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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 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 number 1-14761
GAMCO Investors, Inc.
(Exact name of registrant as specified in its charter)
New York 13-4007862
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
One Corporate Center, Rye, NY 10580-1422
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (914) 921-5100
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered:
Class A Common Stock, New York Stock Exchange
$ .001 Par Value
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes No X .
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Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
Yes No X .
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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 .
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K [ ].
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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The aggregate market value of the class A common stock held by non-affiliates of
the registrant as of June 30, 2006 (the last business day of the Registrant's
most recently completed second fiscal quarter) was $278,573,382.
As of March 1, 2007, 7,554,392 shares of class A common stock and 20,671,143
shares of class B common stock were outstanding. 20,428,500 shares of the class
B common stock were held by GGCP, Inc.
DOCUMENTS INCORPORATED BY REFERENCE: The definitive proxy statement for the 2007
Annual Meeting of Shareholders.
PART I
Forward-Looking Information
Our disclosure and analysis in this report and in documents that are
incorporated by reference 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 Item 1A below and in our other public filings or in documents
incorporated by reference here or in prior filings or reports.
We are providing these statements as permitted by the Private Litigation Reform
Act of 1995. We do not undertake to update publicly any forward-looking
statements if we subsequently learn that we are unlikely to achieve our
expectations or if we receive any additional information relating to the subject
matters of our forward-looking statements.
ITEM 1: BUSINESS
Unless we have indicated otherwise, or the context otherwise requires,
references in this report to "GAMCO Investors, Inc.," "GBL," "we," "us" and
"our" or similar terms are to GAMCO Investors, Inc., its predecessors and its
subsidiaries.
Overview
GAMCO Investors, Inc. (NYSE: GBL), well known for its Private Market Value (PMV)
with a CatalystTM investment approach, is a widely-recognized provider of
investment advisory services to mutual funds, institutional and high net worth
investors, and investment partnerships, principally in the United States.
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.
Since 1977, we have been identified with and enhanced the "value" style approach
to investing. Over the 29 years since the inception of the firm, consistent with
our fundamental objective of providing an absolute rate of return for our
clients, GBL generated over $15 billion in investment returns for our
institutional and high net worth clients. The 29 year CARR (compounded annual
rate of return) for the institutional client (as measured by our composite
return) approached 19% on a gross basis and 18% on a net basis, and in 2006 we
produced $2.1 billion and 23.2% net returns for our institutional clients. Our
mission statement, 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 portfolios, we offer our clients a broad
array of investment strategies that include global, growth, international and
convertible products. We also offer a series of investment partnership
(performance fee-based) vehicles that provide a series of long-short investment
opportunities in market and sector specific opportunities, including offerings
of non-market correlated investments in merger arbitrage, as well as fixed
income strategies.
As of December 31, 2006, we had $28.1 billion of assets under management (AUM),
97% of which were in equity products. 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.
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Our assets under management are organized into three groups:
o Investment Partnerships: we provide advisory services to limited
partnerships, offshore funds and separate accounts, and also serve as
a sub-advisor to certain third-party investment funds across merger
arbitrage, global and regional long/short equity, and sector-focused
strategies ("Investment Partnerships"). We managed a total of $491
million in Investment Partnership assets on December 31, 2006.
o Separate Accounts: we provide advisory services to a broad range of
investors, including high net worth individuals, corporate pension and
profit-sharing plans, foundations, endowments, jointly-trusteed plans
and municipalities, and also serve as sub-advisor to certain other
third-party investment funds including registered investment companies
("Separate Accounts"). Each Separate Account portfolio is managed to
meet the specific needs and objectives of the particular client by
utilizing investment strategies and techniques within our areas of
expertise. On December 31, 2006, we had $12.7 billion of Separate
Account assets under management.
o Open and Closed-End Funds: we provide advisory services to (i) twenty
open-end mutual funds and seven closed-end funds under Gabelli, GAMCO
and Comstock brands; and (ii) six mutual funds within the Westwood
family of funds (collectively, the "Mutual Funds"). The Mutual Funds
had $14.9 billion of assets under management on December 31, 2006. In
January 2007, we launched the Gabelli Global Deal Fund (NYSE: GDL), a
closed-end fund that invests primarily in announced merger and
acquisition transactions and, to a lesser extent, in corporate
reorganizations involving stubs, spin-offs and liquidations.
GAMCO Investors, Inc. is a holding company formed in connection with our initial
public offering ("Offering") in February 1999. GGCP, Inc. owns a majority of the
outstanding shares of class B common stock of GAMCO Investors, Inc., which
ownership represented approximately 95% of the combined voting power of the
outstanding common stock and approximately 72% of the equity interest on
December 31, 2006. GGCP, Inc. is majority-owned by Mr. Mario J. Gabelli ("Mr.
Gabelli") with the balance owned by our professional staff and other
individuals. Accordingly, Mr. Gabelli could be deemed to control GAMCO
Investors, Inc.
Our corporate name change to GAMCO Investors, Inc. became effective August 29,
2005. GAMCO is a more inclusive parent company name and more appropriately
represents the various investment strategies and asset management brands of our
company.
Our principal executive offices are located at One Corporate Center, Rye, New
York 10580. Our telephone number is (914) 921-5100. We post or provide a link on
our website, www.gabelli.com, to the following filings as soon as reasonably
practicable after they are electronically filed with or furnished to the
Securities and Exchange Commission ("SEC"): our annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments
to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934. All such filings on our website are available
free of charge.
Performance Highlights
Separate Accounts
Institutional clients of our institutional and high net worth asset management
business have achieved a compound annual return of approximately 18% on a net
basis in our separate accounts composite for over 29 years since inception
through December 31, 2006. In 2006, the institutional composite return was a
23.2% net return. These accounts in this composite have been managed in the
absolute return, research-driven PMV with a CatalystTM style since inception.
4
The table below compares the long-term performance record for our separate
account composite since 1977, using our traditional value-oriented product, the
Gabelli PMV with a Catalyst investment approach, versus various benchmarks.
[SEE SUPPLEMENTAL PDF]
GAMCO Value 1977-2006
GAMCO(a) S&P 500(b) Russell 2000(b) CPI +10(b)
Number of Up Years 26 24 21
Number of Down Years 3 5 7
Years GAMCO Value beat index 18 18 18
Total Return (CAGR) (a) 18.8% 13.1% 13.3% 14.2%
Total Return (CAGR) (net) 17.9%
Beta 0.78
The chart below illustrates how this methodology performed during recent market
cycles to capture the upside in positive markets while limiting the downside in
the most recent down markets.
[SEE SUPPLEMENTAL PDF]
Performance 1997-2006
GAMCO Value vs. S&P 500 Index
-Up Markets- -Down Markets- -Up Markets-
1997-1999 2000-2002
2003-2006
S&P 500(b) +27.6% -14.6% +14.7%
GAMCO(a) +30.5% -4.4% +18.8%
Footnotes to Table and Chart
(a)
o The GAMCO Value composite represents fully discretionary, tax-exempt
institutional accounts managed for at least one full quarter and meeting
minimum account size requirements. The minimum size requirement for
inclusion in 1985 was $500,000; 1986, $1 million; and 1987 and thereafter,
$5 million. The performance calculations include accounts under management
during the respective periods. As of 12/31/06, the GAMCO Value composite
included 40 accounts with an aggregate market value of $4.1 billion. No two
portfolios are identical. Accounts not within this size and type may have
experienced different results.
o GAMCO Value performance results are computed on a total-return basis, which
includes all dividends, interest, and realized and unrealized gains and
losses. The summary of past performance is not intended as a prediction of
future results. Returns are presented in U.S. dollars. The inception date
of the GAMCO Value composite is 10/1/77.
o The compound annual growth rate from 1990 to present is net of actual fees
and actual transaction costs. The compound annual growth rate before 1990
reflects the calculation of a model investment fee (1% compounded
quarterly) and actual transaction costs.
o GAMCO Total Return represents the total net return of the composite from
10/1/77 through 12/31/06.
o Beta is the measure of the GAMCO composite's risk (volatility) in
relation to the S&P 500 Index.
(b)
o The S&P 500 is an unmanaged index of 500 U.S. stocks and performance
represents total return of the index including reinvestment of dividends.
The Russell 2000 is an unmanaged index of 2000 small capitalization stocks
and performance represents total return of the index including reinvestment
of dividends. The performance figures for the Russell 2000 are based on an
inception date of 1/1/79. The S&P 500 and Russell 2000 do not necessarily
reflect how a managed portfolio of equity securities would have performed.
The CPI is a widely-used measure of inflation, and the CPI+10 measure is
used to show the results that would have been achieved by obtaining a rate
of return that exceeded the CPI by a constant 10% as a basis of comparison
versus the results of the GAMCO composite.
o Up and down markets in the chart determined by the performance
of the S&P 500 Index during the respective periods.
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- GAM GAMCO Equity Fund, managed by Mario Gabelli since 1987, was awarded
Standard & Poor's AAA Rating(a) for the third consecutive year in November
2006 and was one of only six S&P AAA rated funds out of the 1,028 fund
Mainstream Sector Group. GAM GAMCO Equity Fund has been sub-advised by
GAMCO Asset Management Inc. for London UK-based Global Asset Management
(GAM) since the fund's launch in October 1987.
Open and Closed-End Funds
- The February 2007 issue of Consumer Reports (b) lists "60 Funds You Can
Count On", and highlights two Gabelli Funds: Gabelli Equity Income Fund and
the Gabelli Small Cap Growth Fund.
- The Gabelli ABC Fund recorded its thirteenth consecutive full year of
positive returns in 2006. According to Lipper, Inc.(c), The Gabelli ABC
Fund is one of only three equity-oriented funds (among 1,476 funds) that
has had a positive return for each of the last thirteen years. The fund
seeks to achieve total returns that are attractive to investors in various
market conditions without excessive risk of capital. The performance of The
Gabelli ABC Fund has been enhanced since April 2002 by fee waivers
initiated by Gabelli Funds, LLC. This fund was up 12.0% for the year ended
December 31, 2006 and up 6.2%, 4.9% and 7.2% for the three, five and ten
year periods ended December 31, 2006, respectively.
- Gabelli Equity Trust provided a return of 28.4% for the year ended December
31, 2006 and average annual returns of 17.6%, 12.8%, and 12.2% for the
three, five and ten year periods ended December 31, 2006, respectively. In
November 2006, the fund's board of directors approved the creation of The
Gabelli Global Healthcare & WellnessRx Trust as a spin-off of the fund
subject to shareholder approval in May 2007. The fund will focus on health
and wellness investment opportunities.
- Gabelli Dividend & Income Trust enjoyed a return of 22.4% for the year
ended December 31, 2006 and an average annual returns of 14.0% and 14.1%
for the three year and since inception (November 2003) periods ended
December 31, 2006.
- Gabelli Utility Trust generated a return of 29.4% for the year ended
December 31, 2006 and average annual returns of 17.4%, 12.6% and 11.3% for
the three, five year, and since inception (July 1999) periods ended
December 31, 2006, respectively.
- Gabelli Global Multimedia Trust produced a return of 25.9% for its
shareholders for the year ended December 31, 2006 and average annual
returns of 13.8%, 8.2%, and 12.8% for the three, five and ten year periods
ended December 31, 2006, respectively.
- The GAMCO Gold Fund, managed by Caesar Bryan, continues to deliver strong
performance as the fund generated a return of 32.4% for its shareholders in
2006 and average annual returns of 16.4%, 34.6%, 9.1% for the three, five
and ten year periods ended December 31, 2006, respectively.
- Gabelli Asset Fund (Class AAA), in its twentieth year, generated a return
of 21.8% for its shareholders for the year ended December 31, 2006 and
average annual returns of 14.0%, 10.7%, and 12.8% for the three, five and
ten year periods ended December 31, 2006, respectively.
- Gabelli Equity Income Fund (Class AAA), since its inception, has earned an
average annual return of 12.5% for its shareholders through December 31,
2006 and average annual returns of 19.2%, 12.7%, 11.2%, and 11.4% for the
one, three, five and ten year periods ended December 31, 2006,
respectively.
- GAMCO Global Telecommunications Fund (Class AAA) generated a total
return of 28.9% for the year ended December 31, 2006 and
average annual returns of 17.8%, 10.5%, and 12.2% for the three,
five, and ten year periods ended December 31, 2006, respectively.
- The Gabelli U.S. Treasury Money Market Fund (GUSTO) is currently the lowest
cost money market fund in its class of money market funds investing
exclusively in U.S. Treasury obligations. Gabelli Funds, LLC, the advisor
of the fund, has voluntarily waived a larger portion of its management fee
and will maintain total expenses at eight basis points or 0.08% of the
average net assets at least through September 30, 2007 and may renew its
decision to do so annually. The 7 day and 30 day annualized yield as of
December 31, 2006 were 5.00% and 5.06% , respectively
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Past performance is no guarantee of future results. Other share classes are
available and have different performance characteristics. The average
annual returns and total returns are historical and reflect changes in
share price, reinvested dividends and capital gains and are net of
expenses. Investment returns and principal value of an investment will
fluctuate. When shares are redeemed, they may be worth more or less than
their original costs. Current performance may be lower or higher than the
performance presented. Performance information as of the most recent
month-end is available at www.gabelli.com. Investors should carefully
consider the investment objectives, risks, charges and expenses of a fund
before investing. The prospectus for a fund contains information about this
and other matters and should be read carefully before investing. Call
800-GABELLI to obtain a prospectus. Equity funds involve the risk that the
underlying investments may lose value. Accordingly, it is possible to lose
money by investing in these funds. Funds investing in a single sector such
as utilities may be subject to more volatility than funds that invest more
broadly. Investing in gold stocks is considered speculative and is affected
by a variety of worldwide economic, financial, and political risks. The
utilities industries can be affected by government regulation, financing
difficulties, supply or demand of services or fuel and natural resources
conservation. According to iMoneyNet, Inc. An investment in a money market
fund is not insured or guaranteed by The Federal Deposit Insurance
Corporation or any other government agency. Although the fund seeks to
preserve the value of an investment at $1.00 per share, it is possible to
lose money by investing in the fund. There is no guarantee that the fund
can achieve its objective. Yields fluctuate. Yields are enhanced by a fee
waiver initiated by Gabelli Funds, LLC.
(a) Standard & Poor's is a globally-recognized provider of objective fund
information and a leading authority in the investment world. S&P's
evaluation process is based on an in-depth analysis of both quantitative
and qualitative factors that are considered key contributors to long-term
investment performance. These include the historic performance, volatility
and portfolio construction of a fund, the manager's investment process,
risk control, skill, experience and resources, and the group's corporate
management, investment culture and stability.
(b) Consumer Reports does not endorse or recommend any products or
services.
(c) Lipper, Inc. is a nationally-recognized organization which tracks the
performance of all registered investment companies.
2006 Highlights
Since our initial public offering in February 1999, GBL has generated a 129%
total return (including dividends) for its shareholders through December 31,
2006 versus a total return of 31% (including dividends) for the S&P 500 Index
during the same period. Our class A common stock, which is traded on the New
York Stock Exchange under the symbol "GBL", ended the year at a closing market
price of $38.46.
During 2006, we returned $58.0 million of our earnings to shareholders through
our stock buyback program and $3.4 million, or $0.12 per share, in dividends to
our common shareholders. We purchased approximately 1.3 million shares for $54.6
million, an investment of $40.88 per share.
In 2006, we reported earnings of $2.40 per fully diluted share vs. $2.10 (as
restated) per fully diluted share in 2005. Our net income for the full year
ended December 31, 2006 was $69.5 million versus $63.5 million (as restated) in
the 2005 period, and revenues were $261.5 million in 2006 compared to $253.3
million (as restated) in the prior year. Our 2006 earnings are after $0.34 per
fully diluted share related to a regulatory issue.
We ended 2006 with equity AUM of $27.3 billion versus $26.0 billion on December
31, 2005. Overall, assets under management were $28.1 billion on December 31,
2006 versus $26.8 billion at the end of 2005. Our equity open-end mutual funds
and closed-end funds reached a record AUM of $14.2 billion on December 31, 2006,
an increase of approximately 9.2% from year-end 2005 of $13.0 billion, as our
open-end equity mutual funds and closed-end funds had AUM of $8.4 billion and
$5.8 billion, respectively.
As in prior years, we experienced client "churn" in 2006. In the institutional
and high net worth space, over one half of the assets lost were subadvisory
assets where the advisor underwent a change in control, for instance, a spin-off
from the parent organization or the sale of the advisor to a third party. The
successor advisor assumed management of the assets.
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In January 2006, as part of a firm-wide branding initiative, the names of eight
mutual funds managed by Gabelli Funds, LLC, a subsidiary of GAMCO Investors,
Inc., were changed to GAMCO. The GAMCO brand more appropriately differentiates
the various investment strategies offered to investors including growth, gold,
convertible securities and contrarian. Funds continuing to use the Gabelli name
primarily represent value portfolios managed in the absolute return,
research-driven Private Market Value (PMV) with a CatalystTM investment
approach.
Our $400 million "shelf" registration statement on Form S-3 filed with the
Securities and Exchange Commission (SEC) became effective in May 2006. Under
this shelf registration, we may, from time to time, issue any combination of
senior and subordinate debt securities, convertible debt securities and equity
securities (including common and preferred securities) up to a total amount of
$520 million. This includes the remaining $120 million available under our
previous shelf registration filed in 2001.
On June 30, 2006, we and Cascade Investment L.L.C. ("Cascade") agreed to amend
the terms of the $50 million convertible note issued by us (the "Note") and
maturing in August 2011, as follows: increase the coupon rate of interest to 6%
from 5% and raise the conversion price to $53 per GBL share from $52 per share,
both effective on September 15, 2006. In addition, we and Cascade agreed to
extend the exercise date for Cascade's put option until 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 us the right to redeem the note at 101% of its
principal amount together with all accrued but unpaid interest thereon upon at
least 30 days prior written notice, subject to certain provisions.
Our research and institutional sales team at Gabelli & Company, Inc. hosted
seven industry symposiums and conferences during 2006. These symposiums and
conferences provided an opportunity for the firm's institutional clients to meet
with the senior management teams of leading companies and gain insight on the
dynamics within these industries. Our events in 2006 included our 30th annual
Automotive Aftermarket Symposium, our 17th Pump Valve & Motor Symposium, our
12th annual Aircraft Supplier Conference, Fourth annual Dental Conference, our
second annual RFID (Radio Frequency Identification) Conference, and our first
annual Water Infrastructure conference.
Business Strategy
Our business strategy targets global growth of the franchise through continued
leveraging of our proven asset management strengths including our brand name,
long-term performance record, diverse product offerings and experienced
investment, research and client service professionals. In order to achieve
growth in assets under management and profitability, we are pursuing a strategy
which includes the following key elements:
o Incentive Fees and Fulcrum Fees. Our investment strategy is focused on
adding stock specific alpha through our proprietary Private Market Value
(PMV) with a CatalystTM equity research efforts. We expect to receive an
increasing portion of our revenues and earnings through various products
with incentive and fulcrum fees. Since we envision that a growing
percentage of the firm's revenues will be directly linked to
performance-based fees, this will also increase the variability of our
revenues and profits. As of December 31, 2006, over $1.5 billion of
separate account assets are managed on a performance fee basis along with
$1.18 billion of preferred issues and $491 million of investment
partnership assets. Unlike most money management firms, we elected not to
receive a management fee on preferred offerings in closed-end funds until
the fund's overall performance exceeds each preferred's nominal cost of
capital. In January 2007, we launched the Gabelli Global Deal Fund, a new
closed-end fund that earns a base fee plus a fulcrum performance fee of one
quarter percent for each percentage point the fund's return exceeds the 90
day U. S. Treasury Bill rate, up to a maximum of 2 percent. In addition,
the incubation of new product strategies using proprietary capital will
compensate the investment team with a performance fee model to reinforce
our pay-for-performance approach.
o Corporate Branding Initiative. We have undertaken a series of branding
initiatives to enhance long-term shareholder value. On August 29, 2005, our
corporate name change to GAMCO Investors, Inc. became effective. 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 (PMV) with a Catalyst (TM) investment
approach.
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o Establishing Research and Relationship Centers. In addition to our
corporate office in Rye NY, we have six offices which conduct portfolio
management, research and marketing activities in the United States and
abroad in the following cities: Greenwich CT, Chicago IL, Minneapolis MN,
Palm Beach FL, Reno NV, and London UK. Our offices in Chicago and
Minneapolis were established as the result of acquisitions of on-going
investment advisory operations. The London office was opened in January
2000 to provide a geographic presence overseas and to coordinate investment
research and marketing activities for our investment offerings in the
European markets.
o Introducing New Products and Services. We believe we have the capacity for
development of new products and services around the Gabelli and GAMCO
brands to complement our existing product offerings. New products since our
initial public offering include:
- Four closed-end funds: The Gabelli Dividend & Income Trust, The
Gabelli Global Utility and Income Trust, The Gabelli Global Gold,
Natural Resources & Income Trust, and The Gabelli Utility Trust.
- Three open-end mutual funds: Gabelli Blue Chip Value Fund (1999),
Gabelli Utilities Fund (1999) and the Gabelli Woodland Small Cap Value
Fund (2003).
- Nine private limited partnerships: Gemini Global Partners, L.P.,
Gabelli European Partners, L.P., Gabelli Japanese Value Partners,
L.P., Gabelli Associates Fund II, L.P., GAMCO Performance Partners,
L.P., GAMA Select Energy Plus, L.P., GAMCO Telecom Plus, L.P. GAMCO
Medical Opportunities, L.P., and Gabelli Umbrella Fund, L.P.
- Five offshore funds: Gabelli Global Partners, Ltd., Gabelli European
Partners, Ltd., Gabelli Japanese Value Partners, Ltd., GAMCO
Performance Partners, Ltd., and GAMCO SRI Partners, Ltd.
During January 2007, we also launched the Gabelli Global Deal Fund (NYSE: GDL),
a unique closed-end fund which will seek to achieve its investment objective of
absolute return by investing primarily in announced merger and acquisition
transactions and, to a lesser extent, in corporate reorganizations involving
stubs, spin-offs and liquidations. This fund provides the advisor with a fulcrum
fee, consistent with our strategy of alpha creation.
o Promulgating the Gabelli "Private Market Value (PMV) with a
CatalystTM"Investment Approach. While we have expanded our investment
product offerings, our "value investing" approach remains the core of our
business. This method is based on the value investing principles
articulated by Graham & Dodd in 1934 and further augmented by Mario J.
Gabelli with his development of Private Market Value (PMV) with a
CatalystTM and his introduction of a catalyst into the value investment
methodology. The development of PMV analysis combined with the concept of a
catalyst has evolved into our value investing approach, commonly referred
to as Private Market Value (PMV) with a CatalystTM investing.
Private Market Value (PMV) with a CatalystTM investing is a disciplined,
research-driven approach based on the extensive use of security analysis.
In this process, we carefully select stocks whose intrinsic value, based on
our estimate of current asset value and future growth and earnings power,
is significantly different from the value as reflected in the public
market. We then calculate the firm's PMV, which is defined as the price an
informed industrial buyer would be likely to pay to acquire the business.
To limit the time horizon in which the PMV is likely to be realized, we
look for situations in which catalysts are working to help eliminate the
premium or realize the discount between the public market price and the
estimated PMV. Catalysts which are company specific include: realization of
hidden assets, recognition of underperforming subsidiaries, share buybacks,
spin-offs, mergers and acquisitions, balance sheet changes, new products,
accounting changes, new management and cross-shareholder unwinding. Other
catalysts are related to industry dynamics or macroeconomics and include
but are not limited to: industry consolidation, deregulation, accounting,
tax, pension and political reforms, technological change and the
macroeconomic backdrop. The time horizons for catalysts to trigger change
can either be short-term, medium-term or long-term.
To further extend "value investing" and our fundamental research approach
to stock selection:
- We sponsored Value Investing Seminars in Milan and London for
institutional investors from leading UK and other European business
schools. The seminars were hosted by Bruce N. Greenwald, the Robert
Heilbrunn Professor of Finance and Asset Management at Columbia
University Graduate School of Business and the academic Director of
the Heilbrunn Center for Graham & Dodd Investing.
9
- We established the Graham & Dodd, Murray, Greenwald Prize for Value
Investing in coordination with the Columbia University Graduate School of
Business. The monetary prize is awarded each year at GAMCO's annual client
meeting to the individual who best exemplifies the goals of refining,
extending, and disseminating the practice of Value Investing.
- GAMCO underwrote a series of lectures on Value Investing by Professor
Roger F. Murray, the co-author of the Fifth Edition of Security
Analysis. This series of lectures served as a catalyst to re-focus the
Columbia University Graduate School of Business's curriculum to Value
Investing, leading to the eventual creation of the Graham & Dodd
Center.
o Expanding Mutual Fund Distribution. We continue to expand our distribution
network primarily through national and regional brokerage firms and have
developed additional classes of shares for most of our mutual funds for
sale through these firms and other third-party distribution channels on a
commission basis. We intend to increase our wholesaling efforts to market
the multi-class shares, which have been designed to meet the needs of
investors who seek advice through financial consultants.
o Increasing Presence in High Net Worth Market. Our high net worth business
focuses, in general, on serving clients who have established an account
relationship of $1 million or more with us. According to industry
estimates, the number of households with over $1 million in investable
assets will continue to grow in the future, subject to ups and downs in the
equity and fixed income markets. With our 30-year history of serving this
segment, long-term performance record, customized portfolio approach,
dominant, tax-sensitive, buy-hold investment strategy, brand name
recognition and broad array of product offerings, we believe that we are
well-positioned to capitalize on the growth opportunities in this market.
o Increasing Marketing for Institutional Separate Accounts. The institutional
Separate Accounts business was principally developed through direct
marketing channels. Historically, pension and financial consultants have
not been a major source of new institutional Separate Accounts business for
us. We plan to augment our institutional sales force through the addition
of staff to market directly to the consultant community as well as our
traditional marketing channels.
o Attracting and Retaining Experienced Professionals. We have increased the
scope of our investment management capabilities by adding portfolio
managers and other investment personnel in order to expand our broad array
of products. The ability to attract and retain highly-experienced
investment and other professionals with a long-term commitment to us and
our clients has been, and will continue to be, a significant factor in our
long-term growth.
o Sponsorship of Industry Conferences. Gabelli & Company, Inc., our
institutional research boutique, sponsors industry conferences and
management events throughout the year. At these conferences and events,
senior management from leading industry companies share their thoughts on
the industry, competition, regulatory issues and the challenges and
opportunities in their businesses with portfolio managers and securities
analysts. We currently host annual industry conferences and symposiums
which include the Automotive Aftermarket Symposium (30 years), Pump Valve &
Motor Symposium (17 years), Aircraft Supplier Conference (12 years), and
Dental Conference (4 years). Consistent with our innovative research on
emerging technologies, we sponsored conferences focusing on RFID (Radio
Frequency Identification) in 2006 as well as our first annual Water
Infrastructure Conference.
o Hosting of Investor Symposiums. We have a tradition of sponsoring
symposiums that bring together prominent portfolio managers, members of
academia and other leading business professionals to present, discuss and
debate current issues and topics in the investment industry.
- 1997 "Active vs. Passive Stock Selection"
- 1998 "The Role of Hedge Funds as a Way of Generating Absolute Returns"
- 2001 "Virtues of Value Investing"
- 2003 "Dividends, Taxable versus Non-Taxable Issues"
- 2006 "Closed-End Funds: Premiums vs. Discounts, Dividends
and Distributions"
We also hold annual conferences for our investment partnership clients and
prospects in New York and London at which our portfolio management team
discusses the investment environment, our strategies and portfolios, and
event-driven investment opportunities.
10
o Capitalizing on Acquisitions and Strategic Alliances. We intend to
selectively and opportunistically pursue acquisitions and alliances that
will broaden our product offerings and add new sources of distribution. In
November 2002, we completed our alliance with Woodland Partners LLC, a
Minneapolis based investment advisor of institutional, high net-worth and
sub-advisory accounts. On October 1, 1999, we completed our alliance with
Mathers and Company, Inc. and now act as investment advisor to the Mathers
Fund (renamed GAMCO Mathers Fund), and in May 2000, we added Comstock
Partners Funds, Inc., (renamed Comstock Funds, Inc.). The Mathers and
Comstock funds are part of our Non-Market Correlated mutual fund product
line.
We believe that we have the entrepreneurial flexibility and corporate
resume to pursue acquisitions and alliances.
We believe that our growth to date is tracable to the following factors:
o Strong Industry Fundamentals: According to data compiled by the U.S.
Federal Reserve, the investment management industry has grown faster than
more traditional segments of the financial services industry, including the
banking and insurance industries. Since GBL began managing institutional
separate accounts in 1977, world equity markets have grown at a 12.6%
compounded annual growth rate through December 31, 2006, including the net
addition of new stocks in many countries, to $49.9 trillion(a). The U.S.
equity market comprises about $17.5 trillion(a) or 35.1% of world equity
markets. We believe that demographic trends and the growing role of money
managers in the placement of capital compared to the traditional role
played by banks and life insurance companies will result in continued
growth of the investment management industry.
o Long-Term Performance: We have a superior long-term record of achieving
relatively high returns for our Separate Account clients. We believe that
our performance record represents a competitive advantage and a recognized
component of our franchise.
o Stock Market Gains: Since we began managing institutional separate accounts
in 1977, our traditional value-oriented separate account composite has
earned a compound annual return of 17.9% net of fees versus a compound
annual return of 13.1% for the S&P 500 through December 31, 2006. Since our
initial public offering in February 1999 through December 2006, the
compound annual return for our traditional value-oriented separate account
composite was 10.3% versus the S&P 500's compound annual total return of
3.4%.
o Widely-Recognized "Gabelli" and "GAMCO" Brand Names: For much of our
history, our portfolio managers and investment products have been featured
in a variety of financial print media, including both U.S. and
international publications such as The Wall Street Journal, Financial
Times, Money Magazine, Barron's, Fortune, Business Week, Nikkei Financial
News, Forbes Magazine, Consumer Reports and Investor's Business Daily. We
also underwrite publications written by our investment professionals,
including Deals...Deals...and More Deals which examines the practice of
merger arbitrage and Global Convertible Investing: The Gabelli Way, a
comprehensive guide to effective investing in convertible securities.
o Diversified Product Offerings: Since the inception of our investment
management activities, we have sought to expand the breadth of our product
offerings. We currently offer a wide spectrum of investment products and
strategies, including product offerings in U.S. equities, U.S. fixed
income, global and international equities, convertible securities, U.S.
balanced and investment partnerships.
Our financial strength is underscored by having received an investment grade
rating from two well-respected ratings agencies, Moody's Investors Services and
Standard and Poor's Ratings Services. We believe that maintaining these
investment grade ratings will provide greater access to the capital markets,
enhance liquidity and lower overall borrowing costs. However, we will also
consider the use of leverage as part of our corporate financial strategy even if
it results in a lowering of our investment rating.
(a) Source: Birinyi Associates, LLC
Business Description
GBL was originally founded in 1976 as an institutional broker-dealer. We entered
the separate accounts business in 1977, management of investment partnerships in
1985 and the mutual fund business in 1986. Our initial product offerings
centered on our tax sensitive, buy-hold, value-oriented investment philosophy.
Starting in the mid-1980s, we began building on our core value-oriented equity
investment products by adding new investment strategies designed for a broad
array of clients seeking to invest in growth-oriented equities, convertible
securities and fixed income products. Since then, we have continued to build our
franchise by expanding our investment management capabilities through the
addition of industry specific, international, global, non-market correlated,
venture capital, leveraged buy-out and merchant banking product offerings.
Throughout our 30-year history, we have marketed most of our products under the
"Gabelli" and "GAMCO" brand names. Other brands include Mathers, Comstock,
Westwood and Woodland.
11
Our assets under management are organized principally in three groups: Separate
Accounts, Mutual Funds and Investment Partnerships.
Separate Accounts - Institutional and High Net Worth: Since 1977, we have
provided investment management services through our subsidiary GAMCO Asset
Management Inc. ("GAMCO") to a broad spectrum of institutional and high net
worth investors. At December 31, 2006, we had $12.7 billion of assets under
management (AUM) in approximately 1,700 separate accounts, representing
approximately 45% of our total AUM. We currently provide advisory services to a
broad range of investors, the majority of which (in total number of accounts)
are high net worth client accounts - defined as individuals and their retirement
assets generally having minimum account balances of $1 million. As of December
31, 2006, Institutional client accounts, which include corporate pension and
profit sharing plans, jointly-trusteed plans and public funds, represented 43%
of the Separate Accounts assets and 8% of the accounts. High net worth accounts
comprised approximately 83% of the total number of Separate Accounts and
approximately 29% of the assets as of December 31, 2006.
High net worth clients are attracted to us by our gross returns and the tax
efficient nature of the underlying investment process in these traditional
products. Foundation and endowment fund assets represented an additional 9% of
the number of Separate Accounts and approximately 10% of the assets. The
sub-advisory portion of the Separate Accounts (where we act as sub-advisor to
certain other third-party investment funds) held approximately $2.3 billion or
18% of total Separate Account assets with less than 1% of the number of
accounts.
The ten largest relationships comprised approximately 43% of our total Separate
Account assets under management and approximately 24% of our total Separate
Account revenues as of and for the year ended December 31, 2006, respectively.
In general, our Separate Accounts are managed under the GAMCO brand to meet the
specific needs and objectives of each client by utilizing investment strategies
- traditional "value", "large cap value", "large cap growth", "global",
"international growth" and "convertible bonds" - and techniques that are within
our areas of expertise. We distinguish between taxable and tax-free assets and
manage client portfolios with tax sensitivity within given investment
strategies.
At December 31, 2006, over 85% of our assets in Separate Accounts (excluding
sub-advisory assets) were obtained through direct sales relationships. Sales
efforts are conducted on a regional and product specialist basis. Members of the
sales and marketing staff for the Separate Accounts business have an average of
more than ten years of experience with us and focus on developing and
maintaining direct, long-term relationships with their Separate Account clients.
