SECURITIES & EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(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, 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
GAMCO INVESTORS, INC.
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(Exact name of Registrant as specified in its charter)
New York 13-4007862
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(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Corporate Center, Rye, NY 10580-1422
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(Address of principle executive offices) (Zip Code)
(914) 921-3700
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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
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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, 2006
----- ----------------------------
Class A Common Stock, .001 par value 7,473,758
Class B Common Stock, .001 par value 20,781,027
1
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, 2006 and 2005
Condensed Consolidated Statements of Financial Condition:
- December 31, 2005 (Audited)
- June 30, 2006
- June 30, 2005
Condensed Consolidated Statements of Stockholders' Equity and
Comprehensive Income:
- Three months ended June 30, 2006 and 2005
- Six months ended June 30, 2006 and 2005
Condensed Consolidated Statements of Cash Flows:
- Three months ended June 30, 2006 and 2005
- Six months ended June 30, 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
2
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 2005 (A) 2006 2005 (A)
------------- ------------- ------------- -------------
Revenues
Investment advisory and incentive fees $ 54,724 $ 52,088 $ 106,413 $ 106,019
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 62,797 59,570 123,372 121,101
Expenses
Compensation and related costs 26,724 27,246 54,233 53,401
Management fee 1,804 2,306 5,282 4,561
Distribution costs 5,329 4,535 10,544 10,748
Other operating expenses 7,713 6,000 15,104 12,754
Reserve for settlement 11,900 - 11,900 -
------------- ------------- ------------- -------------
Total expenses 53,470 40,087 97,063 81,464
Operating income 9,327 19,483 26,309 39,637
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 16,288 20,752 58,893 41,044
Income tax provision 7,308 7,782 23,285 15,391
Minority interest 108 107 7,458 108
------------- ------------- ------------- -------------
Net income $ 8,872 $ 12,863 $ 28,150 $ 25,545
============= ============= ============= =============
Net income per share:
Basic $ 0.31 $ 0.43 $ 0.98 $ 0.86
============= ============= ============= =============
Diluted $ 0.31 $ 0.42 $ 0.97 $ 0.85
============= ============= ============= =============
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 for recognizing management
fee revenues on closed-end preferred shares (See Note A in item 1 of this
report on Form 10-Q).
See accompanying notes.
3
GAMCO INVESTORS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except per share data)
December 31, June 30, June 30,
2005 2006 2005 (A)
--------------------------------------------------
ASSETS (Unaudited)
Cash and cash equivalents, including restricted cash of
$2,503, $730 and $1,508. $ 170,659 $ 116,852 $ 191,413
Investments in securities, including restricted securities of
$52,219, $52,141 and $52,270. 401,216 447,464 366,664
Investments in partnerships and affiliates 91,971 89,380 85,716
Receivable from brokers 8,545 39,490 24,274
Investment advisory fees receivable 22,260 24,574 16,310
Other assets 26,443 12,121 27,625
-------------- -------------- --------------
Total assets $ 721,094 $ 729,881 $ 712,002
============== ============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Payable to brokers $ 4 $ 2,037 $ 1
Income taxes payable, including deferred taxes of $1,699, $4,323,
and $296. 10,132 2,473 2,994
Compensation payable 27,889 39,249 31,791
Capital lease obligation 2,992 2,891 3,084
Securities sold, not yet purchased - - 3,357
Accrued expenses and other liabilities 17,489 28,895 15,506
-------------- -------------- --------------
Total operating liabilities 58,506 75,545 56,733
-------------- -------------- --------------
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 50,000 50,000
5.22% Senior notes (due February 17, 2007) 82,308 82,308 82,308
-------------- -------------- --------------
Total liabilities 290,814 307,853 289,041
Minority interest 6,151 19,712 5,735
Stockholders' equity
Class A Common Stock, $0.001 par value; 100,000,000
shares authorized; 9,648,339, 12,010,812 and 9,621,064
issued, respectively; 6,414,517, 7,509,058 and 6,820,642
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 226,353 228,573 235,104
Retained earnings 329,090 355,439 292,729
Accumulated comprehensive gain 526 2,423 1,864
Treasury stock, at cost (3,233,822, 4,501,754 and 2,800,422
shares, respectively) (131,873) (184,152) (112,504)
-------------- -------------- --------------
Total stockholders' equity 424,129 402,316 417,226
-------------- -------------- --------------
Total liabilities and stockholders' equity $ 721,094 $ 729,881 $ 712,002
============== ============== ==============
(A) As restated for the Change in Accounting Method for recognizing management
fee revenues on closed-end preferred shares (See Note A in item 1 of this
report on Form 10-Q).
