale was $86.7$87.6 million and $80.9$78.5 million, respectively. An
unrealized gainUnrealized gains in
market value, net of management fee and taxes, of $2.4$3.0 million and $1.9$1.1 million
hashave been included in stockholders' equity for June 30,the three month periods ended
March 31, 2006 and June 30, 2005, respectively.
The unrealized gain inProceeds from sales of investments available for sale were approximately
$1.5 million for the sixthree month period ended June 30, 2005 included an increase of $1.9 million, net of
management fee and taxes, from the write down of available for sale securities
when these losses were reclassified from comprehensive loss within stockholders'
equity to current period statement of income for the six months ended June 30,
2005.March 31, 2006. There were no
sales of investments available for sale for the three month period ended June 30, 2006 or for the three and six month periods ended
March
31, 2005 and June 30, 2005. Proceeds from salesFor the first three months of 2006, gross gains on the sale of
investments available for sale amounted to $442,000; there were approximately $1.5 millionno gross losses
on the sale of investments available for the six month period ended June 30,
2006.sale.
C. Investments in Partnerships and Affiliates
Beginning January 1, 2006, the provisions of FASB Interpretation No.FIN 46R ("FIN 46R") and Emerging Issue Task ForceEITF 04-5 ("EITF 04-5")have
been adopted and require consolidation of the majority of our investment
partnerships and offshore funds managed by our subsidiaries into our consolidated financial statements.subsidiaries. However, since we amendeddue to
amendments effected to some of these partnership and offshore fund agreements
during the agreementsthree month period ended March 31, 2006, consolidation of certain investment partnerships and an
offshore fundthese
entities ceased on March 31, 2006 FIN46Rin accordance with FIN 46R and EITF 04-5 only required us to
consolidate04-5.
Accordingly, these entities are consolidated on our statement of income statement and our
statement of cash flows for the first quarter 2006. We werethree months ended March 31, 2006 but not required to consolidate these entities
on our balance sheetthe
statement of financial condition at March 31, 2006.
In addition, these partnerships and
offshore funds, for which the agreements were amended, are not required to be
11
C. Investments in Partnerships and Affiliates (continued)
consolidated within our statement of income and statement of cash flows or on
our balance sheet in the second quarter or future periods. However, for the six
months ended June 30, 2006, the consolidation of these entities for the first
quarter 2006 does affect the classification of income between operating and
other income. As a result, we have provided our results for the six month period
through June 30, 2006 before adjusting for FIN46R and EITF 04-5 as we believe
this basis is comparable to our reported results for the six months ended June
30, 2005.
We consolidated fourfive other investment partnerships and two offshore funds
in which we have a direct or indirect controlling financial interest as of and
for the three and six monthsperiod ended June 30,March 31, 2006. These entities have been consolidated
within our financial statements for the three and six month periods
ended June 30,first quarter 2006 and will continue to
be consolidated in future periods as long as we continue to maintain a direct or
indirect controlling financial interest. In addition to minor FIN 46R and EITF
04-5 adjustments to the statement of income and statement of cash flows for the
three and six month
periodsmonths ended June 30,March 31, 2006 related to these entities, the consolidation
of these entities also resulted in minor adjustments to our statement of
financial condition at June 30,March 31, 2006. The consolidation of these entities on
the statement of financial condition has increased assets by $16.0$16.5 million,
liabilities by $2.8$2.9 million and minority interest by $13.2$13.6 million. Prior to
consolidation of these entities, our investments in these entities were
reflected within Investments in partnerships and affiliates on the statement of
financial condition and accounted for under the equity method.
For the three and six months ended June 30,March 31, 2006, the consolidation of these
entities had no impact on net income but did result in (a) the elimination of
revenues and expenses which are now intercompany transactions; (b) the recording
of all the partnerships' operating expenses of these entities including those
pertaining to third-party interests; (c) the recording of all other income of
these entities including those pertaining to third-party interests; (d)
recording of income tax expense of these entities including those pertaining to
third party interests and (e) the recording of minority interest which offsets
the net amount of any of the partnerships' revenues, operating expenses, other
income and income taxes recorded in these respective line items which pertain to
third-party interest in these entities. While this had no impact on net income,
the consolidation of these entities does affect the classification of income
between operating and other income.
12
D. Earnings Per Share
The computations of basic and diluted net income per share are as follows:
Three Months Ended Six Months Ended
June 30, June 30,
2006(a) 2005(a) 2006(a) 2005(a)
--------------- --------------- --------------- -------------
(in thousands, except per share amounts)
Basic:
Net income $ 8,641 $ 12,900 $ 27,341 $ 25,329
=============== =============== =============== =============
Average shares outstanding 28,507 30,079 28,842 29,821
=============== =============== =============== =============
Basic net income per share $0.30 $0.43 $0.95 $0.85
=============== =============== =============== =============
Diluted:
Net income $ 8,641 $ 12,900 $ 27,341 $ 25,329
Add interest expense on 5% convertible
note, net of management fee and taxes 351 352 703 1,055
--------------- --------------- --------------- -------------
Total $ 8,992 $ 13,252 $ 28,044 $ 26,384
=============== =============== =============== =============
Average shares outstanding 28,507 30,079 28,842 29,821
Dilutive stock options 27 171 34 186
Assumed conversion of 5% convertible note 962 961 962 1,440
--------------- --------------- --------------- -------------
Total 29,496 31,211 29,838 31,447
=============== =============== =============== =============
Diluted net income per share $ 0.30 $ 0.42 $ 0.94 $ 0.84
=============== =============== =============== =============
(a) As restated for the change in accounting method as described in Note A in
Item 1 of this report on Form Q.
12
Three Months Ended
March 31,
(in thousands, except per share amounts) 2005 (a) 2006 (a)
---------- -----------
Basic:
Net income $ 12,429 $ 18,700
Average shares outstanding 29,560 29,180
---------- -----------
Basic net income per share $ 0.42 $ 0.64
========== ===========
Diluted:
Net income $ 12,429 $ 18,700
Add interest expense on 5% convertible note,
net of management fee and taxes 703 352
---------- -----------
Total $ 13,132 $ 19,052
========== ===========
Average shares outstanding 29,560 29,180
Dilutive stock options 201 43
Assumed conversion of 5% convertible note 1,923 962
---------- -----------
Total 31,684 30,185
========== ===========
Diluted net income per share $ 0.41 $ 0.63
========== ===========
(a) As restated for the change in accounting method as described in Note A in
item 1 of this report.
E. Stockholders' Equity
Shares outstanding on June 30, 2006 were 28,290,085, approximately
1.7% lower than the March 31, 2006 were 28,774,485, which is
approximately 2.6% lower than shares outstanding shares of 28,774,485,29,543,017 at the end of
2005 and approximately 5.5%5.1% below the 29,949,142 shares outstanding of 30,321,492 on June 30,March 31,
2005. Fully diluted shares outstanding for the secondfirst quarter of 2006 were
29,495,75930,185,312 approximately 2.3%1.5% lower than firstfourth quarter 20062005 fully diluted
shares of 30,185,31230,652,102 and approximately 5.5%4.7% lower than our fully diluted shares
of 31,211,34731,684,268 for the secondfirst quarter 2005.
In June 2006, the holders of 2,347,473 Class B shares exchanged their
Class B shares for an equal number of Class A shares.2005, primarily due to our stock repurchase
program.
The 2,347,473 Class A
shares are currently unregistered with Securities and Exchange Commission
("SEC") and GAMCO intends to file a registration statement for the Class A
shares with the SEC in the near future. 2,071,635 of these Class A shares are
subject to a lockup period of two years, beginning on the date of registration
of the shares with the SEC. On the first day of every month during the lockup
period, one-twenty fourth (1/24th) of these 2,071,635 Class A shares are freed
from the lockup restrictions and thereafter may be sold in the public markets or
otherwise disposed of. As of June 30, 2006, there were 7,509,058 of Class A
shares outstanding compared to 5,645,985 shares outstanding at March 31, 2006.
On May 8, 2006, the Board of Directors declared a quarterly dividend of $0.03 per share
that was paid on JuneMarch 28, 2006 to shareholders of record on JuneMarch 15, 2006.
Stock Award and Incentive Plan
Effective January 1, 2003, we adopted the fair value recognition provisions
of SFAS No. 123 in accordance with the transition and disclosure provisions
under the recently issued SFAS No. 148, "Accounting for Stock Based Compensation
- - Transition and Disclosure."
We adopted SFAS 123 (R) on January 1, 2005. In light of our modified
prospective adoption of the fair value recognition provisions of SFAS 123 (R)
for all grants of employee stock options, the adoption of SFAS 123 (R) did not
have a material impact on our consolidated financial statements. During June
2005, we announced that our Board of Directors approved the accelerated vesting
of all unvested stock options. In accordance with Statement of Financial
Accounting Standards ("SFAS") 123(R), the acceleration of vesting resulted in
the recognition of approximately $1.8 million of incremental compensation
expense during the second quarter 2005. For the three months ended June 30,
2006, we recognized a tax benefit from previously exercised stock options of
$1.8 million. For the three months ended June 30,March 31,
2006 and 2005, we recognized stock-based compensation expense of approximately $14,000$6,000 and
$2.3 million,
respectively. For the six months ended June 30, 2006 and 2005, we recognized
stock-based compensation expense of approximately $20,000 and $2.3 million,$485,000, respectively. The total compensation costs related to non-vested
awards not yet recognized is approximately $0.2 million.$104,000. This will be recognized as
expense in the following periods:
13
Remainder
of 2006 2007 2008 2009
2010
------- ---- ---- ---- ----
$33,000 $67,000 $62,000 $20,000 $2,000--------- --------- --------- ---------
$29,000 $37,000 $32,000 $6,000
Proceeds from the exercise of 5,00010,000 and 8,75013,475 stock options were approximately $133,000$215,000
and $253,000$333,000 for the three months ended June 30,March 31, 2006 and 2005, respectively,
resulting in a tax benefit to GAMCO of $21,000$66,000 and $52,000$102,000 for the three months
ended June 30,March 31, 2006 and 2005, respectively.