The firm will host its 22nd Annual Client Conference in April 2007. This two-day
event will kick off with a gathering at the American Museum of Natural History
in New York followed by presentations by our portfolio managers and analysts the
following day. Along with these client seminars, we continue to establish and
staff relationship offices around the country.
We act as a sub-advisor on certain funds for several large and well-known fund
managers. Similar to corporate clients, sub-advisory clients are also subject to
business combinations which may result in the curtailment of product
distribution or the termination of the relationship.
Investment advisory agreements for our Separate Accounts are typically subject
to termination by the client without penalty on 30 days' notice or less.
Open and Closed-End Funds: We provide advisory services to (a) twenty open-end
mutual funds and seven closed-end funds of which one open-end fund is managed by
an unaffiliated advisor; and (b) the Westwood family of funds, consisting of six
open-end mutual funds, five of which are managed on a day-to-day basis by
Westwood Management Corporation, a wholly-owned subsidiary of Westwood Holdings
Group (collectively, the "Mutual Funds"). At December 31, 2006, we had $14.9
billion of AUM in open-end mutual funds and closed-end funds, representing
approximately 53% of our total AUM. Our equity mutual funds and closed-end funds
reached a record $14.2 billion in AUM on December 31, 2006, 9.2% ahead of the
$13.0 billion on December 31, 2005.
12
During December 2005 eight open-end Mutual Funds changed their brand to GAMCO
from Gabelli. The GAMCO brand more appropriately represents the various
investment strategies offered to investors by Gabelli Funds, including growth,
gold, convertible securities and contrarian. Funds continuing to use the Gabelli
name primarily represent value portfolios managed in the absolute return,
research-driven Private Market Value (PMV) with a CatalystTM style. This name
change has no effect on the management, the investment objective, or the
investment strategy of each fund.
The eight GAMCO branded open-end mutual funds are:
GAMCO Growth
" International Growth
--------------------
" Gold
----
" Global Telecommunications
-------------------------
" Global Growth
-------------
" Global Opportunity
------------------
" Global Convertible Securities
-----------------------------
" Mathers
-------
The Gabelli brand continues to represent our "Value" business and is primarily
our absolute return, research-driven Private Market Value (PMV) with a
CatalystTM funds including the Westwood series Mighty MitesSM micro-cap value
fund and the Global Telecommunications Fund, which is a value portfolio but
retains the GAMCO Global series name. The Gabelli brand also includes The
Gabelli Blue Chip Value Fund and The Gabelli Woodland Small Cap Value Fund as
well as all of the closed-end funds.
The GAMCO brand encompasses a panoply of portfolios. It is the brand for our
"Growth" business, which is primarily represented by The GAMCO Growth Fund, The
GAMCO Global Growth Fund, and The GAMCO International Growth Fund. GAMCO also
includes other distinct investment strategies and styles including our gold,
convertible securities and contrarian funds.
Open-end Funds
On December 31, 2006, we had $9.1 billion of AUM in twenty six open-end mutual
funds. At year-end, of the AUM in open-end mutual funds having an overall
rating from Morningstar, Inc. ("Morningstar") 89% were ranked "three stars" or
better, with approximately 59% ranked "five stars" or "four stars" on an overall
basis (i.e., derived from a weighted average of the performance figures
associated with its three-, five-, and ten-year Morningstar Rating metrics).
There can be no assurance, however, that these funds will be able to maintain
such ratings or that past performance will be indicative of future results.
At December 31, 2006, approximately 37% of our assets under management in
open-end, equity mutual funds had been obtained through direct sales
relationships. We also sell our open-end mutual funds through Third-Party
Distribution Programs, particularly No-Transaction Fee ("NTF") Programs, and
have developed additional classes of shares for many of our mutual funds for
sale through additional third-party distribution channels on a commission basis.
At December 31, 2006, Third Party Distribution Programs accounted for
approximately 63% of all assets in open-end funds.
Closed-end Funds
We act as investment advisor to seven closed-end funds, five of which trade on
the NYSE: Gabelli Equity Trust (GAB), Gabelli Global Multimedia Trust (GGT),
Gabelli Convertible and Income Securities Fund (GCV), Gabelli Utility Trust
(GUT) and Gabelli Dividend & Income Trust (GDV) and two that trade on the
American Stock Exchange ("AMEX"): Gabelli Global Utility & Income Trust (GLU)
and Gabelli Global Gold, Natural Resources & Income Trust (GGN). As of December
31, 2006, the seven Gabelli closed-end funds had record breaking total assets of
$5.8 billion, representing 38.9% of the total assets in our Mutual Funds
business.
The Gabelli Equity Trust, which raised $400 million through its initial public
offering in August 1986, finished its 20th year with net assets of $2.1 billion.
In September 2005, the Equity Trust completed its first acquisition of the
assets of another closed-end investment company, Sterling Capital Corporation,
with total assets of $18.3 million. In October 2005, the Equity Trust completed
a heavily over-subscribed rights offering, retaining gross proceeds of $143.7
million. Since inception, the Equity Trust has distributed $2.0 billion in cash
to common shareholders through its 10% Distribution Policy and has spun off two
other closed-end funds, the Gabelli Global Multimedia Trust and the Gabelli
Utility Trust. In 2006, the Equity Trust also received net proceeds of $144.8
million of assets attributable to the 6.20% Series F Preferred Stock.
13
The Gabelli Dividend & Income Trust, launched in November 2003, raised $196.6
million in net proceeds through its placement of Series D and Series E Preferred
Shares in November 2005. The Gabelli Dividend & Income Trust, which invests
primarily in dividend-paying equity securities, had a total annualized return of
14.1% since inception and net assets of $2.5 billion as of December 31, 2006.
The Gabelli Global Gold, Natural Resources & Income Trust raised gross proceeds
of $332 million through its initial public offering in March 2005 and $20
million through the exercise of the underwriters' overallotment option in May
2005. The Gabelli Global Gold, Natural Resources & Income Trust, which invests
primarily in equity securities of gold and natural resources companies and
utilizes a covered call option writing program to generate current income, had a
total annualized return of 23.2% since inception and net assets of $432 million
as of December 31, 2006. The Fund's total return for 2006 was 18.2% and 23.3%
since inception on March 31, 2005.
In January 2007, we launched the Gabelli Global Deal Fund (NYSE: GDL), a
closed-end fund which will seek to achieve its investment objective by investing
primarily in announced merger and acquisition transactions and, to a lesser
extent, in corporate reorganizations involving stubs, spin-offs and
liquidations.
A detailed description of our Mutual Funds is provided within this Item 1
beginning on page 17.
Investment Partnerships: We manage Investment Partnerships through our 92%
majority-owned subsidiary, Gabelli Securities, Inc. ("GSI"). The Investment
Partnerships consist primarily of limited partnerships, offshore funds, separate
accounts and sub-advisory relationships within the following investment
strategies: merger arbitrage, event-driven long/short equity funds,
sector-focused funds and merchant banking. We had $491 million of Investment
Partnership assets under management.
We introduced our first investment partnership, a merger arbitrage partnership
in 1985. An offshore version of this strategy was added in 1989. Building on our
strengths in global event-driven value investing, several new Investment
Partnerships have been added to balance investors' geographic, strategy and
sector needs. Today we offer a broad range of absolute return products. Within
our merger arbitrage strategy, we manage approximately $371 million of assets
for investors who seek positive returns not correlated to fluctuations of the
general market. These funds seek to drive returns by investing in announced
merger and acquisition transactions that are primarily dependent on the deal
closure and less on the overall market environment. In event-driven strategies,
we manage $78 million of assets focused on the U.S., Japanese, and European
markets. We also manage a series of sector-focused absolute return funds
designed to offer investors a mechanism to diversify their portfolios by global
economic sector rather than by geographic region. We currently offer four
sector-focused portfolios: the Gabelli International Gold Fund Ltd., GAMA Select
Energy Plus, L.P., GAMCO Telecom Plus, L.P., and GAMCO Medical Opportunities,
L.P. Merchant banking activities are carried out through ALCE Partners, L.P. and
Gabelli Multimedia Partners, L.P., both of which are closed to new investors. In
2006, in response to SEC registration proposals, GSI registered as an investment
advisor for all of the investment partnerships and long/short portfolios.
Our Investment Partnerships have been marketed primarily by our direct sales
force to high net worth individuals and institutions. Separate accounts and
sub-advisory relationships continue to be an important aspect of our Investment
Partnerships business and account for approximately 6% of our Investment
Partnership assets under management. We intend to expand product offerings, both
domestic and international, and the geographic composition of our customer base
in Investment Partnerships. It is our expectation that the assets invested in
these products will provide a growing source of revenues in the future.
14
Assets Under Management
The following table sets forth total assets under management by product type as
of the dates shown and their compound annual growth rates ("CAGR"):
Assets Under Management
By Product Type
(Dollars in millions)
January 1,
2002 to
December 31,
At December 31, 2006 % Change
------------------------------------------------------
2002 2003 2004 2005 2006 CAGR(a) 2006/05
-------- ------- -------- -------- -------- ------- ------
Equity:
Mutual Funds ............................ $ 8,091 $11,618 $12,371 $12,963 $14,195 6.9 % 9.5%
Institutional & HNW Separate Accounts ...
Direct ............................... 7,376 9,106 9,881 9,550 10,282 3.0 7.7
Sub-advisory ......................... 2,614 3,925 3,706 2,832 2,340 (2.5) (17.4)
------- ------- -------
Total Equity .......................... 18,081 24,649 25,958 25,345 26,817 4.3 5.8
------- ------- -------
Fixed Income:
Money Market Mutual Funds ............... 1,963 1,703 1,488 724 734 (16.2) 1.4
Bond Mutual Funds ....................... 14 11 11 11 10 2.1 (9.1)
Institutional & HNW Separate Accounts ... 613 504 388 84 50 (41.3) (40.5)
------- ------- -------
Total Fixed Income .................... 2,590 2,218 1,887 819 794 (20.6) (3.1)
------- ------- -------
Investment Partnerships:
Investment Partnerships ................. 578 692 814 634 491 (3.0) (22.6)
------- ------- -------
Total Assets Under Management ......... $21,249 $27,559 $28,659 $26,798 $28,102 2.6 4.9
======= ======= =======
Breakdown of Total Assets Under Management:
Mutual Funds ............................ $10,068 $13,332 $13,870 $13,698 $14,939 4.6 9.1
Institutional & HNW Separate Accounts ...
Direct ............................... 7,989 9,610 10,269 9,634 10,332 3.0 7.2
Sub-advisory ......................... 2,614 3,925 3,706 2,832 2,340 (2.5) (17.4)
Investment Partnerships ................. 578 692 814 634 491 (3.0) (22.6)
------- ------- -------
Total Assets Under Management ......... $21,249 $27,559 $28,659 $26,798 $28,102 2.6 4.9
======= ======= ======= ======= =======
(a) Compound annual growth rate.
Summary of Investment Products
We manage assets in the following wide spectrum of investment products and
strategies, many of which are focused on fast-growing areas:
U.S. Equities: Global and International Equities: Investment Partnerships:
-------------- ---------------------------------- ------------------------
All Cap Value International Growth Merger Arbitrage
Large Cap Value Global Growth U.S. Long/Short
Large Cap Growth Global Value Global Long/Short
Mid Cap Value Global Telecommunications European Arbitrage
Small Cap Value Global Multimedia Japanese Long/Short
Small Cap Growth Gold Sector-Focused
Micro Cap - Energy
Natural Resources U.S. Fixed Income: - Global Telecom
Real Estate ----------------- - Gold
Utilities Corporate - Medical Opportunities
Non-Market Correlated Government Merchant Banking
Options Income Municipals
Asset-backed U.S. Balanced:
Convertible Securities: Intermediate --------------
----------------------- Short-term Balanced Growth
U.S. Convertible Securities Balanced Value
Global Convertible Securities
15
In 2006, we continued to develop the skills of our investment team by allocating
firm capital to incubate investment strategies. This began with a capital
structure arbitrage strategy (2004) and now includes a merger-arbitrage, a
global trading strategy as well as investment accounts for a designated group of
analysts.
Additional Information on Mutual Funds
The Mutual Funds include twenty-six open-end mutual funds and seven closed-end
funds which had total assets as of December 31, 2006 of $14.9 billion. The
open-end Mutual Funds are available to individuals and institutions on both a
no-load and commission basis, while the closed-end funds are listed and traded
on either the New York Stock Exchange ("NYSE") or the AMEX. At December 31,
2006, the open-end funds had total net assets of $9.1 billion and the closed-end
funds had total net assets of $5.8 billion. The assets managed in the closed-end
funds represent approximately 39% of the assets in the Mutual Funds group and
21% of the total assets under management at December 31, 2006. Our assets under
management consist of a broad range of U.S. and international stock, bond and
money market mutual funds that meet the varied needs and objectives of our
Mutual Fund shareholders. At December 31, 2006, approximately 37% of our assets
under management in open-end Mutual Funds had been obtained through direct sales
relationships.
Through our affiliates, we act as advisor to all of the Mutual Funds, except
with respect to the Gabelli Capital Asset Fund for which we act as a sub-advisor
and Guardian Investment Services Corporation, an unaffiliated company, acts as
manager. As sub-advisor, we make day-to-day investment decisions for the $234
million Gabelli Capital Asset Fund.
Gabelli Funds, LLC ("Funds Advisor"), a wholly-owned subsidiary of GAMCO
Investors, Inc., acts as the investment advisor for all of the Mutual Funds
other than the Westwood family of funds.
Gabelli Advisers, Inc., a subsidiary controlled by GAMCO Investors, Inc., acts
as investment advisor to the Westwood family of funds and has retained Westwood
Management Corporation, a New York Stock Exchange listed company (NYSE: WHG), to
act as sub-advisor for five of the six portfolios. The Westwood Mighty MitesSM
Fund, launched in May 1998, is advised solely by Gabelli Advisers, Inc., using a
team investment approach. Westwood Management Corporation owns an approximately
19.0% equity interest in Gabelli Advisers, Inc.
16
The following table lists the Mutual Funds, together with the December 31, 2006
Morningstar overall rating, where rated (ratings are not available for the
money-market mutual funds and other mutual funds, which collectively represent
42.7% of the assets under management in the Mutual Funds), provides a
description of the primary investment objective, fund characteristics, fees, the
date that the mutual fund was initially offered to investors and the assets
under management in the mutual funds as of December 31, 2006.
Net Assets as of
December 31,
Fund Advisory 12b-1 Initial 2006
(Morningstar Overall Primary Investment Fund Fees Fees Offer (all classes)
Rating) (1) Objective Characteristics (%) (%) Date ($ in millions)
----------------------------- -------------------------- ---------------- -------- ------ ------- ---------------
OPEN-END FUNDS:
EQUITY INCOME:
The Gabelli Equity High level of total return Class AAA: 1.00 .25 01/02/92 $ 906
Income Fund with an emphasis on No-load,
***** income-producing equities Open-end,
with yields greater than Diversified
the S&P 500 average. Multi-class Shares (2)
Westwood Both capital appreciation Class AAA: .75 .25 10/01/91 $ 155
Balanced Fund and current income using No-load,
**** portfolios containing stocks, Open-end,
bonds, and cash as appropriate Diversified
in light of current economic Multi-class shares (2)
and business conditions.
Westwood High level of current income Class AAA: 1.00(8) .25 09/30/97 $ 12
Income Fund as well as long-term capital No-load,
* appreciation by investing Open-end,
primarily in income producing Diversified
equity and fixed income Multi-class shares (2)
securities.
VALUE:
The Gabelli Asset Growth of capital as a primary Class AAA: 1.00 .25 03/03/86 $ 2,527
Fund investment objective, with No-load,
**** current income as a secondary Open-end,
investment objective. Invests in Diversified
equity securities of companies Multi-class shares (2)
selling at a significant discount
to their private market value.
Westwood Capital appreciation through a Class AAA: 1.00 .25 01/02/87 $ 187
Equity Fund diversified portfolio of equity No-load,
**** securities using bottom-up Open-end,
fundamental research with a Diversified
focus on identifying Multi-class shares (2)
well-seasoned companies.
The Gabelli Blue Chip Capital appreciation through Class AAA: 1.00 .25 08/26/99 $ 37
Value Fund investments in equity securities No-load,
** of established companies, which Open-end,
are temporarily out of favor and Diversified
which have market capitalizations Multi-class shares (2)
in excess of $5 billion.
SMALL CAP VALUE:
The Gabelli Small Cap High level of capital appreciation Class AAA: 1.00 .25 10/22/91 $ 755
Growth Fund from equity securities of smaller No-load,
**** companies with market Open-end,
capitalization of $2 billion or less Diversified
at the time of purchase. Multi-class Shares (2)
17
Net Assets as of
December 31,
Fund Advisory 12b-1 Initial 2006
(Morningstar Overall Primary Investment Fund Fees Fees Offer (all classes)
Rating) (1) Objective Characteristics (%) (%) Date ($ in millions)
----------------------------- -------------------------- ---------------- -------- ------ ------- ---------------
The Gabelli Woodland Long Term capital appreciation Class AAA: 1.00(8) .25 12/31/02 $ 10
Small Cap Value Fund investing at least 80% of its No-load,
*** in equity securities of Open-end,
companies with market Non-diversified
capitalizations less than Multi-class shares(2)
the greater of $3.0 billion
or the largest company
in the Russell 2000 Index.
Westwood Long-term capital Class AAA: 1.00(8) .25 04/15/97 $ 10
SmallCap appreciation, investing No-load,
Equity Fund at least 80% of its assets Open-end,
** in equity securities of Diversified
companies with market Multi-class shares(2)
capitalizations of $2.5 billion
or less at the time of purchase.
FOCUSED VALUE:
The Gabelli Value High level of capital Class A: 1.00 .25 09/29/89 $ 889
Fund appreciation from Front end-load,
*** undervalued equity Open-end
securities that are Non-diversified
held in a concentrated Multi-class shares(2)
portfolio.
GROWTH:
GAMCO International Capital appreciation Class AAA: 1.00 .25 06/30/95 $ 65
Growth Fund by investing primarily No-load,
*** in equity securities of Open-end,
foreign companies with Diversified
rapid growth in revenues Multi-class shares(2)
and earnings.
The GAMCO Growth Capital appreciation from Class AAA: 1.00 .25 04/10/87 $ 959
Fund companies that have No-load,
*** favorable, yet undervalued, Open-end,
prospects for earnings Diversified
growth. Invests in equity Multi-class Shares(2)
securities of companies
that have above-average
or expanding market
shares and profit margins.
AGGRESSIVE GROWTH:
The GAMCO Global High level of capital Class AAA: 1.00 .25 02/07/94 $ 103
Growth Fund appreciation through No load,
** investment in a Open-end,
portfolio of equity Non-diversified
securities focused on Multi-class shares(2)
companies involved
in the global marketplace.
MICRO-CAP:
Westwood Long-term capital Class AAA:, 1.00 .25 05/11/98 $ 38
Mighty MitesSM Fund appreciation by No-load,
**** investing primarily Open-end,
in equity securities Diversified
with market Multi-class shares (2)
capitalization of
$300 million or less at the
time of purchase.
18
Net Assets as of
December 31,
Fund Advisory 12b-1 Initial 2006
(Morningstar Overall Primary Investment Fund Fees Fees Offer (all classes)
Rating) (1) Objective Characteristics (%) (%) Date $ in millions)
----------------------------- -------------------------- ---------------- -------- ------ ------- ---------------
SPECIALTY EQUITY:
The GAMCO Global High level of capital Class AAA: 1.00 (8) .25 05/11/98 $ 24
Opportunity Fund appreciation through No-load,
**** worldwide investments Open-end,
in equity securities. Non-diversified
Multi-class shares(2)
The GAMCO Global High level of total return Class AAA: 1.00 (8) .25 02/03/94 $ 11
Convertible through a combination of No-load,
Securities Fund current income and capital Open-end,
*** Appreciation through Non-diversified
investment in convertible Multi-class shares(2)
securities of U.S. and
non-U.S. issuers.
The Gabelli Capital Asset Capital appreciation from No-load, .75 n/a 05/01/95 $ 234
Fund equity securities of companies Open-end,
(not rated) (7) selling at a significant Diversified,
discount to their private Variable Annuity
market value.
SECTOR:
The Gabelli Utilities High level of total return through Class AAA: 1.00 .25 08/31/99 $ 568
Fund a combination of capital No-load,
** appreciation and current income Open-end,
from investments in utility Diversified
companies. Multi-class shares(2)
The GAMCO Global High level of capital Class AAA: 1.00 .25 11/01/93 $ 216
Telecommunications appreciation through No-load,
Fund worldwide investments Open-end,
**** in equity securities, Non-diversified
including the U.S., Multi-class shares(2)
primarily in the
telecommunications
industry.
GAMCO Gold Seeks capital Class AAA: 1.00 .25 07/11/94 $ 449
Fund appreciation and No-load,
*** employs a value Open-end,
approach to investing Diversified
primarily in equity Multi-class shares(2)
securities of gold-
related companies
worldwide.
ABSOLUTE RETURN:
The Gabelli ABC Fund Total returns that are No-load, .50 (6) n/a (6) 05/14/93 $ 155
** attractive to investors Open-end,
in various market conditions Non-diversified
without excessive risk
of capital loss, utilizing
certain arbitrage strategies
and investing in value
orientated common stocks,
i.e., common stocks trading
At a significant discount
to their PMV.
19
Net Assets as of
December 31,
Fund Advisory 12b-1 Initial 2006
(Morningstar Overall Primary Investment Fund Fees Fees Offer (all classes)
Rating) (1) Objective Characteristics (%) (%) Date ($ in millions)
----------------------------- -------------------------- ---------------- -------- ------ ------- ---------------
CONTRARIAN:
Comstock Capital appreciation and current Class A 1.00 .25 10/10/85 $ 42
Capital Value Fund income through investment in a Load,
(not rated) (7) highly diversified portfolio of Open-end,
securities. Diversified
Multi-class shares (2)
Comstock Capital appreciation and current Class A .85 .25 05/26/88 $ 7
Strategy Fund income through investment in a Load,
(not rated) (7) portfolio of debt securities. Open-end,
Non-Diversified
Multi-class shares (2)
GAMCO Mathers Long-term capital appreciation Class AAA: 1.00 .25 8/19/65 $ 31
Fund in various market conditions No-load,
* without excess risk of capital Open-end,
loss. Diversified
FIXED INCOME:
Westwood Total return and current Class AAA: .60 (8).25 10/01/91 $ 10
Intermediate Bond income, while limiting No-load,
Fund risk to principal. Pursues Open-end,
** higher yields than shorter Diversified
maturity funds and has Multi-class shares (2)
more price stability than
generally higher yielding
long-term funds.
CASH MANAGEMENT-MONEY MARKET:
The Gabelli U.S. Treasury High current income Money Market, .30 (8) n/a 10/01/92 $ 734
Money Market Fund with preservation of Open-end,
(10) principal and Diversified
liquidity, while
striving to keep
expenses among the
lowest of all U.S.
Treasury money market
funds.
20
Net Assets as of
December 31,
Fund Advisory 12b-1 Initial 2006
(Morningstar Overall Primary Investment Fund Fees Fees Offer (all classes)
Rating) (1) Objective Characteristics (%) (%) Date ($ in millions)
----------------------------- -------------------------- ---------------- -------- ------ ------- ---------------
CLOSED-END FUNDS:
The Gabelli Equity Long-term growth of Closed-end, 1.00 (9) n/a 08/14/86 $ 2,115
Trust Inc. capital by investing Non-diversified
(not rated) (7) in equity securities. NYSE Symbol: GAB
The Gabelli High total return Closed-end, 1.00 (9) n/a 07/03/89 $ 152
Convertible and Income from investing diversified
Securities Fund Inc. (4) primarily in NYSE Symbol: GCV
*** convertible
instruments.
The Gabelli Global Long-term capital Closed-end, 1.00 (9) n/a 11/15/94 $ 247
Multimedia Trust Inc. (3)appreciation from Non-diversified
(not rated) (7) equity investments in NYSE Symbol: GGT
global telecommunications,
media, publishing and
entertainment holdings.
The Gabelli High total return from Closed-end, 1.00 (9) n/a 07/09/99 $ 298
Utility Trust (5) investments primarily in Non-diversified
**** securities of companies NYSE Symbol: GUT
involved in gas, electricity
and water industries.
The Gabelli Qualified dividend income Closed-end, 1.00 (9) n/a 11/24/03 $ 2,486
Dividend & Income and capital appreciation Non-diversified
Trust potential. NYSE Symbol: GDV
(not rated) (7)
The Gabelli A consistent level of after-tax Closed-end, 1.00 n/a 5/28/04 $ 75
Global Utility & Income total return with an emphasis Non-diversified
Trust on tax-advantaged dividend AMEX Symbol: GLU
(not rated) (7) income.
The Gabelli High level of current income Closed-end, 1.00 n/a 3/29/05 $ 432
Global Gold, Natural through an option writing strategyNon-diversified
Resources & Income Trust on equity securities owned in the AMEX Symbol: GGN
(not rated) (7) gold and natural resources
industries
(1) Morningstar RatingTM as of December 31, 2006. For each fund with at least a
three-year history, Morningstar calculates a Morningstar RatingTM based on
a Morningstar risk-adjusted return measure that accounts for variation in a
fund's monthly performance (including the effects of sales charges, loads
and redemption fees) placing more emphasis on downward variations and
rewarding consistent performance. The top 10% of the funds in an investment
category receive five stars, the next 22.5% receive four stars, the next
35% receive three stars, the next 22.5% receive two stars and the bottom
10% receive one star. The Overall Morningstar Rating for a fund is derived
from a weighted average of the performance figures associated with its
three, five, and ten-year (if applicable) Morningstar Rating metrics.
Morningstar Ratings are shown for the respective class shown; other classes
may have different performance characteristics. There were 334 Conservative
Allocation funds rated for three years, 178 funds for five years and 95
funds for ten years (GAMCO Mathers Fund). There were 370 Mid-Cap Blend
funds rated for three years, 304 funds for five years and 118 funds for ten
years (The Gabelli Asset Fund, The Gabelli ABC Fund, The Gabelli Value
Fund). There were 1,075 Large Value funds rated for three years, 812 funds
for five years and 394 funds for ten years (The Gabelli Blue Chip Value
Fund, Westwood Equity Fund, The Gabelli Equity Income Fund). There were 72
Convertibles funds rated for three years, 61 funds for five years and 45
funds for ten years (The GAMCO Global Convertible Securities Fund). There
were 402 World Stock funds rated for three years, 316 funds for five years
and 158 funds for ten years (The GAMCO Global Growth Fund, The GAMCO Global
Opportunity Fund). There were 40 Specialty-Communications funds rated for
three years, 40 funds for five years and 11 funds for ten years (The GAMCO
Global Telecommunications Fund). There were 57 Specialty-Precious Metals
funds rated for three years, 44 funds for five years and 30 funds for ten
21
years (GAMCO Gold Fund). There were 1,373 Large Growth funds rated for
three years, 1,095 funds for five years and 453 funds for ten years (The
GAMCO Growth Fund). There were 199 Foreign Large Growth funds rated for
three years, 169 funds for five years and 72 funds for ten years (GAMCO
International Growth Fund). There were 305 Small Value funds rated for
three years, 225 funds for five years and 77 funds for ten years (The
Gabelli Small Cap Growth Fund, Westwood Mighty MitesSM Fund, Gabelli
Woodland Small Cap Value Fund). There were 85 Specialty-Utilities funds
rated for three years and 74 funds rated for five years (The Gabelli
Utilities Fund). There were 838 Moderate Allocation funds rated for three
years, 624 funds for five years and 358 funds for ten years (Westwood
Balanced Fund). There were 925 Intermediate-Term Bond funds rated for three
years, 754 funds for five years and 367 funds for ten years (Westwood
Intermediate Bond Fund). There were 228 Specialty-Real Estate funds rated
for three years and 152 funds for five years (Westwood Income Fund). There
were 474 Small Blend funds rated for three years and 383 funds for five
years (Westwood SmallCap Equity Fund, The Gabelli Woodland Small Cap Value
Fund). (a) 2006 Morningstar, Inc. All Rights reserved. This information is
(1) proprietary to Morningstar and/or its content providers (2) may not be
copied or distributed; and (3) is not warranted to be accurate, complete or
timely. Neither Morningstar nor its content providers are responsible for
any damages or losses arising from any use of this information. Past
performance is no guarantee of future results.
(2) These funds have multi-classes of shares available. Multi-class shares
include Class A shares which have a front-end sales charge, Class B shares
which are subject to a back-end contingent deferred sales charge for up to
6 years and Class C which shares are subject to a 1% back-end contingent
deferred sales charge for up to two years. However, Class B shares are no
longer offered for new purchases as of July 2004. Comstock Strategy Fund
Class R shares, which are no-load, are available only for retirement and
certain institutional accounts. Comstock Strategy Fund class O shares are
no longer offered to the public. Class I shares are available to
institutional accounts. Net assets include all share classes.
(3) The Gabelli Global Multimedia Trust Inc. was formed in 1994 through a
spin-off of assets from The Gabelli Equity Trust.
(4) The Gabelli Convertible and Income Securities Fund Inc. was originally
formed in 1989 as an open-end investment company and was converted to a
closed-end investment company in March 1995.
(5) The Gabelli Utility Trust was formed in 1999 through a spin-off of assets
from The Gabelli Equity Trust.
(6) Funds Advisor has reduced the Advisory fee from 1.00% to 0.50% since April
1, 2002. Gabelli & Company, Inc. waived receipt of the 12b-1 Plan
distribution fees as of January 1, 2003, and on February 25, 2004, the
Fund's Board of Directors agreed with the Funds Advisor's request to
terminate the 12b-1 Plan.
(7) Certain funds are not rated because they do not have a three year history,
or there are not enough similar funds in the category determined by
Morningstar.
(8) Funds Advisor has an agreement in place to waive its advisory fee or
reimburse expenses of the Fund to maintain fund expenses at a specified
level for Class AAA shares; multiclass shares have separate limits as
described in the Fund's prospectus. (The Gabelli Woodland Small Cap Value
Fund - 2.00%; Westwood Income Fund - 1.50%; The GAMCO Global Opportunity
Fund - 2.00%; The GAMCO Global Convertible Securities Fund - 2.00%;
Westwood SmallCap Equity Fund - 1.50%; Westwood Intermediate Bond Fund -
1.00%; The Gabelli U.S. Treasury Money Market Fund -0.08% through September
30, 2007. Such agreements are renewable annually).
(9) Funds Advisor has agreed to reduce its advisory fee on the liquidation
value of preferred stock outstanding if certain performance levels are not
met.
(10) The Gabelli U.S. Treasury Money Market Fund, as a direct result of having
the lowest expense ratio out of 42 funds, had the highest yield for the
year ended December 31, 2006 of the 42 funds ranked by the iMoney Net Money
Fund Report, in the 100% U.S. Treasury category. Longer term, the Fund has
equally impressive results, ranking 2nd out of 41 funds for 1 year, 3rd out
of 28 funds for 5 years, and 3rd out of 24 funds for 10 years, all periods
ended December 31, 2006. Investment returns and yield will fluctuate. An
investment in a money market fund is not guaranteed by the United States
government nor insured by the Federal Deposit Insurance Corporation or any
government agency. Although the Fund seeks to preserve the value of an
investment at $1.00 per share, it is possible to lose money by investing on
the Fund.
Shareholders of the open-end Funds are allowed to exchange shares among the same
class of shares of the other open-end funds as economic and market conditions
and investor needs change at no additional cost. However, as noted below,
certain Mutual Funds impose a 2% redemption fee on shares redeemed in seven days
or less after a purchase. We periodically introduce new mutual funds designed to
complement and expand our investment product offerings, respond to competitive
developments in the financial marketplace and meet the changing needs of
investors.
22
On December 30, 2004, the shareholders of The Gabelli ABC Fund voted to approve
a charter amendment that would require investment accounts held at the fund's
transfer agent, State Street Bank & Trust Company, be directly registered to the
beneficial owners of the fund. The action, which was recommended by Gabelli
Funds, LLC ("Funds Advisor") and approved by the fund's Board of Directors,
permits the redemption of shares held through certain brokers and financial
consultants in omnibus and individual accounts where the beneficial owner is not
disclosed.
In January 2006, Funds Advisor announced that the Board of Trustees of the Ned
Davis Research Funds voted to liquidate the Ned Davis Research Asset Allocation
Fund and distribute the assets to shareholders. The Board agreed that
liquidating the Fund, which was launched on March 31, 2003, was in the best
interests of shareholders given its asset level, ongoing transactional and
operating costs, and limited marketability. The liquidation took place on
February 10, 2006.
Our marketing efforts for the Mutual Funds are currently focused on increasing
the distribution and sales of our existing funds as well as creating new
products for sale through our distribution channels. We believe that our
marketing efforts for the Mutual Funds will continue to generate additional
revenues from investment advisory fees. We have traditionally distributed most
of our open-end Mutual Funds by using a variety of direct response marketing
techniques, including telemarketing and advertising, and as a result we maintain
direct relationships with many of our no-load open-end Mutual Fund customers.
Beginning in late 1995, we expanded our product distribution by offering several
of our open-end Mutual Funds through Third-Party Distribution Programs,
including NTF Programs. In 1998 and 1999, we further expanded these efforts to
include substantially all of our open-end Mutual Funds in Third-Party
Distribution Programs. More than 37% of the assets under management in the
open-end Mutual Funds are still attributable to our direct response marketing
efforts. Third-Party Distribution Programs have become an increasingly important
source of asset growth for us. Of the $8.4 billion of assets under management in
the open-end equity Mutual Funds as of December 31, 2006, approximately 63% were
generated through Third-Party Distribution Programs. We are responsible for
paying the service and distribution fees charged by many of the Third-Party
Distribution Programs, although a portion of such service fees under certain
circumstances are payable by the funds. Several bills have been introduced in
Congress that would amend the Investment Company Act. These proposals, which
include but are not limited to the elimination or restriction of Rule 12b-1
distribution fees, if enacted or adopted, could have a substantial impact on the
regulation and operation of our registered funds. In light of such legislation
and efforts by some of the program sponsors to increase fees beyond what we deem
to be acceptable, several of our Mutual Funds may be withdrawn from such
programs. During 2000, we completed development of additional classes of shares
for many of our mutual funds for sale through national brokerage and investment
firms and other third-party distribution channels on a commission basis. The
multi-class shares are available in all of Gabelli mutual funds except The
Gabelli ABC Fund, Gabelli Capital Asset Fund and the GAMCO Mathers Fund,
although The Gabelli ABC Fund is planning on offering another class of shares.