See accompanying notes.
4
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 2005 (A) 2006 2005 (A)
---------- ---------- ---------- ----------
Stockholders' equity -- beginning of period $ 410,991 $ 417,445 $ 424,129 $ 334,878
Comprehensive income:
Net income 8,872 12,863 28,150 25,545
Foreign currency translation adjustments (128) (16) (53) 34
Net unrealized (loss) gain on securities available for sale (588) 741 1,867 1,883
---------- ---------- ---------- ----------
Comprehensive income 8,156 13,588 29,964 27,462
Dividends declared (851) (599) (1,718) (1,334)
Stock option expense 14 2,275 20 2,760
Proceeds from settlement of purchase contracts - - - 70,567
Excess tax benefit for exercised stock options 1,782 - 1,782 -
Exercise of stock options including tax benefit 137 304 418 740
Capitalized costs - (15) - (15)
Purchase of treasury stock (17,913) (15,772) (52,279) (17,832)
---------- ---------- ---------- ----------
Stockholders' equity -- end of period $ 402,316 $ 417,226 $ 402,316 $ 417,226
========== ========== ========== ==========
(A) As restated for the Change in Accounting Method for recognizing management
fee revenues on closed-end preferred shares (See Note A in item 1 of this
report on Form 10-Q).
See accompanying notes.
5
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 2005 (A) 2006 2005 (A)
------------ ------------ ------------ ------------
Operating activities
Net income $ 8,872 $ 12,863 $ 28,150 $ 25,545
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)
Depreciation and amortization 220 237 444 471
Stock-based compensation expense 14 2,275 20 2,760
Tax benefit from exercise of stock options 21 52 87 154
Foreign currency loss 30 (9) 30 202
Other-than-temporary loss on available for sale securities 56 122 56 3,301
Impairment of goodwill - - - 1,127
Minority interest in net income of consolidated subsidiaries 75 107 362 108
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)
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 -
(Increase) decrease in operating assets:
Purchases of investments in securities (203,842) (147,495) (450,832) (535,101)
Proceeds from sales of investments in securities 166,816 70,231 451,032 473,392
Receivables from affiliates 2,277 (497) 5,439 580
Investments in partnerships and affiliates (7,833) (4,126) (10,059) (10,683)
Distributions from partnerships and affiliates 7,075 4,248 7,923 17,002
Investment advisory fees receivable 655 6,189 6,304 10,257
Receivable from brokers 37,151 (656) (27,005) (18,736)
Other assets 842 532 (31) (1,731)
Increase (decrease) in operating liabilities:
Payable to brokers 190 - 186 (301)
Income taxes payable (12,110) (5,511) (8,851) (6,657)
Compensation payable 2,645 (2,156) 11,029 3,809
Accrued expenses and other liabilities 10,307 (3,500) 10,417 (2,279)
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) -
Change in unrealized value of investments in securities and securities
sold short, net (2,942) - (4,782) -
Purchases of investments in securities and securities sold short (9,218) - (648,099) -
Proceeds from sales of investments in securities and securities sold short 9,517 - 628,428 -
Investment advisory fees receivable 10,897 - 98 -
Increase in receivable from brokers (9,757) - (9,757) -
Decrease in other assets (21) - 387 -
Increase in payable to brokers 1,847 - 7,630 -
Decrease in accrued expenses and other liabilities (1,892) - (12,992) -
Income related to investment partnerships and offshore funds consolidated
under FIN 46R and EITF 04-5, net 207 - 14,637 -
Total adjustments (1,369) (82,157) (55,247) (70,350)
------------ ------------ ------------ ------------
Net cash provided by (used in) operating activities 7,500 (69,294) (27,097) (44,805)
------------ ------------ ------------ ------------
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 2005 2006 2005
------------ ------------ ------------ ------------
Investing activities
Purchases of available for sale securities (247) (1,016) (3,253) (4,960)
Proceeds from sales of available for sale securities - - 1,486 -
------------ ------------ ------------ ------------
Net cash used in investing activities (247) (1,016) (1,767) (4,960)
------------ ------------ ------------ ------------
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 -
Proceeds from exercise of stock options 116 253 332 586
Repurchase of 5% convertible note - (50,000) - (50,000)
Dividends paid (851) (599) (1,718) (18,636)
Proceeds from settlement of purchase contracts - (1) - 70,567
Capitalized costs - (15) - (15)
Purchase of treasury stock (17,913) (15,772) (52,279) (17,832)
------------ ------------ ------------ ------------
Net cash used in financing activities (17,111) (66,678) (26,429) (15,874)
------------ ------------ ------------ ------------
Net decrease in cash and cash equivalents (9,858) (136,988) (55,293) (65,639)
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)
Cash and cash equivalents at beginning of period 126,842 328,428 170,659 257,096
------------ ------------ ------------ ------------
Cash and cash equivalents at end of period $116,852 $191,413 $116,852 $191,413
============ ============ ============ ============
(A) As restated for the Change in Accounting Method for recognizing management
fee revenues on closed-end preferred shares (See Note A in item 1 of this
report on Form 10-Q).