Proceeds fromStock Repurchase Program
In March 1999, the exerciseBoard of 15,000 and 22,225 stock options were approximately $348,000 and
$586,000 forDirectors established the six months ended June 30, 2006 and 2005, respectively,
resulting in a tax benefitStock Repurchase
Program to GAMCOgrant us authority to repurchase shares of $87,000 and $154,000 forour Class A common stock.
For the three months ended June 30, 2006 and 2005, respectively.
13
Stock Repurchase Program
Our stock buyback program was initiated in March 1999. In the second
quarter of31, 2006, we repurchased 489,400778,532 shares at an
average investment of $36.58. In May$44.13. Since the inception of the program we have
repurchased 4,113,158 shares at an average investment of $39.87 per share.
During March 2006, ourthe Board of Directors authorized an additional 400,000500,000
shares to be repurchased bringingrepurchased. At March 31, 2006, the total amount of shares currently available
to be repurchased under
the program to be repurchased was approximately 714,000 shares at June 30,
2006. In the period since our buyback program was initiated, 4,602,558 class A
common shares have been repurchased through June 30, 2006 at an average
investment of $39.52 per share.804,000.
F. Debt
In May 2006, the SEC declared effective the Company's $400 million
"shelf" registration statement on Form S-3. This provides us flexibility to sell
any combination of senior and subordinate debt securities, convertible debt
securities and equity securities (including common and preferred securities) up
to a total amount of $520 million, which includes the remaining $120 million
available under our shelf registration filed in 2001.
In June 2006, GAMCO and Cascade Investments L.L.C. ("Cascade") agreed
to amend the terms of the $50 million convertible note maturing in August 2011.
The rate on the note will increase from 5% to 6% while the conversion price will
be raised to $53 per share from $52 per share, in each case effective September
15, 2006. In addition, the exercise date of Cascade's put option was extended to
May 15, 2007, the expiration date of the related letter of credit was extended
to May 22, 2007 and a call option was included giving GAMCO the right to redeem
the note at 101% of its principle amount together with all accrued but unpaid
interest thereon upon at least 30 days prior written notice, subject to certain
provisions.
G. Goodwill
In accordance with SFAS 142 "Accounting for Goodwill and Other Intangible
Assets," we assess the recoverability of goodwill and other intangible assets at
least annually, or more often should events warrant. There was no impairment
charge recorded for the three month or six month periodsmonths ended June 30,March 31, 2006. During the first
quarter of 2005, assets under management for our fixed income business decreased
approximately 42% from the beginning of the year, triggering under our
accounting policies the need to reassess goodwill for this 80% owned subsidiary.
Using a present value cash flow method, we reassessed the recoverability of goodwill for this entity
and determined that the value of the entity no longer justified the amount of
goodwill. Accordingly, we recorded a charge of $1.1 million during the first quarter of 2005 for the impairment
of goodwill that represented the entire amount of goodwill for this entity.entity
during the first quarter of 2005. At June
30,March 31, 2006, there remains $3.5 million included in other assets,
of goodwill related to our 92% owned subsidiary, Gabelli Securities, Inc.
H.G. Other Matters
Since September 2003, GAMCOGBL and certain of its subsidiaries have received, and have been cooperating with inquiriesresponding
to, information requests and subpoenas from the N.Y.New York Attorney General's
officeOffice and the SEC by providingrequesting documents and testimony regarding certainon mutual fund share
trading practices. In June 2006, we began discussions with the SEC for a potential
resolution of their inquiry. As a result of these discussions, GAMCO recorded a
reserve against earnings of approximately $12 million. Since these discussions
arethis matter is ongoing, we cannot determine at this
time whether they will ultimately
result in a settlement ofwhat effect, if any, this matter whether our reserves will be sufficient
to cover any payments by GAMCO related to such a settlement,may have on GBL's financial position or
whether and to
what extent insurance may cover such payments.
14
the results of its operations.
In November 2002, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness to Others" ("FIN 45"),
which provides accounting, and disclosure requirements for certain guarantees.
The disclosure requirements are effective for financial statements of interim or
annual periods ending after December 15, 2002. The Interpretation's initial
recognition and initial measurement provisions are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002. We indemnify our
clearing brokers for losses they may sustain from the customer accounts
introduced by our broker-dealer subsidiaries. In accordance with NYSE rules
customer balances are typically collateralized by customer securities or
supported by other recourse provisions. In addition, we further limit margin
balances to a maximum of 25% versus 50% permitted under Regulation T of the Federal Reserve Board and exchange regulations. At
June 30,March 31, 2006 and June 30, 2005 the total amount of customer balances subject to
indemnification (i.e. margin debits) was immaterial. The Company also has
entered into arrangements with various other third parties which provide for
indemnification against losses, costs, claims and liabilities arising from the
performance of their obligations under our agreement, except for gross
negligence or bad faith. The Company has had no claims or payments pursuant to
these or prior agreements, and we believe the likelihood of a claim being made
is remote. Utilizing the methodology in FIN 45, our estimate of the value of
such agreements is de minimis, and therefore an accrual has not been made in the
financial statements.
I.14
H. Subsequent Events
From JulyApril 1 through July 31,May 5, 2006, we repurchased 45,800413,400 shares of our
class A common stock, under the Stock Repurchase Program, at an average
investment of $34.31$37.04 per share. On May 8, 2006, our Board of Directors
authorized the repurchase of an additional 400,000 shares of our Class A common
stock, bringing the total available authorization to approximately 790,000
shares.
On May 8, 2006, our Board of Directors declared a quarterly dividend of
$0.03 per share to be paid on June 28, 2006 to shareholders of record on June
15, 2006.
On May 8, 2006, the SEC declared effective the Company's $400 million
"shelf" registration statement on Form S-3. This provides us opportunistic
flexibility to sell any combination of senior and subordinate debt securities,
convertible debt securities and equity securities (including common and
preferred securities) up to a total amount of $520 million, which includes the
remaining $120 million available under our shelf registration filed in 2001.
15
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (INCLUDING QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK)
Overview
GAMCO Investors, Inc. (formerly Gabelli Asset Management Inc.) (NYSE: GBL)
is a widely recognized provider of investment advisory services to mutual funds,
institutional and high net worth investors, and investment partnerships. Through
Gabelli & Company, Inc., we provide institutional research services to
institutional clients and investment partnerships. We generally manage assets on
a discretionary basis and invest in a variety of U.S. and international
securities through various investment styles. Our revenues are based primarily
on the firm's levels of assets under management and fees associated with our
various investment products, rather than our own corporate assets.
Since 1977, we have been identified with and enhanced the "value" style
approach to investing. Our investment objective is to earn a superior
risk-adjusted return for our clients over the long-term through our proprietary
fundamental research. In addition to our value products, we offer our clients a
broad array of investment strategies that include growth, international and
convertible products. We also offer non-market correlated, and fixed income
strategies. By earning returns for our clients, we will be earning returns for
all our constituents.
As part of our re-branding initiative to accelerate growth, our corporate
name change to GAMCO Investors, Inc. became effective August 29, 2005. Since the
firm was founded in 1977, GAMCO has been the name of our asset management
business, representing our institutional and high net worth effort. We believe
changing our corporate name to GAMCO helps us achieve our vision for assets
entrusted to us, that is, to earn a superior return for our clients by providing
various value-added (alpha) products. GAMCO is a more inclusive parent company
name, and more appropriately represents the various investment strategies and
asset management brands contributing to the continued growth of our company. The
Gabelli brand will continue to represent our absolute return, research driven
Value style that focuses on our unique Private Market Value with a Catalyst (TM)
investment approach. Our class A common stock will continue to trade on the New
York Stock Exchange under the ticker symbol "GBL". As part of this initiative,
the directors of our mutual funds approved in November 2005 the name change of
the Growth, the Global Series, the Mathers and the International Growth funds
(among others) to GAMCO from Gabelli, which became effective in December 2005.
The funds that reflect the Private Market Value with a Catalyst approach will
continue under the Gabelli brand.
Our revenues are highly correlated to the level of assets under management,
which are directly influenced by the level and changes of the overall equity
markets. Assets under management 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 assets under management and hence, revenues.
This becomes increasingly likely as the base of assets grows.
We conduct our investment advisory business principally through: GAMCO
Asset Management Inc. (Separate Accounts), Gabelli Funds, LLC (Mutual Funds) and
Gabelli Securities, Inc. (Investment Partnerships). We also act as an
underwriter, are a distributor of our open-end mutual funds and provide
institutional research through Gabelli & Company, Inc., our broker-dealer
subsidiary.
16
Assets Under Management (AUM) were $26.8 billion asAs of June 30, 2006,
3.1% lower than March 31, 2006, and June 30, 2005 AUMwe had $27.6 billion of $27.6 billion. Equity assets under management
(AUM), approximately 96.9% of which were $25.9 billion on June 30, 2006, down 3.4% from
March 31, 2006in equity assets of $26.8 billion, and down 2.4% from $26.5 billion
on June 30, 2005.products. Our equity open-end
mutual funds and closed-end funds stood at $13.1had a record $14.3 billion in AUM on June 30, 2006, 4.6% higher thanat quarter
end, 4.2% above the $12.5$13.7 billion on June 30,December 31, 2005 but 3.0% belowand 5.2% ahead of the
$13.5$13.6 billion level on March 31, 2006. Our2005. In the institutional and high net worth segment
of our business, GAMCO Asset Management Inc. had AUM of $12.3$12.6 billion in
separately managed equity accounts on June 30,March 31, 2006, 2.9% lower than2.1% ahead of the $12.6$12.4
billion on December 31, 2005 but down 5.4% from the $13.4 billion on March 31,
2006, and 7.0% under the $13.2 billion on June 30, 2005. AUMAssets in our investment partnerships were $536$681 million, versus $6817.4% ahead of
year-end 2005 assets of $634 million but 20.3% below the $854 million on March
31, 2006
and $831 million on June 30, 2005. Fixed income AUM,assets, primarily money market mutual funds, totaled $918$866
million on June 30, 2006, up 6% from the March 31, 2006, 5.7% ahead of year-end 2005 assets of $866$819 million
and 18%but 39.0% lower than fixed income AUMassets of $1.1$1.4 billion on June 30,March 31, 2005, which was
principally duerelated to the closingwithdrawal of assets from the Treasurer's Fund, inwhich
was closed during the fourth quarter of 2005.