The use of multi-class share products will expand the distribution of Gabelli
Fund products into the advised sector of the mutual fund investment community.
During 2003, we introduced Class I shares, which are no load shares with higher
minimum initial investment and without distribution fees available to
Institutional and Retirement Plan Accounts directly through Gabelli & Company,
Inc. The no-load shares are designated as Class AAA shares and are available for
new and current investors. Effective February 15, 2007, Class AAA shares of the
GAMCO Growth Fund, GAMCO International Growth Fund, and GAMCO Global Growth Fund
are only available to existing Gabelli Fund Shareholders who established
accounts prior to February 15, 2007. In general, distribution through
Third-Party Distribution Programs has greater variable cost components and lower
fixed cost components than distribution through our traditional direct sales
methods.
We provide investment advisory and management services pursuant to an investment
management agreement with each Mutual Fund. The investment management agreements
with the Mutual Funds generally provide that we are responsible for the overall
investment and administrative services, subject to the oversight of each Mutual
Fund's Board of Directors or Trustees and in accordance with each Mutual Fund's
fundamental investment objectives and policies. The investment management
agreements permit us to enter into separate agreements for administrative and
accounting services on behalf of the respective Mutual Funds.
We provide the Mutual Funds with administrative services pursuant to the
management contracts. Such services include, without limitation, supervision of
the calculation of net asset value, preparation of financial reports for
shareholders of the Mutual Funds, internal accounting, tax accounting and
reporting, regulatory filings and other services. Most of these administrative
services are provided through sub-contracts with unaffiliated third parties.
Transfer agency and custodial services are provided directly to the Mutual Funds
by unaffiliated third parties.
Our Mutual Fund investment management agreements may continue in effect from
year to year only if specifically approved at least annually by (i) the Mutual
Fund's Board of Directors or Trustees or (ii) the Mutual Fund's shareholders
23
and, in either case, the vote of a majority of the Mutual Fund's directors or
trustees who are not parties to the agreement or "interested persons" of any
such party, within the meaning of the Investment Company Act of 1940 as amended
(the "Investment Company Act"). Each Mutual Fund may terminate its investment
management agreement at any time upon 60 days' written notice by (i) a vote of
the majority of the Board of Directors or Trustees cast in person at a meeting
called for the purpose of voting on such termination or (ii) a vote at a meeting
of shareholders of the lesser of either 67% of the voting shares represented in
person or by proxy or 50% of the outstanding voting shares of such Mutual Fund.
Each investment management agreement automatically terminates in the event of
its assignment, as defined in the Investment Company Act. We may terminate an
investment management agreement without penalty on 60 days' written notice.
Mutual Fund Distribution, Institutional Research, Brokerage and Underwriting
Gabelli & Company, Inc. ("Gabelli & Company"), the wholly-owned subsidiary of
our 92% majority-owned subsidiary Gabelli Securities, Inc., is a broker-dealer
registered under the Securities Exchange Act of 1934 and a member of the
National Association of Securities Dealers, Inc. ("NASD"). Gabelli & Company's
revenues are derived primarily from the distribution of our Mutual Funds,
brokerage commissions, underwriting fees and selling concessions.
Mutual Fund Distribution
Gabelli & Company distributes our open-end Mutual Funds pursuant to distribution
agreements with each Mutual Fund. Under each distribution agreement with an
open-end Mutual Fund, Gabelli & Company offers and sells such open-end Mutual
Fund's shares on a continuous basis and pays all of the costs of marketing and
selling the shares, including printing and mailing prospectuses and sales
literature, advertising and maintaining sales and customer service personnel and
sales and services fulfillment systems, and payments to the sponsors of
Third-Party Distribution Programs, financial intermediaries and Gabelli &
Company sales personnel. Gabelli & Company receives fees for such services
pursuant to distribution plans adopted under provisions of Rule 12b-1 ("12b-1")
of the Investment Company Act. Distribution fees from the open-end Mutual Funds
amounted to $18.9 million, $19.4 million and $20.6 million for the years ended
December 31, 2004, 2005 and 2006, respectively. Gabelli & Company is the
principal underwriter for funds distributed in multiple classes of shares which
carry either a front-end or back-end sales charge. Underwriting fees and sales
charges retained amounted to $346,000, $646,000 and $859,000 for the years ended
December 31, 2004, 2005 and 2006, respectively.
Under the distribution plans, the open-end Class AAA shares of the Mutual Funds
(except The Gabelli US Treasury Money Market Fund, Gabelli Capital Asset Fund
and The Gabelli ABC Fund) and the Class A shares of various funds pay Gabelli &
Company a distribution or service fee of .25% per year (except the Class A
shares of the Westwood Funds which pay .50% per year) on the average daily net
assets of the fund. Class B and Class C shares have a 12b-1 distribution plan
with a service and distribution fee totaling 1%. Gabelli & Company's
distribution agreements with the Mutual Funds may continue in effect from year
to year only if specifically approved at least annually by (i) the Mutual Fund's
Board of Directors or Trustees or (ii) the Mutual Fund's shareholders and, in
either case, the vote of a majority of the Mutual Fund's directors or trustees
who are not parties to the agreement or "interested persons" of any such party,
within the meaning of the Investment Company Act. Each Mutual Fund may terminate
its distribution agreement, or any agreement thereunder, at any time upon 60
days' written notice by (i) a vote of the majority of its directors or trustees
cast in person at a meeting called for the purpose of voting on such termination
or (ii) a vote at a meeting of shareholders of the lesser of either 67% of the
voting shares represented in person or by proxy or 50% of the outstanding voting
shares of such Mutual Fund. Each distribution agreement automatically terminates
in the event of its assignment, as defined in the Investment Company Act.
Gabelli & Company may terminate a distribution agreement without penalty upon 60
days' written notice.
Gabelli & Company also offers our open-end mutual fund products through our
website, www.gabelli.com, where directly registered mutual fund investors can
access their personal account information and buy, sell and exchange Fund
shares. Fund prospectuses, quarterly reports, fund applications, daily net asset
values and performance charts are all available online. As part of our efforts
to educate investors, we introduced Gabelli University with our initial
publications Deals, Deals... and More Deals and Global Convertible Investing:
The Gabelli Way. Our website is an active, informative and valuable resource
which we believe has become an increasingly important feature of our client
service efforts.
Institutional Research
Gabelli & Company provides institutional investors with investment ideas on
numerous industries and special situations, with a particular focus on small-cap
and mid-cap companies. Our team of sell-side analysts follow economic sectors on
a global basis, and are bottom-up stock pickers, recommending companies that
trade at significant differences to Private Market Value. Our research focuses
on company fundamentals, cash flow statistics, and catalysts that will help
realize returns.
24
Brokerage Commissions and Trading
Gabelli & Company generates brokerage commission revenues from securities
transactions executed on an agency basis on behalf of our mutual funds,
institutional and high net worth clients as well as from retail customers.
Commission revenues totaled $15.6 million, $12.2 million, and $12.2 million for
the years ended December 31, 2004, 2005 and 2006, respectively. Gabelli &
Company has considered and continues to explore expansion of its proprietary
trading activities.
Underwriting
Gabelli & Company is involved in external syndicated underwriting activities. In
2004, 2005 and 2006, Gabelli & Company participated in 5, 4 and 4 syndicated
underwritings, respectively, of public equity and debt offerings managed by
major investment banks with commitments of $32.1 million, $21.4 million and
$15.5 million, respectively. In January 2007, Gabelli & Company participated in
an underwriting syndicate of the initial public offering of the Gabelli Global
Deal Fund (NYSE: GDL), a closed-end fund which will seek to achieve its
investment objective by investing primarily in announced merger and acquisition
transactions and, to a lesser extent, in corporate reorganizations involving
stubs, spin-offs and liquidations.
Competition
We compete with other investment management firms and mutual fund companies,
insurance companies, banks, brokerage firms and other financial institutions
that offer products that have similar features and investment objectives to
those offered by us. Many of the investment management firms with which we
compete are subsidiaries of large diversified financial companies and many
others are much larger in terms of assets under management and revenues and,
accordingly, have much larger sales organizations and marketing budgets.
Historically, we have competed primarily on the basis of the long-term
investment performance of many of our investment products. However, we have
taken steps to increase our distribution channels, brand name awareness and
marketing efforts.
The market for providing investment management services to institutional and
high net worth Separate Accounts is also highly competitive. Approximately 36%
of our investment advisory fee revenue for the year ended December 31, 2006 was
derived from our Separate Accounts. Selection of investment advisors by U.S.
institutional investors is often subject to a screening process and to favorable
recommendations by investment industry consultants. Many of these investors
require their investment advisors to have a successful and sustained performance
record, often five years or longer, and also focus on one-year and three-year
performance records. We have significantly increased our assets under management
on behalf of U.S. institutional investors since our entry into the institutional
asset management business in 1977. At the current time, we believe that our
investment performance record would be attractive to potential new institutional
and high net worth clients. However, no assurance can be given that our efforts
to obtain new business will be successful.
Intellectual Property
Service marks and brand name recognition are important to our business. We have
rights to the service marks under which our products are offered. We have
registered certain service marks in the United States and will continue to do so
as new trademarks and service marks are developed or acquired. We have rights to
use the "Gabelli" name, the "GAMCO" name, and other names. Pursuant to an
assignment agreement, Mr. Gabelli has assigned to us all of his rights, title
and interests in and to the "Gabelli" name for use in connection with investment
management services, mutual funds and securities brokerage services. However,
under the agreement, Mr. Gabelli will retain any and all rights, title and
interests he has or may have in the "Gabelli" name for use in connection with
(i) charitable foundations controlled by Mr. Gabelli or members of his family or
(ii) entities engaged in private investment activities for Mr. Gabelli or
members of his family. In addition, the funds managed by Mr. Gabelli outside GBL
have entered into a license agreement with us permitting them to continue
limited use of the "Gabelli" name under specified circumstances. We have taken,
and will continue to take, action to protect our interests in these service
marks.
Regulation
Virtually all aspects of our businesses are subject to various federal and state
laws and regulations. These laws and regulations are primarily intended to
protect investment advisory clients and shareholders of registered investment
companies. Under such laws and regulations, agencies that regulate investment
advisors and broker-dealers such as us have broad administrative powers,
including the power to limit, restrict or prohibit such an advisor or
broker-dealer from carrying on its business in the event that it fails to comply
with such laws and regulations. In such event, the possible sanctions that may
be imposed include the suspension of individual employees, limitations on
engaging in certain lines of business for specified periods of time, revocation
of investment advisor and other registrations, censures, and fines. We believe
that we are in substantial compliance with all material laws and regulations.
25
Our business is subject to regulation at both the federal and state level by the
Securities and Exchange Commission ("Commission" or "SEC") and other regulatory
bodies. Certain of our subsidiaries are registered with the Commission under the
Investment Advisers Act, and the Mutual Funds are registered with the Commission
under the Investment Company Act. We also have a subsidiary that is registered
as a broker-dealer with the Commission and is subject to regulation by the NASD
and various states.
The subsidiaries of GBL that are registered with the Commission under the
Investment Advisers Act (Gabelli Funds LLC, Gabelli Advisers, Inc., Gabelli
Fixed Income LLC, GAMCO Asset Management Inc. and Gabelli Securities, Inc.) are
regulated by and subject to examination by the Commission. The Investment
Advisers Act imposes numerous obligations on registered investment advisors
including fiduciary duties, record keeping requirements, operational
requirements, marketing requirements and disclosure obligations. The Commission
is authorized to institute proceedings and impose sanctions for violations of
the Investment Advisers Act, ranging from censure to termination of an
investment advisor's registration. The failure of a subsidiary to comply with
the requirements of the Commission could have a material adverse effect on us.
We believe that we are in substantial compliance with the requirements of the
regulations under the Investment Advisers Act.
We derive a substantial majority of our revenues from investment advisory
services through our investment management agreements. Under the Investment
Advisers Act, our investment management agreements terminate automatically if
assigned without the client's consent. Under the Investment Company Act,
advisory agreements with registered investment companies such as the Mutual
Funds terminate automatically upon assignment. The term "assignment" is broadly
defined and includes direct assignments as well as assignments that may be
deemed to occur, under certain circumstances, upon the transfer, directly or
indirectly, of a controlling interest in GBL.
In its capacity as a broker-dealer, Gabelli & Company, Inc. is required to
maintain certain minimum net capital and cash reserves for the benefit of our
customers. Gabelli & Company, Inc.'s net capital, as defined, has consistently
met or exceeded all minimum requirements. Gabelli & Company, Inc. is also
subject to periodic examination by the NASD.
Subsidiaries of GBL are subject to the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), and to regulations promulgated there under,
insofar as they are "fiduciaries" under ERISA with respect to certain of their
clients. ERISA and applicable provisions of the Internal Revenue Code of 1986,
as amended (the "Code"), impose certain duties on persons who are fiduciaries
under ERISA and prohibit certain transactions involving ERISA plan clients. Our
failure to comply with these requirements could have a material adverse effect
on us.
Investments by GBL on behalf of our clients often represent a significant equity
ownership position in an issuer's class of stock. As of December 31, 2006, we
had five percent or more beneficial ownership with respect to approximately 110
equity securities. This activity raises frequent regulatory and legal issues
regarding our aggregate beneficial ownership level with respect to portfolio
securities, including issues relating to issuers' shareholder rights plans or
"poison pills," state gaming laws and regulations, federal communications laws
and regulations, public utility holding company laws and regulations, federal
proxy rules governing shareholder communications and federal laws and
regulations regarding the reporting of beneficial ownership positions. Our
failure to comply with these requirements could have a material adverse effect
on us.
The USA Patriot Act of 2001, enacted in response to the terrorist attacks on
September 11, 2001, contains anti-money laundering and financial transparency
laws and mandates the implementation of various new regulations applicable to
broker-dealers, mutual funds and other financial services companies, including
standards for verifying client identification at account opening, and
obligations to monitor client transactions and report suspicious activities.
Anti-money-laundering laws outside of the U.S. contain some similar provisions.
Our failure to comply with these requirements could have a material adverse
effect on us.
We and certain of our affiliates are subject to the laws of non-U.S.
jurisdictions and non-U.S. regulatory agencies or bodies. In particular, we are
subject to requirements in numerous jurisdictions regarding reporting of
beneficial ownership positions in securities issued by companies whose
securities are publicly-traded in those countries. In addition, GAMCO is
registered as an international advisor, investment counsel and portfolio manager
with the Ontario Securities Commission in Canada in order to market our services
to prospective clients who reside in Ontario. Several of our Investment
Partnerships are organized under the laws of foreign jurisdictions. In
connection with our opening of an office in London and our plans to market
certain products in Europe, we are required to comply with the laws of the
United Kingdom and other European countries regarding these activities. Our
subsidiary, GAMCO Asset Management (UK) Limited, is regulated by the Financial
Services Authority. In connection with our registration in the United Kingdom,
we have minimum capital requirements that have been consistently met or
exceeded.
26
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 and have
been complying with these requests for documents and testimony. We implemented
additional compliance policies and procedures in response to recent industry
initiatives and an internal review of our mutual fund practices and procedures
in a variety of areas. 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 GBL'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 staff for a potential resolution of
their inquiry. As a result of these discussions, GBL recorded a reserve of
approximately $12 million in the second quarter of 2006. In February 2007, one
of our advisory subsidiaries made an offer of settlement to the SEC staff for
communication to the Commission for its consideration to resolve this matter.
This offer of settlement is subject to final agreement regarding the specific
language of the SEC's administrative order and other settlement documents. As a
result of these developments, we increased our reserves as of the fourth quarter
of 2006 by $3 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 GBL 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 SEC that they may
recommend to the Commission that one of our advisory subsidiaries be held
accountable for the actions of two of the 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 advisors 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.
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.
27
Personnel
On February 28, 2007, we had a full-time staff of approximately 200 individuals,
of whom 83 served in the portfolio management, research and trading areas, 61
served in the marketing and shareholder servicing areas and 56 served in the
administrative area. As part of our staff, we employ 24 portfolio managers for
the Mutual Funds, Separate Accounts and Investment Partnerships.
ITEM 1A: RISK FACTORS
Business Risks
We caution the reader that the following business risks and those risks
described elsewhere in this report and in our other SEC filings could cause our
actual results to differ materially from expectations stated in our
forward-looking statements.
Risks Related to Our Industry
Changes in laws or regulations or in governmental policies could limit the
sources and amounts of our revenues, increase our costs of doing business,
decrease our profitability and materially and adversely affect our business.
Our business is subject to extensive regulation in the United States, primarily
at the federal level, including regulation by the SEC under the Investment
Company Act and the Investment Advisers Act, by the Department of Labor under
the ERISA, as well as regulation by the NASD and state regulators. The mutual
funds managed by Gabelli Funds, LLC and Gabelli Advisers, Inc. are registered
with the SEC as investment companies under the Investment Company Act. The
Investment Advisers Act imposes numerous obligations on investment advisors,
including record-keeping, advertising and operating requirements, disclosure
obligations and prohibitions on fraudulent activities. The Investment Company
Act imposes similar obligations, as well as additional detailed operational
requirements, on registered investment companies and investment advisors. Our
failure to comply with applicable laws or regulations could result in fines,
censure, suspensions of personnel or other sanctions, including revocation of
our registration as an investment advisor or broker-dealer. Industry regulations
are designed to protect our clients and investors in our funds and other third
parties who deal with us and to ensure the integrity of the financial markets.
They are not designed to protect our stockholders. Changes in laws or
regulations or in governmental policies could limit the sources and amounts of
our revenues, increase our costs of doing business, decrease our profitability
and materially and adversely affect our business.
In response to scandals in the financial services industry regarding late
trading, market timing and selective disclosure of portfolio information,
various legislative and regulatory proposals are pending in or before, or have
been adopted by, the U.S. Congress, the legislatures in states in which we
conduct operations and the various regulatory agencies that supervise our
operations, including the SEC. These proposals, to the extent enacted or
adopted, could have a substantial impact on the regulation and operation of
registered funds, investment advisors and broker-dealers and could adversely
affect our assets under management, revenues and net income. Additionally, the
SEC, the NASD and other regulators, as well as Congress, are investigating
certain practices within our industry. These investigations could lead to
further legislative and regulatory proposals that, if enacted or adopted, could
adversely affect our business.
To the extent we are forced to compete on the basis of price, we may not be able
to maintain our current fee structure.
The investment management business is highly competitive and has relatively low
barriers to entry. To the extent we are forced to compete on the basis of price,
we may not be able to maintain our current fee structure. Although our
investment management fees vary from product to product, historically we have
competed primarily on the performance of our products and not on the level of
our investment management fees relative to those of our competitors. In recent
years, however, there has been a trend toward lower fees in the investment
management industry. In order to maintain our fee structure in a competitive
environment, we must be able to continue to provide clients with investment
returns and service that make investors willing to pay our fees. In addition,
the board of directors of each mutual fund managed by Gabelli Funds, LLC and
Gabelli Advisers, Inc. must make certain findings as to the reasonableness of
its fees. We cannot be assured that we will succeed in providing investment
returns and service that will allow us to maintain our current fee structure.
Fee reductions on existing or future new business could have an adverse effect
on our profit margins and results of operations.
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We derive a substantial portion of our revenues from contracts that may be
terminated on short notice.
A substantial majority of all of our revenues are derived from investment
management agreements and distribution arrangements. Investment management
agreements and distribution arrangements with the Mutual Funds are terminable
without penalty on 60 days' notice (subject to certain additional procedural
requirements in the case of termination by a Mutual Fund) and must be
specifically approved at least annually, as required by law. Such annual renewal
requires, among other things, approval by the disinterested members of each
Mutual Fund's board of directors or trustees. Investment advisory agreements
with the Separate Accounts are typically terminable by the client without
penalty on 30 days' notice or less. Any failure to renew or termination of a
significant number of these agreements or arrangements would have a material
adverse effect on us.
Investors in the open-end funds can redeem their investments in these funds at
any time without prior notice, which could adversely affect our earnings.
Open-end fund investors may redeem their investments in those funds at any time
without prior notice. Investors may reduce the aggregate amount of assets under
management for any number of reasons, including investment performance, changes
in prevailing interest rates and financial market performance. In a declining
stock market, the pace of mutual fund redemptions could accelerate. Poor
performance relative to other asset management firms tends to result in
decreased purchases of mutual fund shares and increased redemptions of mutual
fund shares. The redemption of investments in mutual funds managed by Gabelli
Funds, LLC or Gabelli Advisers, Inc. would adversely affect our revenues, which
are substantially dependent upon the assets under management in our funds. If
redemptions of investments in mutual funds caused our revenues to decline, it
could have a material adverse effect on our earnings.
Certain changes in control of our company would automatically terminate our
investment management agreements with our clients, unless our separate account
clients consent and, in the case of fund clients, the funds' boards of directors
and shareholders vote to continue the agreements, and could prevent us for a
two-year period from increasing the investment advisory fees we are able to
charge our mutual fund clients.
Under the Investment Company Act, an investment management agreement with a fund
must provide for its automatic termination in the event of its assignment. The
fund's board and shareholders must vote to continue the agreement following its
assignment, the cost of which ordinarily would be borne by us.
Under the Investment Advisers Act, a client's investment management agreement
may not be "assigned" by the investment advisor without the client's consent. An
investment management agreement is considered under both acts to be assigned to
another party when a controlling block of the advisor's securities is
transferred. In our case, an assignment of our investment management agreements
may occur if, among other things, we sell or issue a certain number of
additional common shares in the future. We cannot be certain that our clients
will consent to assignments of our investment management agreements or approve
new agreements with us if an assignment occurs. Under the Investment Company
Act, if a fund's investment advisor engages in a transaction that results in the
assignment of its investment management agreement with the fund, the advisor may
not impose an "unfair burden" on that fund as a result of the transaction for a
two-year period after the transaction is completed. The term "unfair burden" has
been interpreted to include certain increases in investment advisory fees. This
restriction may discourage potential purchasers from acquiring a controlling
interest in our company.
Regulatory developments designed to increase oversight of hedge funds may
adversely affect our business.
The SEC has proposed a rule that would limit the eligibility of individuals to
invest in hedge funds by requiring that such individuals own not less than $2.5
million in investments at the time of their hedge fund investment. The SEC may
also propose or enact other rules designed to increase oversight of hedge funds
by the SEC. Any regulations applicable to hedge funds that may be adopted could
have an impact on our operations and may adversely affect our hedge fund
business and decrease our future income.
A decline in the prices of securities would lead to a decline in our assets
under management, revenues and earnings.
Substantially all of our revenues are determined by the amount of our assets
under management. Under our investment advisory contracts with our clients, the
investment advisory fees we receive are typically based on the market value of
assets under management. In addition, we receive asset-based distribution and/or
service fees with respect to the open-end funds managed by Gabelli Funds, LLC or
Gabelli Advisers, Inc. over time pursuant to distribution plans adopted under
29
provisions of Rule 12b-1 under the Investment Company Act. Rule 12b-1 fees
typically are based on the market value of assets under management and
represented approximately 7.9% of our revenues for the year ended December 31,
2006 and 7.4% and 7.7% of our revenues for the years ended December 31, 2004 and
2005, respectively. Accordingly, a decline in the prices of securities generally
may cause our revenues and net income to decline by either causing the value of
our assets under management to decrease, which would result in lower investment
advisory and Rule 12b-1 fees, or causing our clients to withdraw funds in favor
of investments they perceive to offer greater opportunity or lower risk, which
would also result in lower fees. The securities markets are highly volatile, and
securities prices may increase or decrease for many reasons, including economic
and political events and acts of terrorism beyond our control. If a decline in
securities prices caused our revenues to decline, it could have a material
adverse effect on our earnings.
Catastrophic and unpredictable events could have a material adverse effect on
our business.
A terrorist attack, war, power failure, cyber-attack, natural disaster or other
catastrophic or unpredictable event could adversely affect our future revenues,
expenses and earnings by: interrupting our normal business operations;
sustaining employee casualties, including loss of our key executives; requiring
substantial expenditures and expenses to repair, replace and restore normal
business operations; and reducing investor confidence.
We have a disaster recovery plan to address certain contingencies, but we cannot
be assured that this plan will be sufficient in responding or ameliorating the
effects of all disaster scenarios. If our employees or vendors we rely upon for
support in a catastrophic event are unable to respond adequately or in a timely
manner, we may lose clients resulting in a decrease in assets under management
which may have a material adverse effect on revenues and net income.
Risks Related to Our Business
Control by Mr. Gabelli of a majority of the combined voting power of our common
stock may give rise to conflicts of interests.
Since our initial public offering in 1999, Mr. Gabelli, through his majority
ownership of GGCP, has beneficially owned a majority of our outstanding class B
common stock. As of December 31, 2006, GGCP's holdings of our class B common
stock represent approximately 95% of the combined voting power of all classes of
our voting stock. As long as Mr. Gabelli indirectly beneficially owns a majority
of the combined voting power of our common stock, he will have the ability to
elect all of the members of our Board of Directors and thereby control our
management and affairs, including determinations with respect to acquisitions,
dispositions, borrowings, issuances of common stock or other securities, and the
declaration and payment of dividends on the common stock. In addition, Mr.
Gabelli will be able to determine the outcome of matters submitted to a vote of
our shareholders for approval and will be able to cause or prevent a change in
control of our company. As a result of Mr. Gabelli's control, none of our
agreements with Mr. Gabelli and other companies controlled by him have been
arrived at through "arm's-length" negotiations, although we believe that the
parties endeavor to implement market-based terms. There can be no assurance that
we would not have received more favorable terms from an unaffiliated party.
In order to minimize conflicts and potential competition with our investment
management business, in 1999 and as part of our initial public offering, Mr.
Gabelli entered into a written agreement to limit his activities outside of GBL.
Mr. Gabelli has undertaken that so long as he is associated with GBL or for a
period of five years from our initial public offering, whichever is longer, he
will not provide investment management services for compensation other than in
his capacity as an officer or employee of GBL except for (a) those investment
funds and accounts managed by Mr. Gabelli outside the company under performance
fee arrangements, but only to the extent that any such investment fund or
account consists solely of one or more of the persons who were investors as of
the date of the consummation of the initial public offering or such additional
investors to the extent that all revenues attributable to such additional
investors are paid to GBL, and (b) successor funds and accounts which serve no
investors other than those in the funds and accounts referred to in (a) or those
investors' successors, heirs, donees or immediate families, which funds and
accounts operate according to an investment style similar to such other accounts
or funds, which style we did not use at the time of our initial public offering,
and which are subject to performance fee arrangements. To the extent that such
activities are not prohibited under this agreement, Mr. Gabelli intends to
continue devoting time to activities outside GBL, including managing his own
assets and his family's assets, managing or controlling companies in other
industries and managing assets for other investors through the permissible
accounts, which are the funds and accounts managed outside GBL that are
permitted under the agreement between us and Mr. Gabelli (these assets were
approximately $71.3 million in February 1999 and approximately $97.3 million as
the end of 2006). These activities may present conflicts of interest or compete
with GBL. Our Certificate of Incorporation expressly provides in general that
30
Mr. Gabelli, members of his immediate family who are officers or directors of
GBL and entities controlled by such persons have an obligation to present
corporate opportunities to us and resolve conflicts of interest through one of
the processes described in the Certificate of Incorporation, which include
independent director or independent shareholder approval.
We will not derive any income from activities outside GBL by Mr. Gabelli (except
as described above) or members of his immediate family who are officers or
directors of GBL and may not be able to take advantage of business and
investment opportunities that could later prove to be beneficial to us and our
shareholders, either because such opportunities were not GBL opportunities at
the time they arose or because we did not pursue them. Where a conflict of
interest involves a transaction between Mr. Gabelli or members of his immediate
family who are officers or directors of GBL or their affiliates and GBL, there
can be no assurance that we would not receive more favorable terms if we were
dealing with an unaffiliated party, although we will seek to achieve
market-based terms in all such transactions.
We depend on Mario J. Gabelli and other key personnel.
We are dependent on the efforts of Mr. Gabelli, our Chairman of the Board, Chief
Executive Officer and the primary portfolio manager for a significant majority
of our assets under management. The loss of Mr. Gabelli's services would have a
material adverse effect on us.
In addition to Mr. Gabelli, our future success depends to a substantial degree
on our ability to retain and attract other qualified personnel to conduct our
investment management business. The market for qualified portfolio managers is
extremely competitive and has grown more so in recent periods as the investment
management industry has experienced growth. We anticipate that it will be
necessary for us to add portfolio managers and investment analysts as we further
diversify our investment products and strategies. There can be no assurance,
however, that we will be successful in our efforts to recruit and retain the
required personnel. In addition, our investment professionals and senior
marketing personnel have direct contact with our Separate Account clients, which
can lead to strong client relationships. The loss of these personnel could
jeopardize our relationships with certain Separate Account clients, and result
in the loss of such accounts. The loss of key management professionals or the
inability to recruit and retain sufficient portfolio managers and marketing
personnel could have a material adverse effect on our business.
Potential adverse effects on our performance prospects from a decline in the
performance of the securities markets.
Our results of operations are affected by many economic factors, including the
performance of the securities markets. During the 1990s, unusually favorable and
sustained performance of the U.S. securities markets, and the U.S. equity
market, in particular, attracted substantial inflows of new investments in these
markets and has contributed to significant market appreciation which has, in
turn, led to an increase in our assets under management and revenues. At
December 31, 2006, approximately 97% of our assets under management were
invested in portfolios consisting primarily of equity securities. More recently,
the securities markets in general have experienced significant volatility, with
declines in value experienced during the years 2001 and 2002, and increases in
subsequent years. Any decline in the securities markets, in general, and the
equity markets, in particular, could reduce our assets under management and
consequently reduce our revenues. In addition, any such decline in the equity
markets, failure of these markets to sustain their prior levels of growth, or
continued short-term volatility in these markets could result in investors
withdrawing from the equity markets or decreasing their rate of investment,
either of which would be likely to adversely affect us. From time to time, a
relatively high proportion of the assets we manage may be concentrated in
particular industry sectors. A general decline in the performance of securities
in those industry sectors could have an adverse effect on our assets under
management and revenues.
Possibility of losses associated with proprietary investment activities.
We may from time to time make or maintain large proprietary investment positions
in securities. Market fluctuations and other factors may result in substantial
losses in our proprietary accounts, which could have an adverse effect on our
balance sheet, reduce our ability or willingness to make new investments or
impair our credit ratings.
Future investment performance could reduce revenues and other income.
Success in the investment management and mutual fund businesses is dependent on
investment performance as well as distribution and client servicing. Good
performance generally stimulates sales of our investment products and tends to
keep withdrawals and redemptions low, which generates higher management fees
(which are based on the amount of assets under management). Conversely,
relatively poor performance tends to result in decreased sales, increased
withdrawals and redemptions in the case of the open-end Mutual Funds, and in the
31
loss of Separate Accounts, with corresponding decreases in revenues to us. Many
analysts of the mutual fund industry believe that investment performance is the
most important factor for the growth of open and closed-end funds, such as those
we offer. Failure of our investment products to perform well could, therefore,
have a material adverse effect on us.
Loss of significant Separate Accounts could affect our revenues.
We had approximately 1,700 Separate Accounts as of December 31, 2006, of which
the ten largest accounts generated approximately 8% of our total revenues during
the year ended December 31, 2006. Loss of these accounts for any reason would
have an adverse effect on our revenues. Notwithstanding performance, we have
from time to time lost large Separate Accounts as a result of corporate mergers
and restructurings, and we could continue to lose accounts under these or other
circumstances.
During 2006, as in prior years, we experienced client "turnover". In the
Separate Accounts, over one half of the decrease in assets were subadvisory
assets where the advisor underwent a corporate change in control, such as, a
spin-off from a parent organization or the sale of the subadvisor to a third
party.
A decline in the market for closed-end funds could reduce our ability to raise
future assets to manage.
Market conditions may preclude us from increasing the assets we manage in
closed-end mutual funds. A significant portion of our recent growth in the
assets we manage has resulted from public offerings of the common and preferred
shares of closed-end mutual funds. We have raised $1.2 billion in gross assets
through closed-end fund offerings since January 2004. The market conditions for
these offerings may not be as favorable in the future, which could adversely
impact our ability to grow the assets we manage and our revenue.
We rely on third-party distribution programs.
We have since 1996 experienced significant growth in sales of our open-end
Mutual Funds through Third-Party Distribution Programs, which are programs
sponsored by third-party intermediaries that offer their mutual fund customers a
variety of competing products and administrative services. Most of the sales
growth from our Third-Party Distribution Programs is from programs with no
transaction fees payable by the customer, which we refer to as NTF Programs.
Approximately $2.5 billion of our assets under management in the open-end Mutual
Funds as of December 31, 2006 were obtained through NTF Programs. The cost of
participating in Third-Party Distribution Programs is higher than our direct
distribution costs, and it is anticipated that the cost of Third-Party
Distribution Programs will increase in the future. Any increase would be likely
to have an adverse effect on our profit margins and results of operations. In
addition, there can be no assurance that the Third-Party Distribution Programs
will continue to distribute the Mutual Funds. At December 31, 2006,
approximately 88.7% of the NTF Program net assets in the Gabelli and Westwood
families of funds are attributable to two NTF Programs. The decision by these
Third-Party Distribution Programs to discontinue distribution of the Mutual
Funds, or a decision by us to withdraw one or more of the Mutual Funds from the
programs, could have an adverse effect on our growth of assets under management.
Possibility of losses associated with underwriting, trading and market-making
activities.