See accompanying notes.
7
GAMCO INVESTORS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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.
Changes in Accounting Policy
GAMCO has voluntarily changed its accounting method for recognizing
management fee revenues on closed-end preferred shares effective January 1,
2006. GAMCO, unlike most investment advisors that use leverage, does not earn a
fee on assets from the leverage until the return on assets exceeds the cost of
capital. 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.
After considering the guidance provided in EITF D-96, "Accounting for
Management Fees Based on a Formula", GAMCO believes that the preferable method
of accounting is to recognize management fee revenues on closed-end preferred
shares (which fees are only earned if the annual performance of the fund exceeds
the cost to the fund of the preferred shares) at the end of the measurement
period, which is currently the end of each calendar year for all closed-end
funds. This method results in revenue recognition only when the measurement
period has been completed and when the management 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.
8
A. Basis of Presentation (continued)
Under SFAS No. 154, which GAMCO adopted on January 1, 2006, this 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. Because full
year results are equivalent under both the old and new accounting methods, only
interim periods during a year are affected by the change. Therefore, there is no
cumulative effect adjustment at the beginning of the first period presented
herein. This policy change resulted in a restatement to reduce 2005 revenues of
approximately $0.3 million, or $0.01 per fully diluted share, in the second
quarter, $2.9 million, or approximately $0.03 per fully diluted share, in the
third quarter and a corresponding increase in revenues of $3.2 million, or
approximately $0.03 per fully diluted share, in the fourth quarter. This change
will have no effect on total revenues or net income reported in 2005.
Quarter Ended (a)
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 $61.5 million $59.6 million $63.3 million $68.0 million
Change - ($0.3) million ($2.9) million $ 3.2 million
EPS Reported $0.42 $0.43 $0.64 $0.61
Restated $0.42 $0.42 $0.61 $0.64
Change - ($0.01) ($0.03) $0.03
(a) Differences due to rounding
Recent Accounting Developments
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 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 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 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
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.
9
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.
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.
For the three and six month periods ended June 30, 2006, there were $0.1
million in losses on AFS securities deemed to be other than temporary which were
recorded in the statement of income. For the three and six month periods ended
June 30, 2005, there were $0.1 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 six month period ended June 30,
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 six months of 2005. For the six month period
ended June 30, 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 million and $80.9 million, respectively. An
unrealized gain in market value, net of management fee and taxes, of $2.4
million and $1.9 million has been included in stockholders' equity for June 30,
2006 and June 30, 2005, respectively. The unrealized gain in the six 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.
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 sales of investments available for
sale were approximately $1.5 million for the six month period ended June 30,
2006.
C. Investments in Partnerships and Affiliates
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, FIN46R and EITF 04-5 only required us to
consolidate these entities on our income statement and statement of cash flows
for the first quarter 2006. We were not required to consolidate these entities
on our balance sheet at March 31, 2006. In addition, these partnerships and
offshore funds, for which the agreements were amended, are not required to be
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
10
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 four 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 months ended June 30, 2006. These entities have been
consolidated within our financial statements for the three and six month periods
ended June 30, 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
periods ended June 30, 2006 related to these entities, the consolidation of
these entities also resulted in minor adjustments to our statement of financial
condition at June 30, 2006. The consolidation of these entities on the statement
of financial condition has increased assets by $16.0 million, liabilities by
$2.8 million and minority interest by $13.2 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, 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.