17
Assets Under Management
The company reported assets under management as follows:
Table I:
Assets Under Management (in millions)
------------------------------------------
June 30
---------------------------------------------------------------
March 31
---------------------- %
2005 2006 Inc. (Dec.)
------------------------ ---------- ------------ --------------
Mutual Funds:
Equities
Open endEnd $ 7,7987,808 $ 7,796 (0.0)%
Closed-end 4,684 5,258 12.38,176 4.7%
Closed-End 4,602 5,284 14.8
Fixed Income 852 863 1.3
-------------- ------------1,154 807 (30.1)
-----------------------
Total Mutual Funds 13,334 13,917 4.4
-------------- ------------13,564 14,267 5.2
-----------------------
Institutional & High Net Worth Separate
Accounts:
Equities 13,189 12,270 (7.0)13,364 12,639 (5.4)
Fixed Income 269 55 (79.6)
-------------- ------------266 59 (77.8)
-----------------------
Total Institutional & High Net Worth Separate
Accounts 13,458 12,325 (8.4)
-------------- ------------13,630 12,698 (6.8)
-----------------------
Investment Partnerships 831 536 (35.5)
-------------- ------------854 681 (20.3)
-----------------------
Total Assets Under Management $27,623 $26,778 (3.1)
============== ============$ 28,048 $ 27,646 (1.4)
=======================
Equities $26,502 $25,860 (2.4)26,628 26,780 0.6
Fixed Income 1,121 918 (18.1)
-------------- ------------1,420 866 (39.0)
-----------------------
Total Assets Under Management $27,623 $26,778 (3.1)
============== ============
$ 28,048 $ 27,646 (1.4)
=======================
Table II: Fund Flows - 2nd1st Quarter 2006 (in millions)
-------------------------------------------
Market
MarchDecember 31, Net Appreciation / June 30,
2006March 31,
2005 Cash Flows (Depreciation) 2006
-------------- ----------- --------------- ----------------------------- --------------- ----------------
Mutual Funds:
Equities $13,460$ 12,963 ($411)220) $ 5 $13,054717 $ 13,460
Fixed Income 735 64 8 807
43 13 863
-------------- ----------- --------------- ----------------------------- --------------- ----------------
Total Mutual Funds 13,698 (156) 725 14,267
(368) 18 13,917
-------------- ----------- --------------- ----------------------------- --------------- ----------------
Institutional & HNW Separate Accounts
Equities 12,382 (595) 852 12,639 (376) 7 12,270
Fixed Income 84 (26) 1 59
(5) 1 55
-------------- ----------- --------------- ----------------------------- --------------- ----------------
Total Institutional & HNW Separate
Accounts 12,466 (621) 853 12,698
(381) 8 12,325
-------------- ----------- --------------- ----------------------------- --------------- ----------------
Investment Partnerships 634 22 25 681
(155) 10 536
-------------- ----------- --------------- ----------------------------- --------------- ----------------
Total Assets Under Management $27,646$ 26,798 ($904) $36 $26,778
============== =========== 755) $ 1,603 $ 27,646
=============== ==============
=============== =============== ================
Table III: Assets Under Management (in millions)
----------------------------------------------------------------
Table III:----------------------------------------------------------
%
Increase/(decrease)
3/05 6/05 9/05 12/05 3/06 6/0612/05 3/06 6/05
---------- ---------- ---------- ---------- ---------- -------- --------- --------- --------- ------------ ----------
Mutual Funds
Open end $ 7,808 $ 7,798 $ 7,959 $ 7,888 $ 8,176 $ 7,796 (4.6)% (0.0)%3.7% 4.7%
Closed-end 4,602 4,684 4,851 5,075 5,284 5,258 (0.5) 12.34.1 14.8
Fixed income 1,154 852 796 735 807 863 6.9 1.39.8 (30.1)
---------- ---------- --------- --------- ------------------- ---------- ----------
Total Mutual Funds 13,564 13,334 13,606 13,698 14,267 13,917 (2.5) 4.44.2 5.2
---------- ---------- --------- --------- ------------------- ---------- ----------
Institutional & HNW Separate
Accounts:
Equities 13,364 13,189 13,129 12,382 12,639 12,270 (2.9) (7.0)2.1 (5.4)
Fixed Income 266 269 158 84 59 55 (6.8) (79.6)(29.8) (77.8)
---------- ---------- --------- --------- ------------------- ---------- ----------
Total Institutional & HNW Separate
Accounts 13,630 13,458 13,287 12,466 12,698 12,325 (2.9) (8.4)1.9 (6.8)
---------- ---------- --------- --------- ------------------- ---------- ----------
Investment Partnerships 854 831 745 634 681 536 (21.3) (35.5)7.4 (20.3)
---------- ---------- --------- --------- ------------------- ---------- ----------
Total Assets Under Management $27,623 $27,638 $26,798 $27,646 $26,778 (3.1) (3.1)$ 28,048 $ 27,623 $ 27,638 $ 26,798 $ 27,646 3.2 (1.4)
========== ========== ========= ========= =================== ========== ==========
18
Recent regulatory developments
On September 3, 2003, the New York Attorney General's office ("NYAG")
announced that it had found evidence of widespread improper trading involving
mutual fund shares. These transactions included the "late trading" of mutual
fund shares after the 4:00 p.m. pricing cutoff and "time zone arbitrage" of
mutual fund shares designed to exploit pricing inefficiencies. Since the NYAG's
announcement, the NASD, the SEC, the NYAG and officials of other states have
been conducting inquiries into and bringing enforcement actions related to
trading abuses in mutual fund shares. We have received information requests and
subpoenas from the SEC and the NYAG in connection with their inquiries. We are
complying with these requests for documents and testimony and have been
conducting an internal review of our mutual fund practices and procedures in a
variety of areas with the guidance of outside counsel. A special committee of
all of our independent directors was also formed to review various issues
involving mutual fund share transactions and was assisted by independent
counsel.
As part of our review, hundreds of documents were examined and
approximately fifteen individuals were interviewed. We have found no evidence
that any employee participated in or facilitated any "late trading". We also
have found no evidence of any improper trading in our mutual funds by our
investment professionals or senior executives. As we previously reported, we did
find that in August of 2002, we banned an account, which had been engaging in
frequent trading in our Global Growth Fund (the prospectus of which did not
impose limits on frequent trading) and which had made a small investment in one
of our hedge funds, from further transactions with our firm. Certain other
investors had been banned prior to that. We also found that certain discussions
took place in 2002Since our internal review and 2003 between GAMCO's staffrequests
from regulators for documents and personnel of an investment
advisor regarding possible frequent trading in certain Gabelli domestic equity
funds. In June 2006, we began discussions with the SEC for a potential
resolution of their inquiry. As a result of these discussions, GAMCO recorded a
reserve against earnings of approximately $12 million. Since these discussionstestimony are ongoing, we cannot determine at this time whether theycan make no
assurances that additional information will ultimately
result in a settlement of this matter, whether our reservesnot become available or that we will
be sufficientnot become subject to cover any payments by GAMCO related to such a settlement, or whether and to
what extent insurance may cover such payments.disciplinary action.
In September 2005, we were informed by the staff of the Securities and
Exchange Commission that they may recommend to the Commission that one of our
advisory subsidiaries be held accountable for the actions of two of the seven
closed-end funds managed by the subsidiary relating to Section 19(a) and Rule
19a-1 of the Investment Company Act of 1940. These provisions require registered
investment companies to provide written statements to shareholders when a
dividend is made from a source other than net investment income. While the funds
sent annual statements containing the required information and 1099 statements
as required by the IRS, the funds did not send written statements to
shareholders with each distribution in 2002 and 2003. The staff indicated that
they may recommend to the Commission that administrative remedies be sought,
including a monetary penalty. The closed-end funds changed their notification
procedures and we believe that all of the funds are now in compliance.
In response to industry-wide inquiries and enforcement actions, a number of
regulatory and legislative initiatives were introduced. The SEC has proposed and
adopted a number of rules under the Investment Company Act and the Investment
Advisers Act and is currently studying potential major revisions of other rules.
The SEC adopted rules requiring written compliance programs for registered
investment advisers and registered investment companies and additional
disclosures regarding portfolio management and advisory contract renewals. In
addition, several bills were introduced in a prior Congress that, if adopted,
would have amended the Investment Company Act. These proposals, if reintroduced
and enacted, or if adopted by the SEC, could have a substantial impact on the
regulation and operation of our registered and unregistered funds. For example,
certain of these proposals would, among other things, limit or eliminate Rule
12b-1 distribution fees, limit or prohibit third party soft dollar arrangements
and restrict the management of hedge funds and mutual funds by the same
portfolio manager.
In the coming months, 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 SEC has substantially
increased its use of focused inquiries in which it requests information from 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 impact.