Our underwriting, trading and market-making activities are primarily conducted
through our subsidiary, Gabelli & Company, Inc., both as principal and agent.
Such activities subject our capital to significant risks of loss. The risks of
loss include those resulting from ownership of securities, extension of credit,
leverage, liquidity, counterparty failure to meet commitments, client fraud,
employee errors, misconduct and fraud (including unauthorized transactions by
traders), failures in connection with the processing of securities transactions
and litigation. We have procedures and internal controls to address such risks,
but there can be no assurance that these procedures and controls will prevent
losses from occurring.
We may have liability as a general partner or otherwise with respect to our
alternative investment products.
Certain of our subsidiaries act as general partner for investment partnerships,
including arbitrage, event-driven long/short, sector focused and merchant
banking limited partnerships. As a general partner of these partnerships, we may
be held liable for the partnerships' liabilities in excess of their ability to
pay such liabilities. In addition, in certain circumstances, we may be liable as
a control person for the acts of our investment partnerships. As of December 31,
2006, our assets under management included approximately $491 million in
investment partnerships. A substantial adverse judgment or other liability with
respect to our investment partnerships could have a material adverse effect on
us.
Operational risks may disrupt our businesses, result in regulatory action
against us or limit our growth.
32
We face operational risk arising from errors made in the execution, confirmation
or settlement of transactions or from transactions not being properly recorded,
evaluated or accounted for. Our business is highly dependent on our ability to
process, on a daily basis, transactions across markets in an efficient and
accurate manner. Consequently, we rely heavily on our financial, accounting and
other data processing systems. If any of these systems do not operate properly
or are disabled, we could suffer financial loss, a disruption of our businesses,
liability to clients, regulatory intervention or reputational damage.
Dependence on information systems.
We operate in an industry that is highly dependent on its information systems
and technology. We outsource a significant portion of our information systems
operations to third parties who are responsible for providing the management,
maintenance and updating of such systems. There can be no assurance, however,
that our information systems and technology will continue to be able to
accommodate our growth or that the cost of maintaining such outsourcing
arrangements will not increase from its current level. Such a failure to
accommodate growth, or an increase in costs related to these information
systems, could have a material adverse effect on us.
We may not be able to refinance or have the funds necessary to repurchase our
existing indebtedness.
On August 10, 2001, we and certain of our affiliates entered into a note
purchase agreement with Cascade Investment, L.L.C., pursuant to which Cascade
purchased $100 million in principal amount of a convertible promissory note.
Pursuant to the terms of the note, Cascade may require us, or upon a change in
control or Mr. Gabelli ceasing to provide our predominant executive leadership,
to repurchase the note (i.e., put option) at par plus accrued and unpaid
interest on the note. In March 2005, we amended the terms of the note. The new
terms extended the exercise date of Cascade's put option to September 15, 2006,
reduced the principal of the convertible note to $50 million, effective April 1,
2005, and removed limitations on the issuance of additional debt. In June 2006,
GBL and Cascade agreed to amend the terms of the note. Effective September 15,
2006, the rate on the note increased from 5% to 6% while the conversion price
was raised to $53 per share from $52 per share. 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 GBL the right to redeem the note at 101% of its principal amount
together with all accrued but unpaid interest thereon upon at least 30 days
prior written notice, subject to certain provisions.
If Cascade exercises its right under the note to require us to repurchase the
note, we may not be able to obtain new financing on similar terms to the note
and may not have sufficient funds, or we may not be able to arrange financing on
acceptable terms, to pay the repurchase price for the note. If we could not
obtain sufficient cash to repurchase the note, we would be in default on our
obligation under the note purchase agreement.
Our credit ratings affect our borrowing costs.
Our borrowing costs and our access to the debt capital markets depend
significantly on our credit ratings. A reduction in our credit ratings could
increase our borrowing costs and limit our access to the capital markets.
We face exposure to litigation within our business.
The volume of litigation against financial services firms and the amount of
damages claimed has increased over the past several years. The types of claims
that we may face are varied. For example, we may face claims against us for
purchasing securities that are inconsistent with a client's investment
objectives or guidelines, in connection with the operation of the Mutual Funds
or arising from an employment dispute. The risk of litigation is difficult to
assess or quantify, and may occur years after the activities or events at issue.
Even if we prevail in a legal action brought against us, the costs alone of
defending against the action could have a material adverse effect on us.
Compliance failures and changes in regulation could adversely affect us.
Our investment management activities are subject to client guidelines, and our
Mutual Fund business involves compliance with numerous investment, asset
valuation, distribution and tax requirements. A failure to adhere to these
guidelines or satisfy these requirements could result in losses which could be
recovered by the client from us in certain circumstances. Although we have
installed procedures and utilize the services of experienced administrators,
accountants and lawyers to assist us in adhering to these guidelines and
satisfying these requirements, and maintain insurance to protect ourselves in
the case of client losses, there can be no assurance that such precautions or
insurance will protect us from potential liabilities.
33
Our businesses are subject to extensive regulation in the United States,
including by the SEC and the NASD. We are also subject to the laws of non-U.S.
jurisdictions and non-U.S. regulatory agencies or bodies. Our failure to comply
with applicable laws or regulations could result in fines, suspensions of
personnel or other sanctions, including revocation of our registration or any of
our subsidiaries as an investment advisor or broker-dealer. Changes in laws or
regulations or in governmental policies could have a material adverse effect on
us. The regulatory matters described in the "Recent Regulatory Developments"
section above or other regulatory or compliance matters could also have a
material adverse effect on us.
Our reputation is critical to our success.
Our reputation is critical to maintaining and developing relationships with our
clients, Mutual Fund shareholders and third-party intermediaries. In recent
years, there have been a number of well-publicized cases involving fraud,
conflicts of interest or other misconduct by individuals in the financial
services industry. Misconduct by our staff, or even unsubstantiated allegations,
could result not only in direct financial harm but also harm to our reputation,
causing injury to the value of our brands and our ability to retain or attract
assets under management. In addition, in certain circumstances, misconduct on
the part of our clients or other parties could damage our reputation. Harm to
our reputation could have a material adverse effect on us.
We face strong competition from numerous and sometimes larger companies.
We compete with numerous investment management companies, stock brokerage and
investment banking firms, insurance companies, banks, savings and loan
associations and other financial institutions. Continuing consolidation in the
financial services industry has created stronger competitors with greater
financial resources and broader distribution channels than our own.
Additionally, competing securities dealers whom we rely upon to distribute our
mutual funds also sell their own proprietary funds and investment products,
which could limit the distribution of our investment products. To the extent
that existing or potential customers, including securities dealers, decide to
invest in or distribute the products of our competitors, the sales of our
products as well as our market share, revenues and net income could decline.
Fee pressures could reduce our profit margins.
There has been a trend toward lower fees in some segments of the investment
management industry. In order for us to maintain our fee structure in a
competitive environment, we must be able to provide clients with investment
returns and service that will encourage them to be willing to pay such fees.
Accordingly, there can be no assurance that we will be able to maintain our
current fee structure. Fee reductions on existing or future new business could
have an adverse impact on our profit margins and results of operations.
Risks Related to the Company
The disparity in the voting rights among the classes of shares may have a
potential adverse effect on the price of our class A common stock.
The holders of class A common stock and class B common stock have identical
rights except that (i) holders of class A common stock are entitled to one vote
per share, while holders of class B common stock are entitled to ten votes per
share on all matters to be voted on by shareholders in general, and (ii) holders
of class A common stock are not eligible to vote on matters relating exclusively
to class B common stock and vice versa. The differential in voting rights and
the ability of our company to issue additional class B common stock could
adversely affect the value of the class A common stock to the extent the
investors, or any potential future purchaser of our company, view the superior
voting rights of the class B common stock to have value.
Future sales of our class A common stock in the public market or sales or
distributions of our class B commons stock could lower our stock price, and any
additional capital raised by us through the sale of equity or convertible
securities may dilute our stockholders' ownership in us.
We may sell additional shares of class A common stock in subsequent public
offerings. We also may issue additional shares of class A common stock or
convertible debt securities. As of December 31, 2006, we had 7,487,018
outstanding shares of class A common stock. On September 1, 2006, a shelf
registration statement on Form S-3 was declared effective by the SEC for the
re-sale of up to 2,486,763 class A shares.
34
No prediction can be made as to the effect, if any, that future sales or
distributions of class B common stock owned by GGCP will have on the market
price of the class A common stock prevailing from time to time. Sales or
distributions of substantial amounts of class A or class B common stock , or the
perception that such sales or distributions could occur, could adversely affect
the prevailing market price for the class A common stock.
One section under Item 1A. Risk Factors
We reported two material weaknesses in our internal controls over financial
reporting in 2006. Failure to properly remediate these material weaknesses could
negatively impact our business and the price of our common stock.
We concluded that these material weaknesses existed in our internal control over
financial reporting. First, there was a material weakness relating to the
reporting of individual assets and liabilities of certain proprietary investment
accounts in the consolidated financial statements. Next, there was a material
weakness relating to the evaluation of and accounting for certain non-routine
transactions in accordance with U.S. generally accepted accounting principles.
We have remediated the first material weakness by implementing a new procedure
to review the accounting treatment for all of the Company's proprietary
investments on a regular basis and are in the process of remediating the second
material weakness.
We cannot assure you that our disclosure controls, procedures
and internal controls over financial reporting required under Section 404 of the
Sarbanes-Oxley Act will prove to be adequate in the future. Our failure to
properly remediate these material weaknesses could negatively impact our
business and the price of our common stock.
ITEM 1B: UNRESOLVED STAFF COMMENTS
None.
ITEM 2: PROPERTIES
At December 31, 2006, we leased our principal offices which consisted of a
single 60,000 square foot building located at 401 Theodore Fremd Avenue, Rye,
New York. This building was leased in December 1997 (prior to our 1999 IPO) from
an entity controlled by members of Mr. Gabelli's immediate family, and
approximately 9,000 square feet are currently subleased to other tenants. We
receive rental payments under the sublease agreements, which totaled
approximately $261,000 in 2006 and were used to offset operating expenses
incurred for the property. The lease provides that all operating expenses
related to the property, which are estimated at $740,000 annually, are to be
paid by us.
We have also entered into leases for office space in both the U.S. and overseas
principally for portfolio management, research, sales and marketing personnel.
These offices are generally less than 4,000 square feet and leased for periods
of five years or less.
ITEM 3: LEGAL PROCEEDINGS
From time to time, we are a defendant in various lawsuits incidental to our
business. We do not believe that the outcome of any current litigation will have
a material effect on our financial condition.
Since September 2003, we have been cooperating with inquiries from the NYAG 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, GBL
recorded a reserve against earnings of approximately $15 million in 2006. 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 GBL related to such a settlement, or
whether and to what extent insurance may cover such payments.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders during the fourth
quarter of 2006.
35
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Our shares of class A common stock have been traded on the New York Stock
Exchange ("NYSE") under the symbol GBL since our initial public offering on
February 11, 1999. Prior to that, there was no public market for our common
stock.
As of March 1, 2007, there were 64 class A common stockholders of record and 14
class B common stockholders of record. These figures do not include stockholders
with shares held under beneficial ownership in nominee name, which are estimated
to be approximately 2,000.
The following table sets forth the high and low prices of our class A common
stock for each quarter of 2006 and 2005 as reported by the NYSE.
Quarter Ended High Low
March 31, 2006 $ 49.05 $ 38.80
June 30, 2006 $ 42.50 $ 32.82
September 30, 2006 $ 39.94 $ 33.62
December 31, 2006 $ 40.50 $ 36.49
March 31, 2005 $ 49.20 $ 43.60
June 30, 2005 $ 46.03 $ 38.60
September 30, 2005 $ 48.55 $ 41.88
December 31, 2005 $ 47.88 $ 42.23
We paid our first dividend, a $.02 per share dividend, on December 15, 2003 to
our class A shareholders of record December 1, 2003. Our class B shareholders
elected to waive receipt of this dividend.
In 2004, we paid $1.16 per share in dividends to our common shareholders. This
included three quarterly dividends of $0.02 per share on June 30, 2004,
September 30, 2004 and December 28, 2004 to all shareholders of record on June
15, 2004, September 15, 2004 and December 14, 2004, respectively. We also paid
two special dividends, a $0.10 per share dividend on June 30, 2004 to all
shareholders of record on June 15, 2004 and a $1.00 per share dividend on
November 30, 2004 to class A shareholders of record on November 15, 2004 and on
December 23, 2004 to our class B shareholders of record on that date.
In 2005, we paid $0.69 per share in dividends to our common shareholders. This
included three quarterly dividends of $0.02 per share on March 28, 2005, June
28, 2005, September 28, 2005 to all shareholders of record on March 14, 2005,
June 15, 2005 and September 15, 2005, respectively and a quarterly dividend of
$0.03 per share on December 28, 2005 to all shareholders of record on December
15, 2005. We also paid a special dividend of $0.60 per share on January 18, 2005
to all shareholders of record on January 3, 2005.
In 2006, we paid $0.12 per share in dividends to our common shareholders. This
included four quarterly dividends of $0.03 per share on March 28, 2006, June 28,
2006, September 28, 2006, and December 26, 2006, respectively, to all
shareholders of record on February 7, 2006, May 9, 2006, August 8, 2006, and
November 13, 2006, respectively.
In June 2006, the holders of 2,347,473 Class B shares exchanged their B shares
for an equal number of Class A shares. Subsequently, the holders of 109,884
Class B shares have exchanged their B shares for an equal number of Class A
shares.
The information set forth under the caption "Equity Compensation Plan
Information" in the Proxy Statement is incorporated herein by reference.
36
The following table provides information with respect to the shares of our class
A common stock we repurchased during the three months ended December 31, 2006:
(d) Maximum Number
of Shares (or
(c) Total Number of Approximate Dollar
Shares Repurchased Value) That May Yet
(a) Total Number (b) Average Price as Part of Be Purchased Under
of Shares Paid Per Share, net Publicly Announced the Plans or
Period Repurchased of Commissions Plans or Programs Programs
--------------------------------------------------------------------------------------------------
10/01/06 - 10/31/06 - - - 652,461
11/01/06 - 11/30/06 - - - 1,052,461
12/01/06 - 12/31/06 4,700 $37.91 4,700 1,047,761
---------------- -------------------
Totals 4,700 4,700
================ ===================
In November 2006, we announced an increase in the number of shares of GBL to be
repurchased of 400,000 shares. Our stock repurchase program is not subject to an
expiration date.
We are required by the Securities and Exchange Commission to provide you with a
comparison of the cumulative total return on our class A common stock as of
December 31, 2006 with that of a broad equity market index and either a
published industry index or a peer group index selected by us. The following
chart compares the return on the class A common stock with the return on the S&P
500 Index, Russell 2000 Index and an index comprised of public companies with
the Standard Industrial Classification (SIC) Code 6282, Investment Advice. We
have elected to use the S&P 500 Index in place of the Russell 2000 Index as our
broad market index. We view the S&P 500 Index as a more widely recognized
benchmark of U.S. equity market performance. The comparison assumes that
$100 was invested in the class A common stock and in each of the named indices,
including the reinvestment of dividends, on December 31, 2001. This chart is not
intended to forecast future performance of our common stock.
[TOTAL RETURN COMPARISON GRAPH]
Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31,
2001 2002 2003 2004 2005 2006
---------- ---------- ---------- ---------- ---------- ----------
GAMCO Investors, Inc. 100.00 69.54 92.18 116.61 104.82 92.90
SIC Code Index 100.00 78.23 103.13 132.63 165.57 215.88
S&P 500 Index 100.00 76.85 97.71 109.92 115.32 133.54
Russell 2000 Index 100.00 78.42 114.00 133.94 138.40 162.02
37
Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31,
2001 2002 2003 2004 2005 2006
--------- --------- --------- --------- --------- ---------
GAMCO Investors, Inc. 100.00 69.54 92.18 116.61 104.82 92.90
SIC Code Index 100.00 78.23 103.13 132.63 165.57 215.88
S&P 500 Index 100.00 76.85 97.71 109.92 115.32 133.54
Russell 2000 Index 100.00 78.42 114.00 133.94 138.40 162.02
The following table shows information regarding outstanding options and shares
reserved for future issuance under our equity compensation plans as of December
31, 2006.
Number of Securities
Remaining Available for
Number of Securities Future Issuance under
to be Issued upon Weighted-Average Equity Compensation
Exercise of Exercise Price of Plans (Excluding
Outstanding Options, Outstanding Options, Securities Reflected in
Plan Category Warrants and Rights Warrants and Rights the First Column
Equity compensation plans approved by
security holders.................... 193,075 $31.77 1,244,775
Equity compensation plans not
approved by security holders........ -0- -0- -0-
Total................................. 193,075 $31.77 1,244,775
ITEM 6: SELECTED FINANCIAL DATA
General
The selected historical financial data presented below has been derived in part
from, and should be read in conjunction with Management's Discussion and
Analysis included in Item 7 and the audited Consolidated Financial Statements of
GAMCO Investors, Inc. and subsidiaries and related notes included in Item 8 of
this report.
Year Ended December 31,
(In thousands, except per share data)
2002 (a) 2003 (a) 2004 (a) 2005 (a) 2006
---------- ---------- ---------- ---------- ----------
Income Statement Data
Revenues:
Investment advisory and
incentive fees $177,073 $175,195 $220,561 $220,464 $227,005
Commission revenue 13,883 12,863 15,573 12,195 12,188
Distribution fees and other
income 18,999 17,631 19,651 20,673 22,270
---------- ---------- ---------- ---------- ----------
Total revenues 209,955 205,689 255,785 253,332 261,463
---------- ---------- ---------- ---------- ----------
Expenses:
Compensation costs 79,820 86,998 103,837 106,966 106,646
Management fee 9,533 8,961 11,023 11,380 12,771
Distribution costs 16,164 16,510 20,347 21,512 25,782
Other operating expenses 14,774 18,872 21,455 26,665 44,103
---------- ---------- ---------- ---------- ----------
Total expenses 120,291 131,341 156,662 166,523 189,302
---------- ---------- ---------- ---------- ----------
Operating income 89,664 74,348 99,123 86,809 72,161
---------- ---------- ---------- ---------- ----------
Other income (expense), net:
Net gain from investments 1,353 15,610 5,627 10,912 41,737
Interest and dividend income 6,757 5,530 10,481 18,483 29,382
Interest expense (11,977) (14,838) (16,027) (13,782) (14,226)
---------- ---------- ---------- ---------- ----------
Total other income
(expense), net (3,867) 6,302 81 15,613 56,893
---------- ---------- ---------- ---------- ----------
Income before income taxes and
minority interest 85,797 80,650 99,204 102,422 129,054
Income taxes 32,260 30,201 36,118 38,408 49,278
Minority interest 224 816 495 498 10,258
---------- ---------- ---------- ---------- ----------
Net income $53,313 $ 49,633 $ 62,591 $ 63,516 $ 69,518
===================== ========== ========== ==========
Net income per share:
Basic $ 1.77 $ 1.65 $ 2.11 $ 2.13 $ 2.44
========== ========== ========== ========== ==========
Diluted $ 1.76 $ 1.65 $ 2.06 $ 2.10 $ 2.40
========== ========== ========== ========== ==========
Weighted average shares
outstanding:
Basic 30,092 30,018 29,673 29,805 28,542
========== ========== ========== ========== ==========
Diluted 30,302 32,081 31,804 31,155 29,525
========== ========== ========== ========== ==========
Actual shares outstanding at
December 31st 29,881 30,050 28,837 29,543 28,241
========== ========== ========== ========== ==========
Dividends declared $ - $ 0.02 $ 1.76 $ 0.09 $ 0.12
========== ========== ========== ========== ==========
-
(a) Restated as described in note A of item 8 of this report on Form 10-K.
38
December 31,
2002 (a) 2003 (a) 2004 (a) 2005 (a) 2006
----------- ----------- ----------- ----------- -----------
(In thousands)
Balance Sheet Data
Total assets $ 582,727 $ 734,759 $ 697,842 $ 728,138 $ 837,231
Total liabilities and minority
interest 260,933 356,658 363,142 304,063 388,490
----------- ----------- ----------- ----------- -----------
Total stockholders' equity $ 321,794 $ 378,101 $ 334,700 $ 424,075 $ 448,741
=========== =========== =========== =========== ===========
December 31,
2002 2003 2004 2005 2006
----------- ----------- ----------- ----------- -----------
(In millions)
Assets Under Management (unaudited)
(at year end, in millions):
Mutual Funds $ 10,068 $ 13,332 $ 13,870 $ 13,698 $ 14,939
Institutional & HNW
Separate Accounts
Direct 7,989 9,610 10,269 9,634 10,332
Sub-advisory 2,614 3,925 3,706 2,832 2,340
Investment Partnerships 578 692 814 634 491
----------- ----------- ----------- ----------- -----------
Total $ 21,249 $ 27,559 $ 28,659 $ 26,798 $ 28,102
=========== =========== =========== =========== ===========
(a) Restated as described in note A of item 8 of this report on Form 10-K.
39
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements and the notes thereto included in Item 8 to this report.
Introduction
GAMCO Investors, Inc. (NYSE: GBL) is a widely-recognized provider of investment
advisory services to mutual funds, institutional and high net worth investors,
and investment partnerships. The Gabelli brand represents our absolute return,
research driven value style that focuses on our unique Private Market Value
(PMV) with a CatalystTM investment approach. In addition to our value products,
we offer our clients a broad array of investment strategies under the GAMCO
brand that include growth, international, convertible, non-market correlated,
and fixed income products. Through Gabelli & Company, Inc., we provide our
institutional equity research reports and services to institutional clients and
investment partnerships.
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
equity research. By earning returns for our clients, we will be earning returns
for all our constituents. We generally manage assets on a discretionary basis
and invest in a variety of U.S. and international securities.
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. As part
of this initiative, the directors of our mutual funds approved (November 2005)
the name change of the Growth, the Global Series, Gold, International Growth,
and Mathers to GAMCO from Gabelli, which became effective in December 2005. The
funds that reflect the Private Market Value (PMV) with a CatalystTM approach
will continue under the Gabelli brand.
Our revenues are highly correlated to the level of assets under management and
fees associated with our various investment products, rather than our own
corporate assets. Assets under management, which are directly influenced by the
level and changes of the overall equity markets, can also fluctuate through
acquisitions, the creation of new products, the addition of new accounts or the
loss of existing accounts. Since various equity products have different fees,
changes in our business mix may also affect revenues. At times, the performance
of our equity products may differ markedly from popular market indices, and this
can also impact our revenues. It is our belief that general stock market trends
will have the greatest impact on our level of 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.
Overview
Material Weaknesses
As discussed in Item 9A. of this report on Form 10-K, management concluded that
the following material weaknesses existed in the Company's internal control over
financial reporting at December 31, 2006 and disclosed this to the Audit
Committee and to the independent registered public accountants. Management did
not have adequate controls in place to ensure that there was no more than a
remote likelihood that a material misstatement of the annual or interim
financial statements would be prevented or detected as it relates to two items.
First, there was a material weakness relating to the reporting of individual
assets and liabilities of certain proprietary investment accounts in the
consolidated financial statements. Next, there was a material weakness relating
to the evaluation of and accounting for certain non-routine transactions in
accordance with U.S. generally accepted accounting principles. All required
adjustments were made to the December 31, 2006 consolidated financial statements
prior to issuance.
As a result of the first material weakness, the Company restated its
consolidated statement of financial condition as of December 31, 2005. In the
consolidated statement of financial condition, the assets and liabilities
(primarily short positions and margin) associated with these proprietary
investments were reported on a net basis, rather than reported on a gross basis.
The effects of the restatement on the December 31, 2005 consolidated statement
of financial position are as follows: Cash and cash equivalents, investments in
securities, receivable from brokers and other assets increased by $2.5 million,
$20.4 million, $1.3 million and $0.1 million, respectively, and investments in
partnerships and affiliates decreased by $17.1 million for a net increase in
total assets of $7.2 million. Accrued expenses and other liabilities, payable to
brokers, and securities sold, not yet purchased increased by $0.1 million, $3.9
million and $3.2 million, respectively, for a total increase in liabilities of
$7.2 million.
Material Weakness
As financial analysts, we would like to have available all financial data that
helps evaluate a security - plus some. Today, under Reg FD, selected data that
we could use in our analysis of a company is clothed - more than fully.
As for GBL, one of our strengths - pound for pound - is the brainpower and
experience of our professional team. Add to that a strong balance sheet, a
passion for investing and a commitment to the client first, second and third and
you have insight into (y)our team. Yet this asset - accumulated over thirty
years - with proven investment results and proven financial acumen is not on our
balance sheet.
The Accounting
About two years ago, we started incubating a financial product managed by an
investment professional of our firm. If successful, and we had expectations it
would be, we could add to our investment options offered to our extended client
base.
40
As the results unfolded better than we expected, we kept adding to the size of
our investment.
Now The Twist
Internally, we ask - how is the investment alternative working? We tracked
results daily.
Approximately $5 million was in this product at January 2006. By year-end, $22
million was invested. The increase was aided by an enlarged investment from us
and quality, i.e., risk adjusted performance.
Since the product, with our knowledge, uses leverage - not ten or fifteen times
- but three times to generate returns, it adds to "gross assets." At year-end,
the accounting footings were assets of $52 million consisting of $30 million of
high yield debt, $20 million of convertible bonds and preferreds and equities of
$2 million long and $7 million short plus $23 million of margin borrow. Instead
of carrying these numbers on our balance sheet, we carried the net figure.
This isolated portfolio will continue to use leverage. And it will grow.
Moreover, as it is repackaged and offered to clients, we will then be able to
return to account to our own shareholders, the net investment. All will be
consistent with U.S. generally accepted accounting principles.
Material Weakness
From an accounting point of view, our initial classification of reporting the
alternative vehicle was wrong. We share with you in the following table the
adjusted results:
000's 12/31/2005 3/31/2006 6/30/2006 9/30/2006
------------- ------------- ------------- -------------
Assets:
-Reported (a) $ 720,938 $ 734,892 $ 725,244 $ 754,448
-Gross 728,138 742,972 740,056 777,464
------------- ------------- ------------- -------------
-Difference 7,200 8,080 14,812 23,016
Operating
Liabilities:
-Reported (a) 58,408 72,228 71,843 83,891
-Gross 65,608 80,308 86,655 106,907
------------- ------------- ------------- -------------
-Difference 7,200 8,080 14,812 23,016
Total Liabilities:
-Reported (a) 290,716 304,536 304,151 316,199
-Gross 297,916 312,616 318,963 339,215
------------- ------------- ------------- -------------
-Difference 7,200 8,080 14,812 23,016
Equity:
-Reported 424,075 410,359 401,453 418,031
-Gross 424,075 410,359 401,453 418,031
------------- ------------- ------------- -------------
-Difference $ - $ - $ - $ -
(a) on a net basis - non-GAAP
Changes in Accounting Policy
GBL has voluntarily changed its accounting method to recognize management fee
revenues on assets attributable to closed-end preferred shares at the end of the
measurement period, effective January 1, 2006. Unlike most money management
firms, GBL 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. Prior to the accounting
change, GBL 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.
In addition, GBL has changed its accounting method to recognize incentive
allocation or fee revenues on investment partnerships at the end of the
measurement period, effective January 1, 2006. Prior to the accounting change,
GBL recognized these revenues during each interim reporting period. Under this
method, incentive fee revenues recognized in prior interim periods during the
41
measurement period were subject to possible reversal in subsequent periods
during the measurement period. Had this method not changed, we would have
recorded approximately $0.1 million less in incentive fee revenues on investment
partnerships for the year ended December 31, 2006.
After considering the guidance provided in EITF D-96, "Accounting for Management
Fees Based on Formula", GBL 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.
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 GBL 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 GBL's fiscal year-end, there is an adjustment for
the cumulative effect of a change to the accounting principle at January 1,
2004. Such cumulative effect of change in accounting amounted to $210,000 as of
January 1, 2004 which is presented in the consolidated statement of
stockholder's equity. Additionally, there is a change in full year 2004 and 2005
revenues and net income from what was previously reported. Therefore, this
change in accounting principle resulted in an increase of revenues of
approximately $0.6 million and $1.0 million in 2004 and 2005, respectively, an
increase in net income of approximately $32,000 and $125,000, respectively and
an increase in earnings per share of $0.00 and $0.01 in 2004 and 2005,
respectively. In 2006, if the policy had not changed, revenue and net income
would have been decreased by approximately $0.1 million and $35,000
respectively, and there would have been no effect on earnings per share.
Consolidated Statements of Income
Investment advisory and incentive fees, which are based on the amount and
composition of assets under management in our Mutual Funds, Separate Accounts
and Investment Partnerships, represent our largest source of revenues. In
addition to the general level and trends of the stock market, growth in revenues
depends on good investment performance, which influences the value of existing
assets under management as well as contributes to higher investment and lower
redemption rates and facilitates the ability to attract additional investors
while maintaining current fee levels. Growth in assets under management is also
dependent on being able to access various distribution channels, which is
usually based on several factors, including performance and service.
Historically, we have depended primarily on direct distribution of our products
and services but since 1995 have participated in Third-Party Distribution
Programs, including NTF Programs. A majority of our cash inflows to mutual fund
products have come through these channels since 1998. The effects of this on our
future financial results cannot be determined at this time but could be
material. In recent years, we have been engaged to act as a sub-advisor for
other much larger financial services companies with much larger sales
distribution organizations. A substantial portion of the cash flows into our
Separate Accounts has come through this channel. These sub-advisory clients are
subject to business combinations that may result in the termination of the
relationship. The loss of a sub-advisory relationship could have a significant
impact on our financial results in the future.
Advisory fees from the open-end mutual funds, closed-end funds and sub-advisory
accounts are computed daily or weekly based on average net assets. Advisory fees
from the Separate Accounts are generally computed quarterly based on account
values as of the end of the preceding quarter and accrued monthly. Management
fees from Investment Partnership fees are computed either monthly or quarterly
and accrued monthly. These revenues vary depending upon the level of sales
compared with redemptions, financial market conditions and the fee structure for
assets under management. Revenues derived from the equity-oriented portfolios
generally have higher management fee rates than fixed income portfolios.
Revenues from Investment Partnerships also generally include an incentive
allocation or fee of 20% of the economic profit, as defined. The incentive
allocation is generally based on the absolute gain in a portfolio. We recognize
revenue only when the measurement period has been completed and when the
management fees and incentive fees have been earned. We also receive fulcrum
fees from certain institutional separate accounts, which are based upon meeting
or exceeding specific benchmark index or indices. These fees are recognized at
the end of the stipulated contract period for the respective account. Management
fees on assets attributable to closed-end preferred shares are earned at
year-end if the total return to common shareholders of the closed-end fund for
the calendar year exceeds the dividend rate of the preferred shares. These fees
are recognized at the end of the stipulated contract period. A total of $1.2
billion of assets in closed-end funds are subject to such arrangements.
42
Commission revenues consist of brokerage commissions derived from securities
transactions executed on an agency basis on behalf of mutual funds,
institutional and high net worth clients as well as investment banking revenue,
which consists of underwriting profits, selling concessions and management fees
associated with underwriting activities. Commission revenues vary directly with
account trading activity and new account generation. Investment banking revenues
are directly impacted by the overall market conditions, which affect the number
of public offerings which may take place.
Distribution fees and other income primarily include distribution fee revenue in
accordance with Rule 12b-1 ("12b-1") of the Investment Company Act of 1940, as
amended (the "Investment Company Act"), along with sales charges and
underwriting fees associated with the sale of the Mutual Funds plus other
revenues. Distribution fees fluctuate based on the level of assets under
management and the amount and type of Mutual Funds sold directly by Gabelli &
Company and through various distribution channels.
Compensation costs include variable and fixed compensation and related expenses
paid to officers, portfolio managers, sales, trading, research and all other
professional staff. Other operating expenses include marketing, product
distribution and promotion costs, clearing charges and fees for Gabelli &
Company's brokerage operation, and other general and administrative operating
costs.
Other income and expenses include net gain from investments (which includes both
realized and unrealized gains), interest and dividend income, and interest
expense. Net gain from investments is derived from our proprietary investment
portfolio consisting of various public and private investments.
Minority interest represents the share of net income attributable to the
minority stockholders, as reported on a separate company basis, of our
consolidated majority-owned subsidiaries and for certain partnerships and
offshore funds whose net income we consolidate under FIN-46 and EITF 04-5.
Please refer to Note C in our Consolidated Financial Statements.
Consolidated Statements of Financial Condition
We ended 2006 with approximately $729.0 million in cash and investments, which
is net of $16.0 million of cash and investments held by our consolidated
investment partnerships. This included approximately $102.0 million of our
investments in The Gabelli Dividend & Income Trust, The Gabelli Global Utility &
Income Trust, Westwood Holdings Group, various Gabelli and GAMCO open-end mutual
funds as well as other investments classified as "available for sale securities"
for accounting purposes but should be viewed as highly illiquid because of
restrictions. Our debt of $231.8 million consisted of $100 million of 5.5%
senior notes due May 2013, a $49.5 million 6% convertible note due August 2011,
and $82.3 million of 5.22% senior notes due February 17, 2007. We had cash and
investments, net of debt and minority interest of $17.42 per share, excluding
cash and investments held by our consolidated investment partnerships, on
December 31, 2006, compared with $14.79 per share on December 31, 2005.
Stockholders' equity was $448.7 million or $15.89 per share on December 31, 2006
compared to $424.1 million or $14.35 per share on December 31, 2005. The
increase in stockholder's equity from the end of 2005 was principally related to
a $79.4 million increase in total comprehensive income, which was partially
offset by our purchase of treasury stock during 2006 of $54.6 million.
Our liquid balance sheet, coupled with an investment grade credit rating,
provides access to financial markets and the flexibility to opportunistically
add operating resources to our firm, repurchase our stock and consider strategic
initiatives. As a result of a shelf registration which was filed in June 2005
and which became effective in the third quarter of 2006, we have the right to
issue any combination of senior and subordinate debt securities, convertible
debt securities and equity securities (common and/or preferred securities) up to
a total amount of $520 million, including the remaining $120 million available
under our initial shelf registration filed in 2001.