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,
(in thousands, except per share amounts) 2006 2005* 2006 2005*
----------- ----------- ----------- -----------
Basic:
Net income $ 8,872 $ 12,863 $ 28,150 $ 25,545
=========== =========== =========== ===========
Average shares outstanding 28,507 30,079 28,842 29,821
=========== =========== =========== ===========
Basic net income per share $ 0.31 $ 0.43 $ 0.98 $ 0.86
=========== =========== =========== ===========
Diluted:
Net income $ 8,872 $ 12,863 $ 28,150 $ 25,545
Add interest expense on 5% convertible note,
net of management fee and taxes 351 352 703 1,055
----------- ----------- ----------- -----------
Total $ 9,223 $ 13,215 $ 28,853 $ 26,600
=========== =========== =========== ===========
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 $ 0.31 $ 0.42 $ 0.97 $ 0.85
=========== =========== =========== ===========
* As restated for the Change in Accounting Method for recognizing management fee
revenues on closed-end preferred shares (See Note A in item 1 of this report on
Form 10-Q).
E. Stockholders' Equity
Shares outstanding on June 30, 2006 were 28,290,085, approximately 1.7%
11
lower than the March 31, 2006 outstanding shares of 28,774,485, and
approximately 5.5% below the 29,949,142 shares outstanding on June 30, 2005.
Fully diluted shares outstanding for the second quarter of 2006 were 29,495,759
approximately 2.3% lower than first quarter 2006 fully diluted shares of
30,185,312 and approximately 5.5% lower than our fully diluted shares of
31,211,347 for the second 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. 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 June 28, 2006 to shareholders of record on June
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 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, 2006 and 2005, we recognized
stock-based compensation expense of approximately $14,000 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,
respectively. The total compensation costs related to non-vested awards not yet
recognized is approximately $0.2 million. This will be recognized as expense in
the following periods:
Remainder
of 2006 2007 2008 2009 2010
--------- --------- --------- --------- ---------
$33,000 $67,000 $62,000 $20,000 $2,000
Proceeds from the exercise of 5,000 and 8,750 stock options were
approximately $133,000 and $253,000 for the three months ended June 30, 2006 and
2005, respectively, resulting in a tax benefit to GAMCO of $21,000 and $52,000
for the three months ended June 30, 2006 and 2005, respectively. Proceeds from
the exercise of 15,000 and 22,225 stock options were approximately $348,000 and
$586,000 for the six months ended June 30, 2006 and 2005, respectively,
resulting in a tax benefit to GAMCO of $87,000 and $154,000 for the three months
ended June 30, 2006 and 2005, respectively.
Stock Repurchase Program
Our stock buyback program was initiated in March 1999. In the second
quarter of 2006, we repurchased 489,400 shares at an average investment of
$36.58. In May 2006, our Board of Directors authorized an additional 400,000
shares to be repurchased bringing the total amount of shares currently available
to be repurchased under the program to 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.
12
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 periods ended June 30, 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. At June
30, 2006, there remains $3.5 million, included in other assets, of goodwill
related to our 92% owned subsidiary, Gabelli Securities, Inc.
H. Other Matters
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 a
reserve against earnings of approximately $12 million. 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.
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, 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
13
minimis, and therefore an accrual has not been made in the financial statements.
I. Subsequent Events
From July 1 through July 31, 2006, we repurchased 45,800 shares of our
class A common stock, under the Stock Repurchase Program, at an average
investment of $34.31 per share.
14
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.
15
Assets Under Management (AUM) were $26.8 billion as of June 30, 2006, 3.1%
lower than March 31, 2006 and June 30, 2005 AUM of $27.6 billion. Equity assets
under management were $25.9 billion on June 30, 2006, down 3.4% from March 31,
2006 equity assets of $26.8 billion, and down 2.4% from $26.5 billion on June
30, 2005. Our equity open-end funds and closed-end funds stood at $13.1 billion
in AUM on June 30, 2006, 4.6% higher than the $12.5 billion on June 30, 2005,
but 3.0% below the $13.5 billion level on March 31, 2006. Our institutional and
high net worth business had AUM of $12.3 billion in separately managed equity
accounts on June 30, 2006, 2.9% lower than the $12.6 billion on March 31, 2006,
and 7.0% under the $13.2 billion on June 30, 2005. AUM in our investment
partnerships were $536 million versus $681 million on March 31, 2006 and $831
million on June 30, 2005. Fixed income AUM, primarily money market mutual funds,
totaled $918 million on June 30, 2006, up 6% from the March 31, 2006 assets of
$866 million, and 18% lower than fixed income AUM of $1.1 billion on June 30,
2005, principally due to the closing of the Treasurer's Fund in the fourth
quarter of 2005.