19
The following discussion should be read in conjunction with the Condensed
Consolidated Financial Statements and the notes thereto included in Item 1 to
this report.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2006 Compared To Three Months Ended June 30, 2005
Consolidated Results - Three Months Ended June 30:
(Unaudited; in thousands, except per share data)
------------------------------------------------
2006(a) 2005(a)
------------- --------------
Revenues
Investment advisory and incentive fees $ 53,586 $ 52,336
Commission revenue 2,722 2,574
Distribution fees and other income 5,351 4,908
------------- --------------
Total revenues 61,659 59,818
Expenses
Compensation and related costs 26,021 26,919
Management fee 1,760 2,313
Distribution costs 5,329 4,535
Reserve for settlement 11,900 -
Other operating expenses 7,713 6,502
------------- --------------
Total expenses 52,723 40,269
------------- --------------
Operating income 8,936 19,549
Other income (expense)
Net gain from investments 4,244 387
Interest and dividend income 6,111 4,157
Interest expense (3,394) (3,275)
------------- --------------
Total other income (expense), net 6,961 1,269
------------- --------------
Income before taxes and minority interest 15,897 20,818
Income tax provision 7,163 7,808
Minority interest 93 110
------------- --------------
Net income $ 8,641 $ 12,900
============= ==============
Net income per share:
Basic $ 0.30 $ 0.43
============= ==============
Diluted $ 0.30 $ 0.42
============= ==============
Reconciliation of Net income to Adjusted
EBITDA:
Net income $ 8,641 $12,900
Interest Expense 3,394 3,275
Income tax provision and minority interest 7,256 7,918
Depreciation and amortization 220 237
------------- --------------
Adjusted EBITDA(b) $ 19,511 $24,330
------------- --------------
(a) As restated for the change in accounting method as described in Note A in
Item 1 of this report on Form Q.
(b) Adjusted EBITDA is defined as earnings before interest, taxes, depreciation
and amortization, and minority interest. Adjusted EBITDA is a Non-GAAP
measure and should not be considered as an alternative to any measure of
performance as promulgated under accounting principles generally accepted in
the United States nor should it be considered as an indicator of our overall
financial performance. We use Adjusted EBITDA as a supplemental measure of
performance as we believe it gives investors a more complete understanding
of our operating results before the impact of investing and financing
activities as a tool for determining the private market value of an
enterprise.
20
Total revenues were $61.7 million in the second quarter of 2006 up
$1.8 million or 3.1% from total revenues of $59.8 million reported in the second
quarter of 2005
For the second quarter of 2006, investment advisory fees were $53.6
million, an increase of 2.4% from the $52.3 million generated in the second
quarter of 2005. Our closed-end funds revenues increased 17.0% to $10.8 million
for the second quarter 2006, up from $9.2 million in the prior year's period.
The increase was due to increased AUM within our closed-end funds from $4.7
billion as of second quarter 2005 to $5.3 billion as of second quarter 2006.
Open-end mutual funds revenues rose 3.4% to $20.2 million from $19.5 million in
the 2005 period. Institutional and high net worth separate accounts revenues
increased 2.2% to $20.7 million, up from the $20.3 million reported in 2005. The
2006 period includes the recognition of $2.4 million in performance based
fulcrum fees not in the year ago quarter. Investment Partnership revenues were
$1.9 million, a decrease of 42.6% from the $3.3 million in the year ago quarter.
Commission revenues from our institutional research affiliate, Gabelli
& Company, Inc., were $2.7 million in the second quarter 2006, up 5.7% from the
prior year's comparable period, attributable to increased trading volume offset
by lower commissions per trade.
Mutual fund distribution fees and other income were $5.4 million for
the second quarter 2006, 9.0% higher than the $4.9 million reported in the 2005
period. The increase is due to higher distribution fees of $5.1 million for
second quarter 2006 versus $4.7 million for second quarter 2005, principally as
a result of higher average assets under management.
Operating margin, before management fee, decreased to 17.3% for the
second quarter 2006 from 36.5% in the prior year's quarter primarily due to a
reserve against earnings taken in the second quarter 2006 as further described
below. Excluding the reserve, the operating margin for the second quarter 2006
was 36.6%.
Expenses not directly tied to revenues were $25.2 million, an increase
from the $12.9 million recorded in the second quarter of 2005. The increase was
primarily due to a reserve against earnings of approximately $12 million in the
second quarter 2006 relating to the potential resolution of a regulatory
inquiry. Excluding the reserve, expenses not directly tied to revenues were
approximately $13 million. Since September 2003, GAMCO and certain of its
subsidiaries have been cooperating with inquiries from the N.Y. Attorney
General's office and the SEC by providing documents and testimony regarding
certain mutual fund share trading practices. In June 2006, we began discussions
with the SEC for a potential resolution of their inquiry. As a result of these
discussions, GAMCO recorded the reserve. Since these discussions are ongoing, we
cannot determine at this time whether they will ultimately result in a
settlement of this matter, whether our reserves will be sufficient to cover any
payments by GAMCO related to such a settlement, or whether and to what extent
insurance may cover such payments.
Total other income, net of interest expense, rose to $7.0 million for
the second quarter 2006 from $1.3 million in the 2005 period. The majority of
this increase was attributable to higher net gains from investments as well as
higher interest income due to higher interest rates as compared to the prior
year period. In 2005, we recorded gains from our investment in optionsXpress
(Nasdaq: OXPS) of: $0.03 per fully diluted share in the first quarter, $0.00 per
fully diluted share in the second quarter, $0.05 per fully diluted share in the
third quarter, and $0.01 per fully diluted share in the fourth quarter. For
2006, we recorded $0.01 per fully diluted share in the first quarter and six
months ended June 30, 2006.
For the second quarter 2006, interest expense was $3.4 million versus
$3.3 million in the prior year's period.
Management fee was $1.8 million for the three months ended June 30,
2006, versus $2.3 million for the comparable 2005 period. The decrease is due to
lower operating income before management fee, income taxes, and minority
interest of $17.7 million for second quarter 2006 as compared to $23.1 million
for second quarter 2005.
The effective tax rate for the quarter ended June 30, 2006, excluding
the reserve, remained at 37.5%, the same as the prior year period.
21
Six Months Ended June 30, 2006 Compared To Six Months Ended June 30, 2005
To provide a better understanding of core results and trends, GAMCO haswe have also
provided our results before adjusting for FASB Interpretation No. 46R ("FIN
46R") and Emerging Issue Task Force 04-5 ("EITF 04-5"). These results, before
the adjustments for FIN 46R and EITF 04-5, are not presented in accordance with
generally accepted accounting principles ("GAAP") in the United States.States and are
analyzed versus 2005 results beginning on page 18. A reconciliation of these
non-GAAP financial measures to results presented in accordance with GAAP is
presented herein. See Note A in item 1C,
"Investments in Partnerships and Affiliates", of this report on Form 10-Q for a
discussion of FIN 46 and EITF 04-5.
Consolidated Results - Six Months Ended June 30:below.
Three Months Ended March 31, 2006 Compared To Three Months Ended March 31, 2005
Consolidated Results - Three Months Ended March 31st:
(Unaudited; in thousands, except per share data)
Adjust-
2005(a) 2006(a)(b) ments(c) 2006(a)(d)
------------ ------------ ------------ -----------
Revenues
2005 (a) 2006 (a)(b) 2006 (c) 2006 (d)(a)
---------- ---------- ---------- ------------
Revenues
Investment advisory and incentive fees $ 105,04952,713 $ 104,94751,361 ($ 963) $103,984$ 50,398
Commission revenue 5,039 6,1732,465 3,451 - 6,1733,451
Distribution fees and other income 10,043 10,7865,135 5,435 - 10,7865,435
---------- ---------- ---------- ------------ ------------ ------------ -----------
Total revenues 120,131 121,90660,313 60,247 (963) 120,94359,284
Expenses
Compensation and related costs 52,541 51,29825,622 25,277 - 51,29825,277
Management fee 4,519 5,1272,206 3,367 - 5,1273,367
Distribution costs 10,748 10,5446,213 5,215 - 10,544
Reserve for settlement - 11,900 - 11,9005,215
Other operating expenses 13,058 14,9156,556 7,202 189 15,1047,391
---------- ---------- ---------- ------------ ------------ ------------ -----------
Total expenses 80,866 93,78440,597 41,061 189 93,97341,250
---------- ---------- ---------- ------------ ------------ ------------ -----------
Operating income 39,265 28,12219,716 19,186 (1,152) 26,97018,034
Other income (expense)
Net gain from investments 982 13,597595 9,353 13,772 27,36923,125
Interest and dividend income 7,629 11,1593,472 5,048 1,325 12,4846,373
Interest expense (7,204) (6,678)(3,929) (3,284) (591) (7,269)(3,875)
---------- ---------- ---------- ------------ ------------ ------------------------
Total other income (expense), net 1,407 18,078138 11,117 14,506 32,58425,623
---------- ---------- ---------- ------------ ------------ ------------ -----------
Income before taxes and minority interest 40,672 46,20019,854 30,303 13,354 59,55443,657
Income tax provision 15,253 18,5267,445 11,363 5,008 23,53416,371
Minority interest 90 333(20) 240 8,346 8,6798,586
---------- ---------- ---------- ------------ ------------ ------------ -----------
Net income $ 25,32912,429 $ 27,34118,700 $- $ - $27,34118,700
========== ========== ========== ============ ============ ============ ===========
Net income per share:
Basic $ 0.850.42 $ 0.950.64 $- $ - $0.950.64
========== ========== ========== ============ ============ ============ ===========
Diluted $ 0.840.41 $ 0.940.63 $- $ - $0.940.63
========== ========== ========== ============ ============ ============ ===========
Reconciliation of Net income to Adjusted
EBITDA:
Net income $ 25,32912,429 $ 27,34118,700 $- $ - $27,34118,700
Interest Expense 7,204 6,6783,929 3,284 591 7,2693,875
Income tax provision and minority interest 15,343 18,8597,425 11,603 13,354 32,21324,957
Depreciation and amortization 471 444234 224 - 444224
---------- ---------- ---------- ------------ ------------ ------------ -----------
Adjusted EBITDA(e) $ 48,34724,017 $ 53,32233,811 $13,945 $ 13,945 $67,267
------------ ------------ ------------ -----------
(a) As restated for the change in accounting method as described in Note A in
Item 1 of this report on Form Q.