Our primary goal is to use our liquid resources to opportunistically and
strategically convert our interest income to operating income. While this goal
is our priority, if opportunities are not present with what we consider a margin
of safety, we will consider other ways to return capital to our shareholders
including stock repurchase and dividends.
43
Asset Highlights
We reported assets under management as follows (dollars in millions):
% Inc(Dec)
2002 2003 2004 2005 2006 2006/2005 CAGR (a)
-------- -------- -------- -------- -------- ---------- -------------
Mutual Funds
Open-End $ 6,482 $ 8,088 $ 8,029 $ 7,888 $ 8,389 6.4% 0.1%
Closed-End 1,609 3,530 4,342 5,075 5,806 14.4 26.0
Fixed Income 1,977 1,714 1,499 735 744 1.2 (16.1)
-------- -------- -------- -------- --------
Total Mutual Funds 10,068 13,332 13,870 13,698 14,939 9.1 4.6
Institutional & Separate Accounts
Equities: direct 7,376 9,106 9,881 9,550 10,282 7.7 3.0
" sub-advisory 2,614 3,925 3,706 2,832 2,340 (17.4) (2.5)
Fixed Income 613 504 388 84 50 (40.5) (41.3)
-------- -------- -------- -------- --------
Total Institutional & Separate
Accounts 10,603 13,535 13,975 12,466 12,672 1.7 0.7
Investment Partnerships 578 692 814 634 491 (22.6) (3.0)
-------- -------- -------- -------- --------
Total Assets Under Management $21,249 $27,559 $28,659 $26,798 $28,102 4.9 2.6
======== ======== ======== ======== ========
(a) the % CAGR is computed for the five year period January 1, 2002 through
December 31, 2006
Net outflows in 2006 totaled $3.0 billion compared to net outflows of $2.3
billion and $1.7 billion in 2005 and 2004, respectively.
Total net outflows from equities products were approximately $2.9 billion in
2006, and net outflows from fixed income products were $0.1 billion in 2006.
For the three years ended December 31, 2004, 2005 and 2006 our net cash inflows
and outflows by product line were as follows (in millions):
2004 2005 2006
----------- ----------- -----------
Mutual Funds
Equities $ (261) $ 167 $ (802)
Fixed Income (228) (788) (18)
----------- ----------- -----------
Total Mutual Funds (489) (621) (820)
----------- ----------- -----------
Institutional & HNW Separate Accounts
Equities: direct (416) (310) (807)
" sub-advisory (762) (845) (1,057)
Fixed Income (125) (310) (36)
----------- ----------- -----------
Total Institutional & HNW Separate Accounts (1,303) (1,465) (1,900)
----------- ----------- -----------
Investment Partnerships
Equities 92 (208) (236)
Fixed Income - - -
----------- ----------- -----------
Total Investment Partnerships 92 (208) (236)
----------- ----------- -----------
Total Equities (1,347) (1,196) (2,902)
Total Fixed Income (353) (1,098) (54)
----------- ----------- -----------
Total Net Cash In (Out) Flows $ (1,700) $ (2,294) $ (2,956)
=========== =========== ===========
44
For the three years ended December 31, 2004, 2005 and 2006 our net appreciation
and depreciation by product line were as follows (in millions):
2004 2005 2006
----------- ----------- -----------
Mutual Funds
Equities $ 1,015 $ 425 $ 2,034
Fixed Income 12 25 27
----------- ----------- -----------
Total Mutual Funds 1,027 450 2,061
----------- ----------- -----------
Institutional & HNW Separate Accounts
Equities: direct 1,191 (22) 1,539
" sub-advisory 543 (29) 565
Fixed Income 9 6 2
----------- ----------- -----------
Total Institutional & HNW Separate Accounts 1,743 (45) 2,106
----------- ----------- -----------
Investment Partnerships
Equities 30 28 93
Fixed Income - - -
----------- ----------- -----------
Total Investment Partnerships 30 28 93
----------- ----------- -----------
Total Equities 2,779 402 4,231
Total Fixed Income 21 31 29
----------- ----------- -----------
Total Net Appreciation $ 2,800 $ 433 $ 4,260
=========== =========== ===========
Assets Under Management (AUM) were $28.1 billion as of December 31, 2006, 4.9%
greater than December 31, 2005 AUM of $26.8 billion. Equity assets under
management were a record $27.3 billion on December 31, 2006, 5.1% above the
$26.0 billion on December 31, 2005.
- Our closed-end equity funds reached record AUM of $5.8 billion on December
31, 2006, up 14.4% than the $5.1 billion on December 31, 2005.
- Our open-end equity fund AUM were $8.4 billion on December 31, 2006, a 6.3%
gain from the $7.9 billion level on December 31, 2005.
- Our institutional and high net worth business had $12.6 billion in
separately managed equity accounts under management on December 31, 2006,
1.9% above the $12.4 billion on December 31, 2005.
- Our Investment Partnerships AUM were $491 million on December 31, 2006
versus $634 million on December 31, 2005.
- Fixed income AUM, primarily money market mutual funds, totaled $794 million
on December 31, 2006, 3.1% lower than AUM of $819 million on December 31,
2005.
45
Operating Results for the Year Ended December 31, 2006 as Compared to the Year
Ended December 31, 2005
Revenues
Total revenues were $261.5 million in 2006, $8.2 million or 3.2% higher than the
total revenues of $253.3 million in 2005. The increase in total revenues by
revenue component was as follows (in millions):
Increase (decrease)
-------------------
2005 (a) 2006 $ %
--------- --------- --------- ---------
Investment advisory and incentive fees $ 220.4 $ 227.0 $ 6.6 3.0%
Commissions 12.2 12.2 - -
Distribution fees and other income 20.7 22.3 1.6 7.7
--------- --------- ---------
Total revenues $ 253.3 $ 261.5 $ 8.2 3.2
========= ========= =========
(a) Restated as described in note A of item 8 of this report on Form 10-K.
Investment Advisory and Incentive Fees: Investment advisory and incentive fees,
which comprised 86.8% of total revenues in 2006, are directly influenced by the
level and mix of assets under management ("AUM"). At December 31, 2006, AUM were
$28.1 billion, a 4.9% increase from prior year-end AUM of $26.8 billion. Our
equity AUM were $27.3 billion on December 31, 2006 versus $26.0 billion on
December 31, 2005. Increases in open-end and closed-end fund assets ($1.2
billion), principally the result of market appreciation during fourth quarter
2006 and a slight increase in separate account and institutional assets ($206
million) were slightly offset by a decreases in AUM in our investment
partnerships ($143 million). Our fixed income assets decreased slightly to $794
million at year-end 2006 from $819 million at the end of 2005.
Mutual fund revenues increased $11.1 million or 9.0%, driven by record breaking
revenues from closed-end funds and slightly increased revenues from open-end
equity mutual funds. Closed-end fund revenues increased $10.2 million, or 23.7%,
from the prior year to $53.6 million. Revenue from open-end equity funds
increased $0.8 million or 1.0% from the prior year as average AUM in 2006 rose
$0.2 billion to $8.0 billion from the $7.8 billion in 2005.
Revenue from Separate Accounts decreased $1.7 million, or 2.1%, principally due
to lower average asset levels, which was partially offset by a $4.6 million
increase in fulcrum fees earned on certain accounts. Assets in our equity
Separate Accounts increased $0.2 billion or 1.9% for the year to $12.6 billion.
Total advisory fees from Investment Partnerships fell to $12.0 million in 2006
from $14.8 million in 2005. Incentive allocations and fees from investment
partnerships, which generally represent 20% of the economic profit, increased to
$7.7 million in 2006 compared to $7.1 million in 2005 but were more than offset
by a decrease in management fees to $4.3 million in 2006 from $7.7 million in
2005.
Commissions: Commission revenues in 2006 were $12.2 million, remaining level
with commission revenues of $12.2 million in 2005. Commission revenues derived
from transactions on behalf of our Mutual Funds and Separate Account clients
totaled $9.4 million, or approximately 77% of total commission revenues in 2006.
Distribution Fees and Other Income: Distribution fees and other income increased
7.7%, or $1.6 million, to $22.3 million in 2006 from 2005. The increase was
primarily due to higher distribution fees of $20.6 million 2006 versus $19.4
million for the prior year, principally as a result of an increase in average
AUM due to our increased wholesaling of funds sold through unaffiliated broker
dealers.
Expenses Compensation: Compensation costs, which are largely variable in nature,
decreased approximately $0.3 million, or 0.3%, to $106.6 million in 2006 from
$107.0 million in 2005. Our variable compensation costs decreased $1.4 million
to $76.8 million in 2006 from $78.2 million in 2005 and decreased, as a percent
of revenues, to 29.3% in 2006 compared to 30.9% in 2005. The decrease in total
variable compensation costs is principally due to a reversal of previously
accrued compensation relating to our Investment Partnerships ($3.8 million) and
lower variable compensation costs related to Investment Partnerships and
Separate Accounts (a decrease of $1.8 million) partially offset by higher
revenues from Mutual Funds and increased commission payouts (an increase of $4.2
million). The decrease, as a percent of revenues, is due to the reversal of
previously accrued compensation relating to our Investment Partnerships and a
shift in revenue mix from Investment Partnerships to Separate Accounts and
Mutual Funds. Fixed compensation costs rose approximately $1.1 million to $29.9
million in 2006 from $28.8 million in 2005 principally due to increases in
salaries and bonuses, partially offset by reduced stock option expense.
46
Management Fee: Management fee expense is incentive-based and entirely variable
compensation in the amount of 10% of the aggregate pre-tax profits which is paid
to Mr. Gabelli for acting as CEO pursuant to his Employment Agreement so long as
he is an executive of GBL and devoting the substantial majority of his working
time to the business. In 2006, management fee expense increased 12.2% to $12.8
million versus $11.4 million in 2005.
Distribution Costs: Distribution costs, which include marketing, promotion and
distribution costs increased $4.3 million or 19.8% in 2006 from the 2005 period.
This increase relates primarily to the voluntary prepayment of distribution
expenses of $4.2 million in connection with a closed-end fund, The Gabelli
Dividend & Income Trust, and continuing distribution costs increases to $1.2
million in 2006 from the 2005 period.
Other Operating Expenses: Our ongoing other operating expenses were $27.6
million in 2006 compared to $26.7 million in 2005. However, total other
operating expenses increased 65.2% in 2006 as a result of a reserve against
earnings of approximately $15.0 million relating to the proposed settlement of
an SEC inquiry, an increase in operating expenses of $1.0 million due to the
funding of the Graham & Dodd, Murray, Greenwald Prize for Value Investing, and
other donations of approximately $0.5 million. We cannot determine at this time
whether our reserves will be sufficient to cover any payments by the Company
related to such a settlement, or whether and to what extent insurance may cover
such payments.
Other Income and Expense
Our proprietary investment portfolio consists of investments in mutual funds,
U.S. treasury bills, common stocks as well as other investments including
limited partnerships and offshore funds. Net gain from investments increased to
$41.7 million for the year ended December 31, 2006 compared to $10.9 million in
2005. Of the increase, $17.3 million was primarily due to improved investment
results and $13.5 million of the increase was due to the consolidation of
certain partnerships and offshore funds that are not expected to be consolidated
in future periods in accordance with FASB Interpretation No. 46R ("FIN 46R") and
Emerging Issue Task Force 04-5 ("EITF 04-5") in 2006.
Interest and dividend income was $29.4 million in 2006 compared to $18.5 million
in 2005.
Interest expense increased $0.4 million to $14.2 million in 2006, from $13.8
million in 2005. The increase is a result of changes to the terms of our $50
million convertible note with Cascade Investments L.L.C. ("Cascade"). In June
2006, GBL and Cascade agreed to amend the terms of the $50 million convertible
note maturing in August 2011. Effective September 15, 2006, the rate on the note
increased from 5% to 6% while the conversion price was raised to $53 per share
from $52 per share. 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 GBL 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.
Income Taxes
The effective tax rate for 2006 was 38.2% compared to 37.5% in the prior year.
Excluding the tax effects of the reserve against earnings as described above,
the effective tax rate was 37.1%.
Minority Interest
Minority interest expense was $10.3 million in 2006 compared to $0.5 million in
2005. The increase was primarily due to the earnings from our Investment
Partnerships, which were consolidated into our results for year ended December
31, 2006 as a result of FIN 46R and EITF 04-5, and income from investments at
our 92%-owned subsidiary, Gabelli Securities, Inc.
Net Income
Net income for 2006 was $69.5 million or $2.40 per fully diluted share versus
$63.5 million or $2.10 per fully diluted share for 2005.
Operating Margin
For the full year ended December 31, 2006, the operating margin before
management fee was 40.2% versus 38.8% in the prior year. The operating margin in
2006 is before the inclusion of a litigation reserve of approximately $15
million taken in 2006 and other charges in the fourth quarter as described
above.
Shareholder Compensation and Initiatives
During 2006, we returned $58.0 million of our earnings to shareholders through
dividends and our stock repurchases. We paid $0.12 per share in dividends ($3.4
million) to our common shareholders in 2006, which included four quarterly
dividends of $0.03 per share paid on March 28, 2006, June 28, 2006, September
28, 2006 and December 26, 2006.
47
Through our stock buyback program, we repurchased approximately 1,335,000 shares
in 2006 for a total investment of approximately $54.6 million or $40.88 per
share. There remain approximately 1,048,000 shares authorized under our stock
buyback program on December 31, 2006.
Weighted average shares outstanding on a diluted basis in 2006 were 29.5 million
and included 1.0 million shares from the assumed conversion of our 6%
convertible note for the full year 2006, as under the applicable accounting
methodology used to compute dilution, the convertible note was dilutive. The
full number of shares which may be issued upon conversion of this note is
approximately 0.9 million. During 2006, we issued 33,250 shares from the
exercise of stock options.
At December 31, 2006, we had 193,075 options outstanding to purchase our class A
common stock which were granted under our Stock Award and Incentive Plans (the
"Plans").
Operating Results for the Year Ended December 31, 2005 as Compared to the Year
Ended December 31, 2004
Revenues
Total revenues were $253.3 million in 2005, $2.5 million or 1.0% lower than the
total revenues of $255.8 million in 2004. The decrease in total revenues by
revenue component was as follows (in millions):
Increase (decrease)
-------------------
2004 (a) 2005 (a) $ %
--------- --------- --------- ---------
Investment advisory and incentive fees $ 220.5 $ 220.4 ($0.1) - %
Commissions 15.6 12.2 (3.4) (21.8)
Distribution Fees and other income 19.7 20.7 1.0 5.1
--------- --------- ---------
Total revenues $ 255.8 $ 253.3 ($2.5) (1.0)
========= ========= =========
(a) Restated as described in note A of item 8 of this report on Form 10-K.
Investment Advisory and Incentive Fees: Investment advisory and incentive fees,
which comprised 87.0% of total revenues in 2005, are directly influenced by the
level and mix of AUM. At December 31, 2005 AUM were $26.8 billion, a 6.5%
decrease from prior year-end AUM of $28.7 billion. Our equity AUM were $26.0
billion on December 31, 2005 versus $26.8 billion on December 31, 2004. An
increase in closed-end fund assets principally related to the initial public
offering of The Gabelli Global Gold, Natural Resources & Income Trust (AMEX:
GGN) (which generated gross proceeds of approximately $352 million), a rights
offering for The Gabelli Equity Trust Inc. (NYSE: GAB) ($144 million), and a
preferred stock offering for The Gabelli Dividend and Income Trust (NYSE: GDV)
($197 million) were more than offset by decreases in AUM in our separate
accounts business ($1.2 billion), open-end mutual funds ($141 million) and
investment partnerships ($180 million). Our fixed income assets declined to $819
million at year-end 2005 from $1.9 billion at the end of 2004, principally
related to the withdrawal of assets from The Treasurer's Fund, which was closed
during the fourth quarter 2005.
Mutual fund revenues increased $3.9 million or 3.3%, as higher revenues from
closed-end funds were offset slightly by lower revenues from open-end equity
mutual funds and fixed income mutual funds. Revenue from open-end equity funds
decreased $0.4 million or 0.4% from the prior year as average assets under
management in 2005 and 2004 were essentially flat at $7.8 billion. The closing
of The Treasurer's Fund in the fourth quarter of 2005 contributed to lower
revenues from fixed income mutual funds of $1.5 million or 74.6% from the 2004
period. Closed-end fund revenues increased $5.8 million or 15.4% from the prior
year.
Revenue from Separate Accounts decreased $5.1 million or 5.9% principally due to
lower average asset levels and a decrease in fulcrum fees earned on certain
accounts. Assets in our equity Separate Accounts fell $1.2 billion or 8.9% for
the year.
Total advisory fees from Investment Partnerships increased to $14.8 million in
2005 from $13.7 million in 2004. Incentive allocations and fees from investment
partnerships, which generally represent 20% of the economic profit, increased to
$7.1 million in 2005 compared to $5.0 million in 2004, slightly offset by a
decrease in management fees of 11.6% to $7.7 million in 2005 from $8.7 million
in 2004.
Commissions: Commission revenues in 2005 were $12.2 million, $3.4 million or
21.7% lower than commission revenues of $15.6 million in 2004. The decrease in
revenues was due to a decrease in agency trading activity for accounts managed
by affiliated companies offset slightly by higher revenues from institutional
customers. Commission revenues derived from transactions on behalf of our Mutual
Funds and Separate Account clients totaled $9.7 million, or approximately 80% of
total commission revenues in 2005. Distribution Fees and Other Income:
48
Distribution fees and other income increased 5.2% or $1.0 million to $20.7
million in 2005 from $19.7 million in 2004. The year-to-year increase was
principally the result of higher average AUM in class C shares which have 12b-1
fees of 1%.
Expenses
Compensation: Compensation costs, which are largely variable in nature,
increased approximately $3.1 million, or 3.0%, to $107.0 million in 2005 from
$103.9 million in 2004. Our variable compensation costs increased $1.6 million
to $78.2 million in 2005 from $76.6 million in 2004 and increased, as a percent
of revenues, to 30.9% in 2005 compared to 29.9% in 2004. The increase in total
variable compensation costs is principally due to higher revenues from Mutual
Funds and Investment Partnerships (an increase of $2.4 million) partially offset
by lower variable compensation costs related to Commissions (a decrease of $1.3
million). The increase, as a percent of revenues, is due to a shift in revenue
mix from Separate Accounts to Investment Partnerships and Mutual Funds. Fixed
compensation costs rose approximately $1.5 million to $28.8 million in 2005 from
$27.3 million in 2004 principally due to increases in salaries and stock option
expense. The increase in stock option expense of approximately $1.0 million was
related to the accelerated vesting of stock options during the year.
Management Fee: Management fee expense is incentive-based and entirely variable
compensation in the amount of 10% of the aggregate pre-tax profits which is paid
to Mr. Gabelli for acting as CEO pursuant to his Employment Agreement so long as
he is an executive of GBL and devoting the substantial majority of his working
time to the business. In 2005, management fee expense increased 3.6% to $11.4
million versus $11.0 million in 2004.
Distribution Costs: Distribution costs, which include marketing, promotion and
distribution costs increased $1.2 million or 5.7% in 2005 from the 2004 period.
This increase related to the one-time launch costs of $1.5 million for our new
closed-end fund, GGN, as continuing distribution costs decreased $0.3 million in
2005 from the 2004 period.
Other Operating Expenses: Other operating expenses increased $5.2 million or
24.3% to $26.7 million in 2005. This increase includes a one-time charge of $1.1
million from the impairment of goodwill related to our fixed income business. In
addition, there was an increase in accounting and legal costs of approximately
$2.6 million as well as $1.2 million of higher costs directly related to the
elimination of soft dollars in our mutual fund business.
Other Income and Expense
Our proprietary investment portfolio consists of investments in mutual funds,
U.S. treasury bills, common stocks as well as other investments including
limited partnerships and offshore funds. Net gain from investments, which is
derived from our proprietary investment portfolio, was approximately $10.9
million for the year ended December 31, 2005 compared to $5.6 million in 2004.
The higher full year 2005 investment gains are mostly due to our $100,000
venture capital investment in optionsXpress (NASDAQ: OXPS) made in 2001 through
our 92%-owned subsidiary, Gabelli Securities, Inc. OXPS completed its initial
public offering during the first quarter 2005. We recorded a total gain of $5.4
million for the full year 2005.
Interest and dividend income was $18.5 million in 2005 compared to $10.5 million
in 2004. Interest income rose $7.6 million to $12.4 million in 2005 and is a
result of higher short-term interest rates.
Interest expense fell $2.2 million to $13.8 million in 2005, from $16.0 million
in 2004. The decrease is a result of the April 1, 2005 repurchase of $50 million
of the $100 million 5% convertible note and the remarketing of the senior notes
in November 2004, which reduced the interest rate from 6.0% to 5.22%. At
December 31, 2005, the 5% convertible note is convertible, at the holder's
option, into shares of our class A common stock at $52 per share.
Income Taxes
The effective tax rate for 2005 was 37.5% up from the 2004 effective tax rate of
36.4% as we adjusted the tax rate in 2005 to reflect our estimate of the current
year-end tax liability.
Minority Interest
Minority interest expense was essentially flat at $0.5 million in both 2005 and
2004. Minority interest expense was largely the result of earnings from our
Investment Partnerships and income from investments at our 92%-owned subsidiary,
Gabelli Securities, Inc, offset by the losses at our previously 80%-owned Fixed
Income business.
Net Income
Net income for 2005 was $63.5 million or $2.10 per fully diluted share versus
$62.6 million or $2.06 per fully diluted share for 2004.
49
Operating Margin
Operating margins, before management fee, for the full year 2005 declined to
38.8% from 43.1% due to an increase in selling, general and administrative
expenses, including a number of one-time charges.
Shareholder Compensation and Initiatives
During 2005, we returned $57.3 million of our earnings to shareholders through
dividends and our stock repurchases. We paid $0.69 per share in dividends ($20.1
million) to our common shareholders in 2005 which included three quarterly
dividends of $0.02 per share paid on March 28, 2005, June 28, 2005, and
September 28, 2005 and one quarterly dividend of $0.03 per share paid on
December 28, 2005. In addition, we paid a special dividend of $0.60 per share on
January 18, 2005 to all shareholders.
Through our stock buyback program, we repurchased approximately 861,000 shares
in 2005 for a total investment of $37.2 million or $43.22 per share. There
remained approximately 1,083,000 shares authorized under our stock buyback
program on December 31, 2005.
Weighted average shares outstanding on a diluted basis in 2005 were 31.2 million
and included 1.0 million shares from the assumed conversion of our 5%
convertible note for the full year 2005, as under the applicable accounting
methodology used to compute dilution, the convertible note was dilutive. The
full number of shares which may be issued upon conversion of this note is
approximately 1.0 million. During 2005, we issued 49,500 shares from the
exercise of stock options and 1,517,483 shares from the settlement of the
remaining purchase contracts relating to the mandatory convertible securities.
At December 31, 2005, we had 226,325 options outstanding to purchase our class A
common stock which were granted under our Stock Award and Incentive Plans (the
"Plans").
Liquidity and Capital Resources
Our principal assets consist of cash, short-term investments, securities held
for investment purposes and investments in mutual funds, and investment
partnerships and offshore funds, both proprietary and external. Short-term
investments are comprised primarily of United States treasury securities with
maturities of less than one year and money market funds managed by GBL. Although
the investment partnerships and offshore funds are for the most part illiquid,
the underlying investments of such partnerships or funds are for the most part
liquid, and the valuations of these products reflect that underlying liquidity.
Summary cash flow data is as follows:
2004 (a) 2005 (a) 2006
----------- -------------- -----------
(in thousands)
Cash flows used in:
Operating activities $ (23,879) $ (31,029) $ (5,708)
Investing activities (11,056) (7,205) (2,668)
Financing activities (94,480) (45,626) (28,390)
----------- -------------- -----------
Decrease in cash and cash equivalents (129,415) (83,860) (36,766)
Cash and cash equivalents at beginning of
year 386,511 257,096 173,161
Income related to investment partnerships
and offshore funds consolidated under FIN
46R and EITF 04-5, net - - 1,754
Effect of exchange rates on cash and cash
equivalents - (75) (36)
----------- -------------- -----------
Cash and cash equivalents at end of year $ 257,096 $ 173,161 $ 138,113
=========== ============== ===========
(a) Restated as described in note A of item 8 of this report on Form 10-K.
Cash and liquidity requirements have historically been met through cash
generated by operating income and our borrowing capacity. At December 31, 2006,
we had cash and cash equivalents of $138.1 million, a decrease of $35.0 million
from the prior year end primarily due to the Company's financing activities. We
have established a collateral account, consisting of cash and cash equivalents
and U.S. treasury securities totaling $54.2 million, to secure a $51.3 million
letter of credit issued in favor of the holder of the $50 million 6% convertible
note. Cash and cash equivalents and investments in securities held in the
collateral account are restricted from other uses until the date of expiration
and are classified as restricted cash on the consolidated statements of
financial condition. Under the terms of the capital lease, we are obligated to
make minimum total payments of $4.9 million through April 2013.
50
Net cash used in operating activities was $5.7 million for the year ended
December 31, 2006, principally resulting from $1,039.9 million in purchases of
investments in securities, a $42.1 million increase in receivable from brokers,
$4.9 million in purchases of investments in partnerships and affiliates and
$40.0 million from the net effects of the FIN 46R and EITF 04-5 consolidation.
The uses were partially offset by proceeds from sales of investments in
securities of $1,014.3 million, $22.8 million in increase in accrued expenses
and other liabilities, $14.6 million in distributions from investments in
partnerships and affiliates and an increase in compensation payable of $5.5
million. Excluding the net effects of the consolidation of investment
partnerships and offshore funds, our cash provided by operating activities was
$34.2 million. Net cash used in operating activities of $31.0 million in 2005
results primarily from purchases of trading investments in securities of
$1,171.3 million and investments in partnerships and affiliates of $16.0
million, partially offset by proceeds from sales of trading investments in
securities of $1,063.1 million and $37.5 million of distributions from
partnerships and affiliates.
Net cash used in investing activities of $2.7 million in 2006 is due to
purchases of available for sale securities of $5.4 million, partially offset by
proceeds from sales of available for sale securities of $2.8 million. Net cash
used in investing activities of $7.2 million in 2005 is due to purchases of
available for sale securities of $9.3 million, partially offset by proceeds from
sales of available for sale securities of $2.1 million.
Net cash used in financing activities of $28.4 million in 2006 principally
resulted from the repurchase of our class A common stock under the Stock
Repurchase Program of $54.6 million and dividends paid of $3.4 million,
partially offset by $29.7 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 $58.1 million. Net cash used in financing activities of $45.6
million in 2005 was primarily due to the repurchase of $50 million of the 5%
convertible note, the purchase of an additional $37.2 million of our class A
common stock, dividend payments of $20.1 million and $9.7 million for the tender
offer of employee stock options partially offset by $70.6 million received for
the settlement of forward contracts relating to the mandatory convertible
securities.
We continue to maintain our investment grade ratings which we have received from
two ratings agencies, Moody's Investors Services and Standard and Poor's Ratings
Services. We believe that our ability to maintain our investment grade ratings
will provide greater access to the capital markets, enhance liquidity and lower
overall borrowing costs.
Gabelli & Company is registered with the Securities and Exchange Commission
(SEC) as a broker-dealer and is a member of the NASD. As such, it is subject to
the minimum net capital requirements promulgated by the SEC. Gabelli & Company's
net capital has historically exceeded these minimum requirements. Gabelli &
Company computes its net capital under the alternative method permitted by the
SEC, which requires minimum net capital of $250,000. As of December 31, 2005 and
2006, Gabelli & Company had net capital, as defined, of approximately $16.5
million and $17.5 million, respectively, exceeding the regulatory requirement by
approximately $16.2 million and $17.3 million, respectively. Regulatory net
capital requirements increase when Gabelli & Company is involved in underwriting
activities.
Our subsidiary, GAMCO Asset Management (UK) Limited is a registered member of
the Financial Services Authority. In connection with this registration in the
United Kingdom, we have a minimum Liquid Capital Requirement of (pound)267,000,
($523,000 at December 31, 2006) and an Own Funds Requirement of (euro)50,000
($66,000 at December 31, 2006). We have consistently met or exceeded these
minimum requirements.
Market Risk
Equity Price 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 and advisor for AUM in
our Mutual Funds, Separate Accounts, and Investment Partnerships as well as our
proprietary investment and trading activities. At December 31, 2006, our primary
market risk exposure was for changes in equity prices and interest rates. At
December 31, 2005 and 2006, we had equity investments, including mutual funds
largely invested in equity products, of $200.5 million and $279.6 million,
respectively. Investments in mutual funds, $101.3 million and $144.3 million at
December 31, 2005 and 2006, respectively, generally lower market risk through
the diversification of financial instruments within their portfolios. 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.
We also hold investments in partnerships and affiliates which invest primarily
in equity securities and which are subject to changes in equity prices.
Investments in partnerships and affiliates totaled $74.8 million and $81.9
million at December 31, 2005 and 2006, respectively, of which $36.4 million and
$36.9 million were invested in partnerships and affiliates which invest in
event-driven merger arbitrage strategies. These strategies are primarily
dependent upon deal closure rather than the overall market environment.
51
The following table provides a sensitivity analysis for our investments in
equity securities and partnerships and affiliates which invest primarily in
equity securities, excluding arbitrage products for which the principal exposure
is to deal closure and not overall market conditions, as of December 31, 2005
and 2006. The sensitivity analysis assumes a 10% increase or decrease in the
value of these investments.
(In thousands)
Fair Value assuming Fair Value assuming
Fair Value 10% decrease in 10% increase in
equity prices equity prices
------------ -------------------- ---------------------
At December 31, 2005:
Equity price sensitive
investments, at fair
value $271,950 $244,755 $299,145
------------ -------------------- ---------------------
At December 31, 2006:
Equity price sensitive
investments, at fair
value $387,703 $348,933 $426,473
------------ -------------------- ---------------------
Our revenues are primarily driven by the market value of our AUM and are
therefore exposed to fluctuations in market prices of these assets, which are
largely readily marketable equity securities. Investment advisory fees for
mutual funds are based on average daily or weekly asset values. Advisory fees
earned on institutional and high net worth separate accounts, for any given
quarter, are generally determined based on asset values at the beginning of a
quarter. Any significant increases or decreases in market value of assets
managed which occur during a quarter will result in a relative increase or
decrease in revenues for the following quarter.
Investment Partnership advisory fees are computed based on monthly or quarterly
asset values. The incentive allocation or fee of 20% of the economic profit from
Investment Partnerships is impacted by changes in the market prices of the
underlying investments of these products.
Interest Rate Risk
Our exposure to interest rate risk results, principally, from our investment of
excess cash in government obligations and money market funds. These investments
are primarily short term in nature, and the fair value of these investments
generally approximates market value. Our mandatory convertible securities
included a provision to reset the interest rate in November 2004. The reset rate
was determined to be 5.22%.
Commitments and Contingencies
We are obligated to make future payments under various contracts such as debt
agreements and capital and operating lease agreements. The following table sets
forth our significant contractual cash obligations as of December 31, 2006 (in
thousands):
Total 2007 2008 2009 2010 2011 Thereafter
---------- --------- -------- -------- --------- --------- ------------
Contractual Obligations:
5.5% Senior notes $ 100,000 $ - $ - $ - $ - $ - $ 100,000
6% Convertible note 50,000 - - - - 50,000 -
5.22% Senior Notes 82,308 82,308 - - - - -
Capital lease obligations 4,936 856 765 765 765 765 1,020
Non-cancelable operating
lease obligations 278 242 35 1 - - -
---------- --------- -------- -------- --------- --------- ------------
Total $ 237,522 $83,406 $ 800 $ 766 $ 765 $50,765 $ 101,020
========== ========= ======== ======== ========= ========= ============
In June 2006, GBL and Cascade Investments L.L.C. ("Cascade") agreed to amend the
terms of the $50 million convertible note maturing in August 2011. Effective
September 15, 2006, the rate on the note increased from 5% to 6% while the
conversion price was raised to $53 per share from $52 per share. 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 GBL the right to redeem the note at 101% of
its principal amount together with all accrued but unpaid interest thereon upon
at least 30 days prior written notice, subject to certain provisions.
52
Off-Balance Sheet Arrangements
We are the General Partner or co-General Partner of various limited partnerships
whose underlying assets consist primarily of marketable securities. As General
Partner or co-General Partner, we are contingently liable for all of the limited
partnerships' liabilities.
Our income from these limited partnerships consists of our share of the
management fee and the 20% incentive allocation from the limited partners. We
also receive our pro-rata return on any investment made in the limited
partnership. We earned management fees of $1.6 million in 2006 and $1.9 million
in 2005 and incentive fees of $2.4 million and $1.6 million in 2006 and 2005,
respectively. Our pro-rata gain on investments in these limited partnerships
totaled $0.8 million in 2006 as compared to a gain of $0.8 million in 2005.
We do not invest in any other off-balance sheet vehicles that provide financing,
liquidity, market or credit risk support or engage in any leasing activities
that expose us to any liability that is not reflected in the Consolidated
Financial Statements.
Certain Relationships and Related Transactions
The following is a summary of certain related party transactions. Further
details regarding these and other relationships appear in our Proxy Statement
for our 2007 Annual Meeting of Shareholders.
GGCP, Inc. owns a majority of the outstanding shares of class B common stock of
GAMCO Investors, Inc., which ownership represented approximately 95% of the
combined voting power of the outstanding common stock and approximately 72% of
the equity interest on December 31, 2006.
On May 31, 2006, we entered into an Exchange and Standstill Agreement with
Frederick J. Mancheski pursuant to which, among other things, he agreed to
exchange his 2,071,635 shares of our class B common stock for an equal number of
shares of our class A common stock. Certain shareholders of GGCP, including two
of our officers and a director, who received shares of our class B common stock
in a distribution from GGCP, also agreed to exchange their shares of our class B
common stock for an equal number of shares of our class A common stock. Pursuant
to a Registration Rights Agreement that we entered into with Mr. Mancheski, we
filed a shelf registration statement on August 8, 2006 for the sale by Mr.