16
Assets Under Management
The company reported assets under management as follows:
Table I:
Assets Under Management (in millions)
-------------------------------------
June 30
----------------------- %
2005 2006 Inc. (Dec.)
--------- --------- -----------
Mutual Funds:
Equities
Open end $ 7,798 $ 7,796 (0.0)%
Closed-end 4,684 5,258 12.3
Fixed Income 852 863 1.3
--------- ---------
Total Mutual Funds 13,334 13,917 4.4
--------- ---------
Institutional & High Net Worth Separate Accounts:
Equities 13,189 12,270 (7.0)
Fixed Income 269 55 (79.6)
--------- ---------
Total Institutional & High Net Worth Separate Accounts 13,458 12,325 (8.4)
--------- ---------
Investment Partnerships 831 536 (35.5)
--------- ---------
Total Assets Under Management $ 27,623 $ 26,778 (3.1)
========= =========
Equities $ 26,502 $ 25,860 (2.4)
Fixed Income 1,121 918 (18.1)
--------- ---------
Total Assets Under Management $ 27,623 $ 26,778 (3.1)
========= =========
Table II: Fund Flows - 2nd Quarter 2006 (in millions)
Market
March 31, Net Appreciation / June 30,
2006 Cash Flows (Depreciation) 2006
---------------- ---------------- ---------------- ----------------
Mutual Funds:
Equities $ 13,460 ($411) $ 5 $ 13,054
Fixed Income 807 43 13 863
---------------- ---------------- ---------------- ----------------
Total Mutual Funds 14,267 (368) 18 13,917
---------------- ---------------- ---------------- ----------------
Institutional & HNW Separate Accounts
Equities 12,639 (376) 7 12,270
Fixed Income 59 (5) 1 55
---------------- ---------------- ---------------- ----------------
Total Institutional & HNW Separate Accounts 12,698 (381) 8 12,325
---------------- ---------------- ---------------- ----------------
Investment Partnerships 681 (155) 10 536
---------------- ---------------- ---------------- ----------------
Total Assets Under Management $ 27,646 ($904) $36 $ 26,778
================ ================ ================ ================
Assets Under Management (in millions)
--------------------------------------------------------------------------------
Table III:
% Increase/(decrease)
6/05 9/05 12/05 3/06 6/06 3/06 6/05
--------- --------- --------- --------- --------- ------- -------
Mutual Funds
Open end $7,798 $7,959 $7,888 $8,176 $7,796 (4.6)% (0.0)%
Closed-end 4,684 4,851 5,075 5,284 5,258 (0.5) 12.3
Fixed income 852 796 735 807 863 6.9 1.3
--------- --------- --------- --------- ---------
Total Mutual Funds 13,334 13,606 13,698 14,267 13,917 (2.5) 4.4
--------- --------- --------- --------- ---------
Institutional & HNW Separate
Accounts:
Equities 13,189 13,129 12,382 12,639 12,270 (2.9) (7.0)
Fixed Income 269 158 84 59 55 (6.8) (79.6)
--------- --------- --------- --------- ---------
Total Institutional & HNW Separate
Accounts 13,458 13,287 12,466 12,698 12,325 (2.9) (8.4)
--------- --------- --------- --------- ---------
Investment Partnerships 831 745 634 681 536 (21.3) (35.5)
--------- --------- --------- --------- ---------
Total Assets Under Management $ 27,623 $ 27,638 $ 26,798 $ 27,646 $ 26,778 (3.1) (3.1)
========= ========= ========= ========= =========
17
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 2002 and 2003 between GAMCO's staff 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 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.
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
18
regulatory authorities, and the associated compliance costs, have increased our
cost structure and could in the future have a material impact.