(b) Under a comparable reporting methodology as in 2005 - Non-GAAP in 2006.
(c) Represents the effects of consolidation of those entities in which GBL
holds a direct or indirect controlling interest and the consolidation of
entities under FIN 46R and EITF 04-5 for the first quarter of 2006.
(d) GAAP basis.47,756
---------- ---------- ---------- ------------
(a) As restated for the change in accounting method as described in note A in
item 1 of this report.
(b) Financial results before adjustments of FIN 46R and EITF 04-5. (See note
(b) below.)
(c) Adjustments relating to the adoption of FIN 46R and EITF 04-5. Beginning
January 1, 2006, the provisions of FASB Interpretation No. 46R ("FIN 46R")
and Emerging Issue Task Force 04-5 ("EITF 04-5") require consolidation of
the majority of our investment partnerships and offshore funds managed by
our subsidiaries into our consolidated financial statements. However, since
we amended the agreements of certain investment partnerships and an
offshore fund on March 31, 2006, FIN 46R and EITF 04-5 will only require us
to consolidate these entities on our statement of income for the first
quarter 2006, but will not require their consolidation on our statement of
financial condition at March 31, 2006. In addition, these partnerships and
offshore fund, for which the agreements were amended, are not required to
be consolidated within our statement of income or on our statement of
financial condition in future periods as long as we continue to not
maintain a direct or indirect controlling financial interest. For the three
months ended March 31, 2006, the consolidation of these entities had no
impact on net income but does affect the classification of income between
operating and other income. As a result, we have also provided our results
before adjusting for FIN 46R and EITF 04-5 as we believe this basis is
comparable to our reported results for the first quarter 2005. In addition,
we believe these results will be more comparable to our results in future
periods as long as we continue to not maintain a direct or indirect
controlling financial interest.
20
(d) Financial results on a GAAP basis, including adjustments of FIN 46R and
EITF 04-5.
(e) Adjusted EBITDA is defined as earnings before interest, taxes, depreciation
and amortization, and minority interest. Adjusted EBITDA is a Non-GAAP
measure and should not be considered as an alternative to any measure of
performance as promulgated under accounting principles generally accepted
in the United States nor should it be considered as an indicator of our
overall financial performance. We use Adjusted EBITDA as a supplemental
measure of performance as we believe it gives investors a more complete
understanding of our operating results before the impact of investing and
financing activities as a tool for determining the private market value of
an enterprise.
22
Total revenues were $120.9$59.3 million forin the six months ended June 30,first quarter of 2006 up $0.8down $1.0
million or 0.7%1.7% from total revenues of $120.1$60.3 million reported in the first
quarter of 2005. Operating income was $18.0 million, a decline of $1.7 million
or 8.5% from the $19.7 million reported in the first quarter of 2005. Total
other income, net of interest expense, rose to $25.6 million for the first
quarter 2006. In the short-run, our results remain sensitive to changes in the
equity market. Net income for the quarter was $18.7 million or $0.63 per fully
diluted share versus $12.4 million or $0.41 per fully diluted share in the prior
year's period
For the six months ended June 30, 2006, investmentquarter.
Investment advisory and incentive fees were
$104.0decreased $2.3 million a decrease of $1.1or 4.4% to
$50.4 million from the $105.02005 quarter. Investment partnership revenues declined to
$0.6 million generated forin the six months ended June 30, 2005. Further details on our six month ended June
30,first quarter of 2006 from $2.0 million in the prior year
period, due to the consolidation of the investment advisory revenues includedpartnerships and offshore
fund, in accordance with FIN 46R and EITF 04-5, that resulted in the following:
Revenues from ourelimination
of revenues. Our closed-end fundfunds revenue increased 19.2%21.6% to $21.0$10.3 million forin
the six months ended June 30,first quarter 2006 up from $17.6$8.4 million in the prior year's period. Thequarter. This
increase was due to increased average AUM within our closed-end
fundsderived principally from $4.5 billion for the first six months of 2005 to $5.3 billion for the
first half of 2006, largely due to the launch ofThe Gabelli Global Gold, Natural Resources
& Income Trust (GGN) as of(AMEX: GGN) launched on March 29, 2005. Open-endFor the first quarter
2006, our revenues of $20.1 million from open-end mutual funds revenues were $40.3 million, up 1.7%virtually
unchanged from the $39.6 million in the 2005prior year period. InstitutionalRevenues from our institutional and high
net worth separate accounts revenues decreased 5.4%business, which are generally billed based on asset
levels at the beginning of a quarter, declined by 12.4% to $40.1$19.4 million in the
first quarter 2006, down from $22.1 million in the 2005 quarter. The majority of
this decline is attributable to lower fulcrum fees from the $42.4$2.3 million
reportedrecorded in 2005. Investment Partnership
revenues were $2.5the 2005 period to $0.4 million a decrease of 52.8%, as both management fees and
incentive fee revenues were lower.in the 2006 period.
Commission revenues from our institutional research affiliate, Gabelli &
Company, Inc., were $6.2$3.5 million forin the six months ended June 30,first quarter of 2006, up 22.5%40.0% from
$2.5 million in the same period a year earlier.
Revenues from the prior year's comparable period amountdistribution of $5.0 million.
Mutual fund distribution feesmutual funds and other income were $10.8$5.4
million forin the six months ended June 30,first quarter of 2006 7.4%versus $5.1 million in the first quarter of
2005. The increase in fees is principally from higher thanaverage assets under
management in class C shares, which have 12b-1 fees of 1%, in the $10.02006 period as
compared to the prior year's period. As previously discussed, several bills were
introduced in the prior Congress that, if adopted, would, among other things,
pose a risk to our future distribution fee revenue as Rule 12b-1 distribution
fees may be limited or eliminated.
Total expenses, excluding management fee, were $37.9 million in the first
quarter of 2006, a 1.3% decrease from total expenses of $38.4 million reported
in the 2005 period. The increase isfirst quarter of 2005.
Compensation and related costs, which are largely variable, were $25.3
million or 1.3% lower than the $25.6 million recorded in the same period a year
earlier. This decrease was primarily due to higher distribution feeslower revenues versus the prior
year's quarter and accruals for variable compensation.
Distribution costs were $5.2 million, a decrease of $10.216.1% from $6.2 million for six months ended June 30, 2006 versus $9.4 million for prior year
period, principally as a result of higher average assets under management.
Operating margin, before management fee, decreased to 26.5% for the six
months ended June 30, 2006 from 36.4%
in the prior year's period, primarily due
tothe decrease was principally the result of the
elimination of a reserve against earnings taken in the second quarter 2006 as previously
described. Excluding the reserve, the operating margin for the six month period
ended June 30, 2006 was 36.4%.
Expenses not directly tied to revenues were $37.4 million, an increase
of 42.6%one-time charge from the $26.32005 quarter for one-time launch costs
for GGN. Other operating expenses were higher by $0.8 million, recorded in the period ended June 30, 2005. Thea 12.7% increase
was primarily due to a reserve against earnings of approximately $12$7.4 million in the secondfirst quarter of 2006 from the prior year first quarter
of $6.6 million. This increase included legal and accounting costs related to
regulatory and corporate governance dynamics. Management fee expense, which is
totally variable and based on pretax income, was $3.4 million in the first
quarter of 2006 versus $2.2 million in the first quarter of 2005.
21
Other income, net of interest expense, was $25.6 million in the first
quarter of 2006, a positive swing of $25.5 million from the $0.1 million gain
reported in the first quarter of 2005. The net return from our corporate
investment portfolio improved to $29.5 million in the 2006 first quarter from
$4.1 million in the prior year's quarter as we benefited from the strength of
the equity markets in the first quarter of 2006, including superb performance
from our investments in our products as well as an increase in interest rates
from the prior year as well as the inclusion of $14.5 million relating to
adjustments for FIN 46R and EITF 04-5.
Interest expense was virtually the potential resolutionsame at $3.9 million for both the first
quarter of a
regulatory inquiry. Excluding2006 and the reserve, expenses not directly tiedprior year. The increase related to the consolidation of
the Investment Partnerships and offshore fund was offset principally by the
effects of the April 1, 2005 repurchase of $50 million of the $100 million 5%
convertible note.
The estimated effective tax rate for the first quarter of 2006 was 37.5%,
the same as the prior year period.
Minority interest increased to $8.6 million in the 2006 quarter,
principally related to the $8.3 million in adjustments related to the
consolidation of investment partnerships and offshore fund in accordance with
FIN 46R and EITF 04-5.
Comparison of 2006 financial results (before adjustments for FIN 46R and EITF
04-5) to 2005:
Total revenues were $26$60.2 million in the first quarter of 2006 down $0.1
million or 0.1% from total revenues of $60.3 million reported in the first
quarter of 2005. Operating income was lower at $19.2 million, a decrease of $0.5
million or 2.7% from the prior year amount of $19.7 million. Total other income,
net of interest expense, rose to $32.6$11.1 million for the six months ended June 30,first quarter 2006 from
$1.4$0.1 million in the 2005 period. Approximately $14.5 million ofIn the increase representsshort-run, our results remain sensitive
to changes in the effects of
consolidation of entities in which GAMCO holds a direct or indirect controlling
interest under FIN46R and EITF 04-5 during 2006equity market. Net income for the first quarter of 2006.