Mancheski and others, including certain of our officers, employees and a
director, of up to 2,486,763 shares of our class A common stock.
Prior to its initial public offering in February 1999, GBL and GGCP entered into
a Management Services Agreement, with a one-year term and renewable annually,
under which GBL provides certain services for GGCP, including furnishing office
space and equipment, providing insurance coverage, overseeing the administration
of its business and providing personnel to perform certain administrative
services. Pursuant to the Management Services Agreement, GGCP pays GBL for
services provided.
As of December 5, 1997, GGCP entered into a master lease agreement with an
entity controlled by members of Mr. Gabelli's immediate family, for a 60,000
square foot building, of which approximately 9,000 square feet are currently
subleased to other tenants. The master lease for the building and property,
which is located at 401 Theodore Fremd Avenue, Rye, New York (the "Building"),
expires on April 30, 2013. As of February 9, 1999, GGCP assigned all of its
rights and obligations under the master lease to GBL. GBL leases space in the
Building to a company for which Mr. Gabelli serves as Chairman and is a
significant stockholder.
Pursuant to the Employment Agreement, Mr. Gabelli has agreed that, while he is
employed by GBL, he will not provide investment management services outside of
GBL, except for certain permitted accounts managed by MJG Associates, Inc., for
which he serves as Chairman. MJG Associates, Inc., which is wholly-owned by Mr.
Gabelli, serves as a general partner or investment manager of various investment
funds and other accounts. For these investment funds and other accounts, any
management or incentive fees related to new investors after the date of GBL's
initial public offering in 1999 are due to GBL in accordance with a resolution
adopted by GBL's Board of Directors in 1999.
GBL has entered into agreements to provide advisory and administrative services
to MJG Associates, Inc. and to GSI, with respect to the private investment funds
managed by each of them. Pursuant to such agreements, GSI and MJG Associates,
Inc. pay GBL for services provided.
Mr. Gabelli and Gabelli Securities, Inc. serve as co-general partners of Gabelli
Associates Fund. Mr. Gabelli receives relationship manager and portfolio manager
compensation through an incentive fee allocation directly from the partnership.
53
Gabelli Securities International Limited ("Gabelli Securities International")
was formed in 1994 to provide management and investment advisory services to
offshore funds and accounts. Marc Gabelli, a son of Mr. Gabelli, owns 55% of
Gabelli Securities International and GSI owns the remaining 45%.
In April 1999, Gabelli Global Partners, Ltd., an offshore investment fund, was
incorporated. Gabelli Securities International and Gemini Capital Management,
LLC ("Gemini"), an entity owned by Marc Gabelli, were engaged by the fund as
investment advisors as of July 1, 1999. Gemini receives half of the management
and incentive fees as co-investment advisor. In April 1999, GSI formed Gabelli
Global Partners, L.P., an investment limited partnership for which GSI and
Gemini are the general partners. In March 2002, Gabelli Global Partners, L.P.
changed its name to Gemini Global Partners, L.P. Gemini receives half of the
management fee and incentive allocation paid by the partnership to the general
partners.
GBL reimburses GGCP for GGCP's incremental costs (but not the fixed costs)
relating to GBL's use of an airplane in which GGCP owns a fractional interest.
Mr. Gabelli's brother, spouse and a son were employed by GBL during 2006.
Critical Accounting Policies
In the ordinary course of business, we make a number of estimates and
assumptions relating to the reporting of results of operations and financial
condition in the preparation of our financial statements in conformity with U.S.
generally accepted accounting principles. We base our estimates on historical
experience, when available, and on other various assumptions that are believed
to be reasonable under the circumstances. Actual results could differ
significantly from those estimates under different assumptions and conditions.
We believe the critical assumptions and estimates are those applied to revenue
recognition, the valuation of investments, partnerships, and offshore funds,
goodwill and other long-lived intangibles, income taxes, and stock based
compensation accounting.
Revenue Recognition
Advisory fees from the open-end mutual funds, closed-end funds and sub-advisory
accounts are computed daily or weekly based on average net assets. Advisory fees
from the Separate Accounts are generally computed quarterly based on account
values as of the end of the preceding quarter and accrued monthly. Management
fees from Investment Partnerships are computed either monthly or quarterly and
accrued monthly, and amounts receivable are included in other receivables from
affiliates in the consolidated statement of financial condition.
Revenues from Investment Partnerships also generally include an incentive
allocation or a fee of 20% of the economic profit. The incentive allocation or
fee is generally based on the absolute gain in a portfolio, is recognized at the
end of the measurement period, and amounts receivable are included in other
receivables from affiliates in the consolidated statement of financial
condition. Fulcrum fees from certain institutional Separate Accounts, which are
based upon meeting or exceeding specific benchmark index or indices are
recognized at the end of the stipulated contract period for the respective
account and receivables due from fulcrum fees are included in investment
advisory fees receivable on the consolidated statement of financial condition.
There were $4.4 million in fulcrum fees receivable as of December 31, 2006.
Management fees on closed-end preferred shares are received at year-end if the
total return to common shareholders of the closed-end fund for the calendar year
exceeds the dividend rate of the preferred shares. These fees are recognized at
the end of the measurement period. Receivables due on management fees on
closed-end funds are included in investment advisory fees receivable on the
consolidated statement of financial condition.
Distribution fees from the open-end mutual funds are computed daily based on
average net assets, are accrued monthly, and amounts receivable are included in
other receivables from affiliates on the consolidated statement of financial
condition.
Investments in Partnerships and Affiliates
Beginning January 1, 2006, the provisions of FIN 46R and 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 only required us to
consolidate these entities on our consolidated statement of income and
consolidated statement of cash flows for the first quarter 2006. We were not
required to consolidate these entities on our consolidated 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
consolidated within our consolidated statement of income and consolidated
54
statement of cash flows or on our consolidated statement of financial condition
in the second quarter or future periods as long as GBL continues to not maintain
direct or indirect control over the investment partnerships and offshore funds.
For the year ended December 31, 2006, the consolidation of these entities for
the first quarter 2006 had no effect on net income but does affect the
classification of income between operating and other income.
We also consolidated five other investment partnerships and two offshore funds
in which we have a direct or indirect controlling financial interest as of and
for the year ended December 31, 2006. These entities have been consolidated
within our financial statements for the year ended December 31, 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 consolidated statement of income and
consolidated statement of cash flows for the year ended December 31, 2006
related to these entities, the consolidation of these entities also resulted in
minor adjustments to our consolidated statement of financial condition at
December 31, 2006. The consolidation of these entities on the consolidated
statement of financial condition has increased assets by $17.5 million,
liabilities by $3.2 million and minority interest by $14.3 million. Prior to
consolidation of these entities, our investments in these entities were
reflected within investments in partnerships and affiliates on the consolidated
statement of financial condition and accounted for under the equity method.
For the year ended December 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.
Goodwill
Prior to the issuance of Statement of Financial Accounting Standards ("SFAS")
No. 142, goodwill and other long-lived intangible assets were amortized each
year. The adoption of SFAS No. 142 at the beginning of 2002 eliminated the
amortization of these assets and established requirements for having them tested
for impairment at least annually. During the first quarter of 2005, AUM 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 previously 80% owned subsidiary. Using a present value cash flow method, we
reassessed 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 for the impairment of goodwill which represented the entire amount
of goodwill for this entity during 2005.
At November 30, 2005 and November 30, 2006, management conducted its annual
assessments and assessed the recoverability of goodwill and determined that
there was no further impairment of the remaining goodwill on GBL's consolidated
financial statements. In assessing the recoverability of goodwill, projections
regarding estimated future cash flows and other factors are made to determine
the fair value of the respective assets. If these estimates or related
projections change in the future, it may result in an impairment charge for
these assets to income.
Income Taxes
In the ordinary course of business, we prepare a number of tax returns, which
are regularly audited by federal, state and foreign tax authorities. The
inherent complications in the various tax codes often create the need for
subjective judgments in applying its provisions. While management believes that
tax positions taken comply with tax law and are both reasonable and supported by
the facts and circumstances of the situation, upon audit additional taxes may be
assessed. While assessments may be proposed in the future, both the extent of
and potential impact on financial results cannot be determined at this time.
Stock Based Compensation
Effective January 1, 2003, we use a fair value based method of accounting for
stock-based compensation provided to our employees in accordance with SFAS No.
123, "Accounting for Stock Based Compensation." The estimated fair value of
option awards is determined using the Black Scholes option-pricing model. This
sophisticated model utilizes a number of assumptions in arriving at its results,
including the estimated life of the option, the risk free interest rate at the
date of grant and the volatility of the underlying common stock. There may be
other factors, which have not been considered, which may have an effect on the
value of the options as well. The effects of changing any of the assumptions or
55
factors employed by the Black Scholes model may result in a significantly
different valuation for the options. We adopted Statement 123 (R), "Share-Based
Payments" ("Statement 123 (R)") on January 1, 2005. In light of our modified
prospective adoption of the fair value recognition provisions of Statement 123
(R) for all grants of employee stock options, the adoption of Statement 123 (R)
did not have a material impact on our consolidated financial statements.
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," ("Statement 155") that amends FASB Statements No. 133 "Accounting for
Derivative Instruments and Hedging Activities," ("Statement 133") and No. 140
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." ("Statement 140"). 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 principal-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 first fiscal
year that begins after September 15, 2006. The Company plans to adopt this
statement on January 1, 2007. The impact of adopting this statement is expected
to be immaterial to the Company's consolidated financial statements.
In March 2006, the FASB issued FASB Statement No. 156, "Accounting for Servicing
of Financial Assets," which amends Statement 140. 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 first
fiscal year that begins after September 15, 2006. The Company plans to adopt
this statement on January 1, 2007. The impact of adopting this statement is
expected to be immaterial to the Company's 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) ("FSP")" 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 first day of
the first reporting period beginning after September 15, 2006. The Company plans
to adopt this statement on January 1, 2007. The impact of adopting this
statement is expected to be immaterial to the Company's consolidated financial
statements.
In June 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty
in Income Taxes" ("FIN 48"), which is an interpretation of FASB Statement No.
109, "Accounting for Income Taxes" ("FAS109"). This interpretation prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected 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 interpretation on January 1,
2007. The Company has not completed its analysis, and the materiality of the
adoption on the Company's consolidated financial statement is not known at this
time.
In September 2006, the FASB issued FASB Statement No. 157, "Fair Value
Measurement" ("Statement 157"). The statement provides guidance for using fair
value to measure assets and liabilities. The statement provides guidance to
companies about the extent of which to measure assets and liabilities at fair
value, the information used to measure fair value, and the effect of fair value
measurements on earnings. The statement applies whenever other standards require
(or permit) assets or liabilities to be measured at fair value. The statement
does not expand the use of fair value in any new circumstances. The statement is
effective for financial statements issued for fiscal years beginning after
November 15, 2007 and for interim periods within those fiscal years. The Company
plans to adopt this statement on January 1, 2008. The impact of adopting
Statement 157 is expected to be immaterial to the Company's consolidated
financial statements.
In September 2006, the SEC released Staff Accounting Bulletin No. 108 (the
"SAB"), "Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements". The SAB addresses diversity
in how companies consider and resolve the quantitative effect of financial
statement misstatements. The SAB is effective as of the beginning of the first
day of the first reporting period beginning after November 15, 2006. The Company
plans to adopt this SAB on January 1, 2007. The impact of adopting this SAB is
expected to be immaterial to the Company's consolidated financial statements.
56
In February 2007, the FASB issued FAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities," ("Statement 159"), which provides
companies with an option to report selected financial assets and liabilities at
fair value. The standard's objective is to reduce both the complexity in
accounting for financial instruments and the volatility in earnings caused by
measuring related assets and liabilities differently. Statement 159 also
establishes presentation and disclosure requirements designed to facilitate
comparisons between companies that choose different measurement attributes for
similar types of assets and liabilities. This statement is effective as of the
beginning of an entity's first fiscal year beginning after November 15, 2007.
Early adoption is permitted as of the beginning of the previous fiscal year
provided that the entity makes that choice in the first 120 days of that fiscal
year and also elects to apply the provisions of Statement 157. The Company plans
to adopt this statement on January 1, 2008. The impact of adopting Statement 159
is expected to be immaterial to the Company's consolidated financial statements.
Seasonality and Inflation
We do not believe our operations are subject to significant seasonal
fluctuations. We do not believe inflation will significantly affect our
compensation costs, as they are substantially variable in nature. However, the
rate of inflation may affect our expenses such as information technology and
occupancy costs. To the extent inflation results in rising interest rates and
has other effects upon the securities markets, it may adversely affect our
financial position and results of operations by reducing our AUM, revenues or
otherwise.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Reference is made to the information contained under the heading "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Market Risk."
57
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
GAMCO INVESTORS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm.............................. F-2
Report of Independent Registered Public Accounting Firm on Effectiveness of Internal
Control over Financial Reporting................................................... F-3
Consolidated Financial Statements:
Consolidated Statements of Income for the years ended December 31, 2004, 2005
and 2006........................................................................... F-5
Consolidated Statements of Financial Condition at December 31, 2005 and 2006......... F-6
Consolidated Statements of Stockholders' Equity for the years ended December 31,
2004, 2005 and 2006................................................................ F-7
Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2005
and 2006........................................................................... F-8
Notes to Consolidated Financial Statements........................................... F-10
--------
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission that are not required
under the related instructions or are inapplicable have been omitted.
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
GAMCO Investors, Inc. and Subsidiaries
We have audited the accompanying consolidated statements of financial condition
of GAMCO Investors, Inc. and Subsidiaries ("GAMCO") as of December 31, 2006 and
2005, and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the three years in the period ended December 31,
2006. These financial statements are the responsibility of GAMCO's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of GAMCO Investors,
Inc. and Subsidiaries at December 31, 2006 and 2005, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2006, in conformity with U.S. generally accepted
accounting principles.
As discussed in Note A to the consolidated financial statements, in 2006 GAMCO
changed its method of accounting for management fee revenue on closed-end
preferred shares and incentive allocation or fee revenue on investment
partnerships. In addition, as discussed in Note A to the consolidated financial
statements, the 2005 consolidated financial statements have been restated.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of GAMCO
Investors, Inc. and Subsidiaries' internal control over financial reporting as
of December 31, 2006, based on criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated March 16, 2007,
expressed an unqualified opinion on management's assessment of the effectiveness
of GAMCO's internal control over financial reporting and an adverse opinion on
the effectiveness of GAMCO's internal control over financial reporting because
of material weaknesses.
ERNST & YOUNG LLP
New York, New York
March 16, 2007
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON EFFECTIVENESS OF
INTERNAL CONTROL OVER FINANCIAL REPORTING
The Board of Directors and Stockholders
GAMCO Investors, Inc. and Subsidiaries
We have audited management's assessment, included in the accompanying
Management's Assessment of Internal Control Over Financial Reporting, that GAMCO
Investors, Inc. and Subsidiaries (the "Company") did not maintain effective
internal control over financial reporting as of December 31, 2006, because of
the effects of not having processes in place to ensure that individual assets
and liabilities of certain investment accounts were presented in the
consolidated financial statements on a gross basis and that non-routine
transactions were appropriately evaluated and accounted for in accordance with
U.S. generally accepted accounting principles, based on criteria established in
Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the "COSO criteria"). GAMCO Investors,
Inc. and Subsidiaries' management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility
is to express an opinion on management's assessment and an opinion on the
effectiveness of the Company's internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
A material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. The following material weaknesses have been identified and included
in management's assessment. Management did not have adequate controls in place
to ensure that there was a remote likelihood that a material misstatement of the
annual or interim consolidated financial statements would be prevented or
detected as it relates to: (1) the reporting of individual assets and
liabilities of certain investment accounts in the consolidated financial
statements on a gross basis and (2) the evaluation of and accounting for certain
non-routine transactions in accordance with U.S. generally accepted accounting
principles. These material weaknesses resulted in the misstatement of certain
asset, liability and income statement accounts, and incomplete disclosures in
the notes to the consolidated financial statements. The adjustments have been
recorded in the annual consolidated financial statements as of and for the year
ended December 31, 2006 along with the appropriate disclosures. These material
weaknesses were considered in determining the nature, timing, and extent of
audit tests applied in our audit of the 2006 consolidated financial statements,
and this report does not affect our report dated March 16, 2007 on those
consolidated financial statements.
In our opinion, management's assessment that GAMCO Investors, Inc. and
Subsidiaries did not maintain effective internal control over financial
reporting as of December 31, 2006, is fairly stated, in all material respects,
based on the COSO criteria. Also, in our opinion, because of the effect of the
material weaknesses described above on the achievement of the control criteria,
GAMCO Investors, Inc. and Subsidiaries has not maintained effective internal
control over financial reporting as of December 31, 2006, based on the COSO
criteria.
F-3
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated statements of
financial condition of GAMCO Investors, Inc. and Subsidiaries as of December 31,
2006 and 2005, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 2006, of GAMCO Investors, Inc. and Subsidiaries and our report dated March
16, 2007, expressed an unqualified opinion thereon.
ERNST & YOUNG LLP
New York, New York
March 16, 2007
F-4
GAMCO INVESTORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Year ended December 31,
--------------------------------------
2004 (a) 2005 (a) 2006
------------ ------------ ------------
Revenues
Investment advisory and incentive fees $ 220,561 $ 220,464 $ 227,005
Commission revenue 15,573 12,195 12,188
Distribution fees and other income 19,651 20,673 22,270
------------ ------------ ------------
Total revenues 255,785 253,332 261,463
------------ ------------ ------------
Expenses
Compensation costs 103,837 106,966 106,646
Management fee 11,023 11,380 12,771
Distribution costs 20,347 21,512 25,782
Other operating expenses 21,455 26,665 44,103
------------ ------------ ------------
Total expenses 156,662 166,523 189,302
------------ ------------ ------------
Operating income 99,123 86,809 72,161
------------ ------------ ------------
Other Income (Expense)
Net gain from investments 5,627 10,912 41,737
Interest and dividend income 10,481 18,483 29,382
Interest expense (16,027) (13,782) (14,226)
------------ ------------ ------------
Total other income, net 81 15,613 56,893
------------ ------------ ------------
Income before income taxes and minority
interest 99,204 102,422 129,054
Income taxes 36,118 38,408 49,278
Minority interest 495 498 10,258
------------ ------------ ------------
Net income $ 62,591 $ 63,516 $ 69,518
============ ============ ============
Net income per share:
Basic $ 2.11 $ 2.13 $ 2.44
============ ============ ============
Diluted $ 2.06 $ 2.10 $ 2.40
============ ============ ============
Weighted average shares outstanding:
Basic 29,673 29,805 28,542
============ ============ ============
Diluted 31,804 31,155 29,525
============ ============ ============
Dividends declared $ 1.76 $ 0.09 $ 0.12
============ ============ ============
(a) Restated as described in note A in item 8 of this report on Form 10-K.
See accompanying notes.
F-5
GAMCO INVESTORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except per share data)
December 31,
---------------------
2005 (a) 2006
---------- ----------
ASSETS
Cash and cash equivalents, including restricted cash of
$2,503 and $2,079 $ 173,161 $ 138,113
Investments in securities, including restricted securities
of $52,219 and $52,116 421,404 507,595
Investments in partnerships and affiliates 74,827 81,884
Receivable from brokers 9,827 53,682
Investment advisory fees receivable 22,098 31,094
Other receivables from affiliates 12,888 9,902
Capital lease 1,706 1,459
Goodwill 3,523 3,523
Other assets 8,704 9,979
---------- ----------
Total assets $ 728,138 $ 837,231
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Payable to brokers $ 3,937 $ 36,345
Income taxes payable 10,097 12,075
Capital lease obligation 2,992 2,781
Compensation payable 27,820 35,098
Securities sold, not yet purchased 3,183 8,244
Accrued expenses and other liabilities 17,579 41,053
---------- ----------
Total operating liabilities 65,608 135,596
---------- ----------
5.5% Senior notes (due May 15, 2013) 100,000 100,000
6% Convertible note (conversion price, $53.00 per share;
note due August 14, 2011) (b) 50,000 49,504
5.22% Senior notes (due February 17, 2007) 82,308 82,308
---------- ----------
Total liabilities 297,916 367,408
Minority interest 6,147 20,919
Stockholders' equity:
Class A Common Stock, $.001 par value; 100,000,000 shares
authorized; 9,648,339 and 12,055,872 shares issued,
respectively; 6,414,517 and 7,487,018 shares
outstanding, respectively 10 12
Class B Common Stock, $.001 par value; 100,000,000 shares
authorized; 24,000,000 shares issued and 23,128,500 and
20,754,217 shares outstanding, respectively 23 21
Additional paid-in capital 226,353 229,699
Retained earnings 329,036 395,058
Accumulated other comprehensive gain. 526 10,427
Treasury stock, class A, at cost (3,233,822 and 4,568,854
shares, respectively) (131,873) (186,476)
---------- ----------
Total stockholders' equity 424,075 448,741
---------- ----------
Total liabilities and stockholders' equity $ 728,138 $ 837,231
========== ==========
(a) Restated as described in note A in item 8 of this report on Form 10-K. (b)
Convertible note was 5% with a conversion price of $52 per share at December 31,
2005.
See accompanying notes.
F-6
GAMCO INVESTORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
Accumulated
Additional Other
Common Paid-in Retained Compre-hensive Treasury
Stock Capital Earnings (a) (Loss) / Gain Stock Total (a)
-------- ---------- ------------ -------------- ----------- -----------
Balance at December 31, 2003 $ 31 $143,475 $ 257,266 $ 1,480 $ (23,941) $ 378,311
-------- ---------- ------------ -------------- ----------- -----------
Cumulative effect of change in accounting
principle - - (210) - - (210)
------------ -----------
Balance at December 31, 2003, as restated - - $ 257,056 - - $ 378,101
============ ===========
Comprehensive income:
Net income - - 62,591 - - 62,591
Other comprehensive gain:
Net unrealized losses on securities
available for sale, net of management
fees and income tax benefit of $1,198 - - - (1,533) - (1,533)
-----------
Total comprehensive income 61,058
Dividends declared - - (51,306) - - (51,306)
Stock based compensation expense - 1,819 - - - 1,819
Purchase and retirement of mandatory
convertible securities - 45 - - - 45
Exercise of stock options including tax
benefit - 4,090 - - - 4,090
Proceeds from early settlement of purchase
contracts - 11,740 - - - 11,740
Capitalized costs - (116) - - - (116)
Purchase of treasury stock - - - - (70,731) (70,731)
-------- ---------- ------------ -------------- ----------- -----------
Balance at December 31, 2004 $ 31 $161,053 $ 268,341 $ (53) $ (94,672) $ 334,700
Comprehensive income:
Net income - - 63,516 - - 63,516
Other comprehensive gain:
Net unrealized gains on securities
available for sale, net of management
fees and income tax expense of $438 - - - 564 - 564
Foreign currency translation - - - 15 - 15
-----------
Total comprehensive income 64,095
Dividends declared - - (2,821) - - (2,821)
Tender for employee stock options - (9,665) - - - (9,665)
Stock based compensation expense - 2,770 - - - 2,770
Exercise of stock options including tax
benefit - 1,659 - - - 1,659
Proceeds from settlement of purchase
contracts 2 70,567 - - - 70,569
Capitalized costs - (31) - - - (31)
Purchase of treasury stock - - - - (37,201) (37,201)
-------- ---------- ------------ -------------- ----------- -----------
Balance at December 31, 2005 $ 33 $226,353 $ 329,036 $ 526 $(131,873) $ 424,075
Comprehensive income:
Net income - - 69,518 - - 69,518
Other comprehensive gain:
Net unrealized gains on securities
available for sale, net of management
fees and income tax expense of $7,649 - - - 9,834 - 9,834
Foreign currency translation - - - 67 - 67
-----------
Total comprehensive income 79,419
Dividends declared - - (3,413) - - (3,413)
Discount on debt amendment - 633 - - - 633
Excess tax benefit for exercised stock
options - 1,782 - - - 1,782
Stock based compensation expense - 53 - - - 53
Exercise of stock options including tax
benefit - 878 - - - 878
Capitalized costs - - (83) - - (83)
Purchase of treasury stock - - - - (54,603) (54,603)
-------- ---------- ------------ -------------- ----------- -----------
Balance at December 31, 2006 $ 33 $229,699 $ 395,058 $ 10,427 $(186,476) $ 448,741
======== ========== ============ ============== =========== ===========
(a) Restated as described in note A of item 8 of this report on Form 10-K.
See accompanying notes.
F-7
GAMCO INVESTORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year ended December 31
-------------------------------------
2004(a) 2005(a) 2006
---------- ------------ ------------
Operating activities
Net income $ 62,591 $ 63,516 $ 69,518
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Equity in net gains from partnerships and affiliates (4,843) (6,967) (7,427)
Depreciation and amortization 980 975 882
Stock based compensation expense 1,819 2,770 53
Deferred income tax (1,769) 1,088 (3,590)
Tax benefit from exercise of stock options 1,064 328 191
Foreign currency loss - 191 67
Other-than-temporary loss on available for sale
securities - 3,301 40
Impairment of goodwill - 1,127 -
Market value of donated securities - - 331
Minority interest in net income of consolidated
subsidiaries 495 498 1,434
Realized gains on sales of available for sale
securities, net (101) (482) (621)
Realized gains on sales of investments in securities,
net (960) (10,676) (18,667)
Change in unrealized value of trading investments in
securities, net (46) (2,872) (2,035)
Amortization on discount on debt - - 137
Excess tax benefit adjustment - - 1,782
(Increase) decrease in operating assets:
Purchases of trading investments in securities (928,522) (1,171,349) (1,039,946)
Proceeds from sales of trading investments in
securities 873,185 1,063,096 1,014,347
Investments in partnerships and affiliates (37,035) (15,969) (4,903)
Distributions from partnerships and affiliates 20,793 37,448 14,615
Receivable from brokers (4,307) (4,288) (42,052)
Investment advisory fees receivable (5,624) 3,338 (9,123)
Other receivables from affiliates 1,378 126 3,155
Other assets 1,351 (755) (2,486)
Increase (decrease) in operating liabilities:
Payable to brokers (5,389) 3,635 30,929
Income taxes payable (1,082) 267 (686)
Compensation payable 2,933 896 5,530
Accrued expenses and other liabilities (790) (271) 22,769
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 - - (12,522)
Change in unrealized value of investments in securities
and securities sold short, net - - (5,627)
Equity in net gains from partnerships and affiliates - - (885)
Purchases of trading investments in securities and
securities sold short - - (675,519)
Proceeds from sales of trading investments in securities
and securities sold short - - 652,880
Investments in partnerships and affiliates - - (2,004)
Distributions from partnerships and affiliates - - 380
Decrease in investment advisory fees receivable - - 127
Increase in receivable from brokers - - (9,290)
Decrease in other assets - - 441
Increase in payable to brokers - - 7,263
Decrease in accrued expenses and other liabilities - - (11,643)
Income related to investment partnerships and offshore
funds consolidated under FIN 46R and EITF 04-5, net - - 16,447
---------- ------------ ------------
Total adjustments (86,470) (94,545) (75,226)
---------- ------------ ------------
Net cash used in operating activities (23,879) (31,029) (5,708)
---------- ------------ ------------
F-8
GAMCO INVESTORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31
------------------------------
2004(a) 2005(a) 2006
---------- --------- ---------
Investing activities
Purchases of available for sale securities (11,656) (9,290) (5,434)
Proceeds from sales of available for sale
securities 600 2,085 2,766
---------- --------- ---------
Net cash used in investing activities (11,056) (7,205) (2,668)
---------- --------- ---------
Financing activities
Dividend paid to minority stockholders of
subsidiary (2,718) (507) (795)
Contributions related to investment partnerships
and offshore funds
consolidated under FIN 46R and EITF 04-5, net - - 29,734
Proceeds from exercise of stock options 3,026 1,331 687
Repurchase of 5.5% convertible note - (50,000) -
Dividends paid (34,004) (20,122) (3,413)
Proceeds from the settlement of purchase contracts 11,740 70,569 -
Purchase and retirement of mandatory convertible
securities (1,677) - -
Tender for employee stock options - (9,665) -
Capitalized costs (116) (31) -
Purchase of treasury stock (70,731) (37,201) (54,603)
---------- --------- ---------
Net cash used in financing activities (94,480) (45,626) (28,390)
---------- --------- ---------
Net decrease in cash and cash equivalents (129,415) (83,860) (36,766)
Net increase in cash from partnerships and
offshore funds consolidated
under FIN 46R and EITF 04-5 - - 1,754
Effect of exchange rates on cash and cash
equivalents - (75) (36)
Cash and cash equivalents at beginning of year 386,511 257,096 173,161
---------- --------- ---------
Cash and cash equivalents at end of year $ 257,096 $173,161 $138,113
========== ========= =========
Supplemental disclosures of cash flow information
Cash paid for interest $ 16,662 $ 14,692 $ 13,019
========== ========= =========
Cash paid for income taxes $ 37,881 $ 36,779 $ 46,314
========== ========= =========
(a) Restated as described in note A in item 8 of this report on Form 10-K.
See accompanying notes.
F-9
A. Significant Accounting Policies
Basis of Presentation
GAMCO Investors, Inc. ("GBL" or the "Company") was incorporated in April 1998 in
the state of New York, with no significant assets or liabilities and did not
engage in any substantial business activities prior to the initial public
offering ("Offering") of our shares. On February 9, 1999, we exchanged 24
million shares of our class B common stock, representing all of our then issued
and outstanding common stock, with Gabelli Funds, Inc. ("GFI") and two of its
subsidiaries in consideration for substantially all of the operating assets and
liabilities of GFI, relating to its institutional and retail asset management,
mutual fund advisory, underwriting and brokerage business (the
"Reorganization"). GBL distributed net assets and liabilities, principally a
proprietary investment portfolio, of approximately $165 million, including cash
of $18 million, which has been recorded for accounting purposes as a deemed
distribution to GFI. GFI, which was renamed Gabelli Group Capital Partners, Inc.
in 1999, is the parent of GBL and was renamed GGCP, Inc. ("GGCP") during 2005.
On February 17, 1999, we completed our sale of 6 million shares of class A
common stock in the Offering and received proceeds, after fees and expenses, of
approximately $96 million. Immediately after the Offering, GFI owned 80% of the
outstanding common stock of GBL and as of December 31, 2006 their ownership is
72.3%. In addition, with the completion of the Offering, we became a "C"
Corporation for federal and state income tax purposes and are subject to
substantially higher income tax rates. Our corporate name change to GAMCO
Investors, Inc. became effective August 29, 2005.
The accompanying consolidated financial statements include the assets,
liabilities and earnings of:
o GBL; and
o Our wholly-owned subsidiaries: Gabelli Funds, LLC ("Funds Advisor"), GAMCO
Asset Management Inc. ("GAMCO"), GAMCO Asset Management (UK) Limited,
Gabelli Fixed Income, Inc. ("Fixed Income") and its subsidiaries;
o Our majority-owned or majority-controlled subsidiaries: Gabelli Securities,
Inc. ("GSI") and its subsidiaries and Gabelli Advisers, Inc. ("Advisers");
and
o Certain investment partnerships and offshore funds in which we have a
direct or indirect controlling financial interest as required by the
Financial Accounting Standards Board ("FASB") Interpretation No. 46R
("FIN 46R") and Emerging Issue Task Force 04-5 ("EITF 04-5"). Please see
Note C included herein.
At December 31, 2004, 2005 and 2006, we owned approximately 92% of GSI and had a
51% voting interest in Advisers (41% economic interest.) The consolidated
financial statements comprise the financial statements of GBL and its
subsidiaries as of December 31 of each year. The financial statements of the
subsidiaries are prepared for the same reporting year as the parent company,
using consistent accounting policies. All significant intercompany transactions
and balances have been eliminated. Subsidiaries are fully consolidated from the
date of acquisition, being the date on which GBL obtains control, and continue
to be consolidated until the date that such control ceases.
Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S.
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
Nature of Operations
GAMCO, Funds Advisor, Gabelli Fixed Income LLC ("Fixed Income LLC"), a
wholly-owned subsidiary of Fixed Income, Advisers and GSI (effective January 19,
2006) are registered investment advisors under the Investment Advisers Act of
1940. Gabelli & Company, Inc. ("Gabelli & Company"), a wholly-owned subsidiary
of GSI is a registered broker-dealer with the Securities and Exchange Commission
("SEC") and is a member of the National Association of Securities Dealers, Inc.
("NASD"). Gabelli & Company acts as an introducing broker, and all transactions
for its customers are cleared through the New York Stock Exchange ("NYSE")
member firms on a fully-disclosed basis. Accordingly, open customer transactions
are not reflected in the accompanying consolidated statements of financial
condition. Gabelli & Company is exposed to credit losses on these open positions
in the event of nonperformance by its customers, pursuant to conditions of its
clearing agreements with its clearing brokers. This exposure is reduced by the
clearing brokers' policy of obtaining and maintaining adequate collateral and
credit of the counterparties until the open transaction is completed.
F-10
Gabelli Direct, Inc. ("Gabelli Direct"), a wholly-owned subsidiary of GSI, and
Gabelli Fixed Income Distributors, Inc. ("Fixed Income Distributors"), a
wholly-owned subsidiary of Fixed Income LLC, were voluntarily deregistered as
broker-dealers with the SEC and as members of the NASD in October 2006 and
January 2007, respectively.
Cash and Cash Equivalents
Cash equivalents primarily consist of affiliated money market mutual funds which
are highly liquid. At December 31, 2005 and 2006, approximately $2.5 million and
$2.1 million, respectively, of cash and cash equivalents was held as part of the
collateral to secure a $51.3 million letter of credit originally issued on
August 14, 2002, in favor of the holder of the 6% convertible note, and these
amounts are disclosed as restricted cash on the consolidated statements of
financial condition. The $51.3 million letter of credit is due to expire on May
22, 2007.