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 2005 (a) 2005 (b)
--------- --------- ---------
Revenues
Investment advisory and incentive fees $ 54,724 $ 52,088 $ 52,359
Commission revenue 2,722 2,574 2,574
Distribution fees and other income 5,351 4,908 4,908
--------- --------- ---------
Total revenues 62,797 59,570 59,841
Expenses
Compensation and related costs 26,724 27,246 27,353
Management fee 1,804 2,306 2,322
Distribution costs 5,329 4,535 4,535
Reserve for settlement 11,900 - -
Other operating expenses 7,713 6,000 6,000
--------- --------- ---------
Total expenses 53,470 40,087 40,210
--------- --------- ---------
Operating income 9,327 19,483 19,631
Other income (expense)
Net gain from investments 4,244 387 387
Interest and dividend income 6,111 4,157 4,157
Interest expense (3,394) (3,275) (3,275)
--------- --------- ---------
Total other income (expense), net 6,961 1,269 1,269
--------- --------- ---------
Income before taxes and minority interest 16,288 20,752 20,900
Income tax provision 7,308 7,782 7,838
Minority interest 108 107 107
--------- --------- ---------
Net income $ 8,872 $ 12,863 $ 12,955
========= ========= =========
Net income per share:
Basic $ 0.31 $ 0.43 $ 0.43
========= ========= =========
Diluted $ 0.31 $ 0.42 $ 0.43
========= ========= =========
Reconciliation of Net income to Adjusted EBITDA:
Net income $ 8,872 $ 12,863 $ 12,955
Interest Expense 3,394 3,275 3,275
Income tax provision and minority interest 7,416 7,889 7,945
Depreciation and amortization 220 237 237
--------- --------- ---------
Adjusted EBITDA(c) $ 19,902 $ 24,264 $ 24,412
--------- --------- ---------
(a) As restated for the Change in Accounting Method for recognizing management
fee revenues on closed-end preferred shares (See Note A in item 1 of this
report on Form 10-Q).
(b) As originally reported during the quarter ended June 30, 2005.
(c) 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.
19
Total revenues were $62.8 million in the second quarter of 2006 up $3.2
million or 5.4% from total revenues of $59.6 million reported in the second
quarter of 2005
For the second quarter of 2006, investment advisory fees were $54.7
million, an increase of 5.1% from the $52.1 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
$3.1 million, level with the prior year's period.
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 17.7% for the second
quarter 2006 from 36.6% 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
36.7%.
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
$18.1 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.
20
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 has provided
our results before adjusting for FASB Interpretation No. 46R ("FIN 46R") and
Emerging Issue Task Force 04-5 ("EITF 04-5"). These results are not presented in
accordance with generally accepted accounting principles ("GAAP") in the United
States. 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:
(Unaudited; in thousands, except per share data)
------------------------------------------------
2005 Adjustments
Restated (a) 2006 (b) (c) 2006 (d)
------------ ------------ ------------ ------------
Revenues
Investment advisory and incentive fees $106,019 $109,429 ($ 3,016) $106,413
Commission revenue 5,039 6,173 - 6,173
Distribution fees and other income 10,043 10,786 - 10,786
------------ ------------ ------------ ------------
Total revenues 121,101 126,388 (3,016) 123,372
Expenses
Compensation and related costs 53,401 54,233 - 54,233
Management fee 4,561 5,282 - 5,282
Distribution costs 10,748 10,544 - 10,544
Reserve for settlement - 11,900 - 11,900
Other operating expenses 12,754 14,915 189 15,104
------------ ------------ ------------ ------------
Total expenses 81,464 96,874 189 97,063
------------ ------------ ------------ ------------
Operating income 39,637 29,514 (3,205) 26,309
Other income (expense)
Net gain from investments 982 13,597 13,772 27,369
Interest and dividend income 7,629 11,159 1,325 12,484
Interest expense (7,204) (6,678) (591) (7,269)
------------ ------------ ------------ ------------
Total other income (expense), net 1,407 18,078 14,506 32,584
------------ ------------ ------------ ------------
Income before taxes and minority interest 41,044 47,592 11,301 58,893
Income tax provision 15,391 19,047 4,238 23,285
Minority interest 108 395 7,063 7,458
------------ ------------ ------------ ------------
Net income $ 25,545 $ 28,150 $ - $ 28,150
============ ============ ============ ============
Net income per share:
Basic $ 0.86 $ 0.98 $ - $ 0.98
============ ============ ============ ============
Diluted $ 0.85 $ 0.97 $ - $ 0.97
============ ============ ============ ============
Reconciliation of Net income to Adjusted EBITDA:
Net income $ 25,545 $ 28,150 $ - $ 28,150
Interest Expense 7,204 6,678 591 7,269
Income tax provision and minority interest 15,499 19,442 11,301 30,743
Depreciation and amortization 471 444 - 444
------------ ------------ ------------ ------------
Adjusted EBITDA(e) $ 48,719 $ 54,714 $ 11,892 $ 66,606
------------ ------------ ------------ ------------
(a) GAAP, as restated for change in accounting method.