In addition, there were higher net gains of $13.6was $18.7 million from investments as
well as higher interest income of $4.9or
$0.63 per fully diluted share versus $12.4 million due to higher interest rates, as
compared to the prior year period. In 2005, we recorded gains from our
investment in optionsXpress (Nasdaq: OXPS) of: $0.03or $0.41 per fully diluted
share in the first quarter, $0.00 per fully diluted share in the second quarter, $0.05
per fully diluted share in the third quarter,prior year's quarter.
Investment advisory and $0.01 per fully diluted share
in the fourth quarter. For 2006, we recorded $0.01 per fully diluted shareincentive fees, which comprised 85.3% of total
revenues, were $51.4 million in the first quarter of 2006 down $1.4 million or
2.6% from the $52.7 million reported in the prior year's quarter. The lower
revenues during the quarter were primarily driven by our institutional and six months ended June 30, 2006.
Minorityhigh
net worth separate accounts business, which are generally billed based on asset
levels at the beginning of a quarter, declining by 12.4% to $19.4 million in the
first quarter 2006, down from $22.1 million in the 2005 quarter. The majority of
this decline is attributable to lower fulcrum fees from the $2.3 million
recorded in the 2005 period to $0.4 million in the 2006 period. Our closed-end
funds revenues increased 21.6% to $10.3 million in the first quarter 2006 up
from $8.4 million in the prior year's quarter. This increase was derived
principally from The Gabelli Global Gold, Natural Resources & Income Trust
(AMEX: GGN) launched on March 29, 2005. For the first quarter 2006, our revenues
of $20.1 million from open-end mutual funds were virtually unchanged from the
prior year period.
Commission revenues from our institutional research affiliate, Gabelli &
Company, Inc., were $3.5 million in the first quarter of 2006, up 40.0% from
$2.5 million in the same period a year earlier.
Revenues from the distribution of mutual funds and other income were $5.4
million in the first quarter of 2006 versus $5.1 million in the first quarter of
2005. The increase in fees is principally from higher average assets under
management in class C shares, which have 12b-1 fees of 1%, in the 2006 period as
compared to the prior year's period. As previously discussed, several bills were
introduced in the prior Congress that, if adopted, would, among other things,
pose a risk to our future distribution fee revenue as Rule 12b-1 distribution
fees may be limited or eliminated.
Total expenses, excluding management fee, were $37.7 million in the first
quarter of 2006, a 1.8% decrease from total expenses of $38.4 million reported
in the first quarter of 2005.
Compensation and related costs, which are largely variable, were $25.3
million or 1.3% lower than the $25.6 million recorded in the same period a year
earlier. This decrease was primarily due to lower revenues versus the prior
year's quarter and accruals for variable compensation costs.
22
Distribution costs were $5.2 million, a decrease of 16.1% from $6.2 million
in the prior year's period, the decrease was principally the result of the
elimination of a one-time charge from the 2005 quarter for one-time launch costs
for GGN. Other operating expenses were higher by $0.6 million, a 9.9% increase
to $7.2 million in the first quarter of 2006 from the prior year first quarter
of $6.6 million. This increase included legal and accounting costs related to
regulatory and corporate governance dynamics, including Sarbanes-Oxley
compliance. Management fee expense, which is totally variable and based on
pretax income, was $3.5 million in the first quarter of 2006 versus $2.3 million
in the first quarter of 2005.
Other income, net of interest hadexpense, was $11.1 million in the first
quarter of 2006, a positive swing of $11.0 million from the $0.1 million gain
reported in the first quarter of 2005. The net return from our corporate
investment portfolio improved to $14.4 million in the 2006 first quarter from
$4.1 million in the prior year's quarter as we benefited from the strength of
the equity markets in the first quarter of 2006, including superb performance
from our investments in our products as well as an increase in interest rates
from the prior year.
Interest expense fell to $3.3 million in the first quarter of $8.62006 from
$3.9 million asin the prior year's first quarter. This decrease is a result of the
consolidationApril 1, 2005 repurchase of entities$50 million of the $100 million 5% convertible note
and the remarketing of the senior notes in November 2004, which GAMCO holds a direct or indirect controllingreduced the
interest under FIN46R and EITF 04-5 during 2006.
For the six months ended June 30, 2006, interest expense increased
$0.1 millionrate from 6.0% to $7.3 million.
Management fee was $5.1 million for the six months ended June 30,
2006, versus $4.5 million for the comparable 2005 period.5.22%.
The increase is due to
higher operating income before management fee, income taxes, and minority
interest of $64.7 million for the six months ended June 30, 2006, as compared to
$45.2 million for the comparable 2005 period.
Theestimated effective tax rate for the six months ended June 30,first quarter of 2006 excluding the reserve, remained atwas 37.5%,
the same as the prior year period.
23
LIQUIDITY AND CAPITAL RESOURCES
Our assets are primarily liquid, consisting mainly of cash, short term
investments, securities held for investment purposes and investments in
partnerships and affiliates in which we are a general partner, limited partner
or investment manager. Investments in partnerships and affiliates are generally
illiquid, however the underlying investments in such entities are generally
liquid and the valuations of the investment partnerships and affiliates reflect
this underlying liquidity.
Summary cash flow data is as follows:
SixThree Months Ended
June 30,
---------------------------------
2005(a) 2006(a)
---------------- ----------------March 31,
-----------------------
2005 (a) 2006 (a)
---------- -----------
Cash flows used in:(used in) provided by: (in thousands)
Operating activities $(44,805) $(27,097)$ 28,988 $ (39,590)
Investing activities (4,960) (1,767)(3,944) (1,520)
Financing activities (15,874) (26,429)
---------------- ----------------
Decrease (65,639) (55,293)50,804 (6,827)
---------- -----------
Increase (decrease) 75,848 (47,937)
Net increase in cash from investment
partnerships and offshore funds consolidated
under FIN 46R and EITF 04-5 - 1,550
Effect of exchange rates on cash and cash
equivalents (44) (64)(17) 68
Cash and cash equivalents at beginning of
period 257,096 170,659
---------------- ----------------173,161
---------- -----------
Cash and cash equivalents at end of period $191,413 $116,852
================ ================$ 332,927 $ 126,842
========== ===========
(a) As restated for (1) the change in accounting method which was previously
reported on Form 10-Q/A (Amendment No. 2) filed with the Securities and
Exchange Commission on November 9, 2006 as described in Note A in Itemitem 1 of
this report on Form Q.10-Q/A, and (2) the reporting of individual assets and
liabilities of certain proprietary investment accounts as described in Note
A in item 1 of this report on Form 10-Q/A.
Cash requirements and liquidity needs have historically been met through
cash generated by operating activities and through our borrowing capacity. We
have received investment grade ratings from both Moody's Investors Services and
Standard & Poor's Rating Services. These investment grade ratings expand our
ability to attract both public and private capital. In February 2005, our Board
of Directors authorized a plan to file a "shelf" registration statement on Form
S-3, which was filed on June 13, 2005. Our shelf registration, which was
declared effective on May 8, 2006, provides us opportunistic flexibility to sell
any combination of senior and subordinate debt securities, convertible debt
securities, equity securities (including common and preferred stock), and other
securities up to a total amount of $400 million. This authorization is in
addition to the remaining $120 million available under our "shelf" registration
filed in 2001.
23
At June 30,March 31, 2006, we had total cash and cash equivalents of $116.9$126.8
million, a decrease of $53.8$46.3 million from December 31, 2005. This decrease is
primarily due to an increase in the purchase of securities during the six month
period ended June 30, 2006. Gabelli has
established a collateral account, consisting of cash and cash equivalents and
investments in securities totaling $52.8$52.3 million, to secure a letter of credit
issued in favor of the holder of the $50 million 5% convertible note. On April
1, 2005, the letter of credit was reduced to $51.3 million and extended to
September 22, 2006.2006, which coincides with the date of a put option the note
holder may exercise. Additionally, the principal of the convertible note was
reduced to $50 million and limitations on the issuance of additional debt were
removed. The expiration date of the related
letter of credit was extended to May 22, 2007. Cash and cash equivalents and investments in securities held in the
collateral account are restricted from other uses until the date of expiration
and cash and cash equivalents and investments in securities held by investment
partnerships and offshore funds consolidated under FIN 46R and EITF 04-5 are
also restricted from use for general operating purposes. Total debt at June 30,March 31,
2006 was $232.3 million, consisting of the $50 million 5% convertible note, $100
million of 5.5% non-callable senior notes due May 15, 2013 and $82.3 million in
5.22% senior notes due February 17, 2007, issued pursuant to our mandatory
convertible securities.
CashFor 2006, cash used in operating activities was $27.1$39.6 million in the first six
months of 2006 principally
resulting from $450.8$287.6 million in purchases of investments in securities, a $27.0$62.9
million increase in receivable from brokers, $10.0$1.2 million in purchases of
investments in partnerships and affiliates and $36.5$38.4 million from the net
effects of the FIN 46R and EITF 04-5 consolidation. This was partially offset by
$27.3$18.7 million in net income, proceeds from sales of investments in securities of
$451.0$321.5 million, $7.9$1.0 million in distributions from investments in partnerships
and affiliates and an increase in compensationminority interest payable of $7.9$0.2 million.
Excluding the net effects of the consolidation of investment partnerships and
offshore funds, our cash provided byused in operating activities was $9.4$1.2 million.
24
Cash used in investing activities, related to purchases and sales of
available for sale securities, was $1.8$1.5 million in the first sixthree months of
2006.
Cash used in financing activities in the first sixthree months of 2006 was
$26.4$6.8 million. The decrease in cash principally resulted from net contributions
of $28.2 million related to investment partnerships and offshore funds
consolidated under FIN 46R and EITF 04-5. This was partially offset by $35.2
million in dividends paid and the repurchase of our class A common stock under
the Stock Repurchase Program and by the $0.2 million received from the exercise
of $52.3 million
partially offset by a $27.2 million in contributions by partners into our
investment partnerships.non-qualified stock options that further generated cash tax savings of $0.1
million. Excluding the net effects of the consolidation of investment
partnerships and offshore funds, our net cash used in financing activities was
$0.8$35.0 million.