Securities Transactions and Commissions Revenue and Clearing Charges
Investments in securities are accounted for as either "trading securities" or
"available for sale" and are stated at quoted market values. Securities that are
not readily marketable are stated at their estimated fair values as determined
by our management. The resulting unrealized gains and losses for trading
securities are included in net gain from investments, and the unrealized gains
and losses for available for sale securities, net of management fees and tax,
are reported as a separate component of stockholders' equity. Securities
transactions and any related gains and losses are recorded on a trade date
basis. Realized gains and losses from securities transactions are recorded on
the identified cost basis. Commissions revenue and related clearing charges are
recorded on a trade date basis.
At December 31, 2005 and 2006, approximately $52.2 million and $52.1 million,
respectively, of investments in securities were held as collateral to secure a
$51.3 million letter of credit originally issued on August 14, 2002 in favor of
the holder of the 6% convertible note, and these amounts are disclosed as
restricted investments in securities on the consolidated statements of financial
condition. The $51.3 million letter of credit is due to expire on May 22, 2007.
Securities sold, but not yet purchased are recorded at trade date, and are
stated at quoted market values and represent obligations of GBL to purchase the
securities at prevailing market prices. Therefore, the future satisfaction of
such obligations may be for an amount greater or less than the amounts recorded
on the consolidated statements of financial condition. The ultimate gains or
losses recognized are dependent upon the prices at which these securities are
purchased to settle the obligations under the sales commitments.
Investments in Partnerships and Affiliates
Investments in partnerships and affiliates, whose underlying assets consist
mainly of marketable securities, are accounted for as consolidated subsidiaries
or equity investments in accordance with FIN 46 and EITF 04-5 effective as
January 1, 2006. Please refer to Note C included herein. Prior to January 1,
2006, Investments in Partnerships and Affiliates were accounted for using the
equity method under which our share of net earnings or losses of these
partnerships and affiliated entities was reflected in income as earned, capital
contributions were recorded when paid, and distributions received were
reductions of the investments. Investments in partnerships and affiliates for
which market values were not readily available were stated at their estimated
fair values as determined by our management. Depending on the terms of the
investment, the Company may be restricted as to the timing and amounts of
withdrawals.
Receivables from and Payables to Brokers
Receivables from and payables to brokers consist of amounts arising primarily
from the purchases and sales of securities.
Revenue Recognition
Advisory fees from the open-end mutual funds, closed-end funds and sub-advisory
accounts are computed daily or weekly based on average net assets and amounts
receivable are included in investment advisory fees receivable in the
consolidated statements of financial condition. Advisory fees from Separate
Accounts are generally computed quarterly based on account values as of the end
of the preceding quarter and accrued monthly and amounts receivable are included
in investment advisory fees receivable in the consolidated statements of
financial condition. Management fees from Investment Partnerships are computed
either monthly or quarterly and accrued monthly, and amounts receivable are
included in other receivables from affiliates in the consolidated statements of
financial condition.
F-11
Revenues from Investment Partnerships also generally include an incentive
allocation or a fee of 20% of the economic profit. The incentive allocation or
fee is generally based on the absolute gain in a portfolio and is recognized at
the end of the measurement period and amounts receivable are included in other
receivables from affiliates in the consolidated statements of financial
condition. Fulcrum fees from certain institutional separate accounts, which are
based upon meeting or exceeding specific benchmark index or indices, are
recognized at the end of the stipulated contract period for the respective
account, and receivables due from fulcrum fees are included in investment
advisory fees receivable on the consolidated statements of financial condition.
There was $4.4 million in fulcrum fees receivable as of December 31, 2006.
Management fees on closed-end preferred shares are received at year-end if the
total return to common shareholders of the closed-end fund for the calendar year
exceeds the dividend rate of the preferred shares. These fees are recognized at
the end of the measurement period. Receivables due on management fees on
closed-end preferred shares are included in investment advisory fees receivable
on the consolidated statements of financial condition.
Distribution fees from the open-end mutual funds are computed daily based on
average net assets and are accrued monthly. The amounts receivable for
distribution fees are included in other receivables from affiliates on the
consolidated statements of financial condition.
Distribution Costs
We incur certain promotion and distribution costs, which are expensed as
incurred, principally related to the sale of shares of open-end mutual funds,
shares sold in the initial public offerings of our closed-end funds, and
after-market support services related to our closed-end funds. Distribution
costs relating to closed-end funds were approximately $4,365,000, $5,576,000 and
$8,217,000 for 2004, 2005 and 2006, respectively. In fourth quarter 2006, we
made a prepayment of $4.2 million in distribution expenses to a broker in
connection with the termination of certain after-market support services related
to the common share assets of The Gabelli Dividend and Income Trust which is
included in distribution costs on the consolidated statement of income.
Dividends and Interest Income and Interest Expense
Dividends are recorded on the ex-dividend date. Interest income and interest
expense are accrued as earned or incurred.
Depreciation and Amortization
Fixed assets, with net book value of $3.2 million are included in other assets,
are recorded at cost and depreciated using the straight-line method over their
estimated useful lives. Leasehold improvements, which are included in other
assets, are recorded at cost and amortized using the straight-line method over
their estimated useful lives or lease terms, whichever is shorter. Amortization
of the capital lease obligation is computed on the interest rate method while
the leased property is depreciated utilizing the straight-line method over the
term of the lease, which expires on April 30, 2013.
Derivative Financial Instruments
The 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 investments in securities in the consolidated statements of financial
condition, and gains and losses from the swaps and treasury shares are included
in net gain from investments in the consolidated statements of income.
Goodwill
Goodwill pertains to the cost in excess of net assets acquired. Goodwill is
deemed to have indefinite life and, therefore, is not subject to amortization,
but is instead reviewed at least annually for impairment in accordance with SFAS
No. 142, "Goodwill and Other Intangible Assets." 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
F-12
accounting policies the need to reassess goodwill for this previously 80% owned
subsidiary. Using a present value cash flow method, we reassessed 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 for the
impairment of goodwill which represented the entire amount of goodwill for this
entity during 2005. At December 31, 2006, there remains $3.5 million of goodwill
related to our 92% owned subsidiary, Gabelli Securities, Inc.
At November 30, 2005 and November 30, 2006, management conducted its annual
assessments and assessed the recoverability of goodwill and other intangible
assets and determined that there was no further impairment of the remaining
goodwill on GBL's consolidated financial statements. In assessing the
recoverability of goodwill and other intangible assets, projections regarding
estimated future cash flows and other factors are made to determine the fair
value of the respective assets. If these estimates or related projections change
in the future, it may result in an impairment charge for these assets to income.
Income Taxes
We account for income taxes under the liability method prescribed by SFAS No.
109, "Accounting for Income Taxes" ("SFAS 109"). Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to the
differences between the financial statement carrying amount of existing assets
and liabilities and their respective tax basis. Future tax benefits are
recognized only to the extent that realization of such benefits is more likely
than not.
Minority Interest
For the year ended December 31, 2006, minority interest on the consolidated
statement of income represents income attributable to the minority stockholders'
of GSI and Advisers, as well as for income for certain investment partnerships
and offshore funds that are consolidated as required by FIN 46 and EITF 04-5.
With the exception of GSI and investment partnerships, these minority
stockholders are principally employees, officers and directors of GBL. On
December 31, 2005, the minority interest of Fixed Income was eliminated as the
Company acquired the remaining interest it did not own through a settlement with
the minority interest stockholders.
As of December 31, 2006, minority interest on the consolidated statement of
financial condition represents amounts attributable to the minority stockholders
of GSI and Advisers, as well as amounts attributable to the other investors for
certain investment partnerships and offshore funds that are consolidated as
required by FIN 46R and EITF 04-5.
Fair Values of Financial Instruments
The carrying amount of all assets and liabilities, other than goodwill, capital
lease, fixed assets, and certain other assets in the consolidated statements of
financial condition approximate their fair values.
Earnings Per Share
Net income per share is computed in accordance with SFAS No. 128, "Earnings Per
Share". Basic net income per common share is calculated by dividing net income
applicable to common stockholders by the weighted average number of shares of
common stock outstanding in the period.
Diluted net income per share, in addition to the weighted average number of
shares determined for basic net income per share, includes common stock
equivalents which would arise from the exercise of stock options using the
treasury stock method and, if dilutive, assumes the conversion of our
convertible note for the period outstanding since its issuance in August 2001.
An average of 208,000, 151,000 and 29,000 incremental shares were included as
the dilutive effect of stock options in 2004, 2005 and 2006, respectively. In
2004, net income is adjusted for interest expense, net of management fees and
taxes, of $2,862,000 and the weighted average shares outstanding includes
1,923,000 incremental shares as the convertible note had a dilutive effect. In
2005, net income is adjusted for interest expense, net of management fees and
taxes, of $1,758,000 and the weighted average shares outstanding includes
1,199,000 incremental shares as the convertible note had a dilutive effect. In
2006, net income is adjusted for interest expense, net of management fees and
taxes, of $1,489,000 and the weighted average shares outstanding includes
956,000 incremental shares as the convertible note had a dilutive effect.
F-13
Stock Based Compensation
We currently sponsor stock option plans previously adopted and approved by our
shareholders as a means to attract, retain and motivate employees. Effective
January 1, 2003, we adopted the fair value recognition provisions of SFAS No.
123 "Accounting for Stock-Based Compensation - Transition and Disclosure" in
accordance with the transition and disclosure provisions under the recently
issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure". Previously we had elected to use the intrinsic value method
prescribed in Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees" and related interpretations. Accordingly, no
compensation expense was recognized where the exercise price equaled or exceeded
the market price of the underlying stock on the date of grant. We adopted
Statement 123 (R) "Share-Based Payment" ("Statement 123 (R)") on January 1,
2005. In light of our modified prospective adoption of the fair value
recognition provisions of Statement 123 (R) for all grants of employee stock
options, the adoption of Statement 123 (R) did not have a material impact on our
consolidated financial statements. In 2004, 2005 and 2006, we have recognized a
total of $1,819,000, $2,770,000 and $53,000, respectively, in option expense. We
expense stock option compensation over the vesting period of the option in line
with the vesting characteristics. Refer also to Note F.
Business Segments
We operate predominantly in one business segment, the investment advisory and
asset management business. We conduct our investment advisory business
principally through: GAMCO (Separate Accounts), Funds Advisor (Mutual Funds) and
GSI (Investment Partnerships). We also act as an underwriter, are a distributor
of our open-end mutual funds and provide institutional research through Gabelli
& Company, our broker-dealer subsidiary.
Reclassifications
Certain prior period amounts reflect reclassifications to conform with the
current year's presentation.
Changes in Accounting Policy
GBL 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, GBL 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. Prior to the accounting change, GBL 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. This change in method had
no impact on full year net income as the measurement date is the same as the
fiscal year end.
In addition, GBL has changed its accounting method to recognize incentive
allocation or fee revenues on investment partnerships at the end of the
measurement period, effective January 1, 2006. Prior to the accounting change,
GBL 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 $0.2 million less in incentive fee revenues on investment
partnerships for the year ended December 31, 2006.
After considering the guidance provided in EITF D-96, "Accounting for Management
Fees Based on a Formula", GBL 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.
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 GBL 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 GBL's fiscal year-end, there is an adjustment for
the cumulative effect of a change to the accounting principle at January 1,
2004. Such cumulative effect of change in accounting amounted to $210,000 as of
January 1, 2004 which is presented in the consolidated statement of
stockholder's equity. Additionally, there is a change in full year 2004 and 2005
revenues and net income from what was previously reported. Therefore, this
change in accounting principle resulted in an increase of revenues of
approximately $0.6 million and $1.0 million in 2004 and 2005, respectively, an
increase in net income of approximately $32,000 and $125,000, respectively, and
an increase in earnings per share of $0.00 and $0.01 in 2004 and 2005,
respectively. In 2006, if the policy had not changed, revenue and net income
would have been decreased by approximately $0.1 million and $35,000
respectively, and there would have been no effect on earnings per share.
F-14
Material Weaknesses
As discussed in Item 9A of this report on Form 10-K, management concluded that
the following material weaknesses existed in the Company's internal control over
financial reporting at December 31, 2006 and disclosed this to the Audit
Committee and to the independent registered public accountants. Management did
not have adequate controls in place to ensure that there was no more than a
remote likelihood that a material misstatement of the annual or interim
financial statements would be prevented or detected as it relates to two items.
First, there was a material weakness relating to the reporting of individual
assets and liabilities of certain proprietary investment accounts in the
consolidated financial statements. Next, there was a material weakness relating
to the evaluation of and accounting for certain non-routine transactions in
accordance with U.S. generally accepted accounting principles. All required
adjustments were made to the December 31, 2006 consolidated financial statements
prior to issuance.
As a result of the first material weakness, the Company restated its
consolidated statement of financial condition as of December 31, 2005. In the
consolidated statement of financial condition, the assets and liabilities
(primarily short positions and margin) associated with these proprietary
investments were reported on a net basis, rather than reported on a gross basis.
The effects of the restatement on the December 31, 2005 consolidated statement
of financial position are as follows: Cash and cash equivalents, investments in
securities, receivable from brokers and other assets increased by $2.5 million,
$20.4 million, $1.3 million and $0.1 million, respectively, and investments in
partnerships and affiliates decreased by $17.1 million for a net increase in
total assets of $7.2 million. Accrued expenses and other liabilities, payable to
brokers, and securities sold, not yet purchased increased by $0.1 million, $3.9
million and $3.2 million, respectively, for a total increase in liabilities of
$7.2 million.
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," ("Statement 155") that amends FASB Statements No. 133 "Accounting for
Derivative Instruments and Hedging Activities," ("Statement 133") and No. 140
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities a replacement of FASB Statement 125" ("Statement 140"). 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 principal-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 first fiscal year that begins after September 15, 2006. The
Company plans to adopt this statement on January 1, 2007. The impact of adopting
this statement is expected to be immaterial to the Company's consolidated
financial statements.
In March 2006, the FASB issued FASB Statement No. 156, "Accounting for Servicing
of Financial Assets," which amends Statement 140. 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 first
fiscal year that begins after September 15, 2006. The Company plans to adopt
this statement on January 1, 2007. The impact of adopting this statement is
expected to be immaterial to the Company's 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)" ("FSP"). 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 first day of
the first reporting period beginning after September 15, 2006. The Company plans
to adopt this Statement on January 1, 2007. The impact of adopting this
statement is expected to be immaterial to the Company's consolidated financial
statements.
In June 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty
in Income Taxes" ("FIN 48"), which is an interpretation of SFAS109. This
interpretation prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax position taken or
expected 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
interpretation on January 1, 2007. The Company has not completed its analysis,
and the materiality of the adoption on the Company's consolidated financial
statement is not known at this time.
F-15
In September 2006, the FASB issued FASB Statement No. 157, "Fair Value
Measurements" ("Statement 157"). The statement provides guidance for using fair
value to measure assets and liabilities. The statement provides guidance to
companies about the extent of which to measure assets and liabilities at fair
value, the information used to measure fair value, and the effect of fair value
measurements on earnings. The statement applies whenever other standards require
(or permit) assets or liabilities to be measured at fair value. The statement
does not expand the use of fair value in any new circumstances. The statement is
effective for financial statements issued for fiscal years beginning after
November 15, 2007 and for interim periods within those fiscal years. The Company
plans to adopt this statement on January 1, 2008. The impact of adopting
Statement 157 is expected to be immaterial to the Company's consolidated
financial statements.
In September 2006, the SEC released Staff Accounting Bulletin No. 108,
"Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements" (the "SAB"). The SAB
addresses diversity in how companies consider and resolve the quantitative
effect of financial statement misstatements. The SAB is effective as of the
beginning of the first day of the first reporting period beginning after
November 15, 2006. The Company plans to adopt this SAB on January 1, 2007. The
impact of adopting this SAB is expected to be immaterial to the Company's
consoliated financial statements.
In February 2007, the FASB issued FAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities - Including an Amendment of FASB
Satement No. 115," ("Statement 159"), which provides companies with an option to
report selected financial assets and liabilities at fair value. The standard's
objective is to reduce both the complexity in accounting for financial
instruments and the volatility in earnings caused by measuring related assets
and liabilities differently. Statement 159 also establishes presentation and
disclosure requirements designed to facilitate
F-16
comparisons between companies that choose different measurement attributes for
similar types of assets and liabilities. This statement is effective as of the
beginning of an entity's first fiscal year beginning after November 15, 2007.
Early adoption is permitted as of the beginning of the previous fiscal year
provided that the entity makes that choice in the first 120 days of that fiscal
year and also elects to apply the provisions of Statement 157. The Company plans
to adopt this statement on January 1, 2008. The impact of adopting Statement 159
is expected to be immaterial to the Company's consolidated financial statements.
B. Investments in Securities
Investments in securities at December 31, 2005 and 2006 consisted of the
following:
2005(a) 2006
--------------------- ---------------------
Cost Market Cost Market
Value Value
---------- ---------- ---------- ----------
(In thousands)
Trading securities:
U.S. Government obligations $ 185,392 $ 187,606 $ 161,578 $ 164,532
Corporate bonds 23,638 22,741 57,786 59,522
Common stocks 79,982 86,068 98,383 106,175
Mutual funds 40,964 41,530 72,695 71,413
Preferred stocks 1,716 1,911 3,511 3,605
Other investments 480 315 526 383
---------- ---------- ---------- ----------
Total trading securities 332,172 340,171 394,479 405,630
---------- ---------- ---------- ----------
Available for sale securities:
Common stocks 20,028 21,435 21,979 29,081
Mutual funds 59,125 59,798 60,422 72,884
---------- ---------- ---------- ----------
Total available for sale
securities 79,153 81,233 82,401 101,965
---------- ---------- ---------- ----------
Total investments in
securities $ 411,325 $ 421,404 $ 476,880 $ 507,595
========== ========== ========== ==========
(a) Restated as described in Note A in Item 8 of this report on Form 10-K.
At December 31, 2005 and 2006, there were four holdings and one holding in loss
positions, respectively, which were not deemed to be other than temporarily
impaired due to the length of time that they have been in a loss position. An
unrealized holding gain, net of management fees and taxes, of $0.6 million in
2005 and an unrealized holding gain, net of management fees and taxes, of $9.8
million in 2006 has been included in stockholders' equity. Proceeds from sales
of investments available for sale were approximately $0.6 million, $2.1 million
and $2.8 million for the years ended December 31, 2004, 2005 and 2006,
respectively. Realized gains on the sale of investments available for sale
amounted to $0.1 million, $0.5 million and $0.6 million for the years ended
December 31, 2004, 2005 and 2006, respectively. There were no realized losses in
2004, 2005 and 2006.
For the years ended December 31, 2005 and 2006, there were $3.3 million and $0.1
million, respectively, in losses on available for sale securities deemed to be
other than temporary, which were recorded in the consolidated statements of
income. There were no losses recorded for the year ended December 31, 2004.
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 management fee and 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 consolidated statements of income.
C. Investments in Partnerships and Affiliates
Beginning January 1, 2006, the provisions of FIN 46R and 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 consolidated statements of income and
consolidated statements of cash flows for the first quarter 2006. We were not
F-17
required to consolidate these entities on our consolidated statements 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
consolidated within our consolidated statement of income and consolidated
statements of cash flows or on our consolidated statements of financial
condition in the second quarter or future periods as long as GBL continued to
not maintain direct or indirect control over the investment partnerships and
offshore funds. For the year ended December 31, 2006, the consolidation of these
entities for the first quarter 2006 had no effect on net income but does affect
the classification of income between operating and other income.
We also serve as the investment manager or co-investment manager for several
offshore funds and the general partner for one partnership, which are classified
as VIEs. These offshore funds seek to earn absolute returns for investors and
are primarily focused within our event-driven long/short equity and
sector-focused strategies. The partnership seeks to generate absolute returns by
investing in, and optimizing, a portfolio of several investment partnerships
managed and advised by us. Our involvement with one of these offshore funds
began in 1994 but the majority of the offshore funds were launched between 1999
and 2002. The partnership began in 2005.
The total net assets of the six offshore funds and one partnership, which are
classified as VIEs, were approximately $56.5 million on December 31, 2006, and
the total net assets of the five offshore funds and one partnership on December
31, 2005 were approximately $40.0 million. On December 31, 2006, we were not the
primary beneficiary or a holder of a significant variable interest in six of the
seven VIEs therefore these are not consolidated in our consolidated financial
statements. In the other instance, an unconsolidated related party held an
interest in an offshore fund which, when combined with the Company's cash flows
from the incentive fee allocation and the management fee as co-investment
manager results in the Company being considered the primary beneficiary of such
entity. This offshore fund is a global event-driven long/short equity fund with
total assets of $10,078,000 and $9,246,000 and total liabilities of $979,000 and
$872,000 at December 31, 2005 and 2006, respectively. This fund was not
consolidated as of and for the year ended December 31, 2005 but has been
consolidated as of and for the year ended December 31, 2006. As co-investment
manager of this fund, we earned approximately $73,000, $100,000 and $62,000 in
management and incentive fees in 2004, 2005 and 2006, respectively.
Our maximum exposure to loss as a result of our involvement with the six
offshore funds classified as VIEs is limited to our investment in the respective
VIEs which was only the case for one of these funds. On December 31, 2005 and
2006, we had an investment in this offshore fund of approximately $187,000 and
$196,000, respectively. Our maximum exposure to loss as a result of our
involvement with the partnership classified as a VIE includes our investment as
well as being contingently liable for all of the partnership's liabilities in
our capacity as general partner. On December 31, 2005 and 2006, we did not have
an investment in this partnership.
We also consolidated five other investment partnerships and one other offshore
fund in which we have a direct or indirect controlling financial interest as of
and for the year ended December 31, 2006. These entities have been consolidated
within our consolidated financial statements for the year ended December 31,
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 consolidated
statements of income and consolidated statements of cash flows for the year
ended December 31, 2006 related to these entities, the consolidation of these
entities also resulted in minor adjustments to our consolidated statements of
financial condition at December 31, 2006. The consolidation of these entities on
the consolidated statements of financial condition has increased assets by $17.5
million, liabilities by $3.2 million and minority interest by $14.3 million.
Prior to consolidation of these entities, our investments in these entities were
reflected within investments in partnerships and affiliates on the consolidated
statements of financial condition and accounted for under the equity method.
For the year ended December 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.
We are general partner or co-general partner of various limited partnerships and
the Investment Manager of various offshore funds whose underlying assets consist
primarily of marketable securities. As general partner or co-general partner, we
are contingently liable for all of the partnerships' liabilities. As described
above, some of these partnerships and offshore funds are consolidated and others
are not. Summary financial information from partnerships that are not
consolidated at December 31, 2005 and 2006 and for the years then ended, is as
follows (in thousands):
2005 2006
--------- ---------
Total assets.................. $ 250,129 $ 261,437
Total liabilities............. 48,164 3,637
Equity........................ 201,965 257,800
For the year ended December 31, 2006, the net earnings and Company's carrying
value for the above partnerships that are not consolidated were $25,548,000 and
$12,862,000, respectively. For 2005, the net earnings and Company's carrying
value for all the above partnerships were $13,804,000 and $24,642,000,
respectively.
For the year ended December 31, 2006, the income from our investments in the
above partnerships that are not consolidated was $849,000. For the years ended
December 31, 2004 and 2005, the income from our investments for all of the
partnerships was approximately $1,217,000 and $747,000.
As general partner or co-general partner of various limited partnerships, we
receive a management fee based on a percentage of each partnership's net assets
and a 20% incentive allocation based on economic profits. For the year ended
December 31, 2006 for the partnerships that were not consolidated, we earned
management fees and incentive fees of $1,606,000 and $2,373,000, respectively.
For the years ended December 31, 2004 and 2005 for all of the partnerships, we
earned management fees of approximately $2,029,000 and $1,865,000, respectively
and earned incentive allocations of $830,000 and $1,585,000, respectively.
We also serve as investment manager or co-investment manager for various
affiliated offshore funds whose underlying assets consist primarily of
marketable securities. As the investment manager or co-investment manager, we
earn a management fee based on a percentage of net assets and are entitled to a
20% incentive based on the absolute gain in the portfolio. For the year ended
December 31, 2006 for the offshore funds that are not consolidated, we earned
management fees of $1,850,000 and recorded incentive fees of $3,656,000. For the
years ended December 31, 2004 and 2005 for all of the offshore funds, we earned
F-18
management fees of $2,448,000 and $2,306,000, respectively and recorded
incentive fees of $1,423,000 and $3,013,000, respectively. At December 31, 2006
for the offshore funds that are not consolidated, we had investments in these
affiliated offshore funds aggregating $29,008,000 and earned income of
$3,292,000. At December 31, 2005 for all of the offshore funds, we had
investments in these affiliated offshore funds aggregating $27,790,000 and
earned $643,000 and $2,083,000 from these investments in 2004 and 2005,
respectively.
At December 31, 2005 and 2006, we had various interests in unaffiliated limited
partnerships, offshore funds and other investments aggregating approximately
$22,408,000 and $21,098,000, respectively. For the years ended December 31,
2004, 2005 and 2006, we recorded net gains related to these investments of
approximately $1,000,000, $1,183,000, and $2,078,000, respectively.
D. Income Taxes
We account for income taxes under the liability method prescribed by SFAS 109.
Under SFAS 109, deferred income taxes reflect the net effects of temporary
differences between the carrying amounts of assets and liabilities for financial
accounting purposes and the amounts used for income tax purposes.
GBL and our greater than 80% owned subsidiaries file a consolidated federal
income tax return. Advisers, our less than 80% owned subsidiary files a separate
federal income tax return. Accordingly, the income tax provision represents the
aggregate of the amounts provided for all companies.
The provision for (benefit from) income taxes for the years ended December 31,
2004, 2005 and 2006 consisted of the following:
2004 (a) 2005 (a) 2006
------------ -------------- ------------
(In thousands)
Federal:
Current $ 31,799 $ 31,773 $ 50,911
Deferred (1,198) 1,183 (6,502)
State and local:
Current 6,088 5,547 5,496
Deferred (571) (95) (627)
------------ -------------- ------------
$ 36,118 $ 38,408 $ 49,278
============ ============== ============
(a) Restated as described in note A of item 8 of this report on Form 10-K.
Our effective tax rate for each of the years ended December 31, 2004, 2005 and
2006 was 36.4%, 37.5% and 38.2%, respectively. A reconciliation of the Federal
statutory income tax rate to the effective tax rate is set forth below:
2004 2005 2006
----------- ----------- -----------
Statutory Federal income tax rate 35.0% 35.0% 35.0%
State income tax, net of Federal benefit 3.6 3.5 2.4
Other (2.2) (1.0) 0.8
----------- ----------- -----------
Effective income tax rate 36.4% 37.5% 38.2%
F-19
Significant components of our deferred tax assets and liabilities were as
follows:
2005 (a) 2006
------------ -------------
Deferred tax assets: (in thousands)
Stock option expense $ (650) $ (622)
Deferred compensation (3,362) (3,602)
Accrued bonus - (1,575)
Reserve for settlement - (4,500)
Other (482) (495)
------------ -------------
Total deferred tax assets (4,494) (10,794)
------------ -------------
Deferred tax liabilities:
Investments in securities available for sale 64 6,207
Investments in securities and partnerships 5,733 4,551
Other 396 399
------------ -------------
Total deferred tax liabilities 6,193 11,157
------------ -------------
Net deferred tax liabilities $ 1,699 $ 363
============ =============
(a) Restated as described in note A of item 8 of this report on Form 10-K.
E. Debt
Debt consists of the following:
2005 2006
------------ ------------
5.5% Senior notes $ 100,000 $ 100,000
6% Convertible note (a) 50,000 49,504
5.22% Senior notes 82,308 82,308
------------ ------------
Total $ 232,308 $ 231,812
============ ============
(a) Convertible note was 5% with a conversion price of $52 per share for
December 31, 2005. Conversion price at December 31, 2006 is $53 per share.
5.5% Senior notes
On May 15, 2003, we issued 10-year, $100 million senior notes. The senior notes,
due May 15, 2013, pay interest semi-annually at 5.5%.
6% Convertible note
On August 13, 2001, we issued a 10-year, $100 million convertible note to
Cascade Investment LLC ("Cascade"). The convertible note, due August 14, 2011,
paid interest semi-annually at 6.5% for the first year and 6% thereafter and was
convertible into our class A common stock at $53 per share. In August 2003, the
interest rate on the note was lowered to 5% and the conversion price was lowered
by $1 per share to $52 per share. On April 1, 2005 we repurchased $50 million,
plus accrued interest. In June 2006, GBL and Cascade agreed to amend the terms
of the note. Effective September 15, 2006, the rate on the note increased from
5% to 6% while the conversion price was raised to $53 per share from $52 per
share. 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 GBL the right to redeem
the note at 101% of its principal amount together with all accrued but unpaid
interest thereon upon at least 30 days prior written notice, subject to certain
provisions. The evaluation of the change in the terms of the note under EITF
96-19, "Debtor's Accounting for a Modification or Exchange of Debt Instruments,"
and EITF 05-7, "Accounting for Modifications to Conversion Options Embedded in
Debt Instruments and Related Issues," resulted in a debt discount of $632,500,
which will be amortized over the remaining life of the debt. For the year ended
December 31, 2006, we amortized $137,000 of the debt discount.
If this note were converted, Cascade would own approximately 11% of our
aggregate outstanding class A common stock as of December 31, 2006. GBL is
required to reserve and keep available free from pre-emptive rights, shares of
common stock out of its authorized stock for purpose of conversion of the note.
F-20
On August 9, 2002, the Board of Directors authorized GBL to establish a
collateral account consisting of cash or securities totaling $103 million,
lowered to $102.5 million in August 2003, lowered again to $51.3 million in
April 2005, to secure a $51.3 million letter of credit in favor of Cascade. We
have paid $282,000 in 2004, $148,000 in 2005, $128,000 in 2006 and expect to pay
fees of approximately $53,000 in 2007 for the $51.3 million letter of credit
which will expire on May 22, 2007. At that time, the collateral account will be
closed and any cash or securities held will be available for general corporate
use.
Company Obligations under Mandatory Convertible Securities
On February 6, 2002, we completed our public offering of 3.6 million mandatory
convertible securities. The securities were listed on the NYSE under the symbol
"GBL.I" until February 2005. These securities initially consisted of (a) a
purchase contract under which the holder purchased shares of our class A common
stock on February 17, 2005 and (b) senior notes due February 17, 2007. In
connection with the offering, we received $90,000,000 before underwriting and
other expenses of approximately $3,100,000. For accounting purposes, the net
present value of the purchase contract adjustments and their related offering
costs, totaling $4.6 million, have been recorded as a reduction to additional
paid in capital. Costs incurred in connection with the issuance of the senior
notes have been capitalized as deferred financing costs and will be amortized as
an adjustment to interest expense over the term of the notes. During 2004, 2005
and 2006, approximately $95,000, $97,000 and $91,000, respectively, have been
amortized to interest expense.
The notes pay interest quarterly at a rate of 5.22% per year, which rate was
reset on November 17, 2004. Each purchase contract obligated its holder to
purchase, on February 17, 2005, newly issued shares of our class A common stock.
During December 2004, a holder of 469,600 purchase contracts purchased 252,456
shares of our class A common stock through early settlement. In February 2005,
the remaining holders of the 2,822,700 purchase contracts purchased 1,517,483
shares of our class A common stock for $70,569,000.
In May 2002, the Board of Directors approved the repurchase of up to 200,000
shares of the mandatory convertible securities from time to time in the open
market. On August 9, 2002, the Board of Directors increased the number of shares
authorized to be repurchased by an additional 200,000 and in May 2004, the Board
of Directors increased the number of shares authorized to be repurchased by an
additional 200,000. In August 2004, the Board of Directors changed the
authorization to $25 million. Through December 31, 2004, we repurchased 307,700
shares at an average price of $22.54 per share and an aggregate cost of $6.9
million. In 2004, a gain of approximately $34,000, attributable to the
extinguishment of the debt component of each mandatory convertible security
repurchased, was included in net gain from investments. There were no
repurchases during 2005 and 2006. Refer also to Note P.
F. Stockholders' Equity
Stock Award and Incentive Plan
We maintain two Stock Award and Incentive Plans (the "Plans"), approved by the
shareholders, which are designed to provide incentives which will attract and
retain individuals key to the success of GBL through direct or indirect
ownership of our common stock. Benefits under the Plans may be granted in any
one or a combination of stock options, stock appreciation rights, restricted
stock, restricted stock units, stock awards, dividend equivalents and other
stock or cash based awards. A maximum of 1,500,000 shares of class A common
stock have been reserved for issuance under each of the Plans by a committee of
the Board of Directors responsible for administering the Plans. Under the Plans,
the committee may grant either incentive or nonqualified stock options with a
term not to exceed ten years from the grant date and at an exercise price that
the committee may determine. Options granted under the Plans vest 75% after
three years and 100% after four years from the date of grant and expire after
ten years.
F-21
Voting Rights
The holders of class A common stock and class B common stock have identical
rights except that (i) holders of class A common stock are entitled to one vote
per share, while holders of class B common stock are entitled to ten votes per
share on all matters to be voted on by shareholders in general, and (ii) holders
of class A common stock are not eligible to vote on matters relating exclusively
to class B common stock and vice versa.
A summary of the stock option activity for the years ended December 31, 2005 and
2006 is as follows:
Weighted Average
Shares Exercise Price
-------------- ----------------
Outstanding, December 31, 2004 799,325 $27.34
Granted 20,000 $44.90
Forfeited (21,500) $28.95
Tendered (522,000) $26.68
Exercised (49,500) $26.77
--------------
Outstanding, December 31, 2005 226,325 $30.38
Granted 10,000 $39.55
Forfeited (10,000) $44.90
Exercised (33,250) $20.75
--------------
Outstanding, December 31, 2006 193,075 $31.77
==============
Shares available for future issuance
at December 31, 2006 1,244,775
==============
At December 31, 2005 and 2006, there were exercisable outstanding stock options
of 206,325 and 173,075 respectively. The weighted average exercise price of the
exercisable outstanding stock options at December 31, 2005 and 2006 was $28.98
per share and $30.56 per share, respectively.