(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.
(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.
21
Total revenues were $123.4 million for the six months ended June 30, 2006
up $2.3 million or 1.9% from total revenues of $121.1 million reported in the
prior year's period
For the six months ended June 30, 2006, investment advisory fees were
$106.4 million, an increase of $0.4 million from the $106.0 million generated
for the six months ended June 30, 2005. Further details on our six month ended
June 30, 2006 investment advisory revenues included the following:
Revenues from our closed-end fund increased 19.2% to $21.0 million for the
six months ended June 30, 2006, up from $17.6 million in the prior year's
period. The increase was due to increased average AUM within our closed-end
funds 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 of Gabelli Global Gold, Natural
Resources & Income Trust (GGN) as of March 29, 2005. Open-end mutual funds
revenues were $40.3 million, up 1.7% from the $39.6 million in the 2005 period.
Institutional and high net worth separate accounts revenues decreased 5.4% to
$40.1 million from the $42.4 million reported in 2005. Investment Partnership
revenues were $8.1 million, an increase of 27.1%, as higher incentive fees were
slightly offset by lower management fee revenues.
Commission revenues from our institutional research affiliate, Gabelli &
Company, Inc., were $6.2 million for the six months ended June 30, 2006, up
22.5% from the prior year's comparable period amount of $5.0 million.
Mutual fund distribution fees and other income were $10.8 million for the
six months ended June 30, 2006, 7.4% higher than the $10.0 million reported in
the 2005 period. The increase is due to higher distribution fees of $10.2
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 25.6% for the six
months ended June 30, 2006 from 36.5% in the prior year's period primarily due
to 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 35.3%.
Expenses not directly tied to revenues were $37.4 million, an increase of
42.6% from the $26.3 million recorded in the period ended June 30, 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 $26 million.
Total other income, net of interest expense, rose to $32.6 million for the
six months ended June 30, 2006 from $1.4 million in the 2005 period.
Approximately $14.5 million of the increase represents the effects of
consolidation of entities in which GAMCO holds a direct or indirect controlling
interest under FIN46R and EITF 04-5 during 2006 for the first quarter of 2006.
In addition, there were higher net gains of $13.6 million from investments as
well as higher interest income of $4.9 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: $0.03 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.
Minority interest had an increase of $7.1 million as a result of the
consolidation of entities in which GAMCO holds a direct or indirect controlling
interest under FIN46R and EITF 04-5 during 2006.
For the six months ended June 30, 2006, interest expense increased $0.1
million to $7.3 million.
Management fee was $5.3 million for the six months ended June 30, 2006,
versus $4.6 million for the comparable 2005 period. The increase is due to
higher operating income before management fee, income taxes, and minority
interest of $64.2 million for the six months ended June 30, 2006, as compared to
$45.6 million for the comparable 2005 period.
The effective tax rate for the six months ended June 30, 2006, excluding
the reserve, remained at 37.5%, the same as the prior year period.
22
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:
Six Months Ended June 30,
-------------------------
2005 2006
----------- -----------
(in thousands)
Cash flows used in:
Operating activities $ (44,805) $ (27,097)
Investing activities (4,960) (1,767)
Financing activities (15,874) (26,429)
----------- -----------
Decrease (65,639) (55,293)
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)
Cash and cash equivalents at beginning of period 257,096 170,659
----------- -----------
Cash and cash equivalents at end of period $ 191,413 $ 116,852
=========== ===========
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.
At June 30, 2006, we had total cash and cash equivalents of $116.9 million,
a decrease of $53.8 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 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. 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, 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.