Cash used inFor 2005, cash provided by operating activities was $44.8$29.0 million in the first six
months of 2005
principally resulting from $535.1proceeds from sales of investments in securities of
$407.6 million, $29.6 million in distributions from investments in partnerships
and affiliates and $12.4 million in net income partially offset by $400.4
million in purchases of investments in securities, a $18.7$22.1 million increase in
receivable from brokers and a $6.8 million decrease in income taxes payable partially offset by $473.4$6.6 million in proceeds from salespurchases of investments in
securities, $25.3 million in
net income, a $11.2 million decrease in investment advisory fees receivablepartnerships and a $3.2 million increase in compensation payable.affiliates.
Cash used in investing activities, related to investments in and purchases and sales of
available for sale securities, was $5.0$3.9 million in the first sixthree months of
2005.
Cash used inprovided by financing activities in the first sixthree months of 2005 was
$15.9$50.8 million. The decreaseincrease in cash principally resulted from the repurchase of
$50 million of our $100 million 5% convertible note on April 1, 2005, $18.6
million in dividends paid and $17.8 million from the repurchase of our class A
common stock under the Stock Repurchase Program. This was partially offset by $70.6 million
in proceeds from the issuance of 1.5 million shares of class A common stock in
settlement of the purchase contracts issued pursuant to our mandatory
convertible securities and $0.6$0.3 million received from the exercise of
non-qualified stock options that further generated cash tax savings of $0.2$0.1
million partially offset by $18.0 million in dividends paid and the repurchase
of our class A common stock under the Stock Repurchase Program of $2.1 million.
Based upon our current level of operations and anticipated growth, we
expect that our current cash balances plus cash flows from operating activities
and our borrowing capacity will be sufficient to finance our working capital
needs for the foreseeable future. We have no material commitments for capital
expenditures.
24
Gabelli & Company, Inc., a subsidiary of Gabelli, is registered with the
Securities and Exchange Commission as a broker-dealer and is a member of the
National Association of Securities Dealers. As such, it is subject to the
minimum net capital requirements promulgated by the Commission. Gabelli &
Company's net capital has historically exceeded these minimum requirements.
Gabelli & Company computes its net capital under the alternative method
permitted by the Commission, which requires minimum net capital of the greater
of $250,000 or 2% of the aggregate debt items in the reserve formula for those
broker-dealers subject to Rule 15c3-3. The requirement was $250,000 at June 30,March 31,
2006. At June 30,March 31, 2006, Gabelli & Company had net capital, as defined, of
approximately $15.7$17.2 million, exceeding the regulatory requirement by
approximately $15.5$16.9 million. Regulatory net capital requirements increase when
Gabelli & Company is involved in underwriting activities.
Market Risk
Our primary market risk exposure is to changes in equity prices and
interest rates. Since over 95% of our AUM are equities, our financial results
are subject to equity-market risk as revenues from our money 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.
We are subject to potential losses from certain market risks as a result of
absolute and relative price movements in financial instruments due to changes in
interest rates, equity prices and other factors. Our exposure to market risk is
directly related to our role as financial intermediary, advisor and general
partner for assets under management in our mutual funds, institutional and
separate accounts business, investment partnerships and our proprietary
investment activities.
25
With respect to our proprietary investment activities, included in
investments in securities of $447.5$412.0 million at June 30,March 31, 2006 were investments
in Treasury Bills and Notes of $253.8$195.1 million, in mutual funds, largely invested
in equity products, of $109.1$107.7 million, a selection of common and preferred
stocks totaling $65.7$85.6 million and other investments of approximately $18.9$23.6
million. Investments in mutual funds generally lower market risk through the
diversification of financial instruments within their portfolio. In addition, we
may alter our investment holdings from time to time in response to changes in
market risks and other factors considered appropriate by management. Of the
approximately $65.7$85.6 million invested in common and preferred stocks at June 30,March 31,
2006, $22.1$23.0 million is related to our investment in Westwood Holdings Group Inc.
and $1.2$22.4 million is invested in risk arbitrage opportunities in connection with
mergers, consolidations, acquisitions, tender offers or other similar
transactions. Investments in partnerships and affiliates totaled $89.4$89.3 million
at June 30,March 31, 2006, the majority of which consisted of investment partnerships
and offshore funds which invest in risk arbitrage opportunities. These
transactions generally involve announced deals with agreed upon terms and
conditions, including pricing, which typically involve less market risk than
common stocks held in a trading portfolio. The principal risk associated with
risk arbitrage transactions is the inability of the companies involved to
complete the transaction.
GAMCO's exposure to interest rate risk results, principally, from its
investment of excess cash in U.S. Government obligations. These investments are
primarily short term in nature and the carrying value of these investments
generally approximates market value.
Since over 95%Our revenues are largely driven by the market value of our AUMassets under
management and are investedtherefore exposed to fluctuations in equities,market prices.
Investment advisory fees for mutual funds are based on average daily asset
values. Management fees earned on institutional and high net worth separate
accounts, for any given quarter, are generally determined based on asset values
on the last day of the preceding quarter. Any significant increases or decreases
in market value of institutional and high net worth separate accounts assets
managed which occur on the last day of the quarter will generally result in a
relative increase or decrease in revenues for the following quarter.
Recent Accounting Developments
We adopted SFAS 123 (R) on January 1, 2005. In light of our modified
prospective adoption of the fair value recognition provisions of SFAS 123 (R)
for all grants of employee stock options, the adoption of SFAS 123 (R) did not
have a material impact on our consolidated financial statements.
25
In January 2003 the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" which was subsequently revised in December 2003 by
FASB Interpretation No. 46(R) ("FIN 46R"). FIN 46R provides new criteria for
determining whether or not consolidation accounting is required for activities
that were prior to FIN 46R off-balance sheet activities conducted through
certain types of entities. This interpretation focuses on financial interests in
entities (i.e., variable interests) that indicate control despite the absence of
clear control through voting interest. It concludes that a company's exposure
(variable interest) to the economic risks and rewards from the entity's assets
and activities are the best evidence of control. The interpretation requires
that these variable interest entities ("VIEs") be subject to consolidation if
the company holding the variable interest is subject to a majority of the
expected losses or will receive a majority of the expected residual returns of
the VIE (the "primary beneficiary"). As the primary risk
factor affectingbeneficiary, it would be
required to include the variable interest entity's assets, liabilities and
results of operations in its own financial statements.
In June 2005, the FASB ratified the consensus EITF 04-5, "Determining
Whether a General Partner, or the General Partners as a Group, Controls a
Limited Partnership or Similar Entity When the Limited Partners Have Certain
Rights", which provides guidance in determining whether a general partner
controls a limited partnership. The provisions of EITF 04-5 are not applicable
to limited partnerships or similar entities accounted for as VIEs pursuant to
FIN 46R.
We adopted FIN 46R and EITF 04-5 on January 1, 2006 and have, in accordance
with the terms of the provisions of these pronouncements, consolidated the
majority of our revenuesinvestment partnerships and offshore funds that are managed by
our subsidiaries and are not determined to be VIEs for the three months ended
and at March 31, 2006. However, due to amendments effected to some of these
partnership and offshore fund agreements during the three month period ended
March 31, 2006, consolidation of these entities ceased on March 31, 2006 in
accordance with FIN 46R and EITF 04-5. Accordingly, these entities are
consolidated on our statement of income for the three months ended March 31,
2006 but not on the statement of financial resultscondition at March 31, 2006.
We have also consolidated five other investment partnerships and two other
offshore funds in which we have a direct or indirect controlling financial
interest within our consolidated financial statements as of and for the period
ended March 31, 2006. These entities will continue to be consolidated in future
periods as long as we continue to maintain a direct or indirect controlling
financial interest.
In November 2005, the FASB issued FSP FAS 115-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments."
This FSP addresses the determination of when an investment is considered
impaired, whether that impairment is other than temporary, and the general market levelmeasurement
of stock prices and interest rates. Our financial results arean impairment loss. The FSP also subjectincludes considerations for the accounting
subsequent to the gain or lossrecognition of clients. In addition, returns from our proprietary
investment portfolio are also exposedan other-than-temporary ("OTT") impairment and
requires certain disclosures about unrealized losses that have not been
recognized as OTT impairments. The guidance in this FSP amends FASB Statements
No. 115, "Accounting for Certain Investments in Debt and Equity Securities," and
No. 124, "Accounting for Certain Investments Held by Not-for-Profit
Organizations," and APB Opinion No. 18, "The Equity Method of Accounting for
Investments in Common Stock." The FSP is effective for reporting periods
beginning after December 15, 2005. The Company adopted this Statement on January
1, 2006. The adoption is not expected to interest rate and equity market risk.
Should negative market conditions thathave a material impact our AUM or proprietary investment
portfolio occur, we could report lower operating results inon the second half of
2006 than would otherwise be the case. We also note that second half 2006
earnings will be measured against the backdrop of strongCompany's
future consolidated financial results in
the second half of 2005.
Recent Accounting Developmentsstatements.
In February 2006, the FASB issued FASB Statement No. 155, "Accounting for
Certain Hybrid Financial Instruments - an amendment of FASB Statement No. 133
and 140," that amends FASB Statements No. 133 "Accounting for Derivative
Instruments and Hedging Activities," and No. 140 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." The Statement
permits fair value remeasurement for any hybrid financial instrument that
contains an embedded derivative that otherwise would require bifurcation;
clarifies which interest-only strips and principle-only strips are not subject
to the requirements of Statement 133; establishes a requirement to evaluate
interests in securitized financial assets to identify interests that are
freestanding derivatives or that are hybrid financial instruments that contain
an embedded derivative requiring bifurcation; Clarifies that concentrations of
credit risk in the form of subordination are not embedded derivatives; amends
Statement 140 to eliminate the prohibition on a qualifying special-purpose
entity from holding a derivative financial instrument that pertains to a
beneficial interest other than another derivative financial instrument.