The table below represents for various prices, the weighted average
characteristics of outstanding employee stock options at December 31, 2006.
Exercise Price
Weighted average Options of options
Exercise Options remaining currently currently
Price Outstanding contractual life exercisable exercisable
----------- ------------- ----------------- ------------- ----------------
$16.00 6,000 3.08 6,000 $16.00
$16.28 10,025 2.08 10,025 $16.28
$28.95 74,800 6.17 74,800 $28.95
$29.00 22,000 6.42 22,000 $29.00
$31.62 20,250 4.08 20,250 $31.62
$39.55 10,000 9.33 - N/A
$39.65 40,000 7.42 40,000 $39.65
$44.90 10,000 8.83 - N/A
The weighted average estimated fair value of the options granted at their grant
date using the Black-Scholes option-pricing model was as follows:
2004 2005 2006
----------- ----------- -----------
Weighted average fair value of
options granted: $ 13.04 $ 11.99 $ 11.64
Assumptions made:
Expected volatility 33% 23% 23%
Risk free interest rate 2.50% 3.50% 4.89%
Expected life 5 years 5 years 5 years
Dividend yield 0.20% 0.27% 0.30%
The expected volatility reflects the volatility of GBL stock over a period of
approximately four years, prior to each respective grant date, based on
month-end prices. The expected life reflected an estimate of the length of time
the employees are expected to hold the options, including the vesting period,
and is based, in part, on actual experience with other grants. The dividend
yield for the May 11, 2004 grant reflected the assumption that we would continue
our current policy of a $0.02 per share quarterly dividend. The dividend yield
for the November 11, 2005 grant and May 8, 2006 grant reflected the assumption
of an increase to $0.03 per share quarterly dividend. The weighted average
remaining contractual life of the outstanding options at December 31, 2006 was
6.23 years.
F-22
Prior to January 1, 2003, we applied APB Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations in accounting for our stock
option plan. Accordingly, no compensation expense was recognized where the
exercise price equals or exceeds the market price of the underlying stock on the
date of grant.
Effective January 1, 2003, we adopted the fair value recognition provisions of
SFAS No. 123 in accordance with the transition and disclosure provisions of SFAS
No. 148, "Accounting for Stock Based Compensation - Transition and Disclosure".
We adopted Statement 123 (R) on January 1, 2005. In light of our modified
prospective adoption of the fair value recognition provisions of Statement 123
(R) for all grants of employee stock options, the adoption of Statement 123 (R)
did not have a material impact on our consolidated financial statements. During
June 2005, the Board of Directors authorized the accelerated vesting of all
unvested stock options as of July 1, 2005. This resulted in the expensing of an
additional $1.8 million in stock option expense during the second quarter of
2005. The total compensation costs related to non-vested awards not yet
recognized is approximately $151,000 as of December 31, 2006. This will be
recognized as expense in the following periods:
2007 2008 2009 2010
---- ---- ---- ----
$67,000 $62,000 $20,000 2,000
In August 2005, the Company commenced a tender offer to repurchase all
outstanding options to purchase its class A common stock. The tender offer was
completed in October 2005 and approximately 110 option holders elected to tender
options to purchase an aggregate of approximately 522,000 shares of its class A
common stock. These option holders received an aggregate of approximately $9.7
million in cash (less any withholding taxes). For 2006, we recognized a tax
benefit from previously exercised stock options of $1.8 million. As a result of
the completion of the tender offer, there was a reduction in fully diluted
shares outstanding of approximately 130,000 shares.
If we had elected for 2001 and 2002 to account for our stock options under the
fair value method of SFAS No. 123 "Accounting for Stock Based Compensation," our
net income and net income per share would have been reduced to the pro forma
amounts indicated below:
2004 (a) 2005 (a) 2006
-------------- -------------- ---------------
Net income (in thousands):
As reported................................. $ 62,591 $ 63,516 $ 69,518
Additional stock based compensation expense
estimated using the fair value based method (137) - -
Related income tax benefits................. 51 - -
------------- ------------- --------------
Pro forma................................... $ 62,505 $ 63,516 $ 69,518
============= ============= ==============
Net income per share - Basic
As reported................................. $ 2.11 $ 2.13 $ 2.44
Pro forma................................... $ 2.11 $ 2.13 $ 2.44
Net income per share - Diluted
As reported................................. $ 2.06 $ 2.10 $ 2.40
Pro forma................................... $ 2.06 $ 2.10 $ 2.40
(a) Restated as described in note A of item 8 of this report on Form 10-K.
Stock Repurchase Program
In 1999, the Board of Directors established the Stock Repurchase Program through
which we have been authorized to purchase up to $9 million of our class A common
stock. We completed the Stock Repurchase Program during the first quarter of
2001 and on March 2, 2001 the Board of Directors authorized the repurchase of an
additional $3 million of our class A common stock. On September 17, 2001, the
Board of Directors raised the amount authorized to repurchase shares to $10
million. In 2002, the Board of Directors raised the amount authorized by $5
million in July and an additional $10 million in December. In 2004, the Board of
Directors raised the amount authorized by $12 million in May, an additional $25
million in August and by an additional 1 million shares in October. In addition,
the Board of Directors also authorized $25 million to be used for an accelerated
stock repurchase program as further discussed below. During 2005, the Board of
Directors authorized additional repurchases of 500,000 shares each in August and
November. During 2006, the Board of Directors authorized additional repurchases
of 500,000 shares in March, and 400,000 shares in May and November. We also
repurchased 300,000 shares of our class B common stock held by GGCP, our parent,
which was converted to class A common stock in December 2002 at $28.20 per share
and an aggregate cost of $8.46 million. The repurchase of these shares are not
included in determining the total dollars available under the Stock Repurchase
Program. In 2005 and 2006, we repurchased 861,000 and 1,335,032 shares at an
average price of $43.22 per share and $40.88 per share, respectively. There
remain 1,047,761 shares available under this program at December 31, 2006. Under
the program, we have repurchased 4,669,658 shares at an average price of $39.45
per share and an aggregate cost of $184.2 million through December 31, 2006.
F-23
In November 2004, we entered into an accelerated stock repurchase program
("ASR") whereby we repurchased 400,000 shares of stock from an investment bank
for approximately $18.8 million. The ASR permitted us to repurchase the shares
immediately, while the investment bank would purchase the shares in the market
over time. The 400,000 shares repurchased under the agreement were subject to a
future contingent price adjustment based on the actual prices paid by the
investment bank to purchase our stock in the market over time. At December 31,
2004, the investment bank had purchased 203,500 shares resulting in a contingent
purchase liability of approximately $120,000 for the Company. During 2005, the
investment bank completed its share repurchases resulting in a reduction to the
original purchase agreement of approximately $35,000.
Dividends
During 2004, we paid dividends of $1.16 per share to class A and class B
shareholders totaling $34,006,352. During 2005, we paid dividends of $0.69 per
share to class A and class B shareholders totaling $20,121,556. During 2006, we
paid dividends of $0.12 per share to class A and class B shareholders totaling
$3,412,501.
Shelf Registration
On December 28, 2001, we filed a "shelf" registration statement registering $400
million in aggregate amount of debt and other securities. The issuance of the
mandatory convertible securities used $180 million and the issuance of the 5.5%
Senior Notes used $100 million of the shelf registration leaving $120 million
for future use. Such securities may be issued as debt securities, trust
preferred securities or class A common stock.
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.
G. Capital Lease
We lease office space from an entity controlled by members of the Chairman's
family. We have recorded a capital lease asset and liability for the fair value
of the leased property. The lease provides that all operating expenses relating
to the property (such as property taxes, utilities and maintenance) are to be
paid by the lessee, GBL. Accumulated amortization on the leased property was
approximately $1,994,000 and $2,241,000 at December 31, 2005 and 2006,
respectively.
Future minimum lease payments for this capitalized lease at December 31, 2006
are as follows:
(In thousands)
2007.................................... $ 856
2008.................................... 765
2009.................................... 765
2010.................................... 765
2011.................................... 765
Thereafter.............................. 1,020
--------
Total minimum obligations............... 4,936
Interest................................ 2,136
--------
Present value of net obligations........ $ 2,800
=======
Lease payments under this agreement amounted to approximately $772,000, $802,000
and $834,000 for each of the years ended December 31, 2004, 2005 and 2006,
respectively. The capital lease contains an escalation clause tied to the change
in the Consumer Price Index which may cause the future minimum payments to
exceed $765,000 annually. Future minimum lease payments have not been reduced by
related minimum future sublease rentals of approximately $222,000, of which
approximately $95,000 is due from an affiliated entity. Total minimum
obligations exclude the operating expenses to be borne by us, which are
estimated to be approximately $740,000 per year.
F-24
H. Commitments
We rent office space under leases which expire at various dates through January
2009. Future minimum lease commitments under these operating leases as of
December 31, 2006 are as follows:
(In thousands)
2007......... $ 242
2008......... 35
2009......... 1
-----
$ 278
Equipment rentals and occupancy expense amounted to approximately $1,752,000,
$2,662,000 and $2,722,000, respectively, for the years ended December 31, 2004,
2005 and 2006.
I. Related Party Transactions
The following is a summary of certain related party transactions. Further
details regarding these and other relationships appear in our Proxy Statement
for our 2007 Annual Meeting of Shareholders.
As of December 5, 1997, GGCP entered into a master lease agreement with an
entity controlled by members of Mr. Mario Gabelli's immediate family which
expires on April 30, 2013. As of February 9, 1999, GGCP assigned all of its
rights and obligations under the master lease to GBL. GBL leases space in the
Building to a company for which Mr. Mario Gabelli ("Mr. Gabelli") serves as
Chairman and is a significant stockholder.
GGCP, Inc. owns a majority of the outstanding shares of class B common stock of
GAMCO Investors, Inc., which ownership represented approximately 95% of the
combined voting power of the outstanding common stock and approximately 72% of
the equity interest on December 31, 2006.
On May 31, 2006, we entered into an Exchange and Standstill Agreement with
Frederick J. Mancheski, a significant shareholder, pursuant to which, among
other things, he agreed to exchange his 2,071,635 shares of our class B common
stock for an equal number of shares of our class A common stock. Certain
shareholders of GGCP, including two of our officers and a director, who received
shares of our class B common stock in a distribution from GGCP, also agreed to
exchange their shares of our class B common stock for an equal number of shares
of our class A common stock. Pursuant to a Registration Rights Agreement that we
entered into with Mr. Mancheski, we filed a shelf registration statement that
was declared effective by the SEC on September 1, 2006 for the sale by Mr.
Mancheski and others, including certain of our officers, employees and a
director, of up to 2,486,763 shares of our class A common stock.
Prior to its initial public offering in February 1999, GBL and GGCP entered into
a Management Services Agreement, with a one-year term and renewable annually,
under which GBL provides certain services for GGCP, including furnishing office
space and equipment, providing insurance coverage, overseeing the administration
of its business and providing personnel to perform certain administrative
services. Pursuant to the Management Services Agreement, GGCP paid GBL $200,000,
in each of 2004, 2005 and 2006 for services provided.
GBL has entered into agreements to provide advisory and administrative services
to MJG Associates, Inc. with respect to the private investment funds managed by
it. Pursuant to such agreement, MJG Associates, Inc. pays GBL for services
provided.
Mr. Gabelli and GSI serve as co-general partners of Gabelli Associates Fund,
L.P. ("GAF."), one of the investment partnerships consolidated for the period
January 1, 2006 through March 31, 2006 under FIN46R and EITF 04-5. Mr. Gabelli
receives relationship manager and portfolio manager compensation through an
incentive fee allocation directly from GAF. Gabelli Securities International
Limited ("Gabelli Securities International") was formed in 1994 to provide
management and investment advisory services to offshore funds and accounts. Marc
Gabelli, a son of Mr. Gabelli, owns 55% of Gabelli Securities International and
GSI owns the remaining 45%.
In April 1999, Gabelli Global Partners, Ltd., an offshore investment fund that
has been consolidated in 2006 under FIN46R and EITF 04-5 was incorporated.
Gabelli Securities International and Gemini Capital Management, LLC ("Gemini"),
an entity owned by Marc Gabelli, were engaged by the fund as investment advisors
as of July 1, 1999. Gemini receives half of the management and incentive fees as
co-investment advisor. In April 1999, GSI formed Gemini Global Partners, L.P.,
(formerly known as Gabelli Global Partners, L.P.), one of the investment
partnerships consolidated for the period January 1, 2006 through March 31, 2006
under FIN46R and EITF 04-5 and an investment limited partnership for which GSI
and Gemini are the general partners. Gemini receives half of the management fee
and incentive allocation paid by the partnership to the general partners.
F-25
We serve as the investment advisor for the Funds and earn advisory fees based on
predetermined percentages of the average net assets of the Funds. In addition,
Gabelli & Company has entered into distribution agreements with each of the
Funds. As principal distributor, Gabelli & Company incurs certain promotional
and distribution costs related to the sale of Fund shares, for which it receives
a distribution fee from the Funds or reimbursement from the investment advisor.
Gabelli & Company earns a majority of its commission revenue from transactions
executed on behalf of clients of affiliated companies. Advisory and distribution
fees receivable from the Funds were approximately $17,630,000 and $23,219,000 at
December 31, 2005 and 2006, respectively. GBL earned approximately $1,555,000,
$1,323,000 and $1,308,000 in 2004, 2005 and 2006, respectively, in advisory fee
revenues and approximately $13,000, $15,000 and $20,000 in 2004, 2005 and 2006,
respectively, in distribution fees from these investments which are included in
investment advisory and incentive fees and distribution fees and other income,
respectively, on the consolidated statements of income.
We had an aggregate investment in the Funds of approximately $268,713,000 and
$277,487,000 at December 31, 2005 and 2006, respectively, of which approximately
$167,706,000 and $135,428,000 was invested in money market mutual funds,
included in cash and cash equivalents, at December 31, 2005 and 2006,
respectively. GBL earned approximately $3,194,000, $4,615,000 and $6,550,000 in
2004, 2005 and 2006, respectively, in interest income from our investment in our
money market mutual fund.
Immediately preceding the Offering and in conjunction with the Reorganization,
GBL and our Chairman entered into an Employment Agreement. Under the Employment
Agreement, we will pay the Chairman 10% of our aggregate pre-tax profits while
he is an executive of GBL and devoting the substantial majority of his working
time to the business of GBL. The management fee was approximately $11,016,000,
$11,356,000, and $12,771,000 for the years ended December 31, 2004, 2005 and
2006, respectively. The Chairman also earned portfolio management compensation
and relationship manager fees of approximately $43,961,000, $44,186,000, and
$45,434,000, respectively, for the years ended December 31, 2004, 2005 and 2006,
which have been included in compensation costs, of which $2,454,000 and
$4,210,000 was payable at December 31, 2005 and 2006, respectively. Refer also
to Note C and G.
J. Financial Requirements
As a registered broker-dealer, Gabelli & Company is subject to Uniform Net
Capital Rule 15c3-1 (the "Rule") of the Securities and Exchange Commission.
Gabelli & Company computes its net capital under the alternative method
permitted by the Rule which requires minimum net capital of $250,000. We have
consistently met or exceeded this requirement.
In connection with the registration of our subsidiary, GAMCO Asset Management
(UK) Limited with the Financial Services Authority, we are required to maintain
a minimum Liquid Capital Requirement of (pound)267,000 ($523,000 at December 31,
2006), and an Own Funds Requirement of (euro)50,000 ($66,000 at December 31,
2006). We have consistently met or exceeded these requirements.
K. Administration Fees
We have entered into administration agreements with other companies (the
"Administrators"), whereby the Administrators provide certain services on behalf
of several of the Funds and Investment Partnerships. Such services do not
include the investment advisory and portfolio management services provided by
GBL. The fees are negotiated based on predetermined percentages of the net
assets of each of the Funds.
F-26
L. Profit Sharing Plan and Incentive Savings Plan
We have a qualified contributory employee profit sharing plan and incentive
savings plan covering substantially all employees. Company contributions to the
plans are determined annually by the Board of Directors but may not exceed the
amount permitted as a deductible expense under the Internal Revenue Code. We
accrued contributions of approximately $62,000, $32,000 and $67,000 to the plans
for the years ended December 31, 2004, 2005 and 2006, respectively.
During 2005, the qualified contributory employee profit sharing plan was
terminated and the proceeds were distributed to the plan participants. No
contributions were made to the qualified contributory employee profit sharing
plan for 2005.
M. Quarterly Financial Information (Unaudited)
Quarterly financial information for the years ended December 31, 2006 and 2005
is presented below.
2006 Quarter
-------------------------------------------------------------
(in thousands, except per share data) 1st 2nd 3rd 4th Full Year
-------------- ----------- ---------- --------- -------------
Revenues............................................ $ 59,284 $ 61,659 $ 57,994 $ 82,526 $ 261,463
Operating income.................................... 18,034 8,936 18,220 26,971 72,161
Net income.......................................... 18,700 8,641 16,884 25,293 69,518
Net income per share:...............................
Basic............................................ 0.64 0.30 0.60 0.90 2.44
Diluted.......................................... 0.63 0.30 0.59 0.88 2.40
2005 Quarter
-------------------------------------------------------------
1st (a) 2nd (a) 3rd (a) 4th (a) Full Year (a)
-------------- ----------- ---------- --------- -------------
Revenues............................................ $ 60,313 $ 59,818 $ 60,706 $ 72,495 $ 253,332
Operating income.................................... 19,716 19,549 20,300 27,244 86,809
Net income.......................................... 12,429 12,900 18,046 20,141 63,516
Net income per share:...............................
Basic............................................ 0.42 0.43 0.60 0.68 2.13
Diluted.......................................... 0.41 0.42 0.59 0.67 2.10
(a) Restated as described in note A of item 8 of this report on Form 10-K.
N. Goodwill
In accordance with SFAS 142, 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 in 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 December 31, 2006, there remains $3.5
million of goodwill related to our 92% owned subsidiary, Gabelli Securities,
Inc.
At November 30, 2005 and November 30, 2006, management conducted its annual
assessments and assessed the recoverability of goodwill and other intangible
assets and determined that there was no further impairment of the remaining
goodwill on GBL's consolidated financial statements. In assessing the
recoverability of goodwill and other intangible assets, projections regarding
estimated future cash flows and other factors are made to determine the fair
value of the respective assets. If these estimates or related projections change
in the future, it may result in an impairment charge for these assets to income.
O. Other Matters
Since September 2003, GBL 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, GBL recorded a reserve against
earnings of approximately $12 million in the second quarter of 2006. In February
2007, one of our advisory subsidiaries made an offer of settlement to the SEC
for its consideration to resolve an ongoing inquiry. This offer of settlement is
subject to agreement regarding the specific language of the SEC's administrative
order and other settlement documents. As a result of these developments, we
increased our reserves as of the fourth quarter of 2006 by $3 million, bringing
the total reserves to approximately $15 million in 2006. 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 GBL related to such a settlement, or whether and to
what extent insurance may cover such payments.
F-27
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of 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 December 31, 2006 and 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.
P. Subsequent Events
In January 2007, Gabelli & Company participated in an underwriting syndicate of
the initial public offering of the Gabelli Global Deal Fund ("GDL"). GDL issued
18.75 million common shares and the issuance generated gross proceeds to GDL of
$375 million, based on the initial offering price of $20 per share. GBL invested
$25 million from its cash and cash equivalents in GDL. In March 2007, GDL issued
2.5 million additional common shares in conjunction with the exercise of the
underwriters' overallotment option. The issuance of these shares generated gross
proceeds to GDL of $50 million, based on the initial offering price of $20 per
share. We anticipate incurring approximately $1.5 million of expenses in
connection with this offering during first quarter 2007.
On February 7, 2007, the Board of Directors declared a regular quarterly
dividend of $0.03 per share to all of its class A and class B shareholders,
payable on March 28, 2007 to shareholders of record on March 15, 2007.
In February 2007, one of our advisory subsidiaries made an offer of settlement
to the SEC for its consideration to resolve an ongoing inquiry. This offer of
settlement is subject to agreement regarding the specific language of the SEC's
administrative order and other settlement documents. As a result of these
developments, we increased our reserves as of the fourth quarter of 2006 by $3
million bringing the total reserves to approximately $15 million for 2006.
In February 2007, the Company paid off the $82.3 million in 5.22% Senior Notes
plus accrued interest from its cash and cash equivalents and investments. This
debt was originally issued in connection with GBL's sale of mandatory
convertible securities in February 2002 and was remarketed in November 2004.
In 2007, the Company has repurchased 33,000 shares at an average investment of
$38.74 per share as of March 14, 2007. This brings the remaining authorization
under the stock repurchase program to approximately 1,015,000 shares at March
14, 2007.
Subsequent to December 31, 2006, a client, of which we are its subadvisor,
announced an agreement and plan of reorganization of certain of its open-ended
mutual fund products to a New York based investment bank. The transaction is
subject to shareholder approval and is expected to close in the second quarter
of 2007.
F-28
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
Item 9A.
(a) Evaluation of Disclosure Controls and Procedures
Management, with the participation of the Chief Executive Officer and under the
supervision of the Chief Financial Officer, has evaluated the effectiveness of
the Company's disclosure controls and procedures, as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 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 described
below in Item 9A (b). These deficiencies were identified during the course 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.
(b) Management's Report on Internal Control Over Financial Reporting
The Company's management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term is defined in
Rule 13a-15(f) of the Exchange Act. Management, with the participation of the
principal executive officer and under the supervision of the principal financial
officer, the Company conducted an evaluation of the effectiveness of the
Company's internal control over financial reporting as of December 31, 2006, as
required by Rule 13a-15(c) of the Exchange Act. There are inherent limitations
to the effectiveness of any system of internal control over financial reporting,
including the possibility of human error and the circumvention or overriding of
the controls and procedures. Accordingly, even effective internal control over
financial reporting controls can only provide reasonable assurance of achieving
their control objectives. In making its assessment of the effectiveness of its
internal control over financial reporting, the Company used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control-Integrated Framework.
A material weakness (within the meaning of the Auditing Standard No. 2, An Audit
of Internal Control Over Financial Reporting Performed in Conjunction With an
Audit of Financial Statements, of the Public Company Accounting Oversight Board
(United States)) is a significant deficiency, or combination of significant
deficiencies, that results in there being more than a remote likelihood that a
material misstatement of the annual or interim financial statements will not be
prevented or detected. Based on the definition of "material weakness", the
deficiencies described below indicate the existence of material weaknesses in
the Company's design or operation of internal control over financial reporting.
Based on that, management concluded that the following material weaknesses
existed in the Company's internal control over financial reporting at December
31, 2006 and disclosed this to the Audit Committee and to the independent
registered public accountants.
II-1
Management did not have adequate controls in place to ensure that there was no
more than a remote likelihood that a material misstatement of the annual or
interim financial statements would be prevented or detected as it relates to two
items. First, there was a material weakness relating to the reporting of
individual assets and liabilities of certain proprietary investment accounts in
accordance with U.S. generally accepted accounting principles. In the
consolidated statement of financial condition, the assets and liabilities
(primarily short positions and margin) associated with these proprietary
investments were reported on a net basis, rather than reported on a gross basis.
Next, there was a material weakness relating to the evaluation of and accounting
for certain non-routine transactions in accordance with U.S. generally accepted
accounting principles. All required adjustments were made to the December 31,
2006 consolidated financial statements prior to issuance.
As a result of the first material weakness, the Company has restated its
December 31, 2005 consolidated financial statements, included in Item 8 of this
report on 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, all of which will be restated on Forms 10-Q/A for
these periods, which will be filed with the SEC as soon as practicable.
Based on its evaluation, management concluded that, as of December 31, 2006, the
Company did not maintain effective internal control over financial reporting
because of the effect of the material weaknesses described above.
The Company's independent registered public accounting firm has issued an
attestation report on management's assessment of the Company's internal control
over financial reporting. The report appears elsewhere herein.
(c) Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting during
the quarter ended December 31, 2006 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting. 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 in the 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 insure that
appropriate 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 weakness, 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 fully implemented in the
first half of 2007.
ITEM 9B: OTHER INFORMATION
None.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the Directors and Executive Officers of GBL and compliance
with Section 16(a) of the Securities Exchange Act of 1934 is incorporated herein
by reference from our definitive proxy statement for our 2007 Annual Meeting of
Shareholders (the "Proxy Statement").
GBL has adopted a Code of Business Conduct that applies to all of our officers,
directors, full-time and part-time employees and a Code of Conduct that sets
forth additional requirements for our principal executive officer, principal
financial officer, principal accounting officer or controller, or persons
performing similar functions (together, the "Codes of Conduct"). The Codes of
Conduct are posted on our website (www.gabelli.com) and available in print free
of charge to anyone who requests a copy. Interested parties may address a
written request for a printed copy of the Codes of Conduct to: Secretary, GAMCO
Investors, Inc., One Corporate Center, Rye, New York 10580-1422. We intend to
satisfy the disclosure requirement regarding any amendment to, or a waiver of, a
provision of the Codes of Conduct by posting such information on our website.
In addition to the certifications attached as Exhibits to this Form 10-K,
following its 2006 Annual Meeting, GBL also submitted to the New York Stock
Exchange ("NYSE") a certification by our Chief Executive Officer that he is not
aware of any violations by GBL of the NYSE corporate governance listing
standards as of the date of the certification.
ITEM 11: EXECUTIVE COMPENSATION
Information from the Proxy Statement is incorporated herein by reference.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information from the Proxy Statement is incorporated herein by reference.
II-2
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information from the Proxy Statement is incorporated herein by reference.
II-3
ITEM 14: PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information set forth under the caption "Independent Registered Public
Accounting Firm" in the Proxy Statement is incorporated herein by reference.
PART IV
Item 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) List of documents filed as part of this Report:
(1) Consolidated Financial Statements and Independent Registered
Public Accounting Firm's Report included herein: See Index on
page F-1
(2) Financial Statement Schedules:
Financial statement schedules are omitted as not required or not
applicable or because the information is included in the
Financial Statements or notes thereto.
(3) List of Exhibits:
Exhibit
Number Description of Exhibit
------ ----------------------
3.1 -- Restated Certificate of Incorporation of GAMCO Investors, Inc. (the
"Company"). (Incorporated by reference to Exhibit 3.0 to the Company's
Form 10-Q for the quarter ended September 30, 2005 filed with the
Securities and Exchange Commission on November 9, 2005).
3.2 -- Amended Bylaws of the Company. (Incorporated by reference to
Exhibit 3.4 to Amendment No. 4 to the Company's Registration Statement
on Form S-1 (File No. 333-51023) filed with the Securities and
Exchange Commission on February 10, 1999).
4.1 -- Specimen of class A common stock Certificate. (Incorporated by
reference to Exhibit 4.1 to Amendment No. 3 to the Company's
Registration Statement on Form S-1 (File No. 333-51023) filed with the
Securities and Exchange Commission on January 29, 1999).
4.2 -- Convertible Promissory Note, dated August 14, 2001, of the Company.
(Incorporated by reference to Exhibit 99.2 to the Company's Report on
Form 8-K dated March 1, 2005 filed with the Securities and Exchange
Commission on June 30, 2006).
4.3 -- Indenture, dated as of February 6, 2002, between GAMCO Investors,
Inc. and The Bank of New York, as Trustee. (Incorporated by reference
to Exhibit 4.1 to the Company's Report on Form 8-K dated February 8,
2002 filed with the Securities and Exchange Commission on February 8,
2002).
4.4 -- First Supplemental Indenture, dated as of February 6, 2002, between
GAMCO Investors, Inc. and The Bank of New York, as Trustee.
(Incorporated by reference to Exhibit 4.2 to the Company's Report on
Form 8-K dated February 8, 2002 filed with the Securities and Exchange
Commission on February 8, 2002).
4.5 -- Form of Note (included in Exhibit 4.4). (Incorporated by reference
to Exhibit 4.3 to the Company's Report on Form 8-K dated February 8,
2002 filed with the Securities and Exchange Commission on February 8,
2002).
10.1 -- Management Services Agreement between the Company and GFI dated as
of February 9, 1999. (Incorporated by reference to Exhibit 10.1 to
Amendment No. 4 to the Company's Registration Statement on Form S-1
(File No. 333-51023) filed with the Securities and Exchange Commission
on February 10, 1999).
10.2 -- Tax Indemnification Agreement between the Company and GFI.
(Incorporated by reference to Exhibit 10.2 to Amendment No. 4 to the
Company's Registration Statement on Form S-1 (File No. 333-51023)
filed with the Securities and Exchange Commission on February 10,
1999).
10.3 -- GAMCO Investors, Inc. 1999 Stock Award and Incentive Plan.
(Incorporated by reference to Exhibit 10.4 to Amendment No. 4 to the
Company's Registration Statement on Form S-1 (File No. 333-51023)
filed with the Securities and Exchange Commission on February 10,
1999).
10.4 -- GAMCO Investors, Inc. 1999 Annual Performance Incentive Plan.
(Incorporated by reference to Exhibit 10.5 to Amendment No. 4 to the
Company's Registration Statement on Form S-1 (File No. 333-51023)
filed with the Securities and Exchange Commission on February 10,
1999).
10.5 -- GAMCO Investors, Inc. 2002 Stock Award and Incentive Plan.
(Incorporated by reference to Exhibit A to the Company's definitive
proxy statement on Schedule 14A filed with the Securities and Exchange
Commission on April 30, 2002).
II-4
10.6 -- Employment Agreement between the Company and Mario J. Gabelli.
(Incorporated by reference to Exhibit 10.6 to Amendment No. 4 to the
Company's Registration Statement on Form S-1 (File No. 333-51023)
filed with the Securities and Exchange Commission on February 10,
1999).
10.7 -- Registration Rights Agreement, dated August 14, 2001, between the
Company and Cascade Investment LLC. (Incorporated by reference to
Exhibit 4.1 to the Company's Form 10-Q/A for the quarter ended
September 30, 2001 filed with the Securities and Exchange Commission
on November 16, 2001).
10.8 -- Note Purchase Agreement, dated as of August 10, 2001, by and among
Cascade Investment LLC, a Washington limited liability company, GAMCO
Investors, Inc., a New York corporation, Mario J. Gabelli, Gabelli
Group Capital Partners, Inc., a New York corporation, and Rye
Holdings, Inc., a New York corporation, and Rye Capital Partners,
Inc., a Delaware corporation (Incorporated by reference to Exhibit 1.1
to the Company's Form 10-Q/A for the quarter ended September 30, 2001,
filed with the Securities and Exchange Commission on November 16,
2001), as amended by the Third Amendment, dated as of February 28,
2005 (Incorporated by reference to Exhibit 99.2 to the Company's
Report on Form 8-K dated March 1, 2005 filed with the Securities and
Exchange Commission on March 2, 2005), as amended by the Fourth
Amendment, dated as of June 30. 2006 (Incorporated by reference to
Exhibit 99.1 to the Company's Report on Form 8-K dated June 30, 2006
filed with the Securities and Exchange Commission on June 30, 2006).
10.9 -- Exchange and Standstill Agreement, dated May 31, 2006, between the
Company and Frederick J. Mancheski (Incorporated by reference to
Exhibit 10.1 to the Company's Form 10-Q for the quarter ended June 30,
2006 filed with the Security and Exchange Commission on August 8,
2006.)
10.10 -- Registration Rights Agreement, dated May 31, 2006. (Incorporated
by reference to Exhibit 10.2 to the Company's Form 10-Q for the
quarter ended June 30, 2006 filed with Security and Exchange
Commission on August 8, 2006).
12.1 -- Computation of Ratios of Earnings to Fixed Charges.
21.1 -- Subsidiaries of the Company.
23.1 -- Consent of Independent Registered Public Accounting Firm
24.1 -- Powers of Attorney (included on page II-3 of this Report).
31.1 -- Certification of CEO pursuant to Rule 13a-14(a).
31.2 -- Certification of CFO pursuant to Rule 13a-14(a).
32.1 -- Certification of CEO 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 CFO pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes- Oxley Act of 2002.
------------------
(b) Reports on Form 8-K:
We filed the following Current Reports on Form 8-K during the three months ended
December 31, 2006.
1. Current Report on Form 8-K, dated November 13, 2006 containing the
press release disclosing our operating results for the third quarter
ended September 30, 2006.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Rye, State
of New York, on March 16, 2006.
GAMCO INVESTORS, INC.
By: /s/ John C. Ferrara
-------------------
Name: John C. Ferrara
Title: Interim Chief Financial Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints John
C. Ferrara and James E. McKee and each of them, his true and lawful
attorney-in-fact and agent with full power of substitution and resubstitution,
for him in his name, place and stead, in any and all capacities, to sign any and
all amendments to this report and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, and hereby grants to such attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and agent
or his substitute or substitutes may lawfully do or cause to be done by virtue
hereof.
II-4
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons in the capacities and on the dates
indicated.
Signature Title Date
--------- ----- ----
/s/ Mario J. Gabelli Chairman of the Board, March 16, 2007
----------------------------------- Chief Executive Officer
Mario J. Gabelli (Principal Executive Officer)
and Director
/s/ John C. Ferrara Interim Chief Financial Officer March 16, 2007
------------------------------- (Principal Financial Officer)
John C. Ferrara and Director
/s/ Edwin L. Artzt Director March 16, 2007
-----------------------------
Edwin L. Artzt
/s/ Richard L. Bready Director March 16, 2007
-----------------------------
Richard L. Bready
/s/ John D. Gabelli Director March 16, 2007
------------------------------
John D. Gabelli
/s/ Eugene R. McGrath Director March 16, 2007
-----------------------------
Eugene R. McGrath
/s/ Robert S. Prather Director March 16, 2007
-----------------------------
Robert S. Prather
/s/ Karl Otto Pohl Director March 16, 2007
------------------------------------
Karl Otto Pohl
/s/ Vincent S. Tese Director March 16, 2007
---------------------------------------
Vincent S. Tese
II-5