Cash used in operating activities was $27.1 million in the first six months
of 2006 principally resulting from $450.8 million in purchases of investments in
securities, a $27.0 million increase in receivable from brokers, $10.1 million
in purchases of investments in partnerships and affiliates and $39.5 million
from the net effects of the FIN 46R and EITF 04-5 consolidation. This was
partially offset by $28.2 million in net income, proceeds from sales of
investments in securities of $451.0 million, $7.9 million in distributions from
23
investments in partnerships and affiliates and an increase in compensation
payable of $11.0 million. Excluding the net effects of the consolidation of
investment partnerships and offshore funds, our cash provided by operating
activities was $9.4 million.
Cash used in investing activities, related to purchases and sales of
available for sale securities, was $1.8 million in the first six months of 2006.
Cash used in financing activities in the first six months of 2006 was $26.4
million. The decrease in cash principally resulted from the repurchase of our
class A common stock under the Stock Repurchase Program of $52.3 million
partially offset by a $30.3 million in contributions by partners into our
investment partnerships. Excluding the net effects of the consolidation of
investment partnerships and offshore funds, our net cash used in financing
activities was $0.8 million.
Cash used in operating activities was $44.8 million in the first six months
of 2005 principally resulting from $535.1 million in purchases of investments in
securities, a $18.7 million increase in receivable from brokers and a $6.7
million decrease in income taxes payable partially offset by $473.4 million in
proceeds from sales of investments in securities, $25.5 million in net income, a
$10.3 million decrease in investment advisory fees receivable and a $3.8 million
increase in compensation payable.
Cash used in investing activities, related to investments in and purchases
and sales of available for sale securities, was $5.0 million in the first six
months of 2005.
Cash used in financing activities in the first six months of 2005 was $15.9
million. The decrease 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 million received from the exercise of
non-qualified stock options that further generated cash tax savings of $0.2
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.
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,
2006. At June 30, 2006, Gabelli & Company had net capital, as defined, of
approximately $15.7 million, exceeding the regulatory requirement by
approximately $15.5 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.
24
With respect to our proprietary investment activities, included in
investments in securities of $447.5 million at June 30, 2006 were investments in
Treasury Bills and Notes of $253.8 million, in mutual funds, largely invested in
equity products, of $109.1 million, a selection of common and preferred stocks
totaling $65.7 million and other investments of approximately $18.9 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 million invested in common and preferred stocks at June 30,
2006, $22.1 million is related to our investment in Westwood Holdings Group Inc.
and $1.2 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 million
at June 30, 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% of our AUM are invested in equities, the primary risk factor
affecting our revenues and financial results is the general market level of
stock prices and interest rates. Our financial results are also subject to the
gain or loss of clients. In addition, returns from our proprietary investment
portfolio are also exposed to interest rate and equity market risk. Should
negative market conditions that impact our AUM or proprietary investment
portfolio occur, we could report lower operating results in 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 strong financial results in
the second half of 2005.
Recent Accounting Developments
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 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 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 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
25
certain major implementation issues related to FIN 46R, specifically how a
reporting enterprise should determine the variability to be considered in
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.
Item 4. Controls and Procedures
Management, including the Chief Executive Officer and the Chief Financial
Officer has conducted an evaluation of the effectiveness of disclosure controls
and procedures pursuant to Exchange Act Rule 13a-14. Based on the evaluation,
the Chief Executive Officer and the Interim Chief Financial Officer concluded
that the disclosure controls and procedures are effective in ensuring that all
material information required to be filed 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.
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.
26
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, 2006:
(c) Total Number of (d) Maximum
(a) Total (b) Average Shares Repurchased as Number of Shares
Number of Price Paid Per Part of Publicly That May Yet Be
Shares Share, net of Announced Plans or Purchased Under the
Period Repurchased Commissions Programs Plans or Programs
------------------------------------------------------------------------------------------------------
4/01/06 - 4/30/06 - - - 804,261
5/01/06 - 5/31/06 413,400 $37.04 413,400 790,861
6/01/06 - 6/30/06 76,000 $34.11 76,000 714,861
---------- ----------
Totals 489,400 489,400
========== ==========
In May 2006, the board of directors approved an increase of 400,000 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
27
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.
10.2 Registration Rights Agreement dated May 31, 2006.
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
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)
August 7, 2006 /s/ John C. Ferrara
---------------- ----------------------------------
Date John C. Ferrara
Interim Chief Financial Officer
28