Statement 155 does not permit prior period restatement. The Statement is
effective for all financial instruments acquired or issued after the beginning
of an entity's secondfirst fiscal year that begins after September 15, 2006. The
Company plans to adopt this Statement on January 1, 2007. The adoption is not
expected to have a material impact on the Company's future consolidated
financial statements.
26
In March 2006, the FASB issued FASB Statement No. 156, "Accounting for
Servicing of Financial Assets," which amends FASB Statements No. 140 "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities." The Statement permits an entity to choose either the amortization
method or fair value measurement method for each class of separately recognized
servicing assets and servicing liabilities. The Statement is effective as of the
beginning of an entity's secondfirst fiscal year that begins after September 15, 2006.
The Company plans to adopt this Statement on January 1, 2007. The adoption is
not expected to have a material impact on the Company's future consolidated
financial statements.
In April 2006, the FASB issued FSP FIN 46R-6 "Determining the
Variability to be Considered in Applying FASB Interpretation No. 46(R)." The FSP
addresses certain major implementation issues related to FIN 46R, specifically
how a reporting enterprise should determine the variability to be considered in
26
applying FIN 46R. The FSP is effective as of the beginning of the secondfirst day of
the secondfirst reporting period beginning after June 15, 2006. The Company plans to
adopt this Statement on January 1, 2007. The adoption is not expected to have a
material impact on the Company's future consolidated financial statements.
In June 2006, the FASB issued Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes" which is an interpretation of FASB Statement No.
109, "Accounting for Income Taxes". This Interpretation prescribes a recognition
threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expect to be taken in a tax return. This
Interpretation is effective for fiscal years beginning after December 15, 2006. The Company plans to
adopt this Statement on January 1, 2007. The adoption is not expected to have a
material impact on the Company's future consolidated financial statements.
Item 4. Controls and Procedures
Management, includingwith the participation of the Chief Executive Officer and under
the supervision of the Chief Financial Officer, has conducted an evaluationevaluated the effectiveness
of the effectiveness ofCompany's disclosure controls and procedures, pursuant toas such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act Rule 13a-14. Based onof 1934, as
amended (the "Exchange Act"), as of December 31, 2006. In conducting the
aforementioned evaluation and assessment, management identified two material
weaknesses in internal control over financial reporting relating to (i) the
reporting of individual assets and liabilities of certain proprietary investment
accounts in accordance with U.S. generally accepted accounting principles and
(ii) the evaluation of and accounting for certain non-routine transactions in
accordance with U.S. generally accepted accounting principles, as further
described Item 9A (b) of the Chief Executive Officer andCompany's Form 10-K. These deficiencies were
identified during the Interim Chief Financial Officercourse of the 2006 audit. Accordingly, because of these
material weaknesses, management concluded that the Company's disclosure controls
and procedures were not effective, with respect to these items, as of December
31, 2006.
As a result of the first material weakness, the Company restated its
December 31, 2005 consolidated financial statements, included in Item 8 of the
Company's Form 10-K, to properly reflect these proprietary investments. This
first material weakness also resulted in errors in the Company's interim
consolidated financial statements for the periods ended March 31, 2006, June 30,
2006, and September 30, 2006.
Based upon the evaluation described above, management concluded that, as of
March 31, 2006, the Company did not maintain effective internal control over
financial reporting because of the effect of the material weaknesses described
above.
However, subsequent to December 31, 2006, we have taken steps to strengthen
our disclosure controls, procedures and internal controls over financial
reporting. These steps were taken to strengthen our processes relating to the
material weaknesses discussed above. Specifically, we have implemented or are effective in
ensuringthe process of implementing the following internal control improvements:
o With regard to the first material weakness, we have implemented a new
procedure to review the accounting treatment for all proprietary
investments on a regular basis. We have also worked with the personnel
in our operations and accounting areas who are responsible for the
accounting for these proprietary investments to ensure that
allappropriate procedures are in place to more closely monitor
proprietary investments. Although these design changes have been
implemented, management has not had the opportunity to evaluate the
operating effectiveness of these revised controls.
o With regard to the second material information requiredweakness, we are formalizing the
process for identifying and evaluating non-routine and/or
non-recurring transactions to ensure that the revised procedures will
detect such transactions on a timely basis and ensure adequate
evaluation for conformity with U.S. generally accepted accounting
principles. This process is expected to be filedfully implemented in this quarterly report has
been made known to them in a timely fashion. There have been no significant
changes in internal controls, or in factors that could significantly affect
internal controls, subsequent to the
date the Chief Executive Officer and the
Chief Financial Officer completed their evaluation.first half of 2007.
27
Forward-Looking Information
Our disclosure and analysis in this report contain some forward-looking
statements. Forward-looking statements give our current expectations or
forecasts of future events. You can identify these statements because they do
not relate strictly to historical or current facts. They use words such as
"anticipate," "estimate," "expect," "project," "intend," "plan," "believe," and
other words and terms of similar meaning. They also appear in any discussion of
future operating or financial performance. In particular, these include
statements relating to future actions, future performance of our products,
expenses, the outcome of any legal proceedings, and financial results. Although
we believe that we are basing our expectations and beliefs on reasonable
assumptions within the bounds of what we currently know about our business and
operations, there can be no assurance that our actual results will not differ
materially from what we expect or believe. Some of the factors that could cause
our actual results to differ from our expectations or beliefs include, without
limitation: the adverse effect from a decline in the securities markets; a
decline in the performance of our products; a general downturn in the economy;
changes in government policy or regulation; changes in our ability to attract or
retain key employees; and unforeseen costs and other effects related to legal
proceedings or investigations of governmental and self-regulatory organizations.
We also direct your attention to any more specific discussions of risk contained
in our Form 10-K and other public filings. We are providing these statements as
permitted by the Private Litigation Reform Act of 1995. We do not undertake to
update publicly any forward-looking statements if we subsequently learn that we
are unlikely to achieve our expectations or if we receive any additional
information relating to the subject matters of our forward-looking statements.
2728
Part II: Other Information
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities
The following table provides information with respect to the shares of
common stock we repurchased during the three months ended June 30,March 31, 2006:
(c) Total Number of (d) Maximum Number
(a) Total (b) Average Shares Repurchased as Number of Shares That May
Number of Price Paid Per as Part of Publicly That May Yet Be Purchased
Shares Share, net of Announced Plans or Purchased Under the Plans or
Period Repurchased Commissions Programs Plans or Programs
- --------------------------------------------------------------------------------------------
4/------------------------------------------------------------------------------------------
GBL
1/01/06 - 4/30/1/31/06 - - - 804,261
5/36,000 $ 44.18 36,000 1,046,793
2/01/06 - 5/31/2/28/06 413,400 $37.04 413,400 790,861
6/543,632 $ 44.62 543,632 503,161
3/01/06 - 6/30/3/31/06 76,000 $34.11 76,000 714,861
------------- ------------------198,900 $ 42.77 198,900 804,261
--------------- --------------------
Totals 489,400 489,400
============= ==================778,532 778,532
=============== ====================
In MayMarch 2006 the board of directors approvedwe announced an increase of 400,000500,000 shares of GBL available
to be repurchased under our stock repurchase program. Our stock repurchase
programs are not subject to expiration dates.
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders of GAMCO Investors, Inc. was held
in Greenwich, Connecticut on May 8, 2006. At that meeting, the
stockholders considered and acted upon the following matter:
THE ELECTION OF DIRECTORS. The stockholders elected the following
individuals to serve as directors until the 2007 annual meeting
of stockholders and until their respective successors are duly
elected and qualified. All of the nominees were elected with the
following votes cast:
Nominees For Withheld
-------- --- --------
Edwin L. Artzt 232,832,610 1,385,513
Richard L. Bready 234,149,101 69,022
John C. Ferrara 234,142,210 75,913
John D. Gabelli 232,536,392 1,681,731
Mario J. Gabelli 232,552,342 1,665,781
Karl Otto Pohl 232,599,849 1,618,274
Robert S. Prather, Jr. 234,047,756 170,367
Vincent S. Tese 234,046,830 171,293
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Item 6. (a) Exhibits
4.1 Fourth Amendment to the Note Purchase Agreement dated
as of June 30, 2006. (Incorporated by reference to
Exhibit 99.1 of the Company's Report on Form 8-K dated
June 30, 2006.)
4.2 $50 Million Convertible Promissory Note. (Incorporated
by reference to Exhibit 99.2 of the Company's Report on
Form 8-K dated June 30, 2006.)
10.1 Exchange and Standstill Agreement dated May 31, 2006
(Incorporated by reference to Exhibit 10.1 of the
Company's report on Form 10-Q dated August 8, 2006.)
10.2 Registration Rights Agreement dated May 31, 2006
(Incorporated by reference to Exhibit 10.2 of the
Company's report on Form 10-Q dated August 8, 2006.)18.1 Preferability letter
31.1 Certification by Chief Executive Officer Pursuant to Rule 13a-14
(a) and 15d-14 (a) as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification by Interim Chief Financial Officer Pursuant to Rule
13a-14 (a) and 15d-14 (a) as Adopted Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of Interim Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GAMCO INVESTORS, INC.
------------------------------------------------------------------------------
(Registrant)
November 9, 2006April 13, 2007 /s/John C. Ferrara
------------------------ --------------------------------------- -------------- ----------------------------------------
Date John C. Ferrara
Interim Chief Financial Officer
29